You by-God don't fuck with Ted Stevens!

A federal judge this morning tossed out the conviction of former senator Ted Stevens and assigned an outside lawyer to investigate allegations of misconduct by the prosecutors who tried him on public corruption charges.

In throwing out the October conviction, U.S. District Judge Emmet G. Sullivan called accusations that prosecutors mishandled evidence and witnesses "shocking and disturbing." In his 25 years on the bench, the judge said he had "never seen anything approaching the mishandling and misconduct in this case." He then urged Attorney General Eric H. Holder to better train prosecutors about the requirements for turning over evidence to defense lawyers that may help their case.

Stevens, 85, who narrowly lost reelection eight days after being found guilty of seven counts of lying on financial disclosure forms, said the actions of prosecutors had "nearly destroyed" his faith in the criminal justice system. But he thanked the judge and a new team of Justice Department lawyers for pressing to uncover the truth.

One of those Justice Department lawyers, Paul O'Brien, told Sullivan that "we deeply, deeply regret that this occurred."

Last week, the Justice Department asked Sullivan to throw out the conviction after officials discovered prosecutors' notes of an April 2008 interview that contradicted testimony of a key witness. It was the latest of several revelations of potential misconduct by prosecutors with the Justice Department's Public Integrity Unit in connection with this trial. Sullivan chastised them several times during the trial for how they handled witnesses and evidence.

At least twice, the judge instructed the jury to ignore evidence introduced by the prosecution. After the trial, the problems didn't end. A witness complained about being lied to by federal authorities about an immunity deal. And an FBI agent filed a report that accused prosecutors and fellow agents of misconduct.

In February, Sullivan held three prosecutors -- William Welch II, Brenda Morris and Patricia Stemler -- in contempt for failing to comply with a court order. Welch is the head of the public corruption unit, and Morris was the lead prosecutor. Six members of the prosecution team eventually withdrew from the case.

Much of the hearing today focused on what transpired during an April 15, 2008, interview with the key witness, Bill Allen. During that interview, according to notes taken by two of the prosecutors, Allen said he did not recall talking to a friend of Stevens's about sending the senator a bill for work on his home, according to Sullivan.

Under oath at trial, however, Allen testified that he was told by the friend to ignore a note Stevens sent seeking a bill for the remodeling work.

"Bill, don't worry about getting a bill" for Stevens, Allen said the friend told him. "Ted is just covering his [expletive]."

It was an explosive moment at the trial and buttressed prosecutors' arguments that Stevens knew he was receiving gifts and was trying to create a paper trial as a cover story if anyone ever asked about them. But defense attorneys have argued that Allen lied on the stand. They have noted in court papers that Allen did not mention that conversation during at least 20 interviews with agents and prosecutors.

Prosecutors who took the notes and participated in the interview have not been identified. Stevens's attorney, Brendan Sullivan, said that Brenda Morris, the lead prosecutor on the case, did not take part in the interview, which was conducted in Alaska. Two prosecutors participated from Washington by telephone, Brendan Sullivan said.

During the two-hour hearing, the judge said he couldn't trust the Justice Department to conduct an internal probe into the actions of prosecutors. So, the judge said, he was taking the rare step of starting criminal contempt proceedings and appointed an outside attorney, Henry F. Schuelke III, to investigate the misconduct allegations. After gathering evidence, Schuelke will submit a report to the judge with a recommendation on whether to hold the prosecutors in contempt for violating court rules.

The judge can then hold a trial to examine the allegations and decide what sanctions to impose. He can fine them or send them to jail. Those being investigated are Welch, Morris, Joseph Bottini, Nicholas Marsh, Edward Sullivan and James Goeke. Morris has declined to comment in the past. Other prosecutors could not be reached or did not return phone calls seeking comment.

After a month-long trial, Stevens was convicted of not reporting on Senate disclosure forms that he accepted about $250,000 in gifts and free renovations to his home in Girdwood, Alaska. Most of the gifts and free remodeling work were supplied by Bill Allen, chief executive of Veco, a now-defunct oil services company. Stevens testified in his own defense, but jurors said he came off as evasive, arrogant and combative. His testimony also did not jibe with the evidence, they have said.

His legal team said the result would have been different if they knew about the results of prosecutors' interview with Allen. "It is clear from the evidence that the government engaged in intentional misconduct," Brendan Sullivan told the judge.

Goldman Sachs ready to hand out £7bn salary and bonus package... after its £6bn bail-out

By Simon Duke
Last updated at 8:55 AM on 30th October 2008

U.S. investment bank Goldman Sachs HQ which has set aside £7bn for bonuses and salaries this year

Goldman Sachs is on course to pay its top City bankers multimillion-pound bonuses - despite asking the U.S. government for an emergency bail-out.

The struggling Wall Street bank has set aside £7billion for salaries and 2008 year-end bonuses, it emerged yesterday.

Each of the firm's 443 partners is on course to pocket an average Christmas bonus of more than £3million.

The size of the pay pool comfortably dwarfs the £6.1billion lifeline which the U.S. government is throwing to Goldman as part of its £430billion bail-out.

As Washington pours money into the bank, the cash will immediately be channelled to Goldman's already well-heeled employees.

News of the firm's largesse will revive the anger over the 'rewards for failure' culture endemic in the world of high finance.

The same bankers who have brought the global economy to its knees seem to pocketing the same kind of rewards they got during the boom years.

Gordon Brown has vowed to crack down on the culture of greed in the City as part of his £500billion bail-out of the UK banking industry.

But that won't affect the estimated 100 London partners working at Goldman Sachs's London headquarters.

The firm - known as Golden Sacks for the bumper bonuses it pay its top bankers - is expected to cut the payouts by a third this year. However, profits are

falling much faster. Earnings have plunged 47 per cent so far this year amid the worst financial crisis since the Great Depression.

This has wiped more than 50 per cent off the company's market value.

More...

• Two million savers face poorer retirements after Standard Life slashes customer payouts
• Cuts and tax rises to follow recession ... but only after election, hints Darling
• FTSE closes 8.1% up in third best day of trading ever
• Volkswagen shares halve after Porsche's '£12.6bn sting' costs bungling hedge funds billions
• World's biggest airline created after Delta buys Northwest for £1.6bn

The news comes after it was revealed that even bankers working for collapsed Wall Street giant, Lehman Brothers, could receive huge payouts.

Its 10,000 U.S. staff are expected to share a £1.5billion bonus pool. The payouts were agreed as part of the rescue takeover of Lehman's American arm by Barclays last month.

The blockbuster handouts caused consternation among London employees of the firm, many of whom have now lost their jobs.

Even workers at the nationalised Northern Rock will scoop bonuses worth up to £50million over the next three years.

The extraordinary handouts include more than £400,000 for Rock's boss, Gary Hoffman, who is likely to become Britain's best-paid public sector worker.

The majority of Northern Rock's 4,000 workers will receive four separate bonus payments - the first of

which will be made next March. Staff will get an extra 10 per cent on top of their basic salary.

Lloyds TSB also intends to pay its employees bonuses despite taking a £5.5 billion emergency cash injection from the taxpayer.

News of Goldman's bonus plan came as the firm promoted 92 of its bankers to partner level. A quarter are based in Fleet Street, London.

Partnership is the holy grail of the investment banking world as the exclusive club shares around a fifth of the firm's total bonus pool.

New York Attorney General Andrew Cuomo last night warned that Wall Street firms taking government-money risk breaking the law if they hand the cash straight back to employees.

