Wednesday, March 11, 2009

US companies pull out of retirement contributions

US companies pull out of retirement contributions

By Deborah Brewster

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A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn.

Saks, General Motors, newspaper group McClatchy, clothing company J.Crew, FedEx, UPS, Coca-Cola Bottling, Reader’s Digest, Motorola, Regions Financial and Sprint Nextel are among the growing list of companies which have suspended contributions in recent months.

Even the AARP, the influential advocacy group formerly known as the American Association for Retired Persons, will suspend contributions to its staff 401(k) plan from March 22 for the rest of the year.

The growing number of suspensions appears to strike a blow against the viability of 401(k) plans, which were introduced 30 years ago as the main way that Americans should save for retirement, replacing defined benefit pension plans. Companies typically offered to match employee contributions up to 5 per cent of annual salary.

The average 401(k) plan at the end of 2007 held about $65,000, but half of them held less than $19,000, according to a trade group, the Investment Companies Institute. They would hold much less today because of stock market falls. The suspensions mean that individuals can continue to contribute to their plans, but their companies will not.

Adam Sohn, a spokesman for AARP, said his organisation, which has 40m members aged 50 and over, had fully matched staff contributions up to 3 per cent of annual salary.

“We have taken a temporary suspension for the remainder of the year to help with cost containment measures,” he said. The AARP, whose revenue comes in part from investment income, also offers its 2,400 staff a defined benefit pension plan.

In recent months, companies have also become increasingly less likely to enrol new workers automatically in their 401(k) plan, citing the costs as the main reason, according to a study by Hewitt Associates, a human resources consultancy.

“The continued bleak economic outlook is forcing many companies to make difficult decisions with respect to their retirement benefits,” said Pamela Hess, Hewitt’s director of retirement research, said in the study.

Hewitt estimated that only 5 per cent of large companies would halt 401(k) contributions in 2009, but that could rise to more than 10 per cent in the next 12 to 18 months.

Seven states post jobless rates above 10 percent

Seven states post jobless rates above 10 percent

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Seven states posted unemployment rates larger than 10 percent in January, but thankfully Ohio was not one of them, according to figures released Wednesday morning by the U.S. Bureau of Labor Statistics.

Michigan was saddled with the nation's highest jobless rate in January, 12.5 percent in statistics that were not seasonally adjusted. It had been the only state to rise above 10 percent during the previous month, December 2008.

Also topping the 10-percent mark in January were Rhode Island (11.4 percent unemployment), Oregon (10.9 percent), South Carolina (10.9 percent), California (10.6 percent), North Carolina (10.3 percent) and Nevada (10.2 percent).

However, Ohio's unemployment rate was 9.7 percent, just outside the double-digit range. Indiana had a rate of 9.9 percent.

Wyoming registered the lowest unemployment rate of any state, 4.8 percent in the first month of 2009. It was the only state to finish under the 5-percent line.

The Bureau of Labor Statistics releases two sets of unemployment rates each month. Figures that are not seasonally adjusted reflect the actual totals for the month, while numbers that are seasonally adjusted can be more easily compared from month to month. The seasonally adjusted statistics for January showed four states with unemployment of more than 10 percent, led by Michigan at 11.6 percent.

The jobless rates for all 50 states were at least one point higher in January 2009 than in the same month a year earlier, on a not seasonally adjusted basis.

North Carolina suffered the worst upswing in unemployment, five full points from 5.3 percent at the beginning of 2008 to 10.3 percent at the start of this year.

Other sharp year-to-year increases were 4.9 percentage points in Oregon and South Carolina, 4.6 points in Michigan and Indiana, and 4.3 points in Nevada.

The smallest jumps between January 2008 and the same month this year were 1.1 points in Iowa and Wyoming.

The following are the latest unemployment rates (not seasonally adjusted) for all 50 states and the District of Columbia, listed in alphabetical order:

  • Alabama, 8.2 percent
  • Alaska, 9.1 percent
  • Arizona, 7.2 percent
  • Arkansas, 7.3 percent
  • California, 10.6 percent
  • Colorado, 7.2 percent
  • Connecticut, 7.9 percent
  • Delaware, 7.3 percent
  • District of Columbia, 9.7 percent
  • Florida, 8.8 percent
  • Georgia, 8.8 percent
  • Hawaii, 6.1 percent
  • Idaho, 7.8 percent
  • Illinois, 8.5 percent
  • Indiana, 9.9 percent
  • Iowa, 5.8 percent
  • Kansas, 6.4 percent
  • Kentucky, 9.5 percent
  • Louisiana, 5.7 percent
  • Maine, 8.8 percent
  • Maryland, 6.7 percent
  • Massachusetts, 8.1 percent
  • Michigan, 12.5 percent
  • Minnesota, 8.5 percent
  • Mississippi, 9.2 percent
  • Missouri, 8.7 percent
  • Montana, 6.7 percent
  • Nebraska, 5.1 percent
  • Nevada, 10.2 percent
  • New Hampshire, 5.7 percent
  • New Jersey, 7.9 percent
  • New Mexico, 5.2 percent
  • New York, 7.6 percent
  • North Carolina, 10.3 percent
  • North Dakota, 5.1 percent
  • Ohio, 9.7 percent
  • Oklahoma, 5.6 percent
  • Oregon, 10.9 percent
  • Pennsylvania, 7.7 percent
  • Rhode Island, 11.4 percent
  • South Carolina, 10.9 percent
  • South Dakota, 5.1 percent
  • Tennessee, 9.3 percent
  • Texas, 6.8 percent
  • Utah, 5.0 percent
  • Vermont, 7.6 percent
  • Virginia, 6.4 percent
  • Washington, 8.6 percent
  • West Virginia, 6.2 percent
  • Wisconsin, 7.6 percent
  • Wyoming, 4.8 percent

Europe’s banks face a $2 trillion dollar shortage

Europe’s banks face a $2 trillion dollar shortage

European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements.

By Ambrose Evans-Pritchard

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The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets.

“The build-up of large net US dollar positions exposed these banks to funding risk, or the risk that their funding positions could not be rolled over,” said the BIS.

The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all currencies, except the yen.

British banks had accumulated a dollar "funding gap" of $300bn by mid 2007. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.

Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.

The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered.

