Monday, July 14, 2008

Unfolding Financial Meltdown: Sorry, But Just the Facts

Unfolding Financial Meltdown: Sorry, But Just the Facts

US crisis over $5 trillion loans liability

US crisis over $5 trillion loans liability

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White House scrambles for options to rescue mortgage companies Fannie Mae and Freddie Mac

President Bush and US Treasury Secretary Hank Paulson were locked in high-level talks with regulators this weekend to decide the fate of more than $5 trillion-worth of American home loans and the future of the country's two biggest mortgage guarantee companies.

Shares in Fannie Mae and Freddie Mac, which between them own or guarantee some $5.2 trillion-worth (£2.6 trillion) of US mortgages, fell sharply on Friday as the companies teetered on the brink of collapse.

Speculation mounted last week that a government bailout was on the cards as the housing market crisis continues to worsen. Both Fannie Mae and Freddie Mac operate under US government charter to buy mortgages and repackage them into securities, as a means of providing liquidity and stability to the housing market. But as the value of US homes and the market for mortgage-backed securities continue to freefall, both are struggling to maintain adequate capitalisation.

The biggest problem is the huge increase in foreclosures that has followed the sub-prime mortgage crisis. Fannie and Freddie guarantee some 40 per cent of all mortgages in the US, but the value of the homes used to underwrite those mortgages has in many cases fallen well below the value of the loans.

Fears that either Fannie, Freddie or both could collapse prompted Bush to call an emergency meeting with Paulson and other officials last week.

One plan under discussion was to put the two companies into so-called 'conservatorship' - a halfway house between privatisation and nationalisation. Such a plan would render their shares worthless and effectively heap responsibility for their loan books onto the federal government. This could prove disastrous for US Treasury bonds, the market for which is only $4.6 trillion.

Sources close to the US Treasury suggested, however, that it was more likely the Federal Reserve would intervene to help the two companies shore up their finances. The Fed could extend them 10-year loans on favourable terms. Alternatively, it could buy shares in each company in the event of a cash call. 'Both of these routes would seem less drastic and more favourable than any direct government control,' the source said.

Paulson seemed to echo that view in a statement on Friday: 'Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.'

Wall Street is also braced for a fresh round of bad news from troubled investment bank Merrill Lynch. Chief executive John Thain is expected to announce as much as $5bn more in write-downs related to the credit crunch. He is also expected to answer calls to sell off stakes in Bloomberg, the financial information company, and Blackstone Group, the asset manager.

US government bails out mortgage giants

US government bails out mortgage giants

By Nick Beams

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The crisis in the US financial system has taken a major turn for the worse with the announcement on Sunday that the US Treasury and the Federal Reserve Board are to take emergency action to prop up mortgage giants Fannie Mae and Freddie Mac.

Under the rescue plan, Congress will be asked to pass legislation to increase the line of credit to Fannie and Freddie—the amount and terms to be decided later—as well as providing the authority for the government to purchase equity if needed. In addition, the Federal Reserve Board has granted the Federal Reserve Bank of New York authority to lend directly to the two companies “should such lending prove necessary.”

Announcing the measures after a weekend of hectic discussions with bankers, financial institutions and Congressional leaders, Treasury Secretary Henry Paulson said the two companies played a “central role in our housing finance system” and their “support for the housing market is particularly important as we work through the current housing correction.” There were fears that had the intervention not been made Freddie Mac may have had difficulty in a planned sell-off of $3 billion in debt scheduled for today.

Like the Bear Stearns rescue operation in March, the timing of the announcement was meant to allay fears before global markets opened for the week. Paulson said the international reach of the two “government sponsored enterprises” (GSE) necessitated the unprecedented action.

“GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets,” he said.

The emergency action came after a week of stock market turmoil that saw the stocks of the two firms plunge by up to 50 percent as fears grew that they were too poorly capitalised to meet losses incurred as a result of the collapse of the US housing market.

Between them Fannie and Freddie hold or guarantee more than $5 trillion out of the $12 trillion US mortgage market.

Fannie Mae—the Federal National Mortgage Association—was set up in 1938 by the Roosevelt administration to try to boost the housing market during the Great Depression. In 1968 it was given a new charter by Congress and became a publicly traded company that could seek funding from the private sector. Freddie Mac—the Federal Home Loan Mortgage Corporation—was created by Congress in 1970 as a competitor for Fannie.

Because they were set up by legislation, the two companies have been regarded as having an implicit government guarantee—a perception that has enabled them to borrow funds at lowered rates in the market. Over the past three decades, both firms have grown rapidly to the extent that their holdings and guarantee of mortgage debt is even larger than the $4,500 billion US Treasury market.

While they have not been directly involved in the sub-prime market, the rapid decline in US housing prices—the steepest since the Great Depression—has caused the two firms to suffer a loss of $11 billion over the past nine months, raising concerns about the adequacy of their capital.