Cash-strapped workers are being penalised by pay rises which are far below the soaring cost of living, research reveals today.

Despite inflation soaring to a 16-year-high of 5.2 per cent, the average worker got a pay rise of just 3.8 per cent in September.

The research, from the pay specialists Incomes Data Services, highlights the financial problems facing millions of workers.

Most of their household bills, particularly food and fuel, are rocketing by up to 35 per cent. However, their meagre pay rise does not begin to cover the extra cost.

The majority of the 50 pay settlements investigated by IDS were in the private sector covering around 1.1million employees.

They range from just 2 per cent for workers at the BBC to 5.3 per cent for workers at a firm of dockyard workers.

Incomes Data Services warned pay rises are likely to fall even further over the coming year as inflation is expected to drop sharply.

Economists predict inflation will fall below the Government's 2 per cent target next year.

Bridge to Prison - Stevens Convicted all counts

WASHINGTON (CNN) -- A jury found U.S. Sen. Ted Stevens of Alaska guilty Monday of all seven counts in his federal corruption trial.

The jury found Stevens guilty of "knowingly and willfully" scheming to conceal on Senate disclosure forms more than $250,000 in home renovations and other gifts from an Alaska-based oil industry contractor.

Stevens faces a maximum sentence of up to to 35 years in prison -- five years for each of the seven counts.

Legal experts note the judge has the discretion to give Stevens as little as no jail time and probation when he is sentenced.

He sat expressionless as the seven verdicts were read out at the end of his trial, less than a day after the jury began deliberations from scratch because of a change in jurors.

After the second guilty verdict was read, Stevens' lead defense attorney, Brendan Sullivan, patted his back, leaving his hand there.

As Stevens left the defense area, he and his wife exchanged a kiss on the cheek. Stevens said: "It's not over yet." Stevens' defense team said they will move for a new trial.

Stevens left the courthouse without comment.

"This is a sad day for Alaska and a sad day for Senator Stevens and his family," Alaska Gov. and vice presidential candidate Sarah Palin said Monday.

"The verdict shines a light on the corrupting influence of the big oil service company up there in Alaska that was allowed to control too much of our state. And that control was part of the culture of corruption that I was elected to fight, and that fight must always move forward regardless of party affiliation or seniority or even past service," she said.

Stevens accepted "hundreds of thousands of dollars of freebies" from a major oil services company in his state, acting assistant Attorney General Matthew Friedrich said after the verdict.

"This company was not a charity," he said, saying it solicited Stevens for help in Washington at the same time it was transforming Stevens' single-story A-frame Alaska house into a two-story structure with a deck, new gas grill and other accouterments.

The 84-year-old senator is locked in a tight race for re-election against his Democratic challenger, Mark Begich. Stevens hopes to retain the seat he has held since 1968.

A poll by Ivan Moore Research conducted October 17-19 found Begich slightly leading the race 46-45, within the poll's margin of error of plus-or-minus 4.4 percentage points.

The longest-serving Republican senator in history, Stevens becomes the first senator to be convicted of a felony since 1981.

Judge Emmet Sullivan has scheduled a hearing on any pending motions for February 25.

The charges against Stevens related to renovations on his family home in Girdwood, Alaska. The remodeling was done by his longtime friend, Bill Allen, and Allen's oil industry services company, VECO Corp.

The prosecution accused Stevens of knowingly failing to declare hundreds of thousands of dollars worth of gifts and work on his house in Alaska between 1999 and 2006. Members of the Senate are required to fill out forms each year stating what gifts they have received and from whom.

Stevens' defense said Allen, the senator's friend, had quashed bills without the senator's knowledge. Allen testified that he had done so because he "liked Ted."

The defense said Stevens had paid the bills he received, thinking they covered the full cost of renovating the house in Girdwood, Alaska.

Allen, the government's star witness, earlier pleaded guilty to trying to bribe a number of Alaska state lawmakers, not including Stevens. He is awaiting sentencing.

The jury began deliberations at noon Wednesday, but started anew Monday morning when an alternate replaced a juror who left town abruptly last week because of the death of her father.

The verdict comes after jurors spotted a discrepancy Monday between the government's indictment and a key piece of evidence. The judge declined to throw out the related charge against Stevens

The indictment accuses Stevens of checking "No" in response to a question about whether Stevens or his family had "any reportable gift ... more than $260" in 2001. But the form introduced as evidence in court shows he checked "Yes."

The jury sent out a note on the issue, prompting a debate between defense and prosecution attorneys about what instructions Sullivan should send the jury.

Prosecutors said the error was simply a "typo" on the indictment, and that other charges and evidence covered Steven's alleged failure to disclose the home renovations at issue in the case.

Stevens' defense said the judge should toss out the count that no longer matched the evidence.

The juror who left last week was Juror No. 4, a paralegal in her 40s. She told a U.S. marshal that she had to leave the state for a family emergency after the jury was dismissed Thursday.

Judge Sullivan dismissed the jury Friday morning after the woman left for California, hoping to resume with her on the panel as soon as possible.

Since then, court officials made several unsuccessful attempts to reach the woman. Defense attorneys for Stevens, who was in court Sunday, had asked the judge to put off deliberations another day as they awaited the return of the juror, arguing against inserting an alternate in the middle of the process.

Last week, the judge dealt with another juror issue after the panel sent him a note Thursday accusing juror No. 9 of "violent outbursts" and other misconduct. They asked that she be dismissed, but Sullivan gave what he called a "pep talk" to the 12 and told them to resume their deliberations.

Corruption, Whispers & Receivership

by Jim Willie, CB. Editor, Hat Trick Letter | September 24, 2008

Print

The United States has transformed itself, the most radical degraded aspects having occurred in the last eight years. Many might object or cringe at repeated mention of the Fascist Business Model implemented by the Clinton Administration, and carried to extreme by the Bush II Administration. It is a harsh departure from Beacon of Freedom. Too bad, fact of life! This merger of state and big business in the midst of a climax, the biggest display of exported financial toxin in modern history, and the disintegration of the financial structure for the nation owning the world reserve currency. The Fascist Business Model has criminal fraud & corruption as its chief characteristic, alienation & resentment as its chief foreign effect, and systemic failure & collapse as its chief outcome. Broad war often follows. How anybody could think the sharing of bank and oil executives with federal government leadership as a move toward progress on the evolution chart, that is moronic. Surely, it is about political power and corruption. The military budget is sacred, and private contractor deals are made without bids. Now five to six energy giants will hog all Iraqi oil service contracts. The terrorism topic is untouchable for dispute. A Coup d’Etat is in progress as the Wall Street conmen and fraud kings have taken implicit control of the USGovt. This will be recognized in time, even while resistance is evident. To me the ongoing drama smacks of a comedy of corruption. US citizens are in shock & awe, while foreigners are aghast in disgust.

Hidden in the bowels of the Lehman Brothers failure cleanup process was a convenient provision. The JPMorgan firm was given $138 billion to settle ‘private accounts’ in what seems like a clear case of corruption, a handout of counterfeit money, enabling JPMorgan to reload for costly credit default swap losses or for costly gold suppression games, or both. Goldman Sachs and Merrill Lynch have succeeded in converting to private banks, just in time to benefit from the trough devised to benefit banks. Is there a secondary benefit of averting legal liability for bond fraud, since now a new financial firm? These are two more egregious examples of the deep collusion in the Fascist Business Model, a theme that has reached climax proportions. The Securities & Exchange Commission, the Commodities Futures Trading Commission, the Debt Ratings Agencies, the military contractors, and professional lobbyist groups work toward rounding out the collusion pentagrams. See a list of dumbfounding factors, angles, stories, and developments at the end of this article, in outline form. The bust continues.

