Friday, August 28, 2015

Looting Made Easy: the $2 Trillion Buyback Binge

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Corporations are taking the retirement savings of elderly public employees and using them to inflate their stock prices so wealthy CEOs and their shareholders can enrich themselves at the expense of their companies. And it’s all completely legal. Under current financial regulations, corporate bosses are free to repurchase their own company’s shares, push stock prices into the stratosphere, skim off a generous bonuses for themselves in the form of executive compensation, and leave their companies drowning in red ink.
Even worse, a sizable portion of the money devoted to stock buybacks is coming from  “massively underfunded public pension” funds that retired workers depend on for their survival. According to Brian Reynolds, Chief Market Strategist at New Albion Partners,  “Pension funds have to make 7.5%,” so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s.” Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions…It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years.”   (“How a Public Pension Crisis Is Driving an Epic Credit Boom“, Financial Sense)
So, once again, ordinary working people are caught in the crosshairs of a corporate scam that could blow up in their faces and leave them without sufficient resources to muddle through their retirement years.
The amount money that’s being funneled into buybacks is simply staggering. According to Dave Dayen at the Intercept:
“Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years.
Returning profits to shareholders through buybacks and dividends accounted for 95 percent of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under 10 cents of reinvestment, according to a study by J.W. Mason of the Roosevelt Institute.”
This explains why business investment (Capex) is at record lows.  It’s because the bulk of earnings is being recycled into buybacks, over $2.3 trillion dollars since 2009 to be precise. And it’s all connected to the Fed’s zero rate policy.  Zero rates have created an environment in which corporations no longer look for ways to grow their businesses, expand operations, hire more employees or improve productivity.  Instead, they look for the quick fix, that is, load up on debt, buy more shares, goose the stock price, and walk away with a bundle.
It’s all about incentives. The Fed has created incentives that encourage financial engineering and stock manipulation as opposed to growth and productivity. And keep in mind that repurchasing shares is a form of margin buying, the same type of margin buying that triggered Stock Market Crash of 1929.
According to Dayen: “Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations.”
We won’t go over the regulations now because, as you can see,  they obviously don’t work or these corporations wouldn’t be $2 trillion in the hole. But it is interesting to note that, at one time,  policymakers saw how destructive buybacks were and were prepared to prosecute offenders for manipulation. I doubt that any of our regulators today would even dream of bringing a case against these corporate behemoths, after all, they pretty much own the whole show lock, stock and barrel.
The real danger of this buyback phenom, is that the corporations have piled on so much debt that any sharp decline in the market could push one or two of these giants into default.  That, in turn, could quickly take down other counterparties touching off another financial crisis.    So, the question regulators should be asking themselves,  is how much red ink are these corporations hiding on their balance sheets and what are the risks to the public if they’re unable to repay their debts.  According to Henry Blodget at Business Insider:
“As corporations have borrowed more and more money, the level of corporate debt relative to the size of the economy has continued to increase. As the chart below shows, this ratio is now at its highest level ever — even higher than it was in 2007, before the last debt-fueled economic implosion. Importantly, corporate net debt — the amount of debt that corporations are carrying minus the cash they have on hand (green line below) — is also at its highest level ever as a percent of the economy.”
Let’s summarize:
