Wednesday, September 17, 2008

Wall Street privatises US government: be very afraid

Wall Street privatises US government: be very afraid

By Charles Dumas

Go To Original

The US low-tax zealot, Grover Norquist, is famous for wanting to "shrink government down to the size where we can drown it in the bathtub". Still alive, he is not turning in his grave, but his idea has been well and truly buried - and not by the Democrats he hates; they have been tongue-tied on the credit crisis.

It is Wall Street, the paradigm of "red in tooth and claw" capitalism, that has turned to government subsidy on an unprecedented scale.

Low, ideally non-existent, taxes may be very desirable, but when free-market principles came into conflict with the survival of business as we know it, priorities were clear. The US Federal government's full faith and credit - in other words, the resources of American taxpayers - should be urgently deployed to preserve as much as possible of the financial industry.

Luckily for Wall Street, government was still too big to fit in that bathtub - and proved only too willing to take up the challenge.

The scale of the operation has been huge. The Bear Stearns' takeover last March by JP Morgan was helped down by a spoonful of sugar in the form of $29bn of quasi-equity investment by the Federal Reserve Board that can only go down in value, never appreciate. Nice money if you can get it - well done JPM! (I must declare an interest: I am a future pensioner of JP Morgan, so I like to see its fortunes improved.)

By March the Fed might have been forgiven for hardly noticing a mere $29bn: it had provided more than $250bn in liquidity assistance to the money markets, accepting dodgy mortgage paper as collateral. Lucky old Wall Street - though, to be fair, this liquidity was the only justifiable aspect of the Fed's conduct in the 15 months of credit crunch.

The "Bear" was only the hors d'oeuvre, as anyone could see. After a mid-summer Act of Congress promising major help to the mortgage market, the full scope of potential largesse from Washington was more thoroughly exploited last weekend when the two giant "government sponsored enterprises", nicknamed Fannie Mae and Freddie Mac - here collectively "Frannie" for convenience - were formally extended a Federal government guarantee by Treasury Secretary Paulson.

Frannie is emphatically, in fact by definition, not part of the sub-prime crisis. Out of the country's total home mortgages of $10.5 trillion the lowest tier, sub-prime, is (or was) about $1.5 trillion, with another dubious category called "Alt-A" (also not "prime"), of another $0.5 trillion.

Within sub-prime, came the so-called "Ninja" mortgages: qualifications required being No Income, No Job or Assets, and in the bulk of cases no documentation either. Wall Street's enthusiasm for this kind of paper led to the losses even at 15 per cent higher, house prices a year ago, requiring the hors d'oeuvre described above.

With house prices now nearly 20 per cent down from their peak, the story has moved on from sub-prime to prime. Frannie is the main course. The definition of a prime loan is one that can be taken onto the Frannie balance sheet, or placed with investors under a Frannie guarantee. With about $8.5 trillion of prime loans out there in total, Frannie is on the hook, in one form or another, for more than half, some $4.5 trillion.

Back in the sound-money days of more than a half-century ago, Senator Everett Dirksen came up with the classic thought about the US Federal government: "A billion here, a billion there… pretty soon you're talking about real money". How quaint that sounds. In these go-go days for fiscal "conservatives", it is more like "a trillion here, a trillion there…".

The Frannie deal is big even by today's standards. It single-handedly vaults the US from a public debt ratio in the sound-money range into the company of fiscal basket-cases like Italy and Belgium, and that long-standing economic invalid, Japan.

The chart shows how the net US government sector debt pre-Frannie was about the same size relative to the economy as Germany, though worse than other G7 peers such as Canada, Britain and France. Now with one bound, the addition of $4.5 trillion puts it up there with Italy and Japan.


Fed closes the door on hands-off economics. Source: Lombard Street Research

For connoisseurs, the post-Frannie endorsement of the rating agency, Standard & Poor's, may raise an eyebrow: the triple-A rating of the US government is unaffected, we were told after last weekend's events. Many a nasty, even catastrophic, deterioration of credit has started with such a reassurance.

I have myself dealt with bankruptcy of a company that was actually "in the can" less than a year after it was triple-A rated. But triple-A rated mortgage securities trading at 50 cents in the dollar are bad enough. A bank whose credit-worthiness requires public defence has generally lost it. A government has greater resources, but questions are bound to be asked.

Nor is the monetary policy of the Federal Reserve designed to give comfort. Last autumn and winter, only too clearly panicked by Wall Street's fear of meltdown, the Fed made huge cuts in interest rates, as well as advancing (much more reasonably) over a quarter trillion dollars to the money market. The sense of panic told global investors all they needed to know.

China's accumulation of reserves, running at $500bn a year, had to be kept in dollars to support its (unwise) policy of controlling the yuan/dollar exchange rate. But the funds all got shifted to government or Frannie paper - no doubt a major force behind the US government's backing of Frannie: sudden withdrawal of China's dollar support genuinely might lead to financial Armageddon, in contrast with a few badly needed Wall Street failures.

Others flew the dollar - to anything they could think of. The euro, the yen, but notably to oil and other commodity derivatives. Commodity derivatives held off the public exchanges, "over the counter" (OTC), grew six-fold in three years, from $1.5 trillion at the end of 2004 to $9 trillion at the end of 2007 (and no doubt more since, though the data have yet to be published).

This is eight times the size of public-exchange commodity derivatives about which information is more detailed. Nobody knows the form of these OTC positions. But oil prices doubled from $70 a barrel just before the credit crisis to over $140 at the peak in July this year - and have since seen one of the fastest commodity price collapses ever, to little over $100. Those positions contained huge speculative accounts.

Who pays for dearer oil? Chiefly, the US consumer. So the rescue of Wall Street has panicked the Fed into a policy that has hammered American taxpayers, just as they have been called upon to finance the bailout of Wall Street.

The Fed's goals, as specified by Act of Congress, are to sustain good growth and keep inflation low (in that order). By its subjection to Wall Street priorities, it has both stimulated price inflation - the CPI was up 5.6 per cent over the latest 12 months - and thereby cut the real value of US incomes, and with them US growth.

