MP3 Side 1 | Side 2

Intro­duc­tion: National secu­rity func­tions have been out­sourced to an increas­ing degree in recent years. At the epi­cen­ter of the pri­va­ti­za­tion of mil­i­tary and intel­li­gence func­tions is the infa­mous Black­wa­ter secu­rity out­fit. The pro­gram begins with alle­ga­tions by two for­mer employ­ees that the com­pany lead­er­ship not only engaged in ille­gal weapons traf­fick­ing but that they plot­ted to kill whis­tle blow­ers with poten­tially dam­ag­ing infor­ma­tion about the company.

In light of the arro­ga­tion of pub­lic defense and national secu­rity func­tions by ide­ol­o­gized pri­vate inter­ests, the appar­ent dis­ap­pear­ance of thou­sands of pathogens from Ft. Det­rick is of par­tic­u­lar con­cern. What might have hap­pened to these sam­ples? Who has them now?

In the con­text of the oper­a­tions of Black­wa­ter and other pri­vate secu­rity out­fits, some of whom appear to har­bor peo­ple with extrem­ist views, access to such deadly pathogens and their sub­se­quent dis­ap­pear­ance is extremely worrisome.

In Chile, the swine flu has mutated in such a way as to infect turkeys. Will it be spread by other avian species at an accel­er­ated rate?

There has been wide­spread spec­u­la­tion on the Inter­net that the virus may have been cre­ated in a lab­o­ra­tory. In that con­text, it is inter­est­ing to note that, as dis­cussed in FTR #55, the virus from the 1918 flu pan­demic has been stud­ied by mil­i­tary sci­en­tists asso­ci­ated with Ft. Det­rick (the military’s top bio­log­i­cal war­fare research facil­ity for many years). They appar­ently were able to recre­ate the virus’ genome. Is there any con­nec­tion between the military-connected research into the 1918 flu pan­demic and the cur­rent contagion?

In addi­tion to the H1N1, the Ebola virus has also mutated in such a way as to jump species, now infect­ing pigs. Ebola, too, has been cited by researchers as a pos­si­ble bio­log­i­cal war­fare weapon.

The bal­ance of the pro­gram deals with the finan­cial melt­down and bailout. After not­ing some observers’ view that the bailout con­sti­tuted a slow-motion takeover of the U.S. gov­ern­ment by the giants of finance, the broad­cast sets forth an esti­mate that the total tab for the bailout will be $23.7 trillion!

Pro­gram High­lights Include: AIG’s con­tin­ued weak­ness and the con­tin­u­ing threat to the global econ­omy that that weak­ness com­prises; the fact that the finan­cial melt­down and col­lapse have helped to enlarge the very insti­tu­tions deemed “too big to fail”; Euro­pean banks’ con­tin­ued hold­ing of AIG deriv­a­tives; a loop­hole that could per­mit major investors to profit from the TARP pro­gram at tax­pay­ers’ expense; accused Ponzi scheme oper­a­tor R. Allen Stanford’s “blood oath” taken with a col­league and part­ner; Stanford’s attempt to hire Karl Rove’s lawyer to rep­re­sent him.

1. Pri­vate secu­rity out­fit Black­wa­ter has been in the news a great deal in recent months. Recent alle­ga­tions by for­mer employ­ees and asso­ciates impli­cate the firm in attempts at killing whis­tle blow­ers and ille­gal traf­fick­ing in weapons.

With the appar­ent extrem­ist views of Erik Prince, the company’s head, the out­sourc­ing of vital national secu­rity func­tions to Black­wa­ter and other, sim­i­lar firms, should be of great concern.

A for­mer Black­wa­ter employee and an ex-US Marine who has worked as a secu­rity oper­a­tive for the com­pany have made a series of explo­sive alle­ga­tions in sworn state­ments filed on August 3 in fed­eral court in Vir­ginia. The two men claim that the company’s owner, Erik Prince, may have mur­dered or facil­i­tated the mur­der of indi­vid­u­als who were coop­er­at­ing with fed­eral author­i­ties inves­ti­gat­ing the com­pany. The for­mer employee also alleges that Prince “views him­self as a Chris­t­ian cru­sader tasked with elim­i­nat­ing Mus­lims and the Islamic faith from the globe,” and that Prince’s com­pa­nies “encour­aged and rewarded the destruc­tion of Iraqi life.”

In their tes­ti­mony, both men also allege that Black­wa­ter was smug­gling weapons into Iraq. One of the men alleges that Prince turned a profit by trans­port­ing “ille­gal” or “unlaw­ful” weapons into the coun­try on Prince’s pri­vate planes. They also charge that Prince and other Black­wa­ter exec­u­tives destroyed incrim­i­nat­ing videos, emails and other doc­u­ments and have inten­tion­ally deceived the US State Depart­ment and other fed­eral agen­cies. The iden­ti­ties of the two indi­vid­u­als were sealed out of con­cerns for their safety.