1. Buybacks are driving the stock market higher.
2. Corporations purchase buybacks with credit.
3. “The level of corporate debt relative to the size of the economy… is now at its highest level ever.”
What can we deduce from these three observations?
First, that stock prices are a bubble and, second, that a significant stock market shakeout could leave some of the nation’s biggest corporations teetering towards insolvency.
Of course, none of this is going to stop corporations from engaging in the same risky behavior. Heck, no.   In fact,  CEOs are actually looking for ways to speed up the buyback process. I’m not kidding. Check clip from yesterday’s Wall Street Journal:
“Companies are increasingly turning to accelerated share repurchase agreements…to return cash to shareholders and secure an immediate boost to per-share profits…..But these turbo-charged stock buybacks can backfire, especially when a steep market plunge—such as the 5.3% drop in the markets over the past two trading days. That’s because a steep plunge in stock prices can force the companies to potentially pay more to buy the shares through an ASR than what they would pay if they purchased the shares over time on the open market.
“Things can go wrong,” said Robert Leonard, head of specialty equity transactions at Citigroup Inc….
(“Accelerated Buybacks Less Favorable During Market Swoons“, Wall Street Journal)
You’re darn right, they can go wrong, but who gives a rip? Not America’s insatiable CEOs, that’s for sure. They’re just looking for faster ways to cash in, that’s all that matters to them. These guys aren’t even thinking about the health of their companies, let alone their customers. ‘Making widgets for the masses, is for suckers’, right?  Corporate honchos have bigger fish to fry, like leveraging up their whole operation to its eyeballs, skimming the cream off the top, stuffing the moolah in an unmarked Caymans account, and slipping out the backdoor before the whole rickety structure comes crashing to earth. That’s modern-day capitalism in a nutshell. Slash and burn, Baby, just like big boys at the Pentagon.
One last thing: Just to show the extent to which these corporate mandarins will go to enrich themselves at their company’s expense, check out this blurb from this 2014 article at Bloomberg:
“International Business Machines Corp. (IBM) is reducing stock buybacks after an $8.2 billion first-quarter splurge… IBM said last week it won’t sustain its rate of share repurchases in the first quarter, when buybacks more than tripled from a year earlier to the most since 2007. The company plans to spend less than $5.8 billion total in the final nine months of this year….
 IBM’s sales have fallen from a year earlier for eight straight quarters…Declining sales and rising buybacks have squeezed IBM’s free cash flow…The repurchases, meanwhile, have taken a toll on IBM’s balance sheet. Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago….
 During the first quarter, IBM issued $4.5 billion of new bonds, clearly used to fund buybacks, Black said….
“The company tapped the bond market five different times last year, then you have a pretty sizable February issuance,” Black said in the interview. “I feel like there is investor fatigue on the name.” 
(“IBM End to Buyback Splurge Pressures CEO to Boost Revenue“, Bloomberg)
Okay, let’s translate this into English: IBM spent $8.2 billion in first-quarter on stock buybacks, even though “sales have dipped “from a year earlier for eight straight quarters”; even though “declining sales and rising buybacks have squeezed IBM’s free cash flow”; even though buybacks “have taken a toll on IBM’s balance sheet”; and even though “Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago.”
Unbelievable, right? And that’s not even the best part. The best part is the fact that “The company tapped the bond market five different times last year.”  In other words, they went to the bond market with ‘cup in hand’ and appealed to gullible investors to lend them more money to pay their lavish executive bonuses, to shower more dough on their worthless, do-nothing shareholders, and to keep this whole ridiculous farce going on a bit longer.
Talk about balls!
Tell me this, dear reader, when can we stop referring to this activity as “buybacks” and call it by its real name; looting?