The final battle is underway, for USGovt bailout of practically the entire US banking and mortgage system. Its ancillary businesses like insurance are next. The Credit Default Swap segment represents nitroglycerine soon to be brought under the crippled USGovt aegis. The mega bailout plan puts Wall Street firms first in line to benefit. The plan in my view is the culmination of arrogant criminality, as its architects and promoters are the primary agents for the banking system collapse itself. Only one or two senators in Congress had the stones to confront Treasury Secy Paulson and USFed Chairman Bernanke, calling them on their extreme gall to dictate to Congress on bailout responsibility, when failures by the collection of banksters caused the problems even as their cohorts stand in line for deep financial assistance. The claims by Paulson that taxpayer protection is first and foremost is another total lie. His first priority is to funnel as much public money into Wall Street balance sheets before the grand game is shut down. Another phony call, deep lie, pure nonsense!

The desire for punishment, prosecution, and avoidance for benefits has come like a wave. We will see if its legislative delays result in months of grandstanding debate as Rome burns. In haste, the nationalization of the banking and mortgage industry might achieve legislative passage in the same manner as the Patriot Act, without reading its provisions. Pressure builds for passage without examination, with questions and objections regarded as unpatriotic. The next step is for big bold lies of assurances to be given, enough for satisfying sleepy Congressional senators and representatives, few of whom are aware of the deep fraud laced into the banking and asset base being rescued. The plan is being sold as a pre-emptive maneuver to ward off a disaster, providing necessary liquidity ahead of the likely unfolding events instead of providing funds after a bank failure. Fraud’s best friend is amplified liquidity doled out during times of emergency expedience.

One should have noticed on Tuesday that Paulson totally overshadowed a confused bewildered Bernanke, as the seasoned Wall Street conman even answered questions directed at the university rookie. Gentle Ben is totally out of his league when dealing in financial crime syndicate circles. No college courses on syndicates! Bernanke himself is shocked at how wide the ‘Too Big To Fail’ umbrella has become, this from a man who once claimed the subprime mortgage crisis would be contained and not result in any contagion. My retort was to expect total systemic bond contagion, a correct forecast. Bernanke actually is telling Congress today that he expects no inflationary impact from the banking and mortgage bailout program, a truly gigantic package with monstrous inflation implications! The estimated $700 billion bailout cost is laughable, when it will ultimately cost between $1500 and $2000 billion. The entire mega bailout package (let’s be clear) covers the entire US banking industry.

Congressman Ron Paul made a great quote after lecturing the inept misguided and naïve USFed Chairman Bernanke on the high risks of price fixing. The bailout constitutes the quintessential price fix. Ron Paul said, “Most illiquid bond assets are illiquid because they are not worth anything.” The Wall Street fraud kings want the USGovt to pay inflated values for their illiquid worthless assets that clog and obstruct the banking industry. Bernanke actually regards the payment for bank bailouts can come from other funds. He implies the Exchange Stabilization Fund can use its funds. If Plunge Protection Team funds are co-mingled, these funds might be closely connected to USGovt security agency fraud associated with gutting of Fannie Mae. That is a perverse irony! By the way, where is Greenspan, whose fingerprints are on every object being dusted by intrepid examiners. He handed over the reins to a bagholder named Ben, just another dumb university economics professor. To succeed in academic economics circles, one must embrace heresy and weave logic like pretzels.

Paulson is attempting to shove a package down Congressional throats. Bernanke looks in body language like a boy caught in a disaster as his entire neighborhood burned down despite his best (but late) efforts to call in a district full of fire trucks. He actually looks like a man who has slept little in two weeks. To be sure, the Congress has been slow to react to the mortgage and banking crisis, choosing to delay until the new presidential term in office. Congress has become a den of irrelevant men and women owing more to lobbyists than to the people. Their chief function is to apply rubber stamps to directives crafted by others, usually from an array of bankers themselves. Why even GeorgeW himself is aghast!

Events are moving toward climax. The next sequence of events can no longer be regarded as coming from traditional ‘Inside the Box’ solutions. We are way beyond that arena, now firmly in the Twilight Zone. My past forecasts have been verified for bank system collapse, housing market’s unending decline, nationalization of soon everything under the US tainted sun, and finally the New Resolution Trust Corp. The New RTC is being argued as it takes shape. It is called the Troubled Asset Relief Program (TARP). That name conjures up images of the roof tarps that are dotted across the New Orleans landscape from federal programs to repair roofs after Hurricane Katrina. After numerous subcontractor steps, the $150 per square foot allotted by the USGovt resulted in cheap flimsy tarps instead of nice shingled roofs. A better title for the mortgage relief program would be the Securitized Housing Investment Trust (SHIT), offered by an emailer to CNBC. These bond assets are not troubled assets, but rather fraudulent assets. The new finance czar Paulson has asked for a blank check with trust given, laden with low-ball cost estimates, or else the system will surely fail. Why should representatives and elders of Congress trust Wall Street executives? They deserve prosecution, indictment, prison terms, and forced restitution instead. We are witnessing financial treason. Instead, some executives like at Fannie Mae and Freddie Mac received huge severance packages, and Lehman Brothers executives were granted the same. The events are moving toward some upcoming surprises of historical magnitude. Think default and receivership, with foreign control. The massive rollover and refunding requirements from USTreasury Bonds will put monumental strain on the system, which the monetization US$ printing press cannot alone manage. Unless and until foreign creditors step in, the US financial sector will continue to operate like a crime syndicate, since regulatory bodies and law enforcement officials are all part of the coordinated congame.

PREFACE

Many of the overwhelming impressions from the unfolding events are to appear in the October Hat Trick Letter report. First attention must go to paid subscribers. Events is in progress in an accelerated pace, enough to take my breath away on a given day. But rain and cheery faces in Costa Rica straighten me quickly. For more evidence in backing up my claim that private brokerage accounts being open for financial parent firm claim, see the October report also. Numerous (dozens) of emails came in request. The report will show the best information on this subject, with quotes freshly hidden within the US Federal Reserve website. No need to make such stuff up, since the US financial authorities are better than fiction! By the way, if my analysis and forecasts have any advantage over others, it is because my thought process comes from always thinking like a thief. Never think the best thoughts, hope for the best of human dignity, or expect fair play to emerge when forecasting the US financial markets. Their plan seems obviously to gut the system before it fails. Then they blame foreigners. False flag attacks then seal the deal, much like cauterizing a wound with a knife made hot in a bivouac fire.

Here is an outline of topics covered in the next report, due out in the next couple weeks. The date is not set, but the messages are becoming clear. Pardon the brevity of important points, but details are difficult to describe with brievity, and are saved for the next Hat Trick Letter. The ongoing format no longer will be continued as from past issues. Every report is a report of an emergency nature. We are observing the painful steps from failure of a system, with 330 million inhabitants, and commercial tentacles the world over. The four primary features that have pushed the United States into a certain position in Third World status are these:

1. globalization with deep Western investment in China
2. insolvency of four pillars of federal, trade, housing, banking
3. export of fraud with mortgage bonds, mainly to China, Europe, Russia, England
4. military aggression and annexation with continuous deceit and propaganda.

