US Drone Use Setting Off New Global Arms Race

US Drone Use Setting Off New Global Arms Race

The proliferation of drone technology is, justifiably but hypocritically, generating concern in Washington

by John Glaser, January 09, 2013

With the US’s dramatic expansion of drone use for both surveillance and targeted bombings, a veritable arms race in unmanned aerial vehicles has begun, prompting concern from some in Washington worried about international rivals using drones like the US does.

“The number of countries that have acquired or developed drones expanded to more than 75, up from about 40 in 2005, according to the Government Accountability Office, the investigative arm of Congress,” USA Today reports.

Both China and Japan are working on sophisticated drone technology as their territorial disputes get more intense. Pakistan is also attempting to acquire armed drone systems, apparently with help from China. And Iran is known to have fielded their own drones.

Even the United Nations has expressed interest in acquiring their own drones, reportedly for use in peacekeeping missions.

The proliferation of drone technology is justifiably generating some concern in Washington. The prospect of other countries using drones in the same lawless, lethal, unaccountable way the US has is unnerving to Americans, who have long believed they should not be subject to the rules everybody else must follow.

“When we possess such weaponry, it turns out there is nothing unnerving or disturbing, apocalyptic or dystopian about it,” Tom Engelhardt observes in Terminator Planet: The First History of Drone Warfare, 2001-2050.

But “when the first Iranian or Russian or Chinese missile-armed drones start knocking off their chosen sets of ‘terrorists,’ we won’t like it one bit,” Engelhardt warns. “Then let’s see what we think about the right of any nation to summarily execute its enemies—and anyone else in the vicinity—by drone.”

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No Justice No Peace: those who say “we are the terrorists”

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Salaam ala man itabi’a al Huda

A must see and listen

Please forward.

The Real Truth of Wars Dr Dahlia Wasfi

http://www.safeshare.tv/w/qjnEABgxUS

some highlights …

… WOT cover to our military  aggression to gain control of resources of western Asia …

Poor of this country to kill poor of those Muslim countries

… Blood for oil …

For most of world we are the terrorists…

….Remaining silent … is criminal …

… Legitimate resistance to illegal occupation …

… struggling against oppressive hand  of empire ….

… Terrorist cells in Washington DC …

… No justice no peace

http://www.safeshare.tv/w/qjnEABgxUS

Transcript:

NOTE:

We have been saying many of these things for years, every since the illegal unjust occupation of Afghanistan that was planned before Pearl Harbor like event of 911 that the neo con Project for a New American Century wished for and got just as they had hoped in order to reenergize the military upgrade and strategic occupations in the Middle east (interesting coincidence) , but her way is very powerful , very moving, straight to the point …

How many innocent Muslims have been killed unjustly and suffered by these crimes against humanity she destrcibes, by the same people who are the huge corporations, the too big to fail and jail banksters in collusion with the Military Industrial Government Financial complex.

This is the cartel that the Occupy Wall Street movement is protesting about since their destructive immoral greed  is destroying the earth and all people that they deem counterproductive to their agenda of control.

I actually cried with tears for the power and truth of it, and its implications, and how it is exactly is as what I have been saying, is what many people are now saying, and times, places and people are a-moving quickly to the appointed End Time Events prophesized about in the Quran and Sunnah, and may Allah be praised the Most Almighty and Glorious, and may the salutations of peace and blessings be upon His Prophet Muhammad and his family and faithful followers.

See

http://terrorismbreedsterrorism.wordpress.com

https://occupationbreedsterrorism.wordpress.com

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Partial Transcript

For more search about it please

We have an obligation to every last victim of this illegal aggression, because all of this carnage has been done in our name.

Since World War II, 90 percent of the casualties of war are unarmed civilians, a third of them children. Our victims have done nothing to us. From Palestine to Afghanistan to Iraq to Somalia to wherever our next target may be, their murders are not collateral damage. They are the nature of modern warfare.

They don’t hate us because of our freedoms. They hate us because every day, we are funding and committing crimes against humanity.

The so-called war on terror is a cover for our military aggression to gain control of the resources of Western nations. This is sending the poor of this country to kill the poor of those Muslim countries. This is trading blood for oil. This is genocide, and to most of the world, we are the terrorists.

In these times, remaining silent about our responsibility to the world and its future is criminal, and in light of our complicity in the supreme crimes against humanity in Iraq and Afghanistan and ongoing violations of the UN charter and international law, how dare any American criticize the actions of legitimate resistance to illegal occupation? How dare we condemn anyone else’s violence?

Our so-called enemies in Afghanistan, Iraq, Palestine and our other colonies around the world, and our inner cities here at home are struggling against the oppressive hand of empire, demanding respect for their humanity. They are labeled insurgents or terrorists for resisting rape and pillage by the white establishment, but they are our brothers and sisters in the struggle for justice.

The civilians at the other end of our weapons don’t have a choice. But American soldiers have choices, and while there may have been some doubt five years ago, today, we know the truth. Our soldiers don’t sacrifice for duty, honor and country. They sacrifice for Kellogg, Brown and Root. They don’t fight for America–they fight for their lives and their buddies beside them because we put them in a war zone.

They’re not defending our freedoms–they are laying the foundations for 14 permanent military bases to defend the freedoms of ExxonMobil and British Petroleum. They’re not establishing democracy, they’re establishing the basis for an economic occupation to continue after the military occupation has ended.

Iraqi society today, thanks to American help, is defined by house raids, death squads, checkpoints, detentions, curfews, blood in the streets and constant violence. We must dare to speak out in support of the Iraqi people, who resist and endure the horrific existence we brought upon them through our bloodthirsty imperial crusade.

We must dare to speak out in support of the American war resisters–the real military heroes, who uphold their oath to defend the Constitution of the United States against all enemies, foreign and domestic, including those terrorist cells in Washington, D.C., more commonly known as the legislative, executive and judicial branches.

I close with a quote from Frederick Douglass, but if you want more information, please visit my Web site at liberatethis.com.

Frederick Douglass said: “Those who profess to favor freedom and yet deprecate agitation are men who want crops without plowing up the ground, they want rain without thunder and lightning. They want the ocean without the awful roar of its mighty waters.

“The struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did, and it never will.”

Every one of us must keep demanding, keep fighting, keep thundering, keep plowing, keep speaking and keep struggling until justice is served. No justice, no peace.

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Learn The Truth About War – Find Out Who The Real Terrorists Are.

Uploaded by  on Jul 29, 2011

Since being in Iraq and Afghanistan over 1 million civilians have been killed and thousands of soldiers have lost their lives to empire, to the bankers and elite who make a profit from human suffering, they are the real terrorists..This video was dedicated to those who have lost their lives to these criminals…. The final video with the girl speaking was not edited by me it was made the Youtube user TheParadigmShift it is an excerpt from an amazing video, which I recommend everyone watches.

This is a well done video. It appears here because it speaks the truth. Truth is what I seek. Truth needs to be told – far and wide. As an American it really hurts to watch this, but it needs watching. Please share it with your friends, put it on Facebook and Twitter and on your own blogs and sites. Thanks. You know it’s important. Most people just do not know about these things. Tell them. Thanks.

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“The real terrorist was me” : US Soldier

Posted September 3, 2010 by Hala in TV/MoviesLeave a Comment

wow…

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The real terrorist was me US Soldier – Subtitulado

Posted by Dr Mark Daniels on August 6, 2011Leave a comment (2)Go to comments

I tried hard to be proud of my service, but all I could feel was shame. Racism could no longer mask the reality of the occupation. These were people, these were human beings. I’ve since been plagued by guilt, any time I see an elderly man, li…ke the one who couldn’t walk, who we rolled onto a stretcher, and told the Iraqi police to take him away. I feel guilt any time I see a mother with her childen, like the one who cried hysterically, and screamed that we’re worse than Saddam, as we forced her from her home. I feel guilt any time I see a young girl, like the one I grabbed by the arm, and dragged into the street. We were told we were fighting terrorists.. the real terrorist was me, and the real terrorism was this occupation. Racism within the military has long been an important tool to justify the destruction and occupation of another country, it has long been used to justify the killing, subjugation and torture of another people. Racism is a vital weapon employed by this government; it is a more important weapon than a rifle, a tank, a bomber, or a battleship; it is more destructive than an artillery shell, or a bunker buster, or tomahawk missile. While all those weapons are created and owned by this government, they are harmless without people willing to use them. Those who send us to war, do not have to pull the trigger, or lob a mortar round; they do not have to fight the war, they merely have to sell the war. They need a public who’s willing to send their soldiers 
Video Rating: 5 / 5

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“The real terrorist was me”: Confessions of a US soldier

Posted by 

“I tried hard to be proud of my service, but all I could feel was shame. Racism could no longer mask the reality of the occupation. These were people, these were human beings. I’ve since been plagued by guilt, any time I see an elderly man, like the one who couldn’t walk, who we rolled onto a stretcher, and told the Iraqi police to take him away. I feel guilt any time I see a mother with her childen, like the one who cried hysterically, and screamed that we’re worse than Saddam, as we forced her from her home. I feel guilt any time I see a young girl, like the one I grabbed by the arm, and dragged into the street.

We were told we were fighting terrorists.. the real terrorist was me, and the real terrorism was this occupation. Racism within the military has long been an important tool to justify the destruction and occupation of another country, it has long been used to justify the killing, subjugation and torture of another people. Racism is a vital weapon employed by this government; it is a more important weapon than a rifle, a tank, a bomber, or a battleship; it is more destructive than an artillery shell, or a bunker buster, or tomahawk missile.

While all those weapons are created and owned by this government, they are harmless without people willing to use them. Those who send us to war, do not have to pull the trigger, or lob a mortar round; they do not have to fight the war, they merely have to sell the war. They need a public who’s willing to send their soldiers into harm’s way. They need soldiers who are willing to kill and be killed, without question…

They can spend millions on a single bomb, but that bomb only becomes a weapon, when the ranks of the military are willing to follow orders to use it. They can send every last soldier anywhere on Earth, but there will only be a war, if soldiers are willing to fight.. And the ruling class, the billionaires who profit from human suffering, care only about expanding their wealth, controlling the world economy.

Understand that their power lies only in their ability to convince us that war, oppression, and exploitation is in our interest. They understand that their wealth is dependent on their ability to convince the working class to die, to control the market of another country, and convincing us to kill and die, is based on their ability to make us think that we are somehow superior.

Soldiers, sailors, marines, airmen, have nothing to gain from this occupation. The vast majority of people living in the U.S. have nothing to gain from this occupation. In fact, not only do we have nothing to gain, but we suffer more because of it. We lose limbs, endure trauma, and give our lives. Our families have to watch flag-draped coffins lowered into the earth.

Millions in this country without health care, jobs, or access to education, have watched this government squander over FOUR-HUNDRED AND FIFTY MILLION DOLLARS A DAY ON THIS OCCUPATION. [IRAQ]

Poor and working people in this country, are send to kill poor and working people in another country, to make the rich richer; and without racism, soldiers would realize that they have more in common with the Iraqi people, than they do with the billionaires who send us to war.

I threw families onto the street in Iraq, only to come home and find families thrown onto the street in this country, and it’s a tragic, and unnecessary foreclosure crisis.

We need to wake up and realize that our real enemies are not in some distant land, they’re not people whose names we don’t know, and cultures we don’t understand. The enemy is people we know very well, and people we can identify. The enemy is a system that wages war when it’s profitable. The enemy is the CEO’s who lay us off from our jobs when it’s profitable; it’s the insurance companies who deny us health care when it’s profitable; it’s the banks who take away our homes when it’s profitable.

Our enemy is not five thousand miles away, they are right here at home. When we organize, and fight with our sisters and brothers, we can stop this war, we can stop this government, and we can create a better world.”

Text of the speech made by a US soldier.

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The Real Terrorist was ME! An Amazing Speech by an Iraq Veteran.

“The Real Terrorist Was Me”
Speech By War Veteran

Our real enemies are not those living in a distant land whose names or policies we don’t understand; The real enemy is a system that wages war when it’s profitable, the CEOs who lay us off our jobs when it’s profitable, the Insurance Companies who deny us Health care when it’s profitable, the Banks who take away our homes when it’s profitable. Our enemies are not several hundred thousands away. They are right here in front of us
– Mike Prysner

Posted July 29, 2010

Please Support the Veterans at:
http://www.ivaw.org/

AMAZING SPEECH BY WAR VETERAN

I tried hard to be proud of my service but all i can feel is shame

I seem i claim by guilt everytime i see an eldery man like the one that could’t walk and we brought by the stretcher and we called the Iraq’s Police to take him away

I feel guilt everytime i see a mother with her children like the one who cried hystericly and screaming that we are worst than Saddam, as we forced her from her home.

I feel guilt anytime I see a young girl, like the one I grabbed by the arm, and dragged into the street.

We are told we are fighting terrorists; the real terrorist was me and the real terrorism is in this occupation.

Those who send us to war do not have to pull a trigger, or lab a mortal round.

They don’t have to fight the war, they merely have to sell the war.

They need a public who is willing to send their soldiers in the harms way.

They need soldiers who are willing to kill and be killed without question.

They can spend millions on a single bomb

http://www.youtube.com/watch?v=akm3nYN8aG8&feature=player_embedded

http://www.informationclearinghouse.info/article26047.htm

THE BRITISH VETERANS AGAINST THE WAR!

The descent of Britain’s Afghan campaign into a Vietnam-style madness
By CAPTAIN DOUG BEATTIE MC

‘I really wanted to believe the greater good was being served in Afghanistan. But I wasn’t convinced; not by a long shot,’ said Doug Beattie
That night, as I lay staring into the inky blackness, the horrors replayed themselves time and again in my mind. I kept coming back to the futility of it all. The waste of lives – on all sides. How had things got so bad that children were prepared to act and die in such a hideous manner?

Soon afterwards news came that Sergeant Jon Mathews had been killed in Marjah. He left behind a wife and young daughter. Then it was announced that the base was being closed. So what had been the point of ever setting it up? Of allowing ourselves to get bogged down in yet another enemy town with limited manpower and no easy way of being re-supplied? In my mind it had been a waste of time, a waste of resources and a waste of Jon’s life.

http://uruknet.com/index.php?p=m58338&hd=&size=1&l=e

US AND UK GOVERNMENT DO NOT CARE ABOUT SOLDIERS , THEY CARE ABOUT PROFIT AND SELF-IMAGE.
SO LONG AS THIER DEFENCE STOCK PORTFOLIOS ARE MAKING MONEY AND THEY DO NOT LOOK STUPID IN PUBLIC (LIKE ADMITTING THEY WHERE WRONG OR LYING OR BEING BLACKMAILED!!) LET THE WAR AND THE SLAUGHTER CONTINUE , SO SOME MORE SOLDIERS AND CIVILIANS GET MUTILATED…NO BIG DEAL FOR OUR GOVERNMENT REPRESENTATIVES

BUT WE THE PEOPLE AND THE SOLDIERS WILL BE PAYING THE PRICE FOR GENERATIONS TO COME!!!

“By now most people know that DU has damaged tens of thousands of our own troops and caused soaring cancer rates in target populations, including the people of Iraq, Kosovo, and Afghanistan. Over 130,000 veterans of the first Gulf War have been declared “unfit for service” because of medical conditions which independent scientists and physicians connect to exposure to depleted uranium.

What is less well known is the staggering rate of birth defects in the children of the veterans of these wars. The British are reporting rates as high as 65%. It seems that breathing in the radioactive dust from exploded DU shells not only causes decapacitating illnesses, but massive genetic damage as well.

How the military poisons its own troops. “U.S War Crimes”

http://eclipptv.com/viewVideo.php?video_id=11812

The Roots of Gulf War Illness.
The US military has a long tradition of using its soldiers as medical guinea pigs.

In recent years, with the involvement of pharmaceutical executives like Donald Rumsfeld with the Department of Defense, the trend has accelerated. Now hundreds of thousands of US servicemen and women receive vaccines that are untested and experimental in nature.

On October 16, 2006, the Department of Defense announced that it will resume its previously court-halted anthrax vaccination program and that troops who do not agree to receive the six-injection series voluntarily will be faced with disciplinary action.

Untested vaccinations are believed to be one of the source of Gulf War Illness, a crippling condition which disabled tens of thousands of soldiers after the first Gulf War.

To learn more, visit this site: www.beyondtreason.com.

http://cuthulan.wordpress.com/2010/02/26/health-in-the-21st-cenutry-is-killing-us/

BE PREPARED TO LOOSE ANOTHER 100 SOLDIERS THIS SUMMER. ITS THE AFGHAN GROUSE SEASON , AND OUR TROOPS ARE THE TARGETS!!

http://cuthulan.wordpress.com/2010/07/19/tis-the-killing-season-afghanistans-grouse-season-2/

SOLDIERS ARE HUMAN BEINGS TOO, AND THEY KNOW THAT THIER POLITIONS HAVE SENT THEM OFF TO SLAUGHTER . IT PUTS AN AMAZING MENTAL STRAIN ON SOLDIERS WHEN THEY REALISED THEY ARE THE BAD GUYS!!!!
THUS THE US MILITARY SEEMS TO HAVE A SUICIDE DIVISION EVEN AL QUADA OR THE TALIBAN WOULD BE PROUD OF!!!

18 veterans commit suicide each day

By Rick Maze – Staff writer
Posted : Monday Apr 26, 2010 8:00:40 EDT

Troubling new data show there are an average of 950 suicide attempts each month by veterans who are receiving some type of treatment from the Veterans Affairs Department.

http://www.armytimes.com/news/2010/04/military_veterans_suicide_042210w/

http://cuthulan.wordpress.com/2010/05/08/darwin-award-for-soldiers-and-israel-will-natural-selection-end-war-and-israel/

SO WHO BENEFITS FROM THESE WARS?

POLITIONS ,DEFENCE CONTRACTORS AND DRUG DEALERS BENEFIT-

WASHINGTON – U.S. lawmakers have a financial interest in military operations in Iraq and Afghanistan, a review of their accounts has revealed.

Members of Congress invested nearly 196 million dollars of their own money in companies that receive hundreds of millions of dollars a day from Pentagon contracts to provide goods and services to U.S. armed forces, say nonpartisan watchdog groups.
Lawmakers charged with overseeing Pentagon contractors hold stock in those very firms, as do vocal critics of the war in Iraq, says the Centre for Responsive Politics (CRP).

http://cuthulan.wordpress.com/2009/10/12/us-government-making-a-killing-on-war/

Blair certainly did what he “thought was right” for Tony Blair. As Peter Oborne pointed out in March : “We now know that the wretched Blair has multiplied his personal fortune many times over by trading off the connections he made while in Downing Street. Shockingly, he fought a long battle to conceal the source of his new-found wealth, and only this month did it finally become public that one of his largest clients was a South Korean oil company, the UI Energy Corporation, with extensive interests in Iraq … he has also made £1million from advising the Kuwaiti royal family. It can be fairly claimed that Blair has profiteered as a result of the Iraq War in which so many hundreds of thousands of people died … in the league of shame, Tony Blair is arguably the worst of them all.”

Tony Blair tried to keep the public in the dark over his dealings with South Korean oil firm UI Energy Corporation
http://www.dailymail.co.uk/debate/article-1260204/Tony-Blairs-legacy-sleaze-cleaned-up.html#ixzz0tAqgpoDn

http://cuthulan.wordpress.com/2010/07/16/raoul-moat-tony-blair-or-the-police-who-is-the-biggest-murderer/

BLAIR also spent a great deal of effort covering up PEDOPHILE RINGS ,that seemed to point straight to his advisors and cabinet ministers.

http://cuthulan.wordpress.com/2010/01/07/uk-government-blackmailed-into-war-blair-covers-mps-paedophile-ring-and-the-dunblane-massacre/

http://cuthulan.wordpress.com/2010/07/20/tony-blair-i-told-you-so-and-so-did-millions-of-others/

DRUGS DEALERS ARE MAKING MASSIVE PROFITS-“Afghan drug trafficking brings US $50 billion a year”
The US is not going to stop the production of drugs in Afghanistan as it covers the costs of their military presence there, says Gen. Mahmut Gareev, a former commander during the USSR’s operations in Afghanistan.
http://www.russiatoday.com/Top_News/2009-08-20/afghanistan-us-drug-trafficking.html
http://cuthulan.wordpress.com/2010/07/22/dying-for-drugs-drugs-war-finance-and-your-government-representative/

AND DO THEY REDUCE TERRORISM? ..NO!!!

Baroness Manningham-Buller said the terrorist threats resulting from the campaigns in Iraq and Afghanistan left MI5 “swamped”
Iraq inquiry: Ex-MI5 boss says war raised terror threat
Baroness Manningham-Buller said the terrorist threats resulting from the campaigns in Iraq and Afghanistan left MI5 “swamped”
The invasion of Iraq “substantially” increased the terrorist threat to the UK, the former head of MI5 has said.

Giving evidence to the Iraq inquiry, Baroness Manningham-Buller said the action “radicalised” a generation of young people, including UK citizens.
http://www.bbc.co.uk/news/uk-politics-10693001

SOLDIERS ,ITS TIME TO PUT DOWN THE WEAPONS AND COME HOME . ITS NOT YOUR FAULT  AND ITS NOT YOUR WAR!!!!

http://cuthulan.wordpress.com/2010/01/10/the-real-uk-legacy-of-the-iraq-and-afghan-wars-death-stalks-our-streets-and-the-world/

http://cuthulan.wordpress.com/2010/04/07/military-heroes-or-welfare-zeros/

OTHERS ,WHO SHOULD OF AND CLAIMED TOO, KNOW BETTER SENT YOU OUT TOO FIGHT. THEY LIED AND THEY PROFITED BIG TIME!!!!

http://cuthulan.wordpress.com/2009/09/10/are-us-wars-in-iraq-and-afghanistan-well-intended-mistakes-what-we-now-know-from-the-evidence/

http://cuthulan.wordpress.com/2010/07/13/the-last-act-of-any-government-is-to-loot-the-nation-do-you-have-the-feeling-youre-being-robbed/

ITS NOT LIKE WE HAVE NOT BEEN HEAR BEFORE!!!!

THE SOLDIER

When you’re wounded and left on Afghanistan’s plains,
and the women come out to cut up what remains,
jest roll to your rifle and blow out your brains
and go to your gawd like a soldier.

THE POLITION

”Now all my lies are proved untrue
And I must face the men I slew.
What tale shall serve me here among
Mine angry and defrauded young?”
(Epitaphs of War, Rudyard Kipling, 1865-1936.)

THE REAL GAME PLAN EXPLAINED
The Divide and Rule .The NWO capitalist, communist con!! Stalin was a good state capitalist!
http://cuthulan.wordpress.com/2009/09/02/a-short-history-of-global-domination-or-rockefella-rothschild-and-the-capitalist-communist-nwo-con/
USA spreading death and destruction aka democracy since 1945
http://cuthulan.wordpress.com/2010/06/22/us-government-spreading-freedom-and-democracy-since-1945/
The system keeps repeating. Here is the 1933 game plan , exactly the same as today!
http://cuthulan.wordpress.com/2009/09/02/33/
Here is the obvious evidence for a 911 INSIDE JOB!!
http://cuthulan.wordpress.com/2010/06/11/911-the-case-for-an-inside-job/

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“We were told we were fighting Terrorists but the real terrorist was me” US Soldier speaks out

8022011

Let us not forget what Wikileaks has exposed and the price Bradley Manning is paying for revealing the loss suffered by the people of Iraq and Afghanistan.

The WAR Of TERROR must end and those responsible for engineering such crimes against humanity should be held accountable.
This soldier is absolutely inspiring. This is a must WATCH video… please share

– WACA –

Share this:

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Wikileaks exposes the real terrorists in Afghanistan

By Nick Everett

“I’ve been waiting for [this] for a long time”, tweeted Daniel Ellsberg, in reference to the release of more than 92,000 pages of classified US military documents by the whistle-blower website Wikileaks, on July 25.

Ellsberg, who famously leaked thousands of pages of a classified document revealing the secret history of the Vietnam War (the Pentagon Papers) in 1971, told Democracy Now’s Amy Goodman: “It is the first release in 39 years on the scale of the Pentagon Papers. How many times in these years should there have been the release of thousands of pages showing our being lied into war in Iraq, as in Vietnam, and the nature of the war in Afghanistan?”

Wikileaks’ “Afghanistan War Diary” is an archive of reports written mostly by soldiers on the ground between 2004 and 2009, detailing killings of civilians, including children, the growing strength of the resistance to the occupation and covert support for the Taliban from Pakistan’s military. Its release has left White House and Pentagon spokespeople floundering to defend the nine-year war, which the US military and its NATO allies are losing.

At first, they claimed that the documents didn’t reflect the reality of the war, since they predated the Obama administration’s “surge” of combat troops announced late last year. Then national security adviser General James Jones condemned the disclosure, saying it “could put the lives of Americans and our partners at risk, and threaten our national security”. At the same time, White House press secretary Robert Gibbs said, “There’s no broad new revelations in this”. Admiral Mike Mullen, chair of the Joint Chiefs of Staff, told a news conference, “[Wikileaks founder and chief editor Julian] Assange can say whatever he likes about the greater good he thinks he and his source are doing, but the truth is [Wikileaks] might already have on their hands the blood of some young soldier or that of an Afghan family”.

Slaughter of the innocents

But — as the leaked documents reveal — it is not Wikileaks that has blood on its hands. It’s the Obama administration, which continues to send troops to fight and die for its imperial interests in both Afghanistan and Iraq. With public support for the war already waning, this leak can only strengthen the call for the troops to come home.

Following the release, Assange told Amy Goodman: “Most civilian casualties occur in instances where one, two, 10 or 20 people are killed — they rarely numerically dominate the list of events … The way to really understand this war is by seeing that there is one killed after another, every day, going on and on.” Assange described a massacre, which he referred to as a “Polish My Lai”. On August 16, 2007, after returning to a village where they had suffered a roadside bomb that morning, Polish troops — part of the NATO occupation troops in Afghanistan — launched mortars into the village, striking a house where a wedding party was under way.

In another incident in 2007, reported in the Guardian, a convoy of US Marines was struck by a minivan rigged with explosives near the city of Jalalabad. As they raced the six miles back to their base, the Marines opened fire with automatic weapons, spraying bullets at anything in their path, including “teenage girls in fields, motorists in their cars, old men as they walked along the road”. In what the Guardian described as a “bloodbath”, “nineteen unarmed civilians were killed and 50 wounded”. The Wikileaks documents demonstrate a cover-up by the US military, which, according to the Guardian, initially reported that, simultaneously with the suicide explosion, “the patrol received small arms fire from three directions”. The six-mile rampage back to the base — which the Guardian notes was later the subject of a 17-day military inquiry and 12,000-page report — was described as simply, “The patrol returned to JAF [Jalalabad air field].”

The documents also illustrate how the massacre and initial cover-up sparked public fury among Afghan civilians at their US occupiers. Demonstrators ran through the streets of Jalalabad breaking windows and blocking roads.

A month later, in April 2007, the Afghan Human Rights Commission published a report into the shooting which said the victims included a 16-year-old woman carrying a bundle of grass and a 75-year-old man walking back from the shops. By then, a US army colonel had admitted to the Afghan puppet government that the shootings were a “terrible, terrible mistake” and “a stain on our honour”. Two thousand dollars were paid to the families of each victim. Yet all of the Marines involved in the incident were later exonerated by the military of any wrongdoing.

The Polish “My Lai” and the massacre near Jalalabad are only two war crimes among many. According to theGuardian, the documents show at least 144 separate instances of the killing of innocent Afghan civilians, ranging from individual shootings at the hands of CIA paramilitaries to mistaken air strikes that wiped out entire families and villages.

Air strikes

In July 2008, American planes attacked an Afghan bridal party of 70 to 90 people on a road near the Pakistani border. The bride and at least 27 other members of the party, including children, were killed. A month later, a memorial service for a tribal leader in the village of Azizabad in Afghanistan’s Herat province was hit by repeated US air strikes that killed at least 90 civilians, including 15 women and up to 60 children, according to a United Nations report. Among the dead were 76 members of one extended family, headed by a “wealthy businessman with construction and security contracts with the nearby American base at Shindand airport”, according to New York Times journalist Carlotta Gall. A local tribal leader told Gall: “It is quite obvious, the Americans bombed the area due to wrong information. I am 100 percent confident that someone gave the information due to a tribal dispute … These people they killed were enemies of the Taliban.”

Afghan President Hamid Karzai denounced the strikes against Azizabad and fired two Afghan commanders, including the top ranking officer in western Afghanistan, for “negligence and concealing facts”. An investigation launched by Karzai concluded that more than 90 Afghan civilians had died. The US military initially denied any civilians had died, claiming 30 Taliban “militants” had been killed. This estimate was then revised to 25 Taliban fighters and five “non-combatants”, including a woman and two children. A military “investigation” released findings on August 29, 2008, that supposedly corroborated this casualty count.

Ironically, the US military claimed that its now discredited findings at Azizabad “were corroborated by an independent journalist embedded with the U.S. force”, That “independent journalist” (working for Fox News) was Oliver North, who gained notoriety not only for his role in the Reagan administration’s cover-up of the Iran-Contra scandal, but for his testimony in defence of one of the Marines accused of carrying out a massacre of Vietnamese at Son Thang in February 1970.

This year more reports of civilian casualties have emerged. In February, US helicopters shot at a convoy of mini-buses, killing up to 27 civilians, including women and children. Also in February, in a special operations night raid, two pregnant women and a teenage girl, as well as a police officer and his brother, were shot dead in their home in a village in Paktia province. The soldiers reportedly dug the bullets out of the bodies, washed the wounds with alcohol, and tried to cover up the incident.

On July 23, two days before the release of the Wikileaks documents, a NATO missile attack killed 52 civilians in a small town in Helmand province, in southern Afghanistan. Women and children from eight families were packed into a house to escape a US incursion into the village when the residence was demolished from the sky. “They have ruined us, and they have killed small children and innocent women”, a 57-year-old resident told reporters, after he dragged the bodies of his relatives and neighbours from the carnage, according to a report in the New York Times. This incident, like so many others, was initially denied by US and NATO spokespeople and is now being “investigated”.

Previous Afghan war commander General Stanley McChrystal, after being sacked by the Obama administration, admitted candidly, “We’ve shot an amazing number of people and killed a number and, to my knowledge, none has proven to have been a real threat to the force”. McChrystal’s replacement, General David Petraeus, has promised to escalate the violence in order to subdue the Afghan resistance and force it to make a deal with Washington. The Wikileaks documents also reveal that the Pentagon set up a secret commando unit, Task Force 373 – made up of Army and Navy special operatives whose task is to assassinate individuals from a list of 2000 targets.

Changed strategy?

Obama used Wikileaks’ disclosures to announce a “change in strategy”.

Thirty-six hours after Wikileaks released the Afghan War Diary, the US House of Representatives voted to pass a bill that funds the war in Afghanistan with an extra US$33 billion and 30,000 more troops, for another year. This “change in strategy” follows a “surge” of 60,000 additional troops deployed to Afghanistan in late 2009.

With each additional deployment, troop casualties mount. July 2010 was the deadliest month of the entire war for both US and NATO troops. The US death count of at least 66 surpassed the June record of 50 killed. US soldiers are being maimed at four times the rate of 2009, and the number of wounded in 2009 was almost three times that of 2008. Ten Australian troops have been killed since June, nearly half the 21 fatalities suffered by Australian forces since 2001. More than 150 Australian soldiers have been wounded.

After the death of three Australian commandos in a helicopter crash on June 21, the Australian defence minister, John Faulkner, told ABC Radio: “It is absolutely critical for the safety and security of Australians and Australia to help prevent Afghanistan from again becoming a training ground and operation base for international terrorists”. Throughout the federal election campaign, both Prime Minister Julia Gillard and opposition leader Tony Abbott used the funerals of troops killed in Afghanistan to pledge their commitment to the war. But their calls for Australians to support the occupation are not being heeded. On the same day the three commandos were killed, a poll conducted by Essential Research found that 60% of Australians want the troops withdrawn from Afghanistan.

What the Wikileaks documents so clearly reveal — and the US and Australian governments have been determined to hide — is that the occupation troops are the real terrorists in Afghanistan today. Only their withdrawal can bring peace for the people of Afghanistan.

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so much more but you search for yourself to be convinced

 and reflect and return to your own soul which must stand for the accounting on the Final Judgement of the ONE God

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Derivatives ‘Mother of All Bubbles’ exploding

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NOTE: more recent at bottom of page

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Derivatives Mother of All Bubbles exploding 

In 2003, Warren Buffett called

Derivatives:

“financial weapons of mass destruction”

Why?

What are they about to destroy

massively? 

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a few charts to see magnitude

click on image to enlarge

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and this

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and

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and for more info see

Also see

Hedge Hogs; Gold Man’s Sacks; “financial terrorist attacks;” and the Obama sellout: > HERE

SUPER COMMITTEE BIG BANK ROBBERY and “this sucker” going down > HERE

Terrorism by Economic Collapse, debt bondage, money as debt on interest, etc > HERE

Derivatives ‘Mother of All Bubbles’ exploding > HERE

Super rich 1% vs 99 %; Terrorism Cycle: Guillotines: Occupy “ALL” streets  > HERE

and so many more on those websites (under development with limited resources)

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Great derivatives crash

Mother of All Bubbles Exploding,

Political Earthquakes Under Way

http://www.cecaust.com.au/pubs/pdfs/nce06-05.pdf

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Warren Buffett’s Wall Street War (pdf)
TSF’s Dark Comedy Commentary October 20, 2009
by Janet Tavakoli

In a January 2009 interview with NBC’s Tom Brokaw, Warren Buffett criticized leveraging “to the sky,” and creating “phony instruments [RMBSs, CDOs, et al.] that fool other people so you stick money in your pocket.” In 2002, he claimed over-the-counter derivatives are “financial weapons of mass destruction” and participants who account for them have “enormous incentives to cheat.”

Warren Buffett, the blogosphere’s “Oracle of Omaha,” often chastises the financial community. If you cost him money, he’s liable to write an expose. He posts annual shareholder letters on a low-tech website and seems to labor under the assumption that rational people eagerly read his blog. Congress and regulators are dismissive of Buffett’s hyperbolic rhetoric; it is fit only for a banana republic.

Buffett called the crisis an economic Pearl Harbor. [Buffett is not calling for this, but… ] During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees.

End of Excerpt. Click above link for full commentary.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago’s Graduate School of Business. She is the author of:Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli’s book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)

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Last Updated:  Tuesday, 4 March, 2003, 13:32 GMT

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Buffett warns on investment ‘time bomb’Derivatives are financial weapons of mass destruction” Warren BuffettThe rapidly growing trade in derivatives poses a “mega-catastrophic risk” for the economy and most shares are still “too expensive”, legendary investor Warren Buffett has warned.The world’s second-richest man made the comments in his famous and plain-spoken “annual letter to shareholders”, excerpts of which have been published by Fortune magazine.The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system.Contracts devised by ‘madmen’Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares – without buying the underlying investment.

 Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years Warren Buffett

Derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets – in effect buy insurance against market movements -, but have quickly become a means of investment in their own right.

Outstanding derivatives contracts – excluding those traded on exchanges such as the International Petroleum Exchange – are worth close to $85 trillion, according to the International Swaps and Derivatives Association.

Some derivatives contracts, Mr Buffett says, appear to have been devised by “madmen”.

He warns that derivatives can push companies onto a “spiral that can lead to a corporate meltdown”, like the demise of the notorious hedge fund Long-Term Capital Management in 1998.

Derivatives are like ‘hell’

 Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers … which can trigger serious systemic problems Warren Buffett

Derivatives also pose a dangerous incentive for false accounting, Mr Buffett says.

The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later.

This can result in nasty accounting errors. Some of them spring from “honest” optimism. But others are the result of “huge-scale fraud”, and Mr Buffett points to the US energy market, which relied for most of its deals on derivatives trading and resulted in the collapse of Enron.

Berkshire Hathaway, the investment group led by Mr Buffett, is pulling out of the market, closing down the derivatives trading subsidiary it bought as part of a huge reinsurance company a few years ago.

In his letter Mr Buffett compares the derivatives business to “hell… easy to enter and almost impossible to exit”, and predicts that it will take years to unwind the complex deals struck by its subsidiary General Re Securities.

Warren Buffett, dubbed “the sage of Omaha”, from where he controls Berkshire Hathaway, is well-known for both his blunt assessments of the markets and the high returns he delivers to shareholders.

This year, he remains cool towards further share investments, despite the sharp correction in stock market values. Mr Buffett says this “dismal fact is testimony to the insanity of valuations reached during The Great Bubble”.

Berkshire backyard barbecues

A good friend of Bill Gates, he famously refused to invest in technology shares during the boom years that came to a sudden end in March 2000. As a result, Berkshire was sitting pretty after the technology bubble burst.

In marked contrast to the hubris of former managers at fallen firms like Enron and WorldCom, Mr Buffett is known for his down-to-earth style, summoning shareholders not to glitzy hotels but “Berkshire backyard barbecues” and baseball games in out-of-the-way Omaha, Nebraska.

But his strategy of identifying undervalued companies with good management in unfashionable retail sectors or the insurance industry and investing in them for the long-term has produced spectacular returns.

During the past 37 years, the company has delivered an average annual return of 22.6%. Since 1965 the company’s book value has gone up by 194,936%.

However in 2001, the last year for which detailed numbers are available, heavy losses in the insurance industry worldwide resulted in a $3.77bn loss at Berkshire Hathaway – the first loss in the firm’s history under Warren Buffett.

http://news.bbc.co.uk/2/hi/2817995.stm

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Derivatives of Mass Destruction: From ‘Fat Man’ to ‘Fat Finger’

5 comments |  May 10, 2010  |  includes: DIAQQQSPY

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I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones. — Albert Einstein

Deputy National Security Adviser John Brennan said Sunday that the White House does not believe Thursday’s Wall Street nosedive was the result of a cyberattack. — The Hill

Had Mr. Einstein lived long enough he would not have been ignorant of WWIII’s weapons- they are financial in nature, and, instead of “Fat Man” and “Little Boy“, modern WMDs are called Credit Default Swaps (CDS) and are ignited by a “Fat Finger“.

The need to hedge derivative portfolio “delta” (sometimes in amounts far exceeding the underlying security’s total value and often “computer driven”) makes financial markets very vulnerable to “Fat Finger” problems (or any multi-standard deviation price changes). It’s a WMD (not confined to CDS, hedging is common to all derivatives) waiting for a trigger.

We need to dismantle these WMD, instead of focusing all effort onstamping out the next lit fuse.

Unconvinced? Think I’m (falsely) “shouting fire in a crowded theater?”

Read on.

In theory, CDS provide securities’ owners a means to cheaply insure against their default. By paying a small premium (or series of premiums) [usually far smaller than the security’s yield] the risk of default is swapped to the CDS seller.

In theory, as with all derivatives (in a former life I used to trade these things), sellers can instantaneously hedge (for instance, by selling the security issuer’s stock, bond, or currency) the assumed risks, deriving (sellers hope) profit from the received premiums less any hedging costs.

In practice, (as I learned, painfully) trying to maintain hedges in fast markets (and I traded foreign exchange–a pretty liquid arena) can be impossible. Worse, as price deviation from last hedged position grows, the amounts to hedge grow as well. A .5% move in the underlying might call for a 10% hedge, while a 2% move might call for 35% and so on.

Adding insult to injury, all those hedges may have to be unwound if prices come back to “normal.” Among traders, market chasing as described above is called hedging “bad gamma” (which is about as fun as having “bad karma”).

In practice, CDS are not primarily used as insurance. They are, more often, purchased “naked,”, not to hedge against a default, but to bet on it, and perhaps, as you’ll see, to actually accelerate it, particularly if one could, through naked purchases in greater amounts than existing underlying securities, force hedgers into selling over-drive.

I suspect events like last week’s panic in equity markets will become far more frequent so long as CDS use (in particular), and thus necessity of hedging thereof, continues to grow.

Warren Buffett (BRK.A) , before a Galileo-like recantation and rebaptism in the church of TBTF finance, was a pioneer in recognizing derivatives as financial weapons of mass destruction. Like the nuclear weapons of WWII, modern WMD are examples of tremendous leverage–tiny amounts of fissile material or premium, respectively, explode with enormous yield, wreaking horrific damage.

Unlike atomic weapons, whose direct effects are limited to a blast and radiation radius, modern WMD, like CDS, use high speed connectivity and computer driven hedging as transmission mechanisms. The “Fat Finger” ignites a “critical price deviation” forcing hedgers of naked CDS to (try to) sell what might be many multiples of available securities.

Thursday’s market action might in the future be seen as the Trinity testof the financial Manhattan Projectbroadcast live to anyone in the world with an internet connection.

Fortunately, just as atomic weapons require radioactive cores, so too do our CDS WMD. In the latter case, the underlying core (financial entity) must be highly leveraged. Instability, either at an atomic or financial level, is key to explosive yield. Trying to force default in an unleveraged, highly solvent financial entity would be about as fun as using carbon-12 instead of uranium-235 in an atomic bomb.

In other words, while real world WMD deterrence might require a missile shield, financial WMD deterrence might require a solvency shield. The more solvent, and less leveraged a company becomes, the less it needs to respond to the whims of the markets. It can just go about its business.

Highly leveraged financial companies like Lehman (LEHMQ.PK) and Bear Stearns were prime “fissile” material–so unstable they needed daily financial stabilization. Unfortunately, there seems to me to be far more financially unstable material laying around than fissile isotopes–Wall Street finance being far more effective than, say, Iranian centrifuges.

On the bright side, fears of “Fat Fingers” igniting naked CDS into financial WMD might someday be seen in the same light as plans for mutually assured destruction (MAD) – as signs of the need to dismantle armaments. Perhaps Homeland Security should audit the Fed, and dismantle the highly leveraged and unstable financial cores we’ve strategically placed around the nation.

Either that or people of the future might visit New York as they now visit Hiroshima and Nagasaki, looking at a plaque commemorating the destruction caused by a “Fat Finger” instead of a “Fat Man” or a “Little Boy.”

Who knows, maybe in addition to Arms Control, Capital Control will be a national security matter.

This article is tagged with: Macro ViewMarket OutlookUnited States

More articles by Dave Lewis »

http://seekingalpha.com/article/204122-derivatives-of-mass-destruction-from-fat-man-to-fat-finger

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A £516 trillion derivatives ‘time-bomb’

Not for nothing did US billionaire Warren Buffett call them the real ‘weapons of mass destruction’

By Margareta Pagano and Simon Evans

The market is worth more than $516 trillion, (£303 trillion), roughly 10 times the value of the entire world’s output: it’s been called the “ticking time-bomb”.

It’s a market in which the lead protagonists – typically aggressive, highly educated, and now wealthy young men – have flourished in the derivatives boom. But it’s a market that is set to come to a crashing halt – the Great Unwind has begun.

Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes.

Some of the world’s biggest hedge funds – SAC Capital, Lone Pine and Tiger Global – all revealed they were sitting on double-digit losses this year. September’s falls wiped out any profits made in the rest of the year. Polygon, once a darling of the London hedge fund circuit, last week said it was capping the basic salaries of its managers to £100,000 each. Not bad for the average punter but some way off the tens of millions plundered by these hotshots during the good times. But few will be shedding any tears.

The complex and opaque derivatives markets in which these hedge funds played has been dubbed the world’s biggest black hole because they operate outside of the grasp of governments, tax inspectors and regulators. They operate in a parallel, shadow world to the rest of the banking system. They are private contracts between two companies or institutions which can’t be controlled or properly assessed. In themselves derivative contracts are not dangerous, but if one of them should go wrong – the bad 2 per cent as it’s been called – then it is the domino effect which could be so enormous and scary.

Most markets have something behind them. Central banks require reserves – something that backs up the transaction. But derivatives don’t have anything – because they are not real money, but paper money. It is also impossible to establish their worth – the $516 trillion number is actually only a notional one. In the mid-Nineties, Nick Leeson lost Barings £1.3bn trading in derivatives, and the bank went bust. In 1998 hedge fund LTCM’s $5bn loss nearly brought down the entire system. In fragile times like this, another LTCM could have catastrophic results.

That is why everyone is now so frightened, even the traders, who are desperately trying to unwind their positions but finding it impossible because trading is so volatile and it’s difficult to find counterparties. Nor have the hedge funds been in the slightest bit interested in succumbing to normal rules: of the world’s thousands of hedge funds only 24 have volunteered to sign up to a code of conduct.

Few understand how this world operates. The US Federal Reserve chairman, Ben Bernanke, tapped up some of Wall Street’s best for a primer on their workings when he took the job a few years ago. Britain’s financial regulator, the Financial Services Authority, has long talked about the problems the markets could face on the back of derivative complexity. Unfortunately it did little to curb the products’ growth.

In America the naysayers have been rather more vocal for longer. Famously, Warren Buffett, the billionaire who made his money the old-fashioned way, called them “weapons of mass destruction”. In the late 1990s when confidence was roaring in the midst of the dotcom boom, a small band of politicians, uncomfortable with the ease with which banks would be allowed to play in these burgeoning markets, were painted as Luddites failing to move with the times.

Little-known Democratic senator Byron Dorgan from North Dakota was one of the most vociferous refuseniks, telling his supposedly more savvy New York peers of the dangers. “If you want to gamble, go to Las Vegas. If you want to trade in derivatives, God bless you,” he said. He was ignored.

What is a Derivative?

Warren Buffett, the American investment guru, dubbed them “financial weapons of mass destruction”, but for the once-great-and-good of Wall Street they were the currency that enabled banks, hedge funds and other speculators to make billions.

Anything that carries a price can spawn a derivatives market. They are financial contracts sold to pass on risk to others. The credit or bond derivatives market is one such example. It is thought that speculation in this area alone is worth more than $56 trillion (£33 trillion), although that probably underestimates the true figure since lax regulation has seen the market explode over the past two years.

At the core of this market is the credit derivative swap, effectively an insurance policy against the default in the interest payment on a corporate bond. One doesn’t even need to own the bond itself. It is like Joe Public buying an insurance policy on someone else’s house and pocketing the full value if it burns down.

As markets slid into crisis, and banks and corporations began to default on bond payments, many of these policies have proved worthless.

Emilio Botin, the chairman of Santander, the Spanish bank that has enjoyed phenomenal success during the credit crunch, once said: “I never invest in something I don’t understand.” A wise man, you may think.

Simon Evans

http://www.independent.co.uk/news/business/news/a-163516-trillion-derivatives-timebomb-958699.html

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Derivatives: Fiscal Weapons of Mass Destruction

Friday, 07 May 2010 12:28 PM

By Arnaud De Borchgrave

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Even the world’s most savvy stock market giants (e.g., Warren E. Buffett) have warned over the past decade that derivatives are the fiscal equivalent of a weapon of mass destruction, potentially lethal, and the consequences of such an explosion would make the recent global financial and economic crisis seem like penny ante.

But generously lubricated lobbyists for the unrestricted, unsupervised derivative markets tell congressional committees and government regulators to butt out.

While banks all over the world were imploding and some $50 trillion vanished in global stock markets, the derivatives market grew by an estimated 65 percent, the Bank for International Settlements said.

B.I.S. convenes the world’s 57 most powerful central bankers in Basel, Switzerland, for periodic secret meetings. Occasionally, they issue a cry of alarm. This time, derivatives had soared from $414.8 trillion at the end of 2006 to $683.7 trillion in mid-2008 — in 18 months time.

The derivatives market is estimated at $700 trillion (notional value, not market value). The world’s gross domestic product in 2009: $69.8 trillion; the United States’: $14.2 trillion. The total market cap of all major global stock markets? A mere $30 trillion. And the total amount of dollar bills in circulation, most of them abroad: $830 billion (not trillion).

One of the Middle East’s most powerful bankers conceded to us recently that even after listening to experts explain the drill, he still doesn’t understand derivatives and therefore doesn’t trust them and won’t have anything to do with them. And when that weapon of mass destruction explodes, he explained, “Our bank’s customers, from all over the world, will be saved from the disaster.”

What’s so difficult to understand about derivatives? Essentially, they are bets for or against the house — red or black at the roulette wheel. Or betting for or against the weather in situations where the weather is critical (e.g., vineyards).