The refugee crisis and the inhuman face of European capitalism

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The horrific treatment of refugees seeking shelter in central Europe in recent weeks via the Balkans and Italy shows the brutal and inhuman face of European capitalism. Desperate people, fearing for their lives and fleeing the war-ravaged regions of the Middle East and North Africa, confront a bitter ordeal.
Every day provides new outrages: corpses drifting in the Mediterranean; refugees without sufficient food and water crammed together in intolerable sanitary conditions; families with small children forced to cross hundreds of kilometers on foot; police deploying batons and tear gas against defenseless migrants; and everywhere borders and barriers, secured by barbed wire and security forces to repel the refugees with force.
Just yesterday, two boats with up to 500 migrants capsized off the coast of Libya, with hundreds feared dead. Among those on board the ships were migrants from Syria, Bangladesh and several African countries, according to media reports.
This follows the discovery of the bodies of up to 50 Syrian refugees in a truck on an Austrian highway. They are presumed to have suffocated en route. The parked vehicle was found by a highway worker who noticed liquid from decaying flesh dripping from the truck.
Just a few kilometers away, in tranquil Vienna, the heads of government and foreign ministers of Austria, Germany, Italy and six Western Balkan countries responded to the gruesome discovery by tightening measures against those fleeing to Europe. The external border of the European Union is to be reinforced and refugee routes through the Western Balkans better monitored. They assigned blame for the mass death on “criminal human traffickers”, whose business is flourishing due to the isolationist policies of the European powers.
The refugee crisis makes an absurdity of the myth that the European Union is a haven of peace, prosperity and international understanding. While governments work closely together to transform Europe into a fortress where thousands die at its borders, they engage in fierce competition over which state can most effectively deter refugees or send them to another country as quickly as possible. Meanwhile, concerned political commentators are warning that the erection of new borders and the dispute over refugee quotas could explode the EU.
Britain, which has accepted just 1 percent of the Syrian refugees arriving in Europe, is spending millions to barricade the entry to the Euro tunnel in Calais, where thousands of refugees live in misery and where 12 have already died this year. Immigrants who work without permission face draconian punishments.
Hungary, a transit country on the West Balkan route, has built a 3.5-meter-high fence at the EU’s external border with Serbia and is considering measures to punish illegal border crossing with years in prison.
Germany and Austria, the target countries for many refugees, are seeking to repel them with intolerable conditions in detention centers, accelerated deportation procedures and the slashing of social support. Germany, in particular, in collaboration with France, is exerting pressure on other EU countries to distribute refugees based on a quota system.
This proposal has met fierce resistance, especially in Eastern Europe. Polish President Andrzej Duda has categorically rejected any acceptance of additional refugees. He justifies his position by arguing, among other things, that his country expects a fresh wave of refugees from Ukraine, where the civil war between the Western-backed Poroshenko regime and pro-Russian rebels has intensified.
Czech Deputy Prime Minister Andrej Babis, a billionaire entrepreneur, has called for an intervention by NATO to “close the Schengen area to the outside”. He referred to the influx of refugees as the “greatest danger for Europe.”
The response of broad layers of the population to the plight of refugees stands in stark contrast to the reaction of the ruling elites. Especially in Germany, refugees have been met with a flood of aid that has surprised and shocked mainstream political circles.
In Hamburg, several tons of donations were delivered to an exhibition hall that has provided shelter for 1,100 refugees from Syria and Eritrea for the past two weeks. Thousands of local citizens donated clothes, toys, blankets or purchased urgently needed hygienic items. While the authorities harass refugees and justify their actions with the claim that they are “overtaxed”, hundreds of volunteers have built a supply chain that distributes donations throughout Germany and organizes language courses and health care.
The media only sporadically reports on such actions, preferring instead to fill their headlines with the xenophobic demonstrations of neo-Nazi groups, infiltrated by the secret services, and the nighttime deeds of cowardly arsonists. In response to these provocations, the wave of aid and support has only intensified.
The support extended to refugees is not just an expression of basic humanity. Many instinctively understand that the refugees are victims of a social system that threatens their own lives.
There has been no popular support for the imperialist wars in Iraq, Afghanistan, Libya and Syria, which have destroyed whole societies and are the root cause of the wave of refugees. And workers throughout Europe have for years experienced falling living standards while a small minority at the top of society has enriched itself enormously.
The refugee crisis is the most dramatic expression of the crisis of a social system that is no longer compatible with the most basic needs of the vast majority of humanity.
Capitalism, based on the private ownership of the means of production and the subordination of every aspect of economic life to the profit of the financial oligarchy, is incompatible with the needs of a global society comprising 7 billion people who are economically dependent on one another. The nation-state, in which capitalism is rooted, stands in irreconcilable opposition to the world economy based on an international division of labor.
The inhuman treatment of refugees, the erection of ever new, insurmountable barriers, the strengthening of the state apparatus and growing militarism are the response of the ruling elites to the insoluble contradictions of capitalism. The despicable treatment of refugees is the product of a profoundly inhuman social system.

Too warm, too few fish: Health warning for world’s oceans

Rampant overfishing combined with the impact of climate change is seriously endangering the wellbeing of the oceans, environmental analysts say.

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The world’s oceans – covering nearly two-thirds of the Earth’s surface, and on which much of human life depends – are under severe pressure, a report says.
Over-fishing has dramatically reduced fish stocks. The thousands of tonnes of rubbish dumped in the oceans wreak havoc on marine life, while climate change is warming and acidifying them, putting them under further stress.
These are the sobering conclusions of a wide-ranging study of the Earth’s ecosystems by theWorldwatch Institute, a US-based organisation widely rated as one of the world’s foremost environmental think-tanks.
“Our sense of the ocean’s power and omnipotence – combined with scientific ignorance – contributed to an assumption that nothing we did could ever possibly impact it”, says Katie Auth, a researcher at Worldwatch and one of the authors of the report.
“Over the years, scientists and environmental leaders have worked tirelessly to demonstrate and communicate the fallacy of such arrogance.”