It has thus failed in both its mandated goals. With one bullet - panicky interest rate cuts that have little relationship to saving Wall Street in any case - it has shot itself in both feet.

The irony is - I hesitate to say "joke", though black joke it is - that Wall Street did not need it, and will not (of course) be grateful. Sometime over this weekend, probably - or maybe a little later - Lehman Brothers is expected to endure a similar fate to Bear Stearns six months ago.

Perhaps "Hank the hunk" Paulson, former head of the leading Wall Street firm, Goldman Sachs, will play his usual highly visible part in devoting US taxpayers' resources to the cause. And will the world come to an end? Just as was feared at Y2K, or the CERN experiment last week? Well, actually, no.

And Wall Street realised this on Thursday when, after several days' worry over Lehman's fate, the stock market managed to go down sharply at the opening and then realise that it did/does not matter so much after all, ending up sharply instead. Neither would it have mattered much last March, had Bear Stearns simply been let go. Finally light has dawned.

In the meantime, the world has been changed. Free markets have been abandoned in America at the crucial hour by their chief exemplars, the financial masters of the universe. Let us hope that the convictions of the British financial and political community, though less confidently flaunted, will prove more durable.

Firms that fail after doing stupid things - or sometimes firms that are just plain unlucky - should go to the wall. Opinions may differ as to which category Northern Rock (our own particular policy disgrace) falls into.

The economy will recover sooner if banks that have made stupid mortgage loans suffer, and house prices fall more rapidly to levels at which affordability is obvious and buyers come forward. Society will also be more just. We should be grateful the Bank of England has an inflation target, not a confusing mishmash like the Fed. And that Mervyn King sticks to it.

It seems that President Bush and the Republicans are not just well to the left of Grover Norquist. They leave clear blue water on the left of Gordon Brown, much to the envy of Euro-lefties no doubt, who would love to ditch what they call "neo-liberalism", and what we call free markets, as easily as the American right wing.

Small wonder Barack Obama is having trouble establishing a distinct political identity - not to mention a feasible economic policy. And where subsidy is concerned, whoever may lead, can Detroit be far behind?

We read of a request for $25bn of Federal help to the car industry - both Messrs McCain and Obama think the amount should be twice that. Pigs to the trough - with or without your lipstick!

US Federal Reserve announces $85 billion bailout of insurance giant AIG

US Federal Reserve announces $85 billion bailout of insurance giant AIG

By Bill Van Auken
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Following emergency consultations between the Federal Reserve, the US Treasury and the Democratic leaders of both houses of Congress, the Federal Reserve on Tuesday night announced a bailout of the Wall Street insurance giant American International Group (AIG).

According to reports posted by the New York Times and the Wall Street Journal, under the emergency plan the Fed will provide the failing firm with an $85 billion loan in exchange for 80 percent of its assets.

The reported bailout is a reversal of the policy adopted by the federal government just last weekend, when it failed to intervene to stop the collapse of Lehman Brothers, the country’s fourth largest investment bank. According to the Journal, government officials believed “it would be ‘catastrophic’ to allow AIG to fail.”

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, the newspaper said, “concluded that federal assistance would be necessary to avert an AIG bankruptcy, which they feared would have disastrous repercussions throughout the financial markets.”

The bailout is one more demonstration of the systemic crisis confronting American and world capitalism. It is unprecedented and, in some respects, goes even further than the government takeover of Fannie Mae and Freddie Mac barely a week before. Unlike the two mortgage finance giants, AIG is not a government-sponsored institution and is not even directly regulated by the federal government.

Pressure for a rescue of AIG grew after all three major rating agencies downgraded its credit Monday night, raising the prospect that lenders would recall their loans.

It was feared that the failure of AIG, with $1 trillion in paper assets, would have a domino effect, threatening banking and corporate failures throughout the world economy. AIG is one of the largest players in the global, unregulated market (estimated at $62 trillion) in credit default swaps, i.e., private contracts under which companies like AIG guarantee the debt, including mortgage-backed bonds, held by other companies.

While ostensibly an insurance company, AIG engaged in the same financial parasitism as the rest of Wall Street, investing heavily in mortgage-backed securities and writing derivatives on collateralized debt obligations (CDOs) tainted by subprime exposure.

Now, once again, millions of ordinary working people will be forced to pay the price for this reckless speculation carried out in pursuit of super-profits.

AIG was forced in recent weeks to take massive write-downs on its assets. In August, the company announced second-quarter results that included a staggering $25 billion in losses on its derivatives.

The government intervention at AIG follows the collapse over the weekend of two of Wall Street’s largest investment banks. The bankruptcy of Lehman Brothers and the takeover of Merrill Lynch by Bank of America sent shockwaves through financial markets around the globe and sparked fears of a chain reaction of banking failures.

A worldwide sell-off of stocks was capped by Monday’s 504-point drop on Wall Street, the steepest one-day loss since markets reopened following the September 11, 2001 attacks.

In response to the deepening financial crisis, the Federal Reserve Board and its counterparts in Europe and Asia poured hundreds of billions of dollars in fresh credit into the economy. Between them, the Fed, the European Central Bank, the Bank of England and the Bank of Japan pumped $210 billion into the money markets on Tuesday in an attempt to prevent a seizing up of the global credit system. Central banks in India and Australia also carried out major injections into their banking systems.

The immediate trigger for the massive cash infusion was the doubling of the interbank lending rate in the wake of the Lehman Brothers collapse. The sharp rise in short-term lending rates, which hit a seven-year high of 6.79 percent, was a measure of deep concern that AIG would follow Lehman into bankruptcy, saddling world financial institutions with hundreds of billions of dollars in losses in credit derivatives.

The interbank lending rate rise fed into the global stock market decline, as investors dumped financial stocks. On Tuesday, London’s FTSE 100 fell below 5,000 for the first time in seven years, with HBOS, Britain’s largest mortgage lender, seeing its shares plummet by 40 percent.

The Tokyo stock market fell by more than 4 percent, while in Paris and Frankfurt markets were down more than 2 percent. In Russia, the country’s main stock market halted trading after suffering losses of 11.47 percent.