Forwards, futures, options, and swaps form the panoply of derivatives. Credit derivatives are based on loans, bonds, or other forms of credit. Over-the-counter derivatives are contracts that are traded and privately negotiated directly between two parties, outside of a regular exchange.

All of this is unregulated. What happens between two parties — notably hedge funds — is like what happens between two individuals who bet on the final score of a football or baseball game.

Congressional committees have been warned time and again about “ticking time bombs” and “financial weapons of mass destruction” — to no avail, demonstrating that both the U.S. government and the U.S. Congress are dysfunctional. The need for constitutional reform comes up frequently in Washington think tank discussions, only to end with the observation that Democrats and Republicans would never agree on anything that momentous.

On May 16, 2006, for example, Richard T. McCormack, vice chairman of Bank of America Merrill Lynch and former undersecretary of state for economic and agricultural affairs, told a Senate banking hearing on derivatives and hedge funds in 2006, when the derivative industry was in the $300 trillion range: “The increasing internationalization of finance and investment suggests the need for an ever more global approach to monitoring potentially dangerous problems.”

Derivatives played a key role in camouflaging the multibillion-dollar Enron scam in 2001. Similarly, the Long-Term Capital Management (LTCM) hedge fund debacle of 1998 almost slayed the global monetary system. Yet its trading loss was a mere $5 billion. But this derivative-driven collapse seriously threatened the soundness of financial markets.

When the Russian ruble suddenly nosedived without warning, LTCM found itself exposed with more than $1 trillion in foreign exchange derivatives. It couldn’t pay. The N.Y. Fed organized a consortium of companies (Bear Stearns, Merrill Lynch, Lehman Bros.) to buy out LTCM and cover its debts. LTCM shareholders were wiped out but none of the creditors took losses.

LTCM was a hedge fund with only 200 employees, but without the N.Y. Fed’s intervention, it would have caused a crash felt around the world.

McCormack pleaded with congressional banking experts to correct, if we can, any structural or technical problems that could increase the likelihood of systemic risk in the event of future shock to the financial system, such as the Russian default (i.e., debacle) in 1998. No response.

On Feb. 28, 2006, when he was president of the New York Federal Reserve, Treasury Secretary Timothy Geithner outlined challenges to financial stability posed by derivatives. No response.

The 2007 U.S. subprime mortgage global disaster was also derivatives-driven — and provoked the biggest financial and economic disaster since the Great Depression.

McCormack, then a senior fellow at the Center for Strategic and International Studies, explained to the banking committee how Italy secured entrance into the euro by purchasing exotic derivatives that “obscured the true financial condition of the country until after they were admitted” to the new European common currency. No reaction.

The same thing happened with Japan when some banks “purchased derivative instruments which disguised the actual catastrophic state of their balance sheets at the time.” No action.

Today’s massive new derivatives bubble is driving the domestic and global economies, far outstripping the subprime-credit meltdown.

Hopefully not belatedly, Congress is considering legislation to curb the use of derivatives and other methods that artificially boost returns. But 13 members of Congress or their wives used derivatives to magnify their daily moves. And one measure proposed by Sen. Blanche Lincoln, D-Ark., would bar banks from trading in derivatives. This, in turn, would push almost $300 trillion beyond the reach of regulators. And derivatives would become still more opaque. Some say abolish derivatives trading in the United States and push it offshore.

The now bloody Greek tragedy over its debt crisis is echoing through the Federal Reserve and the halls of Congress. Greece’s public debt exceeds 100 percent of its economy versus 90 percent (at $13 trillion) for the United States. If you add unfunded U.S. liabilities for Social Security, Medicare, Medicaid, the long-term shortfall is $62 trillion, or about $200,000 for each American. At least that’s the estimate of the Pete Peterson Foundation. And Pete Peterson himself says he’s now in the business of promoting awareness about public borrowing.

With possible trader error plunging the Dow Jones industrial average into a 1,000-point tailspin and back up in 16 minutes, economic and financial prognostication made astrology look respectable.

Could Greece be a harbinger of ugly things to come for the rest of the world? Prominent investor Marc Faber, Hedge fund manager Jim Chanos, and Harvard’s Kenneth Rogoff told Bloomberg News China’s economy will slow and possibly “crash” within a year as the nation’s property bubble is set to burst.

© Newsmax. All rights reserved.

Read more on Newsmax.com: Derivatives: Fiscal Weapons of Mass Destruction
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http://www.newsmax.com/deBorchgrave/Arnaud-derivatives-banking-Greece/2010/05/07/id/358210

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Global Economic Collapse Likely

Derivatives Bubble About to Burst — Manipulated Gold Prices About to Explode

Can Wall Street Survive?

by

Michael C. Ruppert

FTW  A hearing to dismiss a suit by the Gold Ant-Trust Action Committee (GATA) is scheduled to begin in U.S. District Court on October 9th, 2001. That suit, based upon detailed research, alleges that a conspiracy has existed between the U.S. Treasury, The Federal Reserve, former Treasury Secretaries Robert Rubin and Lawrence Summers and major U.S. investment banks to illegally and covertly flood the world with literally twice the amount of gold permitted by a 1999 international treaty. The suit also threatens to publicly expose the artificial manipulation of gold prices going much further back.

In 1998 the collapse of Long Term Capital Management (LTCM), a New York based gold derivatives/futures trading operation, nearly brought about the implosion of the world economy. In order to save LTCM from an insolvency that would have exposed the secret manipulations of gold, the Treasury Secretary Robert Rubin, the Fed Chairman, Alan Greenspan and the Bank of International Settlements allegedly intervened to hide the crimes. They became known as “The Plunge Protection Team.”

One of the prime reasons for artificially suppressing gold prices was to preserve investor confidence in U.S. markets. Gold prices have traditionally been used as a gauge for investor confidence. Low gold prices traditionally mean that stock markets are healthy, good investments; that inflation is low; and that credit may be expanded. Throughout the late 90s as badly needed corrections in the markets failed to happen a monstrous bubble grew on Wall Street. That stock bubble has been threatening the imminent implosion of U.S. markets

Now another, even more terrifying, monster rears its ugly head. This “derivatives bubble” was widely known and discussed when I attend the global crisis economic conference in Moscow, Russia this March. Following is a bulletin I sent to subscribers just two days before the attacks on the World Trade Center and the Pentagon.

FTW, Sept. 9, 2001 – I cannot overstate the importance of this post in helping to understand the economic precipice on which we are all perched. More importantly, there is also a huge socio-political precipice that is just as dangerous because of the fact that trust in government institutions is at an all time low. Every time there is a police shooting these days, whether as corrupt as those revealed in Miami recently; as indicative of bad judgement and poor training as the one in Santa Clarita; or as justified as those in Indiana; the “automatic” reaction of many now is that the cops are always wrong. This “barometer” of public trust indicates that average people are beginning to have a first reaction that government and major institutions are “the enemy” rather than that they should be trusted. Right or wrong, the implications for society as a whole are ominous when emotion overrides reason.

“Let them eat cake.”

It is this mix of economic and socio/political nitroglycerin that scares me. I am joined by many “thinkers” now in sensing the possibility of a “Reign of Terror,” or mindless bloodletting. It would have nothing to do with justice, good and evil, right or wrong and it would not subside until the fear and revenge quotients just below the surface of the collective consciousness have spent themselves. This is especially true for the nations of the world whose populations have suffered under US economic bullying and globalization for many decades.

The sooner corrective action is taken the better. The more it is postponed, the more certain is the bloody abyss, as emotional and rational “account balancings” occur at the same time as the economic ones.

Read this posting carefully and then consider two points:

  1. Since the 1998 Russian economic collapse was triggered by the “looting” by Harvard and Goldman Sachs and THAT in turn triggered the collapse of LTCM, have we been looking at a system of greed out of control where competing pyramids fight each other for diminishing capital streams? Would Goldman and Harvard wage war against LTCM or JPMorganChase knowing that it could destroy the world economy and create a global depression? If true, that implies a pending financial and economic donnybrook, that could “Hiroshima” the economy of the entire planet. The lunatics are officially running the asylum now.
  2. As the DOW plummets – and I expect that it may be in the 8,000s or below by the end of October – I have now come to the conclusion that it is POSSIBLE, IF NOT LIKELY – that the Bowers shootdown in Peru this Spring was an intentional move. Reason: the immediate and total suspension of drug interdiction flights — an apparent easy capitulation by the CIA — that has since allowed drug smuggling to multiply in the intervening months. I have read some estimates indicating that cocaine smuggling to the U.S. is up 30% this year as a result. Add to that the fact that the eradication efforts in Colombia have not reduced coca production but have instead, increased it by 15-20% or more.

What better way to pour additional billions in drug money into markets on the brink of collapse while trying to maintain a public image that fewer and fewer people are buying anyway?

There’s a reason why people in this country no longer get motivated by individual cries for justice or any single human interest story, whether the victim lost a house or $250 million. In the panic of a fire in a crowded movie theater, no one gives a shit. We’re all going to burn.

Mike Ruppert

“From The Wilderness”

www.copvcia.com

On September 8, I received the following from my friend David Guyatt in London.

I have lifted the following from www.lemetropolecafe.com and hope they donÕt mind me posting it here in its entirety.

David

*****

9/7 Adam Hamilton – The JPM Derivatives Monster

The JPM Derivatives Monster

Out of all the incredible financial developments of the 1990s, one of the most important fundamental structural changes in the nature of the operation and interaction of the global financial system was the literal explosion of the use of derivatives.

Derivatives are often highly complex financial instruments that “derive” their value from some other underlying asset. As the use of these instruments evolved and advanced to a stunning degree in the 1990s, an intriguing bifurcation of opinion on the merits of the hybrid instruments developed. Among the Wall Street power players and aggressive private speculators, derivatives were seen as a wonderful financial innovation that would lead to highly customizable risk management and a huge new profit stream for Wall Street.

Outside of the financial halls of power, however, derivatives began to acquire a reputation of being staggeringly risky financial instruments that could turn sour in a heartbeat and devour the financial wizards who created them like hungry sharks. Like the young sorcererÕs apprentice in Walt DisneyÕs classic 1940 masterpiece “Fantasia”, a general public perception of derivatives gradually evolved that perceived the growth of derivatives as a dangerous experiment being recklessly played out in the financial world. Like the sorcererÕs apprentice dabbling in powerful magic when the master was not around to manage the unleashed forces, derivatives creation was increasingly seen by the average investor as being hazardous attempts to harness enormous financial tides and forces that were simply too big and too complex to be decisively tamed.

A string of massive derivatives debacles in the 1990s helped buttress this negative popular perception of derivatives and provided strong support for the “derivatives are very dangerous” side of the great derivatives debate.

In December 1993 the large German industrial conglomerate Metallgesellschaft AG reported huge derivates related losses racked up by its US subsidiary. Through an intricate hedging strategy involving heavy energy derivatives use that spun out of control, the US subsidiary of the German giant watched in horror as its complex custom-tailored financial instruments exploded in unforeseen market conditions. Total losses were originally estimated at $1b, enough to push Metallgesellschaft, GermanyÕs fourteenth largest industrial corporation, to the brink of bankruptcy. Metallgesellschaft eventually had to cough up $1.9b as a last-ditch rescue package to stave off bankruptcy. What was perhaps the first well-known large derivatives debacle in the 1990s was only a grim taste of things to come.

Unfortunately, the misfortune of Metallgesellschaft in attempting to conquer the brave new derivatives world proved to be only the tip of the iceberg in derivatives disasters of the 1990s. Cargill lost $100m playing with mortgage derivatives, Askin Securities lost $600m dabbling in mortgage-backed securities, US blue-chip Dow 30 company Procter & Gamble lost $157m hedging with currency derivatives, and Codelco Chile obliterated $200m on copper and precious metals futures. We could add Daiwa Bank of Japan, Sumitomo Corporation, Ashanti Goldfields, and the list goes on and on. And these are just a few of the less well-known derivatives debacles!

In 1994 the County Treasurer of one of the wealthiest counties in the United States, Orange County, California, brought the mighty county to its knees in bankruptcy. Robert Citron deployed risky exotic derivatives including reverse repurchase agreements to produce very high returns for the County Investment Pool he managed. Unfortunately, when the markets moved against his huge leveraged positions, the retirement funds under his custodianship quickly hemorrhaged $1.5b. In a hearing before the California State Senate in 1995, Citron said, “I must humbly state I certainly was not as sophisticated a treasurer as I thought I was.”

In February 1995 the proud and strong 223 year-old Barings Investment Bank of England, which even counted Queen Elizabeth as a client, was annihilated by unauthorized derivatives trading activity that imploded as the markets did not move as planned. Nicholas William Leeson, a 27-year old hotshot derivatives trader based in Singapore, managed to quickly lose $1.3b in the highly leveraged derivatives market before BaringsÕ management in London realized what was happening.

Rogue trader Nick Leeson was betting heavily on the future direction of the Japanese blue-chip Nikkei stock index using common options. He placed hundreds of millions of dollars at risk on the premise that the Nikkei was due for a major recovery in 1995. As we all know today as we watch the embattled Nikkei index rip through 17 year lows like a meteorite through a circus tent, Nick Leeson made the wrong bet. His personal derivatives debacle was so extreme that it killed the proud Barings Bank. Barings had been around for centuries and had even helped finance the rise of the great British Empire in the 19th century. A respected, conservative monolith of a British institution died at the hands of powerful and inherently uncontrollable forces unleashed by a young sorcererÕs apprentice halfway around the world in Singapore.

Derivatives disasters continued to blossom around the world like isolated mushroom clouds in the late 1990s, with the most memorable and dangerous being the catastrophic Long Term Capital Management debacle in 1998 on the heels of the Russian Debt Crisis, which we discuss further later in this essay. In light of the frightening record of the enormous risks and leverage of derivatives humbling the mighty in the 1990s, it is no surprise that most people today rightfully believe that derivatives are a highly risky and unforgiving high-stakes game.

As derivatives use continues to explode around the globe, it is prudent for investors to closely monitor derivatives and the companies dealing in them. The markets, if they have taught us anything in this chaotic past year, have certainly reinforced the historical truism that they are as unpredictable as ever over the short-term. Major discontinuities in price and unforeseen volatility events can erupt at any moment, potentially putting unfathomable structural stress on highly-leveraged derivatives portfolios.

As we plunge through the early years of our new millennium, any study of derivates in the United States among leading blue-chip financial institutions inevitably leads to one conclusion. Virtually all paths of derivatives inquiry lead to the same destination. Today, more than ever before in the short history of derivatives, one leading United States institution effectively IS the derivatives market. This company, as we will explore in this essay, is the American giant superbank JPMorganChase (www.JPMorganChase.com).

Before we begin our exploration of JPMorganChaseÕs (JPM-NYSE) mind-boggling exposure to the high-leverage high-risk global derivatives market, a quick and dirty explanation of derivatives is in order.

As we mentioned above, derivatives are simply financial instruments that derive their value from some other underlying asset. The term “asset” is employed rather loosely here, as in the derivatives world it can also include interest rates, currency exchange rates, stock indices, and other market indices. Common examples of derivatives include options, futures, forwards, swaps, and various combinations of these instruments.

The humble option is one of the simplest forms of derivatives. An option is simply the right to buy (call) or sell (put) a certain investment at a contractually set price for a limited time in the future. Options are also used as building blocks to assemble much more complex highly exotic derivatives instruments, kind of like the financial equivalent of the toy Lego blocks perpetually popular with children. Options are a fantastic tool to help comprehend and understand the enormous leverage inherent in derivatives and the huge risks that are shouldered when trading them. In order to wrap our minds around options, it is best to start our illustration with normal equity investing and then move to simple lone options.

Imagine you have saved up $5,000 of risk capital you want to sow into the markets in the hopes of reaping some profits. The conventional stock investing strategy is simply to find some undervalued stock and buy it. You do your due diligence, find an undervalued stock trading at a fair multiple with good future prospects, and you buy your shares of the company. For this exampleÕs sake, letÕs assume that your investment in “XYZ Company” was made at a share price of $50. Your $5,000 bought you 100 shares of XYZ Company.

Now that your capital has been successfully deployed, letÕs fast-forward six months into the future and examine two scenarios. In the “Win Scenario”, XYZ rallies 50% and you win some healthy capital gains on your investment. In the “Loss Scenario”, XYZ plunges 50% and you begin to feel like a typical NASDAQ investor today.

In the Win Scenario when you are simply buying stock outright, your gains are easy to calculate. Your 100 shares of XYZ that you purchased at $50 ran up 50% to $75, leaving you with an equity position worth $7,500, a straightforward $2,500 profit. In the Loss Scenario, XYZ plunged to $25, vaporizing one half of your original capital deployed. Your shares are still worth $2,500, however, even after the share price implosion of XYZ. This clear-cut equity example which we all intuitively understand is a pure unleveraged position that is most useful to contrast with the extraordinary risks and potential rewards/losses inherent in derivatives trading.

Next, letÕs warp back in time to your original decision to deploy your $5,000 of risk capital. LetÕs assume that the money is not super-important to you and that you have a very-high risk tolerance, so you decide to place the money in options instead of stock. You still like XYZ Company and its prospects but you crave higher leverage and you are willing to accept higher risks of loss to attain that leverage. You fully realize the risks in playing options are very high, but you will not shed any tears if your $5,000 speculation does not pay off. You do some research and find that you can buy a standard call option, the right to purchase, XYZ stock at a strike price of $55 for seven months into the future for $1 per option.

Each option contract on XYZ represents options on 100 shares, so at $1 per share a contract runs $100. With your $5,000 of risk capital you can buy 50 option contracts, yielding a total span of control of 5,000 shares. The enormous leverage inherent in derivatives such as options is immediately apparent. If you buy XYZ outright, you only can afford 100 shares with your $5,000. On the other hand, if you play the risky derivatives market through call options on XYZ, you can control the gains and losses on 5,000 shares, a staggering 50 times increase in absolute leverage. With leverage through derivatives comes the potential for far greater returns, but also far greater losses. Leverage is ALWAYS a sharp double-edged sword.

In the Win Scenario, XYZ rockets to $75 in six months. Your 50 contracts of XYZ call options at a $55 strike price are still one month from expiration and have grown very valuable. As each option grants you the contractual right to purchase a share of XYZ at $55 even though it is now trading at $75, the option on every individual share is now worth $20. The option, a derivative, derives its value from the movements in its underlying asset, the actual shares of XYZ. Since you bought 50 contracts each representing 100 shares worth of XYZ call options, your $5,000 speculation has grown into $100,000 in six months! Through the use of derivatives, your dramatic increase in leverage yielded an awesome $95,000 profit instead of the $2,500 you would have made through outright XYZ stock ownership. When the markets move your way, leverage attained through derivatives can be utterly exhilarating.

In the Loss Scenario, XYZ plummeted to $25 in six months, mimicking the 2001 action of the crippled NASDAQ. Because your options are now so far “out of the money”, they are nearly worthless. Even though there is one month left until they officially expire, no one in the market wants to buy your right to purchase XYZ at $55 when they can just go buy the actual stock at $25 in the open markets. In this scenario, your $5,000 of risk capital has been ground down into oblivion, a catastrophic 100% loss. If you had just bought the stock outright instead, at least you would still have $2,500 dollars left, but through deploying options you basically made an all-or-nothing bet that the XYZ stock price would rise over the limited time horizon of the options. When the markets move against your derivatives, your hard-earned capital can be literally obliterated in mere hours or days, a very difficult and excruciating experience.

Options, the simplest of derivatives, help illustrate the extraordinary leverage and the mega-risk that derivatives exposure entails. Amazingly, long options are one of the lowest risk forms of derivatives because one can never lose more capital than what they paid to purchase the options. Many other more exotic derivatives have dangerous unlimited loss potential and can ultimately destroy far, far more capital than what was actually paid for the financial instruments.

Another critical concept for understanding the strange world of derivatives is “notional value” or “notional amount”. This is a quasi-fictional number that illustrates how much capital a given derivative effectively controls. Although the notional amount does not change hands in a derivatives transaction, it is used to calculate the actual payments that must be made to one counterparty or the other in a derivatives transaction. Furthering our options example above, we can also gain a glimpse into the world of notionality in derivatives.

Although you only deployed $5,000 worth of risk capital in your XYZ call option purchase, you controlled the equivalent of 5,000 shares of stock since each option only cost $1. As the stock was trading at $50 when you originally purchased your options, you controlled a notional amount of XYZ stock worth $50 per share times 5000 shares, or $250,000. In the Win Scenario when XYZ rose 50%, the notional value of your options rose to $75 per share times 5000 shares, $375,000. By purchasing call options you harnessed the extreme leverage of derivatives to enable yourself to originally control the notional equivalent of $250,000 worth of XYZ stock while only risking $5,000 of your own capital.

Realize that the notional amount is not a real number but simply a descriptive fiction detailing how much of the equivalent underlying asset your derivatives position effectively “controls”. Notional amounts are used in the derivatives world to show the effective span of control that derivatives grant market participants over underlying assets at any given point in time. By comparing changing notional values over time, they can be used to measure and analyze positional changes in derivatives exposure over a given time horizon.

Also critical, realize that notional amounts are NOT volume or turnover data, but positional data points. A notional derivatives amount for the end of a given quarter is like a balance sheet presentation of potential exposure at that moment in time, NOT an income-statement like account of activity or turnover in a given quarter. Some prominent analysts have crossed this line out of reality and made the embarrassing public mistake of publishing research where they articulated the twisted fantasy that notional amounts are transactional and not positional. Notional derivatives amounts ARE positional, a snapshot of exposure at a single moment in time.

Although it has lately become somewhat popular on Wall Street and financial circles to claim that notional amounts of derivatives bear no relation to the risk of derivatives positions, we strongly disagree. The higher the notional amounts of an entityÕs total derivatives exposure, generally the higher the leverage it has used to pyramid its derivatives positions. The greater the leverage employed, the higher the aggregate risk of a derivatives portfolio. We will discuss this important concept in more detail further below.

In the United States, commercial banks and trusts are required to report their derivatives exposure once every quarter to the United States Comptroller of the Currency. The Office of the Comptroller of the Currency was founded in 1863 as a bureau of the US Treasury and has been responsible for ensuring a “stable and competitive national banking system”. Per the OCCÕs website atwww.occ.treas.gov , the OCC claims it has four objectives:

“To ensure the safety and soundness of the national banking system, to foster competition by allowing banks to offer new products and services, to improve the efficiency and effectiveness of OCC supervision, including reducing regulatory burden, and to ensure fair and equal access to financial services for all Americans.”

The OCC prepares a quarterly report called the “Bank Derivatives Report” which details general derivatives positions for all US commercial banks and trusts that operate in the derivatives market. US commercial banks and trusts are required by law to report their general derivatives positions to the OCC each quarter. Although the OCC Bank Derivatives Report does not include the derivatives positions of non-commercial bank entities like Goldman Sachs, which is an investment bank, the OCC report is still extremely useful in providing a sample or cross section of derivatives market activity and positions in general. We are not sure what percent of the total derivatives market that commercial banks and trusts represent, but we suspect it approaches a majority.

In this essay, all the derivatives data cited is directly from the latest available OCC Bank Derivatives Report, for the first quarter of 2001, available athttp://www.occ.treas.gov/ftp/deriv/dq101.pdf . All of our graphs and derivatives numbers are either lifted directly from or calculated directly from this important US government report. As the data we are reporting is so mind-blowing as to appear unbelievable, we strongly encourage you to check out this original OCC document with your own eyes. An analysis of this official report makes it quite evident that the enormous derivatives market is dominated by one US holding company, the elite blue-chip Dow 30 superbank JPMorganChase.

Our first graph was constructed using data from “Table 1” of the OCC Q1 2001 Bank Derivatives Report. It clearly shows who the largest derivatives players are out of all the 395 US commercial banks and trusts that dabble in the derivatives market. The first point that leaps out of this pie graph like a central banker sitting on a thumbtack shows the overwhelming iron-fisted dominance that JPMorganChase (Chase Manhattan Bank and Morgan Guaranty together) exercises over the US derivatives market.

As we delve into the often cryptic world of derivatives, it rapidly becomes apparent that the amounts of dollars of capital effectively controlled through derivatives is absolutely staggering. The notional amount pie in our first graph above is a monstrous $43,922 billion, or almost $44 TRILLION dollars. Rarely at a loss for superlatives, we cannot even think of enough to describe how large these numbers truly are! It is virtually impossible for humans to grasp how big even one trillion is, so we are enlisting the help of the fascinating “MegaPenny Project” website which was created to illustrate enormous numbers.

The MegaPenny Project is located at http://www.kokogiak.com/megapenny/ and is designed to illustrate large numbers by stacking given numbers of common US one-cent pennies and showing the relative size of the stacks. We encourage you to take in the whole fascinating MegaPenny tour, but for this essay we are particularly interested in its two pages describing one trillion pennies, beginning at http://www.kokogiak.com/megapenny/thirteen.asp . The MegaPenny Project does a wonderful job graphically illustrating just how much space one trillion pennies would take up.

According to the fine folks at MegaPenny, a solid block of one trillion pennies tightly stacked on top of each other would create a cube 273 feet on each side, each axis of the cube almost as long as an American football field. For comparison purposes, remember that all the gold mined in the last six millennia would fit in a much, much smaller cube only 62 feet on each side! The cube of one trillion pennies would weigh an amazing 3,125,000 tons, almost half as much as the estimated entire weight of all the huge stones comprising the Great Pyramid on the Giza plateau in Egypt! If the trillion pennies were laid flat side-by-side instead of stacked, they would cover 89,675 acres, or over 140 square miles. Stacked on top of each other in a single mega-column, one trillion pennies would create a stack of pennies 986,426 miles high. The average distance from the Earth to the Moon is only around 238,866 miles, so one trillion pennies stacked could travel between the Earth and Moon over four times!

One trillion is a ridiculously large number and almost impossible to visualize in the abstract. Trillions of dollars of derivatives exposure blow the mind! According to MegaPenny, it would take 1.8t pennies to create an exact full-scale replica of the Empire State Building out of pennies. It would take 2.6t tightly stacked pennies to create a life-sized perfect replica of ChicagoÕs mighty SearÕs Tower.

It is very hard to believe that the total US notional derivatives positions of US commercial banks and trusts is $43.9 TRILLION dollars. By comparison, the US GDP, all the goods and services produced and consumed in our entire great nation by every single American each year, was only running $10.1t in the first quarter. The US M3 money supply, the broadest measure of money, was only $7.4t at the time. The 500 best and biggest companies in the United States, the S&P 500, were only worth $10.4t at the end of the first quarter. Clearly, the $43.9t dollars of the notional value of derivatives that a mere 395 commercial banks and trusts control is simply staggering as it far exceeds the entire US GDP, the entire broad US money supply, and the entire value of all the stocks traded in the United States! BIG, BIG, BIG numbers!

Of that huge $43.9t, JPMorganChase, a single holding company, controls a breathtaking $26.3t worth of derivatives in notional terms! JPM represents 59.8% of the total derivatives market controlled by US commercial banks and trusts per the OCC. Why on earth would one entity run up such gargantuan exposure to derivatives? Perhaps JPM controls nearly 60% of the commercial bank segment of the derivatives market because maybe it holds 60% of the commercial bank assets in the United States of America. We constructed the next graph from “Table 1” of the Q1 2001 OCC Bank Derivatives Report as well to investigate this very question.

Although JPM is a very large commercial bank, it only represents around 12.6% of the total commercial bank assets in the United States per the Q1 OCC report. The pie size in this second graph is $4.9t. This number implies that, in general, the US commercial banking system has a derivatives notional value to assets ratio of 9 to 1, pretty extraordinary leverage when one realizes that a large portion of a given bankÕs assets are not usually the shareholdersÕ but represent funds entrusted to the bank by depositors in various forms. It is also pretty extraordinary gross leverage for an industry that prides itself in being “conservative”. A 9 to 1 implied leverage to assets achieved through derivatives sounds more like hedge fund territory than banking!

JPMorganChase controls 12.6% of the total commercial bank and trust assets in the United States, but a whopping 59.8% of the total commercial bank and trust derivatives market. JPMÕs implied derivatives leverage on assets ratio is a colossal 43 to 1. Why would one superbank risk such extreme derivatives exposure relative to its asset base?

Even more provocative and outright frightening is the ratio of the notional value of JPMÕs derivatives positions to its shareholder capital. Per JPMÕs latest 10-Q quarterly financial report filed with the US Securities and Exchange Commission available at www.jpmorganchase.com/pdfdoc/jpmchase/10Q2Q01.pdf , JPM reported a stockholdersÕ equity balance of $42b. $42b is a lot of capital and is nothing to scoff at, but when compared to an outstanding aggregate derivatives position with a notional value of $26,276b, JPMÕs implied leverage on stockholder equity is utterly mind-blowing. For every dollar that JPMÕs shareholders own free and clear, JPM management has pyramided on almost $626 worth of derivatives exposure in notional terms to the highly risky and highly volatile derivatives market! 626 to 1 implied leverage?!? Why, why, why?

While the latest JPM 10-Q was released in mid-August and pertains to Q2 while the latest OCC derivatives report is from Q1, this cross quarter comparison still accurately shows the hyper-extreme leverage inherent in JPMÕs aggregate derivatives exposure. If we instead use JPMÕs Q1 10-Q to ensure we are comparing apples to apples, the implied leverage on stockholdersÕ equity changes little to 611 to 1 on $43b of stockholdersÕ equity.

In financial circles 10 to 1 leverage is considered very aggressive, 100 to 1 is considered to be in the kamikaze realm, but we donÕt ever recall hearing about large-scale leveraged operations exceeding 100 to 1 outside of the horrible example of the doomed super hedge fund Long Term Capital Management. JPMÕs management may have effectively created the most leveraged large hedge fund in the history of the world by using $42b worth of shareholdersÕ equity to control derivatives representing a notional value of a staggering $26,276b. After we shook off the blunt shock of learning of an implied leverage of 626 to 1 by the United StatesÕ premier Wall Street bank and elite Dow 30 blue-chip company, we continued to dig deeper into the revealing OCC Bank Derivatives Report.

The next pie graph was constructed from “Table 8”, “Table 9”, and “Table 10” of the OCC report. It shows a breakdown of how JPMÕs derivatives portfolio is comprised, of what classes of derivatives constitute the JPM Derivatives Monster. The total pie size in this graph is nine-tenths of one percent smaller than the earlier totals in the OCC report. The OCC explained this small delta in a footnote claiming it was caused by the exclusion of some credit derivatives as well as rounding differences. The large green slice of this pie is comprised of a small amount of credit derivatives and other derivatives of which the OCC does not require specific disclosure including “foreign exchange contracts with an original maturity of 14 days or less, futures contracts, written options, basis swaps, and any contracts not subject to risk-based capital requirements.”

Once again, this graph exclusively represents only JPMorganChaseÕs enormous $26t derivatives portfolio, no other banksÕ or trustsÕ data is included in this gargantuan pie. The sorcererÕs apprentice is playing with powerful financial magic indeed!

As the pie illustrates, JPMÕs largest position by far is in interest rate derivatives. The huge red king-sized slice of the pie graph represents interest rate derivatives with a notional amount of a staggering $17.7t!

In interest rate derivatives, the notional amount represents the implied principal of a debt on which interest rate derivatives are written. For instance, a debtor with $1m in debt and variable interest rate payments may contract with JPM to hedge its interest rate payments into a fixed interest rate scheme instead of a variable one. By having a fixed interest rate payment schedule, the debtor company will not have to worry about market fluctuations in interest rates as their counterparty JPMorganChase assumes that risk for a fee. Although the interest streams in this small $1m debt example are swapped, the actual cash changing hands may only be a few tens of thousands of dollars. The $1m in principal, however, is the notional amount for our interest rate derivatives example and provides a true picture of JPM positional exposure in the deal.

Gold investors may be surprised to see what a trivial portion of JPMÕs total derivatives portfolio is deployed in the gold market. Only two tenths of one percent of JPMÕs notional derivatives exposure is in gold. Of course, gold is an exceedingly small market compared to the huge debt or foreign exchange markets so JPMÕs position in gold derivatives is still quite large relative to the gold market itself. JPM reported $56.8b in gold derivatives in the Q1 2001 OCC report. By comparison, with only 2,500 metric tonnes of gold mined on the entire planet each year, the whole freshly mined annual world gold supply is only worth $22b at $275 per ounce.

JPM is controlling a notional amount of gold through derivatives equal to the value of every ounce of gold that will be mined in the entire world for the next two and a half years assuming gold production does not continue to plummet due to dismal gold prices, which it probably will.

Why is a sophisticated superbank like JPM even interested in the small and devastated gold market, let alone motivated enough to maintain derivatives exposure equal to more than 6,400 tonnes of gold? Why does JPM management want to maintain derivatives gold exposure worth 1.35 times the capital owned by the shareholders of the company? With Wall Street perpetually telling the world that gold is a “barbaric relic”, why does the premier Wall Street bank have such large gold derivatives positions? Ever more intriguing questions!

In the lower left corner of the graph above note the percentage of derivatives market shares that JPM controls out of the entire US commercial bank and trust derivatives universe. JPM is the utterly dominant player with 64% of the interest rate derivatives market, 49% of the foreign exchange market, 68% of the equity derivatives market, and 62% of the gold derivatives market among US commercial banks and trusts. JPMÕs management, for whatever reasons, has effectively built up a derivates powerhouse that has almost cornered the entire US commercial bank and trust derivatives market.

Zeroing back in on the $17.7t in interest rate derivatives, we wonder why such enormous exposure to interest rates has been shouldered by JPMÕs management. In terms of interest rate derivatives alone, JPM has an implied leverage ratio of notional interest rate derivatives exposure to stockholdersÕ equity of 422 to 1. Are JPM shareholders aware of this? It is hard to fathom why anyone would want to have leveraged exposure to chaotic interest rates with 422 to 1 leverage, but an intriguing hypothesis has recently emerged that may illuminate the decision by JPM to dominate the enormous interest rate derivatives market. Here is a quick outline of this provocative theory.

As growing numbers of investors around the world realize, American attorney Reginald Howe filed a landmark complaint against the Swiss-based Bank for International Settlements on December 7, 2000. In his lawsuit, which is highly recommended reading and available for free download in PDF format atwww.zealllc.com/howepla.htm , Mr. Howe carefully builds the case that certain large banks that deal in gold derivatives were involved in an effort to actively manipulate the world gold market in violation of key United States laws. Shortly after Mr. Howe filed his complaint in United States District Court, we wrote a summary essay outlining his lawsuit called “Let Slip the Dogs of War” which also has further background information if you are interested in digging deeper.

In Howe v. BIS et al, both the pre-merger JP Morgan and Chase Manhattan were named as defendants with the BIS. In his complaint, Howe points out anomalous gold derivatives activity at both banks documented on earlier OCC bank derivatives reports that correlates extremely well with unusual activity in the gold markets and gold price. The evidence is highly suggestive that both banks, now a single entity, used carefully targeted strategic gold derivatives transactions to help rein in the out-of-control gold rally that was sparked in late 1999 after European central banks agreed to curtail their gold sales and leasing with the Washington Agreement.

Mr. HoweÕs complaint filed in the federal court elaborates on this odd activity by the two banks that have since merged to form superbank JPMorganChase. Interestingly, Mr. HoweÕs case will soon be heard before a federal judge in Boston, Massachusetts on October 9, 2001, when defendants will present their arguments in support of their Motions to Dismiss.

With both ancestor banks of the new JPMorganChase already documented as having well-timed anomalous gold derivatives activity prior to their merger, chances are the banks had some level of insider-type knowledge of what was really transpiring in the gold market. There is no way that JPM management would have acquired gold derivatives with a notional value worth 1.35 times the total of their entire shareholdersÕ equity base unless they knew and intimately understood the gold market.

On May 30, 2001, ace researcher and analyst Michael Bolser and GATA Chairman Bill Murphy co-published an analysis of JPMorganChaseÕs interest rate derivatives in Mr. MurphyÕs “Midas” column at the excellentwww.LeMetropoleCafe.com contrarian investing website. Mr. Bolser titled his research “GoldGateÕs Real Motive?”. Current subscribers towww.LeMetropoleCafe.com can see this analysis in the archives of the “James Joyce” table at LeMetropoleCafe. In his analysis, Mr. Bolser pointed out that JPMorganChase had $16t worth of notional interest rate derivatives exposure at the time and how incredible this fact was. He noted that JPMÕs interest rate derivatives notional amounts had doubled since the middle of 1998, an astronomical increase given the absolute amounts of dollars involved.

Mr. Bolser offered the stunning tentative conclusion that perhaps a suppressed or shackled-down gold price was a necessary prerequisite to JPM assuming enormous amounts of interest rate derivatives, as a managed gold price would ratchet down inflationary expectations and make interest rate positions much less volatile and risky than in a truly free market. Mr. Bolser planned to continue his research and was seeking earlier OCC reports to model JPMÕs derivatives trading activities and exposures further back in time.

After Mr. BolserÕs interest rate derivatives report revealing JPMÕs enormous and massively out-of-proportion derivatives positions, there were a few tangential comments made about this hypothesis over the summer by various market analysts, but for the most part it remained an obscure area of inquiry that appeared to generate little popular interest.

Then, just a few weeks ago on August 13, 2001, Reginald Howe published a fascinating commentary entitled “GibsonÕs Paradox Revisited: Professor Summers Analyzes Gold Prices” available at www.GoldenSextant.com . In his essay Mr. Howe quotes a 1988 academic paper from the Journal of Political Economy co-written by President Bill ClintonÕs future third Secretary of the Treasury, Lawrence Summers. Among other things, Mr. Howe discusses Mr. SummersÕ interpretation of an observation by the famous economist John Maynard Keynes on the behavior of gold prices and real interest rates. Lord Keynes called the relationship “GibsonÕs Paradox”.

As Mr. Howe points out, per Lord Keynes, GibsonÕs Paradox, the solid relationship between price levels including gold and interest rates under a gold standard regime was, “one of the most completely established empirical facts in the whole field of quantitative economics.” Mr. Howe shows, using the writings of Professor Lawrence Summers and legendary economist John Maynard Keynes that there is a rock-solid inverse relationship between gold and real interest rates in a free market. We investigated this phenomenon as well in our essay “Real Rates and Gold”. In effect, real interest rates could be used to predict inverse moves in the price of gold or gold could be used to predict inverse moves in the real interest rates.

For us, HoweÕs fantastic “GibsonÕs Paradox Revisited” essay finally lit the proverbial lightbulbs above our heads that triggered a solid understanding of Michael BolserÕs shrewd earlier hypothesis on JPMÕs enormous interest rate derivatives exposure! GibsonÕs Paradox helped to reconcile the puzzle and answer nagging questions about JPMÕs gargantuan interest rate derivatives position and how it could relate to the active management of the price of gold.

If factions of the US government in the Clinton years from 1995 to late 2000 were really actively manipulating the gold price (as the latest amazing research of government records by James Turk and Reginald Howe certainly strongly suggests through ever-increasing evidence), and if JPM really had inside knowledge of some of these operations as its anomalous gold derivatives activity seems to imply, then it is only a short logical step to assume that a possible catalyst for the explosion in JPMÕs interest rate derivatives operations was the artificially pegged price of gold!

GibsonÕs Paradox, defined by Lord Keynes, effectively claims that under a fixed gold price regime real interest rates remain predictable. If JPM top management was participating in any US efforts to cap gold, they had full knowledge that a de facto fixed gold price regime had been stealthily established and they would have had a carte blanche to massively balloon potentially highly lucrative interest rate derivatives exposure. After all, if JPM was convinced gold was under control, and that gold prices were a prime driver of real interest rates, then what better time to become the king of the interest rate derivates world than when gold was being quietly hammered down through massive sales of official sector gold from Western central banksÕ coffers?

Our superficial presentation here certainly does not do this startling hypothesis justice, but the JPMorganChase interest rate derivatives explosion due to JPM upper management knowledge of and possible involvement in stealthy government machinations in the gold markets is a very intriguing hypothesis that definitely warrants further investigation and discussion. We may write a future essay on this topic alone after we dig deeper, and we certainly hope other analysts and researchers follow Michael BolserÕs original lead and do some serious investigating.

Back to the JPMorganChase Derivatives Monster for now, we have to wonder how many JPM shareholders realize just how incredibly leveraged their superbank has become. Do they think they are holding a safe conservative blue-chip elite Wall Street bank, or do the average shareholders desire to hold a hyper-leveraged mega hedge fund with 600+ times implied leverage on stockholdersÕ equity? Do JPM shareholders understand how dangerous large derivatives positions have proven historically for other companies?

JPM currently has something like 2,700 large institutional shareholders who hold almost 61% of its common stock. Do the managers of these mutual funds and pension funds understand that JPM management has built the biggest most highly-leveraged derivatives pyramid in the history of the world per US government OCC reports? Do fund managers understand the inherent risks in leveraging capital hundreds of times over? These are important questions that ALL JPM investors should carefully consider, especially in this incredibly turbulent and volatile market environment we are experiencing today.

One of the most dangerous possible events for high derivatives exposure is unforeseen market volatility, especially that caused by unusual and unexpected major discontinuities in market pricing. The following graph is also shamelessly taken from the OCC report, “Graph 5C”, which shows the “charge-offs” taken on derivatives written off in each quarter since 1996 by commercial banks and trusts alone. Note the enormous loss that occurred in the third quarter of 1998 coincident with the Russian Debt Crisis/LTCM debacle and the large losses in late 1999 following the Washington Agreement gold spike.

When a non-linear market event that is inherently unpredictable like the Russian Debt Crisis occurs, its effects on carefully crafted derivatives portfolios can be catastrophic. Long Term Capital Management folded during the 1998 crisis. It was an elite hedge fund run by some of the most brilliant market geniuses of the entire last century. The all-star brain trust at LTCM could probably have helped put men on Mars, as the stellar IQs and acclaim of the founders were without equal in the financial world. The gentlemen helping to build the sophisticated computer derivatives trading models for LTCM were Nobel-prize winning economists who understood more about markets and volatility than pretty much everyone else on the planet. Here are a few paragraphs on LTCM from an earlier essay we penned on gold derivatives volatility titled, “Gold Delta Hedge Trap (Part 2)”.

“LTCM employed ScholesÕ and MertonÕs work to hedge and protect its bets. Through Black and Scholes based hedging strategies, LTCM became one of the most highly leveraged hedge funds in history. It had a capital base of $3b, yet it controlled over $100b in assets worldwide, and some reports claim the total notional value of its derivatives exceeded an incredible $1.25 TRILLION. LTCM used extraordinarily sophisticated mathematical computer models to predict and mitigate its risks.”

“In August 1998, an unexpected non-linearity occurred that made a mockery of the models. Russia defaulted on its sovereign debt, and liquidity around the globe began to rapidly dry up as derivatives positions were hastily unwound. The LTCM financial models told the principals they should not expect to lose more than $50m of capital in a given day, but they were soon losing $100m every day. Four days after the Russian default, their initial $3b capital base lost another $500m in a single trading day alone!”

“As LTCM geared up to declare bankruptcy, the US Federal Reserve believed LTCMÕs highly leveraged derivatives positions were so enormous that their default could wreak havoc throughout the entire global financial system. The US Fed engineered a $3.6b bailout of the fund, creating a major moral hazard for other high-flying hedge funds. (Expecting the government or counterparties will bail them out of bad bets once they get too large, why not push the limits of safety and prudence as a hedge fund manager?)”

Long Term Capital Management had $3b in capital allegedly supporting $1,250b of derivatives notional value, an implied leverage ratio of 417 to 1. JPMorganChase, per its own reports filed with the US government, has $42b supporting $26,276b of derivatives notional value. Incredibly, JPMÕs implied capital leverage on its derivatives is far, far higher than LTCMÕs at 626 to 1. IsnÕt it disconcerting to realize JPM management has further leveraged its shareholder equity than even the infamous Long Term Capital Management?

LTCM had the best economic minds in the world running the fund, unlimited brain and computer power, but still an unpredictable volatility event spurred by the Russian Debt Crisis caused their painstakingly developed computer derivatives models to blow up. By many reports, including from the Federal Reserve, the LTCM failure was so dangerous it threatened to take the whole financial system down if LTCMÕs obligations to its counterparties were defaulted upon.

We are NOT suggesting that JPM is another LTCM. We know that the men and women running JPM are very intelligent and have a deep understanding of the global markets in which their company operates. We know they have cross-hedged and carefully modeled their enormous derivatives portfolio to try and make it net market neutral and therefore resilient to shocks. But, just as a tiny imperfection can cause a massive hardened-steel shaft connected to a nuclear aircraft carrierÕs propeller to vibrate uncontrollably until it shatters, even a “balanced” net derivatives portfolio of massive size is highly vulnerable to market shocks that can push it out of proper equilibrium and spin the computer hedging models out of control far faster than derivatives can be unwound.

There comes a point when leverage becomes so extreme that even a tiny unforeseen event can break down the complex contractual glue that holds the various components and players of the convoluted derivatives world together and cause the whole structure to shake or crumble.

We believe that JPMÕs management is taking a mammoth gamble with the wealth of its shareholders by supporting derivatives with a notional value of over $26 TRILLION dollars with a relatively trifling $42 billion of shareholder equity. Any discontinuous market volatility event that is unforeseen and beyond JPM managementÕs control could conceivably cause this immense pyramid to rapidly unwind, utterly annihilating the companyÕs capital in a matter of days or weeks.

Also, JPM, just by virtue of having extreme leverage, is placing itself at risk for a Barings Bank type scenario, where a rogue trader hid derivatives trading activities from management until it was too late and the damage was irreparable. What if some twenty- or thirty-something derivatives trader working for JPM accidentally makes a big mistake in his or her trading and destroys that fragile balance supporting the whole massive JPM derivatives pyramid and the whole structure comes crashing down?

By its own reporting to the US government, JPMorganChase has shown itself to have evolved into a real-life Derivatives Monster. Derivatives offer extreme leverage and the potential for mega-profits, but with that they carry commensurate extreme risks. Until the JPM Derivatives Monster begins to deflate its leverage and exposure, we believe individual and institutional investors alike should be very careful in assessing the potential extreme risk of holding JPM stock.

We canÕt help but feeling that essentially unlimited leverage is the modern financial equivalent of Walt DisneyÕs sorcererÕs apprentice in “Fantasia” unleashing forces he couldnÕt possibly hope to control.

Adam Hamilton, CPA, MCSE

aka Zelotes

7 September 2001

Copyright 2000 – 2001 Zeal Research

Copyright 1999, 2000 Le Metropole Cafe. All rights reserved

http://www.copvcia.com/free/ww3/11_09_01_Derivatives.html

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Derivatives: A $700+ Trillion Bubble Waiting to Burst

31 comments |  April 19, 2009

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In the past three years, while banks all over the world and Wall Street were imploding, while some $40-$50 trillion of capital was being destroyed in global stock markets, one financial market kept growing. That market is the financial derivatives market.

According to the Bank for International Settlements [BIS], the global Over the Counter [OTC] derivatives market has grown almost 65% from $414.8 trillion in December, 2006 to $683.7 trillion in June of 2008. On the BIS’s own website, there are no updated figures for the notional derivatives market since June 2008, so we can likely assume, with some margin of safety, that this market has now grown to more than $700 trillion. Comparatively speaking, the total market cap of all major global stock markets is approximately $30 trillion.

Before I discuss how financial products could grow more than 65% during a time period when financial companies were imploding all over the world, let’s review the definition of a derivative, because this will explain how this market of financial products keeps becoming more valuable at a time when the value of many capital assets are sinking like a rock in an ocean.

According to Wikipedia:

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying value on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index [CPI] — see inflation derivatives), weather conditions, or other items. Credit derivatives are based on loans, bonds or other forms of credit. The main types of derivatives are forwards, futures, options, and swaps.

Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet. Over-the-counter [OTC] derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds…Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.

There are two key phrases to note in the above explanation of the financial derivatives markets-

(1)The notional value of derivatives is recorded OFF the balance sheet of an institution, although the market value of derivatives is recorded ONthe balance sheet; and

(2)OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.