Decadal doubling

More than 50% of commercial fish stocks are now fully exploited with another 20% classified as over-exploited, the report says, while the number of dead zones – areas of the ocean depleted of oxygen and incapable of supporting marine life – has doubled in each decade since the 1960s.
The oceans play a key role in absorbing vast amounts of greenhouse gases and slowing the warming of the atmosphere.
The report says: “…Evidence suggests that as the ocean becomes saturated with CO2, its rate of uptake will slow, a process that has already begun.”
Sea surface temperatures are rising, putting marine systems under pressure and causing fish and sea bird populations to migrate to colder areas.
Worldwatch says there must be big cutbacks in fossil fuel emissions: “If emissions continue at current levels, ocean acidity in surface waters could increase by almost 150% by 2100, creating a marine environment unlike anything that has existed in the past 20 million years.”
The Worldwatch report, State of the World 2015, examines a range of sustainability issues. It says the goal of continued economic growth – an economic doctrine which has prevailed only since the 1950s – is a threat to the sustainability of multiple ecosystems.
The world’s resources – whether its fossil fuels or water resources – cannot go on being plundered. Changes in climate – in particular the prevalence of drought in some of the world’s main food-producing regions – is threatening the planet’s ability to feed itself.
The report concludes: “There is no question that scholars and scientists who study the human economy, the earth and the interactions between them are drawing profoundly troubling conclusions…
It is time for homo sapiens sapiens to live up to its somewhat presumptuous Latin name, and grow up.”

Thursday, August 27, 2015

The Federal Reserve Board and the War for Poverty

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There has been much talk in recent years about inequality and the poor life chances of children who grow up in poverty. Even many conservative Republicans have been putting forward proposals that are ostensibly designed to give people the opportunity to raise themselves out of poverty and into the middle class and beyond.
While the usefulness of the various proposals for combatting poverty can be debated, the stated intention is increasing the income and opportunities for those at the bottom. This stands in sharp contrast to what the Federal Reserve Board seems prepared to do this fall. It plans to implement policies, specifically higher interest rates, which will reduce the income and opportunities for those at the bottom.
The story is that the Fed plans to raise interest rates, possibly beginning as early as next month, in order to slow the economy. The Fed immediately controls short-term interest rates, but raising these rates will likely also lead to increases in longer term interest rates like the interest rate people pay on car loans and mortgages. It will also mean that businesses have to pay more money on loans to finance investment and state and local government will pay higher interest rates on new bonds issued to pay for infrastructure.
The effect of raising these interests is to discourage people from buying cars and houses, companies from investing, and governments from improving and expanding infrastructure. This means less growth, fewer jobs, and higher unemployment.
The impact of this slowdown is disproportionately felt by those at the bottom. This can be seen clearly in the racial breakdown of unemployment. The unemployment rate for African Americans is consistently twice the unemployment rate for whites. In the data for July the unemployment rate for whites was 4.6 percent, for African Americans it was 9.1 percent. The unemployment rate for African American teens tends to be roughly six times the level for whites. In July it was 28.7 percent.
There is a similar story if we look at unemployment by education level. The July unemployment rate for college grads was 2.6 percent. It was 5.5 percent for those with just a high school degree. This means that if the Fed raises interest rates it is disproportionately workers at the bottom end of the income distribution who will be preventing from having jobs.
 And this is not just an issue of jobs for the unemployed; the tightness of the labor market also affects the wages of the people who have jobs. In a tight labor market workers can demand higher wages from their bosses or go to another employer who will pay them more money.
This is exactly the story we saw in the late 1990s boom when even workers at the bottom of the wage ladder saw substantial wage gains. There were accounts of major chains like McDonald's offering bonuses to employees who brought in new workers. In order to keep workers, even many low-wage employers began to offer benefits like flexible work hours or on-site child care.
In principle we could get back to this sort of situation today, if the Fed allows the economy to continue to grow and for the unemployment rate to fall. As a practical matter, we likely have a long way to go before we see the tight labor markets of the late 1990s. While the unemployment rate is not much above its pre-recession level, this is largely because many workers have dropped out of the labor force.
While some of the drop off in labor force participation is due to the aging of the baby boomers, the employment rate of prime age workers (ages 25-54) is still down by 3.0 percentage points from pre-recession levels. This implies a gap of roughly 3 million jobs. (The drop is 4.0 percentage points if the comparison is with the 2000 peak.)
These numbers indicate that we have a long way to go before the labor market is strong enough so that workers at the middle and bottom of the wage distribution have enough bargaining power to share in the gains of growth. However if the Fed raises interest rates too rapidly, the labor market may never reach that point.
Of course the Fed is not acting out of maliciousness. Its concern is that if it allows the current rate of job creation to continue we will see inflation. Many of us see the worry over inflation as very wrong-headed, given the lack of inflationary pressures anywhere in the economy.
However it is important that the public have a clear idea of what is at stake in the Fed’s decisions on interest rates. While many politicians and policy experts are grappling with ways to try to lower the poverty rate, by raising interest rates, the Fed will be directly preventing people in poverty from getting jobs and seeing pay increases. We can argue over the best policies to get people out of poverty, but a good place to start would be to end policies that keep them in poverty.

