Tuesday, September 23, 2008

Taxpayers, Congress Push Back Against Bailout

Taxpayers, Congress Push Back Against Bailout

Matt Renner

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Washington, DC - Push back against the massive $700 billion Wall Street bailout proposal has come hard and fast from members of Congress on both sides of the aisle.

The bailout plan proposed by the Bush administration would give the Treasury Department and Treasury Secretary Henry Paulson - a former Wall Street CEO himself - the power to buy up extremely risky mortgages and other dangerous debt using taxpayer dollars. Because the US government continues to run a deficit, under the plan, the Treasury would have to borrow money to buy this private sector debt - essentially using the taxpayer's credit card to buy home loans that are currently weighing down Wall Street firms.

Members of Congress point to a severe lack of oversight in the proposed Bush administration plan. Section eight of the draft bailout plan states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency," essentially stripping Congress of its responsibility to oversee the how these tax dollars could be spent.

Constituents have been blowing up the phone lines on Capitol Hill, calling House of Representatives members, Republicans and Democrats, objecting to the no-strings-attached bailout, and the representatives have responded. Democrats are currently crafting various proposals to help prop up Wall Street firms which have gotten themselves into trouble, but without simply throwing away taxpayer money and without letting CEOs of the affected firms off the hook with fat retirement packages.

Representative Dennis Kucinich (D-Ohio), spoke out against a bailout, calling the current proposal "cash for trash," and proposing a distribution of the assets back to the taxpayers.

"Since the bailout will cost each and every American about $2,300, tomorrow I will offer legislation to create a United States Mutual Trust Fund, which will take control of $700 billion in stock assets, at market value and not higher, convert those assets to shares, and distribute $2,300 worth of shares to new individual savings accounts in the name of each and every American," Kucinich said in a statement.

"The Wall Street financial disaster is an opportunity to create a genuine ownership society. If Congress invests $700 billion in the market, then the American people must get something of real value for their investment," Kucinich said.

"The seven and a half year march toward deregulation and unfettered greed in our financial markets has exacted a heavy toll on American taxpayers," Representative Jackie Speier (D-California) said in a statement, adding, "I am not comfortable allowing the same Wall Street insiders and manipulators who got us into this mess to get a free pass. At the very least, the Government Accountability Office should be camped out at Treasury and Congress must be continually updated on the status of the bailout." Speier sits on both the House Financial Services and Oversight and Government Reform Committees. She said she would be watching the situation closely.

Conservative Republican Representative Mike Pence of Indiana was the first to loudly oppose the bailout plan from within the Republican Party.

"The Administration's request amounts to the largest corporate bailout in American history. Congress should act, but should act in a way that protects the integrity of our free market and protects the American taxpayer from more debt and higher taxes," Pence said in a statement Saturday.

Pence makes his argument based on his belief in the Republican mantra of "free market" economics. "To have the freedom to succeed, we must preserve the freedom to fail. Any solution to our present crisis must preserve our essential economic freedom," Pence said.

Democrats have begun to craft a counterproposal, the details of which are not yet set at the time of this publication. Congressman Barney Frank (D-Massachusetts) chairman of the House Financial Services Committee, has been pushing for a plan that includes more oversight and possibly direct financial help to indebted homeowners as well as to Wall Street.

Frank would also like to see compensation limited for Wall Street executives who have created the current situation.

"The notion that while they are getting this help from the federal government we can't tell them not to have golden parachutes, not to pay millions to some of the very people who made bad decisions, as a retirement gift, is unacceptable to us," Frank said to CNN.

CNBC is reporting that Frank and Senate Banking Committee Chairman Chris Dodd (D-Connecticut) are negotiating with the Bush administration. According to Frank, administration officials have agreed to take control of pieces of the companies that they are bailing out - equity stakes in the companies - equal to the amount of taxpayer money invested.

According to CNBC, the administration has agreed to creation of a Congressional oversight board of some kind, but details have not yet been released.

However, according to Frank, limiting pay for business executives is a key sticking point for the administration.

The rush to bail out financial institutions and the willingness to defend executive compensation comes as no surprise to campaign finance experts. Massie Ritsch, communications director for the money in politics watchdog group The Center for Responsive Politics, examines the effect of campaign contributions to politicians in Washington.

"Wall Street is one of the biggest campaign givers in American politics. When you combine donations from the finance, insurance and real estate sectors [all of which stand to gain from the bailout], they become the largest contributor, splitting roughly $311 million evenly between Republicans and Democrats," Ritsch said.

U.S. Orgy of Debt

U.S. Orgy of Debt

Americans borrowed to hilt, then housing bubble burst


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The financial panic sweeping the globe is maddeningly complex, but the cause of the worst financial crisis since the 1930s Great Depression is clear.

America has reveled for two decades in an orgy of debt. The U.S. national debt is now twice its net worth. From Wall Street's "masters of the universe" financial powerhouses such as Goldman Sachs, Merrill Lynch, Lehman, and Morgan Stanley, to the humblest homeowners, America's national motto became "borrow to the hilt and bet."

The traditional regulated banking system was pushed aside by Wall Street's financial titans who created their own money in the form of complex securities and furiously traded these exotic instruments and borrowed recklessly against them with little government regulation or oversight.

As Kevin Phillips points out in his prophetic book, Bad Money, America's primary business became non-productive finance. Manufacturing fell to only 12% of GDP. Wall Street titans grew obscenely rich by simply passing around paper. Inflated or semi-worthless securities increased in bogus value at each stage of the trading process.

