To end the occupation, cripple Israeli banks
Terry Crawford-Browne, The Electronic Intifada, 30 June 2010
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Targeting Israeli banks will help bring an end to the occupation. (Oren Ziv/ActiveStills) |
The international banking sanctions campaign in New York against apartheid South Africa during the 1980s is regarded as the most effective strategy in bringing about a nonviolent end to the country’s apartheid system. The campaign culminated in President FW de Klerk’s announcement in February 1990, releasing Nelson Mandela and other political prisoners, and the beginning of constitutional negotiations towards a non-racial and democratic society.
If international civil society is serious about urgently ending Israel’s violations of Palestinian rights, including ending the occupation, then suspension of SWIFT transactions to and from Israeli banks offers an instrument to help bring about a peaceful resolution of an intractable conflict. With computerization, international banking technology has advanced dramatically in the subsequent 20 years since the South African anti-apartheid campaign.
Although access to New York banks remains essential for foreign exchange transactions because of the role of the dollar, interbank transfer instructions are conducted through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is based in Belgium. So, instead of New York — as in the period when sanctions were applied on South Africa– Belgium is now the pressure point.
SWIFT links 8,740 financial institutions in 209 countries. Without access to SWIFT and its interbank payment network, countries are unable either to pay for imports or to receive payment for exports. In short, no payment — no trade. Should it come to a point where trade sanctions are imposed on Israel, it may be able to evade them. Instead of chasing trade sanctions-busters and plugging loopholes, it is both faster and much more effective to suspend the payment system.
The Israeli government may consider itself to be militarily and diplomatically invincible, given support from the United States, and other governments, but Israel’s economy is exceptionally dependent upon international trade. It is thus very vulnerable to financial retaliation. South Africa’s apartheid government had also believed itself to be immune from foreign pressure.
Without SWIFT, Israel’s access to the international banking system would be crippled. Banking is the lifeblood of any economy. Without payment for imports or exports, the Israeli economy would quickly collapse. The matter has gained additional urgency with the bill now before the Knesset, Israel’s parliament, to penalize any person who promotes the imposition of boycotts against Israel. Another important political factor is that SWIFT is not only outside American jurisdiction, it is also beyond the reach of Israeli military retaliation.
Israel has long experience in sanctions-busting since the 1948 Arab boycotts. Apartheid South Africa was also well experienced in sanctions-busting — breaking oil embargoes was almost a “national sport.” Trade sanctions are invariably full of loopholes. Profiteering opportunities abound, as illustrated by Iraq, Cuba and numerous countries against which for many years the United States unsuccessfully has applied trade sanctions. Iran conducts its trade through Dubai, which happily profits from the political impasse.
Suspension of bank payments plugs such loopholes, and also alters the balance of power so that meaningful negotiations between Israelis and Palestinians become even possible. This is because banking sanctions impact quickly upon financial elites who have the clout to pressure governments to concede political change. Trade sanctions, by contrast, impact hardest on the poor or lower-paid workers, who have virtually no political influence.
SWIFT will, however, only take action against Israeli banks if ordered to do so by a Belgian court, and then only in very exceptional circumstances. Such very exceptional circumstances are now well-documented by the UN-commissioned Goldstone report into Israel’s winter 2008-09 invasion and massacre in Gaza and by the attack on the Gaza Freedom Flotilla on 31 May 2010. There is also a huge body of literature from Amnesty International, Human Rights Watch and other organizations detailing Israeli war crimes and violations of humanitarian law.
The Israeli government, like that of apartheid South Africa, has become a menace to the international community. Corruption and abuses of human rights are invariably interconnected. Israel’s long military occupation of the West Bank and Gaza Strip, for example, has corrupted almost every aspect of Israeli society, most especially its economy. The Organization For Economic Cooperation and Development (OECD) reported in December 2009 that the Israeli government lacks commitment in tackling international corruption and money laundering.
The international financial system is exceedingly sensitive about allegations of money laundering, but also to any associations with human rights abuses. Organized crime and money laundering are major international security threats, as illustrated by the United States subpoena after the 11 September 2001 attacks of SWIFT data to track terrorist financing. The website Who Profits? (www.whoprofits.org) lists hundreds of international and Israeli companies that illegally profiteer from the occupation.
Their operations range from construction of the “apartheid wall” and settlements to agricultural produce grown on confiscated Palestinian land. As examples, Caterpillar, Volvo and Hyundai supply bulldozing equipment to demolish Palestinian homes. British supermarkets sell fresh produce grown in the West Bank, but illegally labelled as Israeli. Ahava markets Dead Sea mud and cosmetics.
The notorious Lev Leviev claims in Dubai that Leviev diamonds are of African origin, and are cut and polished in the United States rather than Israel. They are sourced from Angola, Namibia and also allegedly Zimbabwe, and can rightly be described as “blood diamonds.” Israeli diamond exports in 2008 were worth $19.4 billion, and accounted for almost 35 percent of Israeli exports. Industrial grade diamonds are essential to Israel’s armaments industry, and its provision of surveillance equipment to the world’s most unsavory dictatorships. Such profiteering depends on foreign exchange and access to the international payments system. Hence interbank transfers are essential, and SWIFT — willingly or unwillingly — has become complicit, as were the New York banks with apartheid South Africa.
Accordingly, a credible civil society organization amongst the Palestinian diaspora should lead the SWIFT sanctions campaign against Israeli banks. And, per the South African experience, it should be led by civil society rather than rely on governments.
Each bank has an eight letter SWIFT code that identifies both the bank and its country of domicile. “IL” are the fifth and sixth letters in SWIFT codes that identify Israel. The four major Israeli banks and their SWIFT codes are Israel Discount Bank (IDBILIT), Bank Hapoalim (POALILIT), Bank Leumi (LUMIILIT) and Bank of Israel (ISRAILIJ).
Such a suspension would not affect domestic banking transactions within Israel and the occupied West Bank and Gaza Strip — or international transfers to Palestinian banks that have separate “PS” identities. The campaign can be reversed as soon as the objectives have been achieved, and without long-term economic damage.
What is required is an urgent application in a Belgian court ordering SWIFT to reprogram its computers to suspend all transactions to and from Israeli banks until the Israeli government agrees to end the occupation of the West Bank including East Jerusalem, and that it will dismantle the “apartheid wall;” the Israeli government recognizes the fundamental rights of Palestinian citizens of Israel to full equality; and Israel recognizes, respects and promotes the rights of Palestinian refugees.
The writer is a retired banker, who advised the South African Council of Churches on the banking sanctions campaign against apartheid South Africa. He spent October 2009 to January 2010 in East Jerusalem monitoring checkpoints, house demolitions and evictions, and liaising with Israeli peace groups. He lives in Cape Town.
Pakistan ignores US on Iran gas deal
Press TV – June 21, 2010
Pakistan’s Foreign Minister says his country needs energy, emphasizing that Islamabad will continue a gas pipeline deal with Iran despite sanctions on Tehran.
Shah Mehmood Qureshi told reporters on Sunday that the present government has struck the gas pipeline deal with Iran in view of Pakistan’s energy requirements.
“This agreement is in the interest of Pakistan and it will only see its interests and the international laws…… the Iran-Pakistan gas pipeline agreement will not come under the ambit of the sanctions on Tehran,” he said, a Press TV correspondent reported.