Five Things You Need to Know About the US "Reconstruction" Effort in Afghanistan

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Let's start with what we know: Since 2002, the US Congress has appropriated just over $109 billion for Afghanistan's development, making this the largest foreign reconstruction program the government has ever undertaken (and surpassing the amount spent on the Marshall Plan to rebuild Europe's economies following World War II). Much of the money has already been spent, with just $11.9 billion remaining in the kitty as of July 2015.
This much is clear. The rest - where the money has gone (and to whom), how it has been spent (and why), what there is to show for it (and where) - is guess work.
Last month a small government agency comprising 200 employees, also known as the office of the Special Inspector General for Afghanistan Reconstruction, or SIGAR, submitted its quarterly report to Congress. Its findings do not inspire confidence; in fact, it reveals that billions of dollars earmarked for the development of this ravaged and bleeding country have all but disappeared into a black hole.
Under any circumstances, mismanagement of funds on this scale is a problem. In Afghanistan, a country worn very nearly down to the bone by over three decades of uninterrupted warfare, it is a tragedy whose cost will eventually be counted in human lives.
The first six months of 2015 have already witnessed close to 5,000 civilian casualties, including a death toll of 1,500 people classified as "noncombatants."
Half a year after NATO officially ended its military operations, much of the countryside lies in tatters, and the so-called armed opposition, which encompasses the Taliban and a plethora of armed militias including groups operating in the eastern region who have declared their allegiance to ISIS, is alive and kicking.
A shaky Afghan state helmed by president Ashraf Ghani is floundering: The most recent Rule of Law Index - a global survey of over 100,000 households measuring public perceptions of corruption, the courts, and the criminal justice system - ranks Afghanistan second from the bottom in a list of 102 countries.

"The number of police determines how many rifles we allocate, how much money we set aside to purchase boots, fuel, tanks. How can we determine what worked if we don't have a baseline? This is accounting 101." 

