Tuesday, June 18, 2013

Time to Buy a House? Not on Your Life!

Soon the Foreclosure Floodgates Will Open and Prices Will Plunge

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Anyone who buys a house in today’s market should be aware of the risks. They should know that current prices are not supported by fundamentals, but by unprecedented manipulation by the Fed, the Obama administration, Wall Street Private Equity investors, and the nation’s biggest banks. If any of these main-players withdraws or even reduces their support for the market (in other words, if the banks release more of their distressed inventory, if rates rise, if PE firms buy fewer homes, or if the Congress curtails current mortgage modification programs), housing prices will fall. Given the increasing volatility in global stock and bond markets in recent weeks–which is likely to intensify as the Fed  implements its exit strategy from QE– interest rates will continue to fluctuate putting downward pressure on housing sales and prices. The impact the Fed’s policy will have on markets and the economy is unknown. The Central Bank is in uncharted water. That makes it a particularly bad time to buy a home. Caveat emptor.

When we say that fundamentals are weak, it means that the factors that typically drive the market are not strong enough to boost sales or push up prices. In a normal market, “first-time homebuyers” and “move up” buyers would represent the vast majority of sales. In today’s market, these two “demand cohorts” are actually quite weak, which is to say that current prices are not sustainable. Consider this: According to Lender Processing Services (LPS) Mortgage Monitor for April, there are  “4,699,000, or 9.76% of home loans delinquent or in foreclosure as of April 30th”…” (“Mortgage Delinquencies Down….But a Record 843 Days to Foreclose“, Naked Capitalism)

So, nearly 5 million homes are either seriously delinquent or in some stage of foreclosure. This unseen backlog of distressed homes makes up the so called “shadow inventory” which is still big enough to send prices plunging if even a small portion was released onto the market.   In other words, supply vastly exceeds demand in real terms. Now check this out from Zillow:

“13 million homeowners with a mortgage remain underwater. Moreover, the effective negative equity rate nationally —where the loan-to-value ratio is more than 80%, making it difficult for a homeowner to afford the down payment on another home — is 43.6% of homeowners with a mortgage.” (Zillow)

This might sound a bit confusing, but it’s crucial to understanding what’s really going on. While many people know that 13 million homeowners are underwater on their mortgages,  they probably don’t know that nearly half (43.6%) of the potential “move up” buyers (who represent the bulk of organic sales) don’t have enough equity in their homes to buy another house.  Think about that. Like we said,  housing sales depend almost entirely on two groups of buyers; firsttime homebuyers and move up buyers. Unfortunately, the number of potential move up buyers has been effectively cut in half.  It’s simply impossible for prices to keep rising with so many move up buyers on the ropes.

So, if “repeat” buyers cannot support current prices, then what about the other “demand cohort”,  that is, firsttime home buyers?

It looks like demand is weak there, too. According to housing analyst Mark Hanson: “First-timer home volume hit a fresh 4-year lows last month and distressed sales 6-year lows”.

So, no help there either. Firsttime homebuyers are vanishing due to a number of factors, the biggest of which is the $1 trillion in student loans which is preventing debt-hobbled young people from filling the ranks of the firsttime homebuyers. Given the onerous nature of these loans, which cannot be discharged through bankruptcy, many of these people will never own a home which, of course, means that demand will continue to weaken, sales will drop and prices will fall.

The banks have countered this weakness in demand by withholding distressed inventory. According to Realty Trac, foreclosures are down 33 percent in May year-over-year. There’s no reason for this reduction in foreclosures because there are nearly 5 million homes that are either seriously delinquent or in some stage of foreclosure. The banks are simply manipulating distressed supply to push up prices and avoid losses. To better understand what the banks are up to, check out this article on Marketwatch666:

“As of April, the average seriously delinquent homeowner has not paid on their mortgage for 503 days, and that the typical home in foreclosure has been delinquent for 843 days; in general, those who are seriously delinquent (more than 90 days past due) are not being foreclosed on, and those who are in the foreclosure process are not having their homes seized. Since this metric seems to be increasing an average of ten days a month, and new foreclosure starts are being added each month which should be bringing the average days down, we can only conclude that the foreclosure process is damn near frozen.” (“Mortgage Delinquencies Down….But a Record 843 Days to Foreclose“, Naked Capitalism)

“843 days”! That’s a new record, which means that the banks are actually dragging the process out longer today then ever before. This has had profound effect on prices which have soared by more than 10 percent in the last 12 months creating the illusion of a sustainable recovery.  Keep in mind, that the banks have little choice in the matter. They are still sitting on  more-than one trillion dollars worth of  non performing loans leftover from the recession.  If they simply dumped their backlog of distressed homes onto the market all at once, the deluge would push prices below their 2009-lows leaving bank balance sheets in tatters. That’s the scenario they want to avoid at all costs.   Now get a load of this article in last week’s Reuters:

“Well over a million U.S. homeowners are months behind on payments on government-backed mortgages, raising the risk federal housing agencies will end up facing the cost of managing a fresh flood of foreclosed homes, two government watchdogs said on Thursday.

Some 1.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report.

These loan delinquencies represent a “shadow inventory” of homes that could hit the market if foreclosed on, which would need be managed by government-run Fannie Mae (FNMA.OB) or Freddie Mac (FMCC.OB), or some other federal housing agency.” (“Shadow’ homes could burden U.S. housing agencies”, Reuters)

Actually, the numbers are much larger that Reuters indicates, but it’s good to see someone in the MSM finally acknowledging the magnitude of the problem.

It would be interesting to know how many of these 1.7 million non-performing loans were shunted off to Fannie and Freddie in 2009 and 2010 by cagey banksters who knew that they were essentially worthless.  We’ll probably never know for sure. The fact is, the vast majority of toxic mortgages weren’t created by the GSE’s but by crooked bankers who pooled the dreck into private label securities and sold them to gullible investors around the world.  Now, much of that securitized sewage is festering on the Fed’s bloated balance sheet. The Fed has replaced the shadow banking system as the place where bad loans go to die.   Here’s more from Reuters:

“Once seized, these so-called real estate owned properties, or REOs, present significant financial challenges to these government agencies, the report said.