As I’ve noted before, the $700 trillion global derivatives market is the notional value of this market, not the market value of these derivatives. The Bank for International Settlements compiles the notional value of this market worldwide from reported figures by Central Banks of the G10 countries and Switzerland. Thus, if the off-balance sheet assets of major international banks are growing so rapidly in the form of their notional values of their held financial derivative products, how can so many of these banks be in trouble?

The answer, quite simply, is that the market value of these derivatives is nowhere near the notional values of these derivatives maintained and reported by these banks, and that the global derivatives market is in serious trouble. Because derivative products are subject to counterparty risks as well, this means that the failure of one major financial institution could cause the evaporation of assets for many other financial institutions that have derivative products with exposure to that one financial institution. In other words, when the notional values of a good percent of these financial derivative products start evaporating into thin air, and they will, it will have a negative domino effect on the balance sheet of not just one major financial institution, but many.

Of course, when FASB suspended mark-to-market accounting rules recently, major international banks were allowed to re-value some of their derivative products closer to their notional value on their books to pad their balance sheets. Due to this change in accounting law, I can almost guarantee you that before market open Friday, Citigroup will announce better than expected financial results as they carried huge amounts of illiquid mortgages and financial derivatives on their balance sheets. [Editor’s note: Article was written prior to earnings announcement on 4/17/09]

Though many people argue that only the market value of these derivatives, and not their notional values, is ultimately important, this would have only been valid if FASB hadn’t suspended mark-to-market accounting rules. The types of derivative products most likely to continue to blow up are Credit Default Swaps [CDS], and indeed, it wasAIG’s exposure to Credit Default Swaps that caused it to collapse.

In reality, the market value of financial derivatives is only a fraction of its $700 trillion notional value; however the reality is that the potential losses from bad Credit Default Swaps can also be much more than their notional value. For example, consider a scenario where Company ABC underwrites a CDS in which they will receive $100,000 of payments from Company X in return for guaranteeing a $1,000,000 bond issued by Company Z. If all goes well, and the bond performs, then company ABC makes $100,000 in profit. However, if company Z fails, then Company ABC may now have to pay Company X $1,000,000. This is a scenario in which the losses from financial derivative products can be very real and very large. Though many analysts harp on the fact that the $700+ trillion notional figure of the derivative market is not real, it is not realistic either to only consider the much smaller market value of these derivatives as the above example illustrates.

Since it is now likely that the balance sheets of many financial institutions have been quickly “nursed back to health” by returning the book value of OTC financial derivative products to some fantasyland notional value versus their true market value, the collapse of the notional value of the $700+ trillion derivative market will indeed have future devastating consequences for global economies.

This article is tagged with: Long & Short IdeasOptionsMacro ViewMarket Outlook

http://seekingalpha.com/article/131597-derivatives-a-700-trillion-bubble-waiting-to-burst

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The Horrific Derivatives Bubble That Could One Day Destroy The Entire World Financial System

Today there is a horrific derivatives bubble that threatens to destroy not only the U.S. economy but the entire world financial system as well, but unfortunately the vast majority of people do not understand it.  When you say the word “derivatives” to most Americans, they have no idea what you are talking about.  In fact, even most members of the U.S. Congress don’t really seem to understand them.  But you don’t have to get into all the technicalities to understand the bigger picture.  Basically, derivatives are financial instruments whose value depends upon or is derived from the price of something else.  A derivative has no underlying value of its own.  It is essentially a side bet.  Originally, derivatives were mostly used to hedge risk and to offset the possibility of taking losses.  But today it has gone way, way beyond that.  Today the world financial system has become a gigantic casino where insanely large bets are made on anything and everything that you can possibly imagine.

The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe.  Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy.

Because derivatives are so unregulated, nobody knows for certain exactly what the total value of all the derivatives worldwide is, but low estimates put it around 600 trillion dollars and high estimates put it at around 1.5 quadrilliondollars.

Do you know how large one quadrillion is?

Counting at one dollar per second, it would take 32 million years to count to one quadrillion.

If you want to attempt it, you might want to get started right now.

To put that in perspective, the gross domestic product of the United States is only about 14 trillion dollars.

In fact, the total market cap of all major global stock markets is only about 30 trillion dollars.

So when you are talking about 1.5 quadrillion dollars, you are talking about an amount of money that is almost inconceivable.

So what is going to happen when this insanely large derivatives bubble pops?

Well, the truth is that the danger that we face from derivatives is so great that Warren Buffet has called them “financial weapons of mass destruction”.

Unfortunately, he is not exaggerating.

It would be hard to understate the financial devastation that we could potentially be facing.

A number of years back, French President Jacques Chirac referred to derivatives as “financial AIDS”.

The reality is that when this bubble pops there won’t be enough money in the entire world to fix it.

But ignorance is bliss, and most people simply do not understand these complex financial instruments enough to be worried about them.

Unfortunately, just because most of us do not understand the danger does not mean that the danger has been eliminated.

In a recent column, Dr. Jerome Corsi of WorldNetDaily noted that even many institutional investors have gotten sucked into investing in derivatives without even understanding the incredible risk they were facing….

A key problem with derivatives is that in the attempt to reduce costs or prevent losses, institutional investors typically accepted complex risks that carried little-understood liabilities widely disproportionate to any potential savings the derivatives contract may have initially obtained.

The hedge-fund and derivatives markets are so highly complex and technical that even many top economists and investment-banking professionals don’t fully understand them.

Moreover, both the hedge-fund and the derivatives markets are almost totally unregulated, either by the U.S. government or by any other government worldwide.

Most Americans don’t realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.

Do you remember how AIG was constantly in the news for a while there?

Well, they weren’t in financial trouble because they had written a bunch of bad insurance policies.

What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.

So the U.S. government stepped in and bailed them out – all at U.S. taxpayer expense of course.

But the AIG incident was actually quite small compared to what could be coming.  The derivatives market has become so monolithic that even a relatively minor imbalance in the global economy could set off a chain reaction that would have devastating consequences.

In his recent article on derivatives, Webster Tarpley described the central role that derivatives now play in our financial system….

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

But wasn’t the financial reform law that Congress just passed supposed to fix all this?

Well, the truth is that you simply cannot “fix” a 1.5 quadrillion dollar problem, but yes, the financial reform law was supposed to put some new restrictions on derivatives.

And initially, there were some somewhat significant reforms contained in the bill.  But after the vast horde of Wall Street lobbyists in Washington got done doing their thing, the derivatives reforms were almost completely and totally neutered.

So the rampant casino gambling continues and everybody on Wall Street is happy.

For now.

One day some event will happen which will cause a sudden shift in world financial markets and trillions of dollars of losses in derivatives will create a tsunami that will bring the entire house of cards down.

All of the money in the world will not be enough to bail out the financial system when that day arrives.

The truth is that we should have never allowed world financial markets to become a giant casino.

But we did.

Soon enough we will all pay the price, and when that disastrous day comes, most Americans will still not understand what is happening.

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Derivatives: The Quadrillion Dollar Financial Casino Completely Dominated By The Big International Banks

If you took an opinion poll and asked Americans what they considered the biggest threat to the world economy to be, how many of them do you think would give “derivatives” as an answer?  But the truth is that derivatives were at the heart of the financial crisis of 2007 and 2008, and whenever the next financial crisis happens derivatives will undoubtedly play a huge role once again.  So exactly what are “derivatives”?  Well, derivatives are basically financial instruments whose value depends upon or is derived from the price of something else.  A derivative has no underlying value of its own.  It is essentially a side bet.  Today, the world financial system has been turned into a giant casino where bets are made on just about anything you can possibly imagine, and the major Wall Street banks make a ton of money from it.  The system is largely unregulated (the new “Wall Street reform” law will only change this slightly) and it is totally dominated by the big international banks.

Nobody knows for certain how large the worldwide derivatives market is, but most estimates usually put the notional value of the worldwide derivatives market somewhere over a quadrillion dollars.  If that is accurate, that means that the worldwide derivatives market is 20 times larger than the GDP of the entire world.  It is hard to even conceive of 1,000,000,000,000,000 dollars.

Counting at one dollar per second, it would take you 32 million years to count to one quadrillion.

So who controls this unbelievably gigantic financial casino?

Would it surprise you to learn that it is the big international banks that control it?

The New York Times has just published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives“.  Shockingly, the most important newspaper in the United States has exposed the steel-fisted control that the big Wall Street banks exert over the trading of derivatives.  Just consider the following excerpt from the article….

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Does that sound shady or what?

In fact, it wouldn’t be stretching things to say that these meetings sound very much like a “conspiracy”.

The New York Times even named several of the Wall Street banks involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Why does it seem like all financial roads eventually lead back to these monolithic financial institutions?

The highly touted “Wall Street reform” law that was recently passed will implement some very small changes in how derivatives are traded, but these giant Wall Street banks are pushing back hard against even those very small changes as the article in The New York Times noted….

“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”

So why should we be so concerned about all of this?

Well, because the truth is that derivatives could end up crashing the entire global financial system.

In fact, the danger that we face from derivatives is so great that Warren Buffet once referred to them as “financial weapons of mass destruction”.

In a previous article, I described how derivatives played a central role in almost collapsing insurance giant AIG during the recent financial crisis….

Most Americans don’t realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.

Do you remember how AIG was constantly in the news for a while there?

Well, they weren’t in financial trouble because they had written a bunch of bad insurance policies.

What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.

So the U.S. government stepped in and bailed them out – all at U.S. taxpayer expense of course.

As the recent debate over Wall Street reform demonstrated, the sad reality is that the U.S. Congress is never going to step in and seriously regulate derivatives.

That means that a quadrillion dollar derivatives bubble is going to perpetually hang over the U.S. economy until the day that it inevitably bursts.

Once it does, there will not be enough money in the entire world to fix it.

Meanwhile, the big international banks will continue to run the largest casino that the world has ever seen.  Trillions of dollars will continue to spin around at an increasingly dizzying pace until the day when a disruption to the global economy comes along that is serious enough to crash the entire thing.

The worldwide derivatives market is based primarily on credit and it is approximately ten times larger than it was back in the late 90s.  There has never been anything quite like it in the history of the world.

So what in the world is going to happen when this thing implodes?  Are U.S. taxpayers going to be expected to pick up the pieces once again?  Is the Federal Reserve just going to zap tens of trillions or hundreds of trillions of dollars into existence to bail everyone out?

If you want one sign to watch for that will indicate when an economic collapse is really starting to happen, then watch the derivatives market.  When derivatives implode it will be time to duck and cover.  A really bad derivatives crash would essentially be similar to dropping a nuke on the entire global financial system.  Let us hope that it does not happen any time soon, but let us also be ready for when it does.

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The Size of Derivatives Bubble = $190K Per Person on Planet

Posted by Tom Foremski – October 16, 2008

More must read financial analysis from DK Matai, Chairman of the ACTA Open.

The Invisible One Quadrillion Dollar Equation — Asymmetric Leverage and Systemic Risk

According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.

Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers! For example, the North star is “just” a couple of quadrillion miles away, ie, a few thousand trillion miles. The new “Roadrunner” supercomputer built by IBM for the US Department of Energy’s Los Alamos National Laboratory has achieved a peak performance of 1.026 Peta Flop per second — becoming the first supercomputer ever to reach this milestone. One Quadrillion Floating Point Operations (Flops) per second is 1 Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computers across the world totals more than One Exa byte of memory, ie, 1,000 Quadrillion bytes of data.

Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, “Black Swans”, such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously. Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entities ought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing is done.

Let us think about the invisible USD 1.144 quadrillion equation with black swan variables — ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or “Black Swans”. What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:

1. The entire GDP of the US is about USD 14 trillion.

2. The entire US money supply is also about USD 15 trillion.

3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.

4. The real estate of the entire world is valued at about USD 75 trillion.

5. The world stock and bond markets are valued at about USD 100 trillion.

6. The big banks alone own about USD 140 trillion in derivatives.

7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all ‘collapsed’ because of complex securities and derivatives exposures in September.

8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.

The Impact of Derivatives

1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.

2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.

3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.

4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.

5. Derivatives are unravelling at a fast rate with the start of the “Great Unwind” of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.

6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.

7. The derivatives market collapse could make the housing and stock market collapses look incidental.

Three Historical Examples

1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.

2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.

3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.

The Pitfall

The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly. To hope, as US Treasury Secretary Mr Henry Paulson does, that an accounting ruse such as transferring liabilities, however priced, from a private to a public agent will restore the functionality of markets implies a drastic jump in logic. Markets function only when:

1. There is a price level at which demand meets supply; and more importantly when

2. Both sides believe in each other’s capacity to deliver.

Satisfying criterion 1. without satisfying criterion 2. which is essentially about trust, gets one nowhere in the long term, although in the short term, the markets may demonstrate momentary relief and euphoria.

Conclusion

In the context of the USD 700 billion rescue plan — still being finalised in Washington, DC — the following is worth considering step by step. Decision makers are rightly concerned about alleviating immediate pressure points in the global financial system, such as, the mortgage crisis, decline in consumer spending and the looming loss of confidence in financial institutions. However, whilst these problems are grave, they are acting as a catalyst to another more massive challenge which may have to be tackled across many nation states simultaneously. As money flows slow down sharply, confidence levels would decline across the globe, and trust would be broken asymmetrically, ie, the time taken to repair it would be much longer. Unless there is government action in concert, this could ignite a chain-reaction which would swiftly purge trillions and trillions of dollars in over-leveraged risky bets. Within the context of over-leverage, the biggest problem of all is to do with “Derivatives”, of which CDSs are a minor subset. Warren Buffett has said the derivatives neutron bomb has the potential to destroy the entire world economy, and is a “disaster waiting to happen.” He has also referred to derivatives as Weapons of Mass Destruction (WMD). Counting one dollar per second, it would take 32 million years to count to one Quadrillion. The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics. There is a sense of no sustainability and lack of longevity in the “Invisible One Quadrillion Dollar Equation” of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties! The only way out, albeit painful, is via discretionary case-by-case government intervention on an unprecedented scale. Securing the savings and assets of ordinary citizens ought to be the number one concern in directing such policy.

[ENDS]

To reflect further on this, please respond within Facebook’s ATCA Open discussion board.

We welcome your thoughts, observations and views. Thank you.

Best wishes

DK Matai

Chairman, ATCA Open

— ATCA, The Philanthropia, mi2g, HQR —

This is an “ATCA Open and Philanthropia Socratic Dialogue.”

The “ATCA Open” network on Facebook is for professionals interested in ATCA’s original global aims, working with ATCA step-by-step across the world, or developing tools supporting ATCA’s objectives to build a better world.

The original ATCA — Asymmetric Threats Contingency Alliance — is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies — bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of the original ATCA network is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.

The Philanthropia, founded in 2005, brings together over 1,000 leading individual and private philanthropists, family offices, foundations, private banks, non-governmental organisations and specialist advisors to address complex global challenges such as countering climate chaos, reducing radical poverty and developing global leadership for the younger generation through the appliance of science and technology, leveraging acumen and finance, as well as encouraging collaboration with a strong commitment to ethics. Philanthropia emphasises multi-faith spiritual values: introspection, healthy living and ecology. Philanthropia Targets: Countering climate chaos and carbon neutrality; Eliminating radical poverty — through micro-credit schemes, empowerment of women and more responsible capitalism; Leadership for the Younger Generation; and Corporate and social responsibility.


http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

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The Bi-Polar Moving Bretton Woods Meetings

February 7, 2010, at 6:07 pm
by Jim Sinclair in the category General Editorial |  Print This Post |  Email This Post

Dear CIGAs,

1. Bretton Woods was folded.
2. The floating exchange rate system is about to be folded.
3. By default or design we are going to a one-world currency and a one-world central bank of central banks.
4. For Portugal, Ireland, Italy, Greece or Spain to break off from the euro would be an expansion of the floating exchange rate system under present conditions.
5. There are presently 3 major currencies. That is the US dollar, the euro and gold.
6. The SDR was an attempt to form a single reserve currency that never took flight.
7. The SDR is an accounting unit made up of an index of currencies much like the USDX.

There is no immunity now from the size of funds seeking to speculate or manipulate markets. This type of money is attacking the debt of the weaker euro states by intention or coincidence. Their success in the Iceland situation was only the first chapter of a multi chapter play.

Central bankers fear that this type of action, most certainly if it is as successful as it was on Iceland, succeeding against the weaker euro states could easily attack the present functional reserve currencies, the US dollar and the euro.

There is an implicit fear that if the ECB refuses to or cannot sustain the debt of Portugal, Ireland, Italy, Greece and Spain the next to fall will be both the US dollar and the euro.

The states of the US are no different, in form or short opportunity, than weak members of the euro. Already major money is short California, New York and Pennsylvania debt. A pounding of state debt is as easy as the pounding of the weaker members of the euro.

Attack of a currency is primarily an attack of the debt representing that currency.

Central banks are run by bankers who used to measure their capital in millions only a few years ago. After the invention of the OTC derivative they measured their capital as today in billions. They now imagine measuring their capital both of their banks and personally in the trillions as they challenge nations, not companies.

China knows this and is insulating itself from this.

To accomplish this end whilst maintaining and increasing the value of hard assets ( assets of major players) a new single reserve currency must be functionally initiated either by default or by design.

A singular world currency must be an index of many currencies adjusted from time to time. Adjustment within its membership is the key to a common currency that the EU forgot about.

Whatever institution manages that index becomes the central bank of central banks able to create artificial money according to its allocation of the single currency index. This is what was desired of the SDR originally.

The chances of reverting to a Bretton Woods or increasing the Floating Exchange rates are unlikely.

A collapse of the weaker states of the euro would be an expansion of the floating exchange rate strengthening the market forces that will attack all nations one by one after their success in Iceland. The weakest will be the first to go, but none are safe.

The chance of an abrupt change to something new now, as above, is unlikely. The probability of moving towards a one world currency in stages over the next 5 years is a reality.

In order to make that transition a method of raising the status of the IMF and the SDR would be most likely. Such a transition would be for this entity to assist in sustaining the weaker states of the euro and the USA as the states of the USA are now rolling over harder, balance sheet wise, than the weaker states of the euro

The debt of nations is not immune to the tsunami of these speculative and manipulative funds attacking by design or coincidence, focusing on a market all on one side – short.

OTC derivatives are being used in the strategy to collapse the weaker states of the euro.

OTC derivatives are the cause of this entire trauma by design or coincidence.

Nothing has been done to curtail or reduce the ever-growing mountain of these instruments.

All that has occurred is the new means of valuation as value to maturity, and the collapse of FASB requiring market valuation. Both items repaired the appearance of the balance sheet of the financial entities by allowing a cartoon of valuations to re-enter the system.

The decision will take place that is in the best interest of the majority power of four groups ruling these bi-polar central bank meetings. Those groups are the banksters, bankers, Daddy Warbucks and politicians.

Results:

1. Gold will progressively lock price-wise in the inverse to the SDR or similar item.
2. An exchange will soon begin to trade a virtual SDR or similar item just as they trade a virtual dollar as the USDX or virtual gold as a paper gold.
3. The USDX will become redundant.
4. The ability to pay off the debt of previous reserve currencies with market de-valued paper is facilitated.
5. Currencies as a whole will decline.
6. That decline will be the SDR versus the gold price.
7. The method of attacking a currency is inherent in attacking its debt.

The answer is simple even though the problem is complex.

Reduce all your currency positions into strength. Buy gold in all its forms other than US or Euro based in weakness.

Gold will trade at $1650 and above. The US dollar continues its march in phases towards worth-less and worthlessness.

Respectfully,

Jim

http://www.jsmineset.com/2010/02/07/the-bi-polar-moving-bretton-woods-meetings/

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Derivatives and the Recession

My Related Pages

Felix qui potuit rerum cognoscere causas.
– Publius Vergilius Maro

Happy is he who can know the causes of things.

Revision 0.27
Copyright © 2009-2010 by Zack Smith.
All rights reserved.

Introduction

We know we’re in a Recession, so what caused it? And what factors are influencing it now? Who is profiting and who is losing? On this page I am presenting my notes that address these questions.

Let us not just assume, as the media would have us do, that poor people who bought houses they could not afford (or rather were suckered into it by predatory lenders) were the main cause of the crisis, or even that they are the sole worthy recipient of blame. That is a story for children, not for we who seek to know the truth. After all, bankers control much of the mainstream media corporations through interlocking directorships.

No, there’s much more to the story and the duped poor people may in fact be only a tiny part. It involves a much larger mesh of wrongdoing and outright criminality, involving bankers engaging in derivatives gambling, bailouts for politically-connected racketeers, Ponzi schemes, front-running scams, money laundering on a massive scale, and much more.

Contents

The workers
The borrowers
The abusive speculators
The abused savers
Peekaboo accounting scam
The shadow banking system
Market irrationalism
Ponzi schemes
The money supply
What is a market maker?
Zero-reserve banking system
Has Goldman Sachs taken over the US government?
WTC 7 controlled demolition connection
Economic Bubbles 
Shady international cabal of financiers
Inflation
What is the Federal Reserve?
Derivatives
The insurers
Program trades
Naked short selling
Counterfeit ratings
The unemployed
The Chinese lenders
The Wall St. fraudsters
World debt versus world GDP
The US dollar
Dollar devaluation
The Carry Trade
Gold
Places
The future: What could happen?
Africa
Reminder: Our corrupt media
Finance jargon
Gold price
A poem

The workers

  1. Excessive outsourcing of jobs and offshoring of entire factories has hollowed out the US economy.
  2. Excessive importation of foreign workers under H1B and L1 visas has meant that many middle-class jobs have gone to foreigners.
  3. Mass immigration of uneducated foreign workers who work at low-paying jobs either without papers or using stolen or invented social security numbers has meant blue-collar jobs have gone to them.
  4. Therefore more American workers have less income and fewer job prospects.

The borrowers

  1. 9/11 (which was not perpetrated by Muslims) was used as an excuse by the Federal Reserve to reduce interest rates to make money much too easy to get.
  2. After 9/11, Bush stood on the WTC rubble and ludicrously told Americans to go out and shop. This reflected two key facts:
    • 70% of the US GDP of $13 trillion is based on consumption due to exporting of factories and jobs to lower-wage countries.
    • This hollowed-out US economy exists in a debt bubble. Americans have borrowed too much and prices have risen to match available debt money.
  3. Americans generally want to live a middle-class lifestyle and many have used debt to accomplish that. That has increased the debt bubble.
  4. Many Americans who either have money or are willing to take on risky debts have become speculators in the housing bubble with the goal of “flipping” houses or similar.
  5. Therefore home prices rose based on speculation and what the Fed recently called the “illusion” of wealth occurred.
  6. We observed a disappearance of affordable homes for sale and even cheap rentals. For many people this necessitated the use of debt.
  7. Cities enjoyed increased revenues because increased homes prices meant higher tax revenue.
  8. Many Americans who either have money or are willing to take on risky debts have become buy-to-rent operators.
  9. The inability of borrowers/spectulators to pay variable-rate mortgages has led to many foreclosures and the realization that banks possess “troubled assets” meaning worthless loan papers.
  10. Therefore the stock market fell from its high of 14000 to presently near 7000.
  11. Cities also speculated in the stock market and some have reported a halving of assets since the stock market fell.
  12. People who possess retirement accounts have also reported significant falls in their retirement booty.

The abusive speculators

There is a cadre of wealthy speculators who are at war with savers. Who’s a saver? If work for a living and you put money into a bank for safety and to collect interest, you are a saver.

Wealthy speculators like:

  1. Borrowing at low interest.
  2. Collecting (privatizing) all of their gains.
  3. Walking away from (socializing) all of their losses.

This effectively results in a global Ponzi scheme.

Wealthy speculators dislike:

  1. Regulation on derivatives gambling.
  2. Higher bank interest rates.
  3. Higher Treasury bond interest rates.
  4. Stock dividends that are actually paid out.

Wealthy speculators use part of their ill gotten gains to bribe politicians (which is legal in the USA where we call bribes “campaign contribution” or private consultant jobs). Therefore politicians are on their side, not on the side of the savers.

John Paulson and Goldman Sachs

John Paulson is one speculator who became infamous for betting against subprime securities and massively winning. He is said by Kevin Connor to have worked with Goldman Sachs to create those fraudulent securities designing them to fail so that he could later profit on their failure, terming this a “vulture flight pattern”. Paulson is now operating in Greece with a team of 20 traders and is again working with Goldman Sachs betting against their debt.

The abused savers

Savers are regular people who hope to benefit from putting their money in banks, which effectively lends the money to banks to speculate with in return for interest.

Savers like:

  1. Higher bank interest rates.
  2. Higher Treasury bond interest rates.
  3. Stock dividends that are actually paid out.
  4. A guarantee that their money will not disappear if the bank fails.

Now that the FDIC has no money, the guarantee that they formerly offered is ringing pretty hollow.

Peekaboo accounting scam

We now know that Lehman executives were, like almost every US corporation it seems, engaging in “peekaboo accounting” as commentator Max Keiser calls it. This means they would move debts off their balance sheets just days before having to issue a quarterly report, and a week later move it back on.

Peekaboo accounting is also now a common practice by corporations, who shift profits to foreign subsidiaries located in tax havens to avoid paying taxes on those profits. This practice accelerated under the George W. Bush presidency. CTJ report.

General Motors has been accused by Senator Charles E Grassley of using peekaboo accounting to pretend that it paid back bailout money when in truth it repaid it using yet more public money. This is, of course, like a Ponzi scheme. Grassley actually refers to this as a “money shuffle”.

The shadow banking system

Also known as the dark exchange, the after-hours market, the OTC market.

  • Every brokerage firm normally has an “error account” in which brokers’ mistakes are collected. That’s normal.
  • What’s not normal however is that brokerages started trading “derivatives” between themselves through these error accounts. This practice expanded to become the off-the-books or “shadow banking system”.
  • The shadow banking system includes derivatives trading and globally $500 trillion of derivatives debt.
  • Major players include Goldman Sachs, JP Morgan, Citibank, Morgan Stanley.
  • The shadow banking system grew larger than the legitimate, public stock market. The estimate is that it grew to $25 or 30 billion dollars in the US. But $14 trillion globally.
  • Credit default swaps and securitizing are effectively money laundering in his view.

Bank for International Settlements

Located in Basel, Switzerland. Website.

The BIS has useful statistics on the global derivatives market, which is $1200 trillion or so. BIS stats.

Market irrationalism

Market Religion

Some time ago I devised the term market religion to describe what I saw as a set of behaviors that are akin to religion, in a psychological and anthropological senses. I had been taking courses in both psychology and anthropology. Anthropologists are interested in what constitutes a religion and they generally specify a set of characteristics.

I kept seeing these key characteristics of religiousness in financial news reporting, but also in the America’s ostensibly capitalist culture generally. So I began to consider capitalism to be a kind of pseudo-religion.

It was a satirical claim of course, but then again, as an atheist I often see patterns of religiousness in people, even in other atheists’ behaviors and beliefs.

Market Fundamentalism

Market fundamentalism is a term that describes a collection of claims that is actively promoted by various people. Typically these people are pushing the Neoliberal agenda.

Some of these claims:

  • The market is or can be self-regulating.
  • Businesspeople can or should be self-regulating.
  • A higher stock price means a healthier or better company.

Ponzi schemes

Fractional reserve lending

  • This is lending by banks of more money that they have on hand.
  • By law banks can lend out 10 times what they have in deposits.
  • It is standard practice and has been in use for 300+ years.
  • It is explained in the documentary Money Masters.
  • It is a Ponzi scheme.

US dollar

Some have said the US dollar is itself a Ponzi scheme, because it is the world reserve currency.

Bubbles

A bubble is a Ponzi scheme, created to transfer wealth to the Ponzi schemers, who then pop the bubble, and then they rush in afterward to suggest a solution to corrupt politicians like Obama and Gordon Brown that they profit from.

The money supply

Where does money come from literally?

There are two sources of money:

  1. Money comes into existence by being printed. This is about 3 percent of the total money supply.
  2. Money comes into existence (e.g. Fractional Reserve Lending) by being loaned by banks. This is the other 97% of the money supply.

When banks do not lend and/or people are the masses of peole and businesses are too poor to borrow, the money supply shrinks. When the money supply shrinks, money becomes more expensive and the relative value of a currency can increase and deflation can set in.

In the USA, the Goldman-Sachs-controlled Obama Administration started giving billions of dollars away to corrupt, incompetent bankers and to anyone else who would accept it. This expanded the money supply but some deflation has occurred anyway.

What is a market maker?

This term technically means a person or company that exists in the market to provide for an orderly and fair market. They buy when others are selling and the sell when others buy. Market makers are not supposed to profit from their position, because they can see trades before they happen. And yet many do.

However the term as used by Goldman Sachs is a euphemism for thief. Goldman engages in high-frequency trading and therefore has great power over the market. They can push the market up or down on a whim because the number of trades they’re doing (volume) is so large. They are closer to the core mechanisms of the market so that they can rig the market in order to never lose.

Because players like Goldman can manipulate the market in dramatic ways, they stand accused of creating panics in order to influence politicians to prevent imposition of new regulations.

Market makers are sometimes accused of being in a position to run Ponzi schemes.

Zero-reserve banking system

The banking cartel (banks and the US government) has figured out that banks can game the system so that they don’t have anything on hand. A bank will obtain an asset, lend out 10 times its value, and right away sell the asset. So they have basically no risk except for the system itself. If they do experience a loss, they will employ the Neoliberal practice of going to Washington to get the politicians to have the taxpayers bail them out, paying off their bad bets. (In Neoliberalism they privatize profits and socialize losses.)

Leverage

Fractional reserve lending in analogous to the system as a whole. Big financial companies are “over-leveraged” meaning they have bets and debts greatly in excess to their real assets. However since Alan Greenspan the “fraction” has been shrinking as a percentage. This increases the risk for everyone since a stable economy is one that is built upon production (not bets and debts) and whose currency is backed by (built upon) something tangible such as a precious metal like gold and/or silver.

Bernie Madoff

  1. Madoff was probably just the tip of the iceberg.
  2. Since his situation came to light several other con men like him have been identified as well.
  3. The stock market itself for years has been pushing profit increases of 20% per year. This was not a realistic rate of return.
  4. A stock bubble is effectively (like the tech bubble or the housing bubble) a Ponzi scheme.
  5. Since the presidency of Ronald Reagan we have seen a series of economic bubbles and bubble-bursts.
  6. One of the best funds is Berkshire Hathaway run by Warren Buffett. It is considered legit.
  7. Bernie Madoff in this context used a simple scheme of offering a rate of return that was less than Berkshire Hathaway and less than short-lived Ponzi schemes of the past. Therefore it was not perceived as a scam.

Goldman Sachs has taken over the US government?

Some charge that Goldman Sachs has staged a coup d’etat. Consider:

  1. Barack Obama is loyal to them since they were his largest campaign contributor.
  2. Timothy Geithner (formerly NY Fed chief) appointed as his chief of staff a former Goldman Sachs lobbyist. Source
  3. Timothy Geithner as head of the NY Fed had the job of helping Wall Street banks like Goldman Sachs make more money which is why the worldwide economic system is at risk of collapse.
  4. Ben Bernanke is alleged to be under the thumb of Goldman Sachs.
  5. The SEC is headed up by yet another Goldman Sachs banker.
  6. Henry Paulson was a former CEO of Goldman and yet he became Treasury secretary. When he left Goldman he got a golden parachute of $500 million.

Some brokers like Goldman Sachs stand accused of deliberately selling their clients worthless products, then “shorting” these products i.e. betting that the value of those products will fall from their inflated price. In this way, they were ensured of a profit and their clients were certain to lose.

It is also worth pointing out that the controlling board of the BBC is dominated by Goldman Sachs executives, as revealed by Max Keiser. I might also note that it is well known that on 9/11, BBC reporters announced live that World Trader Center building 7 had collapsed due to “terrorism” and yet so obviously by controlled demolition a full 30 minutes before it did.

What are they up to?

They are said to do 1 trillion trades per hour and to make a profit of $100 million per day.

The WTC 7 connection

The controlled demolition of the World Trade Center at 5:20pm on 9/11 had a convenient effect for criminal bankers: The demolition of building 7, which most Americans have never seen nor heard of, resulted in a large loss of documents owned by foreign banks that described the value of assets. It also contained key files on the Enron investigation and other financial investigations.

Building 7 falling on 9/11:

Economic bubbles

What is an economic bubble?

A bubble is a phenomenon in which a feedback loop arises:

  1. A type of asset price goes up.
  2. Speculators form the belief that the rise will continue.
  3. Speculators buy more of this type of asset.
  4. More demand causes the price to go up.

This cycles until some event causes the majority to realize that assets of this type are overvalued and will not continue to rise.

Bubbles are often due to Ponzi schemes. Anything that is a Ponzi scheme naturally creates a bubble.

Examples of economic bubbles:

  • The Dot Com Bubble.
  • The Housing Bubble.
  • The credit crash of 2000-2008.

Since fractional reserve lending is a Ponzi scheme, it too is creating a bubble but slowly.

America’s social security system is a Ponzi scheme.

Bubbles beget more bubbles

A Chinese official has admitted that China and the US are addressing the bubble problem by creating more bubbles.

Source:
Head Of China Sovereign Wealth Fund Openly Admits Asset Bubble Addressed By Creation Of More Bubbles (8/09).

Inflation

Inflation is portrayed in some Economics 101 classes as being a natural phenomenon of the market.

That’s not quite correct.

It is actually also the product of a scheme invented hundreds of years ago by kings and queens and dukes who realized that there was a hard limit on how much they could tax their subjects before they would face the end of a pitchfork. So a new scheme was invented. It works as follows.

If a regular person writes a check without any money in the bank to pay for it, they risk going to jail.

If the Federal Reserve does it however, Congress thanks them for it. The Fed has the right to invent money out of thin air, because it’s a central bank. Printing more money has bad future consequences those won’t appear until later, Congress will have spent the money by then.

So rather than tax the public more, Congress can go to the Fed anytime and get free money. It was the same with royals.

This weakens the dollar, because of supply and demand. The more of a currency that is in circulation, the less value it has.

However printing more money also results in inflation, which erodes consumers’ buying power and destoys savings. But this harm will not occur immediately.

In addition:

  1. Whoever gets the free money early and spends it right away is not affected by the inflation that will happen due to the free money being put into the economy.
  2. Whoever makes a profit by conveying or storing the free money should spend that profit sooner rather than later to avoid the penalty of inflation.
  3. But for the regular Joe Blow he will receive any trickled-down money late in the game when the inflation has had a chance to take effect. His purchasing power is reduced and he becomes poorer.
  4. In addition Joe Blow will have to help pay back the debts. So he is made poorer twice.

Thus, inflation is an indirect form of taxation in two ways.

Shady international cabal of financiers

It has been said that when Ian Fleming was writing his James Bond books he always gave them a basis in truth, albeit uncommon truth. So on some level Dr No, Goldfinger and other bizarre characters had counterparts in the real world.

For the common person who just wants to keep his or her down and live life, talk about an international cabal that is trying to shape world events will immediately illicit scoffs and condemnation of “conspiracy theories” and “tin foil hats”.

Yet there seems to be historical evidence, unsurprisingly not provided by Establishment lackeys, that such Dr No wannabe’s do exist and regularly meet in organizations such as the Bilderberg group, Trilateral Commission, and the Council on Foreign Relation.

Which is to say that economic bubbles are not accidents but are planned, as are Depressions, Recessions, and the like. Rich people of this ilk frequently use the term “New World Order” in public to refer to their ultimate goal.

And indeed there are many momentous events where gross malfeasance or criminality played a role behind the scenes: The creation of the Federal Reserve; the Great Depression; major economic bubbles (Dot Com, Housing, etc.); repeal of the Glass-Stiegel Act;

Since the G20 meeting in Pittsburgh people have said that the NWO goal of a “one world government” and a worldwide bank and currency is now moving ahead, with the Dr No types in control of it.

What is the Federal Reserve?

The Federal Reserve is a cartel of private banks whose members were once (around 1910) known as the Money Trust.

The public despised them and wanted to break their parasitic grip on society so the Money Trust members pulled a fast one: They met secretly on Jekyll Island (Georgia) to write the Federal Reserve bill. They then used trickery to get it passed in Congress as a bill to break their own hold on the economy.

Woodrow Wilson foolishly signed it into law, which he later admitted was a grave mistake.

The Federal Reserve Act indeed legalized and enshrined the Money Trust as the Federal Reserve.

The purpose of any cartel is to reduce competition between members preferably to zero while increasing profits and reducing risk for members. The Federal Reserve Act did that.

The US government is fully in on the scam: The government is an active member in the cartel.

Derivatives

Definition

A derivative is a gamble.

  1. A derivative is a financial instrument (a contract) whose value is determined by something else which is called the underlying.
  2. Derivatives are essentially bets that the value of the underlying item will go up or down. They are a kind of gambling. The underlying can be any of these:
    • An asset such as a stock or real estate or loan.
    • A stock index or other index e.g. Consumer Price Index.
    • The price of grain.
    • The weather.
    • Etc.
  3. There are four kinds of derivatives:
    • Futures = a contract to provide goods at a specific price in the future e.g. grains.
    • Forwards
    • Swaps
    • Options
  4. A recent tally by the Bank of International Settlements was that there exists $700 trillion in derivatives.
  5. Warren Buffett recently referred to derivatives as weapons of mass financial destruction.
  6. Buffetts firm Berkshire Hathaway has $63 billion of “exposure” to derivatives.
  7. Another tally from March 2009 was that the world total of derivatives was near $1.2 quadrillion. This is much more than the world GDP. (The US GDP is $14.2 trillion.)
  8. This sum has been referred as a “ticking time bomb.”

OTC = over the counter

This odd term refers to any transaction that does not have a middleman.

When you buy a car from another person as a private sale, that is an example of an “over the counter” transaction. Transactions negotiated through Craigslist classified ads and on Ebay are often OTC as well.

When you buy a stock on the stock market, this is not OTC. There is an intermediate (the market) who will sell you stocks even if there is no one selling to it. Likewise you can sell to the intermediate even if there is no buyer. The intermedate functions as a market maker.

OTC can be risky for society if some party buys a highly risky product like a mortage-backed security without understanding that it’s junk, and then asks society to bail them out.

Mark to market is the act of defining the market value of a contract. Some companies, realizing that an objective value could not be set, abused the mark to market concept to engage in accounting fraud.

The insurers

  1. AIG convinced itself that it would be a good idea to insure against a kind of derivative called a credit default swap.
  2. This is a type of “insuring against loss.” Imagine that you go to a casino to gamble. But you bring an insurance agent with you to ensure that if you lose at poker then the insurance company will pay for your loss.
  3. So long as you the gambler are guaranteed to win the insurance company has no risk and any insurance premium that you pay is free money for them.
  4. A credit default swap is a deal in which a lender seeks insurance on a loan but does not want to make insurance premium payments. If the loan goes bad the deal is that the insurer buys the troubled loan from the lender.
  5. AIG insured so much of these credit default swaps because these are unregulated and at the time AIG believed that there was little or no risk involved in insuring them.
  6. In other words AIG thought it could use CDSes to get free money.
  7. When the global meltdown began AIG found its goose was cooked and unfortunately the US taxpayer has been giving them money to pay for their bad thinking and massive losses.
  8. Insuring against loss is not a new idea. It has happened with every economic bubble and has caused huge destruction every time. Yet Congress will not outlaw it.

Program trades

A program trade is a trade brought about by a computer program. They are advantageous in certain situations.

What certain situations? Arbitrage, from microsecond to microsecond or millisecond to millisecond.

On the New York Stock Exchange, 70% of the trades are program trades.

Of that 70%, 50% are by Goldman Sachs.

Therefore, 35% of the volume on the NYSE is Goldman Sachs program trades.

Another major program trader is Citadel.

The mid-2009 scandal to do with Goldman Sachs software being stolen by a worker proved that Goldman is using program trades to reap $100 million per day, which is a collossal rigging of the market.

Naked short selling

There’s a technique called “naked short selling” that is used to literally counterfeit a company’s stock in order to make a profit by selling that fake or phantom stock. In the process, its price is driven down and that negatively affects whatever company is the victim of a naked short attack.

  • In a normal “short” sale, you borrow stock and then try to sell it for less money. If you sell, you must deliver what you sell.
  • In a naked short, you don’t borrow anything and if you sell it, you don’t deliver. So it’s totally fraudulent. But Wall Street loves it.

It is because of naked short selling that Bear Stearns’ stock and Lehman Brothers’ stock plummeted and each declared bankruptcy. They were the victims of fund managers orchestrating a coordinated attack on their stock using naked shorting.

It’s not just banks that have been victims. Many companies have including Overstock.com, as explained by its CEO in this Fox News interview of David Byrne.

The SEC identified decreed that 19 banks to be protected from naked shorting. What this really meant was that the SEC was in all other cases and prior to that new rule refusing to enforce the laws against naked short selling, which is definitely an illegal activity.

Why? Because the people and companies who profit from naked shorting are very powerful. Indeed, according to David Byrne 9 of the protected banks were engaging in naked short selling.

Here’s a YouTube video posted by WriterJudd about the naked-short-selling attacks on Bear Stearns and Lehman:

Notice that in this video the author (presumably WriterJudd) identifies three hedge fund managers whom he believes are guilty of the Bear Stearns and Lehman attacks:

  • Jim Chanos
  • Dan Loeb
  • Steven Cohen

Hedge fund transactions may constitute 50% of the trades on the NYSE.

Counterfeit ratings

Everyone knows that mortgage-backed securities were fraudulent. So why did organizations, towns, cities, and countries buy them?

Because ratings agencies like Moody’s were paid more to provide better ratings of these securities. It was fraud.

This established the mortgage-backed securities as a “confidence game”, i.e. one in which a victim is made to feel confident that something is worth a great deal of money when actually it’s fairly worthless.

Source

The unemployed

The official unemployment number is bogus because it ignores people who are working only part-time and people who have stopped looking for work.

So while the official rate as of July 2009 is 9.5% the truth is it’s more like 16%.

The Chinese lenders

  • China has about $1.5 trillion of US dollars the value of which falls when the dollar falls and whenever the Fed prints more and more money.
  • China holds about $2 trillion in foreign exchange reserves overall.
    Source: FT article.
  • China has $500 billion that is mortage-backed securities from Fannie Mae and Freddie Mac.
    Source: NYT article.
  • China can use this debt to demand key assets such as income-producing properties in the USA. For instance toll roads.

The Wall St. fraudsters

There are at least 16 types of fraud that are commonplace on Wall Street. Many of these techniques are old, but they are common and are used to steal from investors.

He refers to Goldman Sachs and JP Morgan as financial-terrorist organizations. He notes that even the mainstream media has said that the economy is being “held random” by these bankers, and that Goldman Sachs desires to put the entire world under the yoke of debt-slavery.

World debt versus world GDP

  • The total of all GDPs of all nations in the world is only $100 trillion versus the US GDP of $13 trillion.
  • The total debt in the world is something like $1000 trillion (a quadrillion).

The US dollar

It’s the world reserve currency. But for how long?

  • Oil and gold are traded in US dollars.
  • The dollar-based financial markets are the “deepest”. It involves $50 trillion.
  • China has been buying up gold bars apparently in order to strenghen the importance of the yuan.

Dollar devaluation

In October 2009, journalist Robert Fisk announced that China, Fruance, Russia, oil producing countries and Gulf states had met secretly to discuss dumping the US dollar as the currency for trading oil.

This is the “decoupling effect” that Peter Schiff warns will happen.

It is known that China has been quietly accumulating gold. Gold has an inverse relationship with the dollar.

It is known that Gulf states have about $2 trillion dollars of reserves.

63% of worldwide reserves of foreign currencies are US dollars according to Russia Today in October 2009.

The Carry Trade

Interest rates are not the same in every country. If you see that the interest rates are low in country A, such that you can borrow cheaply, and that investments exist in country B that are offer a higher rate of return, then you can make money by borrowing in one currency, exchanging it, and investing in country B. This is the carry trade.

If the interest rates rise in country A, the carry trade disappears and investors are left with bad investments.

The carry trade was instrumental in Iceland’s unlikely rise. The carry trade is how they made money without producing anything and despite Iceland’s tiny population of only 300,000 people.

The carry trade can explain why the dollar has risen recently even while the stock market fell. The dollar was in demand because it’s cheap to borrow. Interesting commentary by Jan-willem Nijkamp.

Gold

  • China has 600 tons of gold bullion.
    • China has for some years been quietly buying gold whenever the price dips.
  • USA has 8000 tons of gold bullion.
  • IMF has 1000 tons of gold bullion.
  • German gold is in New York.
  • Hong Kong has demanded its gold back from London.
  • The French took their gold back from New York a few decades ago.
  • The total value of all gold in the world is about US $4 trillion.

The “Beijing put” refers to China’s purchasing of gold whenever it falls below $1000 per ounce. It does so quietly so as to not send the price higher. Thus it buys in the valleys i.e. when the price dips.

Places

London

  • London has been the center of world hedge fund industry.
  • Gordon Brown pushed to relax the rules (weaken regulations) for the City of London.
  • Gordon Brown made the City of London the least regulated financial center in the world.
  • AIG based its credit-default-swap (CDS) operations in London.
  • The UK provides “safe haven” for money launderers.

The future: What could happen?

Peter Schiff says…

Schiff is the former economic advisor to US presidential candidate Ron Paul. He regularly appears on mainstream media news shows to provide his opinions and debate the big wigs. He believes there will be a “decoupling effect” in which the US dollar will cease to be the world’s reserve currency and will be abandoned.

At his point both Russia and China have argued that the US dollar should be abandoned as the world reserve currency.

Source:

China calls for new reserve currency

Jim Rogers says…

His website

Rogers is a famous investor and frugal man who has “little need for money”. He and friend George Soros won big when trading currency during their younger years. Rogers warns everyone to get out of the US dollar and the UK pound. He has famously told young Britons to leave the UK.

Michael Hudson says…

His website

Michael Hudson explains the meltdown: KPFA Guns and Butter interview MP3.

Michael Moore

Moore’s 2009 film “Capitalism, a Love Story” brings the details of the derivatives mess and the threat of corporatism to the public’s doorstep.

He does a pretty good job considering that he makes mainstream American films and is surely constrained from speaking verboten topics.

Yet what he doesn’t say is almost more important than what he does. He fails in this documentary to mention:

  • The $23.7 trillion in bailouts that Neil Barofsky has warned of.
  • The $2 trillion of loans to unknown parties that the Fed issued and which Bloomberg sued over.
  • The fact that the Fed was begun by and is today run by the major corrupt banks that he mentions.
  • The ongoing and increasingly successful effort to audit the Fed.

Africa

The Neoliberal system takes the resources of Africa and gives them aid and guns in returns. You can no longer say it’s “the West” doing it, since China is in on the game.

Reminder: Our corrupt media

We live in an age of huge scams. Massive wrongs are being committed or have been and few people are being held accountable. Even Obama may be in on the racketeering and the cover-ups. He is providing a continuation and expansion of George W. Bush’s disastrous policies, not just in the area of finance.

Both the mainstream media and the carefully-named “alternative” media (who are not truly independent as they are funded by foundations) have to varying extents been active in covering up the facts about all the major scams that have been in play and thereby in protecting the guilty.