Pakistan’s Foreign Minister disclosed that all the different phases of the gas pipeline agreement have been finalized and Islamabad wants it to proceed as planned.
On Sunday, Tehran and Islamabad finished signing a multi-billion-dollar contract, which supplies Pakistan with Iranian natural gas from 2014.
That same day, the US special envoy to Pakistan and Afghanistan, Richard Holbrooke, warned Islamabad that a recently signed gas pipeline deal with Iran could run afoul of new sanctions being finalized in the US Congress.
“We cautioned the Pakistanis to try to see what the (Congressional) legislation is, before deciding how to proceed because it would be a disaster if … we had a situation develop where an agreement was reached which then triggered something under the law,” he said.
Under the $7.6 billion deal, the Islamic Republic has agreed to provide 50 million cubic feet of natural gas to Pakistan on a daily basis from mid-2014.
The pipeline will account for 20 percent of the recipient’s demands once Iran’s giant South Pars gas field is connected with Pakistan’s Baluchistan province.
Iran has already constructed more than 900 kilometers of the pipeline, stating that as a country with huge gas reserves, it is capable of guaranteeing global energy security.
The project, which aims to transport gas from Iran to Pakistan through a 2,600-kilometer pipeline, was first advanced in 1994 but has been stalled by a series of disputes between Pakistan and India.
A note of appreciation from the Elite
By “Mark Twain” – 06/20/2010
Let’s be honest: you’ll never win the lottery.
On the other hand, the chances are pretty good that you’ll slave away at some miserable job the rest of your life. That’s because you were in all likelihood born into the wrong social class. Let’s face it — you’re a member of the working caste. Sorry!
As a result, you don’t have the education, upbringing, connections, manners, appearance, and good taste to ever become one of us. In fact, you’d probably need a book the size of the yellow pages to list all the unfair advantages we have over you. That’s why we’re so relieved to know that you still continue to believe all those silly fairy tales about “justice” and “equal opportunity” in America.
Of course, in a hierarchical social system like ours, there’s never been much room at the top to begin with. Besides, it’s already occupied by us — and we like it up here so much that we intend to keep it that way. But at least there’s usually someone lower in the social hierarchy you can feel superior to and kick in the teeth once in a while. Even a lowly dishwasher can easily find some poor slob further down in the pecking order to sneer and spit at. So be thankful for migrant workers, prostitutes, and homeless street people.
Always remember that if everyone like you were economically secure and socially privileged like us, there would be no one left to fill all those boring, dangerous, low-paid jobs in our economy. And no one to fight our wars for us, or blindly follow orders in our totalitarian corporate institutions. And certainly no one to meekly go to their grave without having lived a full and creative life. So please, keep up the good work!
You also probably don’t have the same greedy, compulsive drive to possess wealth, power, and prestige that we have. And even though you may sincerely want to change the way you live, you’re also afraid of the very change you desire, thus keeping you and others like you in a nervous state of limbo. So you go through life mechanically playing your assigned social role, terrified what others would think should you ever dare to “break out of the mold”.
Naturally, we try to play you off against each other whenever it suits our purposes: high-waged workers against low-waged, unionized against non-unionized, Black against White, male against female, democrat against republican, American workers against Japanese against Mexican against…. We continually push your wages down and take your money by invoking “foreign competition,” “the law of supply and demand,” “national security,” “too big to fail” or “the bloated federal deficit.” We throw you on the unemployed scrap heap if you step out of line or jeopardize our profits. And to give you an occasional break from the monotony of our daily economic blackmail, we allow you to participate in our stage-managed electoral shell games, better known to you ordinary folks as “elections.” Happily, you haven’t a clue as to what’s really happening — instead, you blame “Aliens,” “Tree-hugging Environmentalists,” “Niggers,” “Homos”, “Wet backs”, “Welfare Queens,” and countless others for your troubled situation.
We’re also very pleased that many of you still embrace the “work ethic,” even though most jobs in our economy degrade the environment, undermine your physical and emotional health, and basically suck your one and only life right out of you. We obviously don’t know much about work, but we’re sure glad you do!
Of course, life could be different. Society could be intelligently organized to meet the real needs of the general population. You and others like you could collectively fight to free yourselves from our domination. But you don’t know that. In fact, you can’t even imagine that another way of life is possible. And that’s probably the greatest, most significant achievement of our system — robbing you of your imagination, your creativity, your ability to think and act for yourself.
So we’d truly like to thank you from the bottom of our heartless hearts. Your loyal sacrifice makes possible our corrupt luxury; your work makes our system work. Our governmental, public education, media mind-control, and financial institutions frame a labyrinthine system of lies that you numbingly support for our advancement and your children’s enslavement.
Thanks so much for “knowing your place” — without even knowing it!
The Unbelievably Rampant Corruption On Wall Street
The Economic Collapse | May 20, 2010
In order for a financial system to be able to function properly, it is absolutely essential that the general population has faith in it. After all, who is going to want to invest in the stock market or entrust their money to big financial institutions if there is not at least the perception of honesty and fairness in the financial marketplace? For decades, the American people did have faith in Wall Street. But now that faith is being shattered by a string of recent revelations. It seems as though the rampant corruption on Wall Street is seeping up almost everywhere now. In fact, some of the things that have come out recently have been absolutely jaw-dropping. The truth is that the corruption on Wall Street is much deeper and much more systemic than most of us ever dared to imagine. As the general public digests these recent scandals, it is going to result in a tremendous loss of faith in the U.S. financial system. Once faith in a financial system is lost, it can take years or even decades to get back. So how is the U.S. financial system supposed to work properly when large numbers of people simply do not believe in it anymore?
Just consider some of the recent revelations of Wall Street corruption that have come out recently….
*Bloomberg is reporting that a massive network of big banks and financial institutions have been involved in blatant bid-rigging fraud that cost taxpayers across the U.S. billions of dollars. The U.S. Justice Department is charging that financial advisers to municipalities colluded with Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Wachovia and 11 other banks in a conspiracy to rig bids on municipal financial instruments. Apparently what was going on was that it was decided in advance who would win the auctions of guaranteed investment contracts, which public entities purchase with the proceeds from municipal bond sales, and then other intentionally losing bids were submitted in order to make the process look competitive. The U.S. Justice Department claims that this fraud has been industry-wide and has been going on for years. In fact, at least four financial professionals have already pleaded guilty in this case.
*An industry insider has come forward with “smoking gun” evidence that some of the biggest banks have been openly and blatantly manipulating the price of gold and silver. For a time it looked like the federal government was just going to ignore all of this fraud, but after substantial public uproar some action is indeed being taken. In fact, it has been reported that federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals markets.
*Goldman Sachs is getting most of the press about fraud in the mortgage-backed securities market these days. Of course Goldman is strenuously denying that it “bet against its clients” when it changed its position in the housing market in 2007. But we all know the truth at this point. The truth is that Goldman Sachs clearly bet against its clients and was involved in a whole lot of things that were even worse than that. Many did not think the U.S. government would dare go after Goldman, but that is what we are starting to see. U.S. federal prosecutors have opened a criminal investigation into whether Goldman Sachs or its employees committed securities fraud in connection with its trading of mortgage-backed securities, and it will be very interesting to see if anything comes of that investigation.
*But not everyone is being held accountable for their actions. The guy who helped bring down AIG is going to get off scott-free and is going to be able to keep the millions in profits that he made in the process.