Those concerns were heightened last Wednesday when the former St. Louis Federal Reserve President William Poole said the chances were increasing that the two mortgage companies would have to be bailed out. He said Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it technically insolvent. The “fair value” of Fannie Mae’s assets had fallen 66 percent and could go negative in the next quarter, he said.

On Friday, the New York Times published a report that the two companies may be put into a “conservatorship” if their problems worsened. Under a conservatorship, regulators appoint a person or an entity to run the financial institution until stability is restored.

Fear about the viability of the two firms set off a round of discussions in government, financial and banking circles about emergency action. Paulson has insisted that so far as the administration is concerned it wants Freddie and Fannie to continue in their current form as “shareholder-owned companies.”

This is because the alternative—a full-scale takeover or nationalisation by the government—would have vast implications for the financial position of the US. Taking on the debts and obligations of Fannie and Freddie would mean a more than 50 percent increase of US sovereign debt virtually overnight, bringing the total to the equivalent of the US gross domestic product.

In a bid to bolster confidence, the Democratic chairman of the Senate Banking Committee, Chris Dodd, told CNN on Sunday that Freddie and Fannie were both financially sound.

“What’s important here are facts,” he said. “And the facts are that Fannie and Freddie are in sound situation. They have more than adequate capital—in fact, more than the law requires. They have access to capital markets. They’re in good shape. The chairman of the Federal Reserve has said as much. The secretary of the treasury has said as much.”

Given the experiences of the past year, such “boosterism” will not cut much ice. As the Wall Street Journal commented caustically in response to similar remarks by Dodd last week, the senate chairman claimed that the companies were so safe that the Fed might have to rescue them.

Last Thursday Fed chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, emphasised that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, had found that both companies were adequately capitalised. Similar assurances were also given about Bear Stearns just days before it was taken over.

While attention has focused on Fannie and Freddie, the depth of the US housing and financial crisis has been underscored by the collapse of IndyMac Bank in California.

The Pasadena-based mortgage lender, which had $32 billion in assets, was seized by federal regulators on Friday following an 11-day $1.3 billion run on its funds. IndyMac, which specialised in Alt-A loans to borrowers who did not fully document their assets or their income, ranked as the ninth largest US mortgage lender by volume.

The collapse of the bank—the third largest failure in US banking history after the demise of Continental Illinois in 1984 and the American Saving and Loan Association of Stockton in 1988—is expected to cost the Federal Deposit Insurance Corporation between $4 billion and $8 billion. This is a sizeable chunk of its $53 billion deposit insurance fund, which is expected to be called on again as more banks go under.

Besides pointing to the sheer size of the financial crisis, the Fannie-Freddie rescue operation has underscored the speed with which it is unfolding. On Thursday, Paulson and Bernanke told Congress that they were not seeking new legislation. Just three days later, an emergency package is to be brought forward with no guarantee that further measures will not be required even in the next few days.

US airline CEOs call for controls on oil speculation

US airline CEOs call for controls on oil speculation

By Shannon Jones

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A coalition of US airlines is calling for tighter regulation of trading in petroleum futures contracts, which they cite as a major source of record fuel prices. An open letter sent by the CEOs of 12 major airlines, including Northwest, American, United, Delta and Air Tran, called on customers to contact their representatives in Congress to demand they deal with “poorly regulated market speculation.”

The airline chiefs assert that speculation may account for as much as $30 to $60 a barrel—that is, as much as 43 percent—of the current $140-plus price of oil. They note that controls over oil futures trading have been relaxed or scrapped over the past period.

Airlines are staggering under the impact of rising fuel costs. Carriers have raised fees, cut back service and announced massive layoffs. Northwest Airlines last week said it would cut 2,500 jobs, including pilots, flight attendants and mechanics. Total job cuts announced in the industry over the past several months exceed 26,000.

In addition, Northwest, United, American and US Airways are charging for checking baggage, and US Airways announced it would remove entertainment systems on its domestic flights to reduce weight and save on fuel.

The call by the heads of all the major US air transport corporations for a crackdown on oil speculation utterly exposes the claims of the Bush administration and others that soaring fuel prices are simply the product of supply and demand factors, and that speculation plays no significant role.

A July 7 article in the Wall Street Journal entitled “Commodity Regulator Under Fire” quotes an analyst for Lehman Brothers who, pointing to the influx of huge amounts of capital into commodity speculation, says, “We are seeing the classic ingredients of an asset bubble.”

The Journal cites a number of important facts and figures. By one estimate, the value of unregulated over-the-counter commodity investments totals $9 trillion, with 50 percent or more related to crude oil. This amount far exceeds the $4.78 trillion traded on US commodities futures exchanges regulated by the Commodities Futures Trading Commission. (CFTC).

The scale of commodities futures trading on nominally regulated markets is more than 1,000 times the level three decades ago. In 1976, that figure was $4 billion. This vast increase is a concentrated expression of the growth of financial speculation and parasitism in the American economy.