For info about who controls the alternative media, see here: diagram

Finance Jargon

  1. Great Fool Theory = people who understand risks more will dump their assets onto people who understand risks less e.g. you know your car is broken therefore you sell it to some fool.
  2. Short selling (“shorting”) = a bet in which you borrow something (you do not own it) and sell it in the hope of buying it back at a profit when the price falls. If the price rises then you lose money.
  3. Naked short selling = an attack on a stock (such as Bear Stearns or Lehman) that drives its stock price down short-term so that the attacker can profit from a put option i.e. a bet that the price will go down.
  4. Market liquidity = When the exchange itself serves as a buyer or seller to ensure that buyers and sellers can always find a partner for a transaction — irregardless of whether both buyers and sellers (other than the exchange) are present.
  5. Quantitative easing = The act of creating inflation by printing too much money. Why do that? Because the USA cannot pay back its national debt. Every time the Fed prints more dollars it is decreasing the value of the dollar itself (supply and demand) and since that debt is denominated in dollars the value of the debt decreases.
  6. Black swan = an event that deviated significantly from the norm but that is hard to predict e.g. results of an inside job.
  7. To “front run” = trading based on inside information.
  8. Moral hazard = When one party acts more riskily because they know they are insulated from loss by another party. This has occurred with the US financial bailouts and is why some say that profits are privatized but losses are socialized — the public is the second party paying for losses from the risky behavior of bankers.
  9. Carry trade = Borrowing money in a low-interest currency and then exchanging it to invest it in another, higher-interest currency.
  10. Mark to market = assigning value to an OTC (over the counter) derivative.
  11. Front running = when a broker puts his own trade in front of a client trade. Link
  12. Dead cat bounce = Creating a fake rally in the market just before the real shit hits the fan in order to pull in the “suckers” who wish and wish so hard that the Recession is already over.
  13. Painting the tape = Creating a fake end-of-day rally in a stock so that the news media will claim in the evening/morning news tht the stock is now popular even though no real value has been added.
  14. Margin = money paid to an exchange to be used in the event of a trading loss.
  15. Margin call = use of a margin in the event of a trading loss.
  16. Put option = contract saying you may sell X at price Y for a period of time. X is the “underlier”. Y is the “strike price”. If Y > spot price then you win.
  17. Call option = contract saying you may to buy X at price Y for a period of time. X is the “underlier”. Y is the “strike price”. If Y < spot price then you win.
  18. Straddle = a put combined with a call. You win more money than you bet if the price goes outside of a range. Otherwise you lose and the seller keeps your money.
  19. Breakeven point = the point at which the costs of making a transaction equals the profit/gain achieved by the transaction.
  20. White shoe = mafia-like bankster behavior concealed by a veneer of light-skinned Protestants.
  21. Weenie waving = making stock market gambles just to show you are big stuff.

For reference: Gold price


gold price charts provided by goldprice.org And oil too:

WTI Crude Oil

$84.12 ▼0.11 0.13%
21:23 PM EDT – 2011.10.13

A poem

Soon the people will be hosed,
Despite gold or ameros or whatever
By derivative scams under our nose,
And worthless green Fed toilet paper.

A few links

Links


Google ads on this webpage now use Google’s interest-based advertising.

http://firmitas.org/Recession.html

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Foreclosure Scandal Exposes
Systemic Derivatives Fraud

by John Hoefle

October 2010

This article appears in the October 15, 2010 issue of Executive Intelligence Review and is reprinted with permission

[PDF version of this article]

EIRNS/Stuart Lewis

The foreclosure scandal making headlines across the country is sounding the death knell of the derivatives markets. This sign in Leesburg, Va., was from the very beginning of the wave of foreclosures, in February 2007.

October 9, 2010 — Filing false documents in courts to obtain illegal foreclosures, breaking into homes and changing the locks while the residents are still legally living there, and even foreclosing on homes which have no mortgages—these are just some of the things the derivatives arms of the giant banks are doing, as they throw people to the wolves in a vain effort to stop their own collapse into oblivion. We are not at all surprised that the derivatives banks are acting this way—in fact, we would be a bit surprised if they didn’t, given the criminal nature of the financial markets. It would be nice to be able to say that we are surprised that the Federal regulators are letting them get away with it, but that one won’t fly. Under the Obama regime, with the help of Speaker of the House Nancy Pelosi, and “Bailout” Barney Frank and Chris Dodd of the House and Senate banking committees, the banks have gotten pretty much whatever they wanted. If that includes your house, too bad for you.

Fortunately, a number of state officials have more backbone and morality than the sellouts in Washington, and are beginning to take steps to rein in some of these abuses. Their actions have forced at least four banks—JP Morgan Chase, Bank of America, PNC, and Ally Financial (née GMAC), to temporarily suspend foreclosures—in the 23 states which require court approval in the case of home foreclosures (Bank of America has frozen foreclosures in all 50 states). Attorneys general in a number of states have already launched investigations into the actions of the banks, with more expected. The magnitude of the problem, and the number of banks involved, have only begun to surface.

The state actions have prompted weak cover-your-mustache posturing from Obama, Pelosi, and company, in a desperate effort to hide their abject subservience to the British Empire and the Inter-Alpha Group. No one is buying it.

The banks, for their part, are covering up this scandal as fast as they can, and with the help of compliant media such as the New York Times and Washington Post, are attempting to cast it as a story of “shoddy paperwork by low-level nobodies,” whose errors are now “jeopardizing the fragile recovery.” In effect, these bankers are brazenly threatening us yet again—even as they destroy the nation trying to bail them out. “Stop us from taking what we want,” they’re saying, “and we’ll make you pay.” What unmitigated gall!

Well, we’ve got a hot news flash for these arrogant bastards: You are already way beyond bankrupt, the economy is already collapsing, and we are through capitulating to your suicidal demands. This time, we’re going to shut your derivatives market down, and save ourselves. Enough is enough!

Blame Derivatives

The horror show playing out before our eyes in the foreclosure markets, is the continuing collapse of perhaps the greatest financial swindle in the history of mankind: the derivatives markets. The story revolves around the way that derivatives were used to create a giant pool of fictitious capital, nominally based on home mortgages, and the way that the banks are now attempting to seize the homes to turn their funny money into hard assets.

What is absolutely clear, is that the mortgage system—which was run by and for the big derivatives players—systematically ignored legal requirements for the conveyance of promissory notes and mortgages, as they engaged in this giant scam. Individual mortgages were sold by their originators, and combined into pools, which were, in turn, used as the basis for the issuance of mortgage-backed securities (MBS). These MBS were then sliced and diced into pieces, and sold. Then many of these pieces were combined into new pools, against which new derivatives were created and sold, ad nauseam.

Rather than record these sales with county courts, as required by state real estate laws, the bankers created a giant database called MERS, to keep track of the sales. This allowed the banks to save billions of dollars in time and money on court filings, and made the whole train-wreck run more smoothly—for a while.

The problems for the bankers began in mid-2007, when the mortgage-derivatives market collapsed. Panic set in after the collapse of two Bear Stearns hedge funds, and with good reason: The pyramid scheme had collapsed. Speculators suddenly retrenched into survivalist mode, thereby killing the flow of funds into the mortgage market, and sending property values plunging.

Now the foreclosures have begun to accelerate, as the derivatives-holders try to seize real homes to cover their fictitious claims. The problem they face is that, having ignored real estate filing laws, they are now finding it difficult to prove they are the legal owners of the mortgages/notes, and thus have the legal standing to foreclose.

As a result, the banks acting on behalf of their derivatives pools have resorted to faking the paperwork, filing false affidavits with the courts, and other unsavory actions. They have become so blatant in their criminality and contempt for the law, and for the welfare of the people, that they have triggered a revolt by the public, and the state regulators and courts.

Prosecution of the individuals and institutions that knowingly violated the law is certainly warranted, but that is not sufficient to deal with the problem. If we fine the banks, they will just pay us back with our own bailout money. So people need to go to jail, and institutions need criminal convictions. We must teach the British Empire that violating U.S. laws has serious consequences. No more slaps on the wrist (especially when accompanied by cash under the table).

We must finally recognize that this financial crisis—from the so-called “subprime crisis” to the “foreclosure crisis” and everything in-between, has been the result of a derivatives market which has turned the global financial system into a giant, and completely bankrupt casino, and that the attempt to bail out this casino by sticking the public with the bill is killing us all. If we are to survive, we must shut down the derivatives markets, declaring all existing derivatives contracts null and void, and prohibiting them in the future. Wall Street will howl, but that’s just a sign something right is being done. If they’re not howling, we’re not doing enough.

Get Back On Track

Putting the nation back on track requires a fundamental change in policy, starting with the reinstatement of Franklin Roosevelt’s Glass-Steagall law. We must separate out and protect real banking, of the sort needed to keep a proper economy functioning, from the speculations of the casino. We will honor legitimate debts, but not derivatives claims and other casino chips. We will put the Federal Reserve into receivership, go back to a Hamiltonian credit system, return to a Bretton Woods-style fixed exchange rate, and launch an infrastructure Renaissance in the style of Lyndon LaRouche’s NAWAPA/Mars concept.

To succeed, we must break the power of the British Empire and its Rothschild-run Inter-Alpha Group over the world economy, and, in particular, the U.S. economy. We are at war with the empire, and our very survival is on the line. The actions we see in the foreclosure process are just a small part of the financial warfare directed against us. The empire’s puppets—from Obama on down, in Washington, and virtually all of Wall Street and the Boston Vault—must go. We must return to the concept of “of, by, and for the People.”

We had a chance in 2007 and 2008 with LaRouche’s Homeowners and Bank Protection Act, which would have stopped the foreclosures, and ripped legitimate banking functions from the clutches of the speculators. That effort, which had considerable public support, was sabotaged by “Bailout” Barney Frank and others. Had it passed, we would not be in the mess we are today. Those who blocked the HBPA on behalf of the empire, committed treason, if not by the letter of the law, then by the intent of the Constitution. They are not fit for public office—even in sanitation. They’re so corrupt they would probably contaminate the sewers.

What was a financial crisis, having been made far worse by the bailout scheme, has turned into a full-fledged breakdown crisis. We must bust up the imperial crime wave via Glass-Steagall. That will clean up the mess, but it still leaves us with a dying economy, which is where NAWAPA (the North Amerian Water and Power Alliance) and LaRouche’s “platform” concept come in. Nothing less will work, anything less is a waste of time.

Finally, in closing, we have a suggestion for all the investigators looking into the foreclosure crisis. The devil is not in the details, but in the nature of the now-dead financial system. You are looking at a vast criminal conspiracy intended to destroy the United States, and the nation-state system itself, in favor of the re-establishment of the British Empire on a global scale.

You should also consider the possibility that the deliberate failure to follow legal document-recording standards has to do with more than just saving time and money. We suspect, knowing the nature of the empire, that what they were really doing is selling the same assets to more than one buyer. They will gladly take “paperwork” fines, to hide that. Don’t let them get away with it.

So, put away your Sherlock Holmes, and turn off “CSI,” and read Edgar Allan Poe’s “The Purloined Letter.” That is the method you will need to get to the bottom of these crimes. Look with your mind, not your senses.

johnhoefle@larouchepub.com

Related pages:

END-GAME IS ON: Getting Out in Time! by Lyndon H. LaRouche, Jr.

Obama Out To Kill Glass-Steagall, While Pushing Weimar Hyperinflation by Lyndon H. LaRouche, Jr.

A Glass-Steagall for Europe: Outlaw Currency Speculation by Helga Zepp-LaRouche

Federal Reserve Sparks Hyperinflation: Implement Glass-Steagall in September! by Helga Zepp-LaRouche

Glass-Steagall: The Constitutional Solution To Goldman Sachs Criminality

Lyndon H. LaRouche, Jr. Addresses Diplomats On Solution to Economic Crisis May 2010

An Extraordinary International Dialogue With Lyndon LaRouche

LAROUCHE WEBCAST: The Ides of March 2010

An Appeal for a Two-Tier Banking System: Europe Will Go Under Without Global Glass-Steagall June 2010 by Helga Zepp-LaRouche

There Is No `Greek’ Crisis: It’s the Euro That Has Failed May 2010 by Helga Zepp-LaRouche

EU Opens the Floodgates For Hyperinflation April 2010 by Helga Zepp-LaRouche

Lyndon H. LaRouche Emergency Address September 1, 2007 (MP3 audio)

LaRouche Proposes Homeowners and Bank Protection Act in Foreclosure Crisis

Resolution Filed With National Black Caucus of State Legislators: Implement the Homeowners and Bank Protection Act of 2007

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Systemic Uneconomics: Financial Crisis Root Causes: Part III

Submitted by Scott Cleland on Thu, 2010-01-21 16:03

To discern the real “root” causes of the financial crisis of 2008, one must probe beneath the surface and examine the health of the “root system” of our capital markets “forest.” The roots of the capital markets forest are sound economics; the natural market function of automatically equilibrating supply and demand and risk and reward, that is commonly appreciated as Adam’s Smith’s “invisible hand.” We generally assume that the natural market strength of the capital market forest’s root system ensures that all the trees are not in danger of being blown over in the crisis of a storm.

In the fall of 2008, we all were shocked to learn that the root system of our capital markets, that we had always assumed was healthy and strong, was actually frighteningly weak and brittle requiring the slapdash reinforcement of multi-trillion dollar emergency scaffolding of whatever material was close at hand, a TARP, bailout lifelines, capital sandbags, etc. — to buttress the main market “trees” from toppling over, trees that the Government judged to big to be allowed to fall.

With the financial storm clouds apparently passed for now, many are becoming complacent, because the old adage is true — out of sight out of mind. Moreover, everyone desperately wants and needs to be able to assume that the essential root system that they cannot see is fine and nothing to worry about. That’s because if people knew the root system was weak with root rot, systemic uneconomics, they would have less confidence in the capital markets forest or the fledgling economic recovery.

So many are myopically focusing on structurally preventing the trees from falling down, largely by packing tens of billions of dollars of additional capital “soil” around the base of the trees to try and reinforce them. More capital “soil” to reinforce the trees makes good sense. However, it totally covers up the most important point — that the capital markets forest must have a healthy root system so that the market’s trees can stand by themselves long-term. If the health of the root system is not restored with sound economics, it won’t be able to withstand future storms/crises that will surely come, if the future is anything like the past three decades.

Unfortunately, we also know that another old adage is true: what we don’t know can hurt us.

The real problem is neither the market nor economics, but the irresponsible proliferation of inherently uneconomic financial instruments that undermine the ability of natural market economics to function. It is common sense that if enough inherently uneconomic activity is introduced, condoned, and allowed to spread broadly and deeply into the public capital markets system, public markets deteriorate from being systemically economic to being systemically uneconomic; in other words the systemically dysfunctional mess we witnessed in the dismal fall of 2008.

More specifically, the root system rot of uneconomics comes from introducing a variety of inherently uneconomic derivative financial instruments into the public capital markets system, that inherently undermine, weaken and destabilize the market’s (or invisible hand’s) natural ability to equilibrate: supply and demand; risk and reward; the borrower and lender relationship; the balance between short and long term horizons; and the economic equation between risk and insurance.

Let me be crystal clear, financial derivatives themselves are not the problem because derivatives can be economic and have many legitimate and valuable benefits. As I explained in Part II of this series, “Systemic Risk Laundering,” the problem is an unaccountable, out-of-control derivative system where derivatives are all assumed to be systemically benign and allowed to destroy the underlying public asset they are derived from. Central to accountability is the fundamental question: is a particular derivative financial instrument economic or uneconomic when integrated into the overall capital market system? In other words, are particular derivative instruments constructive or destructive to the core economic linkage of: supply and demand? Risk and reward? Borrower and lender? Short term and long term? Risk and insurance? To carry the root metaphor deeper, do the particular derivative instruments impede, block, or distort the root system’s natural ability to absorb and benefit from the water and nutrients in the soil?

So what are the uneconomic derivative financial instruments that create systemic risk and systemic uneconomic dysfunction?

First, employee stock options (in stark contrast to actual employee stock grants) are inherently uneconomic because they pervasively disconnect risk from reward and supply from demand. Stock options are the market equivalent of something for nothing, an opportunity to gain with no offsetting opportunity to lose. Stock options, unlike stock grants or the buying or selling of stock, are one-way upside potential with no potential downside risk. The tech bubble taught us that too much personal financial opportunity divorced from any personal financial risk encourages unwarranted risk taking with other peoples’ money. Typical of the system, not enough was done after the tech bubble to address the inherent uneconomic nature of stock options, so they continue to rot away the market’s natural strength to this day.

Second, indexing financial instruments are inherently uneconomic because pervasive indexing is inherently destabilizing, anti-capital formation, speculative, and hyper-stressing of the financial system, as I described inPart I of this series: “Indexing into the Ditch.” Indexing naturally impedes the market’s ability to reach equilibrium by exacerbating market volatility because it artificially creates a massive one-sided economic market. It generates substantial supply with no offsetting demand in a down market; and it generates substantial demand with no offsetting supply in an up market. Indexing fosters a market momentum dynamic which means a dominant segment of the market does not care about economics: price, fundamentals or time horizon — at all. Therefore prices can never be too high or too low for an indexer because economics have absolutely nothing to do with indexing.

Third, off-exchange derivatives often are destructively uneconomic, because like indexing, they can subordinate the first purpose of an underlying publicly-traded asset by advantaging the second purpose of the derivative ahead of the first purpose of the publicly traded asset — the quintessential tail wagging the dog. Credit default swap derivative instruments were dangerously uneconomic in that they perverted the essential equilibrium of borrower and lender and the concept that insurance is only economically viable for quantifiable risk. New experiments with “life settlements” derivatives assuredly will end badly because they mix the economic concept of insurance for highly-quantifiable risk with markets with inherently unquantifiable risks, rewarding speculative arbitrage, manipulation and fraud.

Almost by definition, the second purposes of derivative instruments are different from the first purpose financial instruments, and that difference can either be benign and productive or uneconomic and destructive. Returning to the root system metaphor, many derivatives are akin to introducing untested synthetic bacteria or virus into the capital market’s forest ecosystem. The current near-total lack of accountability for many off-exchange derivatives means that anyone can dump in the capital market forest whatever they can convince or trick someone into buying.

Finally, computer-automated program trading, or more simply algorithmic trading, is rapidly becoming the market norm because it offers efficiencies, mostly centered on substantially lowering transaction and management costs, which can contribute to better net performance. However, the much under-appreciated problem here is the inherent uneconomic “short-termism” effect of pervasive algorithmic trading in capital markets. The obsession, trend, and technology arms race to achieve ever faster, more complex, and more comprehensive automated trading is tautologically short-term focused. This is essentially devolving into a counter-productive race where artificial intelligence portfolio management arbitrages new information faster and faster (now measured in milliseconds and soon in nanoseconds), rather than compete for long-term investment returns — the universal goal of most investors, pensioners, and companies that are supposedly the true customers of the public capital markets system.

I call this pervasive and corrosive technological dynamic “algorithmia.” At core, algorithmia is a technological downward spiral to achieve a relative mili-second edge and is all about extremely short-term arbitrage, often less than a day. The flood of investable resources into immediate-term algorithmia only exacerbates the distortion and destabilization for the rest of the market that is trying to investment optimize for various long-term investment horizons that investors, pensioners and companies need.

Why algorithmia is profoundly uneconomic is that it powerfully disconnects the market’s natural function of reaching equilibrium by matching buyers and sellers via different investment horizons. If most liquid investable resources are inherently immediate-term focused, even if they are masquerading as having a longer term investment horizon, the long-term capital market purposes of capital formation, economic growth and investment simply cannot function economically.  Algorithmia is not about investing at all, but about constant arbitrage within and between asset classes. In the virtual mathematical world of algorithmia, what happens in the real world that’s not readily quantifiable, other than infrequently reported official numbers, is largely irrelevant.

Like indexing, algorithmia is inherently a momentum dynamic too, because what drives all of these algorithms is the same basic official input data. Once the market adjusts to new information the algorithmic task then shifts to see how the next piece of information will change the relative arbitrage equation competition based on what just happened, so this process is inherently sequential and cumulative, and hence momentum driven, not driven by economic fundamentals.

The 2008 Financial Crisis was a perfect and ominous example of the perils of algorithm-dominated markets. Algorithmia becomes a problem for the market when something happens that the programmers did not anticipate. Much of the market froze in fear in the fall of 2008 precisely because the established momentum of the market broke so unpredictably that many of the programs could not function as designed. In other words they worked when everything went according to plan, but they could be disastrous if and when the market behaved in an unanticipated or uneconomic way.

The scariest part of algorithmia is that almost by definition oversight and regulators will be lagging and reactive. Algorithmia also only increases the knowledge and sophistication gap between industry practitioners and regulators. Common sense suggests that, at a minimum, there needs to be an accountability system where all the algorithmic decisions and changes are at least subject to audit and re-creation by law enforcement, because without that deterrence and accountability, algorithmia, like off-exchange derivatives, will become a safe haven for speculators, market manipulators and fraudsters.

In sum, a primary root cause of the Financial Crisis of 2008 was systemic uneconomics: the ever-increasing accumulation of trillions of dollars of inherently uneconomic derivative financial instruments rotting out the root system of the capital markets forest. No amount of surface reinforcement or capital soil piled on the top of the big trees in the capital markets forest will enable the trees to stand on their own during the next big storm if their root systems continue to rot away from systemic uneconomics.

The best way to avert another financial crisis is stop the root rot in the capital markets forest. The best way to do that is to apply an “Accountability Framework Checklist” (like the one recommended below) to discern which derivative financial instruments and algorithmic practices are inherently economic and productive and which are inherently uneconomic and destructive. If the overall economic purposes of capital markets are capital formation, economic growth and investment, all the roots of the capital markets system need to be based on sound economics and not arbitrage, manipulation and fraud.

*****

Note:  Don’t miss Part I & II of this research series:

  • Systemic Risk Laundering — Financial Crisis Root Causes — Part II” Click here.
  •  “Indexing into the Ditch – Financial Crisis Root Causes – Part I” Click here.

***

Scott Cleland is President of Precursor LLC, an industry research and consulting firm, and was the Founding Chairman of the Investorside Research Association. Click here for Cleland’s Biography.

***

Systemic Risk Prevention Framework & Derivative Accountability Checklist

(Same Recommended Framework as in Part II of the series)

All of the thousands of new derivative financial instruments and systemic practices that have emerged over the last decade since the CFMA created a safe harbor from accountability need to be audited and evaluated for unaccountable systemic risk, fraud and uneconomics.

  1. What asset, instrument, or market is the derivative dependent or predicated upon?
  2. Does the derivative’s second purpose conflict with, or undermine, the first purposes/value of the underlying public asset, instrument, or market that the derivative is derived from?
  3. How is the derivative interconnected with other assets, instruments, markets or counterparties? And to what extent is that interconnectedness reasonably transparent and known by all the affected parties?
  4. What are the side effects, externalities, and long-term/cumulative effects of the derivative?
  5. Does the derivative enhance or detract from the underlying asset, instrument, or market?
  6. Does the derivative undermine or break any linkage/relationship/balance between:
    1. Supply and demand?
    2. Risk and reward?
    3. Borrower and lender?
    4. Short and long term?
    5. Risk and insurance?
  7. As the derivative scales in usage could it foster systemic:
    1. Market momentum?
    2. Market speculation?
    3. Misrepresentation?
    4. Front running?
    5. Destabilization?
  8. Is the derivative’s effect prone to undermining or discouraging capital formation?
  9. Is the derivative’s effect prone to undermining market efficiency in reaching price equilibrium?
  10. How could the derivative be susceptible to fraud or manipulation?
  11. Does the derivative transfer risk transparently and with fair representation?
  12. Does the derivative have independent research coverage?
  13. How is the derivative accountable and to what/whom?
  14. What are the accountability measures, (audit, internal controls, etc.) for the derivatives algorithms or quant models?
  15. What independent third party audits and creates accountability for ensuring integrity of the algorithms and computer code that undergird these virtual derivative exchanges/systems?

http://www.precursorblog.com/content/systemic-uneconomics-financial-crisis-root-causes-part-iii

>

Wiki accessed oct 13 2011-10-13

Credit default swap

From Wikipedia, the free encyclopedia

This article may be too technical for most readers to understand. Please help improve this article to make it understandable to non-experts, without removing the technical details. The talk page may contain suggestions.  (November 2010)

If the reference bond performs without default, the protection buyer pays quarterly payments to the seller until maturity

If the reference bond defaults, the protection seller pays par value of the bond to the buyer, and the buyer physically delivers the bond to the seller

Sovereign credit default swap prices of selected European countries from June 2010 till September 2011. The left axis issiis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.

credit default swap (CDS) is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default. Generally, this involves an exchange or “swap” of the defaulted loan instrument (and with it the right to recover the default loan at some later time) for immediate money – usually the face value of the loan.

However, there is a significant difference between a traditional insurance policy and a CDS. Anyone can purchase a CDS, even buyers who do not hold the loan instrument and may have no direct “insurable interest” in the loan. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults.

Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion[1], falling to $26.3 trillion by mid-year 2010.[2]

Most CDSs are documented using standard forms promulgated by the International Swaps and Derivatives Association (ISDA), although some are tailored to meet specific needs. CDSs have many variations.[3] In addition to the basic, single-name swaps, there are basket default swaps (BDSs), index CDSs, funded CDSs (also called a credit-linked notes), as well as loan-only credit default swaps (LCDS). In addition to corporations and governments, the reference entity can include a special purpose vehicleissuing asset backed securities.[4]

CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency.[5] During the2007-2010 financial crisis the lack of transparency became a concern to regulators, as was the multi-trillion dollar size of the market, which could pose a systematic risk to the economy.[6][3][7][8]

Credit default swaps and other derivatives are unusual–and potentially dangerous–in that they combine priority in bankruptcy with a lack of transparency.[6] In March 2010, the DTCC Trade Information Warehouse (see Sources of Market Data) announced it would voluntarily give regulators greater access to its credit default swaps database.[9]

A number of financial professionals, regulators, and the media have begun using credit default swap pricing as a gauge of the riskiness of corporate and sovereign borrowers, and U.S. Courts may soon be following suit. [10]

Contents

  [hide]

[edit]Description

Buyer purchased a CDS at time t0and makes regular premium payments at times t1, t2, t3, and t4. If the associated credit instrument suffers no credit event, then the buyer continues paying premiums at t5, t6 and so on until the end of the contract at time tn.

However, if the associated credit instrument suffered a credit event at t5, then the seller pays the buyer for the loss, and the buyer would cease paying premiums to the seller.

A CDS is linked to a “reference entity” or “reference obligor”, usually a corporation or government. The reference entity is not a party to the contract. The buyer makes regular premium payments to the seller, the premium amounts constituting the “spread” charged by the seller to insure against a credit event. If the reference entity defaults, the protection seller pays the buyer the par value of the bond in exchange for physical delivery of the bond, although settlement may also be by cash or auction.[3][11] A default is often referred to as a “credit event” and includes such events as failure to pay, restructuring and bankruptcy, or even a drop in the borrower’s credit rating.[3] Most CDSs are in the $10–$20 million range[12] with maturities between one and 10 years. Five years is the most typical maturity.[4]

A holder of a bond may “buy protection” to hedge its risk of default. In this way, a CDS is similar to credit insurance, although CDS are not subject to regulations governing traditional insurance. Also, investors can buy and sell protection without owning debt of the reference entity. These “naked credit default swaps” allow traders to speculate on the creditworthiness of reference entities. CDSs can be used to create synthetic long and short positions in the reference entity.[7] Naked CDS constitute most of the market in CDS.[13][14] In addition, CDSs can also be used in capital structurearbitrage.

A “credit default swap” (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults or experiences a similar credit event.[3][11][15] The CDS may refer to a specified loan or bond obligation of a “reference entity”, usually a corporation or government.[12]

As an example, imagine that an investor buys a CDS from AAA-Bank, where the reference entity is Risky Corp. The investor—the buyer of protection—will make regular payments to AAA-Bank—the seller of protection. If Risky Corp defaults on its debt, the investor receives a one-time payment from AAA-Bank, and the CDS contract is terminated. A default is referred to as a “credit event” and include such events as failure to pay, restructuring and bankruptcy.[3][5] CDS contracts on sovereign obligations also usually include as credit events repudiation, moratorium and acceleration.[5]

If the investor actually owns Risky Corp’s debt (i.e., is owed money by Risky Corp), a CDS can act as a hedge. But investors can also buy CDS contracts referencing Risky Corp debt without actually owning any Risky Corp debt. This may be done for speculative purposes, to bet against the solvency of Risky Corp in a gamble to make money, or to hedge investments in other companies whose fortunes are expected to be similar to those of Risky Corp (see Uses).

If the reference entity (i.e., Risky Corp) defaults, one of two kinds of settlement can occur:

  • the investor delivers a defaulted asset to Bank for payment of the par value, which is known as physical settlement;
  • AAA-Bank pays the investor the difference between the par value and the market price of a specified debt obligation (even if Risky Corp defaults there is usually some recovery, i.e., not all the investor’s money is lost), which is known as cash settlement.

The “spread” of a CDS is the annual amount the protection buyer must pay the protection seller over the length of the contract, expressed as a percentage of the notional amount. For example, if the CDS spread of Risky Corp is 50 basis points, or 0.5% (1 basis point = 0.01%), then an investor buying $10 million worth of protection from AAA-Bank must pay the bank $50,000 per year. These payments continue until either the CDS contract expires or Risky Corp defaults. Payments are usually made on a quarterly basis, in arrears.

All things being equal, at any given time, if the maturity of two credit default swaps is the same, then the CDS associated with a company with a higher CDS spread is considered more likely to default by the market, since a higher fee is being charged to protect against this happening. However, factors such as liquidity and estimated loss given default can affect the comparison. Credit spread rates and credit ratings of the underlying or reference obligations are considered among money managers to be the best indicators of the likelihood of sellers of CDSs having to perform under these contracts.[3]

[edit]Not insurance

CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example:

  • The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[16][17][18][19] In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;
  • the seller doesn’t have to be a regulated entity;
  • the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;
  • insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;
  • in the United States CDS contracts are generally subject to mark-to-market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract;
  • Hedge accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.

However the most important difference between CDS and insurance is simply that an insurance contract provides an indemnity against the losses actually suffered by the policy holder, whereas the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method.

There are also important differences in the approaches used to pricing. The cost of insurance is based on actuarial analysis. CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ the CDS contract refers to.

Further, to cancel the insurance contract the buyer can simply stop paying premium whereas in case of CDS the protection buyer may need to unwind the contract, which might result in a profit or loss situation.

Insurance contracts require the disclosure of all known risks involved. CDSs have no such requirement. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims.

[edit]Risk

When entering into a CDS, both the buyer and seller of credit protection take on counterparty risk:[3][4]

  • The buyer takes the risk that the seller may default. If AAA-Bank and Risky Corp. default simultaneously (“double default”), the buyer loses its protection against default by the reference entity. If AAA-Bank defaults but Risky Corp. does not, the buyer might need to replace the defaulted CDS at a higher cost.
  • The seller takes the risk that the buyer may default on the contract, depriving the seller of the expected revenue stream. More important, a seller normally limits its risk by buying offsetting protection from another party — that is, it hedges its exposure. If the original buyer drops out, the seller squares its position by either unwinding the hedge transaction or by selling a new CDS to a third party. Depending on market conditions, that may be at a lower price than the original CDS and may therefore involve a loss to the seller.

In the future, in the event that regulatory reforms require that CDS be traded and settled via a central exchange/clearing house, such as ICE TCC, there will no longer be ‘counterparty risk’, as the risk of the counterparty will be held with the central exchange/clearing house.

As is true with other forms of over-the-counter derivative, CDS might involve liquidity risk. If one or both parties to a CDS contract must post collateral (which is common), there can be margin calls requiring the posting of additional collateral. The required collateral is agreed on by the parties when the CDS is first issued. This margin amount may vary over the life of the CDS contract, if the market price of the CDS contract changes, or the credit rating of one of the parties changes. Many CDS contracts even require to pay an upfront at the beginning (also referred to as “initial margin”).[20]

Another kind of risk for the seller of credit default swaps is jump risk or jump-to-default risk.[3] A seller of a CDS could be collecting monthly premiums with little expectation that the reference entity may default. A default creates a sudden obligation on the protection sellers to pay millions, if not billions, of dollars to protection buyers.[21] This risk is not present in other over-the-counter derivatives.[3][21]

[edit]Sources of market data

Data about the credit default swaps market is available from three main sources. Data on an annual and semiannual basis is available from the International Swaps and Derivatives Association (ISDA) since 2001[22] and from the Bank for International Settlements (BIS) since 2004.[23] The Depository Trust & Clearing Corporation (DTCC), through its global repository Trade Information Warehouse (TIW), provides weekly data but publicly available information goes back only one year.[24] The numbers provided by each source do not always match because each provider uses different sampling methods.[3]

According to DTCC, the Trade Information Warehouse maintains the only “global electronic database for virtually all CDS contracts outstanding in the marketplace.”[25]

The Office of the Comptroller of the Currency publishes quarterly credit derivative data about insured U.S commercial banks and trust companies.[26]

[edit]Uses

Credit default swaps can be used by investors for speculationhedging and arbitrage.

[edit]Speculation

Credit default swaps allow investors to speculate on changes in CDS spreads of single names or of market indices such as the North American CDX index or the European iTraxx index. An investor might believe that an entity’s CDS spreads are too high or too low, relative to the entity’s bond yields, and attempt to profit from that view by entering into a trade, known as abasis trade, that combines a CDS with a cash bond and an interest-rate swap.

Finally, an investor might speculate on an entity’s credit quality, since generally CDS spreads increase as credit-worthiness declines, and decline as credit-worthiness increases. The investor might therefore buy CDS protection on a company to speculate that it is about to default. Alternatively, the investor might sell protection if it thinks that the company’s creditworthiness might improve. The investor selling the CDS is viewed as being “long” on the CDS and the credit, as if the investor owned the bond.[4][7] In contrast, the investor who bought protection is “short” on the CDS and the underlying credit.[4][7] Credit default swaps opened up important new avenues to speculators. Investors could go long on a bond without any upfront cost of buying a bond; all the investor need do was promise to pay in the event of default.[27] Shorting a bond faced difficult practical problems, such that shorting was often not feasible; CDS made shorting credit possible and popular.[4][27] Because the speculator in either case does not own the bond, its position is said to be a synthetic long or short position.[7]

For example, a hedge fund believes that Risky Corp will soon default on its debt. Therefore, it buys $10 million worth of CDS protection for two years from AAA-Bank, with Risky Corp as the reference entity, at a spread of 500 basis points (=5%) per annum.

  • If Risky Corp does indeed default after, say, one year, then the hedge fund will have paid $500,000 to AAA-Bank, but then receives $10 million (assuming zero recovery rate, and that AAA-Bank has the liquidity to cover the loss), thereby making a profit. AAA-Bank, and its investors, will incur a $9.5 million loss minus recovery unless the bank has somehow offset the position before the default.
  • However, if Risky Corp does not default, then the CDS contract runs for two years, and the hedge fund ends up paying $1 million, without any return, thereby making a loss. AAA-Bank, by selling protection, has made $1 million without any upfront investment.

Note that there is a third possibility in the above scenario; the hedge fund could decide to liquidate its position after a certain period of time in an attempt to realise its gains or losses. For example:

  • After 1 year, the market now considers Risky Corp more likely to default, so its CDS spread has widened from 500 to 1500 basis points. The hedge fund may choose to sell$10 million worth of protection for 1 year to AAA-Bank at this higher rate. Therefore, over the two years the hedge fund pays the bank 2 * 5% * $10 million = $1 million, but receives 1 * 15% * $10 million = $1.5 million, giving a total profit of $500,000.
  • In another scenario, after one year the market now considers Risky much less likely to default, so its CDS spread has tightened from 500 to 250 basis points. Again, the hedge fund may choose to sell $10 million worth of protection for 1 year to AAA-Bank at this lower spread. Therefore over the two years the hedge fund pays the bank 2 * 5% * $10 million = $1 million, but receives 1 * 2.5% * $10 million = $250,000, giving a total loss of $750,000. This loss is smaller than the $1 million loss that would have occurred if the second transaction had not been entered into.

Transactions such as these do not even have to be entered into over the long-term. If Risky Corp’s CDS spread had widened by just a couple of basis points over the course of one day, the hedge fund could have entered into an offsetting contract immediately and made a small profit over the life of the two CDS contracts.

Credit default swaps are also used to structure synthetic collateralized debt obligations (CDOs). Instead of owning bonds or loans, a synthetic CDO gets credit exposure to a portfolio of fixed income assets without owning those assets through the use of CDS.[8] CDOs are viewed as complex and opaque financial instruments. An example of a synthetic CDO is Abacus 2007-AC1, which is the subject of the civil suit for fraud brought by the SEC against Goldman Sachs in April 2010.[28] Abacus is a synthetic CDO consisting of credit default swaps referencing a variety of mortgage backed securities.

[edit]Naked credit default swaps

In the examples above, the hedge fund did not own debt of Risky Corp. A CDS in which the buyer does not own the underlying debt is referred to as a naked credit default swap, estimated to be up to 80% of the credit default swap market.[13][14] There is currently a debate in the United States and Europe about whether speculative uses of credit default swaps should be banned. Legislation is under consideration by Congress as part of financial reform.[14]

Critics assert that naked CDS should be banned, comparing them to buying fire insurance on your neighbor’s house, which creates a huge incentive for arson. Analogizing to the concept of insurable interest, critics say you should not be able to buy a CDS—insurance against default—when you do not own the bond.[29][30][31] Short selling is also viewed as gambling and the CDS market as a casino.[14][32] Another concern is the size of CDS market. Because naked credit default swaps are synthetic, there is no limit to how many can be sold. The gross amount of CDS far exceeds all “real” corporate bonds and loans outstanding.[5][30] As a result, the risk of default is magnified leading to concerns about systemic risk.[30]

Financier George Soros called for an outright ban on naked credit default swaps, viewing them as “toxic” and allowing speculators to bet against and “bear raid” companies or countries.[33] His concerns were echoed by several European politicians who, during the Greek Financial Crisis, accused naked CDS buyers of making the crisis worse.[34][35]

Despite these concerns, Secretary of Treasury Geithner[14][34] and Commodity Futures Trading Commission Chairman Gensler[36] are not in favor of an outright ban of naked credit default swaps. They prefer greater transparency and better capitalization requirements.[14][21] These officials think that naked CDS have a place in the market.

Proponents of naked credit default swaps say that short selling in various forms, whether credit default swaps, options or futures, has the beneficial effect of increasing liquidity in the marketplace.[29] That benefits hedging activities. Without speculators buying and selling naked CDS, banks wanting to hedge might not find a ready seller of protection.[14][29]Speculators also create a more competitive marketplace, keeping prices down for hedgers. A robust market in credit default swaps can also serve as a barometer to regulators and investors about the credit health of a company or country.[29][37]

Despite politicians’ assertions that speculators are making the Greek crisis worse, Germany’s market regulator BaFin found no proof supporting the claim.[35] Some suggest that without credit default swaps, Greece’s borrowing costs would be higher.[35]

[edit]Hedging

Credit default swaps are often used to manage the risk of default that arises from holding debt. A bank, for example, may hedge its risk that a borrower may default on a loan by entering into a CDS contract as the buyer of protection. If the loan goes into default, the proceeds from the CDS contract cancel out the losses on the underlying debt.[12]

There are other ways to eliminate or reduce the risk of default. The bank could sell (that is, assign) the loan outright or bring in other banks as participants. However, these options may not meet the bank’s needs. Consent of the corporate borrower is often required. The bank may not want to incur the time and cost to find loan participants. If both the borrower and lender are well-known and the market (or even worse, the news media) learns that the bank is selling the loan, then the sale may be viewed as signaling a lack of trust in the borrower, which could severely damage the banker-client relationship. In addition, the bank simply may not want to sell or share the potential profits from the loan. By buying a credit default swap, the bank can lay off default risk while still keeping the loan in its portfolio.[8] The downside to this hedge is that without default risk, a bank may have no motivation to actively monitor the loan and the counterparty has no relationship to the borrower.[8]

Another kind of hedge is against concentration risk. A bank’s risk management team may advise that the bank is overly concentrated with a particular borrower or industry. The bank can lay off some of this risk by buying a CDS. Because the borrower—the reference entity—is not a party to a credit default swap, entering into a CDS allows the bank to achieve its diversity objectives without impacting its loan portfolio or customer relations.[3] Similarly, a bank selling a CDS can diversify its portfolio by gaining exposure to an industry in which the selling bank has no customer base.[4][12][38]

A bank buying protection can also use a CDS to free regulatory capital. By offloading a particular credit risk, a bank is not required to hold as much capital in reserve against the risk of default (traditionally 8% of the total loan under Basel I). This frees resources the bank can use to make other loans to the same key customer or to other borrowers.[3][39]

Hedging risk is not limited to banks as lenders. Holders of corporate bonds, such as banks, pension funds or insurance companies, may buy a CDS as a hedge for similar reasons. Pension fund example: A pension fund owns five-year bonds issued by Risky Corp with par value of $10 million. To manage the risk of losing money if Risky Corp defaults on its debt, the pension fund buys a CDS from Derivative Bank in a notional amount of $10 million. The CDS trades at 200 basis points (200 basis points = 2.00 percent). In return for this credit protection, the pension fund pays 2% of $10 million ($200,000) per annum in quarterly installments of $50,000 to Derivative Bank.

  • If Risky Corporation does not default on its bond payments, the pension fund makes quarterly payments to Derivative Bank for 5 years and receives its $10 million back after five years from Risky Corp. Though the protection payments totaling $1 million reduce investment returns for the pension fund, its risk of loss due to Risky Corp defaulting on the bond is eliminated.
  • If Risky Corporation defaults on its debt three years into the CDS contract, the pension fund would stop paying the quarterly premium, and Derivative Bank would ensure that the pension fund is refunded for its loss of $10 million minus recovery (either by physical or cash settlement — see Settlement below). The pension fund still loses the $600,000 it has paid over three years, but without the CDS contract it would have lost the entire $10 million minus recovery.

In addition to financial institutions, large suppliers can use a credit default swap on a public bond issue or a basket of similar risks as a proxy for its own credit risk exposure on receivables.[14][29][39][40]

Although credit default swaps have been highly criticized for their role in the recent financial crisis, most observers conclude that using credit default swaps as a hedging device has a useful purpose.[29]

[edit]Arbitrage

Capital Structure Arbitrage is an example of an arbitrage strategy that utilizes CDS transactions.[41] This technique relies on the fact that a company’s stock price and its CDS spread should exhibit negative correlation; i.e., if the outlook for a company improves then its share price should go up and its CDS spread should tighten, since it is less likely to default on its debt. However if its outlook worsens then its CDS spread should widen and its stock price should fall. Techniques reliant on this are known as capital structure arbitrage because they exploit market inefficiencies between different parts of the same company’s capital structure; i.e., mis-pricings between a company’s debt and equity. An arbitrageur attempts to exploit the spread between a company’s CDS and its equity in certain situations. For example, if a company has announced some bad news and its share price has dropped by 25%, but its CDS spread has remained unchanged, then an investor might expect the CDS spread to increase relative to the share price. Therefore a basic strategy would be to go long on the CDS spread (by buying CDS protection) while simultaneously hedging oneself by buying the underlying stock. This technique would benefit in the event of the CDS spread widening relative to the equity price, but would lose money if the company’s CDS spread tightened relative to its equity.

An interesting situation in which the inverse correlation between a company’s stock price and CDS spread breaks down is during a Leveraged buyout (LBO). Frequently this leads to the company’s CDS spread widening due to the extra debt that will soon be put on the company’s books, but also an increase in its share price, since buyers of a company usually end up paying a premium.

Another common arbitrage strategy aims to exploit the fact that the swap-adjusted spread of a CDS should trade closely with that of the underlying cash bond issued by the reference entity. Misalignments in spreads may occur due to technical reasons such as:

  • Specific settlement differences
  • Shortages in a particular underlying instrument
  • Existence of buyers constrained from buying exotic derivatives.

The difference between CDS spreads and asset swap spreads is called the basis and should theoretically be close to zero. Basis trades can aim to exploit any differences to make risk-free profit.

[edit]History

[edit]Conception

Forms of credit default swaps had been in existence from at least the early 1990s,[42] with early trades carried out by Bankers Trust in 1991.[43] J.P. Morgan & Co. is widely credited with creating the modern credit default swap in 1994.[44][45][46] In that instance, J.P. Morgan had extended a $4.8 billion credit line to Exxon, which faced the threat of $5 billion inpunitive damages for the Exxon Valdez oil spill. A team of J.P. Morgan bankers led by Blythe Masters then sold the credit risk from the credit line to the European Bank of Reconstruction and Development in order to cut the reserves that J.P. Morgan was required to hold against Exxon’s default, thus improving its own balance sheet.[47] In 1997, JPMorgan developed a proprietary product called BISTRO (Broad Index Securitized Trust Offering) that used CDS to clean up a bank’s balance sheet.[44][46] The advantage of BISTRO was that it used securitization to split up the credit risk into little pieces that smaller investors found more digestible, since most investors lacked EBRD’s capability to accept $4.8 billion in credit risk all at once. BISTRO was the first example of what later became known as synthetic collateralized debt obligations (CDOs).

Mindful of the concentration of default risk as one of the causes of the S&L crisis , regulators initially found CDS’s ability to disperse default risk attractive.[43] In 2000, credit default swaps became largely exempt from regulation by both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole ,[5] specifically stated that CDSs are neither futures nor securities and so are outside the remit of the SEC and CFTC.[43]

[edit]Market growth

At first, banks were the dominant players in the market, as CDS were primarily used to hedge risk in connection with its lending activities. Banks also saw an opportunity to free up regulatory capital. By march 1998, the global market for CDS was estimated atabout $300 billion, with JP Morgan alone accounting for about $50 billion of this.[43] The high market share enjoyed by the banks was soon eroded as more and more asset managers and hedge funds saw trading opportunities in credit default swaps. By 2002, investors as speculators, rather than banks as hedgers, dominated the market.[3][4][39][42] National banks in the USA used credit default swaps as early as 1996.[38] In that year, the Office of the Comptroller of the Currency measured the size of the market as tens of billions of dollars.[48] Six years later, by year-end 2002, the outstanding amount was over $2 trillion.[1] Although speculators fueled the exponential growth, other factors also played a part. An extended market could not emerge until 1999, when ISDA standardized the documentation for credit default swaps.[49][50][51]Also, the 1997 Asian Financial Crisis spurred a market for CDS in emerging market sovereign debt.[51] In addition, in 2004, index trading began on a large scale and grew rapidly.[4]

The market size for Credit Default Swaps more than doubled in size each year from $3.7 trillion in 2003.[1] By the end of 2007, the CDS market had a notional value of $62.2 trillion.[1]But notional amount fell during 2008 as a result of dealer “portfolio compression” efforts (replacing offsetting redundant contracts), and by the end of 2008 notional amount outstanding had fallen 38 percent to $38.6 trillion.[52]

Explosive growth was not without operational headaches. On September 15, 2005, the New York Fed summoned 14 banks to it offices. Billions of dollars of CDS were traded daily but the record keeping was more than two weeks behind.[53] This created severe risk management issues, as counterparties were in legal and financial limbo.[4][54] U.K. authorities expressed the same concerns.[55]

[edit]Market as of 2008

Composition of the United States 15.5 trillion US dollar CDS market at the end of 2008 Q2. Green tints show Prime asset CDSs, reddish tints show sub-prime asset CDSs. Numbers followed by “Y” indicate years until maturity.

Proportion of CDSs nominals (lower left) held by United States banks compared to all derivatives, in 2008Q2. The black disc represents the 2008 public debt.

Since default is a relatively rare occurrence (historically around 0.2% of investment grade companies default in any one year),[56] in most CDS contracts the only payments are the premium payments from buyer to seller. Thus, although the above figures for outstanding notionals are very large, in the absence of default the net cash flows are only a small fraction of this total: for a 100 bp = 1% spread, the annual cash flows are only 1% of the notional amount.

[edit]Regulatory concerns over CDS

The market for Credit Default Swaps attracted considerable concern from regulators after a number of large scale incidents in 2008, starting with the collapse of Bear Stearns.[57]

In the days and weeks leading up to Bear’s collapse, the bank’s CDS spread widened dramatically, indicating a surge of buyers taking out protection on the bank. It has been suggested that this widening was responsible for the perception that Bear Stearns was vulnerable, and therefore restricted its access to wholesale capital, which eventually led to its forced sale to JP Morgan in March. An alternative view is that this surge in CDS protection buyers was a symptom rather than a cause of Bear’s collapse; i.e., investors saw that Bear was in trouble, and sought to hedge any naked exposure to the bank, or speculate on its collapse.

In September, the bankruptcy of Lehman Brothers caused a total close to $400 billion to become payable to the buyers of CDS protection referenced against the insolvent bank. However the net amount that changed hands was around $7.2 billion[58] This difference is due to the process of ‘netting’. Market participants co-operated so that CDS sellers were allowed to deduct from their payouts the inbound funds due to them from their hedging positions. Dealers generally attempt to remain risk-neutral, so that their losses and gains after big events offset each other.