Simon Derrick, currency chief at the Bank of New York Mellon, said the implications are obvious. “The global bullion of the last eight years was funded on dollar balance sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar is clearly going to appreciate a lot further,” he said.

* This article has been updated following reader queries over the complexity of the banks' "short" and "long" positions in dollars.

The American Criminal Injustice System

The American Criminal Injustice System

By Paul Craig Roberts

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Ronald Cotton spent 11 years in prison because Jennifer Thompson provided eye witness testimony that he was the person who raped her. On March 9, National Public Radio revisited the story.

It turned out that Thompson was completely wrong, DNA evidence indicated that it was not Cotton but another man who had bragged about the rape.

Thompson asked Cotton for forgiveness, and he gave it. The two became friends and have collaborated on a book. On NPR Thompson said that eye witness testimony is incorrect 70 percent of the time.

I am familiar with psychological studies that conclude that eye witness accounts are wrong half of the time. That is enough to discredit eye witness testimony as evidence; yet, police and juries always bank on it.

Rape victims tend to be angry, and they want someone to pay. When shown mug shots or a lineup, they tend to pick someone, naively believing that if it is the wrong person the police investigation will clear the person.

Witnesses to crimes who are not themselves victims want to be helpful to the police. Consequently, they also tend to deliver up the innocent to justice.

And then there is the purchased “witness” testimony that prosecutors pay for with money and dropped charges in order to close a case. A favorite trick is to put a “snitch” in the cell with a defendant. The snitch then comes forward and reports that the defendant confessed.

Law and order conservatives think that the only miscarriages of justice are effected by liberal judges and liberal parole boards who can’t wait to release dangerous criminals to prey on the public.

The absurd idea that the justice system doesn’t make mistakes about those it convicts, except when they are let off by liberals, has made it impossible for innocent people wrongfully convicted to be paroled.

To be paroled, a person must admit to his crime and go through rehabilitation. Of course, only the guilty admit their crimes, and so only the guilty qualify for parole. Innocent people tend to maintain their innocence.

A case in point is that of William R. Strong, who has been locked away for a dozen years or more for “wife rape.”

According to people familiar with the case, Strong’s wife had a boyfriend and wanted rid of her husband. She accused him of rape. This was prior to DNA testing, but the perp kit still exists.

Strong comes from a patriotic military family. His father was a colonel and Strong served as a lieutenant and has two college degrees. The family trusted America and the police and the justice (sic) system. When advised that Strong would be out in a year if he agreed to a plea bargain, the family, beset with troubles, pressured Strong to accept the deal.

Only it was a double cross. The judge, seeking women’s support, gave Strong 60 years.

That should be enough to wreck marriage in America, or for that matter, heterosexual sex unless there is a signed contract prior to each act.

It seems obvious that Strong was set up, double crossed, and is a threat to no one. Many have recommended his parole. But on February 20 of this year the Virginia Parole Board turned Strong down for the 11th time.

The American criminal justice (sic) system is incapable of admitting that it makes mistakes. The criminology bureaucrats claim that those inmates who proclaim their innocence are in denial and, thus, cannot be rehabilitated and, therefore, remain dangerous. In truth, it is the bureaucrats who are in denial and constitute a danger to justice.

Strong’s insistence on his innocence is doubly problematic for him. Although pressured, he agreed to a plea, and it is very difficult to overturn plea convictions. Strong maintains that the DNA in the perp kit is that of the boyfriend, but his plea allows the state to consider the matter closed.

The criminal justice (sic) system has nothing to do with justice. It is a massive producer of injustice. The agenda is to clear court dockets and to produce high conviction rates.These high rates are achieved through coerced plea bargains.

Strong still believes in America and that justice will win out. I hope he is right.

Law and order conservatives think of the police in god-like terms as “public defenders.”Conservatives could gain more perspective if they watch some of the videos on Utube of gratuitous police violence, such as this one of a police officer delivering a brutal beating to a 15-year old girl.

A Google search for Utube videos of police violence lists 485,000 entries, and these are just the acts captured on camera. How many cops are psychopaths who constitute a greater danger to the public than do criminals? SWAT teams are notorious for breaking down doors at the wrong address and murdering innocent citizens.

Cops are also notorious for framing people as it is easier than doing serious investigation of crimes and collecting evidence. Even the guilty are often framed as that is easier than convicting them on the evidence.

Libertarian free market types believe that the private sector can do everything better than the public sector. This ideology causes libertarians to be blind to the dangerous incentives created by the privatization of prisons.

On February 12, CBS News reported that two Pennsylvania judges have been charged with sending kids to privately operated detention centers in exchange for $2.6 million in payoffs.

State operated prisons don’t want more inmates. The more inmates the more the work and the more the risk that a judge will intervene because of overcrowding.

In contrast, private jails make more money the more inmates they have.

Just think of all the kids whose lives have been ruined by the greedy judges and private prison operators. The judges have been sentenced to seven years on reduced charge plea bargains.

But what about the private prison operators who paid the bribes to have the kids sentenced? Shouldn’t they be put away for life?

The US has the highest incarceration rate and the biggest prison population of any country in the world. With 5 percent of the world’s population, the US has 25 percent of the world’s prison inmates. Recent research by the Pew Center concludes that one in every 31 Americans is in prison or jail or on probation or parole.

So much in America needs to be revamped--the economy, foreign policy, health care, and the criminal justice (sic) system. Does a country broken in so many ways have a future?

Why the U.S. Under Obama Is Still a Dictatorship

Why the U.S. Under Obama Is Still a Dictatorship

by Andy Worthington

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Two weeks ago, when the Obama administration announced that it was bringing to an end the disturbing isolation endured by Ali al-Marri, a U.S. resident who has been held without charge or trial for seven years and two months — and who, most worryingly, has spent the last five years and nine months as an “enemy combatant” in solitary confinement in the Naval Consolidated Brig in Charleston, South Carolina — it was clear that one of the Bush administration’s most arrogant and un-American policies was coming to an end.

President Obama clearly regarded al-Marri’s imprisonment as significant, as he issued a presidential memorandum on his second day in office ordering the Justice Department to review the Qatari national’s case, and the announcement that al-Marri was to be moved out of his seemingly endless legal limbo and into the federal court system demonstrated that, in this specific case at least, the president was sticking to his word.