The role of Democratic as well as Republican administrations in fostering this trend is reflected in the fact that the number of regulators overseeing exchanges has been cut back. Last year, the CFTC had a staff of just 437, 12 percent fewer than it employed in 1976, shortly after it began operating, according to the Journal.

The largest unregulated sector of the commodities market is the customized market for derivatives, known as swaps. Big Wall Street investment banks such as Goldman Sachs and Morgan Stanley have set up swaps to allow hedge funds, pension funds and commodity traders to speculate on prices among themselves, outside of any scrutiny by federal regulators. Trades through swaps can be larger than those on futures exchanges. The majority of commodity swaps involve oil.

Not coincidentally, the treasury secretary during the Democratic Clinton administration, Robert Rubin, and the treasury secretary in the Bush administration, Henry Paulson, both held top position at Goldman Sachs before assuming their government posts. Paulson has repeatedly declared that speculation is not a major factor in the run-up of oil and gasoline prices.

Some financial experts say that the entry of giant institutional investors such as government and corporate pension funds and sovereign wealth funds into commodity speculation is a major factor in the spike in oil prices. Over the past five years, from 2003 to 2008, investment in index funds tied to commodities has grown twenty-fold, from $13 billion to $260 billion. Increasingly over the past two years, positions have been taken out based on the anticipation of price increases.

A loophole in CFTC rules permits large investment banks to side-step reporting requirements and limits on trading positions that apply to other investors. According to BussinessWeek, “The loophole allows pension funds to enter into swap agreements with an investment bank, which can then trade unlimited numbers of the contracts in futures markets.” The top five users of swaps are investment banks.

Currently, there is a raft of bills before Congress aimed at placing curbs on commodity speculation. They contain such measures as requiring higher margins—the amount of upfront cash required to trade—and the curtailment of oil futures trading by large institutional investors.

In the recently enacted farm bill, Congress addressed the “Enron loophole,” which exempts overseas electronic energy trades from regulation. The change in rules enacted in 2000 at the instigation of Enron helped the company in its manipulation of the California energy market that resulted in the near-bankruptcy of the state. However, in the new farm bill Congress barred unregulated trades only in natural gas, not oil.

In response to the calls for Congressional action to rein in speculation in oil, major commercial banks and Wall Street investment banks have flooded Washington with lobbyists to block any serious reform.

Bank of America, JPMorgan Chase, Citigroup and others insist that oil price rises are due to factors other than speculation, such as the falling dollar and increased demand, particularly from China. While these factors no doubt play a significant role in upward price pressures, they do not explain the scale and rapidity of the explosion in oil prices. That is largely due to a massive influx of speculative capital into energy and food commodities futures as a hedge against financial instability and an alternative source of profits to the slumping stock market and the collapse of speculative activity in housing and leveraged corporate buyouts.

For his part, acting CFTC Chairman Walter Lukken maintains that the flow of speculative capital into oil futures has not contributed significantly to the more than doubling of crude oil prices over the past two years. Instead, he says the influx of investor cash has provided the liquidity needed to make the markets run smoothly. He has sought to forestall Congressional action by claiming the CFTC needs more time to collect and study data.

Meanwhile, banks and oil companies are reaping massive profits from the run-up in oil prices. Oil giant ExxonMobil earned a record $40.7 billion in 2007. The top four oil companies took in a combined total of over $100 billion last year and another $36 billion in the first quarter of 2008.

Even if Congress eventually enacts some limited curbs on oil speculation, they will not resolve the energy crisis in the interests of millions of ordinary working-class and middle-class people. The vast flows of international finance capital involved are beyond the power of any national government, including the United States, to control.

Far from the market being the engine of economic development, the anarchy of capitalist production and exchange is threatening to plunge the world into a depression and force hundreds of millions into destitution. A rational solution can be found only by mobilizing the international working class in a political and revolutionary movement against the profit system.

Among the measures immediately required is a complete accounting of the looting carried out by the energy conglomerates, banks and big commodity speculators. Their ill-gotten gains must be expropriated and used to provide relief to the public.

The energy and finance industries must be reorganized on the basis of production for human need, not private profit. This requires that the oil monopolies and the banks and Wall Street investment houses be placed under public ownership, subject to the democratic control of the working class.

Such policies can be implemented only through the development of an independent political movement of the working class against the Democratic and Republican parties and the establishment of a workers’ government.

Major Bank Failure: 10,000 People Lose Massive Amounts of their Savings Deposits Over $1 Billion Uninsured Deposits!

Major Bank Failure: 10,000 People Lose Massive Amounts of their Savings Deposits Over $1 Billion Uninsured Deposits!

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Q: Why is Henry Paulson covering his hands over his face?

A. He knows the #$%@ is about to hit the fan!!

And the media is hiding the story. This morning if you go to it is buried and even The New York Times does not have the story on the cover of its business section! What the heck is going on here?