The Federal Reserve Board shocked Wall Street Tuesday afternoon by leaving US interest rates unchanged. Speculation had run rife in the financial markets that the Fed would cut its federal funds rate by as much as 75 basis points in light of the deepening credit crisis.

The statement the US central bank issued in announcing its decision to stand pat painted a grim picture of the US economy. “Strains in financial markets have increased significantly and labor markets have weakened further,” it stated. “Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.”

It likewise cited “increases in the prices of energy and some other commodities” that left the outlook for inflation “highly uncertain.” It concluded that the “downside risks to growth and the upside risks to inflation are both of significant concern.”

The decision not to heed the demands of the stock market was attributed by some analysts to the Fed’s conviction that, given the depth of the banking crisis, lowering interest rates would have little or no effect in terms of generating credit for the economy.

“You could cut the Fed funds rate from 2 percent to 1.5 percent. It won’t cause any more lending. The banking system has no capital base to lend,” George Feiger, chief executive at Contango Capital Advisors in Berkley, California, told Reuters news agency.

The announcement of the Fed decision provoked sustained booing from the floor of the New York Stock Exchange, and stocks resumed their downward slide before rebounding later in the afternoon. The Dow Jones Industrial Average closed up 1.3 percent, or 141.5 points, at the end of the day.

Most analysts saw the rebound from Monday’s dramatic market decline as a response to predictions that the government would mount a rescue of AIG.

Furious trading in the company’s shares churned the market. At one point in the day, AIG stocks had lost 74 percent—falling to $1.25, compared to a year high of $70. By the end of the day, they were down 21.2 percent.

In the face of these developments, there was recognition within ruling circles and the major media internationally that world capitalism is facing a crisis of historic dimensions. Comparisons of the present crisis to the onset of the Great Depression of the 1930s were widespread.

The Financial Times of London, the sober voice of British finance capital, commented in its editorial Tuesday, “The world has not ended. The international economy has not yet collapsed. But one thing is now quite clear: the banking system as we know it has failed.”

Denunciations of the American financial establishment and the “free market” ideology that Washington has sought to ram down the rest of the world’s throat over the course of decades were also prevalent.

In Germany, the Frankfurter Rundschau stated: “The Americans are exposing the world to a highly dangerous experiment. For ideological reasons they don’t want to save another bank with taxpayers’ money and nationalize it. They are accepting the risk that this policy could end up costing a lot more money and lead to upheavals that no one had even dared imagine.”

The German newspaper added, “If things take a sharp turn for the worse, European taxpayers ... will have to pay billions of euros to save local banks, returns from life insurance and other retirement provisions will decline sharply, and the crisis will bestow upon Europe millions of unemployed. Thank you America!”

For its part, the Wall Street Journal, the unwavering champion of “free market” capitalism, published an editorial Tuesday entitled “Surviving the Panic.” It argued for a massive government intervention to buy up all of the worthless paper on the books of Wall Street’s finance houses and thereby secure their profits together with the multi-million-dollar incomes of their top executives.

The newspaper warned ominously, “More major bank failures are a certainty, including some very large ones.”

Its solution? The setting up of a new Resolution Trust Corporation, of the type created during the savings and loan crisis of the 1980s, which would “provide a buyer for securities for which there is no market.” In other words, the US Treasury’s vaults should be opened up to bail out major Wall Street investors and CEOs who made billions off of a speculative housing bubble that has now burst, precipitating the greatest financial crisis since the 1930s and threatening millions of working people with the loss of their jobs and homes.

Wall Street’s newspaper of record offered no indication of how it would pay for such a bailout for the rich. Undoubtedly, the answer will come after the November election, in the form of a ferocious assault on working class living standards and the dismantling of what remains of America’s tattered social safety net, including Social Security, Medicare and Medicaid.

Gold Climbs the Most in Nine Years as Investors Seek Haven From Turmoil

Gold Soars Most Since 1999, Silver Surges on Demand for Haven

By Pham-Duy Nguyen

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Gold surged the most in nine years as investors sought the safety of precious metals on concern that the credit crisis will deepen, leading more financial institutions to fail. Silver soared the most since 1979.

Equities tumbled after the Federal Reserve took over the biggest U.S. insurer. The cost of borrowing dollars for three months jumped the most since 1999 as banks hoarded cash. Central banks in the Phillipines and Venezuela said they may buy gold. In March, the metal reached a record as the government steered JPMorgan Chase & Co. to buy Bear Stearns Cos.

‘‘People are worried about money being safe in a bank,'' said Ron Goodis, the futures trading director at Equidex Brokerage Inc. in Closter, New Jersey. ‘‘With paper assets in question, gold represents the textbook storehouse of value.''

Gold futures for December delivery gained $70, or 9 percent, to $850.50 an ounce on the Comex division of the New York Mercantile Exchange. The percentage gain was the biggest for a most-active contract since Sept. 28, 1999. The metal reached a record $1,033.90 on March 17.

Silver futures for December delivery rose $1.158, or 11 percent, to $11.675 an ounce, the biggest gain since Dec. 31, 1979.

Gold is up 1.5 percent this year, while silver still is down 22 percent.

The dollar fell as much as 1.3 percent against a weighted basket of the euro, yen and four other major currencies.

Financial ‘Catastrophe'

‘‘When you're perhaps facing a catastrophe in the U.S. financial market, investors are thinking: ‘Screw it. I'm jumping back into the old faithful,''' said Joel Crane, a metals strategist at Deutsche Bank AG in New York. ‘‘Gold's relative value is cheap compared with the dollar.''

About $2.8 trillion of market value was erased from global stocks this week as Lehman Brothers Holdings Inc. filed for bankruptcy, Bank of America Corp. purchased Merrill Lynch & Co. for $50 billion, and the U.S. government took control of American International Group Inc. in an $85 billion takeover to prevent the biggest financial collapse ever.

Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.

‘‘You're sorting out, by process of elimination, that gold is the asset you'd rather own,'' said Greg Orrell, who manages the OCM Mutual Fund at Orrell Capital Management Inc. in Livermore, California. ‘‘It's the currency you'd prefer.''