*Entire U.S. cities have been victims of this rampant Wall Street fraud. In fact, it is now being alleged that the biggest banks on Wall Street are ripping off some of the largest American cities with the same kind of predatory deals that brought down the financial system in Greece.
*The really sad thing is that fraud is very, very lucrative. Executives at many of the big banks that received large amounts of money during the Wall Street bailouts are being lavished with record bonuses as millions of other average Americans continue to suffer economically. Even the CEOs of bailed-out regional banks are getting big raises. It must be really nice to be them.
So does all of this make you more likely or less likely to invest in the stock market?
Do you think that the American people can see all of this and still believe that the financial system is “fair” and “honest”?
The truth is that Wall Street is full of rip-off artists and fraudsters who don’t even try to hide their greed anymore.
It is as if a thousand junior Gordon Gekkos have been unleashed and they are all trying to be masters of the universe at any cost.
But what they are doing is ripping the heart out of the U.S. financial system.
If people lose faith in the system the system will ultimately fail.
A financial system that allows open fraud and manipulation is operating on borrowed time.
So will the rampant corruption on Wall Street now be cleaned up?
Only time will tell.
But one thing is for certain.
The American people will be watching.
An Interview With Joseph Stiglitz — Regulation and the Euro Zone
“Big Banks are the real threat to our economy and to our society”
By Lia Petridis Maiello | May 16, 2010
Nobel Prize winner and Professor for Economy at Columbia University, Joseph Stiglitz, just returned from a book tour in Europe where he introduced his widely acclaimed analysis of the Financial Crisis, called Free Fall. In an interview he explains the future of the Euro Zone, how it was possible to create a moral vacuum on Wall Street, why US citizens do not take their anger to the streets and how the US should follow Greece and start regulating now.
Lia Petridis Maiello: During the Financial Crisis I was surprised by the moral vacuum that has been created on Wall Street. When the case Bernie Madoff took place I heard people on Wall Street wondering in Admiration how he was able “to pull this off”. Last week I saw that John Paulson was motivating Americans on Marketwatch to buy houses again and I was thinking that he had forfeit somewhat of his credibility with what has happened related to the Goldman Sachs scandal. What is your explanation?
Joseph Stiglitz: The problem on Wall Street is that we had bought into the idea that money is everything, and that the metric of whether you are doing well for the economy is how much money you were making for yourself. To me there were two very serious moral failings. One is that so much energy went into exploiting the poorest Americans; selling them houses they knew were beyond their ability to pay, with mortgages that were exploitive. There were people who called themselves mortgage brokers supposedly looking for the best mortgage, but in fact were looking for the worst mortgage. The whole hosts of mortgages that are designed to maximize fees basically rob the poorest people of all their life savings. The irony was that the financial markets were hoisted on their own petard, as I point out in my book. That is to me, one of the most serious moral failings on the part of the financial markets. The second is while Bernie Madoff represented a pyramid scheme engaging in illegal activity, much of what the financial markets were doing was perhaps legal, but clearly unethical, or borderline. That the financial markets did not seem to see much distinction is a severe criticism. A good example is what Goldman Sachs did; how they sold products that they knew were bad, so bad that they were actually selling them short, betting on the fact that they would lose money. The whole debate in their mind is whether what they did was legal or not. The unanimity that it was immoral that they did not disclose to the buyers that they thought these were so crappy that they were going to lose money on them and the fact that they see nothing wrong with that suggests that they live in a parallel universe, a different world, a different moral compass than the rest of society.
LPM: I read repeatedly now, not only in your book, that it would have made sense to nationalize the banks for a while, sort out the bad assets and then privatize them again. That idea created back then a big outcry on Wall Street. Why the hysteria?
JS: It’s hard to understand. I think it was the banks that perhaps stirred it up, because they didn’t want the normal rules of capitalism to be followed. The normal rules of capitalism say that when a bank can not pay what it owes it is going to be placed under conservatorship, the bond holders become the new share holders. If the bondholders don’t have enough to meet the obligations, the government fills in the gap because of its insurance of deposits. But this is not nationalization, this is simply a financial restructuring facilitated by government because of its role in insuring depositors. What we wound up with is an aberration from market economics, “ersatz capitalism,” where you socialize losses and privatize gains. Not only is it inequitable, it’s actually distortionary because it leads to incentives that are perverse, excessive risk taking, and it undermines faith in the market economy.
LPM: Regarding the economical situation in Europe right now, do you think that that crisis could lead to another crisis of the financial markets with further write-offs?
JS: “Yes it can, and one can view what Europe is doing as a valiant attempt to prevent that. It has finally dawned on some of the leaders that were reluctant to act, that if they didn’t intervene, Greece and perhaps other countries might have to default. If that happened the banks that hold large amounts of those bonds would be in an even weaker position. Many of the European banks are highly leveraged so that a relatively small change in the value of their assets could wipe out significant amounts of their net worth, leaving them to be undercapitalized. From the perspective of many this was not so much a bailout of Greece or Spain as it was of the banks to protect them
from the consequences.”
LPM: Do you think Greece’s bankruptcy is still an option?
JS: “There is no reason why Greece needs to go bankrupt. Greece has the capability of paying the loans that are due provided markets have confidence in Greece. Even at a 120 percent debt-to-GDP ratio, if interest rates were low, at 3 percent, that’s only 3.6 percent of GDP, a small enough number that it could clearly service that debt. On the other hand, if markets don’t have confidence and interest rates soar, then even a country with a much lower debt-to-GDP ratio, like Spain,
will face difficulties. It is a situation that economists refer to as a multiple-equilibrium. If the markets lose confidence, interest rates will go high, and the market’s beliefs will become self-fulfilling. The hope is that by Europe coming to the rescue, Greece won’t have to turn to the markets for rolling over its debt and financing its new deficits. Greece will be able to meet its debt obligations, markets will calm down, and then in fact it won’t cost Europe anything. They will get repaid.”
LPM: In that context how do you feel about European Central Banks starting to buy government bonds of threatened countries like Greece and Spain?
JS: “It’s a very normal course for Central Banks to buy bonds of the country for which they serve as the Central Bank. The problem is that when the EU was created, in particular the Euro, there wasn’t sufficient attention to the institutional structure that would be necessary to make the Euro work. Of course as long as things were going well, the Euro would work fine. The question is what would happen if a country like Spain or Greece had an aftershock. The Euro took away two of the critical instruments of adjustment, the exchange rate and interest rate. It didn’t put anything in its place. In the absence of an adjustment mechanism, there is a problem. A very severe problem. My hope is that Europe, having finally realized that there was this institutional deficiency, will now repair it. But what is needed is a more permanent institutional framework.”
LPM: What sort of framework do you mean in particular? Is there a global scheme of market regulation you could think of?
JS: “There are two things that need to be put on the table. The first is a better regulatory system. What is clear is that the financial markets did not perform the social functions for which they are well rewarded. There was a massive market failure. The United States and Europe are now engaged in extensive discussions of how to fix the regulatory framework. The big banks are pushing back. They are doing everything they can, they made big investments in political capital. They have already gotten high returns in the deregulation that occurred in the 90’s, the bailouts that occurred in recent years, and they hope to continue to reap dividends from their investments in political capital, by stopping the regulatory process.