This is the third largest bank in U.S. History to fail. It is up there with the failure of Republic Bank in Texas in the 1980s as well as Continental Bank of Illinois. This loss is wiping out $4 to $8 billion of the FDIC's $53 billion deposit-insurance fund. Get set for a slew of failures!


The Federal Reserve and the U.S. Treasury have been hinting about the danger of one or more major banks failing for a few weeks now in hopes that making that the warning ahead of time might help overt an all out banking panic.

The Pasadena, California thrift IndyMac Bank, spun out of Countrywide Credit who was a prolific mortgage specialist that helped fuel the housing boom, was seized by federal regulators late yesterday, in the third-largest bank failure in U.S. history.

What caused the failure? Simple. Bad loans. The run on the bank occurred when Senator Charles Schumer of NewYork made a bad situation worse when he released a letter he wrote to the Office of Thrift Supervision expressing concern that IndyMac was not a going concern. He then released this letter to grandstand his views. As these views became known over $1 billion was taken from the bank, effectively a bank run.

The Wall Street Journal is saying this collapse won’t likely be the last. The Journal goes on to report that Banking regulators are bracing “for a slew of failures”.

To give you an idea on how immense this failure is it is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

I believe this his failure is going to shock and frighten most people in that over 10,000 people are going to loose half the money they had in the bank over the FDIC insured $100,000.

If you have more than $100,000 in any one bank, I am begging you to take steps immediately to make sure you don’t have more than $100,000 in any one bank and that every bank you are doing business with had FDIC insurance to cover the amount you have on deposit. Please, NO BANK IS TOO BIG TO FAIL.

Also, you need to review where your assets are held in brokerage accounts. Just like the banks who are insured by the FDIC your brokerage accounts are insured by SPIC. This stands for Securities Investor Protection Corporation. SPIC has even less in its insurance fund, only $1 billion. That’s right while the FDIC has $53 billion SPIC has $1 billion.

SIPC coverage is limited to $500,000 per customer but here is the catch ONLY $100,000 in cash. How could they cover a failure of Merrill Lynch whose assets are in the trillions? The answer is they cannot.

Yesterday, even before the market opened fears that Fannie Mae and Freddie Mac (which have issued insurance on $5 Trillion in mortgages and have just $80 billion in reserves) were going about to collapse sent shares in both nose diving over 40%. Should the mortgage failure rate continue to rise even a few percentage points at this point, we could see the worst financial meltdown since 1929. Even though the Federal Reserve has said it would come to the rescue of Fannie Mae and Freddie Mac.

Where are they going to get the money from? You got it, they’ll just print it!

Wall Street’s Reaction

To be clear I am not saying Wall Street will collapse because of this one bank failure but I am issuing this urgent call so you can to take steps to make sure you don’t wind up standing in line outside any bank you do business to collect what’s left of your deposits.

Please ... if you don’t own physical gold or just own a small amount it’s now a matter of financial survival that you put at least 15% of your savings in U.S. and World Gold and Platinum bullion and rare coins. I prefer rare coins certified and graded by NGC or PCGS. You can actually buy physical gold, platinum and silver for your IRA and my staff of gold experts can help you do this.

When I envisioned gold shooting to $2,500 and platinum soaring to $5,000 I always knew the first sign of a dollar panic would come in the form of a “slew of bank failures.” I consider the the largest banking failure in almost twenty years as a clear shot over the bow and the warnings of more to come to be enough a clear signal that we may be only months, weeks or even days from a catastrophic banking panic.

Bernanke, Paulson testify before Congress: Democrats cower before Wall Street

Bernanke, Paulson testify before Congress: Democrats cower before Wall Street

By Andre Damon

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Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke called on Congress Thursday to expand the Fed’s ability to bail out failing Wall Street firms. Their testimony, delivered before the House Financial Services committee, evoked a fawning response from the Democratic committee members as they scrambled for ways to accommodate Wall Street.

Bernanke and Paulson came before Congress in the midst of growing panic on financial markets over the sinking balance sheets of Fannie Mae and Freddie Mac, the government-sponsored home mortgage finance companies that guarantee or own half of all outstanding US mortgage debt. The two companies, whose stock values have plummeted by up to 80 percent since the sub-prime mortgage bust and credit crisis erupted last August, have more than $5 trillion in outstanding debt that is held by financial institutions and investors around the world. As the top US regulators testified before the House of Representatives committee, reports were swirling of a possible government bailout of the mortgage giants, whose collapse would have even greater global consequences than the near-bankruptcy of investment bank Bear Stearns last March.

The policies of the Fed and the Treasury Department, promoting bank deregulation and fostering unbridled speculation in housing and financial markets, played a critical role in precipitating a worldwide financial crisis without precedent since the Great Depression. The result is record home foreclosures, rising unemployment, falling wages and skyrocketing commodity prices.