Rates Plunge

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954. Investors pushed the rate as low as 0.0304 percent.

‘‘It's not even worth it to keep money in the bank,'' said John Licata, the chief investment strategist at Blue Phoenix Inc. in New York. ‘‘Gold is going to be the beneficiary of a global move toward a safe haven.''

Reserve Primary Fund, the oldest U.S. money-market fund, yesterday became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman.

‘‘That's systemically scary,'' said Frank McGhee, the head dealer of Integrated Brokerage Services LLC in Chicago. ‘‘Unless you put gold in your backyard, you have to trust your money to an institution.''

Gold's gains accelerated after prices topped $800, analysts said.

‘‘There are going to be more banks that will fail,'' said Matt Zeman, a metals trader at LaSalle Futures Group Inc. in Chicago. ‘‘This is the time when people want to buy gold.''

London-based researcher GFMS Ltd. said gold may rise to $950 by the end of the year as central banks and mining companies hold back sales and investors buy the metal as a haven against falling equities.

Mortgage Meltdown

Since the second quarter of 2007, banks worldwide have posted $517.7 billion in losses and writedowns related to investments in subprime mortgages. The Fed has also engineered $200 billion in takeovers for Fannie Mae and Freddie Mac, the biggest providers of financing for U.S. homes.

The world's central banks, already the biggest holders of gold, may look to the metal as an alternative reserve asset to the dollar, said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia. Until today, Gartman had been bearish in his outlook for gold.

Venezuela said today it may buy 15 metric tons of gold a year to develop investment products, including coins. At a conference in London, Maria Ramona Gertrudes Santiago, the managing director of the treasury at the Phillipines Central Bank, called gold a ‘‘perfect hedge.''

Sales of gold by European central banks may total 365 metric tons in the year through Sept. 26, below the cap of 500 tons, the World Gold Council said yesterday. That would mark the lowest amount since the banks agreed to sell the metal in 1999.

Global banks brace for derivative blow-up

Global banks brace for derivative blow-up

Matthew Stevens

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SO here we are on the morning of D Day. The world's major couterparties on the $US455 trillion derivatives market go into technical default and no one is sure what is going to happen.

Lehman Bros yesterday formally petitioned the State Bankruptcy Court of the Southern District Court of New York for Chapter 11 protection.

Lehman would also have filed what are called "first day motions", which allow the bank to pay salaries and wages, while it continues to market its non-toxic, broker-dealer operations and work out what on earth to do with its highly toxic $US53 billion residential and commercial mortgage portfolio.

But, as scary and Spartan as it might sound, failure is as essential to the workings of an effective marketplace as is success.

Which means only that, given this shattered, battle-weary investment bank is unable to find itself a new owner or think its own way through the current calamitous circumstances, then one of the legendary brands of Wall Street should be left to fail.

In a weekend of unprecedented drama, the Fed seems to have been forced to play Solomon and choose between Merrill Lynch and Lehman. Both were facing mortal threat. But it seems only one could survive intact.

So, the Fed seems to have shifted Bank of America's sights away from the arguably unsalvageable Lehman and onto the bigger and more systemically important Merrill Lynch. It was the right choice.

Mind you, there are some more tough ones ahead for the Fed, not least of them being how to respond to the request from US insurer AIG for $US40 billion in emergency assistance.

AIG is reported to have but days to survive. The rating agencies, bless them, have threatened to downgrade AIG's credit if it cannot raise $US40 billion by Monday. The company has been in unsuccessful negotiations with KKR, TPG and J.C. Flowers. But the price, so far, has not been right. But as the risks mount, so will the pressure to surrender. The predators are playing it very tough indeed in their quest for bargains.

In the 13 months since the sub-prime crisis froze US credit markets, three of the world's top five independent investment banks have essentially failed, while the US Government has assumed control of mortgage twins Fanny Mae and Freddie Mac.

Of Wall Street's big five independents, only two are now left standing, Goldman Sachs and Morgan Stanley. Both must be wondering whether it is the model that is broken here.

Now, if you had said 18 months ago that three US investment banks would fail or be forced into shot-gun marriages to avoid failure, people would have looked at you like you had two heads. Particularly if those people worked in the investment banking sector. But nothing in that sector is certain any more.

Of the two remaining independents, Goldman Sachs remains steadfastly aloof from sub-prime's deathly creep because it closed out all its paper positions ahead of the credit crunch. At least that's what it believes.

Morgan Stanley, on the other hand, is still a player in the potential lethal shadow markets, but seems currently to sailing in comparatively clear air.

And then there is Lehman Bros. It will now likely be dismembered by the Wall Street wolves. The prices will be low and the cost to the banking system and Lehman shareholders quite frightening.

According to the senior work-out specialist with one of Australia's so far insulated Four Pillars, the global banking system has now "drifted into unchartered waters".

"What we know, well, what we believe we know at least, is that is that Lehman is in the top 10 players in the global credit default swap market.

"What we don't know is how many trades that equates to. And that means we do not really have any way of anticipating the short-term impact on that market as it opens in Europe overnight and the US this morning.

"But you can expect massive two-way pricings as counterparties move to close-out trades currently being held with Lehmans. What will flow from that, well, who knows. But certainly you can expect another round of big losses to be brought to book in the next batch of quarterlys in the States."

The problem in making predictions here is that a counterparty the size of Lehmans has never failed before. It is that simple.

The hope, expressed with typical confidence on Sunday by none other than Alan Greenspan, is that there will be an orderly liquidation and wind-down of Lehman with the usual suspects, the US hedge funds and private equity buyout merchants, picking the eyes out of what still has value.

That makes some sense given that the one thing everyone agrees on is that, whatever Lehman was worth on Friday, it is worth a lot less now. But there isn't much else to make a bet on here.

There remain two distinctly divergent schools of thought on the ramifications of the collapse of an organisation as pivotal to the synthetic securities markets as Lehman is.

The likes of Warren Buffett would have it that the defaults triggered by Lehman's implosion would resound fearfully through the multi-trillion-dollar derivatives market, generating a global, capital-burning bushfire in global markets.

Then there are those who believe the systemic risk in the $US455 trillion derivatives market has been overcooked.