Also in September American International Group (AIG) required a federal bailout because it had been excessively selling CDS protection without hedging against the possibility that the reference entities might decline in value, which exposed the insurance giant to potential losses over $100 billion. The CDS on Lehman were settled smoothly, as was largely the case for the other 11 credit events occurring in 2008 that triggered payouts.[57] And while it is arguable that other incidents would have been as bad or worse if less efficient instruments than CDS had been used for speculation and insurance purposes, the closing months of 2008 saw regulators working hard to reduce the risk involved in CDS transactions.

In 2008 there was no centralized exchange or clearing house for CDS transactions; they were all done over the counter (OTC). This led to recent calls for the market to open up in terms of transparency and regulation.[59] In November, DTCC, which runs a warehouse for CDS trade confirmations accounting for around 90% of the total market,[60] announced that it will release market data on the outstanding notional of CDS trades on a weekly basis.[61] The data can be accessed on the DTCC’s website here:[62] The U.S. Securities and Exchange Commission granted an exemption for IntercontinentalExchange to begin guaranteeing credit-default swaps.

The SEC exemption represented the last regulatory approval needed by Atlanta-based Intercontinental. Its larger competitor, CME Group Inc., hasn’t received an SEC exemption, and agency spokesman John Nester said he didn’t know when a decision would be made.

[edit]Market as of 2009

The early months of 2009 saw several fundamental changes to the way CDSs operate, resulting from concerns over the instruments’ safety after the events of the previous year. According to Deutsche Bank managing director Athanassios Diplas “the industry pushed through 10 years worth of changes in just a few months”. By late 2008 processes had been introduced allowing CDSs that offset each other to be cancelled. Along with termination of contracts that have recently paid out such as those based on Lehmans, this had by March reduced the face value of the market down to an estimated $30 trillion.[63] The Bank for International Settlements estimates that outstanding derivatives total $592 trillion.[64] U.S. and European regulators are developing separate plans to stabilize the derivatives market. Additionally there are some globally agreed standards falling into place in March 2009, administered by International Swaps and Derivatives Association (ISDA). Two of the key changes are:

1. The introduction of central clearing houses, one for the US and one for Europe. A clearing house acts as the central counterparty to both sides of a CDS transaction, thereby reducing the counterparty risk that both buyer and seller face.

2. The international standardization of CDS contracts, to prevent legal disputes in ambiguous cases where what the payout should be is unclear.

Speaking before the changes went live , Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York, stated

A clearinghouse, and changes to the contracts to standardize them, will probably boost activity. … Trading will be much easier…. We’ll see new players come to the market because they’ll like the idea of this being a better and more traded product. We also feel like over time we’ll see the creation of different types of products.

In the U.S., central clearing operations began in March 2009 , operated by InterContinental Exchange (ICE). A key competitor also interested in entering the CDS clearing sector is CME Group.

In Europe, CDS Index clearing was launched by ICE’s European subsidiary ICE Clear Europe on July 31. It launched Single Name clearing in Dec 2009. By the end of 2009, it had cleared CDS contracts worth EUR 885 billion reducing the open interest down to EUR 75 billion [65]

By the end of 2009, banks had reclaimed much of their market share; hedge funds had largely retreated from the market after the crises. According to an estimate by the Banque de France, by late 2009 the bank JP Morgan alone now had about 30% of the global CDS market.[43]

[edit]Government approvals relating to Intercontinental and its competitor CME

The SEC’s approval for ICE’s request to be exempted from rules that would prevent it clearing CDSs was the third government action granted to Intercontinental in one week. On March 3, its proposed acquisition of Clearing Corp., a Chicago clearinghouse owned by eight of the largest dealers in the credit-default swap market, was approved by the Federal Trade Commission and the Justice Department. On March 5, the Federal Reserve Board, which oversees the clearinghouse, granted a request for ICE to begin clearing.

Clearing Corp. shareholders including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG, received $39 million in cash from Intercontinental in the acquisition, as well as the Clearing Corp.’s cash on hand and a 50-50 profit-sharing agreement with Intercontinental on the revenue generated from processing the swaps.

SEC spokesperson John Nestor stated

For several months the SEC and our fellow regulators have worked closely with all of the firms wishing to establish central counterparties…. We believe that CME should be in a position soon to provide us with the information necessary to allow the commission to take action on its exemptive requests.

Other proposals to clear credit-default swaps have been made by NYSE Euronext, Eurex AG and LCH.Clearnet Ltd. Only the NYSE effort is available now for clearing after starting on Dec. 22. As of Jan. 30, no swaps had been cleared by the NYSE’s London- based derivatives exchange, according to NYSE Chief Executive Officer Duncan Niederauer.[66]

[edit]Clearing house member requirements

Members of the Intercontinental clearinghouse will have to have a net worth of at least $5 billion and a credit rating of A or better to clear their credit-default swap trades. Intercontinental said in the statement today that all market participants such as hedge funds, banks or other institutions are open to become members of the clearinghouse as long as they meet these requirements.

A clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the risk of a counterparty defaulting on a transaction. In the over-the-counter market, where credit- default swaps are currently traded, participants are exposed to each other in case of a default. A clearinghouse also provides one location for regulators to view traders’ positions and prices.

[edit]Terms of a typical CDS contract

A CDS contract is typically documented under a confirmation referencing the credit derivatives definitions as published by the International Swaps and Derivatives Association.[67] The confirmation typically specifies a reference entity, a corporation or sovereign that generally, although not always, has debt outstanding, and a reference obligation, usually an unsubordinated corporate bond or government bond. The period over which default protection extends is defined by the contract effective date and scheduled termination date.

The confirmation also specifies a calculation agent who is responsible for making determinations as to successors and substitute reference obligations (for example necessary if the original reference obligation was a loan that is repaid before the expiry of the contract), and for performing various calculation and administrative functions in connection with the transaction. By market convention, in contracts between CDS dealers and end-users, the dealer is generally the calculation agent, and in contracts between CDS dealers, the protection seller is generally the calculation agent. It is not the responsibility of the calculation agent to determine whether or not a credit event has occurred but rather a matter of fact that, pursuant to the terms of typical contracts, must be supported by publicly available information delivered along with a credit event notice. Typical CDS contracts do not provide an internal mechanism for challenging the occurrence or non-occurrence of a credit event and rather leave the matter to the courts if necessary, though actual instances of specific events being disputed are relatively rare.

CDS confirmations also specify the credit events that will give rise to payment obligations by the protection seller and delivery obligations by the protection buyer. Typical credit events include bankruptcy with respect to the reference entity and failure to pay with respect to its direct or guaranteed bond or loan debt. CDS written on North American investment gradecorporate reference entities, European corporate reference entities and sovereigns generally also include restructuring as a credit event, whereas trades referencing North American high yield corporate reference entities typically do not. The definition of restructuring is quite technical but is essentially intended to respond to circumstances where a reference entity, as a result of the deterioration of its credit, negotiates changes in the terms in its debt with its creditors as an alternative to formal insolvency proceedings (i.e., the debt is restructured). This practice is far more typical in jurisdictions that do not provide protective status to insolvent debtors similar to that provided by Chapter 11 of the United States Bankruptcy Code. In particular, concerns arising out of Conseco‘s restructuring in 2000 led to the credit event’s removal from North American high yield trades.[68]

Finally, standard CDS contracts specify deliverable obligation characteristics that limit the range of obligations that a protection buyer may deliver upon a credit event. Trading conventions for deliverable obligation characteristics vary for different markets and CDS contract types. Typical limitations include that deliverable debt be a bond or loan, that it have a maximum maturity of 30 years, that it not be subordinated, that it not be subject to transfer restrictions (other than Rule 144A), that it be of a standard currency and that it not be subject to some contingency before becoming due.

The premium payments are generally quarterly, with maturity dates (and likewise premium payment dates) falling on March 20, June 20, September 20, and December 20. Due to the proximity to the IMM dates, which fall on the third Wednesday of these months, these CDS maturity dates are also referred to as “IMM dates”.

[edit]Settlement

[edit]Physical or cash

As described in an earlier section, if a credit event occurs then CDS contracts can either be physically settled or cash settled.[3]

  • Physical settlement: The protection seller pays the buyer par value, and in return takes delivery of a debt obligation of the reference entity. For example, a hedge fund has bought $5 million worth of protection from a bank on the senior debt of a company. In the event of a default, the bank pays the hedge fund $5 million cash, and the hedge fund must deliver $5 million face value of senior debt of the company (typically bonds or loans, which are typically worth very little given that the company is in default).
  • Cash settlement: The protection seller pays the buyer the difference between par value and the market price of a debt obligation of the reference entity. For example, a hedge fund has bought $5 million worth of protection from a bank on the senior debt of a company. This company has now defaulted, and its senior bonds are now trading at 25 (i.e., 25 cents on the dollar) since the market believes that senior bondholders will receive 25% of the money they are owed once the company is wound up. Therefore, the bank must pay the hedge fund $5 million * (100%-25%) = $3.75 million.

The development and growth of the CDS market has meant that on many companies there is now a much larger outstanding notional of CDS contracts than the outstanding notional value of its debt obligations. (This is because many parties made CDS contracts for speculative purposes, without actually owning any debt that they wanted to insure against default.) For example, at the time it filed for bankruptcy on September 14, 2008, Lehman Brothers had approximately $155 billion of outstanding debt[69] but around $400 billion notional value of CDS contracts had been written that referenced this debt.[70] Clearly not all of these contracts could be physically settled, since there was not enough outstanding Lehman Brothers debt to fulfill all of the contracts, demonstrating the necessity for cash settled CDS trades. The trade confirmation produced when a CDS is traded states whether the contract is to be physically or cash settled.

[edit]Auctions

When a credit event occurs on a major company on which a lot of CDS contracts are written, an auction (also known as a credit-fixing event) may be held to facilitate settlement of a large number of contracts at once, at a fixed cash settlement price. During the auction process participating dealers (e.g., the big investment banks) submit prices at which they would buy and sell the reference entity’s debt obligations, as well as net requests for physical settlement against par. A second stage Dutch auction is held following the publication of the initial mid-point of the dealer markets and what is the net open interest to deliver or be delivered actual bonds or loans. The final clearing point of this auction sets the final price for cash settlement of all CDS contracts and all physical settlement requests as well as matched limit offers resulting from the auction are actually settled. According to the International Swaps and Derivatives Association (ISDA), who organised them, auctions have recently proved an effective way of settling the very large volume of outstanding CDS contracts written on companies such as Lehman Brothers and Washington Mutual.[71]

Below is a list of the auctions that have been held since 2005.[72]

Date

Name

Final price as a percentage of par

2005-06-14 Collins & Aikman – Senior 43.625
2005-06-23 Collins & Aikman – Subordinated 6.375
2005-10-11 Northwest Airlines 28
2005-10-11 Delta Air Lines 18
2005-11-04 Delphi Corporation 63.375
2006-01-17 Calpine Corporation 19.125
2006-03-31 Dana Corporation 75
2006-11-28 Dura – Senior 24.125
2006-11-28 Dura – Subordinated 3.5
2007-10-23 Movie Gallery 91.5
2008-02-19 Quebecor World 41.25
2008-10-02 Tembec Inc 83
2008-10-06 Fannie Mae – Senior 91.51
2008-10-06 Fannie Mae – Subordinated 99.9
2008-10-06 Freddie Mac – Senior 94
2008-10-06 Freddie Mac – Subordinated 98
2008-10-10 Lehman Brothers 8.625
2008-10-23 Washington Mutual 57
2008-11-04 Landsbanki – Senior 1.25
2008-11-04 Landsbanki – Subordinated 0.125
2008-11-05 Glitnir – Senior 3
2008-11-05 Glitnir – Subordinated 0.125
2008-11-06 Kaupthing – Senior 6.625
2008-11-06 Kaupthing – Subordinated 2.375
2008-12-09 Masonite [7] – LCDS 52.5
2008-12-17 Hawaiian Telcom – LCDS 40.125
2009-01-06 Tribune – CDS 1.5
2009-01-06 Tribune – LCDS 23.75
2009-01-14 Republic of Ecuador 31.375
2009-02-03 Millennium America Inc 7.125
2009-02-03 Lyondell – CDS 15.5
2009-02-03 Lyondell – LCDS 20.75
2009-02-03 EquiStar 27.5
2009-02-05 Sanitec [8] – 1st Lien 33.5
2009-02-05 Sanitec [9] – 2nd Lien 4.0
2009-02-09 British Vita [10] – 1st Lien 15.5
2009-02-09 British Vita [11] – 2nd Lien 2.875
2009-02-10 Nortel Ltd. 6.5
2009-02-10 Nortel Corporation 12
2009-02-19 Smurfit-Stone CDS 8.875
2009-02-19 Smurfit-Stone LCDS 65.375
2009-02-26 Ferretti 10.875
2009-03-09 Aleris 8
2009-03-31 Station Casinos 32
2009-04-14 Chemtura 15
2009-04-14 Great Lakes 18.25
2009-04-15 Rouse 29.25
2009-04-16 LyondellBasell 2
2009-04-17 Abitibi 3.25
2009-04-21 Charter Communications CDS 2.375
2009-04-21 Charter Communications LCDS 78
2009-04-22 Capmark 23.375
2009-04-23 Idearc CDS 1.75
2009-04-23 Idearc LCDS 38.5
2009-05-12 Bowater 15
2009-05-13 General Growth Properties 44.25
2009-05-27 Syncora 15
2009-05-28 Edshcha 3.75
2009-06-09 HLI Operating Corp LCDS 9.5
2009-06-10 Georgia Gulf LCDS 83
2009-06-11 R.H. Donnelley Corp. CDS 4.875
2009-06-12 General Motors CDS 12.5
2009-06-12 General Motors LCDS 97.5
2009-06-18 JSC Alliance Bank CDS 16.75
2009-06-23 Visteon CDS 3
2009-06-23 Visteon LCDS 39
2009-06-24 RH Donnelley Inc LCDS 78.125
2009-07-09 Six Flags CDS 14
2009-07-09 Six Flags LCDS 96.125
2009-07-21 Lear CDS 38.5
2009-07-21 Lear LCDS 66
2009-11-10 METRO-GOLDWYN-MAYER INC. LCDS 58.5
2009-11-20 CIT Group Inc. 68.125
2009-12-09 Thomson 77.75
2009-15-09 Hellas II 1.375
2009-12-16 NJSC Naftogaz of Ukraine 83.5
2010-01-07 Financial Guarantee Insurance Compancy (FGIC) 26
2010-02-18 CEMEX 97.0
2010-03-25 Aiful 33.875
2010-04-15 McCarthy and Stone 70.375
2010-04-22 Japan Airlines Corp 20.0
2010-06-04 Ambac Assurance Corp 20.0
2010-07-15 Truvo Subsidiary Corp 3.0
2010-09-09 Truvo (formerly World Directories) 41.125
2010-09-21 Boston Generating LLC 40.75
2010-10-28 Takefuji Corp 14.75
2010-12-09 Anglo Irish Bank 18.25
2010-12-10 Ambac Financial Group 9.5

[edit]Pricing and valuation

There are two competing theories usually advanced for the pricing of credit default swaps. The first, referred to herein as the ‘probability model’, takes the present value of a series of cashflows weighted by their probability of non-default. This method suggests that credit default swaps should trade at a considerably lower spread than corporate bonds.

The second model, proposed by Darrell Duffie, but also by John Hull and White, uses a no-arbitrage approach.

[edit]Probability model

Under the probability model, a credit default swap is priced using a model that takes four inputs; this is similar to the rNPV (risk-adjusted NPV) model used in drug development:

  • the “issue premium”,
  • the recovery rate (percentage of notional repaid in event of default),
  • the “credit curve” for the reference entity and
  • the “LIBOR curve”.

If default events never occurred the price of a CDS would simply be the sum of the discounted premium payments. So CDS pricing models have to take into account the possibility of a default occurring some time between the effective date and maturity date of the CDS contract. For the purpose of explanation we can imagine the case of a one year CDS with effective date t0 with four quarterly premium payments occurring at times t1t2t3, and t4. If the nominal for the CDS is N and the issue premium is c then the size of the quarterly premium payments is Nc / 4. If we assume for simplicity that defaults can only occur on one of the payment dates then there are five ways the contract could end:

  • either it does not have any default at all, so the four premium payments are made and the contract survives until the maturity date, or
  • a default occurs on the first, second, third or fourth payment date.

To price the CDS we now need to assign probabilities to the five possible outcomes, then calculate the present value of the payoff for each outcome. The present value of the CDS is then simply the present value of the five payoffs multiplied by their probability of occurring.

This is illustrated in the following tree diagram where at each payment date either the contract has a default event, in which case it ends with a payment of N(1 − R) shown in red, whereR is the recovery rate, or it survives without a default being triggered, in which case a premium payment of Nc / 4 is made, shown in blue. At either side of the diagram are the cashflows up to that point in time with premium payments in blue and default payments in red. If the contract is terminated the square is shown with solid shading.

The probability of surviving over the interval ti − 1 to ti without a default payment is pi and the probability of a default being triggered is 1 − pi. The calculation of present value, givendiscount factor of δ1 to δ4 is then

Description

Premium Payment PV

Default Payment PV

Probability

Default at time t1
Default at time t2
Default at time t3
Default at time t4
No defaults

The probabilities p1p2p3p4 can be calculated using the credit spread curve. The probability of no default occurring over a time period from t to t + Δt decays exponentially with a time-constant determined by the credit spread, or mathematically p = exp( − s(tt / (1 − R)) where s(t) is the credit spread zero curve at time t. The riskier the reference entity the greater the spread and the more rapidly the survival probability decays with time.

To get the total present value of the credit default swap we multiply the probability of each outcome by its present value to give

[edit]No-arbitrage model

In the ‘no-arbitrage’ model proposed by both Duffie, and Hull-White, it is assumed that there is no risk free arbitrage. Duffie uses the LIBOR as the risk free rate, whereas Hull and White use US Treasuries as the risk free rate. Both analyses make simplifying assumptions (such as the assumption that there is zero cost of unwinding the fixed leg of the swap on default), which may invalidate the no-arbitrage assumption. However the Duffie approach is frequently used by the market to determine theoretical prices. Under the Duffie construct, the price of a credit default swap can also be derived by calculating the asset swap spread of a bond. If a bond has a spread of 100, and the swap spread is 70 basis points, then a CDS contract should trade at 30. However there are sometimes technical reasons why this will not be the case, and this may or may not present an arbitrage opportunity for the canny investor. The difference between the theoretical model and the actual price of a credit default swap is known as the basis.

[edit]Criticisms

Critics of the huge credit default swap market have claimed that it has been allowed to become too large without proper regulation and that, because all contracts are privately negotiated, the market has no transparency. Furthermore, there have even been claims that CDSs exacerbated the 2008 global financial crisis by hastening the demise of companies such as Lehman Brothers and AIG.[73]

In the case of Lehman Brothers, it is claimed that the widening of the bank’s CDS spread reduced confidence in the bank and ultimately gave it further problems that it was not able to overcome. However, proponents of the CDS market argue that this confuses cause and effect; CDS spreads simply reflected the reality that the company was in serious trouble. Furthermore, they claim that the CDS market allowed investors who had counterparty risk with Lehman Brothers to reduce their exposure in the case of their default.

Credit default swaps have also faced criticism that they contributed to a breakdown in negotiations during the 2009 General Motors Chapter 11 reorganization, because bondholders would benefit from the credit event of a GM bankruptcy due to their holding of CDSs. Critics speculate that these creditors were incentivized into pushing for the company to enter bankruptcy protection.[74] Due to a lack of transparency, there was no way to find out who the protection buyers and protection writers were, and they were subsequently left out of the negotiation process.[75]

It was also reported after Lehman’s bankruptcy that the $400 billion notional of CDS protection which had been written on the bank could lead to a net payout of $366 billion from protection sellers to buyers (given the cash-settlement auction settled at a final price of 8.625%) and that these large payouts could lead to further bankruptcies of firms without enough cash to settle their contracts.[76] However, industry estimates after the auction suggested that net cashflows would only be in the region of $7 billion.[76] This is because many parties held offsetting positions; for example if a bank writes CDS protection on a company it is likely to then enter an offsetting transaction by buying protection on the same company in order to hedge its risk. Furthermore, CDS deals are marked-to-market frequently. This would have led to margin calls from buyers to sellers as Lehman’s CDS spread widened, meaning that the net cashflows on the days after the auction are likely to have been even lower.[71]… Senior bankers have argued that not only has the CDS market functioned remarkably well during the financial crisis, but that CDS contracts have been acting to distribute risk just as was intended, and that it is not CDSs themselves that need further regulation, but the parties who trade them.[77]

Some general criticism of financial derivatives is also relevant to credit derivatives. Warren Buffett famously described derivatives bought speculatively as “financial weapons of mass destruction.” In Berkshire Hathaway‘s annual report to shareholders in 2002, he said, “Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses—often huge in amount—in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen).”[78] To hedge the counterparty risk of entering a CDS transaction, one practice is to buy CDS protection on one’s counterparty. The positions are marked-to-market daily and collateral pass from buyer to seller or vice versa to protect both parties against counterparty default, but money does not always change hands due to the offset of gains and losses by those who had both bought and sold protection. Depository Trust & Clearing Corporation, the clearinghouse for the majority of trades in the US over-the-counter market, stated in October 2008 that once offsetting trades were considered, only an estimated $6 billion would change hands on October 21, during the settlement of the CDS contracts issued on Lehman Brothers’ debt, which amounted to somewhere between $150 to $360 billion.[79] Despite Buffett’s criticism on derivatives, in October 2008 Berkshire Hathaway revealed to regulators that it has entered into at least $4.85 billion in derivative transactions.[80] Buffett stated in his 2008 letter to shareholders that Berkshire Hathaway has no counterparty risk in its derivative dealings because Berkshire require counterparties to make payments when contracts are inititated, so that Berkshire always holds the money.[81] Berkshire Hathaway was a large owner of Moody’s stock during the period that it was one of two primary rating agencies for subprime CDOs, a form of mortgage security derivative dependant on the use of credit default swaps.

The monoline insurance companies got involved with writing credit default swaps on mortgage-backed CDOs. Some media reports have claimed this was a contributing factor to the downfall of some of the monolines.[82][83] In 2009 one of the monolines, MBIA, sued Merrill Lynch, claiming that Merill had misrepresented some of its CDOs to MBIA in order to persuade MBIA to write CDS protection for those CDOs.[84][85][86]

[edit]Systemic risk

The risk of counterparties defaulting has been amplified during the 2008 financial crisis, particularly because Lehman Brothers and AIG were counterparties in a very large number of CDS transactions. This is an example of systemic risk, risk which threatens an entire market, and a number of commentators have argued that size and deregulation of the CDS market have increased this risk.

For example, imagine if a hypothetical mutual fund had bought some Washington Mutual corporate bonds in 2005 and decided to hedge their exposure by buying CDS protection from Lehman Brothers. After Lehman’s default, this protection was no longer active, and Washington Mutual’s sudden default only days later would have led to a massive loss on the bonds, a loss that should have been insured by the CDS. There was also fear that Lehman Brothers and AIG’s inability to pay out on CDS contracts would lead to the unraveling of complex interlinked chain of CDS transactions between financial institutions.[87] So far this does not appear to have happened, although some commentators[who?] have noted that because the total CDS exposure of a bank is not public knowledge, the fear that one could face large losses or possibly even default themselves was a contributing factor to the massive decrease in lending liquidity during September/October 2008.[88]

Chains of CDS transactions can arise from a practice known as “netting”.[89] Here, company B may buy a CDS from company A with a certain annual premium, say 2%. If the condition of the reference company worsens, the risk premium rises, so company B can sell a CDS to company C with a premium of say, 5%, and pocket the 3% difference. However, if the reference company defaults, company B might not have the assets on hand to make good on the contract. It depends on its contract with company A to provide a large payout, which it then passes along to company C. The problem lies if one of the companies in the chain fails, creating a “domino effect” of losses. For example, if company A fails, company B will default on its CDS contract to company C, possibly resulting in bankruptcy, and company C will potentially experience a large loss due to the failure to receive compensation for the bad debt it held from the reference company. Even worse, because CDS contracts are private, company C will not know that its fate is tied to company A; it is only doing business with company B.

As described above, the establishment of a central exchange or clearing house for CDS trades would help to solve the “domino effect” problem, since it would mean that all trades faced a central counterparty guaranteed by a consortium of dealers.

[edit]Tax and accounting issues

The U.S federal income tax treatment of credit default swaps is uncertain.[90] Commentators generally believe that, depending on how they are drafted, they are either notional principal contracts or options for tax purposes,[91] but this is not certain. There is a risk of having credit default swaps recharacterized as different types of financial instruments because they resemble put options and credit guarantees. In particular, the degree of risk depends on the type of settlement (physical/cash and binary/FMV) and trigger (default only/any credit event).[92] If a credit default swap is a notional principal contract, periodic and nonperiodic payments on the swap are deductible and included in ordinary income.[93] If a payment is a termination payment, its tax treatment is even more uncertain.[93] In 2004, the Internal Revenue Service announced that it was studying the characterization of credit default swaps in response to taxpayer confusion,[94] but it has not yet issued any guidance on their characterization. A taxpayer must include income from credit default swaps in ordinary income if the swaps are connected with trade or business in the United States.[95]

The accounting treatment of Credit Default Swaps used for hedging may not parallel the economic effects and instead, increase volatility. For example, GAAP generally require that Credit Default Swaps be reported on a mark to market basis. In contrast, assets that are held for investment, such as a commercial loan or bonds, are reported at cost, unless a probable and significant loss is expected. Thus, hedging a commercial loan using a CDS can induce considerable volatility into the income statement and balance sheet as the CDS changes value over its life due to market conditions and due to the tendency for shorter dated CDS to sell at lower prices than longer dated CDS. One can try to account for the CDS as a hedge under FASB 133[96] but in practice that can prove very difficult unless the risky asset owned by the bank or corporation is exactly the same as the Reference Obligation used for the particular CDS that was bought.

[edit]LCDS

A new type of default swap is the “loan only” credit default swap (LCDS). This is conceptually very similar to a standard CDS, but unlike “vanilla” CDS, the underlying protection is sold on syndicated secured loans of the Reference Entity rather than the broader category of “Bond or Loan”. Also, as of May 22, 2007, for the most widely traded LCDS form, which governs North American single name and index trades, the default settlement method for LCDS shifted to auction settlement rather than physical settlement. The auction method is essentially the same that has been used in the various ISDA cash settlement auction protocols, but does not require parties to take any additional steps following a credit event (i.e., adherence to a protocol) to elect cash settlement. On October 23, 2007, the first ever LCDS auction was held for Movie Gallery.[97]

Because LCDS trades are linked to secured obligations with much higher recovery values than the unsecured bond obligations that are typically assumed the cheapest to deliver in respect of vanilla CDS, LCDS spreads are generally much tighter than CDS trades on the same name.

[edit]Bill failed to limit CDS used for speculation

It is widely accepted that naked CDS are not used for hedging but for speculation. A bill was distributed in U.S. Congress that would give a public authority the power to limit the use of CDS other than for hedging purposes, but the bill did not become law.[98]

[edit]See also

[edit]References

  1. a b c d “Chart; ISDA Market Survey; Notional amounts outstanding at year-end, all surveyed contracts, 1987-present” (PDF). International Swaps and Derivatives Association (ISDA)i. Retrieved April 8, 2010.
  2. ^ ISDA 2010 MID-YEAR MARKET SURVEY
  3. a b c d e f g h i j k l m n o Weistroffer, Christian; Deutsche Bank Research (December 21, 2009). “Credit default swaps: Heading towards a more stable system”(PDF). Deutsche Bank Research: Current Issues. Retrieved April 15, 2010.
  4. a b c d e f g h i j Mengle, David (Fourth Quarter 2007).“Credit Derivatives: An Overview” (PDF). Economic Review (FRB Atlanta) 92 (4). Retrieved April 2, 2010.
  5. a b c d e Kiff, John; Jennifer Elliott, Elias Kazarian, Jodi Scarlata, and Carolyne Spackman (November 2009).“Credit Derivatives: Systemic Risks and Policy Options” (PDF). International Monetary Fund: IMF Working Paper (WP/09/254). Retrieved April 25, 2010.
  6. a b Michael Simkovic, “Secret Liens and the Financial Crisis of 2008,”
  7. a b c d e Sirri, Erik, Director, Division of Trading and Markets U.S. Securities and Exchange Commission.“Testimony Concerning Credit Default Swas Before the House Committee on Agriculture October 15, 2008”. Retrieved April 2, 2010.
  8. a b c d Partnoy, Frank; David A. Skeel, Jr. (2007). “The Promise And Perils of Credit Derivatives”. University of Cincinnati Law Review 75: 1019–1051. SSRN 929747.
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  12. a b c d Federal Reserve Bank of Atlanta (2008-04-14).“Did You Know? A Primer on Credit Default Swaps”.Financial update 21 (2). Retrieved March 31, 2010.
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  98. ^ “Bill H.R. 977”. govtrack.us. Retrieved March 15, 2011.

[edit]External links

Look up credit default swap in Wiktionary, the free dictionary.

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Eco The Dumbest Idea In The World Maximizing Shareholder Value

Steve Denning, Contributor

RADICAL MANAGEMENT: Rethinking leadership and innovation

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11/28/2011 @ 1:19PM |9,713 views

24 comments, 22 called-out

About the book: 

Fixing the Game bubbles crashes … Roger Martin

There is only one valid definition of a business purpose: to create a customer.

Peter Drucker, The Practice of Management

“Imagine an NFL coach,” writes Roger Martin, Dean of the Rotman School of Management at the University of Toronto, in his important new book, Fixing the Game, “holding a press conference on Wednesday to announce that he predicts a win by 9 points on Sunday, and that bettors should recognize that the current spread of 6 points is too low. Or picture the team’s quarterback standing up in the postgame press conference and apologizing for having only won by 3 points when the final betting spread was 9 points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.”

Imagine also, to extrapolate Martin’s analogy, that the coach and his top assistants were hugely compensated, not on whether they won games, but rather by whether they covered the point spread. If they beat the point spread, they would receive massive bonuses. But if they missed covering the point spread a couple of times, the salary cap of the team could be cut and key players would have to be released, regardless of whether the team won or lost its games. Suppose also that in order to manage the expectations implicit in the point spread, the coach had to spend most of his time talking with analysts and sports writers about the prospects of the coming games and “managing” the point spread, instead of actually coaching the team.

‘Capitalism At A Tipping Point’ Robert Lenzner Forbes Staff

H-P and Yahoo!: Just the Tip of the Activist Iceberg Richard Levick Contributor

It would hardly be a surprise that the most esteemed coach in this world would be a coach who met or beat the point spread in forty-six of forty-eight games—a 96 percent hit rate. Looking at these forty-eight games, one would be tempted to conclude: “Surely those scores are being ‘managed’?”

Suppose moreover that the whole league was rife with scandals of coaches “managing the score”, for instance, by deliberately losing games (“tanking”), players deliberately sacrificing points in order not to exceed the point spread (“point shaving”), “buying” key players on the opposing team or gaining access to their game plan.

If this were the situation in the NFL, then everyone would realize that the “real game” of football had become utterly corrupted by the “expectations game” of gambling. Everyone would be calling on the NFL Commissioner to intervene and ban the coaches and players from ever being involved directly or indirectly in any form of gambling on the outcome of games, and get back to playing the game.

Which is precisely what the NFL Commissioner did in 1962 when some players were found to be involved betting small sums of money on the outcome of games. In that season, Paul Hornung, the Green Bay Packers halfback and the league’s most valuable player (MVP), and Alex Karras, a star defensive tackle for the Detroit Lions, were accused of betting on NFL games, including games in which they played. Pete Rozelle, just a few years into his thirty-year tenure as league commissioner, responded swiftly. Hornung and Karras were suspended for a season.

As a result, the “real game” of football in the NFL has remained quite separate from the “expectations game” of gambling. The coaches and players spend all of their time trying to win games, not gaming the games.

The real market vs the expectations market

In the today’s paradoxical world of maximizing shareholder value, which Jack Welch himself has called “the dumbest idea in the world”, the situation is the reverse. CEOs and their top managers have massive incentives to focus most of their attentions on the expectations market, rather than the real job of running the company producing real products and services.

The real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

In fact, a CEO has little choice but to pay careful attention to the expectations market, because if the stock price falls markedly, the application of accounting rules (regulation FASB 142) classify it as a “goodwill impairment”. Auditors may then force the write-down of real assets based on the company’s share price in the expectations market. As a result, executives must concern themselves with managing expectations if they want to avoid write-downs of their capital.

In this world, the best managers are those who meet expectations. “During the heart of the Jack Welch era,” writes Martin, “GE met or beat analysts’ forecasts in forty-six of forty-eight quarters between December 31, 1989, and September 30, 2001—a 96 percent hit rate. Even more impressively, in forty-one of those forty-six quarters, GE hit the analyst forecast to the exact penny—89 percent perfection. And in the remaining seven imperfect quarters, the tolerance was startlingly narrow: four times GE beat the projection by 2 cents, once it beat it by 1 cent, once it missed by 1 cent, and once by 2 cents. Looking at these twelve years of unnatural precision, Jensen asks rhetorically: ‘What is the chance that could happen if earnings were not being “managed’?”’ Martin replies: infinitesimal.

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In such a world, it is therefore hardly surprising, says Martin, that the corporate world is plagued by continuing scandals, such as the accounting scandals in 2001-2002 with Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the options backdating scandals of 2005-2006, and the subprime meltdown of 2007-2008. The recent demise of MF Global Holdings and the related ongoing criminal investigation are further reminders that we have not put these matters behind us.

“It isn’t just about the money for shareholders,” writes Martin, “or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.”

“A pervasive emphasis on the expectations market,” writes Martin, “has reduced shareholder value, created misplaced and ill-advised incentives, generated inauthenticity in our executives, and introduced parasitic market players. The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking, Capital markets—and the whole of the American capitalist system—hang in the balance.”

How did capitalism get into this mess?

Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

The article performed the old academic trick of creating a problem and then proposing a solution to the supposed problem that the article itself had created. The article identified the principal-agent problem as being that the shareholders are the principals of the firm—i.e., they own it and benefit from its prosperity, while the executives are agents who are hired by the principals to work on their behalf. The principal-agent problem occurs, the article argued, because agents have an inherent incentive to optimize activities and resources for themselves rather than for their principals.

Ignoring Peter Drucker’s foundational insight of 1973 that the only valid purpose of a firm is to create a customer, Jensen and Meckling argued that the singular goal of a company should be to maximize the return to shareholders. To achieve that goal, they academics argued, the company should give executives a compelling reason to place shareholder value maximization ahead of their own nest-feathering.

Unfortunately, as often happens with bad ideas that make some people a lot of money, the idea caught on and has even become the conventional wisdom. During his tenure as CEO of GE from 1981 to 2001, Jack Welch came to be seen–rightly or wrongly–as the outstanding  exemplar of the theory, as a result of his capacity to grow shareholder value at GE and magically hit his numbers exactly. When Jack Welch retired from GE, the company had gone from a market value of $14 billion to $484 billion at the time of his retirement, making it, according to the stock market, the most valuable and largest company in the world. In 1999 he was named “Manager of the Century” by Fortune magazine. Since Welch retired in 2001, however, GE’s stock price has not fared so well: GE has lost around 60 percent of the market capitalization that Welch “created”.

Before 1976, professional managers were in charge of performance in the real market and were paid for performance in that real market. That is, they were in charge of earning real profits for their company and they were typically paid a base salary and bonus for meeting real market performance targets.

The change had the opposite effect from what was intended

The proponents of shareholder value maximization and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time.

Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance has declined. “Maximizing shareholder value” turned out to be the disease of which it purported to be the cure.

Between 1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. CEOs earned more for their shareholders for steadily less and less relative compensation. By contrast, in the decade from 1980 to 1990 , CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled.

Meanwhile real performance was declining. From 1933 to 1976, real compound annual return on the S&P 500 was 7.5 percent. Since 1976, Martin writes, the total real return on the S&P 500 was 6.5 percent (compound annual).  The situation is even starker if we look at the rate of return on assets, or the rate of return on invested capital, which according to a comprehensive study by Deloitte’s Center For The Edge are today only one quarter of what they were in 1965.

Although Jack Welch was seen during his tenure as CEO of GE as the heroic exemplar of maximizing shareholder value, he came to be one of its strongest critics. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”

The shift to delighting the customer

What to do? Given the numbers of the people and the amount of money involved, rescuing capitalism from these catastrophically bad habits won’t be easy. For most organizations, it will take a phase change. It means rethinking the very basis of a corporation and the way business is conducted, as well as the values of an entire society.

“We must shift the focus of companies back to the customer and away from shareholder value,” says Martin. “The shift necessitates a fundamental change in our prevailing theory of the firm… The current theory holds that the singular goal of the corporation should be shareholder value maximization. Instead, companies should place customers at the center of the firm and focus on delighting them, while earning an acceptable return for shareholders.”

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If you take care of customers, writes Martin, shareholders will be drawn along for a very nice ride. The opposite is simply not true: if you try to take care of shareholders, customers don’t benefit and, ironically, shareholders don’t get very far either.

In the real market, there is opportunity to build for the long run rather than to exploit short-term opportunities, so the real market has a chance to produce sustainability. The real market produces meaning and motivation for organizations. The organization can create bonds with customers, imagine great plans, and bring them to fruition.

“The expectations market,” says Martin, “generates little meaning. It is all about gaining advantage over a trading partner or putting two trading partners together, then tolling them for the service. This structure breeds a kind of amorality in which information is withheld or manipulated and trading partners are treated as vehicles from which to extract money in the short run, at whatever the cost to the relationship.”

By contrast, the real market contributes to a sense of authenticity for individuals. Because individuals can find meaning in their jobs. They are not playing a zero-sum game. They are doing something real and positive for society.

Examples of the shift

Martin cites three examples of firms that are, even within the legal limits of today’s world, focused on the real world of customers and products more than gaming the stock market.

One is Johnson & Johnson [JNJ]. In 1982, when the Tylenol poisonings occurred, “J&J was in a terrible bind. Tylenol represented almost a fifth of the company’s profits, and any decline in its market share would be difficult to reclaim, especially in the face of rampant fear and rumor. Yet, rather than attempt to downplay the crisis—it was after all, likely the work of an individual madman in one tiny part of the country—J&J did just the opposite. Chairman James Burke immediately ordered a halt to all Tylenol production and advertising, distributed warnings to hospitals across the country, and within a week of the first death, announced a nationwide recall of every single bottle of Tylenol on the market. J&J went on to develop tamper-proof packaging for its products; an innovation that would soon become the industry standard.” Burke’s actions were not the heroic act of a single individual, says Martin. The actions flowed from the company credo which is engraved in granite at the entry to company headquarters, which makes crystal clear that customers are first, then employees, and shareholders absolutely last.

Martin contrasts J&J’s handling of the Tylenol crisis with the handling of the Deepwater Horizon oil spill in 2010 by BP [BP], which he sees as driven by a short-term concern for BP’s profits.

A second example is Procter & Gamble [PG] which “declares in its purpose statement: ‘We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.’ For P&G, consumers come first and shareholder value naturally follows. Per the statement of purpose, if P&G gets things right for consumers, shareholders will be rewarded as a result.”

A third example is Apple [AAPL]. “Apple’s CEO, Steve Jobs, seems to delight in signaling to shareholders that they don’t matter much and that they certainly won’t interfere with Apple’s pursuit of its original customer-focused purpose: ‘to make a contribution to the world by making tools for the mind that advance humankind.’ Jobs’s feisty, almost combative demeanor at shareholder meetings is legendary. At the meeting in February 2010, one shareholder asked Jobs, “What keeps you up at night?” Jobs quickly responded, ‘Shareholder meetings.’”

Making needed legal changes

Admonishing CEOs (and investors) to ignore the expectations market and refocus on delighting the customer isn’t going to work, says Martin. It’s as likely to be “as effective as admonishing frat boys to stop chasing girls.” For CEOs, there are massive incentives for staying attuned to it and severe punishments for ignoring it. Investors, analysts, and hedge funds continue to reward firms that meet expectations and punish those that do not. Missing expectations, a dropping stock-price, and real-asset write-downs can together create an unstoppable downward spiral. In the current environment, to simply ignore the expectations market is to court disaster.

One of the great values of the Martin’s book is that he puts his finger on the needed legal changes that can help shift the dynamic of business away from gaming the expectations market and back to doing the real job of delighting customers.

  • One is the repeal of 1995 Private Securities Litigation Reform Act, which contains what has become known as the “safe harbor” provision. “To move ahead productively,” he writes, “the safe harbor provision should simply be repealed. Executives and their companies should be legally liable for any attempt to manage expectations. Without the safe harbor provisions, there would be no earnings guidance and that would be a great thing.” Making this change would immediately bring the practice of giving guidance to the stock market, and so gaming expectations, to a screeching halt. There is, says Martin, simply no societal value to earnings guidance. The market will know exactly what earnings are going to be at the end of the quarter, in just three or fewer months. Society is not better off to have an executive publicly guess at what that number is going to be. We need to turn executives from the useless, vapid task of managing expectations to the psychologically and economically rewarding business of creating value.
  • A second is the elimination of regulation FASB 142 which forces the real write-downs of real assets based on the company’s share price in the expectations market. The current rule forces executives to concern themselves with managing expectations in order to avoid write-downs. Changing the rule would remove the major sanction that now exists for executives who ignore the expectations market.
  • A third is to restore the focus of executives on the real market and on an authentic life by eliminating the use of stock-based compensation as an incentive. This doesn’t mean that executives shouldn’t own shares. If an executive wants to buy stock as some sort of bonding with the shareholders or for whatever other reasons, that’s just fine. However, executives should be prevented from selling any stock, for any reason, while serving in that capacity—and indeed for several years after leaving their posts. Stock based compensation is a very recent phenomenon, one associated with lower shareholder returns, bubbles and crashes, and huge corporate scandals. In 1970, stock based compensation was less than 1 percent of compensation. By 2000, it was around half of compensation. For the last 35 years, stock-based compensation has been tried. It had the opposite effect of what was intended. We should learn from experience and discontinue it.

Other needed changes

Martin also argues for associated changes:

  • We must restore authenticity to the lives of our executives. The expectations market generates inauthenticity in executives, filling their world with encouragements to suspend moral judgment. They receive incentive compensation to which the rational response is to game the system. And since they spend most of their time trading value around rather than building it, they lose perspective on how to contribute to society through their work. Customers become marks to be exploited, employees become disposable cogs, and relationships become only a means to the end of winning a zero-sum game.
  • We need to address board governance. Boards have become complicit in gaming the expectations market, and the associated inflation of executive compensation.
  • We need to regulate expectations market players, most notably hedge funds. Net, hedge funds create no value for society. They have huge incentives to promote volatility in the expectations market, which is dangerous for us but lucrative for them. So, we need to rein in the power of hedge funds to damage real markets.

What’s next?

In a book that offers so much, one is tempted to ask for more. Perhaps in subsequent writings, Martin will expand and carry his thinking forward.

In future writings, he might document more of the economically disastrous practices that enable firms to meet their quarterly targets, such as  looting the firm’s pension fund or cutting back on worker benefits or outsourcing production to a foreign country in ways that further destroy the firm’s ability to innovate and compete.

He might also spell out the specific management changes that are necessary to delight the customer. The command-and-control management of hierarchical bureaucracy is inherently unable to delight anyone–it was never intended to. To delight customers, a radically different kind of management needs to be in place, with a different role for the managers, a different way of coordinating work, a different set of values and a different way of communicating. This is not rocket science. It’s called radical management.

He might also show how the shift from maximizing shareholder value to delighting the customer involves a major power shift within the organization. Instead of the company being dominated by salesmen who can pump up the numbers and the accountants who can come up with cuts needed to make the quarterly targets, those who add genuine value to the customer have to re-occupy their rightful place.

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He might also build on the theme that the shift from maximizing shareholder value to delighting the customer doesn’t involve sacrifices for the shareholders, the organizations or the economy. That’s because delighting the customer is not just profitable: it’s hugely profitable.

Bottom-line: capitalism is at risk

American capitalism hangs in the balance, writes Martin. His book gives a clear explanations as to why this is so and what should be done to save it.

A large number of rent-collectors and financial middlemen making vast amounts of money are keeping the current system in place. The fact that what they are doing is destroying the economy will not sway their thinking. As Upton Sinclair noted, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Is change possible? Martin believes so, quoting Vince Lombardi: “We would accomplish many more things if we did not think of them as impossible.”

Other “impossible” changes have been accomplished. “Not long ago, it seemed fanciful that public smoking would be restricted and tobacco companies would sponsor public service ads that discourage smoking,” wrote Deepak Chopra and David Simon in 2004. “But this shift in awareness occurred when a critical mass of people decided they would no longer tolerate a behavior that harmed many while benefited a few.”

For instance, the Aspen Institute’s Corporate Values Strategy Group has been working  on promoting long-term orientation in business decision making and investing. In 2009, twenty-eight leaders representing business, investment, government, academia, and labor (including Warrent Buffett, CEO of Berkshire Hathaway [BRK.A, BRK.B], Lou Gerstner, former CEO of IBM [IBM] and Jim Wolfensohn, former president of the World Bank) joined with the Institute to endorse a bold call to end the focus on value-destroying short-term-ism in our financial markets and create public policies that reward long-term value creation for investors and the public good.

Ultimately, the change will happen, not just because it’s right, but because it makes more money. Once investors realize what is going on, the economics will drive the change forward.

The recognition that maximizing shareholder value is the dumbest idea in the world is an obvious but still a radical idea. Like all obvious, radical ideas, in the first instance it will be rejected. Then it will be ridiculed. Finally it will be self-evident and no one will be able to remember why anyone ever thought otherwise.

Buy the Martin’s book. Read it. Implement it. The very future of our society “hangs in the balance”.

Roger L. Martin:  Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Harvard Business Review Press 2011.

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Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).

Follow Steve Denning on Twitter @stevedenning

‘Capitalism At A Tipping Point’ Robert Lenzner Forbes Staff

H-P and Yahoo!: Just the Tip of the Activist Iceberg Richard Levick Contributor

http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

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Main | William Black: Not With A Bang, But A Whimper: Bank Of America’s Derivatives Death Rattle »

HOLY BAILOUT – Federal Reserve Now Backstopping $75 Trillion Of Bank Of America’s Derivatives Trades

UPDATE – Chcek out regulator William Black’s blistering reaction to this story HERE.

This story from Bloomberg just hit the wires this morning. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers.  Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties.  Now the Fed and the FDIC are fighting as to whether this was sound.  The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.  You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan.  Even worse, the total exposure is unknownbecause Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

This is a recipe for Armageddon.  Bernanke is absolutely insane.  No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks.  His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.

Bloomberg

Excerpt:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

MOODY’S DOWNGRADE

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

U.S. Bailouts

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill.

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

Continue reading at Bloomberg…

Related stories:

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Thursday, December 1, 2011

How to End the Federal Reserve and the Bailout Madness (Videos)

Eric Blair
Activist Post

As the Super Committee failed to agree on a measly $1 trillion in budget cuts, Bloomberg recently reportedyet another secret bank bailout totaling $7.7 trillion courtesy of the private Federal Reserve bank.  This disclosure is in addition to the first-ever Congressional audit of the Fed that revealed a startling $16 trillion in secret bailouts.

This brings the grand total of previously unknown theft to $23.7 trillion which, interestingly enough, is the exact figure Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program, estimated in July 2009.

As Americans are being told that they need to tighten their belts and that Congress must do the same or the country will fall into economic ruin, these private bank bailouts, nearly double the size of the national debt, are handed out without any benefit to the public.

Indeed, it is of great detriment to the public who bear the brunt of the inflationary and tax burdens, as well as reduced public benefits forced by the failed Super Committee.  Furthermore, it has been recently disclosed that the people’s FDIC will now backstop some $75 trillion in derivatives at Bank of America alone. And just today, they threw in a fresh new bailout of Europe that is just another temporary fix.  When will the people tire of bailing out a clearly broken monetary system?