However, what worried al-Marri’s lawyers — and those, like myself, who have been following his case closely — was that the president’s decision would also bring to an end al-Marri’s pending Supreme Court challenge, in which the nation’s most powerful judges were scheduled to review whether or not the president — any president, not just a member of the Bush family — had the right to designate as an “enemy combatant” any person accused of terrorism arrested on American soil, whether a citizen or a resident, and to imprison them indefinitely without charge or trial.

This was not merely an academic exercise. When al-Marri’s case was reviewed by the Fourth Circuit Court of Appeals last July, a majority of the judges decided that the president was indeed entitled to subject people arrested on American soil to arbitrary imprisonment, despite the complaints of the dissenting judges, led by Judge Diana Gribbon Motz, who argued that, if the ruling were allowed to stand, it “would effectively undermine all of the freedoms guaranteed by the Constitution.”

The Fourth Circuit majority also ignored the complaints of al-Marri’s lawyers, even though they were clearly more aware of the restraints on executive power that had been enforced by Congress in the wake of the 9/11 attacks than most of the judges. In a brief to the court, the lawyers pointed out that the president lacked the legal authority to designate and hold al-Marri as an “enemy combatant” for two particular reasons: firstly, because the Constitution “prohibits the military imprisonment of civilians arrested in the United States and outside an active battlefield,” and secondly, because, although a district court had previously held that the president was authorized to detain al-Marri under the Authorization for Use of Military Force (the September 2001 law authorizing the President to use “all necessary and appropriate force” against those involved in any way with the 9/11 attacks), Congress explicitly prohibited “the indefinite detention without charge of suspected alien terrorists in the United States” in the Patriot Act, which followed five weeks later.

When the Obama administration announced its decision to move al-Marri to the federal court system, Justice Department officials also asked the Supreme Court to dismiss the pending case as “moot,” and on Friday the justices agreed, although, to their great credit, they also made a point of vacating the horrendous decision made by the Fourth Circuit Appeals Court last summer.

As a result, you may be thinking that the president no longer has the power to hold Americans without charge or trial as “enemy combatants,” but if this is the case then you may be — and should be — dismayed to learn that a previous ruling to this effect still stands, which was not addressed by the Supreme Court, and which has not been addressed by the Obama administration either.

In February 2005, in the case of Jose Padilla, an American citizen who was also held in prolonged solitary confinement as an “enemy combatant,” District Court Judge Henry F. Floyd ruled against the government, and ordered Padilla’s release. Noting that the power to suspend the writ of habeas corpus “belongs solely to Congress” under the Constitution, Judge Floyd declared, “Since Congress has not acted to suspend the writ, and neither the President nor this Court have the authority to do so,” Padilla had to be released. “It is true,” he added, “that there may be times during which it is necessary to give the Executive Branch greater power than at other times. Such a granting of power, however, is in the province of the legislature and no one else — not the Court and not the President.… Simply stated, this is a law enforcement matter, not a military matter.” Echoing the decision taken by President Obama’s Justice Department in the case of Ali al-Marri, Judge Floyd added that the government could avoid releasing Padilla if it filed criminal charges against him, or acted to hold him as “a material witness.”

However, Judge Floyd’s ruling only stood for seven months. On September 9, 2005, three Fourth Circuit judges — J. Michael Luttig, M. Blane Michael, and William B. Traxler Jr. — overturned it (PDF), based on their belief (contested by Padilla’s lawyers, and also, as noted above, by al-Marri’s) that Congress had granted these sweeping and otherwise unconstitutional powers to the president as part of his wartime prerogative under the Authorization for Use of Military Force.

As with al-Marri, this ruling was never tested in the Supreme Court. Just before a review was scheduled to begin, the Bush administration got cold feet, and moved Padilla into the federal court system, where, in August 2007, he was convicted of providing material support for terrorism in a lopsided trial — in which all mention of his long years of torture in solitary confinement were excluded by the judge —and, in January 2008, received a sentence of 17 years and 3 months.

In many ways, of course, history is repeating itself with al-Marri, even though the man at the top has changed, but what is most worrying is that the Padilla ruling still stands. Without the Supreme Court being given the opportunity to rule decisively on this question, what is needed is a clear repudiation of the policy by the Obama administration.

Instead, the Justice Department explained, in a brief filed with the Supreme Court last Wednesday, that, while the government “did not defend its power to detain Mr. Marri at present” (as Glenn Greenwald described it for, “it left open the possibility that he or others might be subject to military detention as enemy combatants in the future.” In the Justice Department’s exact words, “Any future detention — were that hypothetical possibility ever to occur — would require new consideration under then-existing circumstances and procedure.”

It’s one thing, I suppose, to keep your options open, but quite another to defend the indefensible. Instead of fudging, in anticipation of future emergencies, President Obama and Attorney General Holder need to spell out clearly that no president will ever again treat suspected terrorists, either Americans or foreigners, arrested on American soil as “enemy combatants.” Otherwise, Barack Obama’s fine words, in August 2007, when he declared, “We will again set an example to the world that the law is not subject to the whims of stubborn rulers, and that justice is not arbitrary,” will be meaningless, and Judge Rogers’ opinion — that the very constitutional foundations of the Republic had been fatally undermined — will be as applicable to the Obama administration as it was to that of George W. Bush.

UN Report Says US Rendition Policy Broke International Law

U.N. report says U.S. rendition policy broke international law

Julie Sell

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A U.N. expert is accusing the United States and some of its allies of breaching international law for the so-called extraordinary renditions and subsequent alleged torture of terrorism suspects during the Bush administration's global war on terrorism, and is launching a probe into the detention of suspects.

Martin Scheinin, a U.N. special rapporteur and expert on international law, issued his annual report to the U.N. Human Rights Council on Tuesday. While it identifies a U.S. role in masterminding a "comprehensive system" of rendition and detention of suspects as well as creating "an international web" of intelligence sharing, his report notes that it was possible only through collaboration with many other countries.

Scheinin cites "consistent, credible reports" that countries involved in facilitating extraordinary renditions in various ways included Bosnia and Herzegovina, Britain, Canada, Croatia, Georgia, Indonesia, Kenya, Macedonia and Pakistan. Suspects then were transferred to "mostly unacknowledged" detention sites in Afghanistan, Egypt, Ethiopia, Jordan, Pakistan, Morocco, Saudi Arabia, Yemen, Syria, Thailand, Uzbekistan "or to one of the CIA covert detention centers, often referred to as 'black sites,' " according to the human rights report.

