Tuesday, December 16, 2008

The Madoff scandal

The Madoff scandal

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The repercussions from the collapse of Bernard L. Madoff Investment Securities LLC, whose founder and owner was arrested last Thursday after admitting that his $17 billion investment advisory business was "a giant Ponzi scheme," continue to widen. According to a criminal complaint filed by the FBI and a civil action brought by the Securities and Exchange Commission (SEC), the elderly Madoff estimated that the losses from his fraud exceeded $50 billion. The tally of losses already reported by banks, hedge funds and wealthy investors climbed over the weekend to nearly $20 billion.

Banks and hedge funds around the world—in the US, Britain, Italy, Spain, France, Switzerland and Japan—are reporting hundreds of millions and even billions in losses. University endowments, charities and other institutions that entrusted their money to Madoff or to hedge funds that invested in Madoff's company are reeling from the news that their investments are worthless.

Prominent and wealthy individuals—including J. Ezra Merkin, the chairman of GMAC, Fred Wilpon, the principal owner of the New York Mets, Norman Braman, the former owner of the Philadelphia Eagles professional football team, Frank Lautenberg, the multimillionaire Democratic senator from New Jersey, and Mortimer Zuckerman, the owner of the New York Daily News—are among those who have lost millions. Among the thousands and even tens of thousands of individuals likely to be affected is no small number of retirees of relatively modest means whose life savings were tied into Madoff's operation.

The fallout from the Madoff scandal will inevitably result in the failure of other investment firms, impacting thousands more individuals and hundreds more businesses.

Madoff's scam could not have been carried out without the complicity of the highest echelons of the financial elite and the government.

US officials now allege that Madoff was engaged in a Ponzi scheme—using new revenues from investors to meet payments due to existing investors—at least since 2005. As of yet, no one really knows how long Madoff, a former chairman of the Nasdaq Stock Market and current member of the board of governors of the National Association of Securities Dealers, was paying his old clients with money obtained from new ones. The scheme collapsed after clients requested some $7 billion in redemptions.

As the New York Times reported Saturday, "There is fragmentary evidence that Mr. Madoff's alleged scam may have lasted for years or even decades... It is not even clear whether Mr. Madoff actually made any of the trades he reported to investors."

One thing is clear, Madoff, known as a Wall Street legend, was a man with many connections in high places. Since 2000, he has given at least $100,000 to the Democratic Senatorial Campaign Committee and more than $23,000 to the party's candidates, including Senator Charles Schumer of New York, the chairman of the Joint Economic Committee of Congress, and Senator Lautenberg. His legal defense team includes Mark Mukasey, the son of the current attorney general.

There were ample signs that Madoff's operation was fraudulent. He made his reputation and his millions by delivering solid returns of 1 or 2 percent a month to his investors month in and month out from the day he launched his investment advisory business as an adjunct to his brokerage firm. Wealthy investors and hedge fund operators marveled as Madoff worked his "magic" in bull markets and bear markets alike, regardless of the gyrations on the stock market.

But there were also those who realized that such consistent returns could not be achieved through legal means. They looked at Madoff's amazing record, the secretive nature of his investment funds and the fact that his auditing firm was an obscure one-room operation based in New City, New York, and concluded that Madoff was working a scam.

One executive in the securities industry, beginning in 1999, repeatedly urged the SEC to investigate Madoff. "Madoff Securities is the world's largest Ponzi scheme," he wrote in one letter to the SEC. Other investment firms steered their clients away from Madoff.

The SEC, which had investigated and cleared Madoff in 1992, refused to intervene. On the contrary, he was appointed to a committee of academics, regulators and executives formed in 2000 by former SEC Chairman Arthur Levitt to advise the agency on new stock market rules in response to the growth of electronic trading.

The role of the SEC epitomizes the transformation of government regulatory agencies into the facilitators of financial fraud on a colossal scale. Its job has become running interference for the skullduggery of brokerage houses, hedge funds and banks.

The removal of any regulatory restraint on the operations of the banks and finance houses over the past three decades is itself an expression of the crisis and decay of American capitalism. The hallmark of this process is the growth of financial parasitism. It is the other side of the coin of the systematic dismantling of large sections of industry and the relentless attack on the jobs and wages of the working class. This assault, in tandem with the unfolding economic crisis, is entering a new and even more brutal stage.

The very fact that the Madoff scandal has had its impact on the most privileged social layers testifies to the depth of the underlying crisis that produced it. It has, moreover, shed light on the social physiognomy of those elite sections of the population that have benefited from the vast redistribution of wealth from the bottom to the top. So manic is the drive for personal enrichment that supposedly savvy investors and Wall Street insiders barely bothered to examine Madoff's operations, so long as he delivered a steady stream of solid returns.

What is being widely reported as the largest financial fraud in history goes far deeper and extends far wider than the machinations of a single broker and fund manager. It marks a new stage in the disintegration of the US and world financial system—the convulsive outcome of decades in which a vast accumulation of personal wealth at the top has been achieved on the basis of semi-criminal forms of financial manipulation unrelated to production and the creation of real value. To a great extent, the entire economy has been transformed into a giant Ponzi scheme. The collapse of trillions in paper assets will assume ever more malignant forms.

The Neo-Alchemy of the Federal Reserve By Ron Paul

The Neo-Alchemy of the Federal Reserve

By Ron Paul

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As the printing presses for the bailouts run at full speed, those in power are no longer even pretending that the new giveaways will fix our problems. Now that we are used to rewarding failure with taxpayer-funded bailouts, we are being told that this is “just a start,” more funds will inevitably be needed for more industries, and that things would be much worse had we done nothing.

The updated total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months. This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation. Dumping money on an economy, as they have been doing, is not the same as dumping wealth. In fact, it has quite the opposite effect.

One key attribute that gives money value is scarcity. If something that is used as money becomes too plentiful, it loses value. That is how inflation and hyperinflation happens. Giving a central bank the power to create fiat money out of thin air creates the tremendous risk of eventual hyperinflation. Most of the founding fathers did not want a central bank. Having just experienced the hyperinflation of the Continental dollar, they understood the power and the temptations inherent in that type of system. It gives one entity far too much power to control and destabilize the economy.

Our central bankers have had a tremendous amount of hubris over the years, believing that they could actually manage a paper money system in such a way as to replicate the behavior and benefits of a gold standard. In fact, back in 2004 then Fed Chairman Alan Greenspan told me as much. People talk about toxic assets, but the real toxicity in our economy comes from the neo-alchemy practiced by the Federal Reserve System. Just as alchemists of the past frequently poisoned themselves with the lead or mercury they were trying to turn to gold, today’s bankers are poisoning the economy with accelerated fiat money creation.

Throughout the ages, gold has stood the test of time as a consistently reliable medium of exchange, and has frequently been referred to as “God’s money”, as only God can make more of it. Seeking superhuman power over money in the way alchemists did in ancient times caused society to shun them as charlatans. In much the same way, free people today should be sending the message that this power and control over our money is no longer acceptable.