However, Paulson and Bernanke did not come to Capitol Hill to defend their own conduct. There was no need since none of the congressmen seriously challenged them. Rather, they came to argue for new laws that would modestly increase regulatory oversight of Wall Street while legally sanctioning and institutionalizing the use of taxpayer money to bail out major banks and financial companies.

The session provided a graphic demonstration of the utter subservience of Congress and both parties, Democrats no less than Republicans, to the financial aristocracy that monopolizes ever more of the national wealth.

Barney Frank, the committee chairman and stalwart of the liberal wing of the Democratic Party, opened the session with praise for Bernanke and Paulson, saying “I congratulate the officials of this administration for doing such a good job.” Other members were no less servile in their praise. Republican Judy Biggert of Illinois praised Bernanke’s “steady leadership” in her opening statement. Such phrases were repeated by most of the committee members.

Frank and most of the Democrats on the committee pressed for some increase in financial regulation, but Frank set the tone by making clear their opposition to any major reversal of the deregulatory polices of the past thirty years. “We don’t want to do anything that would interfere with our wonderful financial system,” he declared. “Done right,” he added, “regulatory authority... is pro-market.”

There is nothing anomalous or surprising in the abject prostration of the committee before Wall Street. As the web site of the Center for Responsive Politics ( documents, in the 2008 election cycle, members of the House Financial Service Committee—which is supposed to oversee and monitor Wall Street—received over $18 million from the financial services/insurance/real estate sector, a sum three times greater than the committee received from any other sector. Frank himself raised over $1.2 million this year, almost half of which came from finance and related industries. The top five industries that contributed to his campaign were securities and investment, real estate, law firms, insurance and commercial banking.

The Center for Responsive Politics web site describes the financial establishment’s market in congressmen with the following characterization of the House Financial Services Committee: ‘“This committee, formerly known as the Banking Committee, has long been considered a ‘big money’ panel, with jurisdiction over commercial banks and savings and loans that traditionally have been very generous with their campaign contributions to committee members. That trend is likely to continue in the 110th Congress with the addition of two cash-rich industries to the committee’s portfolio: insurance and securities. Look for the giant financial sector, which includes banks, insurance companies, and securities firms, to continue its robust giving to committee members.”

The main question raised by a number of Democratic committee members was not whether there was a regulatory failure and who was responsible for it, but whether Congress should hasten to enact emergency legislation to facilitate more government bailouts of Wall Street giants. Typical was Frank’s question to Paulson and Bernanke: “Is it your view that immediate legislation is necessary, or should we have this first thing on the agenda next year?"

Thursday’s hearing highlighted certain fundamental aspects of American politics. Both parties represent the interests of a small and parasitic financial elite. When negligence and borderline criminality among the super-rich lead to a crisis, it is the unanimous consensus of both parties that none of those responsible should be punished and that the masses of working people should be left to pay the bill.

The degree to which the two-party system has so openly and shamelessly become an instrument of the financial aristocracy is a reflection of the immense growth of social inequality in America. The concentration of wealth at the very top has become the central feature of a social structure that is increasingly incompatible with democratic institutions.

The decline in the popular base of support for both big business parties, and their inability to offer any policies to address the social disaster facing tens of millions of people, bespeaks a social and political system in an advanced stage of decay. The working class, as it enters into massive social struggles, will be compelled to look for political alternatives to the moribund two-party system of American capitalism.

Reactions to Iranian missile tests underscore danger of war

Reactions to Iranian missile tests underscore danger of war

By Peter Symonds

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American and Israeli reactions to Iranian missile tests this week have again highlighted the danger of an explosive new military conflict in the Middle East.

The two sets of missile tests on Wednesday and Thursday followed a string of barely-concealed Israeli threats to launch air strikes on Iran’s civilian nuclear installations. Despite Iranian denials, the US and Israel allege that Iran is actively building a nuclear weapon—contradicting a National Intelligence Estimate produced by 16 US spy agencies last December, which concluded that no such weapons program exists.

Tehran used the missile tests to underscore warnings that it will respond to any attack by striking Israel and blocking the Strait of Hormuz, through which 40 percent of the world’s oil is transported. The state media reported that the Iranian Revolutionary Guard Corp (IRGC) had fired a variety of missiles, including the medium-range Shabab-3, and quoted a senior official saying the tests were “a lesson for enemies”.

Among military analysts, there is debate as to the number and type of missiles tested. Several reports claimed that one of the photographs released by the IRGC photograph appeared to have been doctored to show an extra rocket being fired, perhaps covering up a misfiring. According to the US Defence Department and intelligence agencies, between 7 and 10 missiles were launched.

Several analysts pointed out that no new missiles were tested. Charles Vick from told the New York Times that the newer version of the Shabab-3, which has a range of around 2,000 kilometres and is capable of striking Israel, was apparently not fired. John Pike, also from, told Reuters: “They put on a big show and as a result they were able to get headline coverage.”