Wall Street was allowed to virtually print money and peddle toxic securities around the globe because the big financial houses and heads of hedge funds bought the politicians of both parties.

Equally important, the mammoth financial and housing bubble thus created was hailed by the Bush administration as proof positive of Republican free market philosophy and the true road to prosperity.

More cautious European and Canadian bankers were dismissed by Republican chest thumpers as financial sissies.

This Ponzi scheme worked so long as markets kept rising. When the music stopped - disaster.

It's uncertain how far damage from America's financial equivalent of Hurricane Katrina will spread. Hedge funds, money market funds and automakers could be next. Real estate losses may reach $636 billion by 2012.

All stock market gains of the past 10 years have been wiped out in the most dangerous crash since the 1930s.

The "free market" Republican administration has ended up nationalizing nearly $1 trillion worth of businesses, including the federal mortgage agencies Fannie Mae and Freddie Mac, Bear Stearns, and global insurer AIG. Welcome to Wall Street socialism.

One thing is now clear. When great empires run onto the financial rocks, their power quickly ebbs. France's Sun King, Louis XIV, ended his once glorious rein in near bankruptcy caused by his long, ruinous wars with the British and Dutch. Louis XVI's runaway borrowing to finance the American Revolution helped ignite the French Revolution. The Soviet Union's collapse was caused by spending half its national income on arms, and failure to modernize industry.

Over the past decade, the U.S. foreign debt doubled. Japan and China now hold 47% of the U.S. foreign debt and finance Washington's wars. The addition in recent days of at least $1 trillion in new debt will cause interest rates to rise and the dollar to weaken. Even the U.S. government's AAA credit rating now is in question.

Washington may no longer be able to spend half the globe's defence budgets.

The $12-13 billion a month wars in Iraq and Afghanistan will end up costing $750 billion by December 2008. There will be less cash in Washington's kitty to buy foreign dictators and prop up their regimes, as in the Mideast and Central Asia. Less cash to pay for little wars in Africa.

Less for exotic anti-missile systems and death rays.

America's enormous global power is based as much on its financial might as military muscle. Wall Street has been the vehicle and policeman of America's hegemony. It shaped the destiny of the globe and made many nations subservient to the demands of New York's titan bankers. Wall Street is essential to raising capital for business expansion, but often it resembled New York's ruthless loan sharks: Once you borrowed from them, you never got off the hook.

Americans will have to relearn the hard truth that you can't borrow your way to prosperity.

Crisis Draws Attention to McCain Social Security Plan

Crisis Draws Attention to McCain Social Security Plan

Support for Market Could Be Hurt by Financial Strife

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Financial turmoil may not just boost government's role in markets. It could undermine a push in recent years by conservatives, including John McCain, to inject more market forces into government-run and heavily regulated programs.

On the presidential campaign trail, Democrat Barack Obama is seizing on the recent turbulence to lambast proposals by Sen. McCain on Social Security and health care, two areas on which the Republican presidential nominee has embraced market-oriented solutions.

These proposals -- particularly private accounts carved out of Social Security -- were controversial to begin with, and the new crisis only heightens the concerns. The accounts are designed to generate greater returns than the government gets holding onto the money. But if workers invest their Social Security taxes in the stock market, what happens if the market is down when it comes time to retire?

Those are potent questions for voters, and the unfolding financial crisis could kill any chance this proposal had of becoming law when Congress eventually works out a solution to the retirement program's financial problems.

It is a "particularly perilous" time to favor any sort of privatization, said Neil Newhouse, a Republican pollster. Even if the policy is good, he said, it is a hazardous moment to advocate it.

Overall, the economic turmoil is working to swing the race toward Sen. Obama, said Matthew Dowd, a former strategist for President George W. Bush. He said the Social Security argument makes Sen. McCain's problems more acute.

"It makes him feel like a traditional Republican: 'Let the market handle it,'" he said. And for Democrats, "it has the added benefit of tying him to Bush."

Mr. Bush campaigned for private accounts in 2000 and pushed hard for them in 2005, only to see the proposal die in a Republican-led Congress.

"Social Security has never been more important," an announcer says in a new Obama ad. "But John McCain's voted three times in favor of privatizing Social Security." It says the plan would amount to "risking Social Security on the stock market."

Sen. Obama is also attacking Sen. McCain on health care, pointing to a piece he wrote in a health-care magazine called Contingencies. In it, he calls for opening health care to "more vigorous nationwide competition, as we have done over the last decade in banking."

"They said they wanted to let the market run free but instead they let it run wild," Sen. Obama told a crowd of 20,000 supporters in Charlotte, N.C., on Sunday. "Now this 'great deregulator' wants to turn his attention to health care."

Sen. McCain wants to allow people to buy health insurance across state lines, which would let them skirt state regulations that offer consumer protections but also drive up the cost of coverage.

Douglas Holtz-Eakin, Sen. McCain's chief economic adviser, said the banking regulations referenced in that magazine article were common-sense provisions approved in 1995 that allowed people to bank across state lines. Obama adviser Jason Furman said Sen. McCain appeared to be referencing 2004 rules that pre-empted state banking regulations and that, he argues, helped bring on the current financial meltdown.

The article was vague, so it is unclear what banking changes Sen. McCain was referring to. Either way, the controversy stirs questions over whether free-market solutions are beneficial.

When it comes to Social Security, Sen. McCain is a longtime supporter of private accounts, in which younger workers could divert a portion of their payroll taxes into personal accounts that would be invested in the market, ideally creating a nest egg that would be at least as big as what they would have received from the government -- especially as the program runs out of money.