These alle­ga­tions, and a series of other charges, are con­tained in sworn affi­davits, given under penalty of per­jury, filed late at night on August 3 in the East­ern Dis­trict of Vir­ginia as part of a seventy-page motion by lawyers for Iraqi civil­ians suing Black­wa­ter for alleged war crimes and other mis­con­duct. Susan Burke, a pri­vate attor­ney work­ing in con­junc­tion with the Cen­ter for Con­sti­tu­tional Rights, is suing Black­wa­ter in five sep­a­rate civil cases filed in the Wash­ing­ton, DC, area. They were recently con­sol­i­dated before Judge T.S. Ellis III of the East­ern Dis­trict of Vir­ginia for pre­trial motions. Burke filed the August 3 motion in response to Blackwater’s motion to dis­miss the case. Black­wa­ter asserts that Prince and the com­pany are inno­cent of any wrong­do­ing and that they were pro­fes­sion­ally per­form­ing their duties on behalf of their employer, the US State Department.

The for­mer employee, iden­ti­fied in the court doc­u­ments as “John Doe #2,” is a for­mer mem­ber of Blackwater’s man­age­ment team, accord­ing to a source close to the case. Doe #2 alleges in a sworn dec­la­ra­tion that, based on infor­ma­tion pro­vided to him by for­mer col­leagues, “it appears that Mr. Prince and his employ­ees mur­dered, or had mur­dered, one or more per­sons who have pro­vided infor­ma­tion, or who were plan­ning to pro­vide infor­ma­tion, to the fed­eral author­i­ties about the ongo­ing crim­i­nal con­duct.” John Doe #2 says he worked at Black­wa­ter for four years; his iden­tity is con­cealed in the sworn dec­la­ra­tion because he “fear[s] vio­lence against me in retal­i­a­tion for sub­mit­ting this Dec­la­ra­tion.” He also alleges, “On sev­eral occa­sions after my depar­ture from Mr. Prince’s employ, Mr. Prince’s man­age­ment has per­son­ally threat­ened me with death and violence.”

In a sep­a­rate sworn state­ment, the for­mer US marine who worked for Black­wa­ter in Iraq alleges that he has “learned from my Black­wa­ter col­leagues and for­mer col­leagues that one or more per­sons who have pro­vided infor­ma­tion, or who were plan­ning to pro­vide infor­ma­tion about Erik Prince and Black­wa­ter have been killed in sus­pi­cious cir­cum­stances.” Iden­ti­fied as “John Doe #1,” he says he “joined Black­wa­ter and deployed to Iraq to guard State Depart­ment and other Amer­i­can gov­ern­ment per­son­nel.” It is not clear if Doe #1 is still work­ing with the com­pany as he states he is “sched­uled to deploy in the imme­di­ate future to Iraq.” Like Doe #2, he states that he fears “vio­lence” against him for “sub­mit­ting this Dec­la­ra­tion.” No fur­ther details on the alleged murder(s) are provided.

“Mr. Prince feared, and con­tin­ues to fear, that the fed­eral author­i­ties will detect and pros­e­cute his var­i­ous crim­i­nal deeds,” states Doe #2. “On more than one occa­sion, Mr. Prince and his top man­agers gave orders to destroy emails and other doc­u­ments. Many incrim­i­nat­ing video­tapes, doc­u­ments and emails have been shred­ded and destroyed.”

The Nation can­not inde­pen­dently ver­ify the iden­ti­ties of the two indi­vid­u­als, their roles at Black­wa­ter or what moti­vated them to pro­vide sworn tes­ti­mony in these civil cases. Both indi­vid­u­als state that they have pre­vi­ously coop­er­ated with fed­eral pros­e­cu­tors con­duct­ing a crim­i­nal inquiry into Blackwater.

“It’s a pend­ing inves­ti­ga­tion, so we can­not com­ment on any mat­ters in front of a Grand Jury or if a Grand Jury even exists on these mat­ters,” John Roth, the spokesper­son for the US Attorney’s office in the Dis­trict of Colum­bia, told The Nation. “It would be a crime if we did that.” Asked specif­i­cally about whether there is a crim­i­nal inves­ti­ga­tion into Prince regard­ing the mur­der alle­ga­tions and other charges, Roth said: “We would not be able to com­ment on what we are or are not doing in regards to any pos­si­ble inves­ti­ga­tion involv­ing an uncharged individual.”

The Nation repeat­edly attempted to con­tact spokes­peo­ple for Prince or his com­pa­nies at numer­ous email addresses and tele­phone num­bers. When a com­pany rep­re­sen­ta­tive was reached by phone and asked to com­ment, she said, “Unfor­tu­nately no one can help you in that area.” The rep­re­sen­ta­tive then said that she would pass along The Nation’s request. As this arti­cle goes to press, no com­pany rep­re­sen­ta­tive has responded fur­ther to The Nation. . .

“Black­wa­ter Founder Impli­cated in Mur­der” by Jeremy Scahill; The Nation; 8/4/200.

2. In light of the arro­ga­tion of pub­lic defense and national secu­rity func­tions by ide­ol­o­gized pri­vate inter­ests, the appar­ent dis­ap­pear­ance of thou­sands of pathogens from Ft. Det­rick is of par­tic­u­lar con­cern. What might have hap­pened to these sam­ples? Who has them now?

In the con­text of the oper­a­tions of Black­wa­ter and other pri­vate secu­rity out­fits, some of whom appear to har­bor peo­ple with extrem­ist views, access to such deadly pathogens and their sub­se­quent dis­ap­pear­ance is extremely worrisome.

