Searching For The Truth

Death Penalty For Economic Crimes

Does a point come where a financial fraud is of such a scope that the death penalty should be considered?

Thousands of people had their life savings invested with the likes of Bernard Madoff and Arthur Nadel.  For most of them, this was the fruit of decades of getting up in the morning, going to work, and sacrificing free time and pleasure in order to save money.  It was their life blood.  It represented a hope of a better future for their children and other loved ones.

Is the threat of serving a few years in a country club prison sufficient deterrence to the potential Madoffs that are out there?  This is a man who has lived like royalty to the age of 70 and has enriched his family with money that will probably never be recovered by creditors.  Even if he serves a decade in prison, how many young sociopaths on Wall Street would, on balance,  still see his as a life worth emulating?

Assigning a monetary value to human life is something that is performed as a regular matter of business in society.  In the early 1970's Ford Motor Company made an economic decision not to add eleven dollars to the cost of a Pinto for an improvement that would have prevented the gas tank from exploding in rear end collisions.  It used a valuation of $200,000 per human life in its analysis, a figure that it derived from the government agency that was responsible for auto safety.  Life insurance is a contact that assigns a monetary value to a human life.  Juries are commonly asked to value human life in terms of dollars in wrongful death suits.  A review of federal agency regulations by Gillette and Hopkins in 1988 concluded that the range was $1,000,000 to $2,000,000 per statistical life saved.

Using the high end of that valuation, an argument could be made that Madoff's alleged $50 billion dollar swindle caused an equivalent in social damage to 25,000 deaths. That's over eight times as many deaths that occurred on September 11, 2001.  It is far more lives than were lost in the Bhopal disaster.  So is it really unthinkable that there should be some level of financial crime that qualifies for the death penalty?

On a pragmatic level, prosecutors already have a difficult time securing convictions against Wall Street fraudsters because such individuals have the resources to mount an exhaustive defense with the best possible legal representation.  This makes it difficult to gain cooperation from offenders and have them turn state's evidence against higher level conspirators.  Institution of the death penalty would give prosecutors a tool valuable tool to gain such cooperation.

In order to achieve adequate justice for the enormous financial crimes that have been committed over the past several years, a constitutional amendment would first need to be passed that would enable the death penalty for financial crimes in excess of a threshold value, perhaps $20 million.  State or federal laws would need to be passed to enable the application of the death penalty to such crimes.  The same constitutional amendment would have to permit the criminal statute to be applicable retroactively, or ex post facto,  so that the threat of the death penalty could be applied to acts that have been committed within the past ten years.

For the financial system to work properly, individuals that are privileged to manage hundreds of millions of dollars of other peoples' money must be held to a level of accountability that is proportionate to the magnitude of their fiduciary responsibilities.  If an adequate balance of responsibility and accountability is not introduced into the system, it will remain broken and the public trust will not be restored. 

If The Usual Shills Are Saying "Sell"....

If you have money invested in a stock or mutual fund, your brokerage/bank can't use that money to maintain its liquidity.  It is a security that you own.

However, if you have it sitting in cash in a bank or a brokerage account, the institution can now take 100% of that money (because reserve requirements have been eliminated) and use it for its own ends to keep itself afloat.  A bank deposit is no more than an unsecured loan from the depositor to the bank.

Accordingly, a Dow scare that causes investors to pull their money out of stocks and into their cash accounts will help the liquidity problems of the banks and brokerages. A drop of 1000 points in the Dow could be equivalent to a multi-trillion dollar bailout package for Wall Street.

So if Cramer and the talking heads on CNBC stop calling a bottom and begin encouraging investors to sell, there may be deeper motives.

Dollar Monetary Base Increases 8% in Past Two Weeks

According to the most recent H.3 release from the Federal Reserve, the monetary Base has increased 8% between September 10- September 24, 2008.  The year over year increase in the monetary base is about 11%, meaning that there has been considerable acceleration recently.