Rupert Colville, a spokesman for the U.N. Office of the High Commissioner for Human Rights, said it was "a fairly major black mark" for any country to be targeted in such a report.

Being on the list is particularly embarrassing for the British government, which already is stinging from charges of its collusion in the alleged torture of a former detainee at Guantanamo Bay. Officials from both key opposition parties in Britain are calling for an independent judicial inquiry on the matter after detailed accusations of collusion between MI5, a British intelligence agency, and the CIA were made in recent days by Binyam Mohamed, who was held at Guantanamo Bay for more than four years. He was flown back to Britain a few weeks ago after the Foreign Office pressed the Obama administration for his release.

A spokesman for the Foreign Office said Tuesday that "there's nothing new" in Scheinin's claims of British involvement in extraordinary rendition. "When we hear of credible allegations, we'll follow them up," he added. It's the office's policy not to allow spokesmen to be named in news reports.

In a speech to the Human Rights Council, which is meeting in Geneva, Scheinin said he planned to conduct a study on the secret detention program worldwide.

"The United States has indicated that it wants to move forward and turn this dark page in its history, but in other countries this practice or permission of secret detentions — often of people who have been branded as terrorist suspects — is continuing," Scheinin said. "Before a page can be turned, we have to know what's on it, in order to move forward."

Scheinin also reportedly hopes to interview detainees at the U.S. military prison at Guantanamo Bay, Cuba, when he visits the United States, although it isn't clear that he'll be granted authorization to do so.

The U.N. report expresses concern about not only active but also passive involvement by state intelligence agencies in interrogations that might have involved torture. It also critiqued the broad powers given to such agencies to collect information on citizens and "compartmentalized oversight" of intelligence services.

In Britain, Foreign Secretary David Miliband and Home Secretary Jacqui Smith, whose department oversees the security services, have refused requests to appear before Parliament's joint committee on human rights to discuss Britain's involvement in rendition and detention of terrorism suspects, citing an ongoing investigation by the Attorney General's Office.

The Foreign Office spokesman said that the human rights committee didn't have the authority to require Miliband's attendance. Rather, he said, Parliament's intelligence and security committee is "the appropriate parliamentary body to be looking into these issues."

Opposition politicians and human rights groups accuse the government of stonewalling.

"Accountability is not the strong point of this government, particularly on foreign policy," said Tom Porteous, the director of Human Rights Watch in London, who noted that British admissions of complicity in America's war on terrorism have emerged slowly, in bits and pieces. With top politicians calling for independent inquiries in recent days, however, "we've built up a head of steam," he added.

"The sum of it all is a very compelling case of U.K. connivance in counter-terrorism abuses," Porteus said.

The Neocons Strike Back

The Neocons Strike Back

By Robert Parry

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The neoconservatives have demonstrated that their power in Washington remains strong as they have succeeded in keeping veteran diplomat Chas Freeman out of a top intelligence job.

Freeman dropped out of the running for chairman of the National Intelligence Council, which oversees preparation of intelligence estimates about threats to the United States, after an intense campaign spearheaded by neocons angered over Freeman’s criticism of Israel’s treatment of Palestinians.

In effect, the neocons showed that their influence over the national news media, especially the Washington Post and the Wall Street Journal, combined with solid Republican support and some key Democratic backing, still lets them blackball potential government appointees who favor a more evenhanded approach toward the Middle East.

The neocons directed a powerful media campaign against Freeman denouncing his criticism of Israel and his associations with the Saudi and Chinese governments. One influential column, entitled “Obama’s Intelligence Blunder,” was published Feb. 28 on the Washington Post’s op-ed page, written by Jon Chait of The New Republic, another important neocon journal.

As Republicans on the congressional intelligence committees, Connecticut Independent Sen. Joe Lieberman and New York Democratic Sen. Charles Schumer joined the fight against Freeman, the former U.S. Ambassador found himself facing formidable – perhaps unprecedented – opposition to a choice for a staff position in the U.S. intelligence community.

Freeman said the attacks took some of his comments out of context, such as a quotation suggesting that the Chinese government had moved too slowly to suppress the 1989 Tiananmen Square protests. Freeman claimed he was only explaining how the Chinese government viewed its own actions.

What the successful neocon campaign against Freeman also showed was that there is little media power at the national level to defend a public figure who comes under sustained assault of this type. Several articles defending Freeman appeared on the Internet, and the Veteran Intelligence Professionals for Sanity published a supportive letter, but those efforts paled in comparison to the neocon barrage.

Freeman bowed out on Tuesday although his potential boss, Director of National Intelligence Dennis Blair, defended him and complained that Freeman’s past comments had been distorted.

Blair told the Senate Armed Services Committee that Freeman had the sort of “inventive mind” that would resist “precooked pablum judgments.” [NYT, March 11, 2009]

In a message at the Foreign Policy magazine’s Web site, Freeman traced the campaign against him to pro-Israel groups that won’t countenance a balanced approach to the Israel-Palestine conflict.

“Tactics of the Israel Lobby plumb the depths of dishonor and indecency and include character assassination, selective misquotation, the willful distortion of the record, the fabrication of falsehoods, and an utter disregard for the truth,” Freeman said.

Flexing Muscles

The larger point, however, is that the neocons were able to flex their muscles against someone they deemed a hated “realist” and draw the line against the inclusion of such people at key jobs in the Obama administration.

Without doubt, the neocons have lost the overall dominance they held during much of George W. Bush’s presidency when they played a central role in distorting intelligence to justify the Iraq invasion.

But they retain “credibility” in the strange world of insider Washington, largely through their influence within the elite media and their prominence at dinner parties. They also remain well-entrenched at powerful think tanks, such as the American Enterprise Institute.

By using their media platform to launch the assault that kept “realist” Freeman out of the National Intelligence Council, the neocons brought together two central elements of their long-term strategy for influencing Washington: targeting the CIA’s analytical division and the national press.