An inven­tory of poten­tially deadly pathogens at Fort Detrick’s infec­tious dis­ease lab­o­ra­tory found more than 9,000 vials that had not been accounted for, Army offi­cials said yes­ter­day, rais­ing con­cerns that offi­cials wouldn’t know whether dan­ger­ous tox­ins were missing.

After four months of search­ing about 335 freez­ers and refrig­er­a­tors at the U.S. Army Med­ical Research Insti­tute of Infec­tious Dis­eases in Fred­er­ick, inves­ti­ga­tors found 9,220 sam­ples that hadn’t been included in a data­base of about 66,000 items listed as of Feb­ru­ary, said Col. Mark Kor­te­peter, the institute’s deputy commander.

The vials con­tained some dan­ger­ous pathogens, among them the Ebola virus, anthrax bac­te­ria and bot­u­linum toxin, and less lethal agents such as Venezue­lan equine encephali­tis virus and the bac­terium that causes tularemia. Most of them, for­got­ten inside freezer draw­ers, hadn’t been used in years or even decades. Offi­cials said some serum sam­ples from hem­or­rhagic fever patients dated to the Korean War.

Kor­te­peter likened the inven­tory to clean­ing out the attic and said he knew of no plans for an inves­ti­ga­tion into how the vials had been left out of the data­base. “The vast major­ity of these sam­ples were work­ing stock that were accu­mu­lated over decades,” he said, left there by sci­en­tists who had retired or left the institute.

“I can’t say that noth­ing did [leave the lab], but I can say that we think it’s extremely unlikely,” Kor­te­peter said.

Still, the over­stock and the pre­vi­ous inac­cu­racy of the data­base raised the pos­si­bil­ity that some­one could have taken a sam­ple out­side the lab with no way for offi­cials to know some­thing was missing.

“Nine thou­sand, two hun­dred undoc­u­mented sam­ples is an extra­or­di­nar­ily seri­ous breach,” said Richard H. Ebright, a pro­fes­sor at Rut­gers Uni­ver­sity who fol­lows biose­cu­rity. “A small num­ber would be a con­cern; 9,200 . . . at an insti­tu­tion that has been the focus of intense scrutiny on this issue, that’s deeply wor­ri­some. Unacceptable.”

The insti­tute has been under pres­sure to tighten secu­rity in the wake of the 2001 anthrax attacks, which killed five peo­ple and sick­ened 17. FBI inves­ti­ga­tors say they think the anthrax strain used in the attacks orig­i­nated at the Army lab, and its prime sus­pect, Bruce E. Ivins, researched anthrax there. Ivins com­mit­ted sui­cide last year dur­ing an inves­ti­ga­tion into his activities. . . .

“Inven­tory Uncov­ers 9,200 More Pathogens” by Nel­son Her­nan­dez; The Wash­ing­ton Post; 6/18/2009.

3. In Chile, the swine flu has mutated in such a way as to infect turkeys. Will it be spread by other avian species at an accel­er­ated rate?

There has been wide­spread spec­u­la­tion on the Inter­net that the virus may have been cre­ated in a lab­o­ra­tory. In that con­text, it is inter­est­ing to note that, as dis­cussed in FTR #55, the virus from the 1918 flu pan­demic has been stud­ied by mil­i­tary sci­en­tists asso­ci­ated with Ft. Det­rick (the military’s top bio­log­i­cal war­fare research facil­ity for many years). They appar­ently were able to recre­ate the virus’ genome. Is there any con­nec­tion between the military-connected research into the 1918 flu pan­demic and the cur­rent contagion?

Chile said Fri­day that tests show swine flu has jumped to birds, open­ing a new chap­ter in the global epidemic.

Top flu and animal-health experts with the United Nations in Rome and the U.S. Cen­ters for Dis­ease Con­trol and Pre­ven­tion in Atlanta were mon­i­tor­ing the sit­u­a­tion closely, but said the infected turkeys have suf­fered only mild effects, eas­ing con­cern about a poten­tially dan­ger­ous development.

Chile’s turkey meat remains safe to eat, they said, and so far there have been no signs of a poten­tially dan­ger­ous mutation.

Chile’s health min­istry said it ordered a quar­an­tine Fri­day for two turkey farms out­side the port city of Val­paraiso after genetic tests con­firmed sick birds were afflicted with the same virus that has caused a pan­demic among humans.

So far, the virus—a mix­ture of human, pig and bird genes—has proved to be very con­ta­gious but no more deadly than com­mon sea­sonal flu. How­ever, virus experts fear a more dan­ger­ous and eas­ily trans­mit­ted strain could emerge if it com­bines again with avian flu, which is far more deadly but tougher to pass along.

The farms’ owner, Sopraval SA, alerted the agri­cul­ture min­istry after egg pro­duc­tion dropped at the farms this month. After ini­tial tests on four sam­ples, fur­ther genetic test­ing con­firmed a match with the sub­type A/H1N1 2009, the agri­cul­ture and health min­istries announced.

“What the turkeys have is the human virus—there is no muta­tion at all,” Deputy Health Min­is­ter Jean­nette Vega told Chile’s Radio Coop­er­a­tiva on Friday. . . .