The irony is that even had the ancient practice of alchemy been successful, and gold was suddenly, magically made abundant, alchemists still would have failed to create real wealth. Creating gold from lead would have cheapened its status to that of rhinestones or cubic zirconia. It is unnatural and dangerous for paper to be considered as precious as a precious metal. Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.

Congress should reject the central bank as a failure for its manipulations of money that have brought our economy to its knees. I am hoping that in the 111th Congress my legislation to abolish the Federal Reserve System gains traction so that the central bank can no longer destroy our money.

Home values seen losing over $2 trillion during 2008

Home values seen losing over $2 trillion during 2008

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Homes in the United States have lost trillions of dollars in value during 2008, with nearly 11.7 million American households now owing more on their mortgage than their homes are worth, real estate website Zillow.com said on Monday.

U.S. homes are set to lose well over $2 trillion in value during 2008, according to an analysis of recent Zillow Real Estate Market Reports.

Home values declined 8.4 percent year-over-year during the first three quarters of this year, compared to the same period in 2007, the reports showed.

U.S. home values lost $1.9 trillion from the first of the year through the end of the third quarter, and will probably fall further in the fourth quarter. One in seven of all homeowners, or 14.3 percent, were "underwater" by the end of the third quarter, the reports showed.

"This year marked the acceleration of the market correction, and is likely to end with the eighth consecutive quarter of declines in home values," Dr. Stan Humphries, Zillow's vice president of data and analytics, said in a statement.

"In general, homeowners in most areas we cover are struggling with foreclosures pouring into the market, large amounts of negative equity and dropping home values. On the positive side, in the third quarter, some markets - particularly those hit hardest in the downturn - showed smaller year-over-year declines than in the prior quarter," he said.

"Our optimism here, though, must be tempered by the knowledge that the larger economic problems that emerged in the fourth quarter will likely further challenge the real estate market," he said.

The U.S. housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices.

Thirty of the 163 metropolitan statistical areas, or MSAs, covered in the Zillow Real Estate Market Reports showed gains in the Zillow Home Value Index, or median value of all homes in the area, over the first three quarters of the year, with the Jacksonville, North Carolina region seeing year-over-year appreciation of 4.9 percent. The change in value was calculated by averaging the year-over-year change in each of the first three quarters of the year, the reports showed.

The U.S. housing market, with falling prices, rising foreclosures, and large numbers of "underwater" mortgages, remains the largest unresolved issue for the global economy.

The Stockton, California region fared the worst in the first three quarters of 2008, with home values sliding 32.3 percent year-over-year. The Merced, California area followed with home values declining 31.2 percent year-over-year in the first three quarters of 2008, the reports showed.

Americans rich and poor pawn more to pay bills

Americans rich and poor pawn more to pay bills

By Sue Zeidler and Tim Gaynor

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Whether it's a Tiffany diamond or a three-year-old lawnmower, more and more Americans from all social classes are pawning their possessions to make ends meet.

Pawn shop owners see strong business across the country, even in unexpected locales like Beverly Hills, the mecca of luxury living and shopping.

"Banks aren't lending so people are coming here for short-term loans against collateral like diamonds, watches and other jewelry," said Jordan Tabach-Bank, CEO of Beverly Loan Co, self-described "pawnbroker to the stars."

"I do see my share of actors, writers, producers and directors," he said, but also cited more visits from white-collar professionals and especially business owners struggling to meet payroll obligations.

"We still do the five-, six-figure loans to Beverly Hills socialites who want to get plastic surgery, but never have we seen so many people in desperate need of funds to finance business enterprises," he added.

In the 70 years of the family business, Beverly Loan, which usually charges 4 percent monthly interest on loans, has never loaned so much as it has in the past few months, he said.

"We're a lot easier to deal with than a bank," he said from his office on the third floor of a Bank of America building near Rodeo Drive. An armed security guard watches over the reception, where case after case is filled with precious gems.

It's less glamorous at Mo Money Pawn, located in the grimy area of central Phoenix, where struggling building contractor Robert Lane waited for the shop to open its doors so he could pawn a table saw he bought for $900.

"It's to get ahead and pay off some of the bills," he says standing outside the store, where he hoped to get $300 for a cherished workshop tool he now rarely uses as work dries up.

MORTGAGE BROKERS AT PAWNBROKERS

There are as many as 15,000 pawnbrokers across the United States. As the U.S. recession deepens, pawnbrokers -- long seen as a lender of last resort -- are noting a rise in business.

No national body keeps statistics for the sector, but proprietors across the spectrum say they are thriving as home foreclosures spiral and bank credit remains scarce.

"Business is good," Mo Money owner Eric Baker said. The store, which makes loans on anything from a motor home to guns to lawnmowers and jewelry, says turnover is up by around 20 percent over a year ago on a broader range of clients.

"You are seeing some bigger stuff, you're seeing some people you probably wouldn't have seen," he said.

Newer clients include struggling contractors like Lane, as well as cash-strapped real estate, land and mortgage brokers, seeking loans, which are pegged by state law at 22 percent over 90 days.

"They are coming in with the houseboats, the quads, the Harleys... The toys they can live without, sitting in the garage," Baker said, sitting in his office at the store, where several of the staff have pistols holstered in their belts.

Across town, William Jachimek, a 25-year veteran of the trade, said cash-strapped mortgage brokers started coming in about a year ago and now account for 10 percent of business.

"We had one mortgage broker who pawned his wife's jewelry and their Viking oven," says the owner of five pawn shops who takes "everything that can be sold on E-bay" as collateral.

Business is up 20 percent on last year at Mo Money Pawn, and seven percent at Pawn Central, Jachimek's flagship store. Nevertheless, a growing number of customers are defaulting on loans, creating some uncertainty.

"It's really good from the aspect that we're taking stuff in and your money is making money while it's out there. But, on the other side, a lot of people are not picking stuff up," Baker said.

Pawnbrokers said it was getting harder to turn over items and unsold merchandise is mounting. Back in Beverly Hills, Tabach-Bank said defaults were up a bit, but still only about 5 percent. "Unlike banks, we are able to work with our customers," Tabach-Bank said. "We're not the kind of pawn shop that cuts you off the day your loan comes due."

States’ Funds for Jobless Are Drying Up

States’ Funds for Jobless Are Drying Up

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With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, and some are turning to the federal government for loans or increasing taxes on businesses to make the payments.

Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent over the next few months, according to the National Association of State Workforce Agencies. Funds in two states, Indiana and Michigan, have already dried up, and both states are borrowing from the federal government to make payments to the unemployed.

Unemployment taxes are collected by states from employers, but the rate varies from state to state per employee. In good times states build up trust funds so that when unemployment is high there is enough money to cover the requests for benefits, which are guaranteed by the federal government.

“You don’t expect the loans to happen this early in a jobs slump,” said Andrew Stettner, the deputy director of the National Employment Law Project, an advocacy organization for low-wage workers. “You would expect that the states should, even when they are not well prepared, to have savings.”

The Labor Department said last week that initial applications for jobless benefits rose to 573,000, the highest reading since November 1982. It is recommended that states keep at least one year of peak-level benefits in their trusts, but many have not, and already some states are far worse off than others.