The blatant raping of the American people couldn’t be more obvious.  The once-fringe Tea Party activists who were spawned from their anger over a meager $700 billion TARP bailout have now seemingly swelled into what appears to be a global “Occupy” movement.  Regardless of their political differences, they both agree that the system of perpetual bailouts on the backs of Americans must end.

Perhaps the only two genuine public servants left in Congress are Ron Paul (R-TX) and Dennis Kucinich (D-OH); Paul being the early inspiration for the Tea Party, and Kucinich an early sympathizer with the Occupiers.  Together they have clearly identified the Federal Reserve System as the disease, and have both proposed pragmatic solutions to cure the ills of the hijacked economy.

Before detailing their exact proposals, many people claim that the Federal Reserve System has a 100-year charter that will expire in 2013.  However, the original Federal Reserve Act only allowed for a 20-year charter until the law was changed in 1927 (6 years before the Fed was up for renewal) to allow perpetual renewal of federal corporations where charters could only be “dissolved by Act of Congress or until forfeiture of franchise for violation of law.” (Source)

Regardless, given the increased rate of awareness of the Federal Reserve’s private, secretive, monopolistic, and destructive structure over the economy, their days are likely numbered.  Perhaps that is the reason for the mass looting they, and their international member banks, are rapidly engaged in.  In other words, they’re raiding the last crumbs of the cookie jar before Daddy comes to punish them.

Ron Paul, a leading proponent for “Ending the Fed” has put forward legislation to legalize competing currencies, which he believes is the first step toward breaking the monopolistic control over currency by the Fed.  As with most of Paul’s legislation, it is undoing laws instead of writing them.  The Free Competition in Currency Act (HR 1098) will essentially do three things: 1) repeal legal tender laws to remove the monopoly control of the Federal Reserve, 2) legalize private mints to issue coins to be controlled by anti-fraud and anti-counterfeit laws, and, 3) remove taxes from precious metal coins to ensure fair competition among new currencies.

Below Paul introduces the bill and explains its importance on the House floor in 2009:

Ron Paul is an advocate for returning to Constitutional money made of, or backed by, precious metals.  Equally angry and aware of the heart of economic problems, Dennis Kucinich has introduced the NEED Act which will dissolve the Fed into the Treasury and return the power to issue currency back to Congress as outlined in the Constitution.

Kucinich explains why his bill is important in a recent video:

Although Kucinich’s legislation doesn’t call for currency to be backed by gold or other precious metals — and public trust for Geithner and the U.S. government’s handling of the economy are at all-time lows — seizing control from the Fed seems like a necessary early step to effectively transfer to something new.

As explained by author and documentary filmmaker, Bill Still, the Treasury still handles the coinage of U.S. currency and issues this money free of interest.  This means that, technically, the entire U.S. debt could be erased by debt-free coins minted by the treasury. Crisis averted, prosperity for all.

Yet, these are just the early steps for getting the monetary system back on track. Perhaps the most acceptable longer term solution is what John F. Kennedy attempted to do with Executive Order 11110 which gave the Treasury the power to issue silver certificates to be backed by, and redeemable in, silver.  This concept is the ideal blend of both Paul and Kucinich’s ideas, and the most Constitutional way to handle modern money.

Please comment and share this, and let’s get on with solutions instead of more bailouts and taxpayer servitude.

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Derivatives Ownership Even More Concentrated Than Ever

As I noted in 2009, 5 banks held 80% of America’s derivatives risk.

Since then, the percent of derivatives held by the top 5 banks has only increased.

As Tyler Durden notes:

The latest quarterly report from the Office Of the Currency Comptroller is out [shows] that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure …. the top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that’s your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

OCC%201 Amount and Concentration of Derivatives Still Threaten Global Economy

Amazingly, the top 5 banks have virtually 100% of all credit derivatives held by American banks (see the second to last line in the above table).

Dwarfing the World Economy

The amount of derivatives dwarfs the size of the world economy. As Bloomerg reported in May:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said …“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008.

Huge Amount of Derivatives Are Dangerous

Credit default swaps were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.

And unexpected changes in interest rates could cause a major bloodbath in interest rate derivatives.

And, no, there have not been any reforms or attempts to rein in derivatives, and the Dodd-Frank financial legislation was really just a p.r. stunt which didn’t really change anything.

But the big banks and their minions claim that the huge amounts of derivatives themselves is unimportant because these are only “notional” values, and – after netting – the notional values are deflated to much more modest numbers.

But as Durden – who has a solid background in derivatives – notes:

At this point the economist PhD readers will scream: “this is total BS – after all you have bilateral netting which eliminates net bank exposure almost entirely.” True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small… Right?

Netting Amount and Concentration of Derivatives Still Threaten Global Economy

…Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd’s bank “resolution” provision would do absolutely nothing to prevent an epic systemic collapse.

Prior to Fukushima, nuclear industry engineers said nuclear was safe.

 

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1% US banks gamble $5 million per US household; $532 trillion total

Reuters and wanttoknow.info provide prima facie evidence that the US 1% runs Wall Street as rigged-casino gambling to transfer wealth from the 99% to themselves. The amount of money fraudulently gambled is not millions of dollars, not billions, not even tens of trillions, but over five hundred trillion ($532,000,000,000,000).

Look at Demonocracy’s images to get an idea of this magnitude of money.

Let this sink in: $532 trillion means that the 1% US banksters gamble over $5 million dollars for every US household and $1.7 million for every American.

It also means that the 1% has cooperation from “leadership” in Congress, law enforcement, and almost all corporate media to have this gambling as the core of the 99%’s mortgages and pension funds, with the criminal fraud of representing this as “investments,” “regulated,” and “fair.”

Ending global poverty would be accomplished with an annual investment of $100 billion a year for ten years. This would save the lives of a million children who die from preventable poverty each month, is less than 0.7% of the developed countries’ GNI, has reduced population growth rates in every historical case, and is the best way the CIA concludes to reduce terrorism. The annual amount to end poverty is 0.02% of what the top five US banks gamble every year.

Excerpts from Reuters:

(Reuters) – U.S. Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, were partners for years at a Washington law firm that represented a Who’s Who of big banks and other companies at the center of alleged foreclosure fraud, a Reuters inquiry shows…. Reuters reported in December that under Holder and Breuer, the Justice Department hasn’t brought any criminal cases against big banks or other companies involved in mortgage servicing, even though copious evidence has surfaced of apparent criminal violations in foreclosure cases.

Excerpt from http://www.wanttoknow.info:

OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2011
December 2011, OCC (U.S. Office of the Comptroller of the Currency, Administrator of National Banks)
http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq311.pdf

The OCC’s quarterly report on trading revenues and bank derivatives activities is based on Call Report information provided by all insured U.S. commercial banks and trust companies, reports filed by U.S. financial holding companies, and other published data. The notional amount of derivatives held by insured U.S. commercial banks decreased $1.4 trillion, or 0.6%, from the second quarter of 2011 to $248 trillion. Notional derivatives are 5.7% higher than at the same time last year. Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Five large commercial banks represent 96% of the total banking industry notional amounts. Insured commercial banks have more limited legal authorities than do their holding companies.

Note: Graphs in this report show that the holding companies for the top five banks also control massive amounts of derivates totaling $326 trillion! The holding companies JPMorgan Chase, BofA, Morgan Stanley, Citigroup, and Goldman Sachs have over $311 trillion in derivates, 95% of the total U.S. market. So these banks and their holding companies combined own $532 trillion in derivates, equivalent to roughly $75,000 for every person on the planet. What are the bankers doing? If the above link fails, click here.

After 15 years of my own research after US political leadership reneged on all promises (public and private) to end poverty after we led to create the Microcredit Summit in 1997, here’s my best explanation of what’s driving economics:

How an economics teacher presents Occupy’s economic argument, victory

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Financial Terrorism in America: elite make zillions while sucking workers and poor

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prelude:

Just before the “Bailout” (ie to the Bansksters) Baby Bush said

“…this sucker could go down”

E.C. Knuth said in “The Empire of the City”:

“The fact that the House of Rothschild made its money in the great crashes of history and the great wars of history, the very periods when others lost their money, is beyond question.” [p.71]

Note that all nations of the world, now in 2011, have some strategically placed  Rothschild controlled banks (except a few ‘rogue’ nations) in their midst.   

Do you wonder who will be positioned to profit handsomely in the coming global financial crash, and the coming manipulated war, as Knuth indicated, and a multitude of  events and  investigative reports with documentation, have confirmed.

Truth dissipates Falsehood as Light dissipates Darkness 

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AmpedStatus Report )))

EXCLUSIVE: Analysis of Financial Terrorism in America: Over 1 Million Deaths Annually, 62 Million People With Zero Net Worth, As the Economic Elite Make Off With $46 Trillion

August 10th, 2011 | Filed under Economy, Feature, Hot List, News, Politics & Government . Follow comments through RSS 2.0 feed. Click here to comment, or trackback.
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Editor’s Note: The following report includes adapted excerpts from David DeGraw’s book, “The Road Through 2012: Revolution or World War III.” Release Date: 9.28.11

Analysis of Financial Terrorism in America
Analysis of Financial Terrorism in America: Over 1 Million Deaths Annually, 62 Million People With Zero Net Worth, As the Economic Elite Make Off With $46 TrillionBy David DeGraw, AmpedStatus Report

Abstract :: Welcome to World War III
Introduction

Part One :: The Economic Devastation

I :: Poverty
II :: Food Insecurity
III :: Unemployment
IV :: Declining Income

Part Two :: The Economic Elite

V :: How Much Wealth Do The Economic Elite Have?
VI :: Who Rules America? Revealing The Economic Top 0.1%
VII :: Tax Breaks For The Rich, Budget Cuts For The Rest Of Us

Part Three :: The Perfect Storm Overhead
(Inequality = Debt = Austerity = Civil Unrest = Inflation + Deflation = Stagflation)

VIII :: Debt Slavery
IX :: Inflation
X :: The Beaten Masses

Part Four :: Fascism in America

XI :: Modern Day Slavery
XII :: The Death Toll
XIII :: Deliberate Systemic Attacks


Abstract :: Welcome to World War III

Despite increasing personal financial hardship, most Americans remain unaware of the economic world war currently unfolding. An all-pervasive corporate and government propaganda campaign has effectively obscured this blatant reality. After extensive analysis, it is evident that World War III is a war between the richest one-tenth of one percent of the global population and 99.9 percent of humanity. Or, as I have called it, The Economic Elite Vs. The People. This war has been a one-sided attack thus far. However, as we have seen throughout the world in recent months, the people are beginning to fight back. The following report is a statistical analysis of the systemic economic attacks against the American people.

Introduction

The American public has sustained intensive economic attacks across broad segments of the population. While the attacks have been increasingly severe in scale over the past four years, they have been implemented with technocratic precision. They have been incrementally applied thus far, successfully keeping the population passive and avoiding any large-scale civilian unrest, while effectively reducing living standards for the majority of the population. As you will see in this report, the 55 million Americans that have been hit the hardest have thus far acquiesced due to temporary financial assistance, such as food stamps and extended unemployment benefits.

The global Economic Elite have been much more strategic in handling the American public, as they are potentially the greatest threat to their continued consolidation of wealth, resources and power. National populations that are not as powerful, and on the periphery of the Economic Elite’s global empire, have been dealt with in much harsher fashion. In many smaller and less powerful countries the dramatic rise in food prices and costs of living have led to all-out revolt — Tunisia, Algeria, Albania and Egypt were among the first to rebel. While the contagion of rebellion has rapidly spread throughout Northern Africa and the Middle East, it is also spreading in a decentralized manner throughout most of the world, now threatening popular rebellion throughout Europe. Like the US population, the geographically clustered European nations represent a potentially powerful countervailing force to the Economic Elite’s continued domination.

Within the United States, the technocratic suppression of the population has been extensive. Increasingly severe economic and governmental policies have systematically eroded civilian wealth, power and rights. Intensive propaganda has effectively distracted, confused, isolated, marginalized and divided the US population. Despite the success of these efforts thus far, given the severe, prolonged, unsustainable and escalating level of economic suffering, outbreaks of civil unrest are inevitable. The US population, if a critical mass is reached, represents the greatest threat to the Economic Elite. In this regard, the American people are their primary adversary.

In writing this report, I will clearly demonstrate the severity and scale of the deliberate systemic economic attacks against the US population, in hope that we can urgently build a critical mass of aware and engaged citizens.

Part One :: The Economic Devastation

Snapshot: According to most recent Census Bureau data, from 2005 – 2009, average US household wealth declined by 28%. This represents a loss of $27,000 per household. Currently, at least 62 million Americans, 20% of US households, have zero or negative net worth.

The Census figures cited above are based on statistics that have been consistently proven to be lowball estimates. The government and corporate media spread propaganda on vital economic statistics that mask the severity of our economic crisis. Deceptive inflation, unemployment, poverty and GDP measures, which cast the illusion of recovery, are easily exposed with some research and a closer look at the data. Throughout this report, we will explore significant examples of government economic propaganda. In several cases, the government has been forced to revise their numbers due to proven inaccuracies. The government’s “revisions” are most always for the worse, and are usually just a footnote correction that the public is rarely ever aware of. All that being said, for many statistics we are forced to use government data, as there are not any other extensive data sets available from alternative sources.

I :: Record Breaking Poverty

The Census Bureau poverty rate is a horribly flawed measurement that uses outdated methodology. The Census measures poverty based on costs of living metrics established in 1955 – 56 years ago. They ignore many key factors, such as the increased costs of medical care, child care, education, transportation, and many other basic costs. They also don’t factor geographically-based costs of living. The National Academy of Science measure, which gets little if any corporate media coverage, gives a much more accurate account of poverty, as they factor in these vital cost of living variables.

The most current Census data revealed that 43.6 million Americans, 14.3% of the population, lived in poverty in 2009. While that is a staggering number that represents the highest number of American people to ever live in poverty, and a dramatic increase of four million people since 2008, it significantly under-counted the total. Last year, in my analysis, extrapolating data from 2008 National Academy of Science findings, I estimated that the number of Americans living in poverty in 2009 was at least 52 million. Recently, the National Academy of Science released their latest findings, backing up my claim by revealing that 52,765,000 Americans, 17.3% of the population, lived in poverty in 2009.

The poverty rate for children is even worse. According to Census data, a total of 15.5 million American children lived in poverty in 2009, which is 20% of all children. The number of children in poverty increased 28% since 2000, and jumped 10% from 2008 to 2009. Extrapolating data from the 2009 National Academy of Science poverty rate, in relation to the Census childhood poverty data, the number of American children living in poverty in 2009 is more accurately 18.8 million, which is 24%, or nearly one in four.

Other than this rapidly increasing number children who are in families that have recently fallen into poverty, “every day in America 2,573 babies are born into poverty.”

As the chart to the right shows, even with the lower Census numbers, nine major American cities have a poverty rate over 25%.

It is important to note, based on many key indicators, as you will see throughout this report, the overall poverty totals have increased since 2009. Also consider that the recent deficit reduction plan is going to cut “anti-poverty” programs that currently assist tens of millions of Americans. A study by the National Bureau of Economic Research estimates that “the poverty rate would double without these programs.” It is predicted that the new deficit deal will cut the funding for these programs in half, which, based on these estimates, would bring the total number of Americans living in poverty up to 80 million people, 26% of the population.

II :: Record Breaking Food Insecurity

For another revealing statistic, which has been quickly increasing, we can look at the number of Americans currently surviving off of food stamps. In 2005, 25.7 million Americans needed food stamps, currently 45.8 million people rely on them. As the chart to the right shows, the number of people in need of food stamps has been rapidly increasing year-over-year.

Meanwhile, Congress is cutting the funding for the food stamp program at a time when the Department of Agriculture estimates that an additional 22.5 million people will need them, bringing the total number of Americans in need of food assistance to a stunning 68.3 million people.

III :: Record Breaking Unemployment

While the “official” unemployment rate hovers around 9%, 14 million people, the government’s numbers are deceptively low once again. The only reason unemployment has stayed below 10% for the past few months is because millions of long-term unemployed, and part-time workers who are looking for full-time work, are not included in the baseline government unemployment rate. John Williams, from ShadowStats.com, has a consistently proven method of tracking unemployment that provides a much more accurate view of the overall situation. As shocking as it may sound, when you apply his SGS method, counting the total number people in need of employment, you get a current unemployment rate of 22.5%, which is an all-time record total of 34 million people currently in need of work. Here is how the SGS rate is calculated:

“The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”

On top of these shocking figures, the labor force participation rate, which measures the percentage of the total population currently working, has fallen to a 27-year low of 63.9%.

Currently, an all-time record 6.3 million people have been unemployed for over six months. As the chart to the right shows, the average time it takes for a person to find a job has also just hit an all-time high of 40.4 weeks.

As companies continue to downsize and shift jobs overseas, unemployment is once again accelerating. Private-sector job cuts in July surged 60% to a 16-month high. When accounting for population growth within the total labor force, from December 2007 to present, we have lost 10.6 million jobs.

With the implementation of state and federal budget cuts, public-sector unemployment is accelerating as well. According to the Center on Budget and Policy Priorities, since August 2008, state and local governments have cut 577,000 jobs. The Economic Policy Institute estimates that cuts in the new deficit deal will lead to an additional 1.8 million job losses.

Of the new jobs that have been added in 2010, 60% of them are in low-wage fields. Since December 2007, the official unemployment rate has masked the fact that 2.8 million of the news jobs created have been part-time jobs.

Breaking down the data, over the last 12 months, the National Employment Law Project found that well-paying jobs are rapidly decreasing, while low-paying jobs are helping to mask an increasingly dire employment crisis:

· Lower-wage industries constituted 23% of job loss, but fully 49% of recent growth
· Mid-wage industries constituted 36% of job loss, and 37% of recent growth
· Higher-wage industries constituted 40% of job loss, but only 14% of recent growth

IV :: Declining Income

While the cost of living from 1990 – 2010 increased by 67%, worker income has declined. According to the most recent available IRS data, covering the year of 2009, average income fell 6.1%, a loss of $3,516 per worker, that year alone. Average income has declined 13.7% from 2007 – 2009, representing a $8,588 loss per worker.

The decline in worker income is due to the dramatic increase in CEO pay. CEO pay has consistently increased year-over-year since the mid-1970s. From 1975 – 2010, worker productivity increased 80%. Over this time frame, CEO pay and the income of the economic top 0.1% (one-tenth of one percent) of the population quadrupled. The income of the top 0.01% (one-hundredth of one percent) quintupled.

To understand the affect CEO pay increases have had on workers’ declining share of income on an annual basis, after analyzing 2008 tax data, leading tax reporter David Cay Johnston summed up the situation with these revealing statistics:

“Had income growth from 1950 to 1980 continued at the same rate for the next 28 years, the average income of the bottom 90 percent in 2008 would have been 68 percent higher…. That would have meant an average income for the vast majority of $52,051, or $21,110 more than actual 2008 incomes. How different America would be today if the typical family had $406 more each week…”

As shocking as that is, over the last two years, workers have lost an even higher share of income to CEOs. In the last year alone, CEO pay skyrocketed by 28%. Looking at 2009, according to a recent Dollars & Sense report, workers lost nearly $2 trillion in wages that year alone:

“In 2009, stock owners, bankers, brokers, hedge-fund wizards, highly paid corporate executives, corporations, and mid-ranking managers pocketed—as either income, benefits, or perks such as corporate jets—an estimated $1.91 trillion that 40 years ago would have collectively gone to non-supervisory and production workers in the form of higher wages and benefits.”

As bad as these numbers are, consider that the attack on American workers has increased significantly since 2009. From 2009 to the fourth-quarter of 2010, 88% of income growth went to corporate profits (i.e. CEOs), while just 1% went to workers.

As the NY Times reported in an article entitled, “Our Banana Republic,” from 1980 – 2005, “more than four-fifths of the total increase in American incomes went to the richest 1 percent.” Again, as bad as that was, since 2005 it has gotten even worse, as Zero Hedge recently reported, labor’s current “share of national income has fallen to its lowest level in modern history.” This chart shows how workers’ percentage of income has been rapidly declining:

The bottom line, as statistics clearly demonstrate, these trends are getting worse and the attacks against us, as severe as they have been over the past four years, are dramatically escalating.

Part Two :: The Economic Elite

“There’s class warfare, all right, but it’s my class,
the rich class, that’s making war, and we’re winning.”

– Warren Buffett, Chairman and CEO of Berkshire Hathaway

V :: How Much Wealth Do The Economic Elite Have?

While 68.3 million Americans struggle to get enough food to eat and wages are declining for 90% of the population, US millionaire household wealth has reached an unprecedented level. According to an extensive study by auditing and financial advisory firm Deloitte, US millionaire households now have $38.6 trillion in wealth. On top of the $38.6 trillion that this study reveals, they have an estimated $6.3 trillion hidden in offshore accounts.

In total, US millionaire households have at least $45.9 trillion in wealth, the majority of this wealth is held within the upper one-tenth of one percent of the population.

If all this isn’t obscene enough, to further demonstrate how the global economy has now been completely rigged, Deloitte’s analysis predicated, based on current trends, that US millionaire households will see a 225% increase in wealth to $87.1 trillion by 2020. Accounting for wealth hidden in offshore accounts, they are projected to have over $100 trillion in total within the next decade.

Most people cannot even comprehend how much $1 trillion is, let alone $46 trillion. One trillion is equal to 1000 billion, or $1,000,000,000,000. To put it in perspective, last year the entire cost of feeding all 40 million Americans on food stamps was $65 billion.

Now consider, according to the latest IRS data, only 0.076% of the population, less than one-tenth of one percent, earned over $1 million in 2009.

The graph below, based on data from the Tax Policy Center, shows how much income is earned by a household at any given percentile in income distribution:

The highest bracket for annual income is $50 million or more. Only 74 Americans are in this elite group. The average income within this category was $91.2 million in 2008. As astonishing as that is, in 2009 they averaged $518.8 million each, or about $10 million per week. This means, in the depths of the recession, the richest 74 Americans increased their income by more than 5 times within this one year. These 74 people made more money than 19 million workers combined.

In context, overall, the richest 400 people in the US have as much wealth as 154 million Americans combined, that’s 50% of the entire country. The top economic 1% of the US population now has a record 40% of all wealth, and have more wealth than 90% of the population combined.

VI :: Who Rules America? Revealing The Economic Top 0.1%

Here is an analysis from an investment manager with mega-wealthy clients breaking down the economic top 0.5% of the population, recently published by William Domhoff, sociology professor and author of Who Rules America?:

“Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the US. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits.

Folks in the top 0.1% come from many backgrounds but it’s infrequent to meet one whose wealth wasn’t acquired through direct or indirect participation in the financial and banking industries…. Most of the serious economic damage the US is struggling with today was done by the top 0.1% and they benefited greatly from it…. For example, in Q1 of 2011, America’s top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries…. The year 2010 was a record year for compensation on Wall Street, while corporate CEO compensation rose by over 30%.…

In 2010 a dozen major companies, including GE, Verizon, Boeing, Wells Fargo, and Fed Ex paid US tax rates between -0.7% and -9.2%. Production, employment, profits, and taxes have all been outsourced….

I could go on and on, but the bottom line is this: A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the US financial system. It allows them to protect and increase their wealth and significantly affect the US political and legislative processes.

They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%….

… the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.”

To get into the top economic 0.01% (one-hundredth of one percent) of the population, you have to have a household income of over $27 million per year.

If you look at some of the central players who caused this economic crisis, you will see that they are among this Economic Elite group.

Former Goldman Sachs CEO and Bush Treasury Secretary Hank Paulson had already amassed at least $700 million prior to moving to the US Treasury in 2006. Current Goldman Sachs CEO Lloyd Blankfein and a few other top executives at Goldman Sachs just received $111.3 million in bonuses. Blankfein just took home $24.3 million, as part of a $67.9 million bonus he was awarded. Goldman’s President Gary Cohn took home $24 million, as part of a $66.9 million bonus he was awarded. Goldman’s CFO David Viniar and former co-president Jon Winkelried both took home over $20 million in bonuses.

Citigroup CEO Vikram Pandit just took home $80 million, in what may eventually total more than $200 million in compensation and bonuses. Coming in at the top of the list is JP Morgan Chase CEO Jamie Dimon, who just took home $90 million.

If you think people in this income level don’t control the US political process, you are not paying attention. After they caused this economic crisis, they got the government to give them trillions of dollars in taxpayer support, and then, after taking our tax dollars, they gave themselves all-time record-breaking bonuses. 2009 was an all-time record-breaking year for Wall Street executives bringing in a total of $145 billion. And then, in 2010, they raised the bar even higher, breaking the all-time record set the year before by pulling in another $149 billion. The audacity of it all is stunning.

Finding people more grotesquely greedy than Wall Street executives would seem to be impossible. However, health insurance CEOs are giving them a run for their money. As the LA Times reported:

“Leaders of Cigna, Humana, UnitedHealth, WellPoint and Aetna received nearly $200 million in compensation in 2009, according to a report, while the companies sought rate increases as high as 39%….

H. Edward Hanway, former chief executive of Philadelphia-based Cigna, topped the list of high-paid executives, thanks to a retirement package worth $110.9 million. Cigna paid Hanway and his successor, David Cordani, a total of $136.3 million last year….

Ron Williams, the CEO of Hartford, Conn.-based Aetna Inc., earned nearly $18.2 million in total compensation, down from $24.4 million in 2008.”

Aetna CEO Ron Williams has recovered from his down year in 2009 by making $72 million in 2010.

Given this level of obscene profiteering within the health care industry, it is not surprising that Americans pay more for medical care than any other nation in the world. In fact, Americans are forced to pay twice as much as most nations, and get lower quality care in return. As health insurance companies admitted, they have been reaping windfall profits because people with health insurance plans still cannot afford to go to the doctors and have stopped going unless it is an absolute emergency. With well over 50 million people unable to afford health insurance and the skyrocketing costs, it is not surprising that over 60% of all personal bankruptcies are the result of medical bills. In fact, 75% of the medical bankruptcies filed are from people who have health insurance.

Within this Economic Elite group, you also have the war profiteering oil companies, which themselves are in large part owned by the big Wall Street banks. The biggest five oil companies, while gas prices have been skyrocketing, reaped $36 billion in profit last quarter. These companies also receive an average of $6 billion per year in tax subsidies.

VII :: Tax Breaks For The Rich, Budget Cuts For The Rest Of Us

To further demonstrate how the mega-wealthy have seized control our political process, consider that the richest 400 Americans paid 30% of their income in taxes in 1995, but they now pay only 18%.

In fact, 1,470 Americans earned over $1 million in 2009 and didn’t pay any taxes.

The average tax rate for millionaires was 22.4% in 2009, down from 30.4% in 1995. The average millionaire saves $136,000 a year due to reduced tax rates.

Looking at the tax rate from a long-term perspective, the amount of money the richest people and most profitable corporations pay in taxes has fallen dramatically since 1955. Corporate tax accounted for 27.3% of federal revenue in 1955. In 2010, corporate tax accounted for only 8.9% of federal revenue. Corporate taxes accounted for 4.3% of overall GDP in 1955, in 2010 they accounted for only 1.3%.

Part Three :: The Perfect Storm Overhead:
(Inequality = Debt = Austerity = Civil Unrest = Inflation + Deflation = Stagflation)

The cuts in taxes for the mega-wealthy have led to record wealth inequality and resulted in a record national deficit. Meanwhile, to make up for the deficit that the richest one-tenth of one percent of the population has created, Democrats and Republicans are committed to making draconian budget cuts to vital social services, which target the poor, middle class, elderly and sick, while handing out billions more in corporate welfare annually. (Inequality = Debt = Austerity)

Just as the government has done, to make up for tax revenue lost to the mega-wealthy, Americans have made up for the decline in income by taking on large amounts of debt as well. (Inequality = Debt)

In a severely unequal society, massive debt will always be created, thus forming a vicious cycle of increasing inequality and increasing debt, until the fragmentation of society reaches a breaking point when those in debt cannot afford to pay back their debts without starving to death. We are now reaching that breaking point. (Inequality = Debt = Austerity = Civil Unrest)

VIII :: Debt Slavery

The Indentured Servant Has Become The Indebted Citizen

As for statistics on Americans being buried in financial debt, the indentured servant has evolved into the indebted citizen. As mentioned before, from 1990 – 2010 costs of living have increased 67%, while wages have stagnated and declined. As the national debt has reached a record $14.6 trillion, total personal debt is now over $16 trillion. Consumer debt is $2.5 trillion. Credit card debt is $805 billion and student debt now exceeds $1 trillion.

Obviously, the more severe your debts are, the more you have to cut back in spending and the less money you have to buy new items. (Debt = Austerity)

Meanwhile, a perfect storm circles overhead as society breaks down and falls into an economic death spiral – health care, food and gas costs are skyrocketing, while income and home values are plummeting. (Inflation + Deflation = Stagflation)

Given these conditions, it is not surprising that over 250 million Americans, another record-breaking number, are currently living paycheck-to-paycheck struggling to make ends meet.

IX :: Inflation

The following charts, from Advisor Perspectives, show the increase in costs of living since 2000:

As you can see, the price of basic necessities are consistently increasing, only clothing (apparel) has declined. The second chart highlights the crucial skyrocketing cost of energy:

The third chart highlights the pernicious skyrocketing cost of education:

The cost of education essentially buries a young person in a debt that they will spend a significant portion of their life attempting to get out of. Given the increasing costs of living, and the decreasing ability to make an expected income from such an expensive level of education, this young demographic will most likely live an entire life locked into spiraling levels of debt that they will never be able to get out of.

Propaganda Inflation

When reporting on inflation, the Bureau of Labor Statistics has twice, since 1980, revised their methodology to mask the severity of inflation, similar to how they mask the severity of unemployment. In their Consumer Price Index (CPI), which measures inflation, they have heavily discounted the measurement weight of energy, food and education – three of the most significant costs for most American households.

To understand the significance in their revised methodology, current “official” CPI is at a 3.6% annual rate. However, if calculated the way it was before former Federal Reserve Chairman Alan Greenspan altered it in 1980, it would be 11.1%, three times worse than officially stated.

So while the government and the Federal Reserve claim that inflation is low, at 3.6% over the past year, food prices have increased 39% and US gas prices have increased 34% over the same time frame.

The increase in gas cost over the past one-year masks the severity of total gas price inflation, which is currently 125% more expensive since December 2008, increasing from $1.67 per gallon to $3.75.

The Hidden Tax

The Federal Reserve’s strategic policy known as Quantitative Easing (QE) has been a significant factor in the rising cost of basic necessities by deliberately stimulating inflation, while decreasing the value of the dollar. Looking at their recent QE2 program, the dollar lost 7.5% of its value from January 2010 through March 2010. From August 2010 through March 2011, the dollar lost 17% of its value. To understand how this acts as a hidden tax, consider if you had $10,000 in the bank, over this time frame you would have lost $1700 in purchasing power. So your $10,000 would now be worth $8300. At the same time, the cost of gas and food drastically increased.

The Phantom Recovery

By decreasing the value of the dollar, the Federal Reserve is also inflating the stock market by creating the impression that stock prices are rising, which, when measured in dollars, they have. However, in real terms, their overall value has decreased. To understand how deceptive this strategy has been in giving the appearance of a rising market, instead of measuring overall stock value in dollars, let’s look at their overall value when measured in terms of gold:

Dow/Gold Chart from January 1, 2003 – August 8, 2011

As investor Michael Krieger explains:

“You can see from the chart above the downtrend of stock prices in real terms is completely intact and they have now hit a new low, below the previous low point in March 2009. In fact, although stocks did temporarily rise in real terms from the low in 2009 for the year as a whole, they were still down 5% in real terms. Then last year, stocks were 14% lower in terms of gold. Finally, despite a brief rally early in 2011, stocks in terms of gold are down 23% year-to-date.”

Dollar Vs. Gold

When comparing the value of the dollar to the value of gold, the dollar has lost a stunning 84% of its value since 2000. In 2000, gold was worth $279 per ounce, as of August 8, 2011, gold is $1,725 per ounce. In fact, the dollar continues to fall in value while gold continues to rise.

Stagflation

All these factors together create a perfect storm of stagflation. As 90% of Americans experience income declines, and the value of the dollar declines, the price of necessities are rising, while the one major asset many Americans have, a house, is also declining in value. Already, thanks to declining home values, 28% of US homeowners owe more on their mortgages than their home is currently worth. With 10.4 million American families having lost their homes to foreclosure since 2007, Amherst Securities, a leading broker/dealer focused on mortgage-related investments, estimates that another 10.8 million homes are at risk of default over the next six years. This will obviously continue downward pressure on home values.

X :: The Beaten Masses

Confronted With Severe Financial Hardship, Why Do Americans Remain Passive?

With an unprecedented sum of wealth, tens of trillions of dollars, held within the top one-tenth of one percent of the US population, we now have the highest and most severe inequality of wealth in US history. Not even the Robber Barons of the Gilded Age were as greedy as the modern day Economic Elite.

As famed American philosopher John Dewey once said, “There is no such thing as the liberty or effective power of an individual, group, or class, except in relation to the liberties, the effective powers, of other individuals, groups or classes.”

In The Economic Elite Vs. The People, I reported on the strategic withholding of wealth from 99% of the US population over the past generation. Since the mid-1970s, worker production and wealth creation has exploded. As the statistics throughout this report prove, the dramatic increase in wealth has been almost entirely absorbed by the economic top one-tenth of one percent of the population, with most of it going to the top one-hundredth of one percent.

If you are wondering why a critical mass of people desperately struggling to make ends meet are still not fighting back with overwhelming force and running the mega-wealthy aristocrats out of town, let’s consider two significant factors:

1) People are so busy trying to maintain their current standard of living that their energies are consumed by holding on to the little that they have left.

2) People have very little understanding of how much wealth has been consolidated within the top economic one-tenth of one percent.

Considering the first factor, it is obvious that people have become beaten down psychologically and financially. A report in the Guardian entitled, “Anxiety keeps the super-rich safe from middle-class rage,” suggests that people are so desperate to hold on to what they have that they are too busy looking down to look up: “As psychologists will tell you, fear of loss is more powerful than the prospect of gain. The struggling middle classes look down more anxiously than they look up, particularly in recession and sluggish recovery.”

Considering the second factor, people do not understand how much wealth has been withheld from them. The average person has never personally experienced or seen the excessive wealth and luxury that the mega-rich live in. Wealth inequality has grown so extreme and the wealthy have become so far removed from average society, it is as if the rich exist in some outer stratosphere beyond the comprehension of the average person. As the Guardian report mentioned above also states:

“… having little daily contact with the rich and little knowledge of how they lived, they simply didn’t think about inequality much, or regard the wealthy as direct competitors for resources. As the sociologist Garry Runciman observed: ‘Envy is a difficult emotion to sustain across a broad social distance.’… Even now most underestimate the rewards of bankers and executives. Top pay has reached such levels that, rather like interstellar distances, what the figures mean is hard to grasp.”

In fact, the average American vastly underestimates the severe wealth disparity that we currently have. This survey, featured in the NY Times, reveals that Americans think our society is far more equal than it actually is:

“In a recent survey of Americans, my colleague Dan Ariely and I found that Americans drastically underestimated the level of wealth inequality in the United States. While recent data indicates that the richest 20 percent of Americans own 84 percent of all wealth, people estimated that this group owned just 59 percent – believing that total wealth in this country is far more evenly divided among poorer Americans.

What’s more, when we asked them how they thought wealth should be distributed, they told us they wanted an even more equitable distribution, with the richest 20 percent owning just 32 percent of the wealth. This was true of Democrats and Republicans, rich and poor – all groups we surveyed approved of some inequality, but their ideal was far more equal than the current level.”

Here is a chart showing the results from their survey:

The fact of the matter is that the overwhelming majority of US population is unaware of the vast wealth at hand. An entire generation of unprecedented wealth creation has been concealed from 99% of the population for over 35 years. Having never personally experienced or known of this wealth, the average American cannot comprehend what is possible if even a fraction of it was used for the betterment of society as a whole.

In fact, given modern technology and wealth, not a single American citizen should live in poverty. The statistics clearly demonstrate that we now live in a Neo-Feudal society. In comparison to the wealthiest one-tenth of one percent of the population, who are sitting on top of tens of trillions of dollars in wealth, we are modern day serfs, essentially propagandized peasants.

The fact that the overwhelming majority of Americans are struggling to get by, while tens of trillions of dollars are consolidated within a small fraction of the population, is a crime against humanity.

The day the average American fully comprehends how much wealth is consolidated within just the top one-tenth of one percent of the population, there will be a massive uprising and all the paid off politicians will be run out of town.

The next time you are stressed out, struggling to make ends meet and pay off your debts, just think about the trillions of dollars sitting in the obscenely bloated pockets of one-tenth of one percent of the population. The first step in overcoming your peasant status is to understand that you are indeed a peasant. This is a bitter pill to swallow and most will prefer to, as they have been conditioned to do, continue on their path of media-induced delusion, denial, apathy and ignorance.

However, I still cling to the hope that once enough people become aware of this hidden and obscured fact, we can have the non-violent revolution we so urgently need. Until then, the rich get richer as a critical mass with increasingly dire economic prospects desperately struggles to make ends meet.

Part Four :: Fascism in America

Other than driving large segments of the American population into poverty, and pushing the majority into massive debt and a state of financial desperation, there is an ever darker side to what is unfolding today. The Economic Elite have turned America into a modern day fascist state.

Fascism is a very powerful word which evokes many strong feelings. People may think that the term cannot be applied to modern day America. However, as Benito Mussolini once summed it up: “Fascism should more properly be called corporatism, since it is the merger of state and corporate power.” In the early 1900s, the Italians who invented the term fascism also described it as “estato corporativo,” meaning: the corporate state.

Very few Americans would argue the fact that corporations now control our government and have the dominant role in our society. Through a system of legalized bribery – campaign finance, lobbying and the revolving door between Washington and corporations – the most power global corporations dominant the legislative and political process like never before. Senator Huey Long had it right when he warned: “When fascism comes to America, it will come in the form of democracy.”

As President Franklin D. Roosevelt once described fascism: “The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes strong than their democratic state itself. That, in its essence, is fascism — ownership of government by an individual, by a group, or any controlling private power.”

The most blatant modern example of this was the bailout of Wall Street, when the “too big to fail” banks got politicians to promptly hand out trillions of tax dollars in support and subsidies to the very people who caused the crisis, without any of them being held accountable.

XI :: Modern Day Slavery

Another shocking example of how far we have descended into fascism is the American Legislative Exchange Council (ALEC), which is a group of corporate executives who literally write government legislation. They have gone as far as setting up a system that imprisons the poor and then puts them to work, instead of paying living wages to non-imprisoned workers. Make no mistake, this is a modern day system of slavery unfolding before our eyes.

At the leadership of ALEC and various other Economic Elite organizations, poverty has essentially become a crime. To demonstrate these attacks against the poor, there was $17 billion cut from public housing programs, while there was an increase of $19 billion in programs for building prisons, “effectively making the construction of prisons the nation’s main housing program for the poor.” Before laws began to be rewritten in 1980, with direct input from ALEC, we had a prison population of 500,000 citizens. After laws were rewritten to target poor inner city citizens with much more severe penalties, the US prison population skyrocketed to 2.4 million people.

We now have the largest prison population in the world. With only 4% of the world’s population, we have 25% of the world’s prison population. As I reported previously, in a report entitled, “American Gulag: World’s Largest Prison Complex“:

“The US, by far, has more of its citizens in prison than any other nation on earth. China, with a billion citizens, doesn’t imprison as many people as the US, with only 308 million American citizens. The US per capita statistics are 700 per 100,000 citizens. In comparison, China has 110 per 100,000. In the Middle East, the repressive regime in Saudi Arabia imprisons 45 per 100,000. US per capita levels are equivalent to the darkest days of the Soviet Gulag.”

XII :: The Death Toll

The dramatic increase in poverty has obviously torn many families apart and caused a devastating psychological toll, but consider the increase in deaths as a result of poverty and severe wealth inequalities. This is a very difficult statistic to accurately measure, but Columbia University’s School of Public Health conducted an intensive examination of mortality and medical data and estimated that “875,000 deaths in the US in 2000 could be attributed to a cluster of social factors bound up with poverty and income inequality.”

As a report by Debra Watson sums up the study, “There is no reason to believe, after a decade that has seen sustained attacks on social programs and consistently high unemployment rates, that the social mortality rate has declined. On the contrary, it has likely risen.” Indeed, poverty and income inequality have skyrocketed since 2000.

Now, let’s consider the fact that, according to the Census Bureau, 31.1 million people lived in poverty in 2000, and according to Columbia’s study 875,000 deaths came as a result. This means that 1 out of every 35.5 people living in poverty die annually as a result of their impoverishment. If you extrapolate this data to the 2009 total of 52.8 million people living in poverty, you get an estimate of 1,486,338 deaths within that year. Even if you use the lower poverty totals from the Census Bureau, 43.6 million people, you get an estimate of 1,228,169 deaths in 2009.

XIII :: Deliberate Systemic Attacks

The dramatic increase in economic inequality and poverty, along with the unprecedented rise in wealth within the top one-tenth of one percent of the population has not happened by mistake. It is the designed result of deliberate governmental and economic policy. It is the result of the richest people in the world, and the “too big to fail” banks, using the campaign finance and lobbying system to buy off politicians who implement policies designed to exploit 99.9% of the population for their financial gain. To call what is happening a “financial terrorist attack” on the United States, is not using hyperbole, it is the technical term for what is currently occurring.

Compare the million people who die annually as a result of these economic attacks, to the 2,977 that died on 9/11. As someone who lived three blocks from the World Trade Center, as tragic as 9/11 was, these economic attacks are much more severe and damaging to us as a nation, albeit a much slower and unseen death toll. Nonetheless, the result is of genocidal proportions. One can statistically compare the economic attacks on the US to the invasion of Iraq, which some estimate as leading to one million deaths. Once again, many of those deaths came in brutal and spectacular fashion in bombing campaigns known as “shock and awe.” However, the death toll compares to the hidden brutality of a four-year campaign of economic “shock and awe.” Just as Iraq was invaded, the US has been invaded by a global banking cartel.

As shocking as that is to realize, consider that this is happening throughout the world. While the US poverty death rate is probably higher than in most European countries, the Federal Reserve’s economic policies — along with policies from the International Monetary Fund, World Bank and Bank of International Settlements — have caused rioting and uprisings over skyrocketing food prices and costs of living throughout the world. The fact of the matter, and very harsh and unfortunate reality of this crisis, is that the global economic central planners are deliberately carrying out genocidal economic policies.

As Che Guevara, a man who took on the global financial elite, once said, “The amount of poverty and suffering required for the emergence of a Rockefeller, and the amount of depravity that the accumulation of a fortune of such magnitude entails, are left out of the picture, and it is not always possible to make the people in general see this.”

When tens of trillions of dollars deliberately flow to the top economic one-tenth of one percent of the global population, while large percentages live in poverty, you have to conclude, in technical terms, that a Neo-Feudal-Fascist state is upon us. The rich have never been richer, while their paid off politicians make budget cuts for the poor and middle class, and cause the cost of basic necessities to skyrocket.

You can call me extreme, but the reality of this is extreme, these people, the global economic top one-tenth of one percent, are genocidal fascists carrying out a holocaust. Fascism has evolved. There is no need to get blood on your hands while rounding up people and putting them into concentration camps when you can do it through economic policy while sitting in a jacuzzi on a corporate jet, or in a three-piece custom-made Armani, completely detached and insulated from the world in which you plunder.

However, as what happens with all empires, greed and arrogance makes them overreach. The beaten down masses get to a point where they literally can’t live under these conditions. This desperation spreads throughout the population until it reaches a critical mass, then, suddenly, they rise up and the empire begins to collapse… Tunisia, Algeria, Egypt, Israel, (Northern Africa, the Middle East), Albania, Greece, Spain, Britain (Europe), Wisconsin…

The Economic Elite are overreaching and their empire is collapsing.

The decentralized global rebellion has begun…

Welcome to World War III.

Which side of history do you want to be on?

As a wise old friend once said, “You can’t be neutral on a moving train.”


– David DeGraw is the founder and editor of AmpedStatus.com. His long-awaited book, The Road Through 2012: Revolution or World War III, will finally be released on September 28th. He can be emailed at David[@]AmpedStatus.com. You can follow David’s reporting daily on his new personal website: DavidDeGraw.org


~ We are fighting to remain 100% independent, completely free from partisan influence. If you respect our work, please donate to support our efforts here.

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  1. Kent Welton said:

    All due to forced “free trade” with the greater slave and debt-money from a private central bank feeding its own owners and manipulators.
    The fascism and depression arising from corporate control of “our” economy is now evident… a result of what I call an extreme “factor imbalance” between the power of labor and capital.
    Kent Welton,
    TheCenterForBalance.org
    PublicCentralBank.com

    August 10th, 2011 at 7:30 pm

  2. How to Rule: (in this case, a nation)

    1. Keep the overwhelming majority of the population focused on carefully-crafted delusions;

    2. feed the population, constantly and consistently, outright lies and complete fabrications, all whilst totally convincing population, through any form of trickery, convince population to believe things that are simply NOT TRUE; LIES.

    3. Use so-called buzz words (such as “God,” “Guns”), while simultaneously using fear tactics (“communism,” “fascism”) in order to prop up or legitimize all conspired-confabulations;

    4. No matter what, ADAMANTLY DENY ANY AND ALL FACTS; CONVINCE people that each of their now-strenuously-held “beliefs” (which actually, in reality, are delusions) convince them that their beliefs are TRUE, RIGHT, RATIONAL and WORTH FIGHTING FOR;

    5. Blatantly pit separate groups of people against each other, heavily using all media, in order to keep each group insanely confused and belligerent with increasingly irrational fear, as they become more and more preoccupied with their delusions and self-righteousness;

    6. Feed the fire: instill hugely inflated sense of rightness (self-righteousness) through wholly-manufactured “evidence;” this particularly useful form of trickery, by the way, is often found disguised as religion in which any one will do;

    7. Merely repeat the words “GOD,” “GUNS,” etc. etc.

    And, with that, the robber barons have their whole voting base: an utterly deluded and totally brainwashed population, busily fighting tooth and nail directly against themselves and against their own self-interests, liberally fed with deliberate and outright lies and wildly inflammatory rhetoric.

    The good news, however, is that TRANSPARENT OPPRESSION is NEVER FOREVER. NOT ANYWHERE IN THE WORLD…Even here in “FREEDOM-LOVING,” “GOD-FEARING,” [WAR-MONGERING, GUN-TOTING] AMERICA…

    SUBVERT NOW!!!!!!!!

    Christina Marlowe

    August 10th, 2011 at 8:00 pm

  3. Abaddon said:

    An impressive and acceptable explanation of how the greatest robbery of the once richest nation on earth has taken place. The easiest way to rob a bank, a country, or a world, is to own it, and we know who has all the money. As the proverb says, “A lover of gold will not be satisfied with gold, neither a lover of silver with silver.” Their avarice knows no bounds, and like all those whose greed has become an obsession, they destroy all about them. Greed, one of the “deadly” sins has layed the foundation for a global catastrophy that is already in motion, and will consume all before it, including those who set in motion this avaricious Apocalypse.

    August 10th, 2011 at 8:18 pm

  4. […] from AmpedStatus. Analysis of Financial Terrorism in America By David DeGraw, AmpedStatus Report Abstract :: Welcome […]

>

Financial Terrorism in America: Over 1 Million Deaths Annually, 62 Million People With Zero Net Worth, As the Economic Elite Make Off With $46 Trillion

  Posted by – August 12, 2011 at 9:46 pm – Permalink Source via Alexander Higgins Blog

The Federal Reserve Global Elite Pyramid Scheme
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Shocking statistics proving the economic elite have launched a deliberate systemic financial terrorist attack against 99.9% of the population.

An all out campaign of corporate and government propagand has obscured the truth of the blatant reality that economic elite have raped and pillaged a generation of Americans.

The veil of secrecy that keeps us blinded to our oppressors is disguised beneath obfuscated financial data and blatantly manipulated government statistics.