As I describe in my book, Secrecy & Privilege, the neocons recognized early on that they could advance their agenda if they seized the two main levers of information inside Washington. So they set out more than three decades ago to dominate – or intimidate – the CIA’s analytical division and the Washington press corps.

The origins of this extraordinary assault on reality can be traced back to 1976 when a young neocon named Paul Wolfowitz joined with a band of Cold War hard-liners to gain access to the CIA’s raw intelligence on the Soviet Union for what became known as the “Team B” experiment.

At the time, CIA analysts were spotting systemic weaknesses in the Soviet system, a finding that encouraged Presidents Richard Nixon and Gerald Ford to pursue a policy of “détente” aimed at reducing tensions with Moscow and possibly ending the Cold War.

However, “détente” was anathema to the neocons and the hard-liners – many of whom had ties to the military-industrial complex – so “Team B” not surprisingly concluded that the Soviet Union was actually on the rise and on the march, possessing new military technologies that were creating a “window of vulnerability” for the United States.

Under political pressure from Ronald Reagan and the ideological Right, President Ford scrapped any talk about “détente” and the stage was set for reigniting the Cold War (with massive new U.S. military spending) when Reagan became President in 1981.

Reagan then credentialed many of the key neoconservatives, the likes of Elliott Abrams and Richard Perle, who continued their collaboration with old-time hardliners like CIA Director William Casey. He began purging the CIA analytical division of “realists” who stubbornly kept seeing evidence of the Soviet Union’s rapid deterioration.

Casey’s key action officer within the CIA’s analytical division was a young up-and-comer named Robert Gates, who ousted or marginalized analysts who refused to march to the new ideological drummers.

Gates’s politicization of the analytical division proved so effective regarding the issue of the Soviet decline that the CIA and the U.S. government were caught off-guard when the East Bloc and the Soviet Union collapsed in the late 1980s and the early 1990s. [In 2006, Gates became George W. Bush's Defense Secretary, a post he has retained under President Obama.]

Media Wars

Also, in the 1980s, a parallel operation, run out of Reagan’s National Security Council, went after journalists who uncovered unwelcome facts about the administration’s support for brutal right-wing despots in Central America and Africa – or who dug up critical information about policies in the Middle East, especially anything that reflected poorly on Israel.

As intellectuals who followed the elitist philosophy of Leo Strauss, the neocons understood the vital need to control and shape the information that reached politicians and the public, all the better to manipulate them. This concept was known internally as “perception management.”

When George W. Bush took power in 2001 and many of the Reagan-era neocons returned, they simply picked up where they had left off. The neocons were back twisting intelligence analyses to fit their policy desires and spinning reporters who then published slanted stories, scaring the American people and ultimately clearing the way to the Iraq War.

Only after years of Bush’s catastrophes did American voters push back, stripping the Republicans of congressional control in 2006 and handing the Democrats the White House in 2008.

But the neocons and other rightists retain one important bastion of power: the U.S. news media, which can roughly be divided between the right-wing media infrastructure, from print to radio to TV to the Internet, and mainstream journalism, which includes important pro-neocon outlets like the Washington Post, the Wall Street Journal and The New Republic.

Now, that strength within the national news media is serving as the neocons’ reserve army, launching counterattacks after its front-line troops of the Bush years were routed.

By driving back the appointment of Chas Freeman, the neocons also have made the point that they have no intention of surrendering to the forces of “realism” or letting go their influence over the country’s intelligence analysis.

Army Regs - Civilian Inmate Labor Program - pdf

Army Regs - Civilian Inmate Labor Program - pdf

Fusion Centers: Giving Cops Too Much Information?

Fusion Centers: Giving Cops Too Much Information?

By Hilary Hylton

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At the time, it seemed one of the unanimous lessons of the tragedy of Sept. 11 — law enforcement agencies at all levels of government have to do a better job of sharing information with each other in order to prevent terror plots. Making that actually happen, of course, is easier said than done, which is why newfangled, multi-organizational agencies were set up to promote cooperation and overcome turf battles. But now critics claim that these so-called fusion centers are making it all too easy for government to collect and share data from numerous public databases.

Organizations like the American Civil Liberties Union are pushing bills to restrict fusion centers' access to data, most notably in New Mexico, where opponents hope to make government snooping a costly offense. Legislation has been introduced in Santa Fe that would prohibit any New Mexico law enforcement agency from collecting information about the religious, political and social associations of law-abiding New Mexicans. And in what would be a first for the nation, the bill would allow private citizens to sue law enforcement agencies for damages over the unauthorized collection of such data.

Privacy advocates point to a scandal in the state of Maryland, where last summer it was revealed that in 2005 and 2006 undercover members of the Maryland State Police had carried out surveillance of war protesters and death penalty opponents. Some of the intelligence gathered on the subjects, according to logs obtained by the ACLU last summer, may have found its way into databases shared with local, national and federal agencies through the state's fusion center. An investigation found the data collection represented a serious lapse in judgment, but the victims had little recourse, except public outrage.

"The lack of proper legal limits on the new fusion centers not only threatens to undermine fundamental American values, but also threatens to turn them into wasteful and misdirected bureaucracies that, like our federal security agencies before 9/11, won't succeed in their ultimate mission of stopping terrorism and other crime," the national ACLU notes in its report on the centers. There are federal and state privacy laws governing the centers, but a recent report by the Department of Homeland Security's own Privacy Office suggested that the multi-governmental nature of the centers allows the staffers to pick and choose a policy that suits their needs. The report, issued in late December, echoed some of the concerns laid out in earlier congressional and Government Accountability Office reports that warned of the potential for "mission creep" by the fusion centers.

There are approximately 60 "fusion centers" nationwide, with some focusing exclusively on criminal activity, others on both criminal and terrorist threats, and some on very specific acts, such as human smuggling, gang activity, online predators or drug trafficking. Much of the funding for the large state centers comes from the federal government, including a new infusion of $250 million courtesy of the stimulus package to be spent by 2010 on "upgrading, modifying, or constructing" state and local fusion centers. The latest fusion center, the $21 million Port of Long Beach facility, opened last month. Staffed by local, state and federal officials, it sits on a small swath of land inside the nation's second largest port and utilizes state of the art surveillance technology, including cameras that can read a badge from two miles away. Every state but Idaho and Pennsylvania has at least one fusion center; Texas, for instance, has its Texas Intelligence Center within the Texas Department of Public Safety "to collect, analyze, and disseminate intelligence information related to terrorist activities" covering the entire state. The state also has the North Central Texas Fusion System, covering a 16 county-area around the Dallas metro area that includes "regional homeland security, law enforcement, public health, fire, medical providers, emergency management, and private security". (See pictures of SWAT teams around the world.)