While this in itself would appear to be inflationary, the rate of deleveraging also appears to be increasing, meaning that credit may be being removed from the economy faster than the money supply is being  goosed.  Whether the net effect is currently inflationary or deflationary is accordingly unclear.

Media Morphs Bailout into "Rescue Plan," But The Same Problems Remain

The media has been working overtime since the historic House of Representatives vote on Monday to turn public resentment over the Paulson TARP plan into support, spinning it now as a "rescue plan" instead of a Wall Street bailout.  Representatives who voted against the plan are being enticed to change their minds. 

Simultaneously, the House e-mail system that seemed to work just fine last week when the opposition to the bill was most intense is now largely inoperative as the pressure builds for another vote, possibly as early as Thursday.  In fact, the IT folks at the House of Representatives have taken measures to electronically throttle back access to the server.  Just temporarily, of course.  Keep moving folks, nothing to see here.

The fact remains that the TARP plan in its present form remains a blatant gift of taxpayer money to the politically connected elite institutions that remain on Wall Street, most notably Goldman Sachs.  Paying more than market value for mortgage-backed assets (and the only way this plan would help the capitalization of any financial institution is if the government pays more than market value) is a gift.  In fact it is worse than a gift- it is a money gift plus a taxpayer funded put on the purchased securities, most of which are likely to decline even further in value as the housing crisis continues to worsen.

Many voters opposed the TARP plan because they are philosophically opposed to government intervention in markets.  Others are more flexible in this regard, but realize that there are  alternatives to the TARP plan that will be more effective in the long run and that better protect the taxpayer.  Henry Blodgett discusses a few of them here.  These proposals would replenish needed capital into the banking system without creating a windfall for the partners of Goldman Sachs and Morgan Stanley as the TARP plan would. 

In an ideal free market, business owners are punished for taking foolish risks by having their equity diminished or wiped out.  When Bear Stearns went down, the equityholders suffered.  Likewise for Lehman, AIG, Wachovia and WaMu.  The real perversity of the Paulson TARP plan is that Goldman Sachs partners and other equityholders would reap a windfall as the government overpays them for the bad assets and insulates them from further depreciation of those assets.  The stock price of this politically connected investment bank, which was at the forefront of the fraudulent mortgage securitization industry, could double.  Strengthened by the gift of taxpayer money, it could gobble up the assets of its insolvent former competitors (which went bankrupt by engaging in the very same activities) and come out of this significantly strengthened. 

That is un-American.  Don't these people have enough advantages in life?

If  taxpayer money needs to be injected into the banking system in order to restore liquidity, it could be done through an institution that is on the verge of failure, as Wachovia was.  The government could nationalize the bank with existing shareholders receiving credit only to the extent that assets exceed liabilities at the time of nationalization.  The infrastructure of the nationalized bank could be used to loan money into the economy.  When the crisis eases, it could be sold back to the public in an IPO.  This way, no taxpayer money ends up in the packet of shareholders or towards paying for golden parachutes.  It all goes toward easing the credit crunch.

Although not knowing all the details, most voters sense that the TARP plan is more a giveaway to Goldman Sachs than it is a solution to the credit crunch.  Make no mistake- the voters will notice who votes for the TARP plan when it comes up again, and vote accordingly in three weeks.  Members of Congress who initially voted against the plan will especially be singled out for punishment if they change their minds. 

 Congress should know that even without its e-mail.

Shameless Cronyism

Henry Paulson made tens of millions of dollars off of the mortgage securitization business when he was at Goldman Sachs.  As Treasury Secretary he stood by or actively assisted as Goldman competitors Bear Stearns, Merrill Lynch and Lehman Bros. were permitted to fail or were sold under duress to other institutions.  As in the AIG bailout and those of Freddie Mac and Fannie Mae, all of these failures were managed in a way that ravaged shareholders and corporate management, but preserved the interests of counterparties. 