“Chile Con­firms Swine Flu in Turkeys” by Fed­erico Quilo­dran [AP]; Breitbart.com; 8/21/2009.

4. Another infec­tious organ­ism found to jump species is the Ebola virus, now seen to infect pigs. Again, is this a nat­ural occur­rence or is this the result of human interference?

Note that a num­ber of researchers have expressed the opin­ion that Ebola may have been adapted for bio­log­i­cal war­fare purposes.

Just months after the swine flu pan­demic pan­icked the world, vary­ing strains of the Ebola virus have been dis­cov­ered in pigs, and they may be jump­ing between swine and humans effort­lessly.
Researchers, who reported their find­ings in the jour­nal Sci­ence, are con­cerned that pigs are pro­vid­ing a melt­ing pot where the virus could mutate into some­thing dead­lier. And they warned that the emer­gence of Ebola in the human food chain is “of seri­ous concern.”

The infec­tions were dis­cov­ered among pigs in the Philip­pines after tis­sue sam­ples were taken to iden­tify the source of unusu­ally severe res­pi­ra­tory infec­tions which were plagu­ing swine across the coun­try. The dis­cov­ery came as a sur­prise to researchers, since until now the Ebola-Reston (REBOV) virus had only been found in humans and other primates.

Per­haps more fright­en­ing, Ebola was also detected in farm work­ers who tend to the infected pigs. And it’s likely that the virus had been trans­mit­ted from swine to humans, and vice versa.

The good news is that so far the virus appears to pose no risk to humans, and none of the infected farm work­ers have shown signs of ill­ness. The US Cen­ters for Dis­ease Con­trol and Pre­ven­tion stress that this cur­rent strain of the virus is not of the same vari­ety as the one which caused out­breaks of hem­or­rhagic fever in the early 90’s, and at present there is no seri­ous cause for concern.

Even so, researchers writ­ing in Sci­ence warn that “there is con­cern that its pas­sage through swine may allow REBOV to diverge and shift its poten­tial for path­o­genic­ity.” In other words, the fact that the virus is being so read­ily exchanged between species could increase its chance of mutat­ing, and this fam­ily of viruses has been asso­ci­ated with fatal dis­eases in humans before. Fur­ther­more, it’s still unknown what effect an infec­tion from the cur­rent strain would have on a human with a com­pro­mised immune system. . . .

“Ebola Virus Found in Pigs, Infects Farm Work­ers” by Bryan Nel­son; Eco Worldly; 7/11/2009.

5. The bulk of the pro­gram deals with the eco­nomic melt­down. Rolling Stone writer Matt Taibi sees the finan­cial melt­down as rep­re­sent­ing the most vis­i­ble part of a grad­ual but deci­sive takeover of the U.S. gov­ern­ment by the lead­ing finan­cial institutions.

It’s over — we’re offi­cially, roy­ally fucked. No empire can sur­vive being ren­dered a per­ma­nent laugh­ing­stock, which is what hap­pened as of a few weeks ago, when the buf­foons who have been run­ning things in this coun­try finally went one step too far. It hap­pened when Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner was forced to admit that he was once again going to have to stuff bil­lions of tax­payer dol­lars into a dying insur­ance giant called AIG, itself a pro­found sym­bol of our national decline — a cor­po­ra­tion that got rich insur­ing the con­crete and steel of Amer­i­can indus­try in the country’s hey­day, only to destroy itself chas­ing phan­tom for­tunes at the Wall Street card tables, like a dis­solute noble­man gam­bling away the fam­ily estate in the wan­ing days of the British Empire.

The lat­est bailout came as AIG admit­ted to hav­ing just posted the largest quar­terly loss in Amer­i­can cor­po­rate his­tory — some $61.7 bil­lion. In the final three months of last year, the com­pany lost more than $27 mil­lion every hour. That’s $465,000 a minute, a yearly income for a median Amer­i­can house­hold every six sec­onds, roughly $7,750 a sec­ond. And all this hap­pened at the end of eight straight years that Amer­ica devoted to fran­ti­cally chas­ing the shadow of a ter­ror­ist threat to no avail, eight years spent stop­ping every cit­i­zen at every air­port to search every purse, bag, crotch and brief­case for juice boxes and explo­sive tubes of tooth­paste. Yet in the end, our gov­ern­ment had no mech­a­nism for search­ing the bal­ance sheets of com­pa­nies that held life-or-death power over our soci­ety and was unable to spot holes in the national econ­omy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).

So it’s time to admit it: We’re fools, pro­tag­o­nists in a kind of grue­some com­edy about the mar­riage of greed and stu­pid­ity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfor­tu­nate acci­dent, not some­thing that was cre­ated by the group of psy­chopaths on Wall Street whom we allowed to gang-rape the Amer­i­can Dream. When Gei­th­ner announced the new $30 bil­lion bailout, the party line was that poor AIG was just a vic­tim of a lot of shitty luck — bad year for busi­ness, you know, what with the finan­cial cri­sis and all. Edward Liddy, the company’s CEO, actu­ally com­pared it to catch­ing a cold: “The mar­ket­place is a pretty crummy place to be right now,” he said. “When the world catches pneu­mo­nia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “con­sumed by the same issues that are dri­ving house prices down and 401K state­ments down and War­ren Buffet’s invest­ment port­fo­lio down.”