But that idea can seem scary after a week when a large portion of the financial sector appeared at risk of collapse.

"If my opponent had his way, the millions of Floridians who rely on it would've had their Social Security tied up in the stock market this week," Sen. Obama told supporters in Daytona Beach, Fla., on Saturday. He warned that "millions would've watched as the market tumbled and their nest egg disappeared before their eyes."

None of the proposals to create private retirement accounts would affect current seniors, despite Sen. Obama's implication. "This is a desperate attempt to gain political advantage using scare tactics and deceit," said Tucker Bounds, a McCain spokesman.

Sen. McCain hasn't campaigned on private accounts, but he hasn't walked away from them either. On Sunday, he said his views haven't changed. "I still believe that young Americans ought to ... be able to, in a voluntary fashion ... put some of their money into accounts with their name on it," he said in an interview with CNBC.

Mr. Holtz-Eakin said Sunday that Sen. Obama's decision to stoke fears about market risk suggests that he thinks the financial problems the nation sees today are likely to persist.

"If they want to run on a position that says we're going to have financial markets this bad for eight years under Barack Obama, let them," Mr. Holtz-Eakin said. "We will never remove all investment risk and we shouldn't pretend otherwise, but we better remove what people are seeing now."

Big Financiers Start Lobbying for Wider Aid

Big Financiers Start Lobbying for Wider Aid


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Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.

Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.

At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.

“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday.

The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.

The scope of the bailout grew over the weekend. As recently as Saturday morning, the Bush administration’s proposal called for Treasury to buy residential or commercial mortgages and related securities. By that evening, the proposal was broadened to give Treasury discretion to buy “any other financial instrument.”

The lobbying became particularly intense because Congress plans to approve a package within just two weeks, without the traditional hearings and committee process.

“Of course there will be fierce lobbying,” said Bert Ely, a financial services industry consultant in Alexandria, Va. “The real question is, Who wouldn’t want to be included in the package?”

Mr. Ely said the open-ended nature of the Treasury’s plan could be interpreted to mean that the government was open to acquiring “any asset, anywhere in the world.”

“The question that I am raising — is there any limit?” Mr. Ely said.

Each part of the financial industry is pursuing its own interests.

Small banks, for example, are pushing the government to buy loans they made to home builders and commercial developers. Wall Street banks are lobbying to temporarily suspend certain accounting rules to avoid taking big losses on the assets they sell to Treasury, which would weaken them further.

Over the weekend, the Securities Industry and Financial Markets Association, Wall Street’s main trade and lobbying group, held conference calls to discuss “your firms’ views and priorities related to Treasury’s proposal,” according to an e-mail message sent to members.

One of the calls addressed the fact that municipal securities were not included in the proposals released at the end of last week. Some bankers are pushing for government support of those securities as part of a broader effort to restore investor confidence in money market funds.

The group also discussed which securities would be eligible to be sold to Treasury. Under the latest proposal, the government would buy securities issued on or before Sept. 17.

But some bankers debated whether the cutoff date should be December 2007, when the market was clearly seizing up, to avoid bailing out those who bought securities recently. Other firms hope to be hired to manage the assets that Treasury acquires, a job that could earn them $1 billion a year, even if they charged fees that were modest by industry standards. Among them are the asset management companies Pimco and BlackRock. Morgan Stanley, the investment bank, is also vying for the work.

Some private equity firms, including the Blackstone Group, may be interested in pursuing an asset-management assignment from the government, people briefed on the matter said. Such firms have already expressed interest in buying up distressed debts after having bet against them early last year.

That raises complications because those firms hold assets similar to the ones the Treasury plans to buy. Democrats suggested on Sunday that a provision be added to avoid any conflicts of interest, with a firm making money from handling assets like its own.

William H. Gross, chief investment officer of Pimco, which manages about $830 billion in assets, would like to be an asset manager for the government but said he had not been in touch with Henry M. Paulson Jr., the Treasury secretary, over the weekend. Mr. Gross is among the financial executives Mr. Paulson, who previously headed Goldman Sachs, has regularly consulted with since the financial crisis began.

Another contender is Morgan Stanley, which advised Treasury on an unpaid public service basis on its takeover of Fannie Mae and Freddie Mac and on the American International Group, the insurer that the Federal Reserve agreed to lend $85 billion to last week in consultation with the Treasury Department.

Similarly, Bank of New York Mellon and JPMorgan Chase, which bought Bear Stearns in a deal brokered by the Federal Reserve and the Treasury Department, were also campaigning for a spot.

BlackRock, a big New York asset management firm, was also involved in negotiations with the government, people briefed on the matter said. The firm is already managing $30 billion of Bear Stearns mortgage assets for the Fed, and it has done work for Fannie Mae, Freddie Mac and A.I.G. A BlackRock spokeswoman declined to comment.

There were signs of the industry’s fingerprints on drafts of the legislation released over the weekend. While an earlier draft said that only firms with headquarters in the United States could sell assets to the government under the program, a later version said sellers could include any financial institution. Securities firms were initially excluded but were included in a version released Sunday afternoon.

Congressional Democrats and advocates of low-income homeowners were also pushing for the direct acquisition of loans, because that would give the government more say over how collection agents modify the terms of onerous mortgages.

“In addition to buying the assets we have to have a workout plan,” said Douglas Dachille, chief executive of First Principles Capital Management, an investment firm in New York. “And we have to have more control, much more control and oversight of how the servicing is done.”