Different missions and different mixes of manpower make each center unique."If you've seen one fusion center — you've seen one fusion center," says Jack Tomarchio, former deputy director of intelligence for the Department of Homeland Security, who oversaw the development of most of the country's state fusion centers during the Bush Administration. Tomarchio says the centers have proved their value in fighting both crime and terrorism — sometimes exposing the link between the two, as in the case of cigarette smuggling in the Carolinas which funded terrorist groups abroad. They also have provided valuable information in preventing further attacks, he claims, adding that while he is not at liberty to disclose the kind of information mined, fusion center intelligence did reach the level of the daily presidential briefing in the Bush Administration.

The model for the centers grew out of "intelligence-led policing" — a British initiative with its roots in the early 1990s. It has evolved into "a management philosophy that places greater emphasis on information-sharing and collaborative, strategic solutions to crime problems," according to Dr. Jerry Ratcliffe, a former British police officer and currently a Temple University professor who has lectured and written extensively on the subject. "It facilitates holistic crime prevention," Ratcliffe says. Rather than each department, or even squad, having its own databases, fusion centers allow access to multiple databases and sources of intelligence; the drug squad in one community can share information with the anti-gang task force in another, picking up on patterns that may indicate an emerging threat as gangs set up to move into a new market, or distribute new contraband, for example.

But that sharing of information troubles critics. New Mexico's All Source Intelligence Center, housed in an old National Guard building, has access to 240 state, regional and federal agencies and their databases, including agricultural and parks agencies, according to Peter Simonson, executive director of the state's ACLU chapter. Establishing what kinds of information is being processed by fusion centers can be difficult, Simonson says, since they do not store the records, or even collect them, but simply mine them through digital gateways. Records are accessed, not retained as they would be in specific case or investigative files. Simonson says the New Mexico chapter of the ACLU has filed several open records requests seeking to find out what kind of information is being reviewed, but has been stymied by the lack of a "material product." Other state ACLU chapters are pressing open records requests aimed at casting light on fusion center activities.

Groups like the ACLU have sued law enforcement agencies in the past aimed at exposing domestic spying, but individuals whose privacy has been violated have little recourse — "suing is a shot in the dark," Simonson says, given current state and federal laws. "There aren't any legal remedies and we are trying to create one," Simonson says, acknowledging that it may take more than one legislative session to pass the bill in New Mexico.

One of the most well regarded fusion centers was created under the leadership of former Arizona Governor Janet Napolitano, now Secretary of Homeland Security. During her confirmation hearings Napolitano highlighted her leadership in creating one of the first state anti-terrorism law enforcement fusion centers in the country, and her first directive at DHS ordered a thorough review of intelligence-sharing programs and methods aimed improving the flow of information to states, local and tribal governments. But in her testimony to Congress, she also cited her commitment to privacy: "As Governor, I created the Statewide Information Security and Privacy Office to ensure adequate controls and safeguards are in place for all State of Arizona government technology systems and business practices." However, Napolitano's appointment gives Simonson pause. "I think the Obama Administration has a much greater sensitivity to these issues than the previous Administration, but the track record from Arizona would suggest that we still have good reason to be concerned."

Western military forces turning inward in anticipation of domestic unrest

Western military forces turning inward in anticipation of domestic unrest

By Daniel Taylor

Go To Original

As the growing world-wide economic crisis deepens, military forces from Canada, the United States, and the United Kingdom are preparing to meet angry citizens on the street. The economic crisis - and the public outrage it is causing - is at the forefront of intelligence agencies and military forces in the western world.

Prominent trends forecaster Gerald Celente has been sounding the alarm for years, warning that riots and tax revolts are coming to America. The Pentagon, U. K. Ministry of Defense, and Canadian military apparently agree. In November of 2008 the United States Army War College released the report Known Unknowns: Unconventional "Strategic Shocks" in Defense Strategy Development. The report identifies economic collapse as a reason for the defense establishment to conduct domestic operations. The report states,

"Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security. Deliberate employment of weapons of mass destruction or other catastrophic capabilities, unforeseen economic collapse, loss of functioning political and legal order, purposeful domestic resistance or insurgency..."

The CIA and MI5 are both watching the economic situation for signs of unrest and political instability. As the Washington Post reports, the CIA has added an economic situation report to its threat assessment for the White House. A further sign that the United States government is anticipating widespread unrest comes with the domestic stationing of the 1st Brigade Combat Team of the 3rd Infantry Division. The Army Times reports,

"They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack."

Canadian military forces have been given a nearly identical domestic mission in a synchronized move with the United States. Canada's National Post reports that,

"The Canadian military has embarked on a wide-ranging plan to turn its reserve soldiers into focused units trained and equipped to respond to a nightmarish array of domestic threats, including terrorist "dirty bomb" attacks, biological agent containment, Arctic catastrophes and natural disasters."

David Bercuson, director of the Centre for Military and Strategic Studies at the University of Calgary admits that contingencies exist that "...envisioned scenarios that might require a form of constabulary or policing function for reserves in civilian containment and security."

Overseas, the United Kingdom's MI5 is also anticipating widespread unrest in response to economic downturn. The Daily Express reports that the U.K. Army is "on standby" in the event of unrest during a "summer of discontent."

The United Kingdom's own Ministry of Defense foresaw middle class revolution two years ago in the 2007 The DCDC Global Strategic Trends report. "The middle classes could become a revolutionary class...," the report states. "The growing gap between themselves and a small number of highly visible super-rich individuals might fuel disillusion with meritocracy, while the growing urban under-classes are likely to pose an increasing threat to social order and stability, as the burden of acquired debt and the failure of pension provision begins to bite."

Ominously, legislation was recently introduced to Congress that would authorize “national emergency centers” on military installations that will provide “temporary housing, medical, and humanitarian assistance to individuals and families dislocated due to an emergency or major disaster." The National Emergency Centers Act can be read here.