Indiana’s unemployment trust fund went insolvent last month, and has borrowed twice from Washington since then — the first such loans to the state since 1983. It also expects to request an additional $330 million early next year.

Michigan, which has been borrowing money from the federal government for the past few years to replenish its fund, is now $508.8 million in the hole and unable to repay it. Next month the state, where the unemployment rate is more than 9 percent, will begin levying a special “solvency tax” against some employers to replenish its trust fund.

California, New York, Ohio, Rhode Island and other states are inching toward insolvency as well, and may have to borrow from the federal government to get through at least the first quarter of 2009.

In South Carolina, officials recently requested a $15 million line of credit.

“Right now we have $40 million in our trust fund, and we are paying out around $11 million a week,” said Allen Larson, deputy executive director for the unemployment insurance program at the South Carolina Employment Security Commission. “So we think it is going to be very close as to whether or not we can get through this year. We have never experienced anything like this.”

Officials in New York said the state’s trust fund has about $314 million, compared with $595 million last year, and will most likely have to borrow from the federal government in January.

The situation puts states, many of them facing huge deficits, in an even tighter vise. As more people lose their jobs, the revenue base that the benefits are drawn from shrinks, making it harder to pay claims. Adding to that burden is that states will eventually have to pay back what they borrow.

Some states are worried about next year because the lion’s share of unemployment taxes are collected early in each year, and they are not sure the money will stretch through the end of the next year. The maximum amount of income the federal government can tax employers for each worker is $7,000. (The amount ranges from about $7,000 to about $25,000 for state taxes.)

“It is something that we are concerned about,” said Kim Brannock, a spokeswoman for the Office of Employment and Training in Kentucky, where the unemployment trust fund balance now sits at $133 million, compared with $250 million a year ago. The fund has not borrowed money from the federal government since the 1980s. “At this point we are solvent,” she said, “but we are monitoring the situation.”

States that come up short have the option of borrowing from the federal government, but if the loan is not paid back within the federal fiscal year, 4.7 percent interest is accrued, which cuts into states’ general funds.

“With longer term solvency issues due to the sharp increase in unemployment, federal borrowing quickly becomes expensive,” said Loree Levy, a spokeswoman for the Employment Development Department in California, which is already facing a multibillion dollar budget gap. “We are anticipating interest payments of $20 million in 2009-10 and if nothing is done to revise the revenue generation model the interest would be $150 million in 2010-11.”

As such, they are then forced to raise taxes or cut services, or both.

Robert Vincent, a spokesman for the Gtech Corporation, a technology company for the lottery industry based in Rhode Island, said, “Unemployment taxes are one of a number of taxes that make it difficult to do business here.”

In many cases, states that have kept unemployment tax rates artificially low — or in some instances decreased them — find themselves in the worst pickle now. Indiana legislators, for example, reduced the tax rates to businesses by 25 percent in 2001.

“So, frankly, they created the perfect storm,” said John Ruckelshaus, the deputy commissioner for the Indiana Department of Workforce Development. “The Legislature will have to go in and look at the whole unemployment trust find first thing when they begin their session.”

At the same time payments have gone up in some states.

To recalibrate the balance, several states are raising taxes on businesses — often through an automatic increase that is triggered when fund levels are endangered — to keep the unemployment checks flowing. An example is the Michigan solvency tax, which will be levied against employers whose workers have received more in benefits than the companies have contributed in unemployment insurance taxes, to the tune of $67.50 per employee.

In Rhode Island, where the unemployment rate is 9.3 percent, the taxable wage base will go to $18,000 from $14,000 in 2009, the highest rate in a decade.

“There is a possibility that we might be slightly under the funds we need come the end of the first quarter,” said Raymond Filippone, the assistant director of income support at the Rhode Island Department of Labor and Training. The state has not borrowed from the federal government since 1980, he said.

“Many states have not raised that tax in years,” said Scott Pattison, executive director of the National Association of State Budget Officers in Washington. “Some states have automatic triggers. But then of course you have businesses saying, ‘Whoa, you are raising taxes on me when we are having a tough time and it is a recession, too.’ ”

Still, some said they were thinking beyond the dollars.

“In these times of financial stress every extra cost is a concern,” said Linda Shelton, the spokeswoman for Lifespan, a large health care system in Rhode Island. “However there are many things that worry us even more. We are much more concerned about Rhode Island’s budget crisis, about rising unemployment, the rising number of uninsured and the continuing cuts to health care.”

Goldman faces $2bn loss – its first since 1929

Goldman faces $2bn loss – its first since 1929

As the banking giant prepares to unveil shock figures, Morgan Stanley braces itself to add its own bad news

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Goldman Sachs, the US investment bank, is this week expected to post its first loss since the Wall Street crash of 1929 when it unveils full-year results on Tuesday.

In the week when many Square Mile bank staff find out if they have scooped a bonus this year, Morgan Stanley is expected to complete a miserable Christmas picture when it also reports a loss, one day later.

Alex Potter, banking analyst at stockbroker Collins Stewart, said: "For these two remaining November year-end reporters, the past three months will have been pivotal to their year as well as to the 2009 outlook. This period encompassed the Lehman failure, as well as the nationalisations of Fannie Mae, Freddie Mac and AIG."

Analysts expect Goldman to say that it lost close to $2bn (£1.4bn) in the last quarter of 2008, compared to a $3.18bn profit during the same period last year.

Big losses are expected at the bank's proprietary property arm, Whitehall, which owns, among other investments, New York's Rockefeller Center. Sources suggest that Goldman will reveal writedowns of more than $2bn on the fund.

Big losses are also believed to have been recorded in its key principal investments portfolio, with some estimates suggesting they could come in as high as $3.5bn.

Goldman laid off 250 staff in Europe last week, the majority of the cuts coming at its London offices in Fleet Street, as part of a drive to slash the group's headcount by 10 per cent.

Morgan Stanley is expected to post only its second loss since it went public in 1986 – around $300m for the fourth quarter is forecast – although some estimates suggest that figure could be as high as $900m.

The ratings agency Standard and Poor's has estimated that Morgan Stanley owns $7.7bn of commercial real estate loan assets – none of which has been written down.

Morgan Stanley's numbers will come days after Bank of America's chief executive, Ken Lewis, revealed that the bank, which snapped up ailing rival Merrill Lynch earlier in the year, is looking to lay off as many as 35,000 jobs in the next three years. It is anticipated that the move will save as much as $7bn.

Last week Spanish bank Santander said it was laying off 1,900 jobs in the UK. Around 250,000 posts have gone so far this year in financial services, including at Citigroup, which is cutting 75,000 jobs, and JP Morgan, which is shedding around 7,000 staff – around 10 per cent of its workforce.

*Ed Annunziato, the former head of European investment banking at Merrill Lynch, is to head a new financial institutions arm at Tricorn Partners, the corporate finance boutique run by Square Mile veterans Guy Dawson and Justin Dowley.

Collapse of Pension Funds: The End of Retirement?

Collapse of Pension Funds: The End of Retirement?