“Not only are current REO inventory levels elevated … they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on,” the report stated….

The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own.” (Reuters)

So, the number of seriously delinquent mortgages IS MORE THAN SEVEN TIMES  the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own?!? What the hell kind of shell-game are these guys playing?  Do you get the impression, dear reader, that the government is pulling the wool over your eyes? 7X is a bit more than a rounding error, I’d say.

Okay, so the government has been fudging the numbers to make things look better than they really are. (What a surprise) But why would the GSE’s try to hide what’s going on, after all, Fannie and Freddie have implicit government guarantees, so they don’t really have to worry about falling prices.  And, as far as the red ink, well, Uncle Sugar will take care of that, right?

Not exactly. It looks to me like Fannie and Freddie are tailoring their policies to meet the needs of the banks.  As Reuters reluctantly admits, “Even a fraction of the shadow inventory falling into foreclosure could considerably swell … inventories of REO properties.”

It’s simple, really; more foreclosures mean lower prices. Lower prices, in turn, mean heavier losses for the banks. That’s why Fannie and Freddie are playing hide-n-seek; it’s another giveaway to the banks.

Reuters again: “Fannie Mae and Freddie Mac owned about 158,000 REO properties at the end of September 2012, while HUD had about 37,000.” (Reuters)

Huh?  The author has already admitted that the real number is at least 7 times that amount (“Well over a million.”), so why the sudden reversal? Is he trying to downplay the bad news to slip it past his editor?

Many of the experts still anticipate between 3 to 6 million foreclosures in the next few years, so it is doubtful that the current strategy will work. Eventually, the floodgates will open, distressed supply will be released, and prices will drop.

And distressed inventory is just one of many headwinds facing the housing industry today. There’s also this: “Rising Prices Lead to Fewer Investor Purchases, Longer Holding Times“, DS News:

“Close to half—48 percent—of the investors surveyed in May said they will purchase fewer properties in the next 12 months than they did in the past year.” (DS News)

And this from CNN Money:

“Say goodbye to ultra-low mortgage rates.

In the past month, rates have been on the rise and they are expected to continue to climb. This week, the average rate on a 30-year fixed-rate mortgage jumped another 10 percentage points to 4.07% and are up from 3.3% in early May, according to mortgage giant Freddie Mac.

“It’s unlikely that rates will ever be that low again,” said Doug Duncan, Fannie Mae’s chief economist. “Those who didn’t take advantage of record-low rates have missed the boat — at least for now.” (“Why 3% Mortgage Rates Are a Thing of the Past”, CNN Money)

And this:

Application Volume Stumbles, Sales to Suffer, OC Housing News

“Mortgage application data for May lends credence to analysts’ predictions of a slowdown in the year’s second half, Capital Economics says in its latest US Housing Data Response.  According to Capital Economics’ data—compiled from statistics offered by the Mortgage Bankers Association (MBA)—total mortgage application volume fell 2.0 percent from April to May, the first monthly drop since February and the biggest decline since January.”  (“Application Volume Stumbles, Sales to Suffer“, OC Housing News)

And, finally, this from BusinessWeek:

“Hedge fund manager Bruce Rose was among the first investors to coax institutional money into the mom and pop business of single-family home rentals, raising $450 million last year from Oaktree Capital Group LLC.

Now, with house prices climbing at the fastest pace in seven years and investors swamping the rental market, Rose says it no longer makes sense to be a buyer.

“We just don’t see the returns there that are adequate to incentivize us to continue to invest….There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”  (“Carrington Stops Buying U.S. Rentals as Blackstone Adding“,  BusinessWeek)

I could go on, but why bother? You get the point. The fact is, is that this is a uniquely bad time to buy a house.  There’s too much uncertainty about rates, inventory, demand and investors. The risks far outweigh the rewards. Anxious buyers should hold-their-horses and wait for the market to normalize instead of chaining themselves to sinking asset that will cost them a bundle.  Remember, patience is a virtue. It can also save you a lot of dough.

Supreme Court says pre-Miranda silence can be used by prosecutors in court

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 The Supreme Court says prosecutors can use a person’s silence against them if it comes before he’s told of his right to remain silent.
The 5-4 ruling comes in the case of Genovevo Salinas, who was convicted of a 1992 murder. During police questioning, and before he was arrested or read his Miranda rights, Salinas answered some questions but did not answer when asked if a shotgun he had access to would match up with the murder weapon.
Prosecutors in Texas used his silence on that question in convicting him of murder, saying it helped demonstrate his guilt. Salinas appealed, saying his Fifth Amendment rights to stay silent should have kept lawyers from using his silence against him in court. Texas courts disagreed, saying pre-Miranda silence is not protected by the Constitution.
The high court upheld that decision.
The Fifth Amendment protects Americans against forced self-incrimination, with the Supreme Court saying that prosecutors cannot comment on a defendant’s refusal to testify at trial. The courts have expanded that right to answering questions in police custody, with police required to tell people under arrest they have a right to remain silent without it being used in court.
Prosecutors argued that since Salinas was answering some questions — therefore not invoking his right to silence — and since he wasn’t under arrest and wasn’t compelled to speak, his silence on the incriminating question doesn’t get constitutional protection.
Salinas’ ”Fifth Amendment claim fails because he did not expressly invoke the privilege against self-incrimination in response to the officer’s question,” Justice Samuel Alito said. “It has long been settled that the privilege ‘generally is not self-executing’ and that a witness who desires its protection ‘must claim it.’”
The court decision was down its conservative/liberal split, with Alito’s judgment joined by Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Antonin Scalia.
Liberal Justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan dissented. “In my view the Fifth Amendment here prohibits the prosecution from commenting on the petitioner’s silence in response to police questioning,” Breyer said in the dissent.
Salinas was charged in 1993 with the previous year’s shooting deaths of two men in Houston. Police found shotgun shells at the crime scene, and after going to the home where Salinas lived with his parents, obtained a shotgun kept inside the house by his father. Ballistic reports showed the shells matched the shotgun, but police declined to prosecute Salinas.
Police decided to charge him after one of his friends said that he had confessed, but Salinas evaded police for years. He was arrested him in 2007, but his first trial ended in a mistrial. It was during his second trial that prosecutors aggressively tried to use his silence about the shotgun in closing remarks to the jury.
Salinas was sentenced to 20 years in prison. The Texas Court of Appeals and the Texas Court of Criminal Appeals upheld the conviction, with the latter court saying “pre-arrest, pre-Miranda silence is not protected by the Fifth Amendment right against self-incrimination, and that prosecutors may comment on such silence regardless of whether a defendant testifies.”
The case is Salinas v. Texas, 12-246.