Liddy made AIG sound like an orphan beg­ging in a soup line, hun­gry and sick from being left out in some­one else’s finan­cial weather. He con­ve­niently for­got to men­tion that AIG had spent more than a decade sys­tem­at­i­cally schem­ing to evade U.S. and inter­na­tional reg­u­la­tors, or that one of the causes of its “pneu­mo­nia” was mak­ing colos­sal, world-sinking $500 bil­lion bets with money it didn’t have, in a toxic and com­pletely unreg­u­lated deriv­a­tives market.

Nor did any­one men­tion that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the after­dawn light, it owed money all over town — and that a huge chunk of your tax­payer dol­lars in this par­tic­u­lar bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casi­nos, one where middle-class tax­pay­ers cover the bets of billionaires.

Peo­ple are pissed off about this finan­cial cri­sis, and about this bailout, but they’re not pissed off enough. The real­ity is that the world­wide eco­nomic melt­down and the bailout that fol­lowed were together a kind of rev­o­lu­tion, a coup d’état. They cemented and for­mal­ized a polit­i­cal trend that has been snow­balling for decades: the grad­ual takeover of the gov­ern­ment by a small class of con­nected insid­ers, who used money to con­trol elec­tions, buy influ­ence and sys­tem­at­i­cally weaken finan­cial regulations.

The cri­sis was the coup de grâce: Given vir­tu­ally free rein over the econ­omy, these same insid­ers first wrecked the finan­cial world, then cun­ningly granted them­selves nearly unlim­ited emer­gency pow­ers to clean up their own mess. And so the gambling-addict lead­ers of com­pa­nies like AIG end up not pen­ni­less and in jail, but with an Alien–style death grip on the Trea­sury and the Fed­eral Reserve — “our part­ners in the gov­ern­ment,” as Liddy put it with a shock­ingly casual matter-of-factness after the most recent bailout.

The mis­take most peo­ple make in look­ing at the finan­cial cri­sis is think­ing of it in terms of money, a habit that might lead you to look at the unfold­ing mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machi­avel­lian terms, what you see is a colos­sal power grab that threat­ens to turn the fed­eral gov­ern­ment into a kind of giant Enron — a huge, impen­e­tra­ble black box filled with self-dealing insid­ers whose scheme is the secur­ing of indi­vid­ual prof­its at the expense of an ocean of unwit­ting invol­un­tary share­hold­ers, pre­vi­ously known as taxpayers. . . .

“The Big Takeover” by Matt Taibi; Rolling Stone; 3/19/2009.

6. Despite the bailout, there appear to be seri­ous defi­cien­cies at A.I.G. In other words, the enor­mous  bailout may not prove to be ulti­mately successful.

The dozens of insur­ance com­pa­nies that make up the Amer­i­can Inter­na­tional Group show signs of con­sid­er­able weak­ness even after their cor­po­rate par­ent got the biggest bailout in his­tory, a review of state reg­u­la­tory fil­ings shows.

Over time, the weak­nesses could mean trou­ble for A.I.G.’s pol­i­cy­hold­ers, and they raise dif­fi­cult ques­tions for reg­u­la­tors, who nor­mally step in when an insurer gets into trou­ble. State com­mis­sion­ers are sup­posed to keep insur­ers from writ­ing new poli­cies if there is any doubt that they can cover their claims. But in A.I.G.’s case, reg­u­la­tors are eager for the insur­ers to keep writ­ing new busi­ness, because they see it as the best hope of pay­ing back taxpayers.

In the months since A.I.G. received its $182 bil­lion res­cue from the Trea­sury and the Fed­eral Reserve, state insur­ance reg­u­la­tors have said repeat­edly that its core insur­ance oper­a­tions were sound — that the finan­cial dis­as­ter was caused pri­mar­ily by a small unit that dealt in exotic derivatives.

But state reg­u­la­tory fil­ings offer a dif­fer­ent pic­ture. They show that A.I.G.’s indi­vid­ual insur­ance com­pa­nies have been doing an unusual vol­ume of busi­ness with each other for many years — invest­ing in each other’s stocks; bor­row­ing from each other’s invest­ment port­fo­lios; and guar­an­tee­ing each other’s insur­ance poli­cies, even when they have lacked the means to make good. Insur­ance exam­in­ers work­ing for the states have occa­sion­ally flagged these activ­i­ties, to lit­tle effect.

More omi­nously, many of A.I.G.’s insur­ance com­pa­nies have reduced their own expo­sure by send­ing their risks to other com­pa­nies, often under the same A.I.G. umbrella. . . . .

“After Res­cue, New Weak­ness Seen at A.I.G.” by Mary Williams Walsh; The New York Times; 7/31/2009.

7. One result of the finan­cial metlt­down is an increase in the size of the very bloated finan­cial giants that pre­cip­i­tated the cri­sis. The insti­tu­tions deemed “too big to fail’ are now even big­ger!

When the credit cri­sis struck last year, fed­eral reg­u­la­tors pumped tens of bil­lions of dol­lars into the nation’s lead­ing finan­cial insti­tu­tions because the banks were so big that offi­cials feared their fail­ure would ruin the entire finan­cial system.

Today, the biggest of those banks are even bigger.

