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Intro­duc­tion: Sup­ple­ment­ing a pre­dic­tion from FTR #412 (June of 2003), this pro­gram notes that the engineer–the Bush administration–has wrecked the train. As we pas­sen­gers stum­ble from the eco­nomic wreck­age, iden­ti­fy­ing the causes of the dis­as­ter is as impor­tant as pur­su­ing the male­fac­tors behind the deci­sive actions. The pro­gram begins with review of an arti­cle by Lucy Komisar stress­ing that the U.S. gov­ern­ment should use its stew­ard­ship of AIG to inves­ti­gate the off­shore oper­a­tions through which it con­ducted busi­ness in the past. In addi­tion to review­ing AIG’s pio­neer­ing devel­op­ment of “cap­tive” rein­sur­ance com­pa­nies to laun­der prof­its and evade taxes, the arti­cle high­lights AIG’s use of Coral Rein­sur­ance for a vari­ety of ille­gal gam­bits. It should be noted that AIG’s ille­gal oper­a­tions have been aided by a num­ber of pow­er­ful and influ­en­tial peo­ple. Much of the first side of the pro­gram con­sists of analy­sis of why AIG was cen­tral to the insti­tu­tional finan­cial col­lapse of Sep­tem­ber 2008. Among those who note the role of what Lucy Komisar calls “off­shore” in the cur­rent eco­nomic deba­cle is Man­hat­tan Dis­trict Attor­ney Robert Mor­gen­thau, who helped inves­ti­gate the BCCI affair. Con­clud­ing with infor­ma­tion from FTR #412, the pro­gram sets forth a col­umn by Paul Krug­man of The New York Times (a pro­fes­sor of eco­nom­ics at Prince­ton Uni­ver­sity.) In numer­ous recent broad­casts, Mr. Emory has used the phrase “the engi­neer is out to wreck the train” to describe the direc­tion of the Bush admin­is­tra­tion and the forces that drive it. For some time, the For The Record series has advanced the work­ing hypoth­e­sis that this admin­is­tra­tion is a front for the Under­ground Reich, with the goal of the polit­i­cal, eco­nomic and/or phys­i­cal destruc­tion and/or sub­ju­ga­tion of the United States as its goal. By mani­a­cally reduc­ing the fed­eral bud­get and dra­mat­i­cally increas­ing fed­eral expen­di­tures, the GOP extrem­ists are going to destroy the coun­try. Now, the notion that “the engi­neer intends to wreck the train” is not just Mr. Emory’s refrain.

Pro­gram High­lights Include: Detailed dis­cus­sion of the role of AIG’s credit default swaps in first but­tress­ing and then under­min­ing the sub­prime mar­ket; a stun­ning recap of the grim sta­tis­tics con­cern­ing the loom­ing deficit pic­ture; review of the fact that Karl Rove and Grover Norquist are the archi­tects of both fis­cal dis­as­ter through mas­sive tax cuts and the forg­ers of the GOP/Muslim Broth­er­hood alliance.

1. The pro­gram begins with review of a paper writ­ten by Lucy Komisar in which she dis­cussed the neces­sity of exam­in­ing AIG’s use of off­shore tax havens.

“The U.S. takeover of the world’s largest insur­ance con­glom­er­ate, AIG, puts it in a unique posi­tion to look into the inner deal­ings of a com­pany that is a prof­li­gate user of tax havens. AIG has employed off­shore shell com­pa­nies to cook its books and dodge taxes. The new U.S. man­agers should inves­ti­gate how they do it. AIG’s favorite off­shore juris­dic­tions are Bermuda, Bar­ba­dos, Switzer­land, and Lux­em­bourg, places immune from even the lax enforce­ment of America’s state insur­ance reg­u­la­tors and the Secu­ri­ties and Exchange Com­mis­sion (SEC). AIG’s off­shore sub­sidiaries include Amer­i­can Inter­na­tional Assur­ance Com­pany Lim­ited, Bermuda; Amer­i­can Inter­na­tional Rein­sur­ance Com­pany, Ltd., Bermuda; AIG Life Insur­ance Com­pany Ltd., Switzer­land; and AIG Finan­cial Advi­sor Ser­vices, S.A., Lux­em­bourg. AIG in the past has used tax havens to evade reg­u­la­tions and hide insider con­nec­tions in sup­pos­edly “arms-length” deals. This is espe­cially sig­nif­i­cant as the com­pany has moved into finan­cial ser­vices and asset man­age­ment. It has also used the off­shore sys­tem to evade U.S. taxes.