The many points describe a system broken without remedy, inviting default and receivership. Both are in progress behind the curtains, but on foreign soil. As Mohamed El-Erian of PIMCO (formerly Harvard Univ) said recently, “The unthinkable is thinkable.” Little known to the majority of Americans, foreign disgust grows. Their desire to isolate the United States is growing, in order to protect themselves from financial collapse and further spread of fraud. The German economics experts are saying “The World Shouldn't Have to Bear the Burden for America's Lapses” in Spiegel Online (click here) in a public article.

Listen to my interview this week handled by Contrary Investors Cafe Radio (click here), where we covered several of the topics mentioned throughout this article.

GOLD LAUNCH & USDOLLAR DEMISE

Not exactly mirror images of each other, the gold price and US$ index are moving in typical opposite directions. A peak in the USDollar occurred in early September, at the same time a bottom occurred for gold. The forewarned timing of events turning sharply around in the week of September 15th happened on schedule. Once again, the short rule restriction against bank stocks helped to stem the flow that favored the euro currency rise by 330 basis points on Monday. The USDollar fundamentals have begun to resemble those of a Third World. The USGovt federal deficits are accelerating. The US trade gap has turned toward a rise again. The housing market continues to hurtle down in its price decline, that being the primary force behind the bank collapse. Now finally comes the climax. USEconomic recession is intensifying, notwithstanding absurd USGovt statistics to the contrary. The nationalization movement for Fannie Mae, Freddie Mac, AIG, not to mention the steady handouts to JPMorgan, have assured of continued heavy red ink in deficits to the USGovt federal budget. Monetization under the table to firms like JPMorgan are happening somewhat in the open, but not properly understood by the masses, trained and untrained. The endless war is a sacred cow of bottomless costs, largely to support the other syndicate, the US security agency clandestine trafficking out of Afghanistan. Foreigners watch the heightened risk having become acute. The USDollar will be sold, and gold will be bought. A COMEX delivery default in gold is in progress.

Few are thinking in nonlinear or discontinuous terms. When (not if) the USTreasurys suffer a default, totally assured in my mind, confirmed by my sources of information, the gold price will launch onward and upward in huge steps. Even without a default, the strains on the USGovt budget will result in extraordinary risk either on the USTreasury Bond yield from added supply, OR on the USDollar from cowardly requisite monetization of debt. My conjecture is the first couple fundings for USGovt bailout debt obligations will be done with normal USTreasury auctions, not to mention some off-budget games. The next fundings will be done via pure monetization. The entire nationalization will cost another $1500 to $2000 billion for banks assets and mortgages, on top of another $1000 billion for an array of US industrial and financial giants outside the banking world. The failed US firms like General Motors are already lining up. So foreigners will be expected to foot the bill??? No way! They will pull the plug, or at least diversify in a huge way out of the USDollar and US$-based bonds.

NOTES & WHISPERS IN ILL WIND

The list of breakdown items, evidence, and criminal overtones is vast.

1. Money market funds almost caused a seizure earlier this week, which means the banking system almost went into a fatal cardiac arrest episode. The seizures spread across entire the financial system, even to brokerage funds, and extended to foreign banks. The commercial paper market was also affected. The Exchange Stabilization Fund was used, having possible currency implications.
2. Foreign entities were blocked from participation in both the Lehman Brothers and American Intl Group (AIG) busts, partly to retain control, but also most likely to limit opportunity for foreigners to obtain data, documents, and records of extreme fraud. The Germans pursued the AIG insurance units in a natural acquisition, far more prudent than inefficient USGovt conservatorship.
3. The USEconomy would move toward a centralized Soviet structure, not socialism, if liberties are curtailed further, especially if martial law is imposed. Rationing is a very real prospect. Watch freedom of speech, assembly, and more.
4. The nationalization of Fannie Mae puts the $1500 billion documented fraud since 1988 on the national tab. The New Jersey burnout home selling for $230k in a Fannie loan, the micro example, has played out on a national aggregate scale. The subprime mortgage movement used to be the visible portion of the mortgage crisis. The Fannie Mae gigantic fraud has been covered by the greater mortgage crisis, perhaps in a wildly successful multi-year project. Thanks to the intrepid Aaron Krowne of www.ML-implode.com for his shared ideas.
5. Final banking & mortgage system bailout by the USGovt might not occur until issues are addressed regarding prosecution, confessions, resignations, state’s evidence, and eventually restitution. The concept of RICO law enforcement against Wall Street would be both unprecedented and empty, since most assets have been gutted. No, on second thought, despite objections, the Congress will pass the bailout bill without reading it.
6. The move to halt home foreclosures is a typical stupid Congressional idea, which might result in civil disobedience and scoffing at mortgage payment on a broad scale. Worse, almost all cost estimates are wrong by a factor of 10x from reasonable forecasts. The pattern is to establish the plan, and deal with cost overruns later. Foreigners are still expected to pay the bills for American deficits anyway.
7. Watch the Lehman Brothers liquidation process, kept hidden. The dead are still trying to marry the dead in farcical ceremonies. The bond cemetery within the New RTC was crafted when it become clear the Lehman liquidation would kill all of Wall Street. Don’t expect any consummation of such necro-marriages to bear offspring. They will not make love with each, but rather EAT EACH OTHER.
8. Wall Street firms are now almost all aligned in similar fashion. If one fails, they all suffer the same risk from similar balance sheet of assets. Marking down one firm’s asset in liquidation would result in the failure of all of them. Any USGovt bank bailout has an unintended consequence of instant markdowns in market value of assets held widely throughout Wall Street and bank industry balance sheets. These banks have resisted writedowns in honest accounting, as only a small handful of financial firms have taken losses in earnest.
9. Any New Resolution Trust Corp for mortgage bailout rescues (a correct big forecast) would ostensibly be managed by the same Wall Street villains who are implicated in massive trillion$ fraud. Expect one in three dollars to be stolen by further fraud, just like the Hurricane Katrina relief efforts. To question their fraud in unpatriotic.
10. Private brokerage stock accounts can now be borrowed by financial firms, evidence produced in Federal Reserve documents. A gigantic final heist might be in the works, requiring a massive event that provides the cover of confusion like a World Trade Center attack. The Glass-Steagall Act was not repealed without a reason and plan! Its removal enables co-mingling of bank, brokerage, and insurance assets.
11. A pattern seems evident among failing Wall Street firms. It seems Wall Street firms without extensive stock brokerage accounts are permitted to fail first, leaving private accounts vulnerable. It seems Wall Street firms with big foreign equity ownership are set to fail last, leaving foreigners outside the loop.
12. The bank short rule restriction once more has been brought back. That emergency measure is as corrupt as possible, a horrible black eye to a nation that claims to be the home of free markets. The re-enacted rule has helped support the USDollar.
13. Tremendous strong high pressure zones are building on monetary inflation, while tremendous strong low pressure zones are building on asset price decline. The combination will surely make for some of the greatest financial storms in modern history, some already witnessed, and more sure to come.
14. Much talk has come of continuing independence of US financial firms, when they are beset by insolvency and worsening liquidity problems. The same applies to the USGovt, whose liquidity flow depends upon foreign credit supply. They have been defrauded, treated with hostility in trade and currency management issues, and in the case of Russia, subjected to military aggression and NATO treaty violation.
15. The totality of events has placed enormous concentrated risk on the USDollar, and consequently on the USTreasury Bond. Expect sharp decline in the US$ and default of the USTBond. Both fraud and nationalization has amplified the pressures.
16. The Global Energy War has opened a new front in the Global Capital War. Aggressive US actions to secure energy supply have endangered its capital supply. The backlash is not even on the American radar systems, as arrogance prevails. In high commerce and banking circles, the US is being isolated. Many European firms do not return phone calls to US bankers, on orders. An analogy of ‘glow candles for diesel engines’ has been stated for upcoming response to US bankers.
17. Reports have come from a London source that gold futures contracts are being settled in cash only at the COMEX, rather than with physical gold metal. That leaves would-be buyers without the metal they wish to take on delivery under contract. IS THAT NOT A DEFAULT?
18. The Hurricanes Gustav & Ike have hit the Southeast region hard, resulting in gasoline rationing. This trend might soon extend nationwide, and broaden to include more items. Hits to AIG and other insurance firms come at a bad time.