I’m hopeful though that the anger is so great, the anger among the American people, people in Europe and all over the world, that something significant will happen and it appears that that will be the case. The second issue is not the question of how to make the financial sector work well, but how to make the Euro system work well, and that is where I think there need to be better systems of fiscal coordination and fiscal assistance. When the EU was created they created solidarity funds to help new entrants, but they didn’t create any solidarity funds to help a country that is facing an aftershock. That was a very big gap and I hope they will do something to fill that gap. What worries me about the rescue package that has been put together is that it is accompanied by severe austerity measures that are likely to lead to a weaker European economy. A weaker European economy is going to increase the deficit so that in fact the deficit reduction that people hope for will not fully be realized. There may be some, but it will be limited.
The risk is that Europe goes into the kind of death spiral that Argentina went in when it had a fixed exchange rate with the United States. It did not want to abandon that fixed exchange rate, there was no assistance of a substantial kind coming. Eventually concretionary measures were imposed and the deficit reduction was not what they had hoped. Finally it abandoned the currency, the fixed exchange rate, and it defaulted on the debt.”
LPM: Lets talk about ratings agencies, briefly. One obvious danger is that they have a strong commercial interest, to rate those corporations favorably that are paying them at the time. Now the Europeans are planning to register rating agencies. Do you think that will solve the problem?
JS: “No, the problem is obviously far deeper than that. We know the mailing address of S&P and Moody’s. It’s not a question of whether they are registered or not, the problem is that they have flawed incentives and they have flawed models. Their ratings of mortgages, mortgage bonds, and CDOs was abysmal. That facilitated the crisis to a very great extent. They had incentives to give excessively good ratings. Correcting the problem is not so easy. There are a few things that clearly have to be done. One of them is to change the incentive structures. A second thing is pension funds. Governments should not rely on these rating agencies delegating their oversight responsibility to a group of people that clearly have demonstrated incompetence. It is striking they maintain their role after their proven incompetence. In some cases they cause bubbles as in the case of the housing crisis, and in some they lead to crises as they did in Thailand and in Greece.”
LPM: Europe is also considering the idea to create a European Rating Agency to create a balance between the European and the Anglo World. What do you think of that idea?
JS: “I think diversity is a good thing, but if they use the same flawed model, if they have the same flawed incentive structures, if they resort again to delegate responsibility for oversight through private parties with distorted incentives and limited competence, they are going to have the same problem. The evidence is that in many ways competition among the Rating Agencies was a race to the bottom. So that one should not think that just having more Rating Agencies by itself will solve the problem.”
LPM: Do you think that the “Financial Transaction Tax” to curtail speculation might help?
JS: “Yes, I think it would help. I think that it would help in two ways. First, the Financial Sector has gotten bloated. It has been subsidized massively and repeatedly by the rest of the economy. We bailed out the banks over and over again. And we forget that. In the United States we had the S&L bailout, globally we have had the “Mexican Bailout.” That was not a bailout of Mexico, but of American financial institutions that made bad credit assessments. Again the same thing is true of Indonesia, Korea, Thailand, Russia, Brazil and I could go on. Each of these were instances of the financial markets failing to do their jobs in assessing credit worthiness and then being bailed out by governments. So we have a bloated financial sector that failed to perform its societal functions. Secondly, a well-designed Financial Transaction Tax could be useful in providing incentives to make the market work better. The basic principle on taxation is you should tax bad things, not good things. We want encourage work, we want encourage savings, we want to discourage speculation, we want to discourage pollution. And that is what the Financial Transaction Tax is intended to do. America’s financial sector polluted the entire world with its toxic mortgages. Every economist believes that we ought to tax toxic waste, we ought to tax the producers of this kind of toxicity as well.”
LPM: Germany is also debating to introduce some kind of a “bank fee” where banks are paying into a fund to provide for their next bail out. Does that make sense to you?
JS: “I very strongly support this! It seems to me that is part of banking, evidently, that they continue to make bad mistakes and it is part of the cost of running the financial system that ought to be borne by the financial system, not by the rest of the economy. If you don’t do that, you will get an over-bloated financial sector. If it’s well designed, it can improve the efficiency of the financial markets, for instance, the real risk is associated with the “too big to fail” banks. In the United States last year we had a 140 small banks go bankrupt. The cost for the tax payer was very limited. It is the big banks that represent the real threat to our economy and to our society.
If you had a tax that was related to the risk, the risk associated with size, the risk associated with flawed incentive structures, the risk associated with leverage, the risk associated with excessive risk taking. That kind of levy on the banks would in fact discourage the bad behaviour, and at the same time would raise revenues that would provide a kitty for the times in which its needed.”
LPM:You were talking about the anger of US citizens before. Why do you think there is no social movement resulting from the Financial Crisis?
JS: “Part of the problem in America is unfortunately the passivity. What they have seen is the banks destroy our economy, the rescue of the banks putting the fiscal health of the United States and Europe in a precarious position, but these same banks then speculating against the countries the governments that rescued them, biting the hand that fed them, the bank officers receiving huge bonuses even in the years in which there were massive losses. Resisting regulations that would prevent this from recurring, and then going on with practices that include exploiting credit card users, pushing for bankruptcy reform that encourages borrowing beyond people’s means, they can not get out from under the burdon of the debt that has been created.”
LPM: Where is 14 trillion US dollars of debt leaving the United States these days? Is the US that much more stable then Europe?
JS: “The United States is perhaps in a better position then Europe, because most of the debt is in dollars, and we can print dollars. There is no real question of our ability to meet our obligations, if only in a phony way. But I think that the worry, the recognition is that we, like Greece, are in a situation that is probably unsustainable. Greece has already started to take measures. We haven’t done that, at least not fully. The magnitude of the problem is illustrated by the fact it is estimated that in the not too distant future, the debt-to-GDP ratio in the United States will be a hundred percent, which is not that different from Greece. Its interest rate is five percent. That means five percent of GDP will be required every year to service the debt. The interest rate could even be higher, but federal tax revenues have only been about eighteen percent. We would be devoting almost a third of our total tax revenues to just servicing the debt, but when you look at the problems posed by the aging of the population, even without this we will face a massive shortfall. There are some answers, for example cutting back on weapons that don’t work against enemies that don’t exist, our bloated military. Also imposing taxes of the kind we talked about, a financial transaction tax, and bank levies, but these are not easy measures in the United States. The military industrial complex has been pushing for a larger and larger military. Yet, the opposition to any tax is so great while people demand the services the government provides. It is an impossible situation something will have to give! It’s just a matter of time, but making things more difficult is that timing is critical and if we start cutting back now we could go into a double dip recession. I have advocated that this is not the time to cut back spending, but this is a time to refocus spending on investments that yield high returns. If we do that we can actually lower the long term national debt, even if we have higher short term deficit.”
Conspiracy of Banks Rigged Bids, Local Governments Robbed
“That money is what we use to build schools”
By Martin Z. Braun and William Selway | Bloomberg | May 18, 2010
A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market.
The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds. On one end of the line was Steven Goldberg, a trader with Financial Security Assurance Holdings Ltd. On the other was Zevi Wolmark, of advisory firm CDR Financial Products Inc. Goldberg arranged to pay a kickback to CDR to land the deal, according to government records filed in connection with a U.S. Justice Department indictment of CDR and Wolmark.
West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks.
They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money.