Glyphosate Weedkiller in our Food and Water?

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“Historians may look back and write about how willing we are to sacrifice our children and jeopardize future generations with a massive experiment that is based on false promises and flawed science just to benefit the bottom line of a commercial enterprise.” So said Don Huber in referring to the use of glyphosate and genetically modified crops. Huber was speaking at Organic Connections conference in ReginaCanada, late 2012.
Huber is an emeritus professor in plant pathology at Purdue University in the US and has worked with the Department of Homeland Security to reduce the impact of plant disease outbreaks. His words are well worth bearing in mind given that a new study commissioned by Friends of the Earth Europe (FoE) and GM Freeze has found that people in 18 countries across Europe have been found to have traces of glyphosate in their urine (1).
Friends of the Earth Europe commissioned laboratory tests on urine samples from volunteers in 18 countries across Europe and found that on average 44 percent of samples contained glyphosate. The proportion of positive samples varied between countries, with Malta, Germany, the UK and Poland having the most positive tests, and lower levels detected in Macedonia and Switzerland. All the volunteers who provided samples live in cities, and none had handled or used glyphosate products in the run-up to the tests.
The Influence of the Biotech Sector on Safety and Regulation
Although ‘weedkiller in urine’ sounds alarming, Tom Sanders, head of the nutritional sciences research division at King’s College London, says the levels found are unlikely to be of any significance to health because they are 300 times lower than the level which might cause concern. Alison Haughton, head of the Pollination Ecology Group at Rothamsted Research, said that if FoE and GM Freeze want their work to have scientific credibility and provide a genuine contribution to the debate on pesticide residues, they should submit their work for publication in a peer-reviewed journal.
Valid points, you might think. But FoE believes that there is sufficient evidence to suggest environmental and health impacts from glyphosate warrant concern. It wants to know how the glyphosate found in human urine samples has entered the body, what the impacts of persistent exposure to low levels of glyphosate might be and what happens to the glyphosate that remains in the body. New research published in the journal Entropy sheds disturbing light on such concerns (discussed later in this article).
In 2011, Earth Open Source said that official approval of glyphosate had been rash, problematic and deeply flawed. A comprehensive review of existing data released in June 2011 by Earth Open Source suggested that industry regulators in Europe had known for years that glyphosate causes birth defects in the embryos of laboratory animals. Questions were raised about the role of the powerful agro-industry in rigging data pertaining to product safety and its undue influence on regulatory bodies (2).
In the same vein, FoE says there is currently very little testing for glyphosate by public authorities, despite its widespread use, and authorities in Europe do not test for glyphosate in humans and tests on food are infrequent. Glyphosate was approved for EU-wide use in 2002, but FoE argues that the European regulatory agencies did not carry out their own safety testing, relying instead on data provided by the manufacturers.
Of course there are certain scientists (usually with links to the agro-industry) who always seem to be strident in calling for peer-reviewed evidence when people are critical of the biotech sector, but then rubbish it and smear or intimidate the scientists involved when that occurs, as has been the case with Dr Arsad Pusztai in the UK or Professor Seralini in France. It is therefore quite revealing that most of the data pertaining to glyphosate safety came from industry studies, not from peer-reviewed science, and the original data are not available for independent scrutiny.
Increasing Use
With references to a raft of peer-reviewed studies, FoE also brings attention to the often disturbing health and environmental dangers and impacts of glyphosate-based herbicides throughout the world (1). The FoE study also highlights concerns around the increasing levels of exposure to glyphosate-based weed killers, particularly as the use of glyphosate is predicted to rise further if more genetically modified (GM) crops are grown. It is after all good for business. And the biggest producer of glyphosate is Monsanto, which sells it under the brand name ‘Roundup’.
“The figures don’t lie; GMOs drive glyphosate sales.” (3)
Despite its widespread use, there is currently little monitoring of glyphosate in food, water or the wider environment. The FoE commissioned study is the first time monitoring has been carried out across Europe for the presence of the weed killer in human bodies. FoE Europe’s spokesperson Adrian Bebb argues that there is a serious lack of action by public authorities and indicates that this weed killer is being widely overused. 

This certainly needs to be addressed not least because the prediction concerning increasing exposure to glyphosate is not without substance. The introduction of Roundup Ready crops has already resulted in an increase of glyphosate use. Using official US government data, Dr Charles Benbrook, research professor at the Center for Sustaining Agriculture and Natural Resources at Washington State University, states that since 1996 the glysophate rate of application per crop year has tripled on cotton farms, doubled in the case of soybeans and risen 39 percent on corn (4). The average annual increase in the pounds of glyphosate applied to cotton, soybeans, and corn has been 18.2 percent, 9.8 percent, and 4.3 percent, respectively, since herbicide tolerant crops were introduced.