The cri­sis may be turn­ing out very well for many of the behe­moths that dom­i­nate U.S. finance. A series of fed­er­ally arranged merg­ers safely landed trou­bled banks on the decks of more sta­ble firms. And it allowed the sur­vivors to emerge from the tur­moil with strength­ened mar­ket posi­tions, giv­ing them even greater con­trol over con­sumer lend­ing and more poten­tial to profit.

J.P. Mor­gan Chase, an amal­gam of some of Wall Street’s most sto­ried insti­tu­tions, now holds more than $1 of every $10 on deposit in this coun­try. So does Bank of Amer­ica, scarred by its acqui­si­tion of Mer­rill Lynch and partly government-owned as a result of the cri­sis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and –owned Cit­i­group, now issue one of every two mort­gages and about two of every three credit cards, fed­eral data show.

A year after the near-collapse of the finan­cial sys­tem last Sep­tem­ber, the fed­eral response has rede­fined how Amer­i­cans get mort­gages, stu­dent loans and other kinds of credit and has made a national spec­ta­cle of exec­u­tive pay. But no con­se­quence of the cri­sis alarms top reg­u­la­tors more than hav­ing banks that were already too big to fail grow even larger and more interconnected. . . .

“Banks ‘Too Big to Fail’ Have Grown Even Big­ger” by David Cho; The Wash­ing­ton Post; 8/28/2009.

8. In a sta­tis­ti­cal assess­ment of the bailouts, an offi­cial reported that the ulti­mate toll for the bailouts could amount to $23.7 tril­lion!

This fig­ures to bur­den the U.S. in a very seri­ous way for a very long time.

The fed­eral gov­ern­ment has devoted $4.7 tril­lion to help the finan­cial sec­tor through its cri­sis, a level of assis­tance equal to about one-third of the over­all U.S. econ­omy, a watch­dog report said Mon­day.
Under the worst of cir­cum­stances, the report said, the government’s max­i­mum expo­sure could total nearly $24 tril­lion, or $80,000 for every Amer­i­can.
The fig­ures are part of a tough new quar­terly report to Con­gress from spe­cial inspec­tor gen­eral Neil Barof­sky, who accuses the Trea­sury Depart­ment of repeat­edly fail­ing to adopt rec­om­men­da­tions aimed at mak­ing one com­po­nent of the gov­ern­ment finan­cial res­cue effort more account­able and trans­par­ent.
The $4.7 tril­lion com­mit­ment to the indus­try takes into account about 50 ini­tia­tives and pro­grams set up since 2007 by the Bush and Obama admin­is­tra­tions as well as by the Fed­eral Reserve. Barof­sky over­sees one of the ini­tia­tives _ the $700 bil­lion Trou­bled Asset Relief Program. . .

“Bailouts to Hit $23.7 Tril­lion, TARP Chief Says” [Newsmax.com/AP];  City-Data.com; 7/20/2009.

9. Under­scor­ing the depth of the red ink pre­cip­i­tated by the implo­sion of AIG, Euro­pean banks may keep deriv­a­tives from AIG worth $200 bil­lion, and they may do so for years!

Amer­i­can Inter­na­tional Group Inc.’s trad­ing part­ners may force the insurer to bear the risk of losses on cor­po­rate loans and mort­gages for years beyond the company’s expec­ta­tions, com­pli­cat­ing U.S. efforts to sta­bi­lize the firm, ana­lysts said.

Euro­pean banks includ­ing Soci­ete Gen­erale SA and BNP Paribas SA hold almost $200 bil­lion in guar­an­tees sold by New York-based AIG allow­ing the lenders to reduce the cap­i­tal required for loss reserves. The firms may keep the con­tracts to hedge against declin­ing assets rather than can­cel­ing them as AIG said it expects the banks to do, accord­ing to David Havens, man­ag­ing direc­tor at invest­ment bank Hexa­gon Secu­ri­ties LLC.

“For coun­ter­par­ties to vol­un­tar­ily ter­mi­nate those con­tracts makes no sense,” Havens said in an inter­view. “There’s no ques­tion that asset val­ues have soured on a global basis. With the faith and credit of the U.S. gov­ern­ment back­ing those guar­an­tees, why would they give that up?”

The falling value of hold­ings backed by the swaps may force AIG to post more col­lat­eral, pres­sur­ing the insurer’s liq­uid­ity and credit rat­ings in a repeat of the cycle that caused the firm’s near col­lapse in Sep­tem­ber, Cit­i­group Inc. ana­lyst Joshua Shanker said last week. The insurer needed a U.S. bailout val­ued at $182.5 bil­lion after hand­ing over col­lat­eral on a dif­fer­ent book of swaps back­ing U.S. sub­prime mortgages.

The aver­age weighted length of the Euro­pean swaps pro­tect­ing res­i­den­tial loans is more than 25 years, while the span tied to cor­po­rate loans is about 6 years, AIG said in a reg­u­la­tory fil­ing. Con­tracts cov­er­ing cor­po­rate loans in the Nether­lands extend almost 45 years, and the swaps on mort­gages in Den­mark, France and Ger­many mature in more than 30 years.