By Shamus Cooke

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Unless things change fast, human history will show that the phenomenon of “retirement” was limited to one generation. After World War II, when European and Japanese economies stood in tatters, American capitalism could fulfill “the American dream,” since there was little foreign competition to speak of. For the first time ever, workers were promised that — after working thirty or so years — they would be able to securely retire. That was largely the case…for one generation.

The second generation is having a devastating reality check. 2008 was supposed to be a watershed year for retirement: it was the first year that the baby-boomers turned 62, and the retirement frenzy was to begin (since people could begin to draw on their social security benefits). Early in the year, however, a study was conducted that found one-fourth of these boomers were delaying retirement (only the baby-boomers who were actually able to plan for retirement were studied). The economy has since nosedived, and many more retirements are being delayed. The unfortunate reality is that many who planned on retiring will work until the grave, joining the millions of other baby-boomers who never had such dreams.

The experts are calling this the “perfect storm” for retirement. Everything that could go wrong is in fact going wrong. This storm, however, was not created by supernatural forces, but the coordinated effort of big-business and their puppet politicians.

The deliberate destruction of the pension and its replacement by the 401(k) was, of course, a giant step towards attacking retirement; but now that the economic crisis has emerged, we’re beginning to see just how ruinous the effects are.

At the end of September, just as the crisis was beginning to gain steam, it was discovered that in the previous year the value of stocks in 401(k) accounts had fallen by nearly $2 trillion! Much more has been lost since then. This is especially devastating since almost one-third of 401(k) participants in their 60s had 80 percent of their money in stocks (pension funds have been similarly destroyed).

The 401(k) was the scheme of the century. Corporations offloaded their "burdensome" pensions and used the combined forces of the media and politicians to sell the ruse to the public, to the great benefit of Wall Street. Workers were told that the boom-slump cycle was over, and that stocks were a sure thing. There were additional factors to invest in stocks: interest rates were so low that investing in bonds and other less-risky instruments offered only tiny returns; and since employers stopped contributing to retirement funds, a bigger return was required.

More importantly, corporations have been driving down real wages since the seventies, allowing less money to be saved for retirement, creating a mood of desperation.

Every “safe bet” for investing has been proven unsafe; the recession has left nothing untouched. After the dotcom bubble burst — taking with it millions of people's 401(k) savings — the housing market became the place to invest. Now the safest possible investment, too, has turned sour. For millions of people, the home they lived in was their nest egg, which they had planned to sell and move into a smaller place. No more.

Rep. Robert Andrews (D-NJ), who chairs the House subcommittee on health, employment, labor and pensions, put it bluntly: “Some will have very little, some will have almost nothing, and some will have nothing when they retire”. Of course, people who “have nothing” do not retire.

This process is being accelerated by the newest trick of big business: declaring bankruptcy to destroy “pension obligations”. These obligations apply with equal weight to workers already retired, many of whom are seeing their pensions slashed in half, forcing them out of retirement.

Now even the threat of bankruptcy is constantly used in union contract negotiations to scare workers into concessions, since after achieving bankruptcy, labor agreements are torn up. The threat of closing the company’s doors is a very effective form of intimidation.

This phenomenon is at the center of the GM debate. The corporate politicians in congress cannot decide whether to appoint a “Car Tsar” to oversee the destruction of the autoworkers pensions, or use the proven method of bankruptcy. Not a day goes by that the corporate media doesn’t join hands to assail the pension and health care benefits of the “spoiled” GM workers. The hypocrisy is sickening.

This after the UAW had already agreed to the most shameful concessions in 2007. Although concessions are often made in the name of “job security,” the result is that corporations become emboldened by such acts. Eventually, every benefit of workers that contradicts company profit will be targeted. The demand for concessions never stops, and soon the point arrives when the benefits of having a union become questioned, since dues money is not paid with concessions in mind.

The autoworkers struggle is at the forefront of the pension battle nationwide, since their struggles in the 1930’s originally paved the way for pensions. Equally important is the pension struggles emerging with public employees, the last stronghold of workers who receive them. Public employees will find their pensions under immense attack as the economic crisis intensifies, and government budgets are depleted (see “State Budget Crisis Deepens” on this site).

Fighting the corporate strategy of bankruptcy and business closures is an immediate need of working people. This tactic will increase in number as the crisis deepens and companies strive to “restore profitability” by drastically lowering wages. If a company attempts such a criminal act, the workers should demand a bailout for themselves; the government should take over the plant so that the workers can keep their jobs, such as was done for the banks. Management must be sacked and instead of a government bureaucrat, the workers themselves should run the business.

To win this program, new levels of organizing and solidarity are needed, such as the example of the United Electrical Workers, who occupied their factory and organized in a brilliant fashion. They won a stunning victory by utilizing the methods of the original autoworkers struggles from the 1930’s. If a fight is to be waged, it must be done seriously and with determination, uniting both retired and active workers. The UEW workers have shown the way forward for the labor movement, which can no longer rely on union concessions or the promises of Democratic politicians, but only their own collective strength.

Loophole guts bailout restrictions on executive pay

Loophole guts bailout restrictions on executive pay

By AMIT R. PALEY

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Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.

But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.

"The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee.

The modification reflects how the rapidly shifting nature of the crisis and the government's response to it have led to unexpected results that are just now beginning to be understood.

The Government Accountability Office, the investigative arm of Congress, issued a critical report last week about the financial industry rescue package that said it was unclear how the Treasury would determine whether banks were following the executive-compensation rules.

Michele Davis, spokeswoman for the Treasury, said the agency is working to develop a policy for how it will enforce the executive-compensation rules. She would not say when the guidance would be issued or what penalties it might impose. But she said the companies promised to follow the rules in contracts with the department.

The final legislation contained unprecedented restrictions on executive compensation for firms accepting money from the bailout fund. The rules limited incentives that encourage top executives to take excessive risks, provided for the recovery of bonuses based on earnings that never materialize and prohibited "golden parachute" severance pay. But several analysts said that perhaps the most effective provision was the ban on companies deducting more than $500,000 a year from their taxable income for compensation paid to their top five executives.

That tax provision, which amended the Internal Revenue Code, was the only part of the law that contained an explicit enforcement mechanism. The provision means the IRS must review the pay of those executives as part of its normal review of tax filings. If a company does not comply, the IRS can impose a tax penalty. The law did not create an enforcement mechanism for reviewing the other restrictions on executive pay.

If a firm violates the executive-compensation limits, department officials said, the Treasury could seek damages, go to court to force compliance, or even rescind the contracts and recover the bailout money. "We therefore have all the remedies available to us for a breach of contract," Davis wrote in an e-mail.

Legal experts said those efforts could be complicated if the Treasury outlines the penalties after companies have received bailout money. David Lynn, former chief counsel of the Securities and Exchange Commission's division of corporation finance, said courts have sometimes placed limits on the government's ability to impose penalties if there was no fair warning.

"Treasury might find its hands tied down the road," said Lynn, who is also co-author of "The Executive Compensation Disclosure Treatise and Reporting Guide."

Congressional leaders are also concerned that the Treasury might simply choose not to enforce the rules or be unwilling to impose financial penalties that could further weaken a firm and send the economy deeper into a tailspin.