These are the very problems that US financial assistance was supposed to alleviate. When the troops came home it was with the promise that huge monetary injections would help to immunize the country against terrorism and disillusionment with the central government. Investments in equipment and training would beef up the armed forces, creating a body capable of keeping the Taliban at bay. It was to be a new age.
Instead, what is playing out is a warped echo of the early years of the US invasion and occupation, only this time it is not war and weapons, but aid and charity, that is fueling a bloody conflict that appears to have no end.
1. The Afghan National Army and Police: Paying Phantom Personnel?
After 13 years and billions of dollars in salary assistance to the Afghan National Army, an April 2015 SIGAR report found "minimal oversight" of personnel and payroll data, information that forms the backbone of assessments by the Ministry of Defense, the Combined Security Transition Command-Afghanistan (CSTC-A) and NATO, among others.
In its audit report covering the approximately $2.3 billion that have been allocated since 2009 to salaries and incentive payments for the entire Afghan National Army, including the Air Force, SIGAR discovered that there were no requirements stipulating that supervisory officials observe attendance data collection, while an information management program that CSTC-A has been implementing since 2010 is still unable to distinguish between active and inactive personnel.
Officers neglect to sign in and out daily, making it difficult if not impossible to ascertain how many paid employees are working at any given time and leaving plenty of room for service men and women to receive salaries for days not worked.
As of January, existing data suggested that nearly 170,000 personnel were assigned to the Afghan National Army, accounting for 87 percent of the 195,000 available posts. But in an inquiry letter to US Defense Secretary Ashton Carter, Special Inspector General John F. Sopko called attention to the gaps in oversight that make confirmation of those numbers a daunting task.  
With 70 percent of civilian casualties in 2015 attributed to the actions of the "armed opposition," according to an August 2015 report by the United Nations Assistance Mission in Afghanistan, the Afghan government can ill afford lax management of its armed forces into which so many millions of dollars have been invested.
The same holds true for the Afghan National Police (ANP), the recipient of $15 billion of US aid since 2002 aimed at training, equipping and sustaining counter-insurgency efforts. Here again, inaccurate data regarding payroll and personnel has put close to $300 million at risk of being wasted.
"If we're paying the salary of somebody that doesn't exist we don't know where that money goes," Sopko told Truthout. "A lot of our assistance is based upon numbers: The number of police determines how many rifles we allocate, how much money we set aside to purchase boots, fuel, tanks. How can we determine what worked if we don't have a baseline? This is accounting 101."
2. Health Care: Clinics in the Mediterranean Sea
By March of 2015, the United States Agency for International Development (USAID) had sunk $210 million into a program known as Partnership Contracts for Health (PCH), made possible by budget assistance to the Afghan Ministry of Public Health to provide basic health services across the country.
On paper, this money has been well spent, much of it going into the construction of 641 medical facilities throughout the country. The program has been touted as a major success and portrayed as partly responsible for increasing the proportion of Afghans living within an hour's walking distance of a health-care facility from 9 percent in 2002 to 57 percent in 2013.
Last year, however, when SIGAR received and analyzed geospatial data for 551 of these clinics, it found that USAID was likely missing accurate location information for about 510 facilities, or 80 percent of the total.
In a June 25 inquiry letter to USAID's acting administrator, Alfonso E. Lenhardt, SIGAR noted the following: 13 coordinates were not located within Afghanistan at all, 6 were located in Pakistan, 6 in Tajikistan and 1 in the Mediterranean Sea. Coordinates for 30 buildings were located in different provinces than those reported by USAID, while in 13 separate cases, the aid agency reported identical coordinates for different facilities.
Further analysis revealed that 189 coordinates did not show a physical structure within 400 feet of the reported location, and 81 coordinates had no physical structure within half a mile.
The absence of reliable data is indicative of much more than just mismanagement of funds.
"We're talking about a conflict zone," Sopko told Truthout, explaining that to minimize the risks they face, aid workers who oversee clinics in Helmland Province prefer to "go in, do a quick survey and get out."
"Now if your coordinates are bad - some are off by 40 km - you can't do that," Sopko added. "This is risky business; it's risking my people, USAID people, the Afghan people. It's reckless."
3. The Rule of Law: A Billion Dollars Down the Drain?
For over a decade, since 2003, no less than $1 billion have been funneled into efforts to buoy up the rule of law in Afghanistan, long considered one of the most corrupt nations in the world.
Undertaken jointly by the Departments of State, Defense and Justice, together with USAID, the program was designed to reform or overhaul aspects of the prison system, introduce legal education initiatives and implement anti-corruption efforts, all with the aim of building a functional, centralized Afghan state.
Twelve years later, the agencies lack a comprehensive strategy on how to guide their work; the Department of Defense cannot say for certain exactly how much it has spent on the initiative; and there is no way of measuring tangible successes or outcomes of pilot projects.
To top it off, the most recent National Corruption Survey undertaken by Integrity Watch Afghanistan found that the vast majority of citizens believe the judiciary to be the most corrupt institution in the country.
Integrity Watch Afghanistan's executive director, Sayed Ikram Afzali, told Truthout that the US's obsession with "winning hearts and minds" has fostered a quick-fix attitude toward aid delivery, with rapid implementation of projects taking precedence over the slower process of building robust institutions.
Far from flocking to the centralized justice system, more and more people in this largely rural country are turning to informal structures such as jirgas (tribal councils, or councils of elders), shuras (local consultative councils) and increasingly to the armed opposition.
In 2012, Integrity Watch Afghanistan put out a report called "Shadow Justice: How the Taliban Run Their Judiciary," examining features of the Taliban's legal system from mobile courts to speedy trials. Riddled as these legal bodies are with rights abuses, paltry record keeping and little opportunity for appeal, they respond to local needs.