Glyphosate is used on many genetically modified crops. 14 new GM crops designed to be cultivated with glyphosate are currently waiting for approval to be grown in Europe. Approval of these crops would inevitably lead to a further increase of glysphosate spraying. In the US, biotech crops, including corn, soybeans, canola and sugarbeets, are planted on millions of acres annually.
Increasing Dangers
Evidence suggests that Roundup could be linked to a range of health problems and diseases, including Parkinson’s, infertility and cancers, according to a new peer-reviewed report, published recently in the scientific journal Entropy (5). The study also concluded that residues of glyphosate have been found in food.
These residues enhance the damaging effects of other food-borne chemical residues and toxins in the environment to disrupt normal body functions and induce disease, according to the report, authored by Stephanie Seneff, a research scientist at the Massachusetts Institute of Technology, and Anthony Samsel, a science consultant. The study says that negative impact on the body is insidious and manifests slowly over time as inflammation damages cellular systems throughout the body.
In 2010, the provincial government of Chaco province in Argentina issued a report on health statistics from the town La Leonesa. The report showed that from 2000 to 2009, following the expansion of genetically-modified soy and rice crops in the region (and the use of glyphosate), the childhood cancer rate tripled in La Leonesa and the rate of birth defects increased nearly fourfold over the entire province (6).
Professor Huber also notes the health risks associated with the (increasing) use of glyphosate. He says a number of plant pathogens are emerging, which when consumed could impact human health. Based on research that he alludes to (he refuses to make his research public or identify his fellow researchers, who he claims could suffer substantial professional backlash from academic employers who received research funding from the biotechnology industry), Huber notes that the use of glyphosate changes the soil ecology, killing many bacteria, while giving other bacteria a competitive advantage. This makes plants highly susceptible to soil borne diseases. At the same time, glyphosate has a negative effect on a number of beneficial soil organisms (7).
Huber’s concerns about the impact of long term use of glyphosate on soil sterility are similar to concerns expressed by Elaine Ingham, a soil ecologist with the Rodale Institute, and also research carried out in by Navdanya in India (8).
As for GM crops, Huber says they have lower water use efficiency, tend to be nutrient deficient, have increased bud and fruit abortion and are predisposed to infectious diseases and insect damage. He suggests that Roundup Ready crops, treated with glyphosate, have higher levels of mycotoxins and lower nutrient levels than conventional crops.
“… you could say that what you’re doing with glyphosate is you’re giving the plant a bad case of AIDS. You’ve shut down the immune system or the defense system.” Professor Ron Huber (7)
He concludes that, when consumed, the GM crops were more likely to cause disease, infertility, birth defects, cancer and allergic reactions than conventional crops.
Huber claims that consumption of food or feed that was genetically modified could bring the altered genes in contact with the microbes in the guts of the livestock or people who eat them. He feels this increases diseases, such as celiac disease, allergies, asthma, chronic fatigue syndrome, diabetes, gluten intolerance, irritable bowel disease, miscarriage, obesity and sudden infant death syndrome.
While none of these findings conclusively prove that plant (or animal) diseases are caused by the glyphosate, Huber feels safety evaluations have been inadequate, suggesting that previous (GM sector) research was substandard and extremely misleading in its interpretation of results – or worse.
With some hugely powerful players involved here, many of whom have successfully infiltrated important government and official bodies (9), much of the science and the ensuing debate surrounding glyphosate is being manipulated and hijacked by vested interests for commercial gain.
“… publishing in this area can also be difficult. I know from the International Symposium on Glyphosate that they had to find a journal publisher outside this country (the US) to publish the research data and symposium proceedings. It’s pretty hard to get it published in the States. There are also some hazards to publishing if you’re a young researcher doing research that runs counter to the current popular concepts. A lot of research on safety of genetic engineering is done outside of this country because it’s difficult to gain access to the materials, or the statements you have to sign to have access to those materials stating that you won’t publish without permission of the supplier. I think the 26 entomologists who sent their letter to EPA in 2009 stated it aptly when they said that objective data wasn’t available to the EPA because the materials haven’t been available to them or that they’re denied the opportunity to publish their data.” Professor Ron Huber (7)
Notes