A solution comes from foreign creditors that does not require Congressional approval or vote, constituting an event to pull the rug from under the Americans. The avenue will be via bank channels. A receivership committee is being formed. More details are a main feature of the October HTL report. The accumulative debt held by US and foreign entities is so grand, that every single day interest of almost $1 billion is owed to them on a daily basis for the USGovt Treasury and Agency mortgage bonds. If the USGovt were to shut down all operations and provision of services, including military, the USGovt might achieve a balanced budget. It could balance its budget from tax revenue against just the interest expense on debt, with no other official function whatsoever. An interesting concept. Maybe that is part of the next Receivership Committee plan.

JPMorgan, 11 Others Sued Over Jefferson County Crisis

By William Selway and Martin Z. Braun

June 17 (Bloomberg) -- JPMorgan Chase & Co., Morgan Keegan & Co. and 10 other banks, advisers and insurers were sued by a Jefferson County, Alabama, man who claims their work on county bond transactions saddled residents with soaring sewer bills.

The complaint, filed in Alabama court in Birmingham today by Charles Wilson, also alleges that seven current and former county commissioners breached their fiduciary duty. The suit seeks damages for the 146,000 sewer customers in Jefferson County, the most-populous county in Alabama, as well as the return of fees.

The ``commissioners, various investment banks, insurers and advisers have continuously failed to act in the best interests of the citizens of Jefferson County,'' according to the lawsuit.

Sewer bills for residents of Jefferson County, with a population of 659,000, have risen more than fourfold over the last 11 years as the county amassed $3.2 billion of debt to build a new sewer system. Almost all of the bonds carry adjustable interest rates and are tied to derivatives intended to protect the county from higher borrowing costs, a strategy that backfired this year and pushed the county to the brink of bankruptcy.

Morgan Keegan spokeswoman Gail Rimer had no immediate response, while JPMorgan spokesman Brian Marchiony said the bank hasn't seen the suit and declined to comment. Jeff Lloyd, a spokesman for Financial Guaranty Insurance Co., which is also named the lawsuit, said the company had yet to review the suit and declined to comment. Michael Gormley, a spokesman for XL Capital Assurance Inc., didn't immediately respond to a request for comment.

Officials Named

Commission President Bettye Fine Collins, one of the politicians named in the lawsuit along with Birmingham Mayor Larry Langford and former finance director Steve Sayler, said she had no opinion about the suit. ``It'll just have to be dealt with,'' she said.

Today's lawsuit is only the latest litigation surrounding Jefferson County's financings.

In April, the Securities and Exchange Commission sued Langford, the former commission president, for allegedly accepting undisclosed payments from the head of a regional underwriting firm that worked on some sewer deals. And bankers who worked for New York-based Bear Stearns Cos. and JPMorgan when the county bought its swaps have been told they might face criminal charges under an antitrust investigation of the municipal derivatives industry.

Gleaning Information

Kathryn Harrington, the Birmingham attorney with Hollis Wright & Harrington who filed the suit, said the lawsuit may allow her to glean new information about how much the deals have contributed to rising sewer rates.

``There's a lot that hasn't come to light,'' she said. ``The citizens feel that they haven't gotten the full story.''

The county's financial crisis began in February after FGIC and XL, which guarantee $2.8 billion of the county's sewer debt, suffered credit rating cuts because of losses on securities tied to subprime mortgages. That caused the investors to sell back the county's $850 million variable-rate bonds to banks that agreed to be buyers of last resort, and to shun about $2 billion of debt whose interest is determined by auctions. Rates on some of the county's debt increased to as high as 10 percent.

At the same time, interest-rate swaps the county bought from JPMorgan, Bear Stearns Cos., Bank of America and Lehman Brothers Holdings Inc. to shield it against rising borrowing costs stopped working. The floating rates it pays on its bonds have climbed while the variable rates banks pay the county under the agreements have declined, pushing expenses higher.

Downgrades to Junk

The surging debt costs led the credit-rating companies to cut the county's sewer bonds to below investment grade. That, in turn, triggered clauses in bond and derivative contracts that gave banks the right to force the county to terminate the swaps at a cost of $277 million and buy back $850 million of the floating-rate debt over four years.

Without restructuring its bonds, interest costs on Jefferson County's sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue, Jefferson County Commission President Collins estimated in March. Since April, the county has obtained agreements to postpone making payments to banks holding its unwanted bonds as it looks for a way to restructure its debts.

Insurers' Proposal

The insurance companies have suggested that the county levy a fee on those who use septic tanks instead of the sewer, which commissioners have rejected. The commission this month hired Merrill Lynch & Co. to advise it on how to revamp the bonds and avoid bankruptcy.

The lawsuit filed today alleges that Jefferson County's bond transactions have left customers responsible for a massive debt load.

``Through a long series of ill-conceived financial transactions, the sewer ratepayers of Jefferson County have been saddled with a debt of roughly $11,491 per residential sewer customer, which is the highest in the nation,'' the complaint says.

The case is Charles E. Wilson, v. JPMorgan Chase & Co., et. al Jefferson County Circuit Court (Alabama). The case number is 01-cv-2008-901907.00

To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net.

How Sweet It Is! (If you're KBR)

June 17, 2008

Lost Army Job Tied to Doubts on Contractor

By JAMES RISEN

WASHINGTON — The Army official who managed the Pentagon’s largest contract in Iraq says he was ousted from his job when he refused to approve paying more than $1 billion in questionable charges to KBR, the Houston-based company that has provided food, housing and other services to American troops.

The official, Charles M. Smith, was the senior civilian overseeing the multibillion-dollar contract with KBR during the first two years of the war. Speaking out for the first time, Mr. Smith said that he was forced from his job in 2004 after informing KBR officials that the Army would impose escalating financial penalties if they failed to improve their chaotic Iraqi operations.

Army auditors had determined that KBR lacked credible data or records for more than $1 billion in spending, so Mr. Smith refused to sign off on the payments to the company. “They had a gigantic amount of costs they couldn’t justify,” he said in an interview. “Ultimately, the money that was going to KBR was money being taken away from the troops, and I wasn’t going to do that.”

But he was suddenly replaced, he said, and his successors — after taking the unusual step of hiring an outside contractor to consider KBR’s claims — approved most of the payments he had tried to block.

Army officials denied that Mr. Smith had been removed because of the dispute, but confirmed that they had reversed his decision, arguing that blocking the payments to KBR would have eroded basic services to troops. They said that KBR had warned that if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on services.

“You have to understand the circumstances at the time,” said Jeffrey P. Parsons, executive director of the Army Contracting Command. “We could not let operational support suffer because of some other things.”

Mr. Smith’s account fills in important gaps about the Pentagon’s handling of the KBR contract, which has cost more than $20 billion so far and has come under fierce criticism from lawmakers.

While it was previously reported that the Army had held up large payments to the company and then switched course, Mr. Smith has provided a glimpse of what happened inside the Army during the biggest showdown between the government and KBR. He is giving his account just as the Pentagon has recently awarded KBR part of a 10-year, $150 billion contract in Iraq.