The Bush administration at first opposed any restrictions on executive pay, congressional aides said. The original three-page bailout proposal presented to lawmakers in September contained no mention of such limits.

"Treasury was pretty clear that they thought doing this exec-comp stuff would limit the effectiveness of the program," said a Democratic congressional aide involved in the negotiations, who, like others interviewed for this story, spoke on condition of anonymity. "They felt companies might not take part if we put in these rules."

Congressional leaders disagreed. By the morning of Saturday, Sept. 27, the final day of marathon negotiations on the bill, the draft language relating to taxes and containing the enforcement provision applied to all companies participating in the bailout programs, Democratic and Republican congressional aides said.

But then Treasury Secretary Henry Paulson and his deputies began pushing for the compensation rules to differentiate between companies whose assets are purchased at auction and those whose assets or equity are purchased directly by the government, the aides said.

Congressional leaders from both parties thought Paulson wanted the distinction for extraordinary cases like American International Group, which the government seized in an $85 billion deal. He wanted to be able to push executives out of companies that the government controlled and have the flexibility to bring in strong new executives, said one senior congressional aide.

"The argument that they were making at the time is that the direct investment was going to be used only in circumstances where the company was AIGed, so to speak," said a senior Democratic congressional aide.

Davis, the Treasury spokeswoman, confirmed that the Treasury pushed to place fewer restrictions on executives at companies receiving capital infusions, but she gave a different explanation. She said many of those firms are more stable and are being encouraged to participate in the bailout to strengthen the overall system.

"The provisions for failing institutions should come with more onerous conditions than those for healthy institutions whose participation benefits the entire system," she said.

Lawmakers agreed to the Treasury's request that the measure apply only to executives at companies whose assets were bought by the government through auctions. In the executive-compensation tax section, a new sentence saying that eventually was inserted.

Meanwhile, Paulson repeatedly told lawmakers that he did not plan to use bailout funds to inject capital directly into financial institutions. Privately, however, his staff was developing plans to do just that, Paulson acknowledged in an interview.

Although lawmakers hailed the rules as unprecedented new limits on executive pay, several were unhappy that the law was not stricter.

Under pressure from Congress, the Treasury issued regulations in October on executive compensation and applied the tax-deduction limits to all companies receiving bailout funds, although the legislation did not require it for firms that received direct capital injections. But the Treasury failed to issue guidelines requiring the IRS or any other agency to enforce the rules, and it also failed to explain how the restrictions would be enforced.

The Treasury's regulations also instructed firms to disclose more compensation information to the Securities and Exchange Commission. But officials at the SEC do not think they have the authority to force companies to disclose the kind of pay information required by the bailout law, according to people familiar with the matter, though they hope companies will cooperate. John Nester, an SEC spokesman, declined to comment.

Senators on the Finance Committee have expressed concern to Paulson and are now considering whether they should amend the law to apply the enforcement mechanism to all firms participating in the bailout.

US government bailouts: poverty wages for auto workers, trillions for bankers

US government bailouts: poverty wages for auto workers, trillions for bankers

By Jerry White

Go To Original

In the debate over federal assistance to the failing Detroit automakers, the clear consensus has emerged within the corporate, political and media establishment that auto workers must accept sharply lower wages and benefits as part of any industry bailout.

The White House, Congress and the incoming Obama administration all insist that substantial sacrifices are needed. The United Auto Workers union, which last year negotiated a fifty percent reduction in the wages of new hires, has pledged to reopen contracts with General Motors, Ford and Chrysler and make pay and benefits "fully competitive" with the non-union factories operated by their international competitors in the southern US states.

Such a course of action would result in a historic reversal for auto workers who would then be earning some $14 an hour—or, adjusting for inflation, about half what their counterparts made in the 1960s.

The Democrats and Republicans made no similar demand for sacrifices from the banking executives and financial speculators who were handed $700 billion in last September's bailout of the Wall Street banks.

In fact, whatever supposed restrictions on executive pay and bonuses were included in that rescue package have proven to be a farce. The banking executives and big investors continue to enrich themselves without needing to account for how they have used trillions in public funds.

A report in the Washington Post Monday, headlined, "Executive Pay Limits May Prove Toothless," made this clear. The article noted that the Bush administration inserted a last-minute loophole into the legislation that has rendered meaningless any restrictions on executive compensation.

The change meant rules would apply only to executives at financial institutions who received federal money through the so-called reverse auctioning of troubled assets to the government. This was the initial means by which the bailout money would be disbursed, according to Treasury Secretary Henry Paulson. However, the Treasury decided instead to inject public assets directly into the banks. None of the $335 billion committed so far has involved auctions nor will future assets, according to Treasury officials.

This has effectively annulled the only enforcement mechanism in the law, according to politicians and legal experts cited by the Post. "The flimsy executive-compensation restrictions in the original bill are now all but gone," Senator Charles E. Grassley (Iowa), ranking Republican on the Senate Finance Committee, told the newspaper.

The Government Accountability Office, the investigative arm of Congress, issued a report earlier this month indicating it was unclear how the Treasury would determine whether banks were following the executive-compensation rules. A Treasury spokeswoman told the Post the agency was working to develop a policy, although she did not say when the guidelines would be ready or if they would include any penalties at all. The companies, she suggested lamely, had promised to follow the rules.

As the Wall Street rescue package was being rushed through Congress, the Democrats sought to conceal this naked theft of public assets by claiming the measure contained unprecedented restrictions on corporate pay, "golden parachutes" and other perks. "This is the first time in the history of United States that anything has been done by Congress to curtail excessive CEO compensation," declared House Financial Services Chairman Barney Frank, a Democrat from Massachusetts.

This was a lie, just like everything else the Democrats said at the time to sell the rescue package: there was no time for discussion or debate, they informed the media and the public, because the credit markets had to be unfrozen in order to prevent a global financial collapse and the spread of the disaster from Wall Street to Main Street, etc. In the end, Congress quietly approved the changes made by the Bush administration and handed the banks the money—which has, of course, not been used to stimulate lending, but to acquire smaller competitors, pay dividends to wealthy bondholders, secure the balance-sheets and guarantee the fortunes of the top executives.

In a staggering double standard, the White House, Obama and congressional Democratic leaders, including Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi, imposed drastic conditions on the auto companies, which are seeking a loan of $14 billion—one fiftieth the amount handed to Wall Street.

Insisting that no taxpayer money be used unless the auto companies demonstrate their "viability" and "accountability" to the public, the Congressional Democrats drafted a bill, which would give the president the power to appoint a so-called car czar to examine the companies' financial books, approve expenditures over $100 million and set benchmarks for restructuring. If the auto firms failed to implement plans for job cutting and slashing labor costs quickly enough, the car czar would recall the loans and throw them into bankruptcy.

No such conditions were imposed on the banks. In fact, despite the talk from Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke about "transparency," the government is deliberately concealing from the public where the money went and how it has been spent.

Bloomberg News has reported that the Federal Reserve has refused its Freedom of Information request to disclose the recipients of more than $2 trillion of emergency loans and the assets the central bank is accepting as collateral. Fed officials say the release of such data could cause a severe loss of confidence and deepen the global financial crisis.