‘The­o­ret­i­cal Argument’

The port­fo­lio shrank by about half in 15 months to $192.6 bil­lion on March 31 and AIG’s mod­els show banks will aban­don more con­tracts, said Mark Herr, a spokesman for the insurer. AIG said in a fil­ing last month it expects the banks to can­cel “the vast major­ity” of the con­tracts in the next year as reg­u­la­tory changes reduce the ben­e­fits of the deriv­a­tives for lenders.

“We think we’re right because we’re bas­ing our analy­sis on actual behav­ior,” said Herr. “The inar­guable fact is that half of the port­fo­lio had been unwound at no cost to us as of March 31.” The con­tention that the swaps will last beyond a year is a “the­o­ret­i­cal argu­ment that is debunked” by banks’ actions, he said.

Last month, AIG said in a reg­u­la­tory fil­ing that it may be at risk for losses for “sig­nif­i­cantly longer than antic­i­pated” if the banks don’t ter­mi­nate their swaps.

‘Plea for Help’

“Given the size of the credit expo­sure, a decline in the fair value of this port­fo­lio could have a mate­r­ial adverse effect on AIG’s con­sol­i­dated results,” the com­pany said in the June 29 filing.

The Secu­ri­ties and Exchange Com­mis­sion asked for AIG to add the dis­clo­sure to the insurer’s “risk fac­tors,” Herr said. The action wasn’t prompted by any change in the secu­ri­ties backed by the swaps, he said.

Royal Bank of Scot­land Group Plc, Banco San­tander SA, Danske Bank A/S, Rabobank Group NV and Credit Agri­cole SA’s Calyon are also among banks which pur­chased the swaps, AIG said in a pre­sen­ta­tion in Feb­ru­ary plead­ing for its lat­est bailout. The banks could be forced to raise $10 bil­lion in cap­i­tal if AIG were allowed to fail, accord­ing to the document.

San­tander said through a spokesper­son that the bank’s risk of an AIG fail­ure is insignif­i­cant and fully col­lat­er­al­ized. Calyon declined to com­ment. Rep­re­sen­ta­tives of the other lenders didn’t imme­di­ately return mes­sages seek­ing comment.

Col­lat­eral Damage

Coun­ter­par­ties ter­mi­nated or allowed to expire $27.8 bil­lion in the so-called reg­u­la­tory relief swaps in the first quar­ter, and AIG got notice for another $16.6 bil­lion in ter­mi­na­tions through April 30, the firm said. Some of the remain­ing swaps have suf­fered losses, and AIG posted $1.2 bil­lion in col­lat­eral as of the first quarter.

“You’ll have an increas­ingly toxic pool of credit-default swaps every quar­ter” as the least risky swaps are ter­mi­nated, said Donn Vick­rey, ana­lyst at research firm Gra­di­ent Ana­lyt­ics Inc. “Swaps that are being held are done so for two rea­sons, either for reg­u­la­tory relief or because they’re ‘in the money’” which means they are valu­able hedges against asset declines.

AIG has rec­og­nized that some of the swaps are no longer being held for reg­u­la­tory relief. The insurer reclas­si­fied $3 bil­lion in swaps through March 31 that are likely to be kept after the reg­u­la­tory ben­e­fit expires, AIG said. The firm had a $393 mil­lion lia­bil­ity on those swaps.

Gerry Pas­ci­ucco, hired in Novem­ber to clean up the Finan­cial Prod­ucts unit that sold the swaps, said in an inter­view in Decem­ber that the Euro­pean swaps would mature over time with­out loss and faced very lit­tle risk. Pas­ci­ucco said in April that future losses will be limited.

Prime Mort­gages

The $192.6 bil­lion fig­ure for the swaps includes $99.4 bil­lion tied to cor­po­rate loans and $90.2 bil­lion linked to prime res­i­den­tial mort­gages, the insurer said.

“The sheer size of the port­fo­lio and the ‘black box’ nature of its under­ly­ing loans and assets do lit­tle to calm fears of fur­ther CDS losses,” Shanker said in the July 8 research note. “Poten­tial mark­downs in the reg­u­la­tory CDS port­fo­lio may result in col­lat­eral calls that would again put pres­sure on AIG’s liquidity.”

The government’s res­cue includes a $60 bil­lion credit line, $52.5 bil­lion to buy mortgage-linked assets owned or insured by the com­pany, and an invest­ment of as much as $70 bil­lion. AIG plans to reduce its debt under the credit line by $25 bil­lion by hand­ing over stakes in two non-U.S. life insur­ance units, the insurer said last month. AIG has tapped about $43 bil­lion from the line as of July 15.

“AIG’s Euro­pean Deriv­a­tives May Take Decades to Expire” by Hugh Son and James Stern­gold; bloomberg.com; 7/17/2009.

10. A loop­hole may–surprise, surprise,–allow traders to use inside infor­ma­tion to profit at the expense of taxpayers.

A con­tro­ver­sial $40-billion gov­ern­ment pro­gram to buy toxic secu­ri­ties from ail­ing banks has a flaw that law enforce­ment and finan­cial experts say could allow traders to ille­gally profit from inside information.

Crit­ics of the pro­gram say that with­out ade­quate safe­guards, traders could use the tens of bil­lions of dol­lars pro­vided by the gov­ern­ment to manip­u­late prices and exploit the price swings in other trades.