Perhaps the biggest question about the Treasury’s acquisition plan is how the government will decide how much it is willing to pay for the loans and securities it acquires. Will the government drive a hard bargain and acquire assets for the lowest possible price to protect taxpayers against losses? Or will the Treasury Department, in the interest of jumpstarting the credit market, try to bolster large financial institutions like Citigroup and Washington Mutual by paying a slight premium to the markets’ valuation of these troubled assets? Over the weekend, Treasury said it might use “reverse” auctions in which financial institutions rather than the Treasury — as buyer — would submit bids.

“The trick for the Treasury and American people is to make sure that the price exacts enough of a toll on the originators and holders of these securities, but not enough to destroy lending,” said Mr. Gross of Pimco, who has argued in recent weeks that the government must buy distressed debt to deal with a “financial tsunami.”

Analysts and investors say they expect financial firms to hold onto their troubled securities until the government begins acquiring assets through reverse auctions and negotiations. Eventually, the Treasury will return to the market to sell the assets back to private investors, but that could be a few years away.

“There will be that period where the Treasury takes the place of the private market,” Mr. Gross said. “Hopefully they will get out of that market but we will have to see how quickly that takes place.”

Can you trust a Wall Street veteran with a Wall Street bailout?

Can you trust a Wall Street veteran with a Wall Street bailout?

Kevin G. Hall

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Making the rounds on the Sunday morning talk shows, Treasury Secretary Henry Paulson repeatedly said today's financial problems were long in the making. He should know. He was part of the Gold Rush that has brought the global financial system to the brink of collapse.

Paulson presided over one of the most profitable runs on Wall Street as chairman and chief executive officer of investment banking titan Goldman Sachs & Co. from 1999 until President Bush nominated him on May 30, 2006 to take over the Treasury Department.

Back then, Bush saw Paulson's Wall Street experience as a plus. "Hank will follow in the footsteps of Alexander Hamilton and other distinguished Treasury secretaries who used their talents and wisdom to strengthen our financial markets and expand the reach of the American Dream," Bush said at the time.

But with Paulson now seeking virtually unfettered authority to administer the largest bailout of the financial industry in U.S. history, many are wondering whether Paulson also doesn't come with enormous potential conflicts of interest.

That was one reason Democrats on Sunday expressed reluctance to approve the administration's draft legislation that would leave to Paulson virtually all authority over the proposed $700 billion bailout. The legislation would allow him to decide which securities to buy, from whom to buy them, and which outside companies and people to hire to help him do so.

"If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight," said Democratic presidential candidate Sen. Barrack Obama. "Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check."

In recent days, there've been few outward expressions of distrust of Paulson in particular. In fact, many said his long reign on Wall Street make him uniquely qualified to deal with today's problems.

"Hank is the right guy," New York Mayor Michael Bloomberg, who made his millions providing information to Wall Street traders, told NBC's Meet the Press. "If I had to have one person at the helm today I would pick Hank Paulson."

But the conflicts are also visible. Paulson has surrounded himself with former Goldman executives as he tries to navigate the domino-like collapse of several parts of the global financial market. And others have gone off to lead companies that could be among those that receive a bailout.

In late July, Paulson tapped Ken Wilson, one of Goldman's most senior executives, to join him as an adviser on what to about problems in the U.S. and global banking sector.

Paulson's former assistant secretary, Robert Steel, left in July to become head of Wachovia, the Charlotte-based bank that has hundreds of millions of troubled mortgage loans on its books.

The administration's draft law also would preclude court review of steps Paulson might take, something Joshua Rosner, managing director of economic researcher Graham Fisher & Co. in New York, said could be used to mask previous illegal activity.

"The Treasury's ability to, without oversight, determine (that) a financial institution (is) an agent of the government seems like it could be used to serve several purposes, including limiting the potential liabilities of an institution or its executives," he wrote in a note to investors late Sunday.

The Treasury proposal sent to Congress also offers no process to hire asset managers in an open and competitive process. That's particularly questionable given that Wall Street players are now hiring Wall Street players, Rosner said.

"This seems to invite a risk of collusion between sellers and buyers to the detriment of the taxpayer," he wrote.

At a minimum, there's irony in Paulson being in charge of so large a bailout.

In the last annual report at Goldman that Paulson signed off on in November 2005, a year in which he received $38 million in compensation, investors were clearly told that the federal government wouldn't be there to save them from bad investments.

"Goldman Sachs, as a participant in the securities and commodities and futures and options industries, is subject to extensive regulation in the United States and elsewhere," the report said.

But those regulations are designed to protect the interests of clients in the market, it said. "They are not ... charged with protecting the interest of Goldman Sachs shareholders or creditors," it said.

That's a different tune from the one Paulson was singing Sunday.

"Last week there were times when the capital markets or credit markets were frozen," Paulson said on NBC's Meet the press. "American companies weren't able to raise financing. That has very serious consequences. So what we need to do right now is stabilize the markets, and this is for the, for the benefit of the taxpayers we're doing this, the American public. Then, once we get behind this and get this stabilized, there's a lot we can talk about in terms of reform."

What Paulson didn't say is that the excesses that led to the frozen credit markets couldn't have happened without Wall Street. Lenders weakened their standards because loans were sold to investment banks, which didn't much care about the loan quality since they then pooled the loans with thousands of other loans and sold them as bonds to investors. If the whole thing collapsed, it would be the investors who lost out.

Those bonds, called mortgage-backed securities, are precisely the bad assets taxpayers will now be buying back from Paulson's colleagues on Wall Street.

During Paulson's tenure, Goldman was not as big a player in issuing mortgage bonds as two other investment banks that have gone under this year, Bear Stearns and Lehman Brothers.