Corporate Espionage and the Outsourcing of National Security

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Pre-9/11 Flashback
When NATO’s US and British troops in Macedonia began evacuating Albanian rebels in June 2001, officials claimed that they were merely trying to help Europe avert a devastating civil war. Most media dutifully repeated this spin as fact. But the explanation only made sense if you ignored a troublesome contradiction; namely, US support for both the Macedonian Armed Forces and the Albanians fighting them. Beyond that, there was a decade of confused and manipulative Western policies, climaxing with NATO bombing and the imposition of “peace” through aggression in Kosovo. Together, these moves effectively destabilized the region.
In Macedonia, the main “cut out” – spook-speak for “intermediary” –was Military Professional Resources, Inc. (MPRI), then a major private military company (PMC) whose Macedonian field commander was a former US general with strong ties to Kosovo Liberation Army Commander Agim Ceku and Macedonian General Jovan Andrejevski.
MPRI and other PMCs that have succeeded it receive much of their funding from the US State Department, Pentagon, and CIA. For example, MPRI trained and equipped the Bosnian Croat Muslim Federation Army with a large State Department contract. Over the years, the company claimed to have “helped” Croatia, Serbia, Bosnia, and Macedonia – in effect, arming and training all parties. In 2000, it pulled in at least $70 million from its global operations.
Working closely with the Pentagon, MPRI also arranged for the Kosovo Liberation Army’s (KLA) training and weapons in the run up to the war on Yugoslavia. Later, the same firm channeled token military aid to the Macedonian army, new US weapons to the rebels, and military intelligence to both sides.
Actually, it was a standard procedure, applied with great success in the Middle East for decades: Keep warring parties from overwhelming one other and you strengthen the bargaining power of the puppeteer behind the scenes. Better yet, combine this with disinformation; that is, tell the public one thing while doing the opposite.
It’s not a question of allies and enemies. Those designations can change for any number of reasons. In 1999, ethnic Albanians were victims and freedom fighters. In 2001, they were “officially” a threat. Manuel Noriega, Saddam Hussein, and Osama bin Laden were just three of the friends-turned-pariahs who learned that lesson.
And what was the real objective in Macedonia? The country was in a financial straight jacket, its budget basically controlled by the IMF and the World Bank on behalf of international creditors. Since the IMF had placed a ceiling on military expenditures, the only funding option left was privatization. According to Jane’s Defense Weekly, the process started with the sale of the government’s stake in Macedonian Telekom.
Even more was at stake – things like strategic pipeline routes and transport corridors through the country. But that wouldn’t become obvious for years, if ever. This is another traditional tactic: Keep the true agenda under wraps for as long as possible.
Pretexts for War
Despite 24-hour news and talk about transparency, there’s much we don’t know about our past, much less current events. What’s worse, some of what we think we know isn’t true.
The point is that it’s no accident. Consider, for example, the proximate circumstances that led to open war in Vietnam. According to official history, two US destroyers patrolling in the Gulf of Tonkin off North Vietnam were victims of unprovoked attacks in August 1964, leading to a congressional resolution that gave President Johnson the power “to take all necessary measures.”
In fact, the destroyers were spy ships, part of a National Security Agency (NSA) eavesdropping program operating near the coast as a way to provoke the North Vietnamese into turning on their radar and other communications channels. The more provocative the maneuvers, the more signals that could be captured. Meanwhile, US raiding parties were shelling mainland targets. Documents revealed later indicated that the August 4 attack on the USS Maddox – the pretext for passing the Gulf of Tonkin Resolution – may not even have taken place.
But even if it did, the incident was still stage managed to build up congressional and public support for the war. Evidence suggests that the plan was based on Operation Northwoods, a scheme developed in 1962 to justify an invasion of Cuba. Among the tactics the Joint Chiefs of Staff considered then were blowing up a ship in Guantanamo Bay, a phony “communist Cuba terror campaign” in Florida and Washington, DC, and an elaborate plan to convince people that Cuba had shot down a civilian airliner filled with students. That operation wasn’t implemented, but two years later, desperate for a war, the administration’s military brass found a way to create the necessary conditions in Vietnam.
NSA and Echelon
For more than half a century, the eyes and ears of US power to monitor and manipulate information (and with it, mass perceptions) has been the NSA, initially designed to assist the CIA. Its original task was to collect raw information about threats to US security, cracking codes and using the latest technology to provide accurate intelligence on the intentions and activities of enemies. Emerging after World War II, its early focus was the Soviet Union. But it never did crack a high-level Soviet cipher system. On the other hand, it used every available means to eavesdrop on not only enemies but also allies and US citizens.
In Body of Secrets, James Bamford described a bureaucratic and secretive behemoth, based in an Orwellian Maryland complex known as Crypto City. From there, supercomputers linked it to spy satellites, subs, aircraft, and equally covert, strategically placed listening posts worldwide. By 2000, it had a $7 billion annual budget and directly employed at least 38,000 people, more than the CIA and FBI. It was also the leader of an international intelligence club, UKUSA, which includes Britain, Canada, Australia, and New Zealand. Together, they monitored and recorded billions of encrypted communications, telephone calls, radio messages, faxes, and e-mails around the world.
Over the years, however, the line between enemies and friends blurred, and the intelligence gatherers often converted their control of information into unilateral power, influencing the course of history in ways that may never be known. No doubt the agency has had a hand in countless covert operations; yet, attempts to pull away the veil of secrecy have been largely unsuccessful.
In the mid-1970s, for example, just as Congress was attempting to reign in the CIA, the NSA was quietly creating a virtual state, a massive international computer network named Platform. Doing away with formal borders, it developed a software package that turned worldwide Sigint (short for “signal intelligence”: communication intelligence, eavesdropping, and electronic intelligence) into a unified whole. An early software package was code named Echelon, a name later connected with eavesdropping on commercial communication.
Of course, the NSA and its British sister, the Government Communications Headquarters (GCHQ), refused to admit Echelon existed, even though declassified documents appeared on the Internet and Congress conducted an investigation. A European Parliament report also confirmed Echelon’s activities, and encouraged Internet users and governments to adopt stronger privacy measures in response.
In March 2001, several ranking British politicians discussed Echelon’s potential impacts on civil liberties, and a European Parliament committee considered its legal, human rights, and privacy implications. The Dutch held similar hearings, and a French National Assembly inquiry urged the European Union to embrace new privacy enhancing technologies to protect against Echelon’s eavesdropping. France launched a formal investigation into possible abuses for industrial espionage.