"We are absolutely certain that money has been diverted from our reconstruction programs into the Taliban and other terrorist organizations."

It is no coincidence that when the Talibs first rose to power in the 1980s they did so on a relentless platform of law and order, filling a chaotic void with strict moral and religious codes. While regimes have risen and toppled around them, this aspect of the Taliban's rule has remained basically unchanged. Afzali estimates that in 2007, only 20 percent of the population relied on the central judiciary in any way, compared to 80 percent who put their trust in informal judicature (including Taliban courts), a ratio he believes still holds in 2015.
He told Truthout the US missed an opportunity to regain public trust in state-run courts by failing to engage with traditional models like shuras and jirgas, which operate according to age-old customs, allowing for fluidity depending on the context and location of disputes.
And by pouring money into top-down solutions and international experts with a quick turnover, the US also neglected grassroots initiatives such as Integrity Watch Afghanistan's community-based monitoring of trials that have a proven track record of success.
"When we started our [monitoring] program in Kapisa Province, only 15 percent of trials were conducted openly, as per constitutional requirements," Afzali said. "Within three years, we have increased this to 70 percent."
In addition to acting as a watchdog for the courts, Integrity Watch Afghanistan also monitors schools, mines and construction projects, stepping into the cavity created by the US's complete lack of oversight or accountability by enlisting community members on a voluntary basis to take ownership over projects carried out in their name.
"We did receive some support from USAID for our [infrastructure] monitoring work," Afzali said. "But that was only for a brief time; after a year, the funding stopped."
Instead, USAID has directed its funds toward bigger and bulkier rule of law efforts that were not only unsustainable but that, in one instance, the Afghan Supreme Court itself claimed to have no interest in.
As a result of reckless and at times meaningless bankrolling of unwanted initiatives, "too much of that billion dollars have been wasted," Sopko said.
4. Education: Empty Classrooms
On August 6, US Sen. Bob Casey (D-Pennsylvania) submitted a letter to Larry Sampler, USAID's assistant to the administrator for Afghanistan and Pakistan affairs, requesting additional information on "monitoring and evaluation of current USAID-funded education program."
Citing a major investigation undertaken by Buzzfeed News this past July, Casey expressed concern that education figures widely cited by US officials going all the way up to Hillary Clinton were wildly exaggerated and in some cases were blatant falsehoods.
Buzzfeed's expose came on the heels of a June 2015 SIGAR inquiry into USAID's $769 million investment in Afghanistan's educator sector, including nearly $600 million in off-budget assistance "and $146 million in so-called 'preferenced' funding to the World Bank's Afghanistan Reconstruction Trust Fund (ARTF) to support education programs."
Sopko said local media reports that quoted Afghan ministers alleging fraud in the education sector prompted his inquiry, which also casts doubt on widely touted claims that development assistance has helped boost the number of enrolled students from 900,000 in 2002 to over 8 million in 2013.
Unable to independently verify these statistics, USAID continues to stand by the data - sourced from the Afghan Ministry of Education's Education Management Information System (EMIS) - in spite of strong evidence that officials in the Hamid Karzai Administration falsified those records in order to obtain more funding.
Indeed, as Sopko pointed out in a May 2015 speech, a ranking USAID official recently put the number of Afghan children in school at 4 million - less than half the figure on which current funding commitments is based. SIGAR also noted that the education monitoring system counts absent children as enrolled for up to three years, before dropping them from the database, making endorsement of numbers a guessing game at best.
A long string of US officials have stressed that investment in education is one of the surest ways to frustrate Taliban recruitment in the largely illiterate hinterland of Afghanistan: UNESCO data suggests that the country has one of the lowest literacy rates in the world, with just 31 percent of its population over the age of 15 able to read.
But if the largest US aid agency continues to parrot false figures and allow money to drain away from classrooms, fundamental improvements to the country's educational infrastructure seem unlikely.
5. Corruption, Warlords and Militarization
A biannual survey carried out by Integrity Watch Afghanistan in 2014 identified corruption as the second most pressing problem for the country, where bribery has doubled in the past four years to hit $2 billion.
It is into this insatiable mouth that the US is tipping its coffers, hoping repeating past mistakes will somehow bring about different results, this time around.
Asked where the missing billions of US development aid could be hiding, Sopko stated plainly: "We are absolutely certain that money has been diverted from our reconstruction programs into the Taliban and other terrorist organizations."
Jarring as it is to hear a US official admit this fact so freely, it comes as no surprise to anyone who's read the fine print of US military policy in Afghanistan over the last 13 years.
In his recent book No Good Men Among the Living, journalist Anand Gopal documents in meticulous detail the long list of occupation-era military blunders and ill-informed allegiances that have shaped Afghanistan's prevailing political reality, from the rise of Washington-allied warlords like Kandahar's Gul Agha Sherzai (who played a major role in turning the derelict Kandahar Airfield into a detention center-cum-torture chamber), to the January 2002 massacre by US special forces of 21 pro-American Afghan leaders in Uruzgan Province in a single night.
In his tenacious investigation of the situation on the ground post April 2002, when al-Qaeda leadership had fled to Pakistan and the Taliban had ceased to exist in key areas like Kandahar and elsewhere, Gopal offers an analysis that bears a striking resemblance to the current reconstruction effort, namely that the Americans were fighting a war against a "phantom enemy, happily fulfilling their mandate from Washington."