But the 2005 annual report shows that Goldman was still a significant player. Its trading division, which included the mortgage bonds and complex financial instruments called derivatives, reported pre-tax earnings of more than $6.2 billion, up sharply from $3.5 billion in 2003.

The report also shows that Goldman benefited greatly from the wave that is now being deemed a wave of excess.

Goldman's pre-tax earnings rose from $4.4 billion in 2003 to almost $8.3 billion in 2005. Similarly, its investment banking division had pre-tax earnings leap from $207 million to $413 million.

Paulson's personal fortunes also zoomed in those years.

In 2002, Paulson received $12.1 million in compensation, including a $6.3 million bonus — an improvement over the previous three years when Wall Street accounting scandals unsettled investment banks, including a $1.5 billion settlement Goldman and other banks paid for issuing overly bullish research reports that promoted deals the banks themselves were involved in.

Published reports said Paulson received $30 million in compensation and salary in 2003.

After Paulson left Goldman and mortgage bonds began losing money, the investment bank erased those losses and then some by betting against the very products it had sold, Fortune magazine reported last year.

$13 Billion in Iraq Aid Wasted Or Stolen, Ex-Investigator Says

$13 Billion in Iraq Aid Wasted Or Stolen, Ex-Investigator Says

By Dana Hedgpeth

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A former Iraqi official estimated yesterday that more than $13 billion meant for reconstruction projects in Iraq was wasted or stolen through elaborate fraud schemes.

Salam Adhoob, a former chief investigator for Iraq's Commission on Public Integrity, told the Senate Democratic Policy Committee, an arm of the Democratic caucus, that an Iraqi auditing bureau "could not properly account for" the money.

While many of the projects audited "were not needed -- and many were never built," he said, "this very real fact remains: Billions of American dollars that paid for these projects are now gone."

He said a report that went to Iraqi Prime Minister Nouri al-Maliki and other top Iraqi officials was never published because "nobody cares" about investigating such cases. Many investigators, he said, feared for their safety because 32 of his co-workers have been murdered.

Adhoob said he reported the abuses to the U.S. Special Inspector General for Iraq Reconstruction, an agency charged by Congress with helping to root out cases of waste, fraud and abuse in the nearly $50 billion U.S. reconstruction effort. SIGIR spokeswoman Kristine Belisle said her agency continues to "actively follow up" on Adhoob's information, but she would not discuss ongoing investigations.

Adhoob was one of three Iraqi men who testified before the Democratic panel yesterday. Abbas S. Mehdi, a former Iraqi official who held a cabinet-level post, told of widespread corruption. And an Iraqi American who for five years has been a senior adviser to Defense and State department officials in Iraq testified in silhouette by video from an undisclosed location because, he said, he feared for his safety. In a modified voice, he said Iraqi government officials worked with al-Qaeda terrorists at the Baiji refinery to steal oil to sell on the black market.

Sen. Byron L. Dorgan (D-N.D.), who chairs the committee, said that "taxpayers have been bled dry with massive misuse of public dollars."

"It is all pretty sobering," he added later. "Our country cannot continue to be blind or oblivious to what is happening."

Adhoob, who worked for three years at the Iraqi agency and oversaw 200 investigators and other employees, said he had a "firsthand, up-close look at corruption" and eventually had to flee the country because of death threats. He said his agency -- the Commission on Public Integrity, which U.S. government officials say is the equivalent of the FBI -- estimates that an additional $9 billion in U.S. funds was lost because of corruption and waste. Because the $13 billion figure came from the Iraqi auditing bureau and the $9 billion figure came from Adhoob's agency, Dorgan's staff members said there could be some overlap.

Adhoob's agency has been accused of pursuing investigations against political rivals.

In one scheme described by Adhoob, Iraqi Defense Ministry officials helped set up two front companies that were to buy airplanes, armored vehicles, guns and other equipment with $1.7 billion in U.S. funds. The companies were paid, but in some cases they delivered only "a small percentage" of the equipment that had been ordered and, in one case, delivered bulletproof vests that were defective and could not be used.

The companies also overcharged for military helicopters and tried to deliver aircraft that were more than 25 years old, he said. Instead of demanding the money back, Adhoob said, the Defense Ministry renegotiated with the companies for "a series of mobile toilets and kitchens -- which have never been delivered."

Adhoob said some of the investigations conducted by his agency and others uncovered "ghost projects" that never existed or instances in which Iraqi and U.S. contractors did poor-quality work. In one case, $24.4 million was spent on an electricity project in Nineveh province but an oversight agency found that it "existed only on paper."

Investigations by Iraqi oversight agencies also found that some of the money sent to the Defense Ministry was diverted to al-Qaeda in Iraq, Adhoob said, and deposited into banks in Jordan and elsewhere.

Oil scores biggest daily dollar price leap in history

Oil scores biggest daily dollar price leap in history

October crude hits daily price-move limit, spurring brief halt to trading

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Crude-oil futures leaped more than $16 a barrel Monday to score their biggest one-day gain in dollar terms since 1984 -- when crude began trading on the New York Mercantile Exchange.

Crude futures rallied Monday to a high of $130 a barrel -- their highest intraday level in two months -- buoyed by a steep drop in the U.S. dollar and speculation that the Bush administration's proposal to stabilize the financial sector might help revive economic growth.

Trading was halted for five minutes after the October crude contract reached the daily price-movement limit of $10 per barrel. Under trading rules, the price-change limit is increased by another $10.

Crude for October delivery rose $16.37, or 15.7%, to close at $120.92 a barrel on the New York Mercantile Exchange.