Because the gov­ern­ment is pro­vid­ing 75% of the program’s money — $30 bil­lion — the manip­u­la­tions could lead to sig­nif­i­cant losses by taxpayers.

“It is a con­flict by design,” said Neal Barof­sky, the spe­cial inspec­tor gen­eral for the bank­ing res­cue pro­gram who has urged tighter con­trols on the nine trad­ing firms selected to participate.

The Trea­sury Depart­ment, which is in charge of the pro­gram, says it intends to closely mon­i­tor trad­ing activ­ity to pre­vent ille­gal insider trad­ing and prof­i­teer­ing at the expense of the pub­lic interest.

But Barof­sky said the gov­ern­ment prob­a­bly stands lit­tle chance of beat­ing Wall Street at its own game.

“The Trea­sury can­not pos­si­bly match wits with the inno­va­tion and aggres­sive­ness of Wall Street,” he said. “If you give them a set of rules and there are tech­ni­cal­i­ties and legal loop­holes and things we haven’t thought of, they are going to find that out, not because they are bad, but because that is what they are sup­posed to do. They are sup­posed to seek out prof­its at all costs.” . . .

“Loop­hole in Gov­ern­ment Pro­gram to Buy Toxic Secu­ri­ties Could Cost Tax­pay­ers” by Ralph Vartabe­dian; The Los Ange­les Times; 8/14/2009.

11. Among the grow­ing num­ber of Ponzi scheme oper­a­tors being belat­edly brought to jus­tice is R.
Allen Stan­ford. Stan­ford and a part­ner in crime took a “blood oath”–literally.

R. Allen Stanford’s rela­tion­ship with the chief reg­u­la­tor of his Antigua bank was closer than most.

At a meet­ing in 2003, they became blood broth­ers, cut­ting their wrists and mix­ing their blood in a “broth­er­hood cer­e­mony” that Mr. Stanford’s chief finan­cial offi­cer said pro­moted an elab­o­rate scheme to hide a multibillion-dollar fraud from Amer­i­can and other regulators.

The asser­tion that the two took a “blood oath” was laid out in a plea agree­ment signed by the offi­cer, James M. Davis, and filed Thurs­day. After the pact, Leroy King, Antigua’s chief bank­ing super­vi­sor, called Mr. Stan­ford “Big Brother.” He received Super Bowl tick­ets, val­ued at thou­sands of dol­lars, for him­self and his girl­friend. And he accepted reg­u­lar bribe pay­ments from a secret Swiss bank account that Mr. Davis said he was told to han­dle by Mr. Stanford.

The unusual twist to the case, in which Mr. Stan­ford is accused of oper­at­ing a multibillion-dollar Ponzi scheme, was dis­closed by Mr. Davis as he pleaded guilty on Thurs­day to fraud and con­spir­acy in Fed­eral Dis­trict Court in Hous­ton. Mr. Davis, who over­saw the move­ment of vast sums of money at Stan­ford Inter­na­tional Bank, also said in a plea agree­ment that Mr. Stan­ford ordered him to report false rev­enue and false invest­ment port­fo­lio bal­ances to bank­ing reg­u­la­tors as far back as 1988, when Mr. Stan­ford ran an off­shore bank on the Caribbean island of Montserrat. . . .

“‘Blood Oath’ Sealed Stan­ford Deal, Court Is Told’ by Clif­ford Krauss, The New York Times; 8/28/2009.

12. A lawyer who has rep­re­sented Karl Rove has said he won’t work for Stan­ford with­out get­ting paid.

Looks like our old friend Allen Stan­ford is hav­ing some trou­ble find­ing a lawyer.

Two high-profile white-collar crime attor­neys, includ­ing the man who rep­re­sents Karl Rove, are try­ing to make sure they don’t get roped into defend­ing the cricket-loving bil­lion­aire — who’s accused of orches­trat­ing an $8 bil­lion fraud — with­out a guar­an­tee of payment.

The Hous­ton Chron­i­cle reports that last Fri­day, Dick DeGuerin, the heavy-hitting Hous­ton defense attor­ney who has been work­ing with Stan­ford for sev­eral months, asked the judge in the case to let him with­draw, because Stan­ford couldn’t assure him he’d be paid for future work.

Stan­ford had ear­lier issued a press release say­ing he’d replaced DeGuerin with Robert Luskin, Rove’s lawyer on the US attor­ney fir­ings and other controversies.

But in an email to the Chron­i­cle sent yes­ter­day, Luskin wrote:

As with Mr. DeGuerin, we’re not will­ing or able to pre­pare an ade­quate defense for Mr. Stan­ford with­out assur­ances that we can be paid. We’re work­ing on var­i­ous means to bring this mat­ter before the court.

Since the judge ruled yes­ter­day that DeGuerin can’t with­draw unless another lawyer agrees “uncon­di­tion­ally” to replace him, DeGuerin is still tech­ni­cally on the case.

The day last year when Stan­ford landed in a heli­copter at London’s Lord’s cricket ground, car­ry­ing a gold-plated brief­case full of cash to announce a deal for a tour­na­ment must seem long, long ago.

“Rove’s Lawyer Insists: I Won’t Work for Stan­ford With­out Get­ting Paid” by Zachary Roth; TPM­Muck­raker; 8/5/2009.