Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

For The Record  

FTR #693 Miscellaneous Articles and Updates

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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.

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