California to Pennsylvania
The workings of the conspiracy — which stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and non- profits — can be pieced together from the Justice Department’s indictment of CDR, civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials.
“The whole investment process was rigged across the board,” said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. “It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded.”
Anderson said he referred scores of cases to the Justice Department when he was with the IRS. He estimates that bid rigging cost taxpayers billions of dollars. Anderson said prosecutors are lining up conspirators to plead guilty and name names.
“This will go on for a long time and a lot of people will be indicted,” he said in a telephone interview.
Bidding Encouraged
The U.S. Treasury Department encourages public bidding for GIC contracts to ensure that localities are paid proper market rates. Banks that conspired in the bid rigging for GICs paid kickbacks to CDR ranging from $4,500 to $475,000 per deal in at least 10 different transactions, government court-filed documents say.
A GIC is similar to a certificate of deposit, but its rates aren’t advertised publicly. Instead, towns rely on advisory firms such as CDR to solicit competing offers.
In the bid-rigging deals, CDR gave false information to municipalities and fed information to bankers allowing them to win with lower interest rates than they were otherwise willing to pay, the indictment says. Banks took their illegal gains from the additional returns and paid CDR kickbacks, according to the indictment.
Not Guilty Plea
Wolmark, 54, who was indicted by a federal grand jury in Manhattan on antitrust, conspiracy and wire fraud charges, to which he pleaded not guilty, declined to comment when reached by telephone at CDR’s office. Goldberg, who hasn’t been charged, declined to comment, says his attorney, John Siffert.
Court records in the broadest-ever criminal investigation of public finance shed new light on how Wall Street’s biggest banks were cheating cities and towns during the same decade in which they were setting the stage for a global economic collapse.
As the banks were steering the world’s financial system to the brink of catastrophe by loading more than $1 trillion of subprime mortgage loans into opaque debt investments, they were also duping public officials across the U.S.
Many of the same bankers and advisers who sold public officials interest-rate swap deals that backfired for taxpayers are now subjects of the criminal antitrust investigation involving GICs.
The swaps are derivatives designed to keep monthly interest payments low as lending rates change. Municipal- derivative units of the largest U.S. banks also sold the contracts, public records across the nation show.
Key Witness
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Options and futures are the most common types of derivatives.
A key witness in the government’s case is a former banker whom the government hasn’t named, according to a civil lawsuit filed by Baltimore, Maryland, and six other municipal borrowers against Bank of America, JPMorgan and nine other banks. The banker is providing evidence against his peers.
The witness, who was employed by Bank of America Corp. starting in 1999, has laid out the inner workings of the scheme in confidential meetings with investigators, according to the civil lawsuit.
Bank of America, based in Charlotte, North Carolina, has also been providing prosecutors with evidence since at least 2007. The bank voluntarily reported its own illegal activity and agreed to cooperate with the Justice Department’s antitrust division, according to a press release from the company.
Amnesty Agreement
In exchange, the government promised in an amnesty agreement not to prosecute the bank. Bank of America spokeswoman Shirley Norton in San Francisco said in an e-mail the firm is continuing to cooperate.
The banker who has been cooperating with the Justice Department said he overheard his colleagues change Bank of America’s bids after coaching from brokers or other banks bidding on the same deal, according to information that the firm provided to plaintiffs in the civil case filed by seven municipalities.
At least five former bankers with New York-based JPMorgan, the second-biggest U.S. bank by assets, conspired with CDR to rig bidding on investment deals sold to local governments, according to the Justice Department list now under seal.
At least three other former JPMorgan bankers are targets of the investigation, according to filings with the Financial Industry Regulatory Authority. Six bankers with Bank of America, the biggest U.S. lender, are also named in the sealed Justice Department list as participants.
16 Companies
Eighteen employees at 16 other companies, including units of General Electric Co., UBS AG and FSA, then a unit of Brussels lender Dexia SA, are also cited as co-conspirators by the Justice Department, according to the list under seal. None have been charged in the case.
Citigroup spokesman Alex Samuelson, Dexia spokesman Thierry Martiny, GE spokesman Ned Reynolds, JPMorgan spokesman Brian Marchiony, UBS spokesman Doug Morris, and Ferris Morrison, a spokeswoman for Wells Fargo & Co., which acquired Wachovia in 2008, declined to comment.
Former CDR employees Douglas Goldberg, Daniel Naeh and Matthew Rothman, pleaded guilty in federal court in Manhattan in February and March to wire fraud and conspiracy to rig bids.
In October, CDR was charged with criminal conspiracy and fraud, along with Chief Executive Officer David Rubin, 48, vice president Evan Zarefsky and Wolmark. They pleaded not guilty. Rubin, who was also charged with making fraudulent bank transactions, faces as much as $3 million in fines and more than 30 years in jail if convicted.
No Law Broken
Rubin declined to comment in a telephone call.
“Mr. Rubin doesn’t think that CDR broke the law in any of these transactions,” said Laura Hoguet, his attorney in New York.
Daniel Zelenko, a lawyer for Zarefsky in New York, said he was confident his client will prevail at trial.
“The government continues to show that it simply doesn’t understand how this market operated,” Zelenko said in an e- mail.
During more than three years of investigation, federal prosecutors amassed nearly 700,000 tape recordings and 125 million pages of documents and e-mails regarding public finance deals.
$400 Billion
Municipalities and states raise $400 billion a year by selling bonds. They invest much of those proceeds in GICs, sold by banks or insurance companies. Those accounts hold taxpayer money and earn interest before public agencies spend it.
Banks and advising firms illegally siphoned money from taxpayers by paying artificially low interest rates in the GICs, the CDR indictment says. The money was intended to build schools, hospitals, roads and sewers and refinance higher-cost debt.
The bid-rigging schemes were orchestrated by CDR and other advisory firms, according to the indictment and the civil suits. Advisers are unregulated private firms hired by local governments to consult on public finance deals — and are almost always paid by the banks that arrange the transactions or manage the GICs.
Wilshire Boulevard
CDR, which was located on Wilshire Boulevard in Beverly Hills, California, during the transactions under investigation, has provided advice on more than $158 billion in public transactions since it was founded in 1986, according to its website.
CDR helped arrange deals in which financial firms took millions of dollars in profits from GICs, Bloomberg News reported in October 2006. Almost all of the deals were shams: As much as $7 billion in bond-issue proceeds were invested in GICs but never spent for the intended purpose of providing services to taxpayers.
CDR signed off on interest-rate swaps to municipalities, as banks took hidden fees sometimes 10 times as much as they charged on fixed-rate bond deals, according to data compiled by Bloomberg. For the public, the swaps were fraught with risks.
In the past decade, banks have peddled swaps the world over, from Jefferson County, Alabama — which was forced to the brink of bankruptcy — to the hill towns of the Umbria region of Italy. Many of these swaps soured when the credit crisis began in 2007.
Getting Out
Dozens of municipalities have paid banks billions to get out of swap contracts. The agency that oversees the San Francisco-Oakland Bay Bridge said it spent $105 million to escape its deal in July 2009.
“They were gouging the municipalities,” said retired IRS investigator Anderson, 59. “Beside the excessive fees, some of the swap deals just didn’t work. It was just awful. The same people were involved in the GIC end of the market.”