When Allies Compete
A prime reason for Europe’s discontent was the suspicion that the NSA had used intercepted conversations to help US companies win contracts heading for European firms. The alleged losers included Airbus, a consortium including interests in France, Germany, Spain, and Britain, and Thomson CSF, a French electronics company. The French claimed they had lost a $1.4 billion deal to supply Brazil with a radar system because the NSA shared details of the negotiations with Raytheon. Airbus may have lost a contract worth $2 billion to Boeing and McDonnell Douglas because of information intercepted and passed on by the agency.
According to former NSA agent Wayne Madsen, the US used information gathered from its bases in Australia to win a half share in a significant Indonesian trade contract for AT&T. Communication intercepts showed the contract was initially going to a Japanese firm. A bit later a lawsuit against the US and Britain was launched in France, judicial and parliamentary investigations began in Italy, and German parliamentarians demanded an inquiry.
The rationale for turning the NSA loose on commercial activities, even those involving allies, was provided in the mid-90s by Sen. Frank DeConcini, then chairman of the Senate Intelligence Committee. “I don’t think we should have a policy where we’re going to invade the Airbus inner sanctum and find out their secrets for the purpose of turning it over to Boeing or McDonnell Douglas,” he opined. “But if we find something, not to share it with our people seems to me to be not smart.” President Bill Clinton and other US officials buttressed this view by charging that European countries were unfairly subsidizing Airbus. In other words, competition with significant US interests can be a matter of national security, and private capitalism must be protected from state-run enterprises.
The US-Europe row about Airbus subsidies was also used as a “test case” for scientists developing new intelligence tools. At US Defense Department conferences on “text retrieval,” competitions were staged to find the best methods. A standard test featured extracting protected data about “Airbus subsidies.”
 Manipulating Democracy
In the end, influencing the outcome of huge commercial transactions is but the tip of this iceberg. The NSA’s ability to listen to virtually any transmitted communication has enhanced the power of unelected officials and private interests to set covert foreign policy in motion. In some cases, the objective is clear and arguably defensible: taking effective action against terrorism, for example. But in others, the grand plans of the intelligence community have led it to undermine democracies.
The 1975 removal of Australian Prime Minister Edward Whitlam is an instructive case. At the time of Whitlam’s election in 1972, Australian intelligence was working with the CIA against the Allende government in Chile. The new PM didn’t simply order a halt to Australia’s involvement, explained William Blum in Killing Hope, a masterful study of US interventions since World War II. Whitlam seized intelligence information withheld from him by the Australian Security and Intelligence Organization (ASIO), and disclosed the existence of a joint CIA-ASIO directorate that monitored radio traffic in Asia. He also openly disapproved of US plans to build up the Indian Ocean Island of Diego Garcia as a military-intelligence-nuclear outpost.
Both the CIA and NSA became concerned about the security and future of crucial intelligence facilities in and near Australia. The country was already key member of UKUSA. After launching its first space-based listening post-a microwave receiver with an antenna pointed at earth-NSA had picked an isolated desert area in central Australia as a ground station. Once completed, the base at Alice Springs was named Pine Gap, the first of many listening posts to be installed around the world. For the NSA and CIA, Whitlam posed a threat to the secrecy and security of such operations.
An early step was covert funding for the political opposition, in hopes of defeating Whitlam’s Labor Party in 1974. When that failed, meetings were held with the Governor-General, Sir John Kerr, a figurehead representing the Queen of England who had worked for CIA front organizations since the 50s. Defense officials warned that intelligence links would be cut off unless someone stopped Whitlam. On November 11, 1975, Kerr responded, dismissing the prime minister, dissolving both houses of Parliament, and appointing an interim government until new elections were held.
According to Christopher Boyce (subject of The Falcon and the Snowman, a fictionalized account), who watched the process while working for TRW in a CIA-linked cryptographic communications center, the spooks also infiltrated Australian labor unions and contrived to suppress transportation strikes that were holding up deliveries to US intelligence installations. Not coincidentally, some unions were leading the opposition to development of those same facilities.
How often, and to what effect, such covert ops have succeeded is another of the mysteries that comprise an unwritten history of the last half century. Beyond that, systems like Echelon violate the human right to individual privacy, and give those who control the information the ability to act with impunity, sometimes destroying lives and negating the popular will in the process.
Hiding the Agenda in Peru
In May 1960, when a U-2 spy plane was shot down over Soviet territory, President Dwight Eisenhower took great pains to deny direct knowledge or authorization of the provocative mission. In reality, he personally oversaw every U-2 mission, and had even riskier and more provocative bomber overflights in mind.
It’s a basic rule of thumb for covert ops: When exposed, keep denying and deflect the blame. More important, never, never let on that the mission itself may be a pretext, or a diversion from some other, larger agenda.
Considering that, the April 20, 2001, shoot down of a plane carrying missionaries across the Brazilian border into Peru becomes highly suspicious. At first, the official story fed to the press was that Peruvian authorities ordered the attack on their own, over the pleas of the CIA “contract pilots” who initially spotted the plane. But Peruvian pilots involved in that program, supposedly designed to intercept drug flights, insist that nothing was shot down without US approval.
Innocent planes were sometimes attacked, but most were small, low flying aircraft that didn’t file flight plans and had no radios. This plane maintained regular contact and did file a plan. Still, even after it crash-landed, the Peruvians continued to strafe it, perhaps in an attempt to ignite the plane’s fuel and eliminate the evidence.
“I think it has to do with Plan Colombia and the coming war,” said Celerino Castillo, who had previously worked in Peru for Drug Enforcement Agency. “The CIA was sending a clear message to all non-combatants to clear out of the area, and to get favorable press.” The flight was heading to Iquitos, which “is at the heart of everything the CIA is doing right now,” he added. “They don’t want any witnesses.”
Timing also may have played a part. The shoot down occurred on the opening day of the Summit of the Americas in Quebec City. Uruguay’s President Jorge Ibanez, who had proposed the worldwide legalization of drugs just weeks before, was expected to make a high-profile speech on his proposal at the gathering. The downing of a drug smuggling plane at this moment, near territory held by Colombia’s FARC rebels, would help to defuse Uruguay’s message and reinforce the image of the insurgents as drug smugglers.
If you doubt that the US would condone such an operation or cover it up, consider this: In 1967, Israel torpedoed the USS Liberty, a large floating listening post, as it was eavesdropping on the Arab-Israeli war off the Sinai Peninsula. Hundreds of US sailors were wounded and killed, probably because Israel feared that its massacre of Egyptian prisoners at El Arish might be overheard. How did the Pentagon respond? By imposing a total news ban, and covering up the facts for decades.