Here are two exam­ples, the first reported exclu­sively by this writer. AIG helped Vic­tor Pos­ner, a noto­ri­ously crooked investor, set up an off­shore rein­sur­ance com­pany so that Pos­ner could evade U.S. taxes. The pol­icy scam was dis­cov­ered in the early 1990s, after the SEC pros­e­cuted Pos­ner for a fraud­u­lent takeover scheme con­cocted with Wall Street thieves Michael Milken and Ivan Boesky, ordered him to pay $4 mil­lion to fraud vic­tims and banned him from serv­ing as offi­cer or direc­tor of any publicly-held com­pany. New man­agers took over Posner’s NVF Corp., which ran a Delaware vul­can­ized rub­ber plant. An insur­ance agent charged with exam­in­ing com­pany poli­cies dis­cov­ered that NVF was pay­ing AIG’s National Union Fire of Pitts­burgh sub­stan­tially over mar­ket for workmen’s com­pen­sa­tion insur­ance. AIG rein­sured the pol­icy through Chesa­peake Insur­ance, an off­shore rein­sur­ance com­pany Pos­ner owned in Bermuda. In essence, NVF, owned by Pos­ner, was buy­ing insur­ance from an AIG com­pany which was buy­ing rein­sur­ance for the pol­icy from an off­shore com­pany owned by Pos­ner. Bermuda pro­vided tax and cor­po­rate secrecy, so Chesapeake’s books were safe from the eyes of Amer­i­can reg­u­la­tors and tax author­i­ties. AIG and Pos­ner made out like ban­dits. AIG got a higher com­mis­sion from the inflated NVF pre­mium before send­ing the rest to Chesa­peake. Pos­ner wrote off the entire amount as a busi­ness expense and enjoyed the extra cash in Bermuda, tax free, stiff­ing the U.S. gov­ern­ment. Reduced prof­its also meant smaller div­i­dends and share prices for investors. The insur­ance agent can­celled the NVF pol­icy with AIG, but the Delaware Insur­ance Depart­ment did not make the scam pub­lic or take any action against AIG. A for­mer insur­ance depart­ment reg­u­la­tor told me, “This was not an iso­lated case with Vul­can [NVF]. AIG did that a lot. AIG helped com­pa­nies set up off­shore cap­tive rein­sur­ance com­pa­nies.” A “cap­tive” is owned by the com­pany it insures. AIG, he alleged, “would then over­charge on insur­ance and pay rein­sur­ance pre­mi­ums to the cap­tives, giv­ing the cap­tive own­ers tax-free off­shore income.”

“U.S. Should Exam­ine AIG’s Use of Tax Havens” by Lucy Komisar.

2. Much of the first side of the pro­gram con­sists of analy­sis of why AIG was cen­tral to the insti­tu­tional finan­cial col­lapse of Sep­tem­ber 2008:

“If Sep­tem­ber didn’t give you enough to worry about, con­sider what will hap­pen to real estate prices as unem­ploy­ment grows steadily over the next sev­eral months. As bad as things are now, they’ll get much worse.

They’ll get worse for the obvi­ous rea­son: because more peo­ple will default on their mort­gages. But they’ll also remain depressed for far longer than any­one expects, for a rea­son most peo­ple will never understand.

What fol­lows is one of the real secrets to September’s stock mar­ket col­lapse. Once you under­stand what really hap­pened last month, the events to come will be much clearer to you...

Every great bull mar­ket has sim­i­lar char­ac­ter­is­tics. The spec­u­la­tion must – at the begin­ning – start with a rea­son­ably good idea. Using long-term mort­gages to pay for homes is a good idea, with a few impor­tant caveats.

Some of these lim­i­ta­tions are obvi­ous to any intel­li­gent observer... like the need for a sub­stan­tial down pay­ment, the ver­i­fi­ca­tion of income, an inde­pen­dent appraisal, etc. But human nature dic­tates that, given enough time and the right incen­tives, any endeavor will be cor­rupted. This is one of the two crit­i­cal ele­ments of a bub­ble. What was once a good idea becomes a farce. You already know all the sto­ries of how this hap­pened in the hous­ing mar­ket, where loans were even­tu­ally given with­out fixed rates, with­out income ver­i­fi­ca­tion, with­out down pay­ments, and with­out legit­i­mate appraisals.

As bad as these prac­tices were, they would not have cre­ated a global finan­cial panic with­out the sec­ond, more crit­i­cal ele­ment. For things to get really out of con­trol, the farce must evolve fur­ther... into fraud.

And this is where AIG comes into the story. . . .”

“How AIG’s Col­lapse Began a Global Run on the Banks” by Porter Stans­berry; DailyWealth.com; 10/04/08.