Bid rigging not only cheated cities and towns, it also illegally denied the IRS required taxes from GIC income, Anderson said. The evidence is clear in telephone recordings made on GIC desks, he said. “We could hear people talking about how everyone knew who was going to win the bid. You could tell it was just everyday business.”
The Securities and Exchange Commission is conducting a probe of bid rigging from its Philadelphia office that’s parallel to the Justice Department investigation.
More Probes
State attorneys general in California, Connecticut and Florida are also investigating. Bank of America, JPMorgan, Fairfield, Connecticut-based GE, and Zurich-based UBS have disclosed in regulatory filings that they may be sued by the SEC.
The Federal Bureau of Investigation has raided at least two of CDR’s competitors, Pottstown, Pennsylvania-based Investment Management Advisory Group Inc., known as Image, and Eden Prairie, Minnesota-based Sound Capital Management. Neither has been charged.
Robert Jones, a managing director of Image, declined to comment, after answering a call to the firm’s office. Johan Rosenberg of Sound Capital didn’t return calls seeking comment.
Tape recordings cited in a letter by Justice Department prosecutor Rebecca Meiklejohn show how those deals worked. In two GIC bids for the Utah Housing Corp., CDR’s Zarefsky advised an unidentified trader that his firm could lower its offer by “a dime,” or 10 basis points (a basis point is 0.01 percentage point).
‘A Couple Bucks’
The West Valley City-based housing agency accepted contracts with GE’s FGIC Capital Market Services division for 5.15 percent and 3.41 percent in 2001, public records show. Zarefsky didn’t return calls seeking comment.
“I can actually probably save you a couple bucks here,” Zarefsky told the trader, according to the letter citing the tape recording.
The Utah agency, which finances mortgages for low-income residents, didn’t know that financial firms were cheating it out of money that could have been used to help home buyers, said Grant Whitaker, who runs the agency. “It sounds like somebody got a better deal than we did,” he said in a telephone interview.
Such deals could produce large illegal profits by banks, said Bartley Hildreth, public finance professor at the Andrew Young School of Policy Studies at Georgia State University in Atlanta.
A New Wrinkle
“Just a basis point on many of these deals is tens to hundreds of thousands of dollars,” he said.
This isn’t the first time Wall Street has faced accusations of reaping excessive fees on investment deals with public officials. Goldman Sachs Group Inc., Lehman Brothers, which filed for bankruptcy in 2008, Merrill Lynch & Co. and other securities firms agreed by 2000 to pay more than $170 million to settle SEC charges that they had sold overpriced Treasury bonds to municipalities.
The so-called yield burning drove down the returns that local governments earned and trimmed required payments to the IRS. The firms neither admitted nor denied wrongdoing.
Even as the banks were settling with regulators, they devised another way to burn yield, this time by skimming money from GICs, according to the indictment, which said the conspiracy went from 1998 to at least 2006.
In the lawsuit against Bank of America and JPMorgan filed in New York in June 2009, the city of Baltimore, two Mississippi universities and four other municipal borrowers say that bankers from those two companies colluded in bidding for GIC contracts in Pennsylvania.
Holiday Party
At a holiday party sponsored by advising firm Image at Sparks Steak House in Manhattan early in the past decade, the Pennsylvania deals were discussed by the Bank of America trader who is cooperating with prosecutors and Sam Gruer of JPMorgan, the civil antitrust lawsuit says.
The Bank of America trader told Gruer that he was happy that the two banks weren’t “kicking each other’s teeth out” on bidding for certificates of deposits for bond proceeds, the suit says. That information was provided by Bank of America to the plaintiffs.
Gruer, who was informed by prosecutors in 2007 that he was a target of the investigation, declined to comment.
Coaching a Bidder
The trader who is now a federal witness joined Bank of America after being recommended by Image, according to information that the bank turned over to the Baltimore-led plaintiffs. He was assigned by Phil Murphy, who headed the municipal trading desk, to be Bank of America’s point person for investment contracts bid by Image, the lawsuit says.
Image coached Bank of America in winning an investment contract in Pennsylvania, according to an internal e-mail exchange in May 2001 between Bank of America trader Dean Pinard and Image’s Peter Loughhead that was obtained by Bloomberg News. The e-mail was provided to Bloomberg by a person who got it from Bank of America and asked to remain unidentified.
Loughead, who ran bids for Image, advised Pinard on how much to offer for managing the cash fund for a $10 million bond issued by the sewer authority of Springfield Township, York County, 100 miles (161 kilometers) west of Philadelphia.
‘Don’t Fall on Any Swords’
Pinard said in the e-mail to Loughead that Bank of America was willing to pay the town as much as $40,000 upfront to win the deal. Loughead wrote that the bank didn’t need to pay that much.
“Don’t fall on any swords,” Loughead wrote to Pinard the day before bids were submitted. He suggested that the bank could win the contract with a bid of slightly more than $30,000. The next day, Bank of America offered $31,000. It won the bidding, authority records show.
Loughead didn’t return calls seeking comment. Pinard didn’t respond to telephone requests for an interview and no one responded to a knock on the door at his Charlotte home.
Image ensured that Bank of America would dominate GIC deals in Pennsylvania by soliciting sham bids from other banks to make the process look legitimate, according to testimony from the trader cooperating with the Justice Department.
Bank of America would return the favor to Image by submitting so-called courtesy bids at the adviser’s request, allowing JPMorgan to win some of the deals, according to information that Bank of America gave plaintiffs’ attorneys.
Switching Jobs
Bank of America has cooperated with the municipalities that were suing the bank as part of its 2007 amnesty agreement with the Justice Department.
Traders such as FSA’s Goldberg often had worked for several banks and insurance companies that had a role in GIC contracts, according to employment records with Finra, the self-regulator of U.S. securities firms. CDR employees went on to work in the derivative departments of Deutsche Bank AG and UBS, the records show.
Before joining Bank of America, Pinard, 40, worked at Wheat, First Securities Inc. in Philadelphia with two bankers who would later join Image, according to broker registration records.
“Few people understand this part of public finance,” Georgia State’s Hildreth said. “It is a very small band of brothers who know the market. So, of course, they are going to reap the benefits.”
34 States
For nearly a decade, CDR founder Rubin, Wolmark, and Zarefsky helped fix prices on investment deals that cheated taxpayers in at least 34 states, according to their indictments and records filed in the case.
FSA’s Goldberg, who received a bachelor’s degree in accounting from St. John’s University in Queens, New York, worked with CDR employees on GIC deals, according to the indictment and public records. Goldberg worked from 1999 to 2001 at GE, which gets 35 percent of its revenue from financial services.
Goldberg was referred to only as “Marketer A” in the CDR indictment. “Marketer A” was then later identified as FSA’s Steven Goldberg in the Justice Department list of co- conspirators.
At GE, Goldberg worked with Dominick Carollo, a senior investment officer for FGIC, and Peter Grimm, who worked there from 2000 until at least 2006, according to court documents and public records. GE sold FGIC in 2003 to a group led by mortgage insurer PMI Group Inc.
Funneling Kickbacks
Goldberg and Grimm worked with CDR to increase their gains on GIC deals, according to the CDR indictment and conspirator list. Carollo left GE in 2003, joining the derivatives unit of Royal Bank of Canada. Grimm and Carollo didn’t respond to telephone calls and e-mails seeking comment.