After Lehman went down, and Goldman's stock started to plummet indicating it was next in line, Paulson in coordination with the Fed and the SEC  immediately banned short selling of financial stocks.  Paulson then tries to ram through a $700B giveaway package of taxpayer dollars that would benefit mostly Goldman and Morgan Stanley.  He does this just as Congress is wrapping up its session and is ready to go home, and urges that it be passed quickly with no amendments or extended debate, or else the world's financial system will unravel.  Media shills report that the system was "a few trades away from complete collapse" until word of the Paulson plan began to spread.

Unlike all of the previous managed collapses and bailouts, this one would remove the distressed assets from Goldman's balance sheet, which would immediately make it much more profitable and cause its stock price to rocket upwards.  

Paulson's proposal provided that only he gets to decide who gets the free money and under what conditions, and that no court could review his decisions.  He alone would decide which firms would survive and which would not, and under what terms.  He adamantly states that "protecting the taxpayer" is his paramount concern.  However, at today's Senate hearing he and Ben Bernanke blanched at the thought of requiring Paulson's ex-partners at Goldman to give up any equity to the taxpayer in exchange for this free money. 

Paulson's plan drew a few mild objections at the Senate Banking Committee hearing today, but it was pretty clear that most of the Senators were unwilling to risk affronting the money masters.  Every time the subject of giving the taxpayers equity came up, the topic was diverted to the more loosely defined "limiting executive compensation," which is something that could comfortably be worked around with a wink and a nod both in terms of substance and timing.  Here are a few questions that I wished were asked but were not:

1. Mr. Paulson, if this is such a great investment for the taxpayer, why hasn't Wall Street been able to find private capital to make the investment?

2. If the government is the lender of last resort, doesn't that mean that it should demand more stringent terms than a private investor would?

3. Would an arms-length investor like Warren Buffett or any of the sovereign wealth funds buy distressed securities for more than their market value without getting equity in return?  Can you point to a single instance of this ever happening?

4. If the purpose of the bailout is just to protect the system without the moral hazard of protecting those who made bad investments, why should people like the Goldman Sachs partners retain any ownership at all? Why should they come out of this better than the Bear Stearns partners did?  Wht not just nationalize Goldman Sachs if it is both insolvent and a systemic risk, stabilize it and eventually sell it back to the public in an IPO for a profit?

5. How will it improve the bank's capitalization if you don't pay more than market value for these assets?  Isn't the only way this plan is going to help the credit crisis if the government overpays for the distressed assets?

6.  Wall Street paid record bonuses last December when it was well aware of the looming crisis.  What can be done to recover these funds for the taxpayer? 

The Paulson plan is shameless cronyism at its worst.  It would give tens of millions of dollars in increased profitability and share appreciation to the same people who are at the root of this mess- the partners of Goldman Sachs.  It would be the mother of all moral hazards.  It would be an unambiguous demonstration of the new reality in American finance that being politically connected out-trumps prudent financial stewardship.

Peak Denial

A recent National Geographic article by Brian Handwerk touts Italian oil executive Leonardo Maugeri's new book The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource, in which the author expresses the cornucopian view that much of the world is still largely unexplored for oil and there are plenty of new oilfields waiting to be discovered.

I'm not an oil industry insider, but I think there is plenty of freely available evidence that Maugeri's book is at best irrationally optimistic and at worst intentionally deceptive.  Consider these facts:

1. Multinational oil giants have been investing billions of dollars in recent years for nonconventional deep sea and polar exploration.  Producing oil from such environments is much more expensive (and therefore less profitable) than is conventional production.  If these companies believed that significant conventional oil deposits are yet to be discovered, it would be in their best economic interests to find them and produce it rather than to rely on nonconventional sources. 
2. Similarly, the industry would not be expected to invest as it has been doing in additional production capacity for heavy oils and syncrude if there was a belief that large conventional deposits of light sweet crude oil are yet to be discovered.   
3. Cornucopians like Maugeri and Daniel Yergin predict that consumption of refined products such as gasoline in the United States is destined to increase significantly in the decades to come as it has in the past.  However, even at today's consumption levels there is a shortage in current refining capacity, particularly in the US.  Why has there been little to no investment or proposed investment in additional refining capacity by commercial energy interests?  The apparent answer is that those in the industry know that it would be an unwise investment because the volume of crude oil that will be available in the future for refining is not going to increase substantially.
4. Perhaps the most telling evidence that Peak Oil may be fast approaching is the US invasion and occupation of Iraq, which was obviously justified on false pretenses, and US efforts to gain influence in energy rich Central Asia.