"The Afghan state is designed to meet the national security interests of the United States - not to be responsive to the needs of Afghan citizens." 

Not only were US Special Forces receiving faulty "intel," allowing warlords access to their armories, carrying out bogus raids and attacking compounds belonging to their own allies, their commanders were facing no consequences for these military disasters, a pattern that is now repeating itself in the ranks of the DoD, DoJ, and USAID who are handing out million- and billion-dollar projects without any notion of whose fist is closing around the contracts, or why the programs are being carried out in the first place.
"I've had a dozen or more USAID people out in Afghanistan come up to me and say, 'You're right on, John. That's how I got rewarded: for how much money I put on contract, not how much it actually worked'," Sopko told Truthout.
If we follow this analysis to its conclusion, then we arrive at the place where corruption is not only to be expected, it is the other side of the coin of the US's invasion of a sovereign country and will likely continue for as long as Washington has a vested interest in directing Afghanistan's economic and geopolitical future.
As Gopal told Truthout, "People who live in Afghanistan will tell you that the corruption we see today as a result of the US pouring so much money into the country is far greater than anything that's ever been seen before, be it under the communist regime, the Taliban or anyone else.
"The fact is that the very presence of the US and the war they're fighting has done more to damage the rule of law in Afghanistan than anything else."
He pointed to the "justice" programs being rolled out in Kandahar City, the same place where Washington's support for Kandahar Police Chief Abdul Raziq makes a mockery of the notion of good governance.
"Raziq undermines rule of law by his very existence, by the torture, extrajudicial killings and assassinations that he carries out," Gopal added. "It's things like this that make the idea of the West trying to build the rule of law in Afghanistan a farce."
It is a hand-in-glove crisis, an impossible contradiction: The aid regime is the result of years of militarization; but stopping that aid means Afghanistan - a struggling state currently capable of raising just $2 [billion] out of the $10 billion it needs annually to manage its affairs - could quickly slide back into the abyss of the 1992-96 civil war years, a period Gopal describes in his book as a time when "any date picked out of the calendar is the anniversary of some grisly toll."
He believes the crux of the crisis lies in the fact that, "The Afghan state is designed to meet the national security interests of the United States - not to be responsive to the needs of Afghan citizens."
As long as this remains the case, the reconstruction effort will continue to be an exercise in futility: The US is watering a patch of militant soil upon which nothing but armed groups can grow. And as their ranks swell, these armed groups will count the US as their most loyal benefactor.