Goldberg continued to participate in the conspiracy after he left for FSA in 2001 and used swap deals with Toronto-based Royal Bank of Canada and UBS to funnel kickbacks to CDR, according to the indictments and the Justice Department list of conspirators. Royal spokesman Kevin Foster said the company is cooperating the government.
FSA, Royal Bank of Canada and UBS all worked on public finance deals in West Virginia that prosecutors say involved bid rigging.
At least three times, Goldberg conspired with CDR to pick up deals with West Virginia agencies, according to a guilty plea by former CDR employee Rothman and other records filed in federal court in Manhattan. Among them was a $147 million investment contract with the West Virginia School Building Authority.
‘Raw Greed’
That state’s schools need every penny they can get, said Mark Manchin, executive director of the school authority. With 17 percent of West Virginians below the poverty line in 2008, the state was 45th among the 50 U.S. states, according to a 2009 Census Bureau report. Manchin said some students study in dilapidated, century-old buildings.
“It’s just raw greed at the expense of the most vulnerable,” he said in a telephone interview. “With deteriorating facilities all over the state, that money is what we use to build schools.”
Bank of America’s municipal derivatives division, which was formed in 1998, worked on the 14th floor of the Hearst Tower in Charlotte. The space was so tight that the banker who’s cooperating with the Justice Department said he could hear others in the office change their bids when they got word from financial advisers, according to information Bank of America gave Baltimore.
Bank of America’s Murphy told the banker helping prosecutors that Image would use sham auctions to steer deals to Bank of America if the employee told Image that he “wanted to win” and “would work with” Image, according to the civil suit filed by Baltimore. Murphy declined to comment.
Verbal Cues
They would use verbal cues to communicate. The banker would ask whether the bid was a “good fit” to get information on competing bids from Image. Sometimes Image’s Martin Stallone said Bank of America’s bids were “aggressive,” or too high, and had to be reworked.
At other times, Stallone would ask the banker to bid a specific number, according to the civil suit.
Stallone didn’t respond to messages left for him at work or to a list of questions faxed and e-mailed to Image.
Like Financial Security Assurance, Bank of America also paid kickbacks to brokers for their help in getting deals, according to the Baltimore lawsuit, which based its allegations on information provided by Bank of America.
On June 28, 2002, Douglas Campbell, a former municipal derivatives salesman at Bank of America, wrote in an e-mail to his boss, then managing director Murphy, that he had paid $182,393 to banks and brokers not tied to any particular deals.
‘Better Relationship’
Three payments totaling $57,393 went to CDR, which played no role in any transaction connected to that amount. A copy of the e-mail was contained in a North Carolina lawsuit filed by Murphy against Bank of America in 2003.
“The CDR fees have been part of the ongoing attempt to develop a better relationship with our major brokers,” Campbell wrote.
The bid rigging in GIC contracts has reduced public funding for schools and housing across the U.S.
“If this was going on in a small state like West Virginia, it must have been huge elsewhere,” the state’s Assistant Attorney General Doug Davis said.
To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net
SEC Admits to Inadequate Tools to Conduct Investigation
Trader’s Harrowing Tape of Market Plunge Reveals Big Name Sellers
By PAM MARTENS | May 17, 2010
SEC Chair Mary Schapiro made a stunning admission during House subcommittee hearings last week seeking answers to the May 6 hit and run in the stock market which briefly trimmed 998 points off the Dow and caused massive losses to small investors who had placed stop loss orders on individual stocks.
According to Ms. Schapiro, the SEC has no consolidated audit trail that captures time and sales in a chronological order among the 40 or more electronic trading platforms and exchanges that constitute today’s deeply fragmented U.S. stock market.
Ms. Schapiro said in her testimony before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises that there were 66 million trades on May 6, coming from the 40 or more stock trading venues. The SEC has requested the individual trading records and must figure out how to review all the disparate trading in sequential time order. Some trading records reside at unregulated entities like hedge funds. Other trades are done by dark pools, internal matching of buys and sells inside brokerage firms (benignly called internalization) and over the counter derivative trades that could impact the stock market but have no oversight by anyone. Ms. Schapiro said she has issued subpoenas but didn’t say to whom.
Ms. Schapiro’s testimony raises the question as to whether the SEC has been properly monitoring potentially rigged trading in real time up to this point.
As far back as five months ago, the SEC was gently coaxing Wall Street to let it police it with proper tools. Below is an excerpt from a speech delivered by James Brigagliano, Deputy Director of the SEC’s Division of Trading and Markets on January 21, 2010 to the Securities Industry and Financial Markets Association (SIFMA), the heavy handed trade and lobby association of Wall Street:
“Chairman Schapiro has expressed her commitment to improving intermarket surveillance. As a step towards fulfilling that commitment, she created an inter-division task force to work with markets to explore ways to establish a comprehensive consolidated audit trail for orders and executions across all markets. While we recognize that such a proposal would require a substantial effort by the SROs [Self Regulatory Organizations] and their members, a consolidated audit trail could be an invaluable regulatory tool to enhance the ability of the SROs and the Commission to detect illegal activity across multiple markets, and would greatly benefit investors and help to restore trust in the securities markets.”
Since when do real cops ask the perps for permission to police them?
Many eyebrows were raised among Wall Street skeptics when President Obama appointed Ms. Schapiro to head the SEC on January 20, 2009. Ms. Schapiro came to the SEC from the Financial Industry Regulatory Authority (FINRA), the self regulatory watchdog of Wall Street, where she served as CEO. Prior to that, she was the Chairman and CEO of the predecessor self regulator, NASD Regulation, which carried the stigma of running a private justice system for Wall Street that investors, industry employees and lawyers felt was rigged in favor of the industry. Why Ms. Schapiro did not insist on creating a consolidated audit trail in her prior regulatory roles or after the four-decade Madoff swindle was revealed remains a nagging question.
Another person to provide Congressional testimony on May 11 was Chief Operating Officer of the New York Stock Exchange, Larry Leibowitz, who was also unable to explain what caused the crash on May 6. Mr. Leibowitz’ younger brother, Comedy Central’s Jon Stewart, had upstaged the hearings the day before on his program “The Daily Show” with his own apt diagnosis. Showing an endless stream of news anchors characterizing everything from the GM bailout to the mortgage crisis to the rescue of AIG as caused by the “perfect storm,” Stewart said: “I’m beginning to think these are not perfect storms. I’m beginning to think these are regular storms and we have a sh*tty boat.”
My only quibble with Stewart’s analysis is that it’s not just that we have a sh*tty boat. It’s that the pirates have a souped up speedboat with computers run by algorithms and have infiltrated the water patrol.
The Congressional testimony of Terry Duffy, Executive Chairman of the Chicago and New York based futures exchanges, known as the CME Group, Inc., raised more alarm bells. Mr. Duffy told the House hearing that “The CME [Chicago Mercantile Exchange] markets functioned properly on May 6, 2010.” “Functioned properly” is clearly a subjective term as his market came within 3 points of being locked limit down. Locked limit down is when the futures market hits a preset percentage decline that automatically halts trading. Without the S&P 500 trading, the cash stock market would have had even less price transparency and this would have accelerated panic selling.
Speaking of the popular futures contract on the Standard and Poor’s 500 called the E-Mini, Mr. Duffy reported that “the market traded in a largely orderly manner…the bid/ask spread momentarily widened to 6.5 points…Market Regulation staff ultimately concluded that there were no anomalies represented by the level of activity or the trading strategies employed by market participants.”