The cost of the Fed's 11 lending programs—which have even less oversight than the Treasury's $700 billion Troubled Asset Relief Program (TARP)—has exploded over recent months as it reduced standards and purchased largely worthless stocks and mortgage-backed securities from Citigroup, JP Morgan Chase and other major financial institutions. "If they told us what they held, we would know the potential losses that the government may take and that's what they don't want us to know," Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, told Bloomberg News.

Since the Senate Republicans blocked the bill to assist the auto industry—demanding even more draconian and immediate wage cuts from auto workers—the Bush administration has been suggesting it may use TARP money to stave off the bankruptcy of GM and Chrysler at least until the Obama administration takes over. Whatever is worked out, however, will be contingent on a massive deterioration in the conditions of auto workers and, inevitably, the working class as a whole.

The struggles of auto workers—beginning with the great 1936-37 sit-down strike at GM plants in Flint, Michigan—put an end to the most brutal and exploitive conditions and won employer-paid pensions, health care benefits and higher wages, which set the standard for industrial workers throughout the post-World War II period. The so-called "middle class lifestyle," however, has been under assault for the last thirty years, beginning with the Chrysler bailout of 1979-80.

This has coincided with an explosion in social inequality. In 1984, the top executives of the US auto industry were paid 12 to 18 times as much as the average blue-collar worker. By 2006, they were paid 122 times more, not including the many golden parachutes worth $100 million or more. The recent labor agreement accepted by the UAW means that auto executives will now earn 240 times what new workers make!

Private equity managers at firms such as Chrysler owner Cerberus Capital Management earn far more still. Last year, the top 50 hedge and private equity fund managers made an average of $588 million—or more than 10,000 times what a current auto worker earns.

The official public opinion makers, corporate spokesmen and politicians insist that the auto companies can no longer afford decent wages, let alone health care and retirement benefits. They claim that to "compete," i.e., to make them profitable for the big investors again, the auto companies must reduce workers' wages to near-poverty levels and erase the gains won through generations of struggle.

State intervention and planning of the economy are indeed necessary, but like the bailout of Wall Street, any intervention by the two capitalist parties is only aimed at preserving the interests of the financial elite. They intend to make the corporations viable at the expense of the jobs and living standards of working people.

This whole reactionary framework must be rejected. Workers are not responsible for the collapse of the auto industry, let alone the financial system. The resolution of the crisis in a progressive manner is only possible on the basis of working people breaking with the Democrats and Republicans and advancing a socialist answer to the breakdown of the capitalist system, including the nationalization of the auto industry and the banks under the public and democratic control of the working class.

Auto bailout's death seen as a Republican blow at unions

Auto bailout's death seen as a Republican blow at unions

For some Senate Republicans, a vote against the bailout was a vote against the United Auto Workers, and against organized labor in general.

By Jim Puzzanghera

Go To Original

The congressional push to help U.S. automakers was generally cast in terms of protecting the reeling national economy from another body blow -- the collapse of one or more of Detroit's Big Three.

But in killing the stopgap rescue plan worked out by President Bush and congressional Democrats, conservative Republicans -- many from right-to-work states across the South -- struck at an old enemy: organized labor.

"If the [United Auto Workers], which is perceived as one of the strongest unions in the country, can be put under control, that may send a message across the whole country," said Michigan State University professor Richard Block, a labor relations expert.

Such antipathy to unions was an undercurrent through the weeks of negotiations leading up to Thursday's Senate vote rejecting the plan.

Handing a defeat to labor and its Democratic allies in Congress was also seen as a preemptive strike in what is expected to be a major battle for the new Congress in January: the unions' bid for a so-called card check law that would make it easier for them to organize workers, potentially reversing decades of declining power. The measure is strongly opposed by business groups.

"This is the Democrats' first opportunity to pay off organized labor after the election," read an e-mail circulated Wednesday among Senate Republicans. "This is a precursor to card check and other items. Republicans should stand firm and take their first shot against organized labor, instead of taking their first blow from it."

One of the leading opponents of the auto bailout, Sen. Jim DeMint (R-S.C.), said: "Year after year, union bosses have put their interests ahead of the workers they claim to represent. Congress never should have given these unions this much power, and now is the time to fix it."

Of course, for Democrats' part, they were fighting for one of their most loyal supporters in backing the $14-billion bailout.

The UAW, which represents about 150,000 employees of the Big Three, delivered campaign contributions and foot soldiers to help elect Barack Obama president, especially in crucial states such as Michigan and Ohio.

What lent a bipartisan gloss to Senate Democrats' effort was the fact that party leaders had negotiated for days with the White House and made a string of concessions that toughened the bill and won active support from the Bush White House.

Sen. George V. Voinovich (R-Ohio), a strong auto industry supporter, acknowledged that some of his colleagues simply did not want to help the UAW.

"We have many senators from right-to-work states, and I quite frankly think they have no use for labor," he said. "Labor usually supports very heavily Democrats and I think that some of the lack of enthusiasm for this [bailout] was that some of them didn't want to do anything for the United Auto Workers."

One major car dealer said conservatives let political ideology get in the way of protecting the country's interests.

"Being a Republican myself, I feel very betrayed by the Republican Party right now," said Beau Boeckmann, vice president of Galpin Motors Inc. in North Hills. Galpin has the nation's largest Ford dealership as well as lots where it sells eight other foreign and domestic brands.

The anti-union sentiment rose to the surface in the final desperate hours of negotiations. Republicans insisted that the UAW agree to cut its wages to be competitive with foreign companies such as Honda, Toyota and BMW by a set date.

UAW officials and their Democratic allies balked, saying the autoworkers were being told to make sacrifices that had not been demanded of other industries receiving government bailouts.

"We could not accept the effort by the Senate GOP caucus to single out workers and retirees for different treatment and to make them shoulder the entire burden of any restructuring," UAW President Ron Gettelfinger said, arguing the union had gone further than any other stakeholder in making concessions to help the companies avoid bankruptcy.

But DeMint argued that the unions had helped create Detroit's plight.

"It is no coincidence that the healthy automakers in the United States are located in 'right-to-work' states and are not unionized by the UAW," he said. "Right-to-work" states bar agreements between trade unions and employers making membership or payment of union dues or "fees" a condition of employment, either before or after hiring.

Rep. John D. Dingell (D-Mich.), a labor ally, said Friday that Republican senators who opposed the bailout might have "wanted to crush a longtime political rival, the United Auto Workers," without concern for the economic consequences.

Democrats lauded the UAW as a hero in the bailout process for agreeing to new concessions on top of major ones given in 2005 and 2007. House Speaker Nancy Pelosi (D-San Francisco) called the union "courageous" just before the House approved the bailout Wednesday.

But some Republicans framed the UAW as the villain, criticizing what they called lavish wages and benefits that they said had driven General Motors, Chrysler and, to a lesser extent, Ford to their knees.

"I'm sure that I'm going to be asked, 'Congressman, I work at Honda' or 'I work at Mercedes. I get $40 an hour. Why are you going to take my tax dollars and pay it to a company that's paying their employees $75 an hour?' " Rep. Spencer Bachus (R-Ala.) said last month.