But even those who maintain a less cataclysmic view than Omaha's Oracle accept that a major default event like the collapse of the 158 year old Lehman will result in massive value burn. And there will be hot-spots in unexpected places -- like, for example, a sad selection of deluded Australian councils and public works authorities that disgracefully figured derivatives were a good place to put public monies.

The fact that banks around the globe spent the weekend re-assessing their position says everything about the latent potential for systemic unravelling.

As does the Fed's decision to busy itself over the weekend with, among it other tasks, the creation of a $US100 billion liquidity dyke to secure against the risk of the sort of counter-party default tsunami Buffett has so often warned of. Up to 10 senior US banks are reported to have pledged to support the emergency fund.

What every bank in the world will be doing right now is assessing where Lehman stood as counter-party. The trades you then will be most concerned to identify will be those where they have acquired protection and Lehman is the protection seller.

Where that has happened, there will be tremendous concern because that protection simply no longer exists.

"Fear is ruling the market," another senior banker said yesterday. "Nobody knows what is going to happen and nobody is trusting anyone."

And what, you might sensibly ask, does all this mean for Australian's banking system?

If you believe the markets, it means a fair bit, given $4.6 billion was lopped from the market value of the Big Four in the wake of uncertainty's dramatic return.

But if you believe the banks themselves, it doesn't mean a whole lot, at least not yet. The consensus is that our pillars have, at very worst, non-material exposures to Lehman here or in the US and that their exposures to counterparty risk are similarly immaterial.

The bigger issue for our banks, given their umbilical dependence on global capital markets to fund their lending, is how the weekend's ordeal at Lehman, Merrily Lynch and AIG play out in global credit markets over the medium term.

Morgan Stanley, Goldman Shares Plunge Most Ever as Credit Crisis Deepens

Morgan Stanley, Goldman Plummet After AIG Takeover

By Christine Harper

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Morgan Stanley and Goldman Sachs Group Inc., the biggest U.S. securities firms, tumbled the most ever in New York trading after a government rescue of American International Group Inc. failed to ease the credit crisis. The cost to protect against a default by the banks rose to a record.

Goldman fell as much as 26 percent on the New York Stock Exchange and Morgan Stanley plunged 44 percent, leading financial stocks to the lowest level in five years.

‘‘They're fish in the barrel, the short sellers have them targeted,'' said William Smith, whose firm Smith Asset Management Inc. in New York manages $80 billion, including Goldman stock. ‘‘Morgan Stanley's probably going to wind up doing a deal, it's really a matter of survival.''

Executives at Goldman Sachs and Morgan Stanley told analysts and investors yesterday that they see no need to combine with banks even after Merrill Lynch & Co.'s emergency sale to Bank of America Corp. over the weekend and Lehman Brothers Holdings Inc. bankruptcy filing. Goldman and Morgan Stanley said they have adequate capital and cash and don't have any pressing need to borrow new money. Spokesmen for both firms declined to comment.

Analysts including David Trone at Fox-Pitt Kelton Cochran Caronia Waller have said the demise of Lehman and Merrill may force Goldman and Morgan Stanley to pursue a sale or some sort of transaction with a bank, to gain a stable funding base of deposits and the confidence of the markets. The firms hold more than $20 of assets for every $1 in capital, making them dependent on lenders.

‘Not Up to You'

‘‘From what Goldman said on their conference call, they said they're going to go it alone,'' Smith said. ‘‘But when you're leveraged it's not up to you, it's up to your trading counterparties.''

Morgan Stanley dropped $10.70 to $17.99, the lowest in almost 10 years, in composite trading on the New York Stock Exchange at 1:45 p.m. Goldman slumped $32.92 to $100.09, a three-year low.

Credit-default swaps protecting against a default Morgan Stanley bonds rose 220 basis points to 900 basis points, and earlier traded at 925, according to broker Phoenix Partners Group in New York. Contracts on Goldman climbed 110 basis points to 530 basis points, Phoenix data show. An increase in price for the contracts indicates a deterioration of the perception of credit quality.

Morgan Stanley Chief Executive Officer John Mack and Goldman's Lloyd Blankfein are trying to navigate declining investor confidence that prompted the emergency sales of Merrill Lynch and Bear Stearns Cos., and the bankruptcy of 158-year-old Lehman.

‘Rumor and Fear'

The turmoil spurred the U.S. government late yesterday to lend as much as $85 billion to AIG to prevent the insurer's collapse.

Markets are reacting to ‘‘rumor and fear,'' Colm Kelleher, Morgan Stanley's finance chief, said yesterday after the New York-based company reported better-than-estimated earnings for the third quarter.

Credit-default swaps on Morgan Stanley and Goldman rose for the third day. Contracts on Charlotte, North Carolina-based Wachovia Corp. approached a record reached yesterday. Contracts on AIG plunged.

Glenn Schorr, an analyst at UBS AG, said today in a note to investors that the market reaction was ‘‘insanity.'' Goldman and Morgan Stanley aren't at risk of running out of money because they keep plenty of cash on hand and can borrow from the Federal Reserve and a consortium of banks set up over the weekend, he said, noting that both have enough capital to absorb any losses.

Locked Up

‘‘If you have the liquidity and capital to withstand the storm, why should CDS spreads be having such a big impact on stocks?'' he wrote. He said investors must be reacting to concern that counterparties or clients will abandon the firms or that the credit-rating companies will cut their ratings.

‘‘At the heart of these issues is available funding, all in funding costs and the inherent mismatch of short-term funding and longer duration, levered balance sheets,'' Schorr said.

Credit markets have been locked up since New York-based Lehman, which was the fourth-largest U.S. securities firm, filed for bankruptcy protection on Sept. 15, raising concern that other financial companies may fail. Investors have been unwilling to take on new debt risk and overnight lending rates have soared.

Morgan Stanley's plunge may add impetus to calls from Democrats in Congress for a broader effort by policy makers to address the financial crisis, including setting up a government agency to take on devalued assets.

‘‘The private market screwed itself up and they need the government come and help them unscrew it,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters late yesterday after top lawmakers met with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke.