The truth of the matter is every single American feels the stress and pain of  increasingly burdensome economic hardships on a daily basis.

While we have been fooled to believe our troubles are isolated the light of truth is revealed from the great dark beyond and the fog that clouds our thoughts begin to clear.

What was once distorted now becomes obvious, thanks to a very lengthy compilation full of some of the most shocking economic statistics every American should be made aware of.

Due to the  length of the article, I fear many will shy away from it.

To remedy the problem, I present here an abbreviated version containing the just the meat of the original along with  a bit of my own spice here and there.

However, I fully encourage you to read the full meat and potatoes version because while meat helps us build strong lean muscle it is the potatoes that give us the much needed energy to move those muscles.

The article is based on excerpts from the book “The Road Through 2012: Revolution or World War III” written by David DeGraw’s book, the editor and founder of AmpedStatus which will be Released September 28th.

I begin here with the abstract of the book  followed by the stripped down version of the shocking statistics used to prove his case that the middle class is the victim of a deliberate systemic financial terrorist attack by the super elite who have raped and pillage a generation of Americans.

Abstract :: Welcome to World War III

Despite increasing personal financial hardship, most Americans remain unaware of the economic world war currently unfolding. An all-pervasive corporate and government propaganda campaign has effectively obscured this blatant reality. After extensive analysis, it is evident that World War III is a war between the richest one-tenth of one percent of the global population and 99.9 percent of humanity. Or, as I have called it, The Economic Elite Vs. The People. This war has been a one-sided attack thus far. However, as we have seen throughout the world in recent months, the people are beginning to fight back. The following report is a statistical analysis of the systemic economic attacks against the American people.

Introduction

The American public has sustained intensive economic attacks across broad segments of the population. While the attacks have been increasingly severe in scale over the past four years, they have been implemented with technocratic precision. They have been incrementally applied thus far, successfully keeping the population passive and avoiding any large-scale civilian unrest, while effectively reducing living standards for the majority of the population. As you will see in this report, the 55 million Americans that have been hit the hardest have thus far acquiesced due to temporary financial assistance, such as food stamps and extended unemployment benefits.

The global Economic Elite have been much more strategic in handling the American public, as they are potentially the greatest threat to their continued consolidation of wealth, resources and power. National populations that are not as powerful, and on the periphery of the Economic Elite’s global empire, have been dealt with in much harsher fashion. In many smaller and less powerful countries the dramatic rise in food prices and costs of living have led to all-out revolt — Tunisia, Algeria, Albania and Egypt were among the first to rebel. While the contagion of rebellion has rapidly spread throughout Northern Africa and the Middle East, it is also spreading in a decentralized manner throughout most of the world, now threatening popular rebellion throughout Europe. Like the US population, the geographically clustered European nations represent a potentially powerful countervailing force to the Economic Elite’s continued domination.

Within the United States, the technocratic suppression of the population has been extensive. Increasingly severe economic and governmental policies have systematically eroded civilian wealth, power and rights. Intensive propaganda has effectively distracted, confused, isolated, marginalized and divided the US population. Despite the success of these efforts thus far, given the severe, prolonged, unsustainable and escalating level of economic suffering, outbreaks of civil unrest are inevitable. The US population, if a critical mass is reached, represents the greatest threat to the Economic Elite. In this regard, the American people are their primary adversary.

In writing this report, I will clearly demonstrate the severity and scale of the deliberate systemic economic attacks against the US population, in hope that we can urgently build a critical mass of aware and engaged citizens.

The Economic Devastation

Census Bureau data, from 2005 – 2009, average US household wealth declined by 28%. This represents a loss of $27,000 per household.

Currently, at least 62 million Americans, 20% of US households, have zero or negative net worth.

Based on government manipulated census data 43.6 million Americans, 14.3% of the population, lived in poverty in 2009.

Here is how the government manipulates the census data to mask our true economic nightmare.

The Census Bureau poverty rate is a horribly flawed measurement that uses outdated methodology. The Census measures poverty based on costs of living metrics established in 1955 – 56 years ago. They ignore many key factors, such as the increased costs of medical care, child care, education, transportation, and many other basic costs. They also don’t factor geographically-based costs of living. The National Academy of Science measure, which gets little if any corporate media coverage, gives a much more accurate account of poverty, as they factor in these vital cost of living variables.

The most current Census data revealed that 43.6 million Americans, 14.3% of the population, lived in poverty in 2009. While that is a staggering number that represents the highest number of American people to ever live in poverty, and a dramatic increase of four million people since 2008, it significantly under-counted the total.

A more accurate assessment of poverty data by National Academy of Science data shows that 52,765,000 Americans, 17.3% of the population, lived in poverty in 2009.

Last year, in my analysis, extrapolating data from 2008 National Academy of Science findings, I estimated that the number of Americans living in poverty in 2009 was at least 52 million. Recently, the National Academy of Science released their latest findings, backing up my claim by revealing that 52,765,000 Americans, 17.3% of the population, lived in poverty in 2009.

According to the manipulated government census figures, 20% or 15.5 million American children lived in poverty in 2009, which is 20% of all children in the U.S. The number of children in poverty increased 28% since 2000, and jumped 10% from 2008 to 2009.

The more accurate National Academy of Science data showed 18.8 million American children living in poverty in 2009, which is 24%, or nearly one in four.

Every day in America 2,573 babies are born into poverty.”

Even with the lower Census numbers, Nine major American cities have a poverty rate over 25%.

Based on many key indicators poverty totals have continued to increase since 2009.

Current deficit reduction plans will cut “anti-poverty” programs that currently assist tens of millions of Americans.

Based on Census data estimates is predicted that the new deficit deal will cut the funding for these programs in half

The “the poverty rate will double without these programs.”

The total number of Americans living in poverty will increase to 80 million using census data estimates.

The total number of Americans living in poverty will increase to 105 million using the National Academy of Science data.

Record Breaking Food Insecurity

In 2005, 25.7 million Americans needed food stamps.

Today nearly 46 million Americans rely on food stamps.

Tent city homeless camps are popping up all over the United States.

Congress has responded the additional need for food stamps by saying fuck you to the public and cutting the funding for the food stamp program.

The cuts come as 22.5 million additional Americans need food stamps

The brings the total number of Americans in need of food assistance to a stunning 68.3 million people.

Our politicians have more important priorities $16 trillion for secret banker bailouts and trillions more to fund the illegal perpetual wars.

Record Breaking Unemployment

“Official” unemployment is at 9%, but only because the government refused to count millions of unemployed as being unemployed. Go figure.

While the “official” unemployment rate hovers around 9%, 14 million people, the government’s numbers are deceptively low once again. The only reason unemployment has stayed below 10% for the past few months is because millions of long-term unemployed, and part-time workers who are looking for full-time work, are not included in the baseline government unemployment rate.

The real number of unemployed is at an all-time record total of 34 million people which puts the unemployment rate is 22.5%.

The labor force participation rate, which measures the percentage of the total population currently working, has fallen to a 27-year low of 63.9%.

Currently, an all-time record 6.3 million people have been unemployed for over six months.

The average time it takes for a person to find a job has also just hit an all-time high of 40.4 weeks.

Private-sector job cuts in July surged 60% to a 16-month high.

From December 2007 to present, we have lost 10.6 million jobs.

Since August 2008, state and local governments have cut 577,000 jobs.

The new deficit deal will lead to an additional 1.8 million job losses.

60% of the jobs created by the $2 trillion stimulus are in low-wage fields.

Since December 2007 2.8 million of the news jobs created have been part-time jobs.

Over 12 months, the National Employment Law Project found that well-paying jobs are rapidly decreasing, while low-paying jobs are helping to mask an increasingly dire employment crisis:

  • Lower-wage industries constituted 23% of job loss, but fully 49% of recent growth
  • Mid-wage industries constituted 36% of job loss, and 37% of recent growth
  • Higher-wage industries constituted 40% of job loss, but only 14% of recent growth

Declining Income

While the cost of living from 1990 – 2010 increased by 67%, worker income has declined.

IRS data showed in 2009 average income fell 6.1%, a loss of $3,516 per worker, that year alone.

Average income has declined 13.7% from 2007 – 2009, representing a $8,588 loss per worker.

Worker income decline is due to the dramatic increase in CEO pay that  has consistently increased year-over-year since the mid-1970s.

From 1975 – 2010, worker productivity increased 80%. Over this time frame, CEO pay and the income of the economic top 0.1% (one-tenth of one percent) of the population quadrupled.

The income of the top 0.01% (one-hundredth of one percent) quintupled.

After analyzing 2008 tax data, leading tax reporter David Cay Johnston summed up the situation pointing out that middle class wages should have been 68% higher which equates to a robbery of $406 each week.

As shocking as that is, over the last two years, workers have lost an even higher share of income to CEOs. In the last year alone, CEO pay skyrocketed by 28%. Looking at 2009, according to a recent Dollars & Sense report, workers lost nearly $2 trillion in wages that year alone:

“In 2009, stock owners, bankers, brokers, hedge-fund wizards, highly paid corporate executives, corporations, and mid-ranking managers pocketed—as either income, benefits, or perks such as corporate jets—an estimated $1.91 trillion that 40 years ago would have collectively gone to non-supervisory and production workers in the form of higher wages and benefits.”

As bad as these numbers are, consider that the attack on American workers has increased significantly since 2009. From 2009 to the fourth-quarter of 2010, 88% of income growth went to corporate profits (i.e. CEOs), while just 1% went to workers.

As the NY Times reported in an article entitled, “Our Banana Republic,” from 1980 – 2005, “more than four-fifths of the total increase in American incomes went to the richest 1 percent.”

It has gotten even worse, as Zero Hedge recently reported, labor’s current “share of national income has fallen to its lowest level in modern history.”

This chart shows how workers’ percentage of income has been rapidly declining:

The bottom line, as statistics clearly demonstrate, these trends are getting worse and the attacks against us, as severe as they have been over the past four years, are dramatically escalating.

Part Two :: The Economic Elite

“There’s class warfare, all right, but it’s my class,the rich class, that’s making war, and we’re winning.” – Warren Buffett, Chairman and CEO of Berkshire Hathaway

How Much Wealth Do The Economic Elite Have?

While 68.3 million Americans struggle to get enough food to eat and wages are declining for 90% of the population, US millionaire household wealth has reached an unprecedented level.

US millionaire households now have $38.6 trillion in wealth.

They also have an additional $6.3 trillion hidden in offshore accounts.

In total, US millionaire households have at least $45.9 trillion in wealth

The majority of this wealth is held within the upper one-tenth of one percent of the population.

US millionaire households will see a 225% increase in wealth to $87.1 trillion by 2020.

Accounting for wealth hidden in offshore accounts, they are projected to have over $100 trillion in total within the next decade.

Most people cannot even comprehend how much $1 trillion is, let alone $46 trillion. One trillion is equal to 1000 billion, or $1,000,000,000,000.

To put it in perspective, last year the entire cost of feeding all 40 million Americans on food stamps was $65 billion.

Now consider, according to the latest IRS data, only 0.076% of the population, less than one-tenth of one percent, earned over $1 million in 2009.

The graph below, based on data from the Tax Policy Center, shows how much income is earned by a household at any given percentile in income distribution:

Only 74 Americans are in this elite group are in the highest bracket for annual income is $50 million or more.

The average income within this category was $91.2 million in 2008.

As astonishing as that is, in 2009 they averaged $518.8 million each, or about $10 million per week.

This means, in the depths of the recession, the richest 74 Americans increased their income by more than 5 times within this one year.

These 74 people made more money than 19 million workers combined.

In context, overall, the richest 400 people in the US have as much wealth as 154 million Americans combined, that’s 50% of the entire country.

The top economic 1% of the US population now has a record 40% of all wealth, and have more wealth than 90% of the population combined.

Who Rules America? Revealing The Economic Top 0.1%

Here is an analysis from an investment manager with mega-wealthy clients breaking down the economic top 0.5% of the population, recently published by William Domhoff, sociology professor and author of Who Rules America?:

“Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the US. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits.

Folks in the top 0.1% come from many backgrounds but it’s infrequent to meet one whose wealth wasn’t acquired through direct or indirect participation in the financial and banking industries…. Most of the serious economic damage the US is struggling with today was done by the top 0.1% and they benefited greatly from it…. For example, in Q1 of 2011, America’s top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries…. The year 2010 was a record year for compensation on Wall Street, while corporate CEO compensation rose by over 30%.…

In 2010 a dozen major companies, including GE, Verizon, Boeing, Wells Fargo, and Fed Ex paid US tax rates between -0.7% and -9.2%. Production, employment, profits, and taxes have all been outsourced….

I could go on and on, but the bottom line is this: A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the US financial system. It allows them to protect and increase their wealth and significantly affect the US political and legislative processes.

They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%….

… the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.”

To get into the top economic 0.01% (one-hundredth of one percent) of the population, you have to have a household income of over $27 million per year.

If you look at some of the central players who caused this economic crisis, you will see that they are among this Economic Elite group.

Former Goldman Sachs CEO and Bush Treasury Secretary Hank Paulson had already amassed at least $700 million prior to moving to the US Treasury in 2006.

Current Goldman Sachs CEO Lloyd Blankfein and a few other top executives at Goldman Sachs just received $111.3 million in bonuses. Blankfein just took home $24.3 million, as part of a $67.9 million bonus he was awarded.

Goldman’s President Gary Cohn took home $24 million, as part of a $66.9 million bonus he was awarded.

Goldman’s CFO David Viniar and former co-president Jon Winkelried both took home over $20 million in bonuses.

Citigroup CEO Vikram Pandit just took home $80 million, in what may eventually total more than $200 million in compensation and bonuses.

Coming in at the top of the list is JP Morgan Chase CEO Jamie Dimon, who just took home $90 million.

If you think people in this income level don’t control the US political process, you are not paying attention. After they caused this economic crisis, they got the government to give them trillions of dollars in taxpayer support, and then, after taking our tax dollars, they gave themselves all-time record-breaking bonuses.

2009 was an all-time record-breaking year for Wall Street executives bringing in a total of $145 billion.

In 2010, they broke  the all-time record set the year before by pulling in another $149 billion. The audacity of it all is stunning.

Finding people more grotesquely greedy than Wall Street executives would seem to be impossible. However, health insurance CEOs are giving them a run for their money. As the LA Times reported:

“Leaders of Cigna, Humana, UnitedHealth, WellPoint and Aetna received nearly $200 million in compensation in 2009, according to a report, while the companies sought rate increases as high as 39%….

H. Edward Hanway, former chief executive of Philadelphia-based Cigna, topped the list of high-paid executives, thanks to a retirement package worth $110.9 million. Cigna paid Hanway and his successor, David Cordani, a total of $136.3 million last year….

Ron Williams, the CEO of Hartford, Conn.-based Aetna Inc., earned nearly $18.2 million in total compensation, down from $24.4 million in 2008.”

Aetna CEO Ron Williams has recovered from his down year in 2009 by making $72 million in 2010.

Given this level of obscene profiteering within the health care industry Americans pay more for medical care than any other nation in the world.

Americans are actually forced to pay twice as much as most nations, and get lower quality care in return.

Health insurances companies openly admit reaping windfall profits because people with health insurance plans still cannot afford to go to the doctors and have stopped going unless it is an absolute emergency.

With well over 50 million people unable to afford health insurance and the skyrocketing costs.

Over 60% of all personal bankruptcies are the result of medical bills.

In fact, 75% of the medical bankruptcies filed are from people who have health insurance.

Within this Economic Elite group, you also have the war profiteering oil companies, which themselves are in large part owned by the big Wall Street banks.

While gas, oil and energy prices skyrocket for the middle class the biggest five oil companies reaped $36 billion in profit last quarter along.

These companies also receive an average of $6 billion per year in government  subsidies paid for by none other than the U.S. taxpayer the same poor and middle class they rape.

Tax Breaks For The Rich, Budget Cuts For The Rest Of Us

To further demonstrate how the mega-wealthy have seized control our political process, consider that the richest 400 Americans paid 30% of their income in taxes in 1995.

They now pay only 18%.

In fact, 1,470 Americans earned over $1 million in 2009 and didn’t pay any taxes.

The average tax rate for millionaires was 22.4% in 2009, down from 30.4% in 1995.

The average millionaire saves $136,000 a year due to reduced tax rates.

Corporate tax accounted for 27.3% of federal revenue in 1955.

In 2010, corporate tax accounted for only 8.9% of federal revenue.

Corporate taxes accounted for 4.3% of overall GDP in 1955, in 2010 they accounted for only 1.3%.

Part Three :: The Perfect Storm Overhead:

(Inequality = Debt = Austerity = Civil Unrest = Inflation + Deflation = Stagflation)

The cuts in taxes for the mega-wealthy have led to record wealth inequality and resulted in a record national deficit. Meanwhile, to make up for the deficit that the richest one-tenth of one percent of the population has created, Democrats and Republicans are committed to making draconian budget cuts to vital social services, which target the poor, middle class, elderly and sick, while handing out billions more in corporate welfare annually. (Inequality = Debt = Austerity)

Just as the government has done, to make up for tax revenue lost to the mega-wealthy, Americans have made up for the decline in income by taking on large amounts of debt as well. (Inequality = Debt)

In a severely unequal society, massive debt will always be created, thus forming a vicious cycle of increasing inequality and increasing debt, until the fragmentation of society reaches a breaking point when those in debt cannot afford to pay back their debts without starving to death. We are now reaching that breaking point. (Inequality = Debt = Austerity = Civil Unrest)

Debt Slavery

The Indentured Servant Has Become The Indebted Citizen

As for statistics on Americans being buried in financial debt, the indentured servant has evolved into the indebted citizen.

As mentioned before, from 1990 – 2010 costs of living have increased 67%, while wages have stagnated and declined.

As the national debt has reached a record $14.6 trillion, total personal debt is now over $16 trillion by official government estimates.

Independent economists put the real national debt at $211 trillion.

Consumer debt is $2.5 trillion.

Credit card debt is $805 billion.

Student debt now exceeds $1 trillion.

Obviously, the more severe your debts are, the more you have to cut back in spending and the less money you have to buy new items. (Debt = Austerity)

Meanwhile, a perfect storm circles overhead as society breaks down and falls into an economic death spiral – health care, food and gas costs are skyrocketing, while income and home values are plummeting. (Inflation + Deflation = Stagflation)

Given these conditions, it is not surprising that over 250 million Americans, another record-breaking number, are currently living paycheck-to-paycheck struggling to make ends meet.

Inflation

The following charts, from Advisor Perspectives, show the increase in costs of living since 2000:

As you can see, the price of basic necessities are consistently increasing, only clothing (apparel) has declined. The second chart highlights the crucial skyrocketing cost of energy:

The third chart highlights the pernicious skyrocketing cost of education:

The cost of education essentially buries a young person in a debt that they will spend a significant portion of their life attempting to get out of. Given the increasing costs of living, and the decreasing ability to make an expected income from such an expensive level of education, this young demographic will most likely live an entire life locked into spiraling levels of debt that they will never be able to get out of.

Propaganda Inflation

The Bureau of Labor Statistics has twice, since 1980, revised the method to calculate the Consumer Price Index (CPI), which measures inflation.

Their methodology now masks the severity of inflation, similar to how they mask the severity of unemployment, by heavily discounting the measurement weight of energy, food and education – three of the most significant costs for most American households.

Tcurrent “official” CPI is at a 3.6% annual rate.

Calculated the way it was before Greenspan altered it in 1980, it would be 11.1%, three times worse than officially stated.

So while the government and the Federal Reserve claim that inflation is low, at 3.6% over the past year inflation for the middle class has skyrocketed.

Food prices increased 39% over the past year.

U.S. gas prices  increased 34% over the same time frame.

The increase in gas cost over the past one-year masks the severity of total gas price inflation at the pump.

Gas is currently 125% more expensive since December 2008, increasing from $1.67 per gallon to $3.75.

The Hidden Tax

The Federal Reserve’s strategic policy known as Quantitative Easing (QE) has been a significant factor in the rising cost of basic necessities by deliberately stimulating inflation, while decreasing the value of the dollar.

Because ofQE2 program, the dollar lost 7.5% of its value from January 2010 through March 2010.

From August 2010 through March 2011, the dollar lost 17% of its value.

To understand how this acts as a hidden tax, consider if you had $10,000 in the bank, over this time frame you would have lost $1700 in purchasing power.

$10,000 in August 2010 would be worth $8300 March 2011. At the same time, the cost of gas and food drastically increased.

The Phantom Recovery

By decreasing the value of the dollar, the Federal Reserve is also inflating the stock market by creating the impression that stock prices are rising, which, when measured in dollars, they have.

In real terms the value of the stock market has decreased.

To understand how deceptive this strategy has been in giving the appearance of a rising market, instead of measuring overall stock value in dollars, let’s look at their overall value when measured in terms of gold:

Dow/Gold Chart from January 1, 2003 – August 8, 2011

As investor Michael Krieger explains:

“You can see from the chart above the downtrend of stock prices in real terms is completely intact and they have now hit a new low, below the previous low point in March 2009. In fact, although stocks did temporarily rise in real terms from the low in 2009 for the year as a whole, they were still down 5% in real terms. Then last year, stocks were 14% lower in terms of gold. Finally, despite a brief rally early in 2011, stocks in terms of gold are down 23% year-to-date.”

Dollar Vs. Gold

When comparing the value of the dollar to the value of gold, the dollar has lost a stunning 84% of its value since 2000.

In 2000, gold was worth $279 per ounce, as of August 8, 2011, gold is $1,725 per ounce.

In fact, the dollar continues to fall in value while gold continues to rise.

Stagflation

All these factors together create a perfect storm of stagflation.

90% of Americans are experiencing declining incomes.

The value of the dollar continues declines.

Tthe price of necessities continue to rise.

The value of the one major asset many Americans have, a house, continues to decline.

Declining home values have left 28% of US homeowners owing more on their mortgages than their home is currently worth.

10.4 million American families having lost their homes to foreclosure since 2007,

Another 10.8 million homes are at risk of default over the next six years.

This will obviously continue downward pressure on home values.

The Beaten Masses

Confronted With Severe Financial Hardship, Why Do Americans Remain Passive?

With an unprecedented sum of wealth, tens of trillions of dollars, held within the top one-tenth of one percent of the US population, we now have the highest and most severe inequality of wealth in US history.

Not even the Robber Barons of the Gilded Age were as greedy as the modern day Economic Elite.

As famed American philosopher John Dewey once said, “There is no such thing as the liberty or effective power of an individual, group, or class, except in relation to the liberties, the effective powers, of other individuals, groups or classes.”

The elite have strategically withheld wealth from 99% of the US population over the past generation

Since the mid-1970s, worker production and wealth creation has exploded.

The dramatic increase in wealth has been almost entirely absorbed by the economic top one-tenth of one percent of the population, with most of it going to the top one-hundredth of one percent.

People  struggling to make ends meet are still not fighting back with overwhelming force and running the mega-wealthy aristocrats out of town because of two significant factors:

1) People are two consumed with holding on to the little they have left to try to maintain their current standard of living.

2) People have very little understanding of how much wealth has been consolidated within the top economic one-tenth of one percent.

Considering the first factor, it is obvious that people have become beaten down psychologically and financially. A report in the Guardian entitled, “Anxiety keeps the super-rich safe from middle-class rage,” suggests that people are so desperate to hold on to what they have that they are too busy looking down to look up: “As psychologists will tell you, fear of loss is more powerful than the prospect of gain. The struggling middle classes look down more anxiously than they look up, particularly in recession and sluggish recovery.”

Considering the second factor, people do not understand how much wealth has been withheld from them. The average person has never personally experienced or seen the excessive wealth and luxury that the mega-rich live in. Wealth inequality has grown so extreme and the wealthy have become so far removed from average society, it is as if the rich exist in some outer stratosphere beyond the comprehension of the average person. As the Guardian report mentioned above also states:

“… having little daily contact with the rich and little knowledge of how they lived, they simply didn’t think about inequality much, or regard the wealthy as direct competitors for resources. As the sociologist Garry Runciman observed: ‘Envy is a difficult emotion to sustain across a broad social distance.’… Even now most underestimate the rewards of bankers and executives. Top pay has reached such levels that, rather like interstellar distances, what the figures mean is hard to grasp.”

The average American vastly underestimates the severe wealth disparity.

Americans are brainwashed into believing our society is far more equal than it actually is:

(NY Times)“In a recent survey of Americans, my colleague Dan Ariely and I found that Americans drastically underestimated the level of wealth inequality in the United States. While recent data indicates that the richest 20 percent of Americans own 84 percent of all wealth, people estimated that this group owned just 59 percent – believing that total wealth in this country is far more evenly divided among poorer Americans.

What’s more, when we asked them how they thought wealth should be distributed, they told us they wanted an even more equitable distribution, with the richest 20 percent owning just 32 percent of the wealth. This was true of Democrats and Republicans, rich and poor – all groups we surveyed approved of some inequality, but their ideal was far more equal than the current level.”

The fact of the matter is that the overwhelming majority of US population is unaware of the vast wealth at hand. An entire generation of unprecedented wealth creation has been concealed from 99% of the population for over 35 years. Having never personally experienced or known of this wealth, the average American cannot comprehend what is possible if even a fraction of it was used for the betterment of society as a whole.

In fact, given modern technology and wealth, not a single American citizen should live in poverty. The statistics clearly demonstrate that we now live in a Neo-Feudal society. In comparison to the wealthiest one-tenth of one percent of the population, who are sitting on top of tens of trillions of dollars in wealth, we are modern day serfs, essentially propagandized peasants.

The fact that the overwhelming majority of Americans are struggling to get by, while tens of trillions of dollars are consolidated within a small fraction of the population, is a crime against humanity.

The day the average American fully comprehends how much wealth is consolidated within just the top one-tenth of one percent of the population, there will be a massive uprising and all the paid off politicians will be run out of town.

The next time you are stressed out, struggling to make ends meet and pay off your debts, just think about the trillions of dollars sitting in the obscenely bloated pockets of one-tenth of one percent of the population. The first step in overcoming your peasant status is to understand that you are indeed a peasant. This is a bitter pill to swallow and most will prefer to, as they have been conditioned to do, continue on their path of media-induced delusion, denial, apathy and ignorance.

However, I still cling to the hope that once enough people become aware of this hidden and obscured fact, we can have the non-violent revolution we so urgently need. Until then, the rich get richer as a critical mass with increasingly dire economic prospects desperately struggles to make ends meet.

Fascism in America

Other than driving large segments of the American population into poverty, and pushing the majority into massive debt and a state of financial desperation, there is an ever darker side to what is unfolding today. The Economic Elite have turned America into a modern day fascist state.

Fascism is a very powerful word which evokes many strong feelings. People may think that the term cannot be applied to modern day America. However, as Benito Mussolini once summed it up: “Fascism should more properly be called corporatism, since it is the merger of state and corporate power.” In the early 1900s, the Italians who invented the term fascism also described it as “estato corporativo,” meaning: the corporate state.

Very few Americans would argue the fact that corporations now control our government and have the dominant role in our society. Through a system of legalized bribery – campaign finance, lobbying and the revolving door between Washington and corporations – the most power global corporations dominant the legislative and political process like never before. Senator Huey Long had it right when he warned: “When fascism comes to America, it will come in the form of democracy.”

As President Franklin D. Roosevelt once described fascism: “The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes strong than their democratic state itself. That, in its essence, is fascism — ownership of government by an individual, by a group, or any controlling private power.”

The most blatant modern example of this was the bailout of Wall Street, when the “too big to fail” banks got politicians to promptly hand out trillions of tax dollars in support and subsidies to the very people who caused the crisis, without any of them being held accountable.

Modern Day Slavery

Another shocking example of how far we have descended into fascism is the American Legislative Exchange Council (ALEC), which is a group of corporate executives who literally write government legislation. They have gone as far as setting up a system that imprisons the poor and then puts them to work, instead of paying living wages to non-imprisoned workers. Make no mistake, this is a modern day system of slavery unfolding before our eyes.

At the leadership of ALEC and various other Economic Elite organizations, poverty has essentially become a crime. To demonstrate these attacks against the poor, there was $17 billion cut from public housing programs, while there was an increase of $19 billion in programs for building prisons, “effectively making the construction of prisons the nation’s main housing program for the poor.” Before laws began to be rewritten in 1980, with direct input from ALEC, we had a prison population of 500,000 citizens. After laws were rewritten to target poor inner city citizens with much more severe penalties, the US prison population skyrocketed to 2.4 million people.

We now have the largest prison population in the world. With only 4% of the world’s population, we have 25% of the world’s prison population. As I reported previously, in a report entitled, “American Gulag: World’s Largest Prison Complex“:

“The US, by far, has more of its citizens in prison than any other nation on earth. China, with a billion citizens, doesn’t imprison as many people as the US, with only 308 million American citizens. The US per capita statistics are 700 per 100,000 citizens. In comparison, China has 110 per 100,000. In the Middle East, the repressive regime in Saudi Arabia imprisons 45 per 100,000. US per capita levels are equivalent to the darkest days of the Soviet Gulag.”

The Death Toll

The dramatic increase in poverty has obviously torn many families apart and caused a devastating psychological toll, but consider the increase in deaths as a result of poverty and severe wealth inequalities. This is a very difficult statistic to accurately measure, but Columbia University’s School of Public Health conducted an intensive examination of mortality and medical data and estimated that “875,000 deaths in the US in 2000 could be attributed to a cluster of social factors bound up with poverty and income inequality.”

As a report by Debra Watson sums up the study, “There is no reason to believe, after a decade that has seen sustained attacks on social programs and consistently high unemployment rates, that the social mortality rate has declined. On the contrary, it has likely risen.” Indeed, poverty and income inequality have skyrocketed since 2000.

Now, let’s consider the fact that, according to the Census Bureau, 31.1 million people lived in poverty in 2000, and according to Columbia’s study 875,000 deaths came as a result. This means that 1 out of every 35.5 people living in poverty die annually as a result of their impoverishment. If you extrapolate this data to the 2009 total of 52.8 million people living in poverty, you get an estimate of 1,486,338 deaths within that year. Even if you use the lower poverty totals from the Census Bureau, 43.6 million people, you get an estimate of 1,228,169 deaths in 2009.

Deliberate Systemic Attacks

The dramatic increase in economic inequality and poverty, along with the unprecedented rise in wealth within the top one-tenth of one percent of the population has not happened by mistake. It is the designed result of deliberate governmental and economic policy. It is the result of the richest people in the world, and the “too big to fail” banks, using the campaign finance and lobbying system to buy off politicians who implement policies designed to exploit 99.9% of the population for their financial gain. To call what is happening a “financial terrorist attack” on the United States, is not using hyperbole, it is the technical term for what is currently occurring.

Compare the million people who die annually as a result of these economic attacks, to the 2,977 that died on 9/11. As someone who lived three blocks from the World Trade Center, as tragic as 9/11 was, these economic attacks are much more severe and damaging to us as a nation, albeit a much slower and unseen death toll. Nonetheless, the result is of genocidal proportions. One can statistically compare the economic attacks on the US to the invasion of Iraq, which some estimate as leading to one million deaths. Once again, many of those deaths came in brutal and spectacular fashion in bombing campaigns known as “shock and awe.” However, the death toll compares to the hidden brutality of a four-year campaign of economic “shock and awe.” Just as Iraq was invaded, the US has been invaded by a global banking cartel.

As shocking as that is to realize, consider that this is happening throughout the world. While the US poverty death rate is probably higher than in most European countries, the Federal Reserve’s economic policies — along with policies from the International Monetary Fund, World Bank and Bank of International Settlements — have caused rioting and uprisings over skyrocketing food prices and costs of living throughout the world. The fact of the matter, and very harsh and unfortunate reality of this crisis, is that the global economic central planners are deliberately carrying out genocidal economic policies.

As Che Guevara, a man who took on the global financial elite, once said, “The amount of poverty and suffering required for the emergence of a Rockefeller, and the amount of depravity that the accumulation of a fortune of such magnitude entails, are left out of the picture, and it is not always possible to make the people in general see this.”

When tens of trillions of dollars deliberately flow to the top economic one-tenth of one percent of the global population, while large percentages live in poverty, you have to conclude, in technical terms, that a Neo-Feudal-Fascist state is upon us. The rich have never been richer, while their paid off politicians make budget cuts for the poor and middle class, and cause the cost of basic necessities to skyrocket.

You can call me extreme, but the reality of this is extreme, these people, the global economic top one-tenth of one percent, are genocidal fascists carrying out a holocaust. Fascism has evolved. There is no need to get blood on your hands while rounding up people and putting them into concentration camps when you can do it through economic policy while sitting in a jacuzzi on a corporate jet, or in a three-piece custom-made Armani, completely detached and insulated from the world in which you plunder.

However, as what happens with all empires, greed and arrogance makes them overreach. The beaten down masses get to a point where they literally can’t live under these conditions. This desperation spreads throughout the population until it reaches a critical mass, then, suddenly, they rise up and the empire begins to collapse… Tunisia, Algeria, Egypt, Israel, (Northern Africa, the Middle East), Albania, Greece, Spain, Britain (Europe), Wisconsin…

The Economic Elite are overreaching and their empire is collapsing.

The decentralized global rebellion has begun…

Welcome to World War III.

Which side of history do you want to be on?

As a wise old friend once said, “You can’t be neutral on a moving train.”


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Super Congress: A Financial Death Panel That Will Help The Banks Loot & Rape America

  Posted by – August 6, 2011 at 4:55 pm – Permalink Source via Alexander Higgins Blog

Yayyy!!! Look at that debt ceiling GO! ;D
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The Super Congress will use dictatorial powers to bypass constitutional checks and balances and ram through a fascist agenda taking direct orders from the criminal bankers on Wall Street.

Saman Mohammadi
THE EXCAVATOR
August 6, 2011

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” – Napoleon

“The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. The financing of all public enterprise, and the conduct of the treasury will become matters of practical administration. Money will cease to be master and will then become servant of humanity.” – Abraham Lincoln

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.” – Thomas Jefferson

The power of life and death over what’s left of the American economy and the millions of people who depend on Social Security checks now rests in the hands of twelve bought off officials who will make up the new Super Congress.

Yayyy!!! Look at that debt ceiling GO! ;DYayyy!!! Look at that debt ceiling GO! ;D

According to NPR, Paul Ryan, Eric Cantor, Harry Reid, and Mitch Mcconnell could be tapped to serve as the top destroyers of America, taking direct orders from the criminal bankers on Wall Street.

The Super Congress will use dictatorial powers to bypass constitutional checks and balances and ram through a fascist agenda through the Congress under the flawed premise that they are bringing the fiscal house in order.

What is not mentioned is that America’s fiscal house was destroyed when Congress was bullied into handing over trillions of dollars to banks that committed fraud in September 2008. That act of high treason was preceded by another act of high treason seven years earlier, when the Bush administration staged the false flag 9/11 attacks.

The attacks were used to justify a manufactured war on terrorism that has channelled trillions of dollars from the American people into a tiny oligarchy that controls the financial-military-industrial complex.

But that history is missing in the corporate media. Instead of informing the American people about the robbery and treason that has taken place, news anchors and reporters are spreading lies and disinformation that Social Security is an unfunded liability and needs to be cut in order for America to have a sound economic future.

The Peter G. Peterson Foundation is behind a billion dollar propaganda campaign that is injecting these lies into the media to control the political discourse and help the financial parasites and oligarchs to loot Social Security and Medicare.

Back in April 2010, economist Dean Baker exposed Peterson’s trickery and corruption, writing:

The media should be jumping on deficit hawks like Peterson, asking him why anyone should take him seriously now when he was so incredibly and disastrously wrong about the economy just a few years ago. Unfortunately, Peterson doesn’t get questions like that; he just gets praise for his willingness to try to take Social Security and Medicare away from retired workers.

The problem is that Peterson has billions of dollars. To the national media and other actors in national policy debates, Peterson’s wealth matters much more than whether or not what he is saying makes sense.

Who is Pete Peterson and why does he want to kill Social Security?

Peterson is a connected insider and a surrogate for the financial parasites that have occupied and looted America since the creation of the private Federal Reserve Bank in 1913. Peterson served as the Chairman of the corrupt Council on Foreign Relations from 1985 to 2007, following the chairmanship of David Rockefeller. He was also Chairman of the Federal Reserve Bank of New York from 2000 to 2004, the most important of the Federal Reserve banks.

Peterson’s aims are the aims of the global private banking cartel that wants to get rid of the social safety net, destroy the American middle class, abolish nation states, and establish a new world authoritarian government that they will control.

On May 25, 2010, Jane Hamsher wrote an article that focused on the political foundations that are funded by Peterson to deliver the false message to the American people that the Social Security System is broken. Hamsher said:

Many of the efforts Peterson funds focus on teaching young people. The message that social security is in trouble, and will not be there for you when you get old unless it is “fixed,” has been a key tenet of Peterson’s campaign. The 990 indicates that in addition to financing the propaganda film I.O.U.S.A., he spent $1,124,987 on MTV advertising. I’ve been told that this is a very compelling message to young staffers in the White House, who support the concept of cutting benefits in order to “save” Social Security.

If Pete Peterson, David Rockefeller, and other criminal financiers have their way, the American people’s pensions will be looted along with America’s national infrastructure as soon as they are privatized and handed over to politically connected banks and corporations. The crooks in the Super Congress will try to sell the massive rip-off to the American people as “fiscal sanity.”

Once the riots begin and martial law is declared, the Super Congress will take over and run Washington while the rest of the Congress will be told to go home for their own safety.

The media propaganda machine might say something like: “Congressmen and Senators are being threatened with assassination as protests increase in Washington, so for their own safety they have been sent back to their districts with security guards assigned to them. Meanwhile, the Super Congress that was created back in August will stay behind to carry out their congressional duties.”

Can you see the bigger picture? It may not be evident now, but in six months or a year from now we will see the real reasons why the Super Congress was created.

Can you see the death and destruction that awaits America because of the treason that has been committed against the American people and U.S. Constitution?

The reason this new power grab by the Super Congress is so dangerous is because it represents the official end of constitutional government in the United States. Combine the power of the Super Congress with the power of dictatorial executive orders that have been used by Bush and Obama, and what you get is the absolute destruction of freedom, the American Constitution, and the rule of law.

The Super overlords in the new imperial Congress and President Obama will force austerity cuts on the American people, just like the paid-off politicians are doing in Greece. America will go through what Greece is going through right now, and what Argentina went through in the beginning of the last decade except it will be ten times worse in America.

And who is responsible for the collapse of nations and the destruction of national economies? The traitorous and criminal parasites who control the private Federal Reserve Bank, IMF, WTO, and World Bank.

They are not capitalists and representatives of the free-market, they are corporate fascists and oligarchical monopolists. So don’t blame capitalism for America’s destruction. Blame plutocracy. Blame stupidity. Blame media brainwashing. Blame treason.

Investigative journalist Greg Palast covered the IMF rape of Argentina. On August 12, 2001, Palast wrote in an article called, Who Shot Argentina? The Finger Prints On the Smoking Gun Read ‘I.M.F.’:

Next to the still warm corpse of Argentina’s economy, the killer had left a smoking gun with his fingerprints all over it.

The murder weapon is called, “Technical Memorandum of Understanding,” dated September 5, 2000. It signed by Pedro Pou, President of the Central Bank of Argentina for transmission to Horst Kohler, Managing Director of the International Monetary Fund.

The IMF vultures have gobbled numerous third-world nations in the last few decades and left millions of human beings to rot and die like animals. But America is different. You can not gobble up a nation where the people have more guns than the government.

Plus, there is a massive political awakening happening in America. The American people are waking up to the fact that America has been financially and spiritually occupied since 1913 by the same parasitic financial system that was defeated by George Washington, Thomas Jefferson, John Adams, Benjamin Franklin, and the revolutionary American colonists.

There was a counter revolution in the late 19th and early 20th century. America, like most other nations, was turned into a colony of a global financial empire that treats nations in the same way that prisons are treated. The people are worked to death and their wealth is stolen from them through an income tax that goes directly to the managers of the global financial cartel who contribute nothing of value to society.

The money that global financiers lend to national governments through their private central banks is made out of thin air. And when they stop lending, the economy stops and people die.

On May 4, 2010, Palast said on the Alex Jones show that there is an economic crisis and an unemployment crisis because there is no credit in the economy:

Obama made a claim that he saved the financial system. No he didn’t. He saved the financiers, and he doesn’t seem to understand there is a difference between financiers who were bailed out and the financial system. Try to get a loan today. Try to get a mortgage today. You can’t. If you’re a small business you can’t borrow money today. It’s impossible. No one will give you money. There is no credit in the system. That’s why we’re on our knees.

The financiers at the Federal Reserve who are holding America hostage and destroying the American economy can be classified as financial terrorists and war criminals. They are engaging in economic warfare against the American people. Other nations that are ruled by the IMF and private global central banks are also being financially conquered.

“The people of Greece need to stand up to financial terrorism because Greece goes down, Ireland goes down, Portugal goes down, Spain goes down, and they’re going to come to the U.S. And the U.S. is going down by the same financial terrorists,” said financial analyst Max Keiser in June.

The time for resistance to the financial occupation of the planet has come. This is our generation’s fight. We must get rid of the IMF, World Bank, WTO, Federal Reserve Bank, and other private central banks that are looting every country they’re in.

Public banking is an idea whose time has come.

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10 Indications The United States Is A Dictatorship

  Posted by – May 22, 2011 at 6:33 pm – Permalink Source via Alexander Higgins Blog

The Bill Of Rights Has Been Destroyed By The Patriot Act In The Name Of The War On Terror
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An in-depth review of the current role of the US Government in domestic and international affairs reveals the US has indeed become a totalitarian democracy.

“Power corrupts, and absolute power corrupts absolutely” — Lord Acton

Activist Post 10 Indications The United States Is A Dictatorship

Dees Illustration - The Patriot Act Killed The Bill Of Rights In the Name Of The War On TerrorDees Illustration – The Patriot Act Killed The Bill Of Rights In the Name Of The War On Terror

Dees Illustration

For a people to be free, they must first be honest with themselves, their government, and the world at large.  History is filled with stories of free nations that fell under the spell cast by their governments who exploited the threat of terror.

In fact, numerous presidents in American history already have used various specific threats to sidestep their Constitutional restraints.  Today we are entering a nebulous world where our “enemy” cannot be defined, has no particular allegiance to one country, and is able to adopt new leaders at will.  Rather than encourage a sense of resilience and independence in its citizens, America has chosen to amplify the terror threat in order to concentrate power in the hands of the State.  The very first signpost on this historically familiar road to tyranny is an atmosphere of hate, suspicion, and vindictiveness.  It first begins as an outwardly directed aggression and then rather abruptly turns inward upon itself.

The good news is that freedom is won and lost in our hearts and minds.  It is for this reason that we must state the obvious:  we have clearly passed through the first “atmospheric” stage of approaching dictatorship, and have now entered the second — the open behavior of a dictatorship in the United States.

War Mongering Under The Facade Of American Liberty War Mongering Under The Facade Of American Liberty

2. Crushing peaceful protest: Despite the current mission to defend protesters living in dictatorships overseas, when George Bush brought “free speech zones” to America it effectively spelled the end of peaceful, lawful street protest.  Now the full force of brutality and surveillance has been unleashed upon the very people intent in stopping it through peaceful means.  It is as sure a sign as any about totalitarian intentions, when anti-war activists have become one of the targets.  The activist is beginning to equal terrorist in the all-seeing eye of the State, and any street gathering is a sure sign to let loose all of the riot weapons that were formerly used against insurgents on foreign battlefields.  One look at the G20 protest in Pittsburgh,  a recent Illinois University event, and the ongoing travesty of the torture and incarceration of Bradley Manning, and we can begin to see through the propaganda of White House officials when they talk about terrible dictators in other nations crushing dissent.

3. Checkpoints: The slow acclimation of the populace to military-style checkpoints began first as border control operations up to 100 miles inland in what the ACLU calls the Constitution Free Zone.  However, this has rather quickly morphed into local traffic stops across the country for “unsavory” characters such as those targeted by the Amber Alert system and DUI checkpoints.   Though apparently well meaning, we are now far beyond even loosely suspected criminal activity, as VIPR teams have been introduced to take over public transportation and events.  The TSA tyranny has hit the streets of America, now forming a de facto internal passport system straight out of the totalitarian playbook.  The expanding checkpoint system dovetails with new initiatives such as the No Ride List proposal of Chuck Shumer, building upon the No Fly List already in place.  These no-travel lists are extrajudicial, secret, and form a guilty-until-proven innocent framework that subverts freedom instead of protecting it.  Incidentally, this element of constant suspicion is exactly what leads to a citizen spy network.

Patriot AppPatriot App

4. Citizen spy network: Dictatorships know how difficult it is to rule over large populations with only the relatively small numbers of military and police. Despite the lessons of terror created by citizen surveillance that the East German Stasi files left us to examine, just such a network has been openly introduced to present-day America — and now it’s even more high-tech and populated.  Secret black budget projects organized through the NSA like Perfect Citizen is just one among many.  Our head of Homeland Security, Janet Napolitano — in partnership with retailer Wal-Mart – kicked off the See Something, Say Something program, which goes beyond the already high-tech surveillance apparatus of the NSA and turns each of us into an unpaid employee of the police state.  Similarly, the web of cameras and data mining is far too massive for even the well-funded NSA, but with gadgets at our disposal we can now download apps to enable spying on our neighbors.  Most dangerous of all, though, is new legislation introduced by Peter King that enshrines Janet Napolitano’s program and would provide immunity for accusers “acting in good faith” while reporting suspicious activities.  This is guaranteed to lead to false arrests and disappearances, just as it has on every occasion throughout history when a society’s fear becomes self-directed.

5. Executive Orders: This is means by which a dictator can come to power in the United States, despite a framework of checks and balances.  Any time a country has centralized its power to the executive branch by erasing the checks and balances of separate legislative and judicial bodies, the result has been dictatorship.  And this normally happens when national security is “threatened.”  The Constitution is clear, however: only the legislature (Congress) can make laws.  Yet, the use of Executive Orders has increased, beginning with President Clinton who came under fire for his abuse of this power, becoming one of only two presidents (the other was Truman’s E.O. 12954) to have an Executive Order struck down by the courts.   His successors seem only to have been encouraged. Clinton issued 14, George W. issued over 60, and Obama is at 26 with many more to be expected if he wins a second term. Among the most egregious of Obama’s orders is the ability to hold detainees indefinitely even after a court has found them not guilty.  Executive Orders also form the basis for control over regulatory agencies, which then impose the directives.  While it seems multi-layered with potential checks and balances, all directives can now be issued top-down in dictatorial fashion.

Feds Crackdown on Indepedent FarmsFeds Crackdown on Indepedent Farms

6. Control of regulatory agencies: This is the more insidious and, ultimately, dangerous tactic used by dictatorships.  Dictatorship through regulation invades every facet of society without relying only upon overt violence.  As mentioned above, only the legislature can make laws.  However, the legislature has created “regulatory bodies” which make de facto laws through “violations” that rob us of freedom.  There is no clearer example at the moment than the FDA, which has brought in near-total food control.  The FDA is working in concert with a global agenda being foisted upon us through the Codex Alimentarius commission in Europe which essentially renders anything healthy as toxic, and all that is toxic as healthy.   Regulatory agencies in the United States have engendered a system where the corporate-government revolving door leads to corruption and consolidation — not free markets.  The current regulations are opposed to the principles of freedom and independence, and favor only those in positions to make money from more control; so more control and less freedom is what we can expect under these federal directives controlling the states.

7. President declares war unilaterally: Despite the parade of lies that led to wars in Iraq and Afghanistan, it pales in comparison with the new war in Libya and other interventions and sanctions throughout the Middle East and North Africa.  Through Executive Orders, outlined above, the President can declare war so long as there is a resolution passed by Congress.  This has been dispensed with through Obama’s illegal wars, and it appears that Congress could go even further by ceding its power completely to the president.  The disregard for Congressional approval is already dictatorial, but if this last step is taken we will effectively be living in a permanent state of war tantamount to WWIII that will be controlled at the sole discretion of the current and future presidents.  This unilateral power to drag nations into war without checks and balances is a hallmark of dictatorships where entire countries are swept along purely by the ideology of their leader. As Ron Paul and Lew Rockwell have stated, “We have a dictatorship when it comes to foreign policy.”  With the latest development, it is actually a dictatorship when it comes to domestic policy as well, since America’s espionage network has turned inward, and this new presidential power would not be limited to overseas actions.