That wage figure -- widely used by opponents of the auto industry bailout -- is not in fact the wage paid to current workers. It is an approximation of the costs of salaries and benefits for current and retired workers. After wage concessions in recent contracts, the UAW says its workers at GM, Ford and Chrysler plants range from $33 an hour for skilled trades to $14 an hour for new hires.

Precise wages and extrapolated benefits costs for U.S. workers at nonunionized foreign companies, such as Honda and Toyota, are difficult to ascertain, but Block estimated salaries for current workers are approximately the same.

The Big Three automakers have higher labor costs primarily because they have operated factories in the U.S. much longer than their foreign counterparts, so have many more retirees receiving pension and healthcare payments, Block said.

Even if UAW workers at GM took a 20% pay cut, it would only save the company about $1.1 billion annually because the company's unionized workforce in the United States has decreased dramatically in recent years, to 55,000, he said.

Sen. Sherrod Brown (D-Ohio) characterized the GOP opposition as "class-warfare assault by the Republicans."

"They never ask about banker salaries. . . . They never asked they give money back," he said.

When Congress convenes in January, the expanded Democratic majorities are expected to push for an Employee Free Choice Act, also known as the "card check," under which companies would recognize unions if a majority of workers signed cards saying they favored a union. That would replace the traditional method of a secret ballot among workers.

Block and other analysts believe the looming fight added to the political maneuvering over the bailout.

"The opposition might be as strong, but it might not be as urgent," Block said.

"If the public could be convinced the problem with the auto industry is the UAW . . . then it will be easier than otherwise to marshal public support against unions and their legislative agenda."

Bush sneaks through host of laws to undermine Obama

Bush sneaks through host of laws to undermine Obama

The lame-duck Republican team is rushing through radical measures, from coal waste dumping to power stations in national parks, that will take months to overturn, reports Paul Harris in New York

Go To Original

After spending eight years at the helm of one of the most ideologically driven administrations in American history, George W. Bush is ending his presidency in characteristically aggressive fashion, with a swath of controversial measures designed to reward supporters and enrage opponents.

By the time he vacates the White House, he will have issued a record number of so-called 'midnight regulations' - so called because of the stealthy way they appear on the rule books - to undermine the administration of Barack Obama, many of which could take years to undo.

Dozens of new rules have already been introduced which critics say will diminish worker safety, pollute the environment, promote gun use and curtail abortion rights. Many rules promote the interests of large industries, such as coal mining or energy, which have energetically supported Bush during his two terms as president. More are expected this week.

America's attention is focused on the fate of the beleaguered car industry, still seeking backing in Washington for a multi-billion-dollar bail-out. But behind the scenes, the 'midnight' rules are being rushed through with little fanfare and minimal media attention. None of them would be likely to appeal to the incoming Obama team.

The regulations cover a vast policy area, ranging from healthcare to car safety to civil liberties. Many are focused on the environment and seek to ease regulations that limit pollution or restrict harmful industrial practices, such as dumping strip-mining waste.

The Bush moves have outraged many watchdog groups. 'The regulations we have seen so far have been pretty bad,' said Matt Madia, a regulatory policy analyst at OMB Watch. 'The effects of all this are going to be severe.'

Bush can pass the rules because of a loophole in US law allowing him to put last-minute regulations into the Code of Federal Regulations, rules that have the same force as law. He can carry out many of his political aims without needing to force new laws through Congress. Outgoing presidents often use the loophole in their last weeks in office, but Bush has done this far more than Bill Clinton or his father, George Bush sr. He is on track to issue more 'midnight regulations' than any other previous president.

Many of these are radical and appear to pay off big business allies of the Republican party. One rule will make it easier for coal companies to dump debris from strip mining into valleys and streams. The process is part of an environmentally damaging technique known as 'mountain-top removal mining'. It involves literally removing the top of a mountain to excavate a coal seam and pouring the debris into a valley, which is then filled up with rock. The new rule will make that dumping easier.

Another midnight regulation will allow power companies to build coal-fired power stations nearer to national parks. Yet another regulation will allow coal-fired stations to increase their emissions without installing new anti-pollution equipment.

The Environmental Defence Fund has called the moves a 'fire sale of epic size for coal'. Other environmental groups agree. 'The only motivation for some of these rules is to benefit the business interests that the Bush administration has served,' said Ed Hopkins, a director of environmental quality at the Sierra Club. A case in point would seem to be a rule that opens up millions of acres of land to oil shale extraction, which environmental groups say is highly pollutant.

There is a long list of other new regulations that have gone onto the books. One lengthens the number of hours that truck drivers can drive without rest. Another surrenders government control of rerouting the rail transport of hazardous materials around densely populated areas and gives it to the rail companies.

One more chips away at the protection of endangered species. Gun control is also weakened by allowing loaded and concealed guns to be carried in national parks. Abortion rights are hit by allowing healthcare workers to cite religious or moral grounds for opting out of carrying out certain medical procedures.

A common theme is shifting regulation of industry from government to the industries themselves, essentially promoting self-regulation. One rule transfers assessment of the impact of ocean-fishing away from federal inspectors to advisory groups linked to the fishing industry. Another allows factory farms to self-regulate disposal of pollutant run-off.

The White House denies it is sabotaging the new administration. It says many of the moves have been openly flagged for months. The spate of rules is going to be hard for Obama to quickly overcome. By issuing them early in the 'lame duck' period of office, the Bush administration has mostly dodged 30- or 60-day time limits that would have made undoing them relatively straightforward.

Obama's team will have to go through a more lengthy process of reversing them, as it is forced to open them to a period of public consulting. That means that undoing the damage could take months or even years, especially if corporations go to the courts to prevent changes.

At the same time, the Obama team will have a huge agenda on its plate as it inherits the economic crisis. Nevertheless, anti-midnight regulation groups are lobbying Obama's transition team to make sure Bush's new rules are changed as soon as possible. 'They are aware of this. The transition team has a list of things they want to undo,' said Madia.

Final reckoning

Bush's midnight regulations will:

• Make it easier for coal companies to dump waste from strip-mining into valleys and streams.

• Ease the building of coal-fired power stations nearer to national parks.

• Allow people to carry loaded and concealed weapons in national parks.

• Open up millions of acres to mining for oil shale.

• Allow healthcare workers to opt out of giving treatment for religious or moral reasons, thus weakening abortion rights.

• Hurt road safety by allowing truck drivers to stay at the wheel for 11 consecutive hours.

Bush Excluded by Latin Summit as China, Russia Loom

Bush Excluded by Latin Summit as China, Russia Loom

By Joshua Goodman

Go To Original

Latin American and Caribbean leaders gathering in Brazil tomorrow will mark a historic occasion: a region-wide summit that excludes the United States.

Almost two centuries after President James Monroe declared Latin America a U.S. sphere of influence, the region is breaking away. From socialist-leaning Venezuela to market-friendly Brazil, governments are expanding military, economic and diplomatic ties with potential U.S. adversaries such as China, Russia and Iran.