Frank this week proposed considering an agency to ‘‘deal with all the bad paper out there'' and get financial markets ‘‘out of the box'' they are in.

Federal bank insurance fund dwindling

Federal bank insurance fund dwindling

Federal bank insurance fund dwindling, regulators consider options for replenishing it

By Marcy Gordon

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Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.

Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.

Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.

Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.

But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.

The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion -- the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.

FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury -- something that has never been done.

The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.

Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board, which consists of her, Comptroller of the Currency John Dugan, Thrift Supervision Director John Reich and two other officials.

Bair also is considering a system in which banks with riskier portfolios would be charged higher premiums, raising the possibility those costs could be passed on to consumers.

A Washington Mutual failure would dwarf the largest bank collapse in U.S. history -- Continental Illinois National Bank in 1984, with $33.6 billion in assets.

By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.

Arthur Murton, director of the FDIC's insurance and research division, said that when large institutions have failed in recent years, the hit to the fund has been about 5 to 10 percent of the company's assets.

Standard & Poor's Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody's and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company's stock price has plummeted.

WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be "significantly above" required levels and that its outlook for expected credit losses is unchanged.

Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.

These amounts aren't publicly disclosed but must be repaid if a bank or thrift fails, notes Karen Shaw Petrou, managing partner of Federal Financial Analytics.

If the FDIC doesn't have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.

Based on projections of possible scenarios of bank failures, "between the (insurance) fund that we have now and our ability to draw on the resources of the industry ... we do have the resources" needed, Murton said Tuesday.

Though short-term borrowing from Treasury for working capital may be possible, he said, tapping the long-term credit line is unlikely.

But Whalen said the Federal Reserve, the Treasury and Congress should "immediately devise" and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks.

"While the FDIC already has a credit line in place and this figure may seem excessive -- and hopefully it is -- the idea here is to overshoot the actual number to reinforce public confidence," Whalen wrote in a note to clients. "Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: 'Show us the money.'"

Before Congress passed the law overhauling deposit insurance in 2006, about 90 percent of all insured banks and thrifts -- considered to have adequate capital and to be well managed -- paid no premiums to the FDIC. Today, all of them do.

There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month. The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail. Total assets of troubled banks tripled in the second quarter to $78 billion, and $32 billion of that coming from IndyMac Bank.

Last month, Bair called those results "pretty dismal," but said they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets. "More banks will come on the (troubled) list as credit problems worsen," he said. "Assets of problem institutions also will continue to rise."

As Wall Street Collapses, Will Washington Get a Clue?

As Wall Street Collapses, Will Washington Get a Clue?

By Nomi Prins
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As the Dow hemorrhages, Wall Street firms are betting on which one will bite the dust next, and Federal Reserve Chairman Ben Bernanke probably wishes he could leave as the next administration sets up shop, no one is proposing the long-term solution to the banking crisis: regulating the industry.

The Fed was right to turn Lehman Brothers away from its window during those final moments of doom on Sunday night. As such, the resulting $613 billion Chapter 11 filing, the largest bankruptcy in U.S. history (WorldCom dropped to second with a mere $104 billion in assets) was secured.

It was wrong to back the $30 billion bailout of Bear Stearns in March, which facilitated JPM Chase's acquisition of Bear. It should not be the Fed's responsibility, or the government's, to back investment bank speculation. Instead, regulators should have been more vigilant as speculation outpaced available capital, and transparent quantification of risk went out the window.

However, it should be the government's job to stabilize the financial system; the question is how. Unfortunately, neither the Federal Reserve, nor the government, nor the presidential candidates have the slightest clue. Neither a blame game nor desperate piecemeal fixes will work. This is not about Republican or Democratic policies, but systemic bipartisan deregulation. Only a quick bout of sweeping and decisive regulation can fix what's broken.

In 1932, three years after the 1929 stock market crash, the banking system last stood at a brink of implosion. Franklin Delano Roosevelt zoomed past Herbert Hoover into the White House. The country was struggling through a Great Depression unleashed by the forces of unregulated economic greed. FDR stood up to the unrestrained power of Wall Street and contained it. The resultant New Deal included a stoplight at the heavy intersection of financial capital and unregulated greed, called the Glass-Steagall Act of 1933.

Decisively, the Glass-Steagall Act forced institutions within the banking community to pick a side. If you want to deal with the population at large, take their deposits, give them a safe place for their savings and make reasonable loans for which you are as responsible as the borrowers -- terrific. As a commercial bank, you will have the newly established Federal Deposit Insurance Corporation (FDIC) backing your depositors. We, the federal government, will regulate you.

If you want to raise capital through speculative investors at home or overseas -- fine. But as an investment bank, you don't get our backing and you don't get to mix it up with citizens' lives or use their capital to fund your trading activities.

That simple premise, the pristine logic of the Glass-Steagall Act, not only kept consumer and speculative capital from intertwining within the same institution; it simplified the ability to understand the activities of all financial organizations. Transparency was not perfect, but it was more easily accomplished.

Lehman Brothers got a taste of the intent of Glass-Steagall. Its demise is ugly, not just because of its 156-year history, the 25,000 employees who are suddenly without jobs, or the long list of institutions to which Lehman owed money that will be slugging it out in bankruptcy court.

It is ugly because it underscores the supreme gutlessness of the executive and congressional branches of government. Bernanke is desperately trying to figure out how to save the banking industry from itself. Treasury Secretary Hank Paulson can't wait until the election saves him from himself. And the presidential candidates are giving Wall Street, and each other, a barrage of verbal shellacking.

None of this changes the playing field.

The catalyst for this current crisis may be the housing market -- not because individual borrowers slightly overleveraged, but because the entire banking industry massively overleveraged. The larger culprit is the killing of Glass-Steagall, which paved the way for this recklessness.

Yet, rather than considering the massive risks of merging commercial and speculative banking interests, given the overwhelming evidence, federal officials actually pushed for Bank of America's $50 billion all-stock takeover of Merrill Lynch, rather than questioned it.

I worked on Wall Street, at Lehman and Bear and Goldman Sachs. Take my word for it: You cannot merge risk management systems more quickly than this economic crisis can continue to unfold. It is technologically impossible.