As new taxes - like paying by mileage and carbon taxes meant to send "price signals" to consumers - are imposed and more money is demanded from debt laden citizens to save failing banks there is little doubt that resistance will grow. Just how far the bankers can go remains to be seen, but the military is ready when we've had enough.

The Federal Reserve is Bankrupt

The Federal Reserve is Bankrupt

How Did It Happen and What are the Ugly Consequences?

by Matthias Chang

Go To Original

The Federal Reserve is bankrupt for all intents and purposes. The same goes for the Bank of England!

This article will focus largely on the Fed, because the Fed is the "financial land-mine".

How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!

The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine![1]

In a recent article, I referred to the remarks of British Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed.

Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances.

The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is "Mary Poppins" in comparison!

The idea of a central bank going bankrupt is not that outlandish. I am by no means the first author who has given this stark warning. WhatShadow Money-Lenders. underlies this crisis (which I initially examined in an article in December 2006) is the potential collapse of the global banking system, specifically the

Nouriel Roubini, the New York University professor said [2]:

"The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."

Please read the underlined words again. "Sovereign bank" means central bank. When a central bank "cracks" i.e. becomes insolvent, "all hell breaks lose", because as the professor correctly pointed out, "any government guarantees will ring hollow and will be useless".

If a central bank goes belly up, it is as good as the government going bankrupt. Period!

In another article, Roubini admitted that the pressure on "the financial land-mine" is totally unbearable. He wrote: "The US Financial system is effectively insolvent". It follows that if the financial system is bankrupt, it is a matter of time before the "sovereign bank" goes belly up. This is a given!

He stated further that:

"Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.

"AIG which lost $62 billion in the fourth quarter and $99 billion in all of 2008 is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.

"Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.

"News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

"But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.

"So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.

"And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate - given the macro outlook -that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent."

McClatchy newspaper reported (03/08/2009) bad news affecting the banks:

"America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

"Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

"The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.

"The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.

"The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.

"The banks' quarterly financial reports show that as of Dec. 31:

— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.

— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.

— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.

HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.

— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.

"Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."

Berkshire Hathaway Chairman, Warren Buffett is so livid by the sheer magnitude of the financial mess that he said:

"These instruments [derivatives] have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."

The above bad news refers to the losses and potential losses that the big banks have suffered and will suffer in the near future.

But what is overlooked by many financial analysts is that these very same derivative products have caused another financial organ failure. And there is no way that the said organ can be resuscitated to its former state of health.

The Repo Market is gridlocked!

There has been an incestuous relationship between the traditional banking system and the shadow banking system and the link that joined the two together is the Repo Market.[Repurchase Market]

This is in fact the weakest link in the entire financial system.

This is a very technical subject and I seek your indulgence and patience when reading the remaining part of this article. The gridlock of the repo market is the basis for my assertion that over and above the aforesaid dire financial facts, it is the major contributing factor to the bankruptcy of the Federal Reserve!

I want to use a simple analogy. This will make the issue easier to understand.

Picture a one-inch diameter thick rope. Such a rope is made up of a few strands of narrower ropes, say 1/10th inch which are twined together to make the thick one-inch diameter rope.

Picture again that all the outer strands have been burnt away, and what remains is the middle strand, still lifting the weight. But this strand cannot on its own, lift such a weight and sooner or later, it will snap. When that happens, the weight will come crashing down!

The middle strand is the repo market.

Alternatively, you can use the analogy that the repo market is the heart that pumps the blood (the cash flow). The financial system is the body and it has suffered a massive heart attack!

What is the repo market?

The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.

It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for Repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!

This requirement is no longer the case. More of this issue later.

The Nature of Repo Transactions

In repo transactions, securities are exchanged for cash with an agreement to repurchase the securities at a future date. The securities serve as collateral for what is effectively a cash loan. A distinguishing feature of repos is that they can be used either to obtain funds or to obtain securities. As repos are short-maturity collateralized instruments, repo markets have strong linkages with securities markets, derivative markets and other short term markets such as inter-bank and money markets. [3]

Like other financial markets, repo markets are subject to credit risks, operational risks and liquidity risks. However, what distinguishes the credit risks on repos from that associated with uncollateralized instruments is that repos credit exposures arise from volatility (or market risk) in the value of collateral. Bear this in mind at all times.

Repos allow institutions to use leverage to take larger positions in financial markets which could add to systemic risks. Bear this in mind at all times.

And because of the close linkages between repo markets and securities markets, any shocks will be transmitted quickly, resulting in a gridlock. Bear this in mind at all times.

Transactions covered by definition of repos are as follows:

(A) Repurchase Agreement

A repurchase agreement involves the sale of an asset under an agreement to repurchase the asset from the same counter-party. Interest is paid on the repurchase agreement by adjusting the sale and purchase price. A reverse repo is the purchase of an asset with an agreement to re-sell the same or a similar asset.

A hold-in-custody repurchase agreement is a trade whereby the repoer (the borrower of cash) continues to hold the collateralizing securities in custody for the lender of cash. The risks are obvious!

A deliver-out repurchase agreement is where securities are delivered to the cash lender for custody in exchange for cash.

A tri-party repurchase agreement is similar to a deliver-out repurchase agreement, except that the security is placed in the custody of a third-party entity. The third-party ensures that the security meets the cash lender’s requirements and provides valuation and margining services. This is the primary form of repurchase agreement for securities dealers in the United States. Bank of New York and JP Morgan Chase are the two main custodians or clearing banks in the US and supervise the vast majority of the tri-party repos. Bear this in mind at all times.

(B) Sell/Buy-Back Agreement

A sell buy-back is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return.

(C) Securities Lending

This is where the owner of the security lends them to another person in return for a fee. The borrower of the security is contractually obliged to redeliver a like quantity of the same securities, or return precisely the same securities.

Repos can be of any duration but are most commonly over-night loans. Repos longer than over-night are called Term Repos. There are also Open Repos which are transactions which can be terminated by both parties on a day’s notice.

The largest players of repos and reverses are the dealers in government securities. There are about 20 primary dealers recognised by the Fed which are authorised to bid for new-issued treasury securities for resale in the market. The dealers are highly leveraged, 50 to 100 times their own capital. To finance the purchase of treasury securities, the dealers need to have repo monies in large amounts on a continuing basis. The institutions that supply such huge funds in the repo market are money funds, large corporations, state and local governments and foreign central banks.