3. Not­ing the sig­nif­i­cance of “off­shore” for rec­ti­fy­ing the cur­rent finan­cial cri­sis, Man­hat­tan Dis­trict Attor­ney Robert Mor­gen­thau high­lights the fact that much of the untaxed money can­not, under cur­rent reg­u­la­tions, be reclaimed by the U.S. Note that Mor­gen­thau helped inves­ti­gate the BCCI case, cited by him in the article.

“A major fac­tor in the cur­rent finan­cial cri­sis is the lack of trans­parency in the activ­i­ties of the prin­ci­pal play­ers in the finan­cial mar­kets. This opaque­ness is com­pounded by vast sums of money that lie out­side the juris­dic­tion of U.S. reg­u­la­tors and other super­vi­sory authorities.

The $700 bil­lion in Trea­sury Sec­re­tary Henry Paulson’s cur­rent pro­posed res­cue plan pales in com­par­i­son to the vol­ume of dol­lars that now escape the watch­ful eye, not only of U.S. reg­u­la­tors, but from the media and the gen­eral pub­lic as well.

There is $1.9 tril­lion, almost all of it run out of the New York met­ro­pol­i­tan area, that sits in the Cay­man Islands, a secrecy juris­dic­tion. Another $1.5 tril­lion is lodged in four other secrecy jurisdictions.

Fol­low­ing the Great Depres­sion, we bragged about a newly installed safety net that was sup­pose to save us from such a hard eco­nomic fall in the future. How­ever, the Secu­ri­ties and Exchange Com­mis­sion, the Fed­eral Reserve Sys­tem, the Comp­trol­ler of the Cur­rency and oth­ers have ignored tril­lions of dol­lars that have migrated to off­shore juris­dic­tions that are secre­tive in nature and out­side the safety net — beyond the reach of U.S. regulators. . . .”

“Too Much Money Is Beyond Legal Reach” by Robert Mor­gen­thau; Wall Street Jour­nal; 9/30/2008.

4. Con­clud­ing with infor­ma­tion from FTR #412, the pro­gram sets forth a col­umn by Paul Krug­man of The New York Times (a pro­fes­sor of eco­nom­ics at Prince­ton Uni­ver­sity.) In numer­ous recent broad­casts, Mr. Emory has used the phrase “the engi­neer is out to wreck the train” to describe the direc­tion of the Bush admin­is­tra­tion and the forces that drive it. For some time, the For The Record series has advanced the work­ing hypoth­e­sis that this admin­is­tra­tion is a front for the Under­ground Reich, with the goal of the polit­i­cal, eco­nomic and/or phys­i­cal destruc­tion and/or sub­ju­ga­tion of the United States as its goal. By mani­a­cally reduc­ing the fed­eral bud­get and dra­mat­i­cally increas­ing fed­eral expen­di­tures, the GOP extrem­ists are going to destroy the coun­try. Now, the notion that “the engi­neer intends to wreck the train” is not just Mr. Emory’s refrain. Note that FTR #412 was recorded in June of 2003.)

“ ‘The lunatics are now in charge of the asy­lum.’ So wrote the nor­mally staid Finan­cial Times, tra­di­tion­ally the voice of solid British busi­ness opin­ion, when sur­vey­ing last week’s bill. Indeed, the leg­is­la­tion is dou­bly absurd: the gim­micks used to make an $800-billion-plus tax cut carry an offi­cial price tag of only $320 bil­lion are a joke, yet the cost with­out the gim­micks is so large that the nation can’t pos­si­bly afford it while keep­ing its other promises.

“But then maybe that’s the point. The Finan­cial Times sug­gests that ‘more extreme Repub­li­cans’ actu­ally want a fis­cal train wreck: ‘propos­ing to slash fed­eral spend­ing, par­tic­u­larly on social pro­grams, is a tricky elec­toral propo­si­tion, but a fis­cal cri­sis offers the tan­ta­liz­ing prospect of forc­ing such cuts through the back door.’ Good for The Finan­cial Times. It seems that stat­ing the obvi­ous has now, finally, become respectable.

“It’s no secret that right-wing ide­o­logues want to abol­ish pro­grams Amer­i­cans take for granted. But not long ago, to sug­gest that the Bush administration’s poli­cies might actu­ally be dri­ven by those ideologues—that the admin­is­tra­tion was delib­er­ately set­ting the coun­try up for a fis­cal cri­sis in which pop­u­lar social pro­grams could be sharply cut—was to be accused of spout­ing con­spir­acy the­o­ries. [Ital­ics are Mr. Emory’s] Yet by push­ing through another huge tax cut in the face of record deficits, the admin­is­tra­tion clearly demon­strates either that it is com­pletely feck­less, or that it actu­ally wants a fis­cal cri­sis. (Or maybe both.)”

“Stat­ing the Obvi­ous” by Paul Krug­man; The New York Times; 5/27/2003.