The limited character of the tests did not stop US and Israeli officials from seizing upon them to issue a new round of threats against Iran. White House spokesman Tony Fratto condemned the exercise as “provocative” and again demanded that Iran halt its uranium enrichment and missile testing. Speaking at a press conference in Georgia, US Secretary of State Condoleezza Rice warned: “We will defend our interests and the interests of our allies... We take very, very strongly our obligations to defend our allies and no one should be confused about that.”

In the context of the ongoing discussion in the US and Israel over launching air strikes on Iran, these claims that Iran is being provocative are completely hypocritical. Just last month, the Israeli air force carried out a large, long-range exercise over the Mediterranean Sea involving more than 100 war planes, helicopters and refuelling aircraft which could only be interpreted as a dry run for an attack on Iran.

While the White House objects to Iran’s missile tests, the US navy is currently conducting joint exercises with its British and Bahraini warships in the Persian Gulf supposedly to protect gas and oil installations in the region. Last week, the US navy conducted a little-reported exercise coordinating two warships, one in the Mediterranean Sea and the other in the Persian Gulf, in the simulated shooting down of a ballistic missile. The unprecedented five-day test, reported in Stars and Stripes, was clearly aimed at enhancing the US military’s ability to neutralise Iran’s ability to retaliate in the event of a US or Israeli strike.

Divisions exist in the Bush administration over whether to launch an attack on Iran. Whereas the most hawkish elements gathered around Vice President Dick Cheney have been pressing for war, President Bush is still supporting, publicly at least, the so-called diplomatic option advocated by Rice aimed at bullying Tehran through international sanctions into agreeing to US demands.

However, Rice’s strident comments in Georgia underline the tactical character of these differences. Her “very, very strong” support for the interests of US allies—above all, Israel—makes clear that the US would be drawn quickly into any conflict between Israel and Iran.

Israeli threats

Responding to the Iranian missile tests, Israeli Defence Minister Ehud Barak warned: “The Iranian issue is a challenge not just for Israel but for the entire world... Israel is the strongest country in the region and has proved in the past it is not afraid to take action when its vital security interests are at stake.”

Barak’s comments are an obvious allusion not only to Israel’s air strike on Iraq’s nuclear reactor in 1981, but also last September’s unprovoked attack that destroyed a building in northern Syria. The Bush administration, which would have been consulted over the Syrian strike, alleged this year that the building was a nuclear reactor under construction—a claim denied by the Syrian government.

To underscore Israel’s capacity to strike Iran, Israel Aerospace Industries displayed its latest state-of-the art airborne early warning and control plane to the media on Thursday. The plane, which is equipped with sophisticated radar and intelligence-gathering technology, as well as electronic warfare systems, would be deployed in any attack on Iran’s nuclear facilities.

Yuval Steinitz, a senior member of the Israeli parliament’s powerful Foreign Affairs and Defence Committee, commented to the press: “If those [Iranian] missiles will one day be equipped with nuclear warheads, this will produce [an] existential threat to Israel... Therefore we have to do our utmost to stop the Iranian nuclear project before such missiles can really become devastating.”

Israel already has nuclear weapons and the ability to deliver them against Iran. In April, amid the country’s largest ever civil defence drill, National Infrastructure Minister Benjamin Ben-Eliezer warned that an Iranian attack would lead to “the destruction of the Iranian nation”. Israel’s determination to shut down Iran’s civilian nuclear programs is to ensure that Tehran does not have the capacity, either now or in the indefinite future, to undermine Israel’s position as “the strongest in the region”.

Iran is clearly at the centre of a series of top-level discussions between Israel and the US. Barak is due in Washington next week for three days of talks with Vice President Cheney, Defence Secretary Robert Gates, Secretary of State Rice and National Security Adviser Stephen Hadley. In an article entitled, “Barak to tell Bush time is running out on thwarting Iran”, the Jerusalem Post described the talks as “aimed at coordinating policies against the Iranian nuclear threat”.

Barak’s visit follows days after Mossad chief Meir Dagan was in Washington for talks with key US intelligence officials. A week after Barak leaves, Israel’s Chief of Staff, Lieutenant General Gabi Ashkenazi, will arrive in the US for a round of discussions with Joint Chiefs of Staff chairman Admiral Michael Mullen and other top Pentagon officials. While all these discussions are described as “routine”, it was only two weeks ago that Mullen was in Israel for talks with Ashkenazi and other Israeli military heads.

A particularly ominous report in the Iraqi media yesterday, based on unnamed Iraqi army officers, claimed that Israeli jets had recently flown via Jordan into Iraqi air space and landed at an airport in Haditha in the western province of Anbar. US, Iraqi and Israeli officials immediately dismissed the report, which contributed to a $5 jump in crude oil futures to more than $146.60 a barrel yesterday. Iraq is one of few routes that Israeli war planes could use in any attack on Iran.