    Why do people like Maugeri and Yergin spread obvious falsehoods?  If the public at large became convinced that a long term energy shortage was imminent it would change their economic behavior.  The debt leveraged world economy, which requires at least nominal economic growth to be sustained in order to avoid collapse, would be threatened.  Industries and entire economies would be expected to. This will no doubt eventually happen anyway, but our corporate and political leaders would like it put off for as long as possible while their own contingency plans are put into place.

Discuss this article at Strategytalk.org

Why is the US Hostile to Al-Sadr?

The immediate cause of the present developments in Iraq seem to stem from the plan that was described in National Security Advisor Stephen Hadley's  November 8, 2006 secret memo (leaked to and reported on by The New York Times) to President Bush.  The memo articulated a strategy to politically and militarily neutralize nationalist Shi'ite cleric Muqtada al-Sadr by fracturing the ruling Shi'ite coalition sponsored that has long been sponsored by Ayatollah Sistani and replacing it with a new coalition made up of SCIRI and Sunni parties.  A.K. Gupta has written a terrific article that outlines the many possible outcomes (none of them good) to the Hadley strategy. 

The bigger question, though is: Why does the U.S. wants al-Sadr out of the picture?  His forces for the most part are not part of the active insurgency.  Of the two major Shi'ite militias, his is the least well-armed and has the fewest links to Iran.   While "rogue elements" of his Mehdi Army have been blamed for  some of the sectarian violence, the worst of the Shi'ite death squads has been the special police commandos of the Iraqi Interior Ministry, which since mid-2005 has been staffed with members of the Badr Brigade militia that is part of SCIRI and is heavily supported by Iran.  As Gupta reports:

Badr operates death squads under the banner of the special police commandos. Beginning in 2004, U.S. forces organized, trained and equipped the police commandos, drawing from Hussein-era security forces, to create a neo-Baathist militia and death squad that would hunt Sunni insurgents. Under the Iraq government that took power in April 2005, Bayan Jabr, a former high-ranking commander in the Badr Brigade, took control of the commandos as head of the Interior Ministry. Jabr ousted Sunni personnel in the commandos, putting in place up to 3,000 Badr militiamen, and they quickly began a reign of terror against Sunnis in general.

The worst of the death squad activity also suspiciously coincided with the arrival of former US ambassador John Negroponte (infamous for being behind much of the death squad activity in El Salvador during the Reagan administration).  Asia Times reporter Pepe Escobar has also hinted at this:

The Proactive, Preemptive Operations Group implemented by the Pentagon is regarded by Sunnis and quite a few Shi'ites as being the mastermind of some of the car bombings, assassinations, sabotage, kidnappings and attacks on mosques fueling the civil war. The "Salvador option" has developed into the "Iraqification option". US-trained death squads in Iraq are not much different from the death squads in El Salvador during the 1980s - subordinated to the same "divide and rule" tactics. This is the "civil war" dirty secret: let the Arabs kill one another with the US posing as "victims".

Al-Sadr, while defending his militia's right to defend itself against hardcore Saddamists and Sunni extremists that view Shi'ites as apostates, has made it clear that he deplores the bulk of the death squad activities. 

Why then is al-Sadr viewed as such a threat by the United States?  Could it be the fact that, unlike SCIRI, he opposes the presence of US troops and rejects the division of Iraq into semi-autonomous federal states?  Could it be that he opposes passage of the proposed hydrocarbon law?  Is it because he is amenable to a coalition with moderate Sunnis, which could end the sectarian strife and make the presence of US troops harder to rationalize?

It seems like the Hadley plan is to co-opt SCIRI away from Iranian influence and to ultimately place its leader al-Hakim in power in Baghdad.