This knee-jerk move follows the same dangerous green-lighting of mega-mergers that began when Citigroup took over Salomon Brothers after Congress killed Glass-Steagall in November 1999, and continued with Chase taking over JPM and recently Bear Stearns.

The Fed wants to avoid another huge failure in Merrill Lynch by pushing it under the rug of Bank of America. That is bad policy. Bank of America cannot possibly have a clue about the extent of Merrill's potential losses. This commercial bank taking over a speculative giant is much more dangerous than Lehman Brothers tanking. The Fed was within all of its rights and sanity to say no to Lehman's plea for a bailout. But it won't be able to do the same thing with Bank of America, which, unlike Lehman or Bear, is responsible for the accounts of millions of customers -- real people with real money on the line.

The speculative nature of the industry, in which commercial and investment banks can borrow beyond their abilities to repay, is a threat to national economic security. It requires a serious exit strategy.

There is no easy answer, but there is only one solution -- and it lies polar opposite to the Bank of America-Merrill Lynch merger logic. The only real way to stabilize the financial industry is to take it apart, quantify and separate its risks, and begin again. We can do this. FDR did it. The market is larger now, and more global. That is not an excuse for inaction; it belies a screaming need for useful action and meaningful regulation. Period.

McCain’s Political Games Can’t Compete With an Economic Meltdown

McCain’s Political Games Can’t Compete With an Economic Meltdown

Earth to McCain: It’s a Crisis

Earth to McCain: It’s a Crisis

Drilling Bill Passes in House

Drilling Bill Passes in House

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After months of debate about expanding offshore oil and gas drilling, the House passed legislation Tuesday that could open up large areas off U.S. coastlines to energy production.

The bill (HR 6899) passed 236-189 despite the objections of Republicans who said it would do little to boost offshore oil and gas production. President Bush threatened a veto.

A Republican attempt to stall the measure was defeated. The chamber voted 191-226 against a motion to recommit the bill to the Natural Resources Committee.

After watching Republicans gain political traction in recent weeks with calls for more offshore drilling, Democratic leaders hope the legislation will provide political cover for moderate members of their caucus who face tough re-election fights.

Democrats touted the bill as a compromise that would expand domestic production and invest in alternative energy sources. It would allow drilling beyond 100 miles off U.S. shores and give states the option of allowing production beyond 50 miles from the shores. It proposes major incentives for renewable energy, building efficiency and advanced technologies for coal-fired power plants.

“I don’t know why my Republican colleagues can’t take yes for an answer,” said co-sponsor Gene Green , D-Texas. “If you want to drill in our country, this is the bill.”

Majority Leader Steny H. Hoyer , D-Md., said the bill represents a change from the policies of Republicans and the Bush administration.

“The bill that we’ve bought to the floor will help end the Bush-McCain energy policies of the past,” he said.

Republicans complained they had no input. The measure was first released late Monday.

“We have a responsibility to defeat this legislation,” said Don Young , R-Alaska. “It was conceived in the dark. Who the father is, I do not know.”

The bill represents a concession for Democrats who have resisted calls for any new offshore drilling. But the House leadership has acknowledged that the measure was probably necessary, because Republicans otherwise were prepared to stall an appropriations package that will keep the government running next year.

The current drilling moratorium has been renewed in annual appropriations legislation since 1982, and the House GOP said it would fight the fiscal 2009 package if it included an extension of the moratorium.

The Senate could take up its own energy legislation in the coming days, but prospects for working out a final version with the House appear difficult. The Senate is not expected to pass the House bill in its current form.

Democrats Sue Michigan G.O.P. on Voter Issue

Democrats Sue Michigan G.O.P. on Voter Issue

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Updated Responding to allegations that Republican Party officials in Macomb County, Michigan plan to use home foreclosure lists to challenge voters at the polls in November, the Obama Campaign and the Democratic National Committee filed a lawsuit on Tuesday in federal court to prevent what they contended was an illegal practice.

Obama Campaign General Counsel Bob Bauer said that using home foreclosure lists as a basis for challenging voter eligibility would have a "deadly effect of the voting process" and argued that the practice would be illegal.

"This is a standard operating procedure within the Republican party that's been under legal challenge," Mr. Bauer said on a conference call with reporters on Tuesday.

Last week the chairman of the G.O.P. in Macomb County, James Carabelli, was quoted in the online publican, the Michigan Messenger, as saying that the party planned to use foreclosure lists to stop voters who no longer have valid addresses from casting their ballots.

"We will have a list of foreclosed homes and will make sure people aren't voting from those addresses," Mr. Carabelli was quoted as saying, according to a Sept. 10 article in the Michigan Messenger.

Since the story first appeared, Mr. Carabelli has repeatedly denied that the party planned to use the lists, and in an interview with The New York Times suggested that he was misquoted.

"I have no voter challenging program here in my county," Mr. Carabelli said late last week.

And in a statement on the Michigan G.O.P. Web site the chairman of the Michigan Republican Party Saul Anuzis called the story "a complete fabrication."

"There has never been a plan to use foreclosure lists to challenge voters. There is no such plan, and there never will be such a plan. Period," Mr. Anuzis said.

Mr. Anuzis repeated those assertions on a conference call today and said that the Republicans would formally ask the Messenger for a retraction. Absent that, he said, the G.O.P. would pursue a libel lawsuit against the publication.

According to a statement on its Web site, Messenger editors appeared to be resisting calls for a retraction.

"There will be no retraction because Mr. Carabelli and Mr. Anuzis' claims are unfounded. The quotes were not fabricated. Michigan Messenger and the Center for Independent Media stand behind this story 100 percent."

Mr. Anuzis characterized the Democrats' legal action a "stunt."

"It clearly shows their desperation as they move forward," he said.

But the Obama campaign countered that the denials amounted to "backpedaling" on the part of the Michigan G.O.P., and said that they had enough evidence to go forward with the lawsuit.

"Our position is very simply, they can tell it to the judge," Mr. Bauer said.

A copy the Obama campaign's complaint, which was filed on Tuesday in United States District Court in Eastern Michigan, is available here.