Heather Browne, a spokeswoman for KBR, said in a statement that the company “conducts its operations in a manner that is compliant with the terms of the contract.” She added that it had not engaged in any improper behavior.

Ever since KBR emerged as the dominant contractor in Iraq, critics have questioned whether the company has benefited from its political connections to the Bush administration. Until last year, KBR was known as Kellogg, Brown and Root and was a subsidiary of Halliburton, the Texas oil services giant, where Vice President Dick Cheney previously served as chief executive.

When told of Mr. Smith’s account, Representative Henry A. Waxman, the California Democrat who is chairman of the House Oversight and Government Reform Committee, said it “is startling, and it confirms the committee’s worst fears. KBR has repeatedly gouged the taxpayer, and the Bush administration has looked the other way every time.”

Mr. Smith, a civilian employee of the Army for 31 years, spent his entire career at the Rock Island Arsenal, the Army’s headquarters for much of its contracting work, near Davenport, Iowa. He said he had waited to speak out until after he retired in February.

As chief of the Field Support Contracting Division of the Army Field Support Command, he was in charge of the KBR contract from the start. Mr. Smith soon came to believe that KBR’s business operations in Iraq were a mess. By the end of 2003, the Defense Contract Audit Agency told him that about $1 billion in cost estimates were not credible and should not be used as the basis for Army payments to the contractor.

“KBR didn’t move proper business systems into Iraq,” Mr. Smith said.

Along with the auditors, he said, he pushed for months to get KBR to provide data to justify the spending, including approximately $200 million for food services. Mr. Smith soon felt under pressure to ease up on KBR, he said. He and his boss, Maj. Gen. Wade H. McManus Jr., then the commander of the Army Field Support Command, were called to Pentagon meetings with Tina Ballard, then the deputy assistant secretary of the Army for policy and procurement.

Ms. Ballard urged them to clear up KBR’s contract problems quickly, but General McManus ignored the request, Mr. Smith said. Ms. Ballard declined to comment for this article, as did General McManus.

Eventually, Mr. Smith began warning KBR that he would withhold payments and performance bonuses until the company provided the Army with adequate data to justify the expenses. The bonuses — worth up to 2 percent of the value of the work — had to be approved by special boards of Army officials, and Mr. Smith made it clear that he would not set up the boards without the information.

Mr. Smith also told KBR that, until the information was received, he would withhold 15 percent of all payments on its future work in Iraq.

“KBR really did not like that, and they told me they were going to fight it,” Mr. Smith recalled.

In August 2004, he told one of his deputies, Mary Beth Watkins, to hand deliver a letter about the threatened penalties to a KBR official visiting Rock Island. That official, whose name Mr. Smith said he could not recall, responded by saying, “This is going to get turned around,” Mr. Smith said.

Two officials familiar with the episode confirmed that account, but would speak only on the condition of anonymity out of concern for their jobs.

The next morning, Mr. Smith said he got a call from Brig. Gen. Jerome Johnson, who succeeded General McManus when he retired the month before. “He told me, “You’ve got to pull back that letter,”’ Mr. Smith recalled. General Johnson declined to comment for this article.

A day later, Mr. Smith discovered that he had been replaced when he went to a meeting with KBR officials and found a colleague there in his place. Mr. Smith was moved into a job planning for future contracts with Iraq. Ms. Watkins, who also declined to comment, was reassigned as well.

Mr. Parsons, the contracting director, confirmed the personnel changes. But he denied that pressure from KBR was a factor in the Army’s decision making about the payments. “This issue was not decided overnight, and had been discussed all the way up to the office of the secretary of defense,” he said.

Soon after Mr. Smith was replaced, the Army hired a contractor, RCI Holding Corporation, to review KBR’s costs. “They came up with estimates, using very weak data from KBR,” Mr. Smith said. “They ignored D.C.A.A.’s auditors,” he said, referring to the Defense Contract Audit Agency.

Lt. Col. Brian Maka, a Pentagon spokesman, disputed that. He said in a statement that the Army auditing agency “does not believe that RCI was used to circumvent” the Army audits.

Paul Heagen, a spokesman for RCI’s parent company, the Serco Group, said his firm had insisted on working with the Army auditors. While KBR did not provide all of the data Mr. Smith had been seeking, Mr. Heagen said his company had used “best practices” and sound methodology to determine KBR’s costs.

Bob Bauman, a former Pentagon fraud investigator and contracting expert, said that was unusual. “I have never seen a contractor given that position, of estimating costs and scrubbing D.C.A.A.’s numbers,” he said. “I believe they are treading on dangerous ground.”

The Army also convened boards that awarded KBR high performance bonuses, according to Mr. Smith.

High grades on its work in Iraq also allowed KBR to win more work from the Pentagon, and this spring, KBR was awarded a share in the new 10-year contract. The Army also announced that Serco, RCI’s parent, will help oversee the Army’s new contract with KBR.

“In the end,” Mr. Smith said, “KBR got what it wanted.”

The Great Depression of the 2010s
Economics is not rocket science. Neither is power

Darryl Robert Schoon
May 6, 2008

Depressions are monetary phenomena caused by central bank issuance of excessive credit. In 1913, the newly created US central bank, the Federal Reserve, began issuing credit-based money in the US. Within ten years, the central bank flow of credit ignited the 1920s US stock market bubble; and shortly thereafter, following the collapse of the bubble in 1929, the world entered its first Great Depression in 1933.

Investment banks are the undoing of central banking. While all banks, central, commercial and investment, view credit as the opportunity to exploit society's growth and productivity, investment bank exploitation of growth and productivity exposes society to extreme risks - for investment banks use society's savings to make their volatile and speculative bets.

The speculative risks undertaken by investment banks is done by leveraging the savings of society; and, when investment bank bets are sufficiently large enough and the bets go bad - as they inevitably do as the luck of investment bankers is due more to their proximity to credit than to their ability to foresee the future - it is society that will bear the brunt of the pain in the loss of its savings.

Inevitably, investment bankers cannot resist the temptations of excessive credit and, like the buyers of teaser-rate home mortgages, they will always overreach themselves - an overreaching that will have disastrous consequences for the society whose savings they bet.

The leveraged overreaching by investment banks in the 1920s caused the Great Depression of the 1930s and their more recent overreaching in this decade, the 2000s, is about to cause another Great Depression in the next, the 2010s.

It is the proximity of investment banks to the pools of savings that allows investment banks to profit. By their access to society's savings, investment banks use society's wealth as the foundation of their highly leveraged bets in financial markets; and in so doing, they have now placed all of us in harms way.

GOVERNMENT - THE DEVICE BY WHICH THE FEW CONTROL THE MANY

The collapse of financial markets in the first Great Depression led to the US Congress to enact laws that would hopefully insure that such a collapse would never again happen. To that end, in 1933 the Glass-Steagall Act was passed by Congress and signed into law.

Acknowledging the role that investment banks had played in the Great Depression, the passage of the Glass-Steagall Act in 1933 separated investment banking and commercial banking to insure that investment bank speculation would not again destabilize commercial banks as it did during the Great Depression leading to the loss of America's savings.

What bankers hath joined together let no man put asunder

However, in 1999, the US Congress repealed the Glass-Steagall Act and America was once again vulnerable to the highly leveraged shenanigans of Wall Street. This time, however, it was not only the US but the entire world whose futures were to be bet and lost by Wall Street gamblers.