The Repo Market and the Financial Crisis

As stated earlier when the repo market first started, US treasuries were the preferred security. But when financial engineering exploded and many financial products (i.e. CDOs) were rated AAA by rating agencies, these securities were also traded as described above in the repo market. This was when problems started.

According to Gary Gorton [4], the repo market before the crisis was estimated to be worth a whopping $12 trillion as compared to the total assets in the entire US banking system of $10 trillion.

The former CEO of Federal Reserve Bank of New York (NYFRB) and now the US Treasury Secretary, Tim Geithner observed in 2008:

"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system. This non-bank financial system grew to be very large, particularly in money and funding markets.

"This parallel system financed some of these very assets on a very short term basis in the bilateral or tri-party repo markets. As the volume of activity in repo markets grew, the variety of assets financed in this manner expanded beyond the most highly liquid securities to include less liquid securities, as well. Nonetheless, these assets were assumed to be readily sellable at fair values, in part because assets with similar credit ratings had generally been tradable during past periods of financial stress. And the liquidity supporting them was assumed to be continuous and essentially frictionless, because it had been so for a long time.

"The scale of long term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type run, but without the protection such as deposit insurance that the banking system has in place to reduce such risks."

Economic historians will argue for another century as to the cause for the run on the repo market. The collapse of Bear Stearns is as good a starting point as any. When the market discovered that its securities were duds, pure junk, shock waves ripped through the system.

Recall that I had mentioned earlier that Federal Bank of New York and JP Morgan Chase were the primary clearing banks for repos.

The Fed’s rescue of Bear Stearns through JP Morgan was not so much to save the former but rather to shore up the "clearing system" of the repos for which JP Morgan Chase and the Bank of New York were the main pillars. One of the functions of a "clearing bank" for repos is to value and match securities tendered for cash borrowings. If Bear Stearns securities are now valued as junks, the integrity of JP Morgan and Federal Bank of New York as clearing banks in this market is as good as zero! And bearing in mind that the five major investment banks in the US rely heavily on the repo market for their funding, any gridlock in this part of the shadow banking system would tear wide open the entire banking system, including the traditional counter-part.

Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!

This was what Bernanke said:

"We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos."

Louis Crandall, economist at Wrightson ICAP observed:

"The vulnerability of the tri-party repo system has been a recurring theme among Federal Reserve and Treasury officials in recent weeks."

The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Federal Bank of New York and JP Morgan Chase.

Yet, way back then, they were held up as rock solid. It is almost hilarious to read the then advert of the Federal Bank of New York as to their expertise and service:

"Sophisticated collateral selection: enforce diversification and credit quality; control adequacy, volatility & liquidity.

"Cutting edge infrastructure: economies of scale facilitate extensive data warehousing, access to more asset classes and markets, auto-substitution, auto-allocation & optimisation technology, same day reporting.

"Introduction to new counterparts: A Global Collateral Clearing House."

Panic swept across the entire repo market.

No securities were considered safe enough for repos except US treasuries.

Fundings in the repo market grind to a halt.

Market players withdrew funds and began hoarding treasuries.

The rest who own structured products were slaughtered.

I would like to quote Gary Gorton again:

"Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut [5] doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 per cent haircut. If the haircut rises to 6 per cent, at least half the assets will have to be sold.

"Another sign of trouble is a ‘repo fail’. A ‘repo fail’ occurs when one side of the agreement fails to abide by the contract. [Fail to deliver the security under the repurchase agreement.]

"Dealer banks would not accept collateral because they rightly believed that if they had to seize the collateral should the counter-party fail, then there would be no market in which to sell it. This was due to the absence of buyers because of the deleveraging. This led to an absence of prices for these securities. If the value cannot be determined because there is no market – no liquidity or there is the concern that if the asset is seized by the lender, it will not be saleable at all, then the dealer will not engage in repo. Repo dealers report that there was uncertainty about whether to believe the ratings on these structured products, and in a very fast moving environment, the response was to pull back from accepting anything structured. If no one would accept structured products for repo, then these bonds could not be traded – and then no one would want to accept them in repo transactions."

This change led to a sharp increase in the demand for government securities for repo transactions, which was compounded by significantly higher safe-haven demand for US Treasuries and the increased unwillingness to lend such securities in repo transactions. As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce. [6]

I will now turn to the issue of the FED’s solvency.

As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.

In the result, what happened was that the Fed’s present balance sheet of approximately $2 trillion is made up mostly of junk securities.

The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.

By way of analogy, if your high street bank’s balance sheet is made up of junk, what would you do? There are just not enough assets to meet its liabilities.

But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to "print money" or "digitalise" money and keep the markets going.

But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued - "In God we trust" - you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as "money".

When Joe Six-Packs realises that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as "money".

If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.

All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes "were so-called backed by these treasuries". It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.

In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.

Now it has been exposed that the Fed’s "assets" comprise of junk bonds and toxic wastes.

The Emperor has no clothes!

Paul Volcker, former Chairman of the Federal Reserve may have given the ultimate epitaph: "The bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place."

And it is any wonder that Professor Nouriel Roubini declared:

"The process of socialising the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."

In my opinion, the Fed has already become "unglued". Whatever guarantees given to secure the indebtedness of CitiGroup and others to prevent a run on these banks are useless.

It is bankrupt!

End Notes

[1] There are two banking systems in existence today. The Traditional Banking System – i.e. High Street banks and the Shadow Banking System. But the players in both the systems overlap because, the major banks of the traditional system helped spawn the shadow banking system. In fact they are the key players in the use of the so-called "new financial products, the CDOs, CLOs, MBS" etc and which have now turned toxic – worthless, junk to be exact.
[2] See my website archives: Roubini Warns of Sovereign Bank Failure – February 20, 2009
[3] See: Implications of repo markets for central banks, CGFS Publications No 10, March 1999.
[4] Gary Gorton, Information, Liquidity, and the (Ongoing) Panic of 2007 prepared for the Jackson Hole Conference 2008
[5] "haircut" here refers to the rate payable for the cash loan or the margin.
[6] Peter Hordahl and Martin R King, Developments in repo markets during the financial turmoil BIS Quarterly Review, December 2008