How 6,000 Tons of Radioactive Sand from Kuwait Ended Up in Idaho

How 6,000 Tons of Radioactive Sand from Kuwait Ended Up in Idaho

By Penny Coleman

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On April 26, 2008, the BBC Alabama arrived in Longview, Washington carrying 6700 tons of Kuwaiti sand. The sand had become contaminated with depleted uranium when U.S. military vehicles and munitions caught fire at Doha Army base in Kuwait during the 1991 Gulf War. The depleted uranium was being repatriated. The sand was a gift of the Kuwaiti government.

So was the cost of repatriation. Neither government will discuss just how much the tab was.

Mike Wilcox, vice president of the International Longshoremen's and Warehousemen's Union local 21, told the Longview Daily News that initially he had been "concerned about the safety of longshoremen and the entire community when he heard a shipment of depleted uranium was coming into Longview."

But the U.S. Nuclear Regulatory Commission determined that the sand contained "unimportant quantities" of radioactive material, and officials from the Department of Health would be available to test radiation levels--just in case any of the sand spilled.

At the last minute, the Army notified port authorities that tests had revealed that the sand was also contaminated with lead--in fact 4 times more lead than EPA's limit for hazardous materials. Transshipment was delayed for a few days awaiting a green light from the EPA.

Mike Wilcox told the Daily News he hoped it would be a one-time thing.

Over the next month, longshoremen loaded 160 containers onto rail cars bound for an Idaho-based waste disposal site owned by a company called American Ecology. When the sand arrived at the Idaho site, the company did its own tests and, as Chad Hyslop, project director for American Ecology, told the Daily News, "found no hazardous levels of lead."

Doug Rokke, who quit his job directing the clean-up of radioactive battlefields for the Army, contacted American Ecology and discovered "that they had absolutely no knowledge of U.S. Army Regulation 700-48, U.S. Army PAM 700-48, U.S. Army Technical Bulletin 9-1300-278, and all of the medical orders dealing with depleted uranium contamination, environmental remediation procedures, safety, and medical care."

Hazardous materials storage has become a lucrative and growing business, especially since Donald Rumsfeld began implementing his plans for a sleek new "global cavalry" capable of swift and lethal response from strategically placed "frontier stockades" to punish bad guys whenever and wherever they have been bad. According to the Pentagon's annual "Base Structure Report," which itemizes its foreign and domestic military real estate, DoD currently operates over 800 such bases around the world; 5311 if you count the ones in American territories and on the U.S. mainland; probably well over 6000 if you count the ones, like Doha in Kuwait, that for some reason didn't make the list. (Similarly omitted are all US bases in Iraq, Afghanistan, Israel, Kyrgyzstan, Qatar, and Uzbekistan.)

Rumsfeld, coyly switching metaphors, referred to them as "lily pads," which is about as convincing a euphemism as "American Ecology." Lily pads may sound greener and friendlier than, say, "footprint," which makes one at least think of boot heels, but it is safe to assume--because there has never been an exception--that every one of those bases is an environmental disaster area. The American military is the most profligate polluter on the planet.

The Thule base in Greenland, for example, was sort of a pioneer lily pad. In the 40's, it was a convenient hop, skip and a bomber run to Berlin, and later it was part of the cold-war surveillance network. In 1953, the US Navy sailed into Thule Harbor and informed the local Inughuit community that they had 48 hours to leave. Sorry for the inconvenience, folks, but there are houses 100 miles north of here with your names on them. We promise.

"Everyone packed what they could on their dogsleds and set off north across the ice," remembers Aron Qaavigaq, who was 12 at the time. "After a while, my father stopped and looked back. He and my mother were crying... We were young and very excited to be going somewhere new. But they kept crying, so we knew there was something wrong."

There were no houses. Qaavigaq and his family spent the winter in tents 695 miles north of the Arctic Circle. The hunting and fishing was lousy and now the ice is melting. After 55 years, Qaavigaq and the rest of the Inughuit still want to go home. But first they want the US to clean up the mess they have made: thousands of barrels of toxic chemistry, rubbish heaps, electrical equipment contaminated with PCBs, and one whole hydrogen bomb -- serial number 78252 -- which was never recovered when a B-52 crashed on landing in 1968.

Unfortunately, unlike the Emir of Kuwait, the Inughuits are poor and not very many of them survived the transplant. In a deal struck with the Danish government in 2003, the Bush Administration agreed to return the original Inughuit community land in return for continued use of the base.

But they insist they are not responsible for any clean up. "They said if they were to clean up after themselves at Thule, then they would be met by similar demands in the Philippines, Japan, and elsewhere in the world," Svend Auken, Denmark's former minister of the environment, told the Christian Science Monitor in August. "They didn't want to set that precedent." CSM also quotes Cheryl Irwin, a spokeswoman for the Secretary of Defense, opining that clean-up costs "reflected a shared burden with our host nation for our contribution for defense of the free world." The United States has, however, agreed to forego "any claims for residual value of improvements made while there."

There is a growing resistance to the omnipresence of US military installations around the world. The coalition, though practically invisible in the US, is very evident elsewhere. NOBASES seeks "an end to military domination and intimidation and an end to the social, environmental and economic consequences of these bases in the host countries." The coalition has recently organized massive demonstrations in Italy, Poland, the Czech Republic and elsewhere, and though few have ultimately been successful, they have made acquiescing to American military expansion an increasingly expensive political choice for foreign leaders.

Here at home in Idaho, however, raping the land is cheap. American Ecology supplies the lubricant and Idaho's Republican officials bend over. Senators Crapo and Craig, Reps Simpson and Sali, Governor Butch Otter and Lt. Governor Jim Risch have all benefited from American Ecology's generosity.

In the first quarter of 2008, American Ecology reported a record disposal volume and a $13.4 million profit, a 17% increase over the same quarter last year.

Asked if the sand was dangerous, Hyslop said, "It's not something you want laying around in Kuwait." So, send it to Idaho instead!

If American Ecology was really thinking outside the litter box, they'd be supporting the NOBASES effort to repatriate all our military's leavings.