The globalization of financial markets had spread the dangers of US investment banking to banks, insurance companies, and pension funds around the world. Now, the savings of Europe and Asia as well as the US were to be impacted by the wagers of Wall Street who in the 2000s literally bet the house on the possibility that subprime CDOs were actually worth their AAA ratings.

Glass-Steagall, the law enacted in1933 to prevent another Great Depression was repealed at the behest of bankers. While it is true that at certain times the US government will act in the best interest of society, usually (and usually in the guise of so doing) the US government is the pawn of the special interests that benefit from the trough of government largesse and regulation. The repealing of the Glass-Steagall Act in 1999 was therefore a reversion to the mean.

We are today in the initial stages of another collapse that will lead to another Great Depression. The safeguards put in place to prevent such from happening were not only disassembled in 1999; but, now in 2008, the US government has moved even closer to exposing its citizenry and indeed the world to the speculative carnage and folly of investment banking excess.

THE RULE OF LAW IS A WONDROUS THING - ESPECIALLY IF YOU WRITE THEM.

Bloomberg.com April 8, 2008
"As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount-window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter-point above the overnight rate on loans between banks."

The US Federal Reserve is now underwriting, i.e. subsidizing, the commercial activities of global private investment banks. The 20 primary dealers in US government bonds include the world's largest investment banks - BNP Paribas Securities Corp. (French), Barclays Capital Inc (British), Banc of America Securities LLC (USA), UBS Securities LLC (Swiss), Dresdner Kleinwort Wasserstein Securities LLC (German), Daiwa Securities US Inc. (Japan) etc.

In truth, these investment banks are global entities and have no actual nationality no matter what jurisdiction in which they are legally domiciled. As such, they also have no allegiance except to their own self-interests.

QUESTION:
Why is the US government allocating public resources for the benefit of private international investment banks?

ANSWER:
US resources are subsidizing international investment banks through the Federal Reserve Bank, a quasi private entity which was given governmental powers in 1913 (some allege in violation of the US Constitution). That a quasi private bank is bailing out private banks with public monies does make sense. What doesn't make sense is why the public allows it.

There is much discussion as to the justification and reasons for US, UK, European, and Japanese central banks bailing out private banks with public money. Issues such as moral hazard are now being raised in questioning the right and consequence of so doing.

In truth, such issues are irrelevant. Not that they are in themselves not important, but issues such as moral hazard will have no effect whatsoever on what is going to happen.

Intent is the underlying motive that explains what is about to occur. The intent of private bankers is not public stability, nor growth, nor productivity - it is the pursuit of private profit via the use of public credit and debt.

Today, most governments, especially the US and UK, are controlled by private bankers - which is why government policy continues and will continue to favor the interests of private bankers over the public good.

THE MELTDOWN OF MAMMON

I am sure that in some quarters of the Catholic Church objections were raised (perhaps even on theological grounds) about the torture used by the Church during the Spanish Inquisition; just as today, there have been objections raised by some in the US in regards to the use of torture in its "war on terror".

Objections are always tolerated by those in power as long as the objections do not rise to the level of action. The objection to central bank credit and influence in our monetary affairs is therefore rhetorical. The influence of private bankers and central banking in our monetary affairs will not change until their influence has run its course - which is now about to happen.

The present epoch of central banking will perhaps be known as the period when bankers roamed the earth. Just as during the Jurassic Age, when dinosaurs roamed freely eating whatever and whomever they encountered, bankers did much the same in the present epoch that is now about to end - profiting by the productivity of society and the public and private debts incurred as a result of bankers' induced credit-based spending.

Bankers achieved their immense power during this era by exploiting flaws in human nature and systemic flaws in the economic system they constructed for their own benefit. But as with all flaws, human or economic, the consequences of so doing are exposed over time. That time has now arrived.

Money is not credit, nor is money created de jure by circulating paper coupons imprinted with a government stamp stating the coupons are now legal tender to be used in the settlement of debts.

The idea that central bank coupons/paper money, sic debt, can be used to settle another debt is astounding. That we have been led to accept it is so is even more astounding. Throughout history, every experiment with paper "money" as a settlement of debt has failed. Our experiment with paper money towards that end will be no different.

The recent correction in the price of gold and silver is just that, a correction in an otherwise direct repudiation of the on-going attempt by governments and bankers to substitute paper coupons for real money.

A paper yen, a paper euro, a paper dollar, when no longer backed and convertible to gold or silver is but a paper coupon masquerading as money - a coupon with an expiration date in invisible ink.

In truth, the bankers' real gambit is not their bet that paper money can be substituted for gold and silver or that subprime mortgages can be passed off as AAA securities. Their real gambit is that central bank issuance of debt as money and their control of governments will never be discovered by the public.

HUBRIS FOLLY AND DISASTER

The world of credit and debt and all it has created has been made possible by bankers and their debt based system of money and central banking. Its cost, however, will be born by future generations who were not present when the debts were incurred.

Those who utter in pious simplicity those wonderful words, "our children are our future", have no idea what they have done to those very children and their future by spending today what future generations will have to earn tomorrow.

Here, in the US, an entire generation has grown up on the suspect promises of easy credit and paper money. That generation is now beginning to suspect that something is wrong, that the price of their gas, food and healthcare is rapidly rising and their dream of home ownership is a trap from which bankruptcy is increasingly their only escape.

Still, this generation has no idea of how terribly wrong it actually is and why it has happened; and their ignorance of such will give them little comfort during the Great Depression that lies directly ahead.

The chickens are coming home to roost; and they closer they come, the more they are looking like vultures.

Note: I will be speaking at Professor Antal E. Fekete's Session IV of Gold Standard University Live (GSUL) July 3-6, 2008 in Szombathely, Hungary. If you are interested in monetary matters and gold, the opportunity to hear Professor Fekete should not be missed. A perusal of Professor Fekete's topics may convince you to attend (see http://www.professorfekete.com/gsul.asp).Professor Fekete, in my opinion, is a giant in a time of small men.

Darryl Robert Schoon

WaMu protects exec bonuses from subprime fallout

Wed Mar 5, 2008 8:15am EST

NEW YORK (Reuters) - Washington Mutual Inc's board of directors approved a plan which helps protect its management's bonus targets from the impact of the subprime loan fallout, according to a filing with U.S. regulators.

The board's human resources committee on February 26 approved bonus targets, some of which will be calculated to exclude expenses related to business re-sizing or restructuring, foreclosed real estate assets and loan loss provisions other than related to its credit card business.

The filing, made with the Securities and Exchange Commission on Monday, refers to targets for WaMu chief executive Kerry Killinger, chief financial officer Thomas Casey, chief operating officer Stephen Rotella, and retail banking chief James Corcoran.

The board's committee said in light of the challenging business environment and the need to evaluate performance across a wide range of factors it will take a three-step approach to rewarding its executives including subjectively evaluating company performance in credit risk management.

In January, Seattle-based Washington Mutual said it awarded Killinger 3.2 million stock options for 2008 to provide a "strong incentive to restore shareholder value".

WaMu's share price sank 70 percent in 2007 as mortgage losses soared.

WaMu is one of the big players in the thrift lenders industry which suffered a record $5.4 billion loss in the fourth quarter of 2007 as the housing market deteriorated.

STIMULUS PLAN A SCAM TO BENEFIT THE RICH

Higher loan limits will lead to Fannie Mae, Freddie Mac bailout

Sean Olender

Sunday, February 3, 2008

Congress is about to sell us the biggest fraud in American history.