Mr. Duffy’s testimony stands in stark contrast to a harrowing audio tape of the bungee jump in the Standard and Poor’s 500 futures pit between 2:42 and 2:51 p.m. New York time; 1:42 and 1:51 Central time. The tape was made by Ben Lichtenstein, who has worked on the trading floor of the Chicago Mercantile Exchange (CME) for 17 years. Starting out as a runner, then member, then trader, Mr. Lichtenstein launched a savvy service for private investors, traders and asset management companies who need to take the pulse of the futures market in real time. Called TradersAudio.com, the service provides a live audio feed directly from the trading pit in Chicago with Mr. Lichtenstein calling out the play by play as trades occur. He says it’s “like being in the pits without all the pushing and shoving.”
Mr. Lichtenstein has confirmed that this is an authentic tape of his broadcast during the plunge.
At several points on the tape, Mr. Lichtenstein clearly indicates that there is a 10 point spread between the bid and the ask. Mr. Duffy told the House hearing that the spread reached a maximum of 6.5 points. A 10 point spread shows a seriously illiquid market where big players have pulled their support.
At one point on the tape Mr. Lichtenstein yells out: “This is probably the craziest I’ve seen it down here ever.” At another point he says the move through the figure was “just nuts,” meaning when the S&P 500 broke its support level of 1100 no buying support came in; a highly unusual occurrence.
Mr. Lichtenstein calls out the names of Salomon and Morgan Stanley as sellers as the plunge worsens. Both of these firms received taxpayer bailouts and Salomon, a unit of Citigroup, is currently a ward of the taxpayer. If these firms were shorting the market for their own in-house casinos, (their proprietary trading desks), the American people have a right to know and so does Congress. It goes to the very heart of legislative proposals to ban proprietary trading at banks holding insured deposits.
In the brief morning comments that are broadcast in the audio, Mr. Lichtenstein calls out that Pru Bache is selling. Stockbrokers I checked with were shocked to learn Prudential Bache has miraculously arisen from the dead. The company was depicted in Kurt Eichenwald’s epic tome, “Serpent on the Rock,” regarding its massive securities fraud in limited partnerships in the 1980s and 90s. The jacket cover reads: “Backstabbing. Lying. Embezzling. Coverups. Just another day on Wall Street in history’s biggest corporate swindle.” It’s less than comforting to know that the name Pru Bache is being called out on a day that looks like serious manipulation at work.
Nor is it comforting to hear that Salomon is selling. Citigroup uses many monikers to trade around the world. Salomon is one of them. Here’s how Bloomberg described a trade Citigroup code named “Dr. Evil” in 2004:
“On Aug. 2, 2004, between 10:28 and 10:29 a.m., Citigroup traders sold 11.3 billion euros of government bonds in 18 seconds using MTS, according to the Financial Services Authority. A further 1.5 billion euros of bonds were sold on other markets. At the time, an average 13.5 billion euros of bonds traded each day on MTS. The traders had planned to sell only 8 billion euros to 9 billion euros of bonds and weren’t expecting the system to work as well as it did, the FSA said. About seven minutes later, they started buying back 3.8 billion euros of bonds after the securities dropped in price. The Citigroup team also bought 66,214 futures contracts and booked an $18.5 million profit on the day, the FSA said.”
I asked the CME if they would aggregate all the trades done by Citigroup and its affiliates and subsidiaries (Citigroup, Citibank, Salomon, Smith Barney, etc.) to see if Mr. Duffy’s statement would hold up that there “were no anomalies represented by the level of activity or the trading strategies employed by market participants.” The CME’s spokesperson, Allan Schoenberg, responded:
“Per your request for access to client trading information we do not provide access to that. As for your question about Citigroup and access to their information specifically you would have to discuss that with Citigroup. As CFTC Chairman Gensler noted, data that he and his staff have reviewed shows that the trades he referred to in his testimony appeared to be a bona fide hedging strategy.”
I took and passed the commodities licensing exam in 1986. At that time, a bona fide hedger was a party like an oil company hedging the price of oil; or a farmer in the Midwest hedging the price of corn. I don’t think securities laws intended that a Wall Street firm could trade for its own account, against the interest of its customers, and call it bona fide hedging. Until we know just what account these big firms were trading for and the aggregated volume of these trades by firm, we know nothing useful about their May 6 conduct. And let’s remember that these firms are already under investigation for potential rigging of the credit default swap and collateralized debt obligation markets.
According to Mr. Duffy, there were 1.6 million (yes, million) contracts traded in the E-Mini S&P 500 in the pivotal hour of 2:00 to 3:00 p.m. New York time. Each E-Mini trades at 50 times the level of the S&P 500 futures price. At 1100 on the S&P, that would be $55,000 per contract or about $88 billion (yes, billion) in one hour, an astonishing amount.
Last week Reuters leaked an internal document from the CME showing that Waddell & Reed has sold 75,000 contracts during that period with the suggestion that it might have triggered the plunge. The idea that this tiny Midwest mutual fund firm pulled something over on the Wall Street bad boys is specious at best and an intentional distraction at worst. If the report is correct, Waddell & Reed’s contracts represented 4.7 percent of those traded in that hour.
The Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment is slated to pick up where the House left off this coming Thursday from 10:00 a.m. to 12:30 p.m. Hopefully, the Senate will probe the issues raised above, along with the following:
During the House hearings, no mention was made of the fact that three of the largest market cap stocks in the S&P 500 suffered losses far in excess of the overall market decline on May 6, raising a strong warning sign of potential manipulation.
The S&P 500 is weighted by the market capitalization of the individual stocks. Market capitalization is the share price times the number of shares outstanding. The impact of a price change in the S&P 500 index is proportional to significant price changes in the stocks ranking highest in market cap weighting. (Big price declines in a handful of the top tier stocks can crater the market index.) Apple Computer, GE and Procter and Gamble all fall within the top 10 component stocks of the S&P 500 and each of these stocks appears to have been targeted for excessive selling by some entity or algorithmic program on May 6. Sharp price declines in these pivotal stocks in the cash stock market quickly transmuted into selling in the futures market, creating a frenzy in the highly leveraged Chicago futures pits.
According to Standard and Poor’s website on May 14, 2010, Apple Computer ranks number 2 in importance in the S&P 500; GE ranks 4th; Procter and Gamble ranks 5th. At the worst point in the market, Apple had declined by 21.5 percent; GE by 16.6 percent; and Procter and Gamble by a whopping 36 percent. The overall market at its worst level had declined by only 9.2 percent. (3M dropped by 21 percent at its worst point but does not rank in the top 10 of the S&P by market cap.)
Before our so-called fair and efficient markets become the brunt of jokes on more comedy shows around the globe, the Senate needs to stop trying to legislate reforms in the dark and get to the bottom of just how rigged Wall Street really is.
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than being long Procter & Gamble. She and family members own less than 500 shares in Procter & Gamble. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
Ahmadinejad welcomes Lula da Silva
Press TV – May 16, 2010
Iranian President Mahmoud Ahmadinejad has officially welcomed his Brazilian counterpart Luiz Inacio Lula da Silva in the capital of Tehran ahead of the G15 summit.
President Lula arrived in Tehran, accompanied by a 300-member delegation — including five Brazilian cabinet ministers — to attend the Group of 15 summit