Discuss this article at StrategyTalk.org
 

Iraq Update

Alternet's Joshua Holland has written a very informative two part article that chronicles the long-planned grab for Iraq's oil resources.  The second part of the article casts some light on what has been happening in the Iraqi parliament over the past few weeks and perhaps why the US media has been ramping up the invective against Shi'ite Iraqi nationalist Muqtada al-Sadr.  Holland cites a BBC article reporting on the passage of a new law that would give greater autonomy to the regions and weaken the central government.  Al-Sadr's group and the two biggest Sunni groups (a nationalist political alliance is the worst nightmare for the US and Big Oil) boycotted the vote, which the US may have felt was necessary to cement support of the SCIRI Shi'a faction and the main Kurdish parties for the soon to be introduced hydrocarbon law.

Holland thinks Big Oil's plans are on the verge of going awry..

It's possible that the administration and its partners badly overplayed their hand. Iraq's new government stands on the verge of a complete meltdown, faced with a crisis of legitimacy based largely on the fact that it is seen as collaborating with American forces. Overwhelming majorities of Iraqis of every sect believe the United States is an occupier, not a liberator, and is convinced that it intends to stay in Iraq permanently.

..and it seems like al-Sadr is the biggest fly in their soup right now.  If you Google "Sadr" and "hydrocarbon law," however, don't expect to find many articles from the US mainstream press reporting on what could be one of the more important developments in US  economic history in the past 50 years. There is no shortage of news articles, though, in which al-Sadr is labeled as an "extremist" and the leader of the "most dangerous" militia, who needs to be "brought under control."  The timing is rather obvious, isn't it?  The US considers Arab nationalists enemies, whether it is Saddam,  Assad or al-Sadr, because one can't be a nationalist and a reliable lapdog at the same time.

The Post Weighs In

The Washington Post has weighed in on the Bush plan to "surge."  Interpreting a US mainstream media source on the Iraq situation is a little bit like reading Pravda back in the 1970s.  You can't take what is written literally, but through careful analysis you may be able to figure out something you didn't previously know.  The article cryptically states:

Responding to skepticism about Maliki within some parts of the administration, the White House may make a deeper involvement in Iraq contingent on Maliki cracking down on militias and death squads while also undertaking bold political initiatives and developing a wider economic plan, U.S. officials say. The addition of new U.S. troops, for example, may be phased over several months and conditioned on Iraq following through on promised political reforms, the officials said.

"Deeper involvement" could mean Maliki survives, or it could mean that the US will send in more troops in an attempt to rout Sunni insurgents that have been encircling Baghdad.  "Cracking down on militias" means using Iraqi government forces to attack Muqtada al-Sadr's Mehdi Army, but it doesn't necessarily mean a similar crackdown against al-Hakim's Badr Brigade militia.

"Bold Political Initiatives" means dumping al-Sadr, forming a new coalition that will be compliant with US goals, and amending the Constitution to give oil companies more assurance that the contracts they are awarded will hold up under future legal scrutiny.  A "wider economic plan" mainly means passing the hydrocarbon law that will hand control over Iraq's oil resources over to US/UK oil companies.

The centerpiece of the political plan is the creation of a national reconciliation government that would bring together the two main Shiite parties with the two largest Kurdish parties and the Sunni Iraqi Islamic Party, according to Iraqi and U.S. officials. The goal is to marginalize Moqtada al-Sadr, the leader of the largest and most powerful Shiite militia and head of a group that has 30 seats in parliament and five cabinet posts.

In reality, al-Sadr is feared by the would-be Western hegemonists not because he is an extremist, but because he is an Iraqi nationalist who desires a unified Iraq that is free from foreign occupation and influence.

To ensure participation of Sunni moderates, the Bush administration is pressing the Maliki government to take three other major steps: Amend the constitution to address Sunni concerns, pass a law on the distribution of Iraq's oil revenue and change the ruling that forbids the participation of former Baath Party officials.