Widespread use of torture by the US GovernmentWidespread use of torture by the US Government

8. Torture: Torture has long been a tactic used by America. In fact it runs the leading school on its methods.  The School of the Americas (now called WHINSEC) has been responsible for training Latin American dictators and their thugs on how to intimidate the local population and rule with an iron fist.  However, the torture debate has hit mainstream media in a serious discussion about its effectiveness, especially following the assassination of Osama bin Laden.  Aside from the despicable morals involved, torture doesn’t work for intelligence gathering, according to experts.  Furthermore, the legalization of torture was what really brought the dreaded Russian secret police out into the open.  When such a declaration is made, it is literally a recruiting strategy to find the criminals and sadists who would love to be part of such a system.  Torture is not normal work for normal people; it is the work of psychopaths such as Dick Cheney who loves the tactic of waterboarding so much that he has stated it should be brought back and used more widely.  No nation that uses torture to obtain confessions can be called legitimate. It is only used as a tool of intimidation and oppression by totalitarian regimes.

9. Forced labor camps (gulags): This is when we know that a totalitarian society has arrived in full and our society is run completely by coercion.  As Naomi Wolf has illustrated, “With its jails in Iraq and Afghanistan, and, of course, Guantánamo in Cuba, where detainees are abused, and kept indefinitely without trial and without access to the due process of the law, America certainly has its gulag now.”  Additionally, a silent gulag has already been created inside America, starting with the nation’s prisoners who are increasingly locked up within a for-profit prison-industrial system that makes money both on the construction of prisons as well as the cheap labor force.  The Defense Department itself pays prisoners 23 cents per hour to build its weapons systems, which is clearly a type of slave labor.  One might immediately argue that there is a huge difference between real prisoners and innocent people swept off the streets as they were in Stalinist Russia, for example, or in modern day North Korea and China.  That is to presume, however, that everyone in prison is guilty; and, if they are, that the crimes which have sent them there really constitute offenses worthy of prison sentences.   America has the world’s largest prison population and the highest incarceration rate precisely because nearly everything is a jail-time crime, and there is money to be made by the growing corporate prison system.  The War on Drugs alone has led to a disproportionate number of inmates for non-violent offenses among the already 2.4 million in jail and the 5 million on probation.  With the economy imploding, even debtors prisons have made a comeback.  Although FEMA camps are still relegated to fringe conspiracy theory, we should be wary of the potential endgame for such a proven system of oppression.  Through Continuity of Government, national emergency directives would openly suspend the Constitution and could possibly lead once again to internment camps in America.

Government Control Of The Media And Censorship Of The InternetGovernment Control Of The Media And Censorship Of The Internet

10. Control over all communications (propaganda):  Once the physical framework of dictatorial control has been set up, then the justification for its continued presence can commence.  The type of high-tech control grid now put into place in The United States to this point has only been explored in works of fiction such as 1984, which has led Paul Craig Roberts to draw a correct parallel.  A public emergency announcement system has in fact been in place since the ’50s, whereby the president can interrupt television and radio to deliver critical messages.  However, this has been recently expanded even beyond the Telecommunications Act of 1996 as the FCC voted to mandate (PDF) “the first-ever Presidential alert to be aired across the United States on the Nation’s Emergency Alert System (EAS).”  Now, with the arrival of the trackable smartphone that can be hijacked to bring government messages (emergency or not) we find ourselves “willing” participants in a scenario reaching far beyond 1984.  Using the bin Laden assassination and the threat of guaranteed reprisal, the government has announced that the president will break into these private networks to carry PLAN government messages and warnings; and there is no opt-out. This is slated to go even further, as Infowars has reported: “All smart devices have federally-mandated control and kill switches added. This will give the government total control over incoming information to all smart phones regardless of manufacturer. These policies dovetail with the roll out of Smart Meters and the new Google controlled smart homes which will send messages over the power-lines to your appliances to control power consumption or simply cut the power. In addition, new ‘green’ lighting systems are being installed in government buildings which send and receive data through controlled pulses of light. And now the Pentagon wants the authority to run it all.” At the same time, we have seen the buildup in rhetoric leading toward Internet control.  As always, an unsavory element of society (pirating) has been used as one of the pretexts to introduce government control over private industry, while cybersecurity lays claim to total control over the infrastructure for national emergencies.  Ideologically, Obama advisor, Cass Sunstein, has proposed a fairness doctrine for the Internet that would enable a government overlay on private websites that would offer counter opinions to anti-establishment content.  We are approaching a situation worse than China, where both mental intrusion via propaganda and physical intrusion via systems control are merging.  It is not comforting to know, also, that the president made a shocking claim recently that he can censor unclassified documents.  There is clearly a concerted effort to take over all forms of information, permitting the government to alter it or censor it before consumption by its citizens.  In any other country we would call this a dictatorship.

It would appear that the United States should be a called a dictatorship based on the above criteria. Once the atmosphere is established, average participants need not be part of a conspiracy, as they tend to unquestioningly go with the flow.  However, we must acknowledge that the U.S. is in a vastly different position than totalitarian regimes of the past, as well as her contemporaries. America has a history that is built upon the foundation of resistance to dictators.  This memory needs to be invoked by following the protections outlined in our founding documents, particularly the power of the states to resist Federal tyranny.  The protections therein can be restored once we have the courage to admit how much freedom we have lost, then refuse to succumb to a fear-based perception of reality.  Only then will Liberty, Love and Peace prevail!

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Epic Santelli Rant – The Real Spectacle Is Making Trillions In Debt And Robbing The Poor To Pay It Back

  Posted by – September 2, 2011 at 6:17 pm – Permalink Source via Alexander Higgins Blog

Santelli - The Real Spectacle Was Creating Trillions In Debt
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Santelli rants the real spectacle is running up of in trillions of debt in the first place and now stripping the poor of everything they have to pay it back

“The darn spectacle was getting up to these trillion dollars worth of debt and then thinking some action to try to address that is the spectacle is exactly half but backwards just as the interpretation if the government dumps a lot of money in the economy, they’ll look like they’re doing something,” says CNBC’s Rick Santelli.

Responding to a comment that the real shame was the Washington failed to compromise, Santelli says “What a great compromise to be Greece. What a great compromise! You talk about compromise. HURRAH! We compromise! Greece, here we come! Get the flaming cheese going!”

The response, “That’s not the compromise. That’s not the future, rick. The future’s not the idea that if we compromise we are going to be Greece. We compromise by…”

Santelli responds, [caps because he is yelling, flaming mad, and pissed off at this point] “YOU’RE NOT ADDRESSING THE PROBLEM WHEN YOU TALK ABOUT COMPROMISE AND CUTTING ENTITLEMENTS. YOU ARE STRIPPING THE POOR OF EVERYTHING THEY HAVE. THEY WON’T HAVE ANYTHING WHEN THE COUNTRY IS BROKE AND THE LINES AT THE UNEMPLOYMENT WILL BE EXPONENTIALLY LARGER. WHAT A GREAT STRATEGY THAT IS!

http://plus.cnbc.com/rssvideosearch/action/player/id/3000043439/code/cnbcplayershare

CNBC reports:

Santelli’s Rant on Govt. $ Printing

Fri 02 Sep 11 | 08:30 AM ET

“The darn spectacle was getting up to these trillion dollars worth of debt and then thinking some action to try to address that is the spectacle is exactly half but backwards just as the interpretation if the government dumps a lot of money in the economy, they’ll look like they’re doing something,” says CNBC’s Rick Santelli.
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Bringing the ‘Bush Six’ to Justice [for torture](ie in Spain not US)

Bringing the ‘Bush Six’ to Justice

ie [for legitimizing torture]

( in Spain, but not in the US, of course)

Michael Ratner
Sat 08 Jan 2011
| Share

If those responsible for the Bush administration’s torture policy will not face charges in the US, then in Spain it must be

Today, the Centre for Constitutional Rights filed papers encouraging Judge Eloy Velasco and the Spanish national court to do what the United States will not: prosecute the “Bush Six”. These are the former senior administration legal advisors, headed by then US Attorney General Alberto Gonzales, who violated international law by creating a legal framework that materially contributed to the torture of suspected terrorists at US-run facilities at Guantánamo and other overseas locations.

Friday’s filing provides Judge Velasco with the legal framework for the prosecution of government lawyers – a prosecution that last took place during the Nuremberg trials, when Nazi lawyers who provided cover for the Third Reich’s war crimes and crimes against humanity were held accountable for their complicity.

CCR would prefer to see American cases tried in American courts. But we have joined the effort to pursue the Bush Six overseas because two successive American presidents have made it clear that there will be no justice for the architects of the US torture programme, or any of their accomplices, on American soil.

Thanks to the US diplomatic cables recently released by WikiLeaks, we now know why seeking justice abroad has also been fraught with difficulty – why there have been so many delays and even dismissals. The same US government that will not pursue justice at home, not even when the CIA destroys 92 videotapes that show detainees being tortured, has put a heavy thumb on the scales of justice in other countries as well.

During the Bush presidency, the US intervened to derail the case of German citizen Khaled el-Masri, who was abducted by the CIA in 2003 and flown to Afghanistan for interrogation as part of the U.S. “extraordinary rendition” program—until they realized they had kidnapped the wrong man and dumped el-Masri on the side of an Albanian road. A leaked 2007 cable reveals the extent both of U.S. pressure and German collusion. In public, Munich prosecutors issued arrest warrants for 13 suspected CIA operatives while Angela Merkel’s office called for an investigation. In private, the German justice ministry and foreign ministry both made it clear to the US that they were not interested in pursuing the case. Later that year, then Justice Minster Brigitte Zypries went public with her decision against attempting extradition, citing US refusal to arrest or hand over the agents.

Will this toxic combination of American pressure and a European ally’s acquiescence derail justice in Spain, as well?

This 1 April 2009 cable, released 1 December 2010, shows Obama administration officials trying their best to stop the prosecution of the Bush Six. They fret that “the fact that this complaint targets former administration legal officials may reflect a ‘stepping-stone’ strategy designed to pave the way for complaints against even more senior officials” and bemoan Spain’s “reputation for liberally invoking universal jurisdiction”. Chief Prosecutor Javier Zaragoza reassures the US that while “in all likelihood he would have no option but to open a case”, he does not “envision indictments or arrest warrants in the near future”, and will “argue against the case being assigned to Garzon” (a notoriously tough judge, who has since been removed from the case).

Judge Velasco, who has since been assigned to the case, has been scrupulous in his oversight. The Spanish court has thrice asked the US, in accordance with international law, “whether the acts referred to in this complaint are or are not being investigated or prosecuted”, and if so, “to identify the prosecuting authority and to inform this court of the specific procedure by which to refer the complaints for joinder”. Of course, no response to any of these requests has been received, because the Obama administration has no intention whatsoever of pursuing justice on this matter.

Democracy demands a fully functioning legal system – one that does not bend to hidden pressures and political agendas. We have faith that Judge Velasco will justify the US officials’ concerns about Spain’s independent judiciary, and its respect for international law, and move forward with the Bush Six case.
January 07, 2010, The Guardian

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Did the US Government Have an American Teenager Beaten In Kuwait?

— By Nick Baumann

| Thu Jan. 6, 2011 8:55 PM PST
— Illustration by Sarah Baumann

UPDATE, January 7, 7:30 p.m.: Gulet Mohamed “was not detained at the behest of the United States government,” Philip Crowley, a State Department spokesman, told reporters on Friday. “We are aware of his detention. We have provided him consular services, and we are ensuring his well-being, as we would for any citizen in detention.” Mother Jones will have more as this story continues to develop. Keep reading below for why Mohamed’s family and lawyer think the US was involved.


Gulet Mohamed, an American teenager detained in Kuwait who claims to have been brutally interrogated there, was arrested and questioned by Kuwaiti security on behalf of the US government, his lawyer and family members charged on Thursday.

Mohamed, a 19-year-old from Alexandria, Virginia, called the New York Times‘ Mark Mazzetti and Salon‘s Glenn Greenwald this week via a cell phone another inmate smuggled into the prison where he is being held. In the interviews, Mohamed recounted being severely beaten. He said he was forced to stand for hours, and that interrogators threatened to torture him with electricity and imprison his mother.

Questions that Kuwaiti interrogators asked Mohamed “indicated a level of knowledge about his family and actions” that could only have been obtained from American law enforcement, the teen’s lawyer, Gadeir Abbas, told the two reporters at a sparsely attended press conference Thursday afternoon. In fact, he added, interrogators mentioned a specific, off-the-cuff conversation Mohamed had at a mosque in the US some time ago—a conversation that he claimed they could only have learned about through surveillance. Since the idea that Kuwaiti intelligence forces are spying on US mosques strains credulity, Abbas and Mohamed’s family believe American officials were passing information to the Kuwaitis.

Mohamed’s case is an example of “proxy detention,” Abbas said. Instead of the US detaining and interrogating Mohamed, or using extraordinary rendition to send him to be tortured in Egypt or Syria, the government is “taking one step back and trying to accomplish the same goal: the unlawful torture and detention abroad of an American citizen by a country that is known to engage in human rights abuses,” Abbas argued.

Salon‘s Greenwald has suggested that Kuwaiti interrogators’ questions about Anwar al-Awlaki, the American cleric and Al Qaeda propagandist who is in hiding in Yemen, are further evidence of American involvement in Mohamed’s detention. Al-Awlaki has “become an obsession of the Obama administration,” Greenwald wrote Thursday, and “the idea that [Kuwait] would do this to an American citizen without the American government’s knowledge, if not its assent and participation, is implausible in the extreme.”

In a letter to the Justice Department sent Thursday, Abbas wrote that  “the manner of his detention and the questions asked of Mr. Mohamed indicate to him that he was taken into custody at the behest of the United States.” The Justice Department did not respond to a request for comment.

Zahra Mohamed, one of Gulet’s six older siblings, offered a tearful defense of her brother at Thursday’s press conference and urged the US government to allow him to return home. In many ways, his family says, Gulet was a normal American kid. He played basketball, had an iPhone, and obsessed with the game Madden NFL. But like many American teenagers, Gulet had a bad case of wanderlust. He wanted to travel abroad to learn more about his heritage, Zahra explained. He begged his mother to let him leave: after all, he’d never known his father, and he wanted to learn Arabic. Traveling to the Middle East would let him get to know his father’s side of the family, get in touch with his roots, and learn the language of the Quran.

He visited Yemen’s capital, Sanaa, sometime around March 2009, and stayed with family there for three weeks. But his family (especially his mother) feared for him, his sister told Mother Jones, and eventually convinced him to leave. He then went to Somalia, where he stayed with another part of his late father’s side of the family.

Gulet didn’t like Somalia—it was too hot, and he kept getting food poisoning. So he went to stay with another uncle in Kuwait, and buckled down to finish his study of Arabic. He never met with militants like al-Awlaki, he told the Times: “I am a good Muslim. I despise terrorism.” He went to renew his three-month Kuwaiti visa several times, his relatives said, each time with no problem. But in December, when he applied for another, he was seized and thrown in prison. After hearing from Gulet every day for months (he’d sometimes ask his sister how Carmelo Anthony, his favorite basketball player, was doing), his family didn’t hear from him for a week.

In a late December conference call using the smuggled cell phone, Gulet told his family he had been tortured. They were shocked. “He is a kid, he hasn’t done anything,” Zahra said Thursday. “All we want is for him to come home; that’s it.”

Kuwaiti officials have told Gulet’s older brother, Mohed Mohamed, that they are ready to release Gulet, “have no interest” in him, and are only holding him “at the behest of the United States government,” Abbas said Thursday. Gulet told the Times that FBI agents visited him in prison “to tell him that he could not return to the United States until he gave truthful answers about his travels.” And American officials told the Times that Mohamed is on the no-fly list and cannot return to the US at this time.

Prohibiting a US citizen from returning to the US or conditioning a citizen’s right to return on answering questions is “absolutely illegal,” Ben Wizner, a staff attorney at the American Civil Liberties Union, told Mother Jones on Thursday.

But this isn’t the first time that US citizens have been detained abroad and questioned about their travels to Yemen and other Muslim countries, Wizner said. Often, these Americans are told they are on the no-fly list and forbidden from returning to the US. Those people do have a way out, however. The ACLU is in the midst of a long legal fight over the no-fly list. As part of that lawsuit, the group sought to obtain a court order preventing the government from using the list in these types of situations. After that, the government “backed down, capitulated, and arranged for our clients abroad to be repatriated,” Wizner says. “Ever since that, every time someone has contacted us on behalf of a citizen stranded abroad we’ve been able to arrange for that citizen to get back using the threat of litigation.”

Gulet Mohamed has not been charged with any crimes. “I went to school, studied the US Constitution,” his sister says. “What happened to the Constitution? I feel like that has been lost. He’s such a kid, a little kid.”

Nick Baumann covers national politics and civil liberties issues for Mother Jones’ DC Bureau. For more of his stories, click here. You can also follow him on twitter. Email tips and insights to nbaumann [at] motherjones [dot] com. Get Nick Baumann’s RSS feed.

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Obama and GOPers Worked Together to Kill Bush Torture Probe

— Zuma/Paul Morse 

A WikiLeaks cable shows that when Spain considered a criminal case against ex-Bush officials, the Obama White House and Republicans got really bipartisan.

— By David Corn

Wed Dec. 1, 2010 2:47 PM PST

In its first months in office, the Obama administration sought to protect Bush administration officials facing criminal investigation overseas for their involvement in establishing policies the that governed interrogations of detained terrorist suspects. A “confidential” April 17, 2009, cable sent from the US embassy in Madrid to the State Department—one of the 251,287 cables obtained by WikiLeaks—details how the Obama administration, working with Republicans, leaned on Spain to derail this potential prosecution.

The previous month, a Spanish human rights group called the Association for the Dignity of Spanish Prisoners had requested that Spain’s National Court indict six former Bush officials for, as the cable describes it, “creating a legal framework that allegedly permitted torture.” The six were former Attorney General Alberto Gonzales; David Addington, former chief of staff and legal adviser to Vice President Dick Cheney; William Haynes, the Pentagon’s former general counsel; Douglas Feith, former undersecretary of defense for policy; Jay Bybee, former head of the Justice Department’s Office of Legal Counsel; and John Yoo, a former official in the Office of Legal Counsel. The human rights group contended that Spain had a duty to open an investigation under the nation’s “universal jurisdiction” law, which permits its legal system to prosecute overseas human rights crimes involving Spanish citizens and residents. Five Guantanamo detainees, the group maintained, fit that criteria.

Soon after the request was made, the US embassy in Madrid began tracking the matter. On April 1, embassy officials spoke with chief prosecutor Javier Zaragoza, who indicated that he was not pleased to have been handed this case, but he believed that the complaint appeared to be well-documented and he’d have to pursue it. Around that time, the acting deputy chief of the US embassy talked to the chief of staff for Spain’s foreign minister and a senior official in the Spanish Ministry of Justice to convey, as the cable says, “that this was a very serious matter for the USG.” The two Spaniards “expressed their concern at the case but stressed the independence of the Spanish judiciary.”

Two weeks later, Sen. Judd Gregg (R-N.H.) and the embassy’s charge d’affaires “raised the issue” with another official at the Ministry of Foreign Affairs. The next day, Zaragoza informed the US embassy that the complaint might not be legally sound. He noted he would ask Cándido Conde-Pumpido, Spain’s attorney general, to review whether Spain had jurisdiction.

On April 15, Sen. Mel Martinez (R-Fla.), who’d recently been chairman of the Republican Party, and the US embassy’s charge d’affaires met with the acting Spanish foreign minister, Angel Lossada. The Americans, according to this cable, “underscored that the prosecutions would not be understood or accepted in the US and would have an enormous impact on the bilateral relationship” between Spain and the United States. Here was a former head of the GOP and a representative of a new Democratic administration (headed by a president who had decried the Bush-Cheney administration’s use of torture) jointly applying pressure on Spain to kill the investigation of the former Bush officials. Lossada replied that the independence of the Spanish judiciary had to be respected, but he added that the government would send a message to the attorney general that it did not favor prosecuting this case.

The next day, April 16, 2009, Attorney General Conde-Pumpido publicly declared that he would not support the criminal complaint, calling it “fraudulent” and political. If the Bush officials had acted criminally, he said, then a case should be filed in the United States. On April 17, the prosecutors of the National Court filed a report asking that complaint be discontinued. In the April 17 cable, the American embassy in Madrid claimed some credit for Conde-Pumpido’s opposition, noting that “Conde-Pumpido’s public announcement follows outreach to [Government of Spain] officials to raise USG deep concerns on the implications of this case.”

Still, this did not end the matter. It would still be up to investigating Judge Baltasar Garzón—a world-renowned jurist who had initiated previous prosecutions of war crimes and had publicly said that former President George W. Bush ought to be tried for war crimes—to decide whether to pursue the case against the six former Bush officials. That June—coincidentally or not—the Spanish Parliament passed legislation narrowing the use of “universal jurisdiction.” Still, in September 2009, Judge Garzón pushed ahead with the case.

The case eventually came to be overseen by another judge who last spring asked the parties behind the complaint to explain why the investigation should continue. Several human rights groups filed a brief urging this judge to keep the case alive, citing the Obama administration’s failure to prosecute the Bush officials. Since then, there’s been no action. The Obama administration essentially got what it wanted. The case of the Bush Six went away.

Back when it seemed that this case could become a major international issue, during an April 14, 2009, White House briefing, I asked press secretary Robert Gibbs if the Obama administration would cooperate with any request from the Spaniards for information and documents related to the Bush Six. He said, “I don’t want to get involved in hypotheticals.” What he didn’t disclose was that the Obama administration, working with Republicans, was actively pressuring the Spaniards to drop the investigation. Those efforts apparently paid off, and, as this WikiLeaks-released cable shows, Gonzales, Haynes, Feith, Bybee, Addington, and Yoo owed Obama and Secretary of State Hillary Clinton thank-you notes.

David Corn is Mother Jones’ Washington bureau chief. For more of his stories, click here. He’s also on Twitter and Facebook. Get David Corn’s RSS feed.

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Taxpayers Paying Torture Contractors’ Legal Bills

— By Nick Baumann

| Fri Dec. 17, 2010 1:15 PM PST

Taxpayers are currently paying the legal bills for Jim Mitchell and Bruce Jessen, two CIA contractors who reportedly helped plan and execute the Bush administration’s “enhanced interrogation” program, the Associated Press’ Adam Goldman and Matt Apuzzo reported Thursday night. The CIA agreed to pay up to $5 million to cover legal fees for the two men—far more than the standard amount that would be covered for employees of the agency (during the Bush administration, it was standard practice for CIA officers to pay half of the cost of insuring themselves against possible legal action).

Mitchell and Jessen were reportedly at the center of the effort to reverse-engineer interrogation methods from the military’s Survival, Evasion, Resistance, and Escape (SERE) training. The SERE training itself was based on interrogation methods that Chinese communists used to extract confessions from American prisoners during the Korean War. Many, if not most, of those confessions were false. In other words, Mitchell and Jessen developed interrogation methods based on training that was based on Chinese techniques the US had described as torture. (The Bush administration reportedly paid them between $1,000 and $2,000 per day to do it.)

Later, Mitchell and Jessen reportedly performed some interrogations—including waterboarding—themselves. The waterboarding technique Mitchell and Jessen reportedly used on suspected Al Qaeda members Abu Zubaydah and Abd al-Nashiri was different from the simulation used in SERE because it was “‘for real'” and “more poignant and convincing,” a CIA inspector general’s report later concluded.

It has long been the talk of the town in Washington that Mitchell and Jessen are targets—and perhaps the top or even only targets—of federal prosecutor John Durham’s probe into what human rights groups call “torture-plus.” Durham’s investigation is looking at whether any interrogations of terrorist suspects went beyond the already brutal techniques authorized by John Yoo’s so-called “torture memos.”

The rumor about Durham targeting Mitchell and Jessen makes sense: politically, it would be far easier for the Obama administration to pursue prosecutions against Mitchell and Jessen, who were outside contractors, than it would be to go after CIA employees or Bush administration officials. (The fact that someone leaked a story about Mitchell and Jessen’s legal defense to the AP could also be read as a hint that the men are in Durham’s sights.)

Human rights and civil liberties advocates won’t be satisfied with a prosecution of Mitchell and Jessen—even a successful one. Many activists would prefer a full, 9/11 Commission-style investigation and report to a prosecutorial campaign that focuses on just a few of the many figures involved in Bush-era interrogation, detention, and rendition practices.

The relevant comparison is the Abu Ghraib detainee abuse investigation, which resulted in jail terms for low-level troops but no higher-level accountability, even though many of the techniques applied to prisoners at Abu Ghraib had been authorized for use by the military and/or the intelligence community. Human rights activists hated the outcome of that investigation. Errol Morris even made a movie about it. And as Adam Serwer points out, the troops at Abu Ghraib didn’t get close to the deal Mitchell and Jessen did.

Anyway, if the rumors are true and Durham really is zeroing in on Mitchell and Jessen, America could soon see a scenario in which taxpayers are paying not only for a torture prosecution that won’t satisfy the demands of the human rights community but also for the massive, top-notch defense team that will be trying to derail that same prosecution.

Here’s a video from ABC News, which tried to get Mitchell and Jessen to speak on the record in April of 2009. Both refused:

In other news, taxpayers are also apparently going to have to foot the bill for Rep. Pete King’s (R-N.Y.) McCarthy-esque hearings investigating the American Muslim commmunity.

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Nick Baumann covers national politics and civil liberties issues for Mother Jones’ DC Bureau. For more of his stories, click here. You can also follow him on twitter. Email tips and insights to nbaumann [at] motherjones [dot] com. Get Nick Baumann’s RSS feed.

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CIA Tapes Found Under Desk Feature 9/11 Plotter’s Interrogation

— By Nick Baumann

| Tue Aug. 17, 2010 1:05 PM PDT
— Ramzi Binalshibh | Red Cross Photo. 

The Associated Press reports on the content several Bush-era interrogation tapes the CIA supposedly found under an employee’s desk in 2007. According to the AP story, the mysterious tapes depict the questioning of 9/11 plotter Ramzi Binalshibh in a prison in Morrocco—but they just happen to be free of any evidence of harsh treatment:

Discovered in a box under a desk at the CIA, the tapes could reveal how foreign governments aided the United States in holding and interrogating suspects. And they could complicate U.S. efforts to prosecute Binalshibh, who has been described as one of the “key plot facilitators” in the Sept. 11, 2001, attacks.

Apparently the tapes do not show harsh treatment—unlike videos the agency destroyed of the questioning of other suspected terrorists.

The two videotapes and one audiotape are believed to be the only existing recordings made within the clandestine prison system and could offer a revealing glimpse into a four-year global odyssey that ranged from Pakistan to Romania to Guantanamo Bay.

The tapes depict Binalshibh’s interrogation sessions in 2002 at a Moroccan-run facility the CIA used near Rabat, several current and former U.S. officials told The Associated Press. They spoke on the condition of anonymity because the videos remain a closely guarded secret.

In 2005, the CIA destroyed nearly 100 tapes that featured accused Al Qaeda plotters Abu Zubaydah and Abd al-Nashiri being waterboarded. At that point, “officials believed they had wiped away all of the agency’s interrogation footage,” the AP says, but that was apparently not the case. In late October 2008, the government told a federal judge it had found what we now know are the Binalshibh tapes. But nothing was known about their contents until Tuesday.

The reported absence of harsh interrogation from the Binalshibh tapes is awfully convenient. Morocco (where Binalshibh’s interrogations took place) is the same country where British detainee Binyam Mohamed says an interrogator cut his penis with a scalpel and CIA officials have told reporters that Binalshibh was subjected to “enhanced interrogation,” so it stands to reason that any tapes that “do not show harsh treatment” don’t constitute a full record of Binalshibh’s time abroad. US Attorney John Durham is leading an investigation of the CIA’s destruction of the interrogation tapes, and the AP story includes a note that Durham is now investigating the Binalshibh tapes as well. Good.

Over at FDL, Marcy Wheeler offers some “wildarsed speculation” that the Binalshibh tapes have been altered in the same way as those that once depicted the interrogation of Abu Zubaydah (and now show “nothing but snow”). Here’s the ACLU’s Alex Abdo commenting on the revalations:

Today’s report is a stark reminder of how much information the government is still withholding about the Bush administration’s interrogation policies. Many records critical to real accountability remain secret, such as transcripts in which prisoners tell of the abuse they suffered in CIA custody and the presidential directive authorizing the CIA to establish secret black sites.

The content of these tapes could provide insight into the U.S.’s troubling collaboration on interrogations with Morocco, a country routinely cited by the State Department for its use of torture. Only with real transparency and accountability for these abuses can the government turn the page on this dark chapter in our history.

The “under-the-desk” tapes aren’t the only interrogation records that survive. Audio and video records of Mohammed al Qahtani’s interrogation still exist, too. Foreign observers of interrogations may have made their own recordings. Also, there has always been talk of a parallel, digital recording system at some overseas prisons and black sites. And the CIA medical personnel monitoring “enhanced” interrogations must have had some way to review sessions at which they couldn’t be present, right? Even if the CIA really did destroy all the visual records of waterboarding, “walling,” stress positions, and so on, it would have a lot more trouble getting rid of all the paper records describing the content of the tapes. There’s no question that there’s enough information out there to paint a pretty detailed picture of the rendition, detention, and interrogation program. America just has to muster up the political will to look for it.

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Nick Baumann covers national politics and civil liberties issues for Mother Jones’ DC Bureau. For more of his stories, click here. You can also follow him on twitter. Email tips and insights to nbaumann [at] motherjones [dot] com. Get Nick Baumann’s RSS feed.

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Posted in Uncategorized | Leave a comment

what is “well regulated militia”

 

>

See

Norway Oslo 2011Terrorist Conservative Christian Anti-Muslim Crusader > HERE

NOTE: he is one of 12 members of a secret right-wing anti-multicultural, anti-Marxist, anti-feminist, anti-Islamic society,

the ‘Knights Templar’

founded in London in April 2002.

Rampage ... Anders Behring Breivik in costumes.

Anders Behring Breivik: Norway Bomber, Terrorist, Mass Murderer, Christian Crusader

>

Gun Purchase and Target Practice  is Legal in most states of the USA; 2nd Amendment of the Constitution reads:

“…A well regulated militia being necessary to the security of a free State,

the right of the People to keep and bear arms shall not be infringed…”

Below: Advertising for Gun Shows and Brisk Sales:: Assault Rifle Sales Through the Roof Since Election of President Barak Husain Obama

jun-ti-guns

Below: Houston TX gun show at the George R. Brown Convention Center

300px-Houston_Gun_Show_at_the_George_R._Brown_Convention_Center

Below: typical gun shows

gun show-00-1-20-07-005

Below:American way of advertising

gun-2008-08-19-rosenthal_gunsbillboard


Below: buy it and others off ebay, etc

gun-3165c0i

and an interesting news item

<> Multiple People Carry Assault Weapons Pistol to President Obama’s VFW Event in Phoenix, Arizona – August 17, 2009 — And it’s perfectly legal

http://www.youtube.com/watch?v=5L40tNRFMT8&feature=related

<> Man carries assault rifle to Obama protest – and it’s legal

  • Story Highlights
  • Video shows man with an assault rifle slung over his shoulder at Phoenix protest
  • Arizona law has nothing in the books regulating assault rifles
  • Secret Service: Man considered no threat to president, who was nearby
  • Man carrying rifle: “I think that people need to get out and do it more”

updated 1 hour, 30 minutes ago

PHOENIX, Arizona (CNN) – A man toting an assault rifle was among a dozen protesters carrying weapons while demonstrating outside President Barack Obama’s speech to veterans on Monday, but no laws were broken. It was the second instance in recent days in which unconcealed weapons have appeared near presidential events

A man is shown legally carrying a rifle at a protest against President Obama on Monday in Phoenix, Arizona.

Video from the protest in Phoenix, Arizona, shows the man standing with other protesters, with the rifle slung over his right shoulder.

Phoenix police said authorities monitored about a dozen people carrying weapons while peacefully demonstrating.

“It was a group interested in exercising the right to bear arms,” said police spokesman Sgt. Andy Hill.

Arizona law has nothing in the books regulating assault rifles, and only requires permits for carrying concealed weapons. So despite the man’s proximity to the president, there were no charges or arrests to be made. Hill said officers explained the law to some people who were upset about the presence of weapons at the protest. Watch the rifle being legally carried at rally »

“I come from another state where ‘open carry’ is legal, but no one does it, so the police don’t really know about it and they harass people, arrest people falsely,” the man, who wasn’t identified, said in an interview aired by CNN affiliate KNVX. “I think that people need to get out and do it more so that they get kind of conditioned to it.”

Gun-toting protesters have demonstrated around the president before. Last week, a man protesting outside Obama’s town hall meeting in New Hampshire had a gun strapped to his thigh. That state also doesn’t require a license for open carry.

Don’t Miss

U.S. Secret Service spokesman Ed Donovan acknowledged the incidents in New Hampshire and Arizona, but said he was not aware of any other recent events where protesters attended with open weapons. He said there was no indication that anyone had organized the incidents.

Asked whether the individuals carrying weapons jeopardized the safety of the president, Donovan said, “Of course not.”

The individuals would never have gotten in close proximity to the president, regardless of any state laws on openly carrying weapons, he said. A venue is considered a federal site when the Secret Service is protecting the president and weapons are not allowed on a federal site, he added.

In both instances, the men carrying weapons were outside the venues where Obama was speaking.

“We pay attention to this obviously … to someone with a firearm when they open carry even when they are within state law,” Donovan said. “We work with our law enforcement counterparts to make sure laws and regulations in their states are enforced.”

http://www.cnn.com/2009/POLITICS/08/17/obama.protest.rifle/

<> NOTE:

President Obama alluded to the multi-trillion USA Military-Industrial complex & propaganda machine (remember President Dwight D. Eisenhower) in his speech and preach on 08/17/09  in Phoenix while mentioning defense bills that are …“loaded with a bunch of pork” and also he mentioned “indefensible no-bid contracts that cost taxpayers billions and make contractors rich” and also “the special interests and their exotic projects that are years behind schedule and billions over budget” and he mentioned those lobbyists and senators and congressmen and “the special interests and their exotic projects that are years behind schedule and billions over budget, the entrenched lobbyists pushing weapons that even our military says it doesn’t want. The impulse in Washington to protect jobs back home building things we don’t need has a cost that we can’t afford.”

Obama said: “It’s inexcusable. It’s an affront to the American people and to our troops. And it’s time for it to stop.”

Pretty good, yet so much hot air, since the reality is, as the AP writer, said:

“Despite objections and veto threats from the White House, a $636 billion Pentagon spending bill was approved by a 400-30 vote in the House late last month. It contains money for a much-criticized new presidential helicopter fleet, cargo jets that the Pentagon says aren’t needed and an alternative engine for the next-generation F-35 Joint Strike Fighter that military leaders say is a waste of money.”

http://www.chron.com/disp/story.mpl/front/6575614.html

<> Experts from the speech blasting the MIC

“…But here’s the simple truth:  We cannot build the 21st-century military we need, and maintain the fiscal responsibility that America demands, unless we fundamentally reform the way our defense establishment does business.  … You’ve heard the stories:  the indefensible no-bid contracts that cost taxpayers billions and make contractors rich; the special interests and their exotic projects that are years behind schedule and billions over budget; the entrenched lobbyists pushing weapons that even our military says it doesn’t want.  The impulse in Washington to protect jobs back home building things we don’t need has a cost that we can’t afford. …

So already I’ve put an end to unnecessary no-bid contracts.  I’ve signed bipartisan legislation to reform defense procurement so weapons systems don’t spin out of control.  And even as we increase spending on the equipment and weapons our troops do need, we’ve proposed cutting tens of billions of dollars in waste we don’t need.

Think about it. Hundreds of millions of dollars for an alternate second engine for the Joint Strike Fighter — when one reliable engine will do just fine.  Nearly $2 billion to buy more F-22 fighter jets — when we can move ahead with a fleet of newer, more affordable aircraft.  Tens of billions of dollars to put an anti-missile laser on a fleet of vulnerable 747s.

And billions of dollars for a new presidential helicopter.  Now, maybe you’ve heard about this. Among its other capabilities, it would let me cook a meal while under nuclear attack.  (Laughter.) Now, let me tell you something, if the United States of America is under nuclear attack, the last thing on my mind will be whipping up a snack. (Laughter and applause.)

So this is pretty straightforward:  Cut the waste.  Save taxpayer dollars.  Support the troops.  That’s what we should be doing.  (Applause.)  The special interests, contractors, and entrenched lobbyists, they’re invested in the status quo.  And they’re putting up a fight.  But make no mistake, so are we.  If a project doesn’t support our troops, if it does not make America safer, we will not fund it.  If a system doesn’t perform, we will terminate it.  (Applause.)  And if Congress sends me a defense bill loaded with a bunch of pork, I will veto it.  We will do right by our troops and taxpayers, and we will build the 21st century military that we need.  (Applause.)……… “

http://latimesblogs.latimes.com/washington/2009/08/obama-speech-transcript-vfw.html

<>

obama event-PH2009081803561

A man with an AR-15 semiautomatic assault rifle joins protesters outside an event in Phoenix where President Obama was discussing health-care reform.
camera works Photo Credit: By Jack Kurtz — Associated Press Photo

<> About a dozen people carrying guns, including one with a military-style rifle, milled among protesters outside the Phoenix convention center where President Obama was giving a speech.

AP Tuesday, August 18, 2009

http://www.foxnews.com/politics/2009/08/18/dozen-protesters-guns-outside-obama-speech/

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America armed, but guns not necessarily loaded

AP – In a Saturday, Aug. 22, 2009 photo, Michael Mayer explains the various types of ammunition for handguns …

By MARY FOSTER, Associated Press Writer Mary Foster, Associated Press Writer – Wed Sep 23, 2:51 pm ET

NEW ORLEANS – Bullet-makers are working around the clock, seven days a week, and still can’t keep up with the nation’s demand for ammunition.

Shooting ranges, gun dealers and bullet manufacturers say they have never seen such shortages. Bullets, especially for handguns, have been scarce for months because gun enthusiasts are stocking up on ammo, in part because they fear President Barack Obama and the Democratic-controlled Congress will pass antigun legislation — even though nothing specific has been proposed and the president last month signed a law allowing people to carry loaded guns in national parks.

Gun sales spiked when it became clear Obama would be elected a year ago and purchases continued to rise in his first few months of office. The FBI’s National Instant Criminal Background Check System reported that 6.1 million background checks for gun sales were issued from January to May, an increase of 25.6 percent from the same period the year before.

“That is going to cause an upswing in ammunition sales,” said Larry Keane, senior vice president of the National Shooting Sports Foundation, a trade association representing about 5,000 members. “Without bullets a gun is just a paper weight.”

The shortage for sportsmen is different than the scarcity of ammo for some police forces earlier this year, a dearth fueled by an increase in ammo use by the military in Iraq and Afghanistan.

“We are working overtime and still can’t keep up with the demand,” said Al Russo, spokesman for North Carolina-based Remington Arms Company, which makes bullets for rifles, handguns and shotguns. “We’ve had to add a fourth shift and go 24-7. It’s a phenomenon that I have not seen before in my 30 years in the business.”

Americans usually buy about 7 billion rounds of ammunition a year, according to the National Rifle Association. In the past year, that figure has jumped to about 9 billion rounds, said NRA spokeswoman Vickie Cieplak.

Jason Gregory, who manages Gretna Gun Works just outside of New Orleans, has been building his personal supply of ammunition for months. His goal is to have at least 1,000 rounds for each of his 25 weapons.

“I call it the Obama effect,” said Gregory, 37, of Terrytown, La. “It always happens when the Democrats get in office. It happened with Clinton and Obama is even stronger for gun control. Ammunition will be the first step, so I’m stocking up while I can.”

So far, the new administration nor Congress has not been markedly antigun. Obama has said he respects Second Amendment rights, but favors “common sense” on gun laws. Still, worries about what could happen persist.

Demand has been so heavy at some Walmarts, a limit was imposed on the amount of ammo customers can buy. The cutoff varies according to caliber and store location, but sometimes as little as one box — or 50 bullets — is allowed.

At Barnwood Arms in Ripon, Calif., sales manager Dallas Jett said some of the shortages have leveled off, but 45-caliber rounds are still hard to find.

“We’ve been in business for 32 years and I’ve been here for 10 and we’ve never seen anything like it,” Jett said. “Coming out of Christmas everything started to dry up and it was that way all through the spring and summer.

Nationwide, distributors are scrambling to fill orders from retailers.

“We used to be able to order 50 or 60 cases and get them in three or four days easy, it was never an issue,” said Vic Grechniw of Florida Ammo Traders, a distributor in Tampa, Fla. “Now you are really lucky if you can get one case a month. It just isn’t there because the demand is way up.”

A case contains 500 or 1,000 bullets.

At Jefferson Gun Outlet and Range in Metairie just west of New Orleans, owner Mike Mayer is worried individuals are going to start buying by the case.

“If someone wants to shoot on the weekend you have to worry about having the ammunition for them. And I know some people aren’t buying to use it at the range, they’re taking it home and hoarding it.”

With demand, prices have also risen.

“Used to be gold, but now lead is the most expensive metal,” said Donald Richards, 37, who was stocking up at the Jefferson store. “And worth every penny.”

http://news.yahoo.com/s/ap/20090923/ap_on_re_us/us_ammo_shortage

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WEDNESDAY, OCT 20, 2010 21:01 ET

I was anti-gun, until I got stalked

I can’t stand weapons. But after disturbing e-mails and letters, I decided to arm myself with more than words

BY JENNIFER WILLIS
I was anti-gun, until I got stalked

istockphoto

“You need to arm yourself.”

I blinked at the Portland police officer in my living room. This uniformed bear of a man — packing a gun, a nightstick, a radio and who knew what else — was responding to an ongoing stalker problem that had started several months earlier. I’d received letters, a phone call, a few packages and several e-mails from this unbalanced stranger who’d read a few newspaper stories I’d written and taken a shine to me. When the latest letter arrived — mentioning my boyfriend, Mike, thoughts on religion, and a trip I’d taken but hadn’t told anyone about — I was seriously alarmed.

But get a gun? Surely, I’d misheard him.

“Getting a concealed carry permit isn’t hard,” the officer continued. “And they make ladies’ purses with concealed weapons compartments.”

In that moment, I understood the phrase, “blood turning to ice.” I’m afraid of guns. When you get right down to it, I abhor them. I used to date a guy who owned a handgun and regularly trekked into the woods with his friends to shoot. I made him move the small gun safe from beneath the bed to another room before I’d agree to stay overnight.

But that morning was like a perfect storm of firearms. The first thing Mike had said to me when I opened my eyes — hours before the officer made his suggestion, before my neighbor confided she’d been thinking of getting a gun for hiking and kayaking trips, before my retired military uncle e-mailed to say that arming myself probably wouldn’t be a bad idea — was, “Maybe you should get a gun.”

Apparently, the Universe really wanted me packing heat.

The officer saw the dismay on my face. “Most bullet wounds don’t kill people,” he assured me. “And it would be self-defense.”

I spent the rest of the day in a general freakout.

I was hopeless trying to get any work done. Periodically, I’d do Web searches on handguns. I discovered that Oregon is a right-to-carry state and that it costs $65 for a concealed carry permit — $50 for the four-year permit and $15 for the background check. I learned the difference between a pistol and a revolver — a revolver’s chambers revolve, like the six-shooters in Hollywood Westerns — and I read that the .357 Magnum and .38 Special were ideal for women interested in a gun for self-defense because they’re relatively lightweight, aren’t prone to jamming and don’t carry too many bullets. Because who really needs a 20-round magazine when you’re defending against a stalker? “Six or seven bullets will do you just fine,” read one Web comment.

But the idea of owning a gun made me sick to my stomach. That afternoon, when I escaped into a fitful nap, I dreamed people were pointing double-barreled shotguns at me.

When I thought about it, I realized I’d grown up with firearms in the house — from the antique rifle mounted on the sun porch wall to the Colt .45 in my father’s sock drawer. When I was 7, I watched my cousins shoot targets on the family farm in Virginia. I’d even picked up the hot shell casings as souvenirs.

As an adolescent, I’d spent my own money on a Daisy air pistol. I was surely the only girl at my single-sex prep school who owned a weapon, and I trained with it regularly, which is probably why, years later, I was an ace shot in paintball (Code name: Salad Shooter). Even the ex-military guys clamored to get me on their teams.

But that was a far cry from carrying — or firing — live rounds.

As Mike tried to sleep, I fretted out loud. I told him a firearm in the house made me nauseous, that I feared the weapon would be turned on one of us, that there’d be an accident. I told him I believe in compassion and peace. I told him the very idea of a gun was a compromise of my principles.

Mike sighed. “Which would you prefer, compromising your principles or getting abducted by Crazy Man?”

That’s when the old Theodore Roosevelt adage popped into my head — “Speak softly and carry a big stick” — and I finally got it. I can still be the compassionate, diplomatic, interfaith groovy gal I’ve always been; I’ll just be packing heat in case negotiations tank.

When I got another letter from the stalker — a movie schedule with show times circled, alongside a handwritten note that was way too familiar — Mike looked up the nearest gun dealer and put me in the car.

“This guy is pissing me off,” he told me. “I already have enough stress without this.”

So now, after a background check and fingerprinting, I have my very own Ruger .38 Special — a black, five-shot double-action revolver that fits my small hands disturbingly well.

I was petrified when I went to the firing range for the first time. The police officer behind the counter laughed at my Ruger. “Oh, you’ve got one of those dinky guns!” he said. He warned me how bad the recoil was going to hurt, which scared me even more.

The woman standing beside me leaned over and whispered, “Don’t mind the guys trying to be all macho.” She was packing the same make and model I had.

Another officer took pity and walked me into the range to demonstrate every single step of loading, holding, aiming and firing my weapon. He showed me how to stand and how to eject the bullet casings afterward. Still, even with ear protection, I literally jumped every time someone else pulled a trigger. Gunshots are LOUD.

My hands were shaking as I loaded the .38, and I was still flinching every time the guy in the next lane fired off his .45. I focused on everything the police officer showed me. I kept the barrel pointed down range and my fingers curled around the cylinder until I was ready to snap it back into place. I remembered to keep my thumbs off the gun, and to keep the grip lodged firmly against the fleshy part between my thumb and hand. I aimed, put my finger on the trigger, and fired.

The gun kicked hard, but not as bad as I’d feared, and it was more startling than painful. I shot a few more rounds, making adjustments to my aim for the recoil and my own jumpiness. After I’d gone through two full cylinders — 10 bullets — Mike took a look at the paper target. Every single shot had not only hit the target, but gone right into the chest and head of my paper dummy. Mike was impressed. Frankly, so was I.

After going through a box of 50 rounds, I left the range with black-smudged fingers that smelled of gunpowder. My firing hand was sore the next day, and the truth is — two months and more target practice later — I’m still not entirely comfortable having a handgun in the house. Whenever the dogs erupt in the middle of the night in a barking frenzy, my thoughts go immediately to my .38.

But I’m not as afraid of my stalker as I used to be, either. I’m armed now, with more than words and good intentions. He keeps sending upsetting letters, but if he ever pays a visit … Jenny’s got a gun, and she knows how to use it.

Freelance writer Jennifer Willis specializes in topics related to sustainable living, religion/spirituality, history and health, and she is a founding member of the Oregon News Incubator. She lives with two big dogs in Portland, Ore., and can be found online at www.jennifer-willis.com.

http://www.salon.com/life/life_stories/index.html?story=/mwt/feature/2010/10/20/buying_gun_protect_from_stalker


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Read about HAARP here

The picture in header above, and in shown full  below, shows the base camp of project  HAARP

You will be hearing more and more about this sonic space weapons system based  partially in Alaska.

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Posted in Uncategorized | Leave a comment