Will we ever find out what really happened in Peru, specifically why a missionary and her daughter were killed? Not likely, since it involves a private military contractor that is basically beyond the reach of congressional accountability.
In 2009, when the Peru shoot down became one of five cases of intelligence operation cover up being investigated by the US House Intelligence Committee, the CIA inspector general concluded that the CIA had improperly concealed information about the incident. Intelligence Oversight and Investigations Subcommittee Chairwoman Jan Schakowsky, who led the investigation, didn’t rule out referrals to the Justice Department for criminal prosecutions if evidence surfaced that intelligence officials broke the law. But she couldn’t guarantee that the facts would ever come to light, since the Committee’s report of its investigation would be classified.
The most crucial wrinkle in the Peruvian incident is the involvement of DynCorp, which was active in Colombia and Bolivia under large contracts with various US agencies. The day after the incident, ABC news reported that, according to “senior administration officials,” the crew of the surveillance plane that first identified the doomed aircraft “was hired by the CIA from DynCorp.” Within two days, however, all references to DynCorp were scrubbed from ABC’s Website. A week later, the New York Post claimed the crew actually worked for Aviation Development Corp., allegedly a CIA proprietary company.
Whatever the truth, State Department officials refused to talk on the record about DynCorp’s activities in South America. Yet, according to DynCorp’s State Department contract, the firm had received at least $600 million over the previous few years for training, drug interdiction, search and rescue (which included combat), air transport of equipment and people, and reconnaissance in the region. And that was only what they put on paper. It also operated government aircraft and provided all manner of personnel, particularly for Plan Colombia.
 Outsourcing Defense
DynCorp began in 1946 as the employee-owned air cargo business California Eastern Airways, flying in supplies for the Korean War. This and later government work led to charges that it was a CIA front company. Whatever the truth, it ultimately became a leading PMC, hiring former soldiers and police officers to implement US foreign policy without having to report to Congress.
The push to privatize war gained traction during the first Bush administration. After the first Gulf War, the Pentagon, then headed by Defense Secretary Dick Cheney, paid a Halliburton subsidiary nearly $9 million to study how PMCs could support US soldiers in combat zones, according to a Mother Jones investigation. Cheney subsequently became CEO of Halliburton, and Brown & Root, later known as Halliburton KBR, won billions to construct and run military bases, some in secret locations.
One of DynCorp’s earliest “police” contracts involved the protection of Haitian President Jean-Bertrand Aristide, and, after he was ousted, providing the “technical advice” that brought military officers involved in that coup into Haiti’s National Police. Despite this dodgy record, in 2002 it won the contract to protect another new president, Afghanistan’s Hamid Karzai. By then, it was a top IT federal contractor specializing in computer systems development, and also providing the government with aviation services, general military management, and security expertise.
Like other private military outfits, the main danger it has faced is the risk of public exposure. Under one contract, for example, DynCorp sprayed vast quantities of herbicides over Colombia to kill the cocaine crop. In September 2001, Ecuadorian Indians filed a class action lawsuit, charging that DynCorp recklessly sprayed their homes and farms, causing illnesses and deaths and destroying crops. In Bosnia, private police provided by DynCorp for the UN were accused of buying and selling prostitutes, including a 12-year-old girl. Others were charged with videotaping a rape.
In the first years of the 21st century, DynCorp’s day-to-day operations in South America were overseen by State Department officials, including the Narcotic Affairs Section and the Air Wing, the latter a clique of unreformed cold warriors and leftovers from 80s operations in Central America. It was essentially the State Department’s private air force in the Andes, with access to satellite-based recording and mapping systems. In the 1960s, a similar role was played by the Vinnell Corp., which the CIA called “our own private mercenary army in Vietnam.” Vinnell later became a subsidiary of TRW, a major NSA contractor, and employed US Special Forces vets to train Saudi Arabia’s National Guard. In the late 1990s, TRW hired former NSA director William Studeman to help with its intelligence program.
DynCorp avoided the kind of public scandal that surrounded the activities of Blackwater. In Ecuador, where it developed military logistics centers and coordinated “anti-terror” police training, the exposure of a secret covenant signed with the Aeronautics Industries Directorate of the Ecuadorian Air Force briefly threatened to make waves. According to a November 2003 exposé in Quito’s El Comercio, the arrangement, hidden from the National Defense Council, made DynCorp’s people part of the US diplomatic mission.
In Colombia, DynCorp’s coca eradication and search-and-rescue missions led to controversial pitched battles with rebels. US contract pilots flew Black Hawk helicopters carrying Colombian police officers who raked the countryside with machine gun fire to protect the missions against attacks. According to investigative reporter Jason Vest, DynCorp employees were also implicated in narcotics trafficking. But such stories didn’t get far, and, in any case, DynCorp’s “trainers” simply ignored congressional rules, including those that restrict the US from aiding military units linked to human rights abuses.
In 2003, DynCorp won a multimillion-dollar contract to build a private police force in post-Saddam Iraq, with some of the funding diverted from an anti-drug program for Afghanistan. In 2004, the State Department further expanded DynCorp’s role as a global US surrogate with a $1.75 billion, five year contract to provide law enforcement personnel for civilian policing operations in “post-conflict areas” around the world. That March, the company also got an Army contract to support helicopters sold to foreign countries. The work, described as “turnkey” services, includes program management, logistics support, maintenance and aircrew training, aircraft maintenance and refurbishment, repair and overhaul of aircraft components and engines, airframe and engine upgrades, and the production of technical publications.
In short, DynCorp was a trusted partner in the military-intelligence-industrial complex. “Are we outsourcing order to avoid public scrutiny, controversy or embarrassment?” asked Rep. Schakowsky upon submitting legislation to prohibit US funding for private military firms in the Andean region. “If there is a potential for a privatized Gulf of Tonkin incident, then the American people deserve to have a full and open debate before this policy goes any further.”
If and when that ever happens, the discussion will have to cover a lot of ground. Private firms, working in concert with various intelligence agencies, constitute a vast foreign policy apparatus that is largely invisible, rarely covered by the corporate press, and not currently subject to congressional oversight. The Freedom of Information Act simply doesn’t apply. Any information on whom they arm or how they operate is private, proprietary information.