Nervousness over a possible war with Iran also contributed to the decision this week by Total, the French energy giant, to cancel plans for a $10 billion project to develop the huge South Pars gas field in Iran. Total has been under intense pressure from the Bush administration and the French government to pull out of Iran. Last year the company’s chief executive Christophe de Margerie and two other executives were investigated by French police over the project. De Margerie declared this week that the political risk was too high to continue.

Even as tensions over Iran escalated this week, a series of comments appeared in the US press playing down the danger of war. Most highlighted the remarks of Defence Secretary Gates who declared on Thursday that the Iranian missile tests did not bring the US any closer to a confrontation. “There is a lot of signalling going on,” he said. “But I think everyone recognises what the consequences of any kind of a conflict would be.” Gates’s comments reflect concerns among layers of the military top brass about the consequences of having to fight a third war on top of the occupations of Iraq and Afghanistan.

However, the dangerous game of brinkmanship being played by the Bush administration in the Persian Gulf has a logic of its own. The hostility of the most hawkish elements in Washington to a diplomatic solution to the standoff with Tehran is based on the calculation that the beneficiaries of any easing of tensions would be America’s rivals in Europe and Asia, which already have large investments and substantial trade links with Iran. A new military adventure, despite its potentially catastrophic geopolitical consequences, thus appears as the only viable alternative to ensure American domination in the vital oil-rich region.

Worries About War Crimes Heat up in the White House

Worries About War Crimes Heat up in the White House

By Frank Rich

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We know what a criminal White House looks like from "The Final Days," Bob Woodward and Carl Bernstein's classic account of Richard Nixon's unraveling. The cauldron of lies, paranoia and illegal surveillance boiled over, until it was finally every man for himself as desperate courtiers scrambled to save their reputations and, in a few patriotic instances, their country.

"The Final Days" was published in 1976, two years after Nixon abdicated in disgrace. With the Bush presidency, no journalist (or turncoat White House memoirist) is waiting for the corpse to be carted away. The latest and perhaps most chilling example arrives this week from Jane Mayer of The New Yorker, long a relentless journalist on the war-on-terror torture beat. Her book "The Dark Side" connects the dots of her own past reporting and that of her top-tier colleagues (including James Risen and Scott Shane of The New York Times) to portray a White House that, like its prototype, savaged its enemies within almost as ferociously as it did the Constitution.

Some of "The Dark Side" seems right out of "The Final Days," minus Nixon's operatic boozing and weeping. We learn, for instance, that in 2004 two conservative Republican Justice Department officials had become "so paranoid" that "they actually thought they might be in physical danger." The fear of being wiretapped by their own peers drove them to speak in code.

The men were John Ashcroft's deputy attorney general, James Comey, and an assistant attorney general, Jack Goldsmith. Their sin was to challenge the White House's don, Dick Cheney, and his consigliere, his chief of staff David Addington, when they circumvented the Geneva Conventions to make torture the covert law of the land. Mr. Comey and Mr. Goldsmith failed to stop the "torture memos" and are long gone from the White House. But Vice President Cheney and Mr. Addington remain enabled by a president, attorney general (Michael Mukasey) and C.I.A. director (Michael Hayden) who won't shut the door firmly on torture even now.

Nixon parallels take us only so far, however. "The Dark Side" is scarier than "The Final Days" because these final days aren't over yet and because the stakes are much higher. Watergate was all about a paranoid president's narcissistic determination to cling to power at any cost. In Ms. Mayer's portrayal of the Bush White House, the president is a secondary, even passive, figure, and the motives invoked by Mr. Cheney to restore Nixon-style executive powers are theoretically selfless. Possessed by the ticking-bomb scenarios of television's "24," all they want to do is protect America from further terrorist strikes.

So what if they cut corners, the administration's last defenders argue. While prissy lawyers insist on habeas corpus and court-issued wiretap warrants, the rest of us are being kept safe by the Cheney posse.

But are we safe? As Al Qaeda and the Taliban surge this summer, that single question is even more urgent than the moral and legal issues attending torture.

On those larger issues, the evidence is in, merely awaiting adjudication. Mr. Bush's 2005 proclamation that "we do not torture" was long ago revealed as a lie. Antonio Taguba, the retired major general who investigated detainee abuse for the Army, concluded that "there is no longer any doubt" that "war crimes were committed." Ms. Mayer uncovered another damning verdict: Red Cross investigators flatly told the C.I.A. last year that America was practicing torture and vulnerable to war-crimes charges.

Top Bush hands are starting to get sweaty about where they left their fingerprints. Scapegoating the rotten apples at the bottom of the military's barrel may not be a slam-dunk escape route from accountability anymore.

No wonder the former Rumsfeld capo, Douglas Feith, is trying to discredit a damaging interview he gave to the British lawyer Philippe Sands for another recent and essential book on what happened, "Torture Team." After Mr. Sands previewed his findings in the May issue of Vanity Fair, Mr. Feith protested he had been misquoted -- apparently forgetting that Mr. Sands had taped the interview. Mr. Feith and Mr. Sands are scheduled to square off in a House hearing this Tuesday.