"Amending the Constitution" in fact has as much to do with the concerns of Big Oil as it does with the Sunnis.  It seems that the existing Constitution never clarified whether it is the central government or the  regional ones that have the power to award oil development contracts. 

It remains to be seen how the Constitution could be amended to simultaneously satisfy SCIRI, the Kurds and the Sunni Iraqi Islamic Party.  The Kurds have already awarded some oil development contracts on the own, and the Kurdish regional government is working on its own energy law that is in conflict with the proposed national hydrocarbon law.  They want autonomy.  SCIRI has previously expressed a preference that the regional Shi'ite government in the south control the oil resources of Southern Iraq.  These positions are antithetical to what the oil-poor Sunnis want, which is central government control of the oil industry and an even distribution of the revenue throughout Iraq.  Their position is far more consistent with that of al-Sadr, who supports national control of the oil resources and revenue.

More on al-Sadr and the Proposed Iraqi Hydrocarbon Law

The heat against Muqtada al-Sadr has obviously been turned up in the US media within the past few weeks.  Al  Sadr's militia is unfailingly labeled as "extremist," as opposed to the presumably more "centrist" Badr Brigades, even though the latter has reportedly been more heavily involved in the sectarian violence against Sunnis than the Sadrists have.  The more cynical among us may take this as a sign that the US has reason to believe that al-Sadr is going to stand in the way of the proposed new Iraqi hydrocarbons law.  Al  Sadr recently met with Ayatollah Sistani and it is a safe bet that the proposed law figured prominently in the discussion.

Several weeks ago, the United States reportedly tried to arrange to have SCIRI and other compliant political parties leave the United Iraqi Shi'ite list in order to form a new coalition with Sunni elements in the Iraqi parliament.  Sistani reportedly used his influence to prevent this from happening.  At the same time, however, the Sadrists were exploring a coalition of their own with Sunni parties that share the Sadrist’s nationalist goals of having foreign military forces leave Iraq and for a strong central Iraqi government that has complete control over future oil revenues.  Reporter Pepe Escobar, writing in Asia Times, explains the significance of this:

The crucial development in the next few weeks is Muqtada's fine-tuning of a stunning Shi'ite counterpunch to demolish once and for all the US-created pro-sectarian strategy: a nationalist, pan-Islamist, anti-occupation coalition of the Sadrists and the neo-Ba'athists,plus any other religious or secular anti-occupation group. Transcending the Sunni/Shi'ite divide, this would preempt any threat of all-out civil war - not to mention decide the fierce Shi'ite family feud between Hakim and Muqtada in the Sadrists' favor. No wonder US Senator John McCain wants to "take out" Muqtada as much as the Pentagon does.                        

A recent interview with US Secretary of State Condoleezza Rice on PBS NewsHour seemed to confirm that the United States is preparing to escalate hostilities against the Mehdi Army if the Sadrists stand in the way of the passage of the proposed hydrocarbon law:

MARGARET WARNER: Now, you've been speaking with some of those leaders. They've come to Washington in the last couple of weeks. After those discussions, how feasible does this idea of a new moderate coalition within the Iraqi government sound to you, that is one that splits off the more radical Shiites, the ones allied with Sadr, and the more moderate Shiites go in with the Sunnis, some Sunnis and Kurds? Is that feasible?

CONDOLEEZZA RICE: Well, the definition is: Are these people who are now willing to have a plan for national reconciliation -- which means hydrocarbons law, for instance, the sharing of resources -- and are they willing to stand by the Iraqi armed forces, the Iraqi prime minister when he goes after the people who are...

There has been a virtual media blackout in the American press when it comes to the proposed hydrocarbon law and the significance of its introduction within the Iraqi parliament, which is reportedly scheduled within the next few days. 

"Victory in Iraq" is a phrase that is being used constantly with little attempt to explain what form such a victory may take.  However, passage of the hydrocarbons law, which would essentially obligate Iraq to hand over control of its oil resources to Big Oil for the next 30 years would likely constitute such a victory in the eyes of the US political and industry leaders who pushed for the Iraq invasion in the first place.

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