The US government downplays its use of mercenaries, a state of affairs that could undermine any efforts to find out about CIA activities that are concealed from Congress. Yet private contractors perform almost every function essential to military operations, a situation that has been called the “creeping privatization of the business of war.” By 2004, the Pentagon was employing more than 700,000 private contractors.
The companies are staffed by former generals, admirals, and highly trained officers. Name a hot spot and some PMC has people there. DynCorp has worked on the Defense Message System Transition Hub and done long-range planning for the Air Force. MPRI had a similar contract with the Army, and for a time coordinated the Pentagon’s military and leadership training in at least seven African nations.
How did this outsourcing of defense evolve? In 1969, the US Army had about 1.5 million active duty soldiers. By 1992, the figure had been cut by half. Since the mid-1990s, however, the US has mobilized militarily to intervene in several significant conflicts, and a corporate “foreign legion” has filled the gap between foreign policy imperatives and what a downsized, increasingly over-stretched military can provide.
Use of high technology equipment feeds the process. Private companies have technical capabilities that the military needs, but doesn’t always possess. Contractors have maintained stealth bombers and Predator unmanned drones used in Afghanistan and Iraq. Some military equipment is specifically designed to be operated and maintained by private companies.
In Britain, the debate over military privatization has been public, since the activities of the UK company Sandline in Sierra Leone and Papua New Guinea embarrassed the government in the late 1990s. But no country has clear policies to regulate PMCs, and the limited oversight that does exist rarely works. In the US, they have largely escaped notice, except when US contract workers in conflict zones are killed or go way over the line, as in the case of Blackwater.
According to Guy Copeland, who began developing public-private IT policy in the Reagan years, “The private sector must play an integral role in improving our national cybersecurity.” After all, he has noted, private interests own and operate 85 percent of the nation’s critical IT infrastructure. He should know. After all, Copeland drafted much of the language in the Bush Administration’s 2002 National Strategy to Secure Cyberspace as co-chair of the Information Security Committee of the Information Technology Association of America.
Nevertheless, when the federal government becomes dependent on unaccountable, private companies like DynCorp and Blackwater (later renamed Xe Services) for so many key security services, as well as for military logistics, management, strategy, expertise and “training,” fundamental elements of US defense have been outsourced. And the details of that relationship are matters that the intelligence community will fight long and hard to keep out of public view.
Corporate Connections and “Soft Landings”
Although the various departments and private contractors within the military-intelligence-industrial complex occasionally have turf battles and don’t always share information or coordinate strategy as effectively as they might, close and ongoing contact has long been considered essential. And it has expanded as a result of the information revolution. The entire intelligence community has its own secret Intranet, which pulls together FBI reports, NSA intercepts, analysis from the DIA and CIA, and other deeply covert sources.
Private firms are connected to this information web through staff, location, shared technology, and assorted contracts. Working primarily for the Pentagon, for example, L-3 Communications, a spinoff from major defense contractor Lockheed Martin, has manufactured hardware like control systems for satellites and flight recorders. MPRI, which was bought by L-3, provided services like its operations in Macedonia. L-3 also built the NSA’s Secure Terminal Equipment, which instantly encrypts phone conversations.
Another private contractor active in the Balkans was Science Applications, staffed by former NSA and CIA personnel, and specializing in police training. When Janice Stromsem, a Justice Department employee, complained that its program gave the CIA unfettered access to recruiting agents in foreign police forces, she was relieved of her duties. Her concern was that the sovereignty of nations receiving aid from the US was being compromised.
In 1999, faced with personnel cuts, the NSA offered over 4000 employees “soft landing” buy outs to help them secure jobs with defense firms that have major NSA contracts. NSA offered to pay the first year’s salary, in hopes the contractor would then pick up the tab. Sometimes the employee didn’t even have to move away from Crypto City. Companies taking part in the program included TRW and MPRI’s parent company, Lockheed Martin.
Lockheed was also a winner in the long-term effort to privatize government services. In 2000, it won a $43.8 million contract to run the Defense Civilian Personnel Data System, one of the largest human resources systems in the world. As a result, a major defense contractor took charge of consolidating all Department of Defense personnel systems, covering hiring and firing for about 750,000 civilian employees. This put the contractor at the cutting edge of Defense Department planning, and made it a key gatekeeper at the revolving door between the US military and private interests.
Invisible Threats
Shortly after his appointment as NSA director in 1999, Michael Hayden went to see the film Enemy of the State, in which Will Smith is pursued by an all-seeing, all hearing NSA and former operative Gene Hackman decries the agency’s dangerous power. In Body of Secrets, author Bamford says Hayden found the film entertaining, yet offensive and highly inaccurate. Still, the NSA chief was comforted by “a society that makes its bogeymen secrecy and power. That’s really what the movie’s about.”
 Unlike Hayden, most people don’t know where the fiction ends and NSA reality begins. Supposedly, the agency rarely spies on US citizens at home. On the other hand, the Foreign Intelligence Surveillance Act allows a secret federal court to waive that limitation. The rest of the world doesn’t have that protection. Designating thousands of keywords, names, phrases, and phone numbers, NSA computers can pick them out of millions of messages, passing anything of interest on to analysts. One can only speculate about what happens next.
After 9/11 the plan was to go further with a project code named Tempest. The goal was to capture computer signals such as keystrokes or monitor images through walls or from other buildings, even if the computers weren’t linked to a network. An NSA document, “Compromising Emanations Laboratory Test Requirements, Electromagnetics,” described procedures for capturing the radiation emitted from a computer-through radio waves and the telephone, serial, network, or power cables attached to it.
Other NSA programs have included Oasis, designed to reduce audiovisual images into machine-readable text for easier filtering, and Fluent, which expanded Echelon’s multilingual capabilities. And let’s not forget the government’s Carnivore Internet surveillance program, capable of collecting all communications over any segment of the network being watched.
Put such elements together, combine them with business imperatives and covert foreign policy objectives, then throw PMCS into the mix, and you get a glimpse of the extent to which information can be translated into raw power and secretly used to shape events. Although most pieces of the puzzle remain obscure, enough is visible to justify suspicion, outrage, and a campaign to pull away the curtain on this Wizard of Oz. But fighting a force that is largely invisible and unaccountable – and able to eavesdrop on the most private exchanges, that is a daunting task, perhaps even more difficult than confronting the mechanisms of corporate globalization that it protects and promotes.