So hot is the speculation that war-crimes trials will eventually follow in foreign or international courts that Lawrence Wilkerson, Colin Powell's former chief of staff, has publicly advised Mr. Feith, Mr. Addington and Alberto Gonzales, among others, to "never travel outside the U.S., except perhaps to Saudi Arabia and Israel." But while we wait for the wheels of justice to grind slowly, there are immediate fears to tend. Ms. Mayer's book helps cement the case that America's use of torture has betrayed not just American values but our national security, right to the present day.

In her telling, a major incentive for Mr. Cheney's descent into the dark side was to cover up for the Bush White House's failure to heed the Qaeda threat in 2001. Jack Cloonan, a special agent for the F.B.I.'s Osama bin Laden unit until 2002, told Ms. Mayer that Sept. 11 was "all preventable." By March 2000, according to the C.I.A.'s inspector general, "50 or 60 individuals" in the agency knew that two Al Qaeda suspects -- soon to be hijackers -- were in America. But there was no urgency at the top. Thomas Pickard, the acting F.B.I. director that summer, told Ms. Mayer that when he expressed his fears about the Qaeda threat to Mr. Ashcroft, the attorney general snapped, "I don't want to hear about that anymore!"

After 9/11, our government emphasized "interrogation over due process," Ms. Mayer writes, "to pre-empt future attacks before they materialized." But in reality torture may well be enabling future attacks. This is not just because Abu Ghraib snapshots have been used as recruitment tools by jihadists. No less destructive are the false confessions inevitably elicited from tortured detainees. The avalanche of misinformation since 9/11 has compromised prosecutions, allowed other culprits to escape and sent the American military on wild-goose chases. The coerced "confession" to the murder of the Wall Street Journal reporter Daniel Pearl by Khalid Sheikh Mohammed, to take one horrific example, may have been invented to protect the real murderer.

The biggest torture-fueled wild-goose chase, of course, is the war in Iraq. Exhibit A, revisited in "The Dark Side," is Ibn al-Shaykh al-Libi, an accused Qaeda commander whose torture was outsourced by the C.I.A. to Egypt. His fabricated tales of Saddam's biological and chemical W.M.D. -- and of nonexistent links between Iraq and Al Qaeda -- were cited by President Bush in his fateful Oct. 7, 2002, Cincinnati speech ginning up the war and by Mr. Powell in his subsequent United Nations presentation on Iraqi weaponry. Two F.B.I. officials told Ms. Mayer that Mr. al-Libi later explained his lies by saying: "They were killing me. I had to tell them something."

That "something" was crucial in sending us into the quagmire that, five years later, has empowered Iran and compromised our ability to counter the very terrorists that torture was supposed to thwart. As The Times reported two weeks ago, Iraq has monopolized our military and intelligence resources to the point where we don't have enough predator drones or expert C.I.A. field agents to survey the tribal areas where terrorists are amassing in Pakistan. Meanwhile, the threat to America from Al Qaeda is "comparable to what it faced on Sept. 11, 2001," said Seth Jones, a RAND Corporation terrorism expert and Pentagon consultant. The difference between now and then is simply that the base of operations has moved, "roughly the difference from New York to Philadelphia."

Yet once again terrorism has fallen off America's map, landing at or near the bottom of voters' concerns in recent polls. There were major attacks in rapid succession last week in Pakistan, Afghanistan (the deadliest in Kabul since we "defeated" the Taliban in 2001) and at the American consulate in Turkey. Who listened to this ticking time bomb? It's reminiscent of July 2001, when few noticed that the Algerian convicted of trying to bomb Los Angeles International Airport on the eve of the millennium testified that he had been trained in bin Laden's Afghanistan camps as part of a larger plot against America.

In last Sunday's Washington Post, the national security expert Daniel Benjamin sounded an alarm about the "chronic" indecisiveness and poor execution of Bush national security policy as well as the continuinginadequacies of the Department of Homeland Security. Mr. Benjamin must feel a sinking sense of dj vu. Exactly seven years ago in the same newspaper, just two months before 9/11, he co-wrote an article headlined "Defusing a Time Bomb" imploring the Bush administration in vain to pay attention to Afghanistan because that country's terrorists "continue to pose the most dangerous threat to American lives."

And so we're back where we started in the summer of 2001, with even shark attacks and Chandra Levy's murder (courtesy of a new Washington Post investigation) returning to the news. We are once again distracted and unprepared while the Taliban and bin Laden's minions multiply in Afghanistan and Pakistan. This, no less than the defiling of the Constitution, is the legacy of an administration that not merely rationalized the immorality of torture but shackled our national security to the absurdity that torture could easily fix the terrorist threat.

That's why the Bush White House's corruption in the end surpasses Nixon's. We can no longer take cold comfort in the Watergate maxim that the cover-up was worse than the crime. This time the crime is worse than the cover-up, and the punishment could rain down on us all.