It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.

But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.

Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.

Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.

Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.

Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.

In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default.

But that's just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.

There are firms that rent assets to people to help them fraudulently qualify for a mortgage - like loaning them money to keep in their bank account for a couple months so they can fool the lender with documented savings that evaporate the day after the mortgage is signed. Another popular ruse: The borrower pays an employer to pay him a lot of money in a fake job for a month or two so he can show a fat paycheck in his loan docs. Some real estate agents and mortgage brokers actually refer buyers to these services.

Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have "moved more prominently into low-documentation loans, which require little or no proof of the borrower's income." Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: "We had no idea Fannie could go under, but we can't cut and run now. We have to bail out Fannie and Freddie for the good of America! It's going to be a tough slog, but you're getting used to those, no?"

Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury.

I've spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what's going on. Seven months without making a single payment! Will Fannie guarantee those loans because they aren't in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That's why lawmakers want to raise the limits now and ask questions later.

This shortsighted plan poses a terrible risk to every American taxpayer, especially retirees, because Social Security money will be needed to bail out Fannie and Freddie. And even if you live in high-priced San Francisco, Los Angeles or New York - and stand to benefit from the increased loan limit - this is a horrible fraud on you, too, because raising the limit to $730,000 risks a systemic crisis that will cost far more than any temporary rebate check.

In support of the economic stimulus bill, Bush will have to face "working American families" and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It's like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called "helping the economy."

I can imagine the president's radio address playing in the heartland: "We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years."

I guess Congress' hope is that median-income families will be too busy using their rebates to buy much-needed groceries to notice that the rich folk are getting way with a new scam.

Several months ago, economist Nouriel Roubini of New York University's Stern School of Business suggested that the housing market has been effectively nationalized. At first it seemed crazy, but now it's fairly obvious. In August alone, Fannie and Freddie increased their loan portfolios by $62 billion, and the Federal Home Loan Bank by $110 billion. That total of $172 billion would come to just over $2 trillion annually - not much less than the entire federal budget.

Everyone seeking a loan, securitizing a mortgage, and buying or selling a mortgage security will now be dealing, in one way or another, with the U.S. government. This type of intervention is very expensive and will eat everything in its path, including Social Security.

If we're going to have a government-financed intervention, it should be to make sure that Social Security benefits go to those who paid for them, that the poor are fed and housed, or that the army of uninsured receive health benefits. If, as they say, we don't have enough money for those important things, then I think we don't have enough money to bail out banks and bond investors.

Don't let me down, my fellow Americans. Let's vote out anyone0 who dares to vote for this scam.

Sean Olender is an attorney in San Mateo. Contact us at insight@sfchronicle.com.

Shadow Banking

THE PAST YEAR has been a harrowing one for the world's financial markets, shaken by subprime crises, credit crunches, and other ills. Things have only gotten stranger in the past week, with stock prices swinging wildly in every major market - drastically down, then back up.

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Last week the Federal Reserve announced the biggest cut in overnight lending rates in more than two decades. Congress, not to be outdone, is slapping together a massive deficit spending package aimed at giving the economy an emergency booster shot.

Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.

Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.

Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.

The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.

In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.

"Central banks have only two tools," says Satyajit Das, author of "Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives," who has emerged as a voice of concern. "They can cut interest rates or they can regulate banks. But these are very old-fashioned tools, and are completely inadequate to the problems now confronting them."

Since the last financial crisis that genuinely threatened the fabric of our society, the Great Depression, the United States has built a system of regulatory checks and balances that has, for the most part, worked. The system has worked because the new regulations enforced some semblance of transparency. Companies abide by an extensive set of rules and file information on their profits, losses, and assets.

Obviously, there are limits to transparency: Without withholding some information from public view, it would be hard for companies to take advantage of opportunities in the marketplace. But a modicum of transparency can go a long way, enabling both regulators and investors to make informed decisions. The advantages of the system are many; the costs of even a single case of nontransparency, as with Enron, can be high.

But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages.

When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers. Home values began their plunge.

In other words, a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.

The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.

"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."

The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.

"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."

The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.

Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.

But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.

As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.

Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.

Derivatives can ripple through the market and link players that might not otherwise be connected. With some types of new investments, that fusion takes place within the security itself.

For instance, some financial instruments are built of two or more different types of assets, linking together sectors of the economy that aren't supposed to move in tandem. In the name of transferring risk - and in the interest of creating an appealing new product to sell to aggressive investors seeking higher returns - a bank could create a CDO, for instance, that packaged subprime mortgages together with corporate bonds. An economist would expect those to move independently, but thanks to a large - and unseen - investment in such a linked package, problems with one could drive down the other. A bad apple can ruin an entire barrel of fruit.

Again, it's not as though anyone necessarily knows the composition of these structured securities. Nor do they know who has invested in them, thanks to the fact that they have not, until recently, counted as conventional assets subject to the normal rules of accounting. And because they don't trade on open markets, their values are essentially guesses, calculated by computer algorithms.

Das disparages much of this as the product of bankers creating "complexity for the sake of complexity," trying to wow their clients by inventing more sophisticated-seeming investments. "Financial innovation is a magical catch phrase," he explains. "It's very sophisticated and chi-chi."

"Investment bankers want to make them more complex, so that they won't be copied, and so that their clients won't understand them," he says. "When they ask whether they're paying the right amount, they won't know."

But when reality comes home to roost, things can get ugly pretty quickly: If an investor is forced to sell a CDO, the onetime price realized on the open market may bear no relationship to the theoretical value generated by a computer formula. That means that everyone holding CDOs can no longer sleep well at night: the same thing can happen to them.

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hese risks are magnified, as they were during the stock bubble of the 1920s, by the fact that many of these assets are owned by investors who borrowed money to make the investments in the first place. When a market shock like the subprime crisis hits, it can send tremors through the system with incredible speed.

If the contagion spreads, the conventional wisdom holds that the Federal Reserve and other central banks around the world can step into the breach caused when consumers and investors start to lose their confidence. But what happens when all these complicated financial arrangements and instruments start to unravel? The market for one product alone - the credit default swap, or CDS - dwarfs this country's economy. The Fed has an uphill battle, made harder by the fact that it is grappling, to a large extent, with unseen forces.

In theory, additional regulation may help with this. The Financial Accounting Standards Board, which establishes corporate accounting procedures and guidelines, took a first step in that direction this past November, ordering investment banks and anyone else holding complicated securities to assign market values to so-called Level 3 assets - a fancy name for assets for which there is no prevailing market price. This meant assigning a market value to all those CDOs.

Banks promptly began writing down tens of billions of dollars of assets, and their investors are still trying to sort through the results. It's still too early to tell whether or not the effort will work, or whether the "market prices" that get reported are anything more than figments of in-house accountants' imaginations. For his part, Das is skeptical. "It will help that people will know the poison they're drinking," he says. "Whether it will help stabilize the system is another question."

It would be ideal if the financial markets became a bit less opaque and intelligible before that happens. That would be the job of regulators, but Das isn't sure that regulators have the intellectual horsepower to figure out what they need to do. "If you're bright and you can make $5 million a year on Wall Street," he asks, "why would you settle for making 50K as a regulator?"

And in any case, transparency isn't really what the denizens of Wall Street want, Das observes. "The regulators keep espousing things like clarity and transparency, but it's in the investment bankers' interest to keep things opaque." Das pauses for a moment.

"It's like a butcher. He doesn't want the buyer to know what goes into making the sausage." He chuckles, noting that it's the same with financiers. "That's what they're all about and always have been."