The gain surpassed the previous price-gain record of $10.75, registered on June 6 of this year. The highest percentage rise in a single day was seen on Jan. 3, 1994, at 20.9%, according to FactSet.

"I never expected a move that big in one day without some real news, but I'm past the point of saying there are any absolutes in a market like this one we're in presently," said Neal Ryan, a managing partner at Ryan Oil & Gas Partners. The move "underscores that energy is the only place to expect outsized profits these days and the money is flocking into that market."

The October contract expired on Nymex at the end of trading Monday, a factor that increased volatility.

"The stocks at Cushing [Okla.], which is the delivery point for Nymex, will be low because they have been drawn down because of the hurricane," said James Williams, an economist at WTRG Economics. "If you are short on the last day of trading you have to either buy back the contract or make physical delivery and it is probably difficult to get spot oil at Cushing to make physical delivery."

November crude, the new front-month contract, was up $6.62 on Nymex, closing at $109.37.

Fear over the U.S. dollar also contributed to oil's gains Monday.

"To the extent the current run-up reflects [that] the dollar is cheap and weak and Wall Street is making it so, then the kick upwards in [the oil] price makes a certain amount of sense," said Anthony Sabino, a professor of law at St. John's University whose legal practice includes oil and gas law.

"Nevertheless, a weak dollar cannot resuscitate demand, so eventually no matter how weak the dollar, how troubled Wall Street is, demand will pull [the per-barrel] price down, down, down," said Sabino. See Commodities Corner.

Rescue plan spurs dollar drop

On the currency markets, the dollar fell sharply against rivals, weighed down by the U.S. government's bailout plan for the financial sector.

The dollar index, a measure of the greenback against a trade-weighted basket of currencies, dropped sharply to 75.944, from 77.663 late Friday in North American trading. See Currencies.

"The hundreds of billions of dollars being pumped into the system is inherently inflationary," said Sean Brodrick, a natural-resources analyst at MoneyandMarkets.com. "That, plus a belief that the federal bailout will boost the economy in the fourth quarter, is putting a floor under oil prices."

The Bush administration is urging speedy passage of its $700 billion proposal in Congress, but Democratic leaders are countering with oversight and additional measures that could complicate efforts for a swift rescue being implemented. See full story.

"Many are hoping that the plans, which still have to be passed by Congress, will help stabilize financial markets and rescue the U.S. economy from further gloom, thus supporting U.S. oil demand growth," said Michael Davies, an analyst at Sucden Research, in a note.

"However, these plans are certainly not guaranteed to stop the chaos in financial markets and the longer-term impact of recent events on the U.S. and world economy may not even start to be felt for some time," Davies said.

Crude's latest gain followed a sharp move on Friday, when the October contract jumped $6.67, or 6.8%. to $104.55 a barrel on Nymex. It gained 3.3% overall in a highly volatile week, during which it traded between a low of $90.80 and a high of $105.25.

Bigger view

"Because markets are now going to be underwritten by the U.S. government to ensure stability, it's time to focus on what are some of the longer-term trends -- one being that we've got growing energy usage across the globe and flat to declining production," said Ryan.

Oil prices "shouldn't bounce right back up to levels seen three months ago, but the market fell too far, too fast and oil prices moving back to $110-$120 area are going to turn out to be the correct pricing level in the market," he said in emailed comments.

On Nymex Monday, prices for petroleum products headed higher alongside oil.

November reformulated gasoline rose 10.4 cents to end at $2.7038 a gallon, and October heating oil gained 14.5 cents to end at $3.043 a gallon.

The average U.S. retail price for a gallon of regular gasoline fell to $3.739 Monday from $3.757 on Sunday, according to AAA's Daily Fuel Gauge Report. A month ago, the price was at $3.692.

The latest figures on U.S. refining activity showed a steep drop for the week ended Sept. 12 as energy facilities in the Gulf of Mexico continued to recover from the hurricanes Gustav and Ike.

About 76.6% of oil production and 65.5% of the natural-gas output in the Gulf are still shut in as of Monday, according to the Minerals Management Service.

"The vast majority of production is still offline," said Ryan. "That'll end up manifesting itself in the prices down the road -- not today."

An area of low pressure over Puerto Rico could become the next named system of the 2008 Atlantic hurricane season, AccuWeather.com reported Monday. If the storm develops, it will be named Kyle.

In the meantime, there are signs that Saudi Arabia is cutting output in response to slowing demand, said Phil Flynn, vice president at Alaron Trading.

Citing industry sources, Reuters reported that the Saudis had cut oil supplies to international oil majors and U.S. refiners since the start of September and that they cut back even before the oil-producer agreement earlier this month to reduce production.

Flawed thinking

Sabino referred to the rising oil prices as "somewhat of a flight to commodities."

"But this is also severely flawed, because it does not account for the to-date drop in demand, with more dropping of demand to follow because of Wall Street's woes," he said.

U.S. stocks headed lower Monday as the market mulled the details of the government bail-out plan. See Market Snapshot.

For oil, "there is a wholly illogical disconnect here," said Sabino. "Since Wall Street is so down and money is so tight, logic says demand will continue to drop like a stone, so price should be back at $90 and heading south to $80."

Elsewhere on Nymex, natural gas traded higher. October natural-gas futures rose by 12.7 cents to close at $7.658 per million British thermal units. That's after finishing last week with a 2.2% gain.

Tracking the commodities market as a whole, the Reuters/Jefferies CRB Index, a benchmark gauging the prices of major commodities, rose by 3.9%.

In other news, gold futures closed with a gain of $44.30 an ounce.

