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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.