“Monroe certainly would be rolling over in his grave,” says Julia Sweig, director of the Latin America program at the Council of Foreign Relations in Washington and author of the 2006 book “Friendly Fire: Losing Friends and Making Enemies in the Anti-American Century.”

The U.S., she says, “is no longer the exclusive go-to power in the region, especially in South America, where U.S. economic ties are much less important.”

Since November, Russian warships have engaged in joint naval exercises with Venezuela, the first in the Caribbean since the Cold War; Chinese President Hu Jintao signed a free-trade agreement with Peru; and Brazil invited Iranian President Mahmoud Ahmadinejad for a state visit.

“While the U.S. remains aloof from a region it no longer sees as relevant to its strategic interests, other countries are making unprecedented, serious moves to fill the void,” says Luiz Felipe Lampreia, Brazil’s foreign minister from 1995 until 2001. “Countries in the region are more aware than ever that they live in a globalized, post-American world.”

A Castro Triumph

The two-day gathering, called by Brazil at a beach resort in Bahia state, is also a diplomatic triumph for Cuban President Raul Castro, making his first trip abroad since taking over from his brother Fidel two years ago. The communist island was suspended from the hemisphere-wide Organization of American States in 1962 over its ties with the former Soviet Union.

“A lot of this is designed to stick it in the eye of the U.S.,” says Peter Romero, the U.S. assistant secretary of state for the Western Hemisphere from 1999 to 2001. “But underlying the bluster, there’s a genuine effort to exploit the gap left by a distant and distracted U.S.”

The effort is most evident in the bloc of countries allied with the anti-American president of Venezuela, Hugo Chavez.

Bolivian President Evo Morales last month expelled the Drug Enforcement Administration, alleging that DEA agents were conspiring to overthrow him; U.S. President George W. Bush dismissed the charges as absurd and suspended trade privileges for the Andean nation.

Drug-War Defeat

In Ecuador, meanwhile, President Rafael Correa has refused to renew the lease on the U.S.’s only military outpost in South America, a critical platform for the U.S. war on drugs.

For Brazil, tomorrow’s summit caps a decade-long diplomatic drive to use its growing economic and political stability to play a bigger role in the world.

While little concrete action is expected from the first-ever Latin American and Caribbean Summit on Integration and Development, the fact that the U.S. wasn’t invited has symbolic importance, says Lampreia.

The summit reinforces such regional initiatives as the Union of South American Nations, which was formed in May by 12 countries to mediate conflicts such as political violence in Bolivia, bypassing the U.S.-dominated OAS.

Thomas Shannon, the top U.S. diplomat for Latin America, says the nature of American influence is only changing, not declining, as the region matures.

No Invitation Sought

The U.S. “didn’t ask to be invited” to the summit, he says, although it had discussed with Brazil and Mexico ways the meeting’s agenda could be used during the U.S.-backed Summit of the Americas, in April in Trinidad and Tobago.

“We don’t subscribe to the hydraulic theory of diplomacy that when one country is up, the other is down -- that if China and Russia are in the area our influence has somehow waned,” Shannon said in a telephone interview.

The fact that “there’s no warfare, weapons proliferation, suicide bombers or jihadists” in Latin America may make its issues “less urgent,” though no less important, Shannon said. The U.S. remains the region’s dominant investor and trading partner: Foreign aid to Colombia to fight drug traffickers and Marxist rebels totals $700 million a year, and remittances from Latin Americans living in the U.S. totaled $66.5 billion last year.

Monroe’s Doctrine

The Monroe Doctrine, which dates back to 1823, declared Latin America off-limits to European powers. Whether welcomed by the region or not, it has been invoked whenever real or imagined security threats to U.S. interests arise, says Gaddis Smith, a retired Yale University historian of American foreign policy.

“Its essence is unilateralism; no Latin American country had any say in it,” says Smith, whose more than a dozen books on American foreign policy include “The Last Years of the Monroe Doctrine.”

The real battle is for a larger share of the region’s abundant resources and expanding economies, and China has led the way.

Two-way trade with the region shot up 12-fold since 1995 to $110 billion last year, according to the Inter-American Development Bank. China’s share of the region’s imports also jumped, to 24 percent from 9.8 percent in 1990, while the U.S. share shrunk to 34 percent from 43 percent. Two years after reaching a bilateral free-trade agreement, China’s demand for copper made it Chile’s biggest export market in 2007, replacing the U.S.

Hu’s Trips

Since making his first of three trips to Latin America in 2004, China’s President Hu Jintao has spent more time in the region than Bush -- 22 days to 20 for the U.S. president. In October, as the global credit crunch dried up lending in the region, China joined the Inter-American Development Bank with a $350 million loan to finance small businesses. This month it pledged $10 billion in loans to state-controlled Petroleo Brasileiro SA so Brazil can develop the Western Hemisphere’s largest oil discovery since 1976.

“The Chinese play up the development side of diplomacy so much better than the Americans,” says William Ratliff, a research fellow at Stanford University’s Hoover Institution who has a Ph.D. in Chinese and Latin American history. “Deals come with none or very few strings attached.”

Even Colombia, which is spending $115,000 a month lobbying the U.S. Congress to approve a stalled free-trade pact, signed an investment treaty last month with China. During this year’s U.S. campaign, President-elect Barack Obama said he opposed the accord over concerns that Colombia isn’t doing enough to stamp out violence against labor organizers.

Colombian President Alvaro Uribe today canceled his plans for the summit to monitor rescue efforts involving 200,000 people affected by flooding over the weekend.

Arms Deals

Changing relationships are also evident in arms deals. Chavez turned to Russia for at least $4.4 billion in weapons after the U.S. blocked sales of aircraft parts. Brazil, the region’s largest economy, is also shopping around: Defense Minister Nelson Jobimsaid in Washington this month that his government will only buy weapons from countries that agree to transfer technology for local production.

Plans to purchase 36 new fighter jets, in which Boeing’s F- 18 is competing for a contract against Stockholm-based Saab AB and France’s Dassault Systemes SA, “can only be justified politically if they contribute to national development,” Jobim said.

Brazil may sign a deal with France for four nuclear submarines intended to help secure its oil basins in the Atlantic when French President Nicolas Sarkozy visits Brazilian President Luiz Inacio Lula da Silva this month.

Reactivating a Fleet

The U.S. plan to reassert its naval presence by reactivating the Fourth Fleet after 58 years to patrol the Caribbean has triggered negative reactions ranging from Chavez’s threat to sink the convoys to the more-diplomatic Lula’s demand for explanations from the Bush administration.

Latin American leaders are looking to Obama to restore relations after the Bush presidency’s initial pledges of greater engagement gave way to a focus on the 9/11 terror attacks and wars in Iraq and Afghanistan. Yet the honeymoon with Obama may be short-lived, says Michael Shifter, vice president of the Inter- American Dialogue in Washington. He says that the issues that have dominated Latin American relations -- including Cuba, immigration and U.S. trade barriers on agricultural products -- may remain in dispute.

“Latin America wants the U.S. to be engaged, but in very different terms that it has in the past,” says Shifter. “In any case, they’re not waiting around for the U.S. to change its mindset.”