Constitutional battle brewing after telecom immunity invoked

Constitutional battle brewing after telecom immunity invoked

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The government has invoked the retroactive immunity provision of the recently-passed FISA Amendments Act in a motion to end the ongoing lawsuits against telecoms charged with complicity in the National Security Agency's controversial program of extrajudicial wiretapping. The Electronic Frontier Foundation, which is spearheading the litigation, promises to fight the immunity clause on constitutional grounds—and has given Ars Technica a sneak preview of the argument it plans to make.

The government's motion to dismiss (PDF), submitted to California district judge Vaughn Walker on Friday in anticipation of a hearing scheduled for December 2, was accompanied by Attorney General Michael Mukasey's public certification (PDF) that the defendant telecoms were immune from civil liability under the FISA Amendments Act. Mukasey also filed a more detailed, classified certification in camera, providing the judge with the specific grounds for the assertion of immunity.

Five paths to immunity...

There are 50 ways to leave your lover, but only five ways for a company to be entitled to immunity under the FISA Amendments Act. Three are versions of "they provided assistance, but it was lawful under the statutes in effect at the time." Another is not to actually have provided any assistance. The final, and most contentious, is the new form of retroactive amnesty provided by the law: The attorney general can assert that the company provided assistance calculated to prevent a terrorist attack on the United States in the wake of 9/11, pursuant to a written directive from a high administration official assuring them that the surveillance had been authorized by the president and determined to be legal.

Mukasey's certification says only that one or more of these excuses applies to all the defendants in the consolidated wiretap litigation, asserting that the public disclosure of any more specific information about the grounds for immunity "would cause exceptional harm to the National Security of the United States." It's therefore impossible to know which of the defendant telecoms provided assistance, or under what circumstances.

The attorney general also denied EFF's contention that, in addition to narrowly targeted eavesdropping on suspected Al Qaeda affiliates, there was any broader program of "dragnet collection on the content of plaintiffs' communications." Precisely what this latter contention means is unclear: As Ars noted last week, there is some legal controversy over when, precisely, the "collection" of a communication takes place. Therefore Mukasey's denial could mean that, despite the evidence provided by AT&T whistleblower Mark Klein, there was no blanket interception of communications for keyword analysis. But it could as easily mean that the attorney general does not believe that whatever form of "inside the box" analysis of those communications NSA conducted counts as "collection" for the purposes of FISA or the Fourth Amendment.

... and four arguments against it

Does that mean the corpulent contralto should start practicing her warm-up scales? Perhaps not: EFF attorney Cindy Cohn has a four-part constitutional harmony for Judge Walker to hear before he strikes the set. In an interview with Ars Technica last week, she outlined the argument she plans to present.

Contra the government's frequent assertions that the NSA's "Terrorist Surveillance Program" was targeted only at communications that were either wholly international or "one-side-foreign," Cohen plans to assert, on the basis of whistleblower Klein's evidence and more recent press reports, that the NSA also broadly intercepted wholly domestic communications. Though, as noted above, Mukasey appears to deny this, we do now know that the program first disclosed by the New York Times in 2005, and scrutinized in congressional hearings, was only one component of a far broader spying effort, elements of which were apparently so controversial that high-ranking Justice Department officials threatened to resign if it was not halted. The Supreme Court ruled in 1972 that domestic national security surveillance is subject to robust Fourth Amendment limitations, while the rules for foreign intelligence collection may be more lax.

Similarly, the group plans to argue that the scope of the surveillance conducted went beyond the bounds of the FISA Amendments Act's grant of amnesty for surveillance "designed to detect or prevent a terrorist attack, or activities in preparation for a terrorist attack, against the United States." Like the previous argument, this line of attack relies on a hybrid of constitutional and statutory claims. Courts generally follow a policy of constitutional "avoidance"—meaning that if there are two ways to read a statute, and one of them would violate the Constitution, they'll assume it was meant to be interpreted the other way. Here, EFF wants to argue that a reading of the statute that covered all the NSA surveillance would be unconstitutionally broad, and so it must be more narrowly constructed. One potential wrinkle here is that Judge Walker might well agree with this Fourth Amendment analysis as it applies to the government's conduct, but reject the claim that it presents a barrier to civil immunity for the telecoms.

Cohn explained that EFF is also developing a separation of powers argument rooted in the discrete spheres of responsibility the Constitution assigns to Congress and the judiciary under Article I and Article III. In effect, the group wants to claim that with the FISA Amendments Act, which makes immunity hinge on presidential authorizations and attorney general certifications, the legislature has illegitimately usurped a judicial power—deciding the outcome of pending litigation—and assigned it to the executive branch. This argument comes with a corollary due process claim: To wit, the plaintiffs have a corresponding right to have their case decided by a judge, not by the President or Michael Mukasey.

Finally, Cohn told Ars, she will make an independent argument against the secrecy provisions of the FISA Amendments Act, grounded in the traditional authority of courts to determine the disposition of their own records. While there is nothing new about the practice of filing sealed in camera documents when classified activities are at issue, Cohn called the Act "unprecedented" in its grant of executive power to "gag the courts," noting that if Judge Walker were to dismiss the lawsuit, he would be barred from explaining publicly precisely why he had dismissed it.

The EFF now has until October 16 to file a brief in opposition to the government's motion to dismiss. The government and the telecoms will have a chance to reply to that brief by November 5, and then EFF will get an opportunity to respond to those filings by November 20. The final showdown is slated for the morning of December 2.

US generals planning for resource wars

US generals planning for resource wars

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The US military sees the next 30 to 40 years as involving a state of continuous war against ideologically-motivated terrorists and competing with Russia and China for natural resources and markets, writes Tom Clonan

AS GENERAL Ray Odierno takes command of US forces in Baghdad from troop surge architect Gen David Petraeus, America has begun planning in earnest for its phased withdrawal.

The extra brigade combat teams - or battlegroups - deployed to Iraq by Petraeus have already withdrawn and a further 8,000 troops have been diverted to Afghanistan.

In January, the next president of the United States will conclude America's timetable for withdrawal in final negotiations with the Iraqi government.

Further evidence of America's future military intentions is contained in recently published strategy documents issued by the US military.

Under the auspices of the US department of defence and department of the army, the US military have just published a document entitled 2008 Army Modernization Strategy which makes for interesting reading against the current backdrop of deteriorating international fiscal, environmental, energy resource and security crises.

The 2008 modernisation strategy, written by Lieut Gen Stephen Speakes, deputy chief of staff of the US army, contains the first explicit and official acknowledgement that the US military is dangerously overstretched internationally. It states simply: "The army is engaged in the third-longest war in our nation's history and . . . the Global War on Terrorism (GWOT) has caused the army to become out of balance with the demand for forces exceeding the sustainable supply."

Against this backdrop, the 90 page document sets out the future of international conflict for the next 30 to 40 years - as the US military sees it - and outlines the manner in which the military will sustain its current operations and prepare and "transform" itself for future "persistent" warfare.

The document reveals a number of profoundly significant - and worrying - strategic positions that have been adopted as official doctrine by the US military. In its preamble, it predicts a post cold war future of "perpetual warfare".

According to its authors: "We have entered an era of persistent conflict . . . a security environment much more ambiguous and unpredictable than that faced during the cold war."

It then goes on to describe the key features of this dawning era of continuous warfare. Some of the characteristics are familiar enough to a world audience accustomed to the rhetoric of the global war on terror.

"A key current threat is a radical, ideology-based, long-term terrorist threat bent on using any means available - to include weapons of mass destruction - to achieve its political and ideological ends."

Relatively new, "emerging" features are also included in the document's rationale for future threats.

"We face a potential return to traditional security threats posed by emerging near-peers as we compete globally for depleting natural resources and overseas markets."

This thinly-veiled reference to Russia and China will, perhaps, come as little surprise given recent events in Ossetia and Abkhazia. The explicit reference in this context to future resource wars, however, will probably raise eyebrows among the international diplomatic community, who prefer to couch such conflicts as human rights-based or rooted in notions around freedom and democracy.

The document, however, contains no such lofty pretences. It goes on to list as a pre-eminent threat to the security of the US and its allies "population growth - especially in less-developed countries - [which] will expose a resulting 'youth bulge'."

This youth bulge, the document goes on to state, will present the US with further "resource competition" in that these expanding populations in the developing world "will consume ever increasing amounts of food, water and energy".

The document goes on to describe in broad-strokes the manner in which its downsized military might ensure survival of the fittest for the US and its allies in future resource wars for water, food and energy.

As a consequence of identifying growing populations in the developed world as a threat in itself, the strategy document highlights a number of paradigm shifts in the way future wars are to be conducted.

It predicts that "21st Century operations will require soldiers to engage among populations and diverse cultures instead of avoiding them".

The document reveals that new US tactical doctrine provides a template by which air, naval and field commanders will no longer just secure traditional strategic targets such as airspace, seaports and bridgeheads, but will, of necessity, also deploy and fight amongst and against the target population itself to win wars.

The document refers to this euphemistically as "commanders employing offensive, defensive and stability or civil support operations simultaneously".

The remainder of the document is devoted to describing in detail how a downsized all volunteer US military - numbering approximately one million soldiers, aircrew and sailors - could maintain an ever-present, international, offensive posture in many countries across many time-zones.

It describes how information communication technologies and digital technologies will create a new "networked" human soldier - the 'Future Force Warrior' - who will deploy among the target population and will operate simultaneously several remote, unmanned ground and air weapons systems.

To this end, the US military is rapidly expanding its inventory of computerised, robotic ground weapons and unmanned aerial vehicles .

According to the strategy document, by supplementing relatively small forces of US troops - brigade combat teams - with ever-larger fleets of remotely controlled, unmanned weapons systems, America will be able to successfully deploy its downsized military to maximum effect among the emerging international youth bulge.

Supplementing these future global offensive operations, according to the strategy document, is the US military's planned domination of inner space or the earth's exo-atmospheric zone.

The document states: "Space is a significant area of joint development that supports battle space awareness and is the backbone for the national and military intelligence, surveillance and reconnaissance architecture, as well as being the domain of choice for commercial broad-area sensing enterprises with military utility."

Together with the US Missile Defence Agency, the US military is currently developing "space-based assets continuously monitoring the globe".

The report elaborates on this by stating that "army space forces are deployed worldwide supporting US efforts to fight and win [the global war on terror]."

The report adds that US military "space control operations ensure freedom of action in space for the United States and its allies and when necessary, deny an adversary freedom of action in space".

The document refers to operations in Iraq in the past tense. It implies that operations in Afghanistan may be expanded.

It states explicitly that the US military is preparing to fight continuous resource wars "for the long haul".

The document also describes explicitly the manner in which the earth's orbit is now deemed a legitimate zone for offensive military activity. This extraordinary document describes US strategic doctrine in terms worthy of 20th century science fiction.

The mix of 20th century science fiction and Orwellian perspectives unwittingly contained in the document appear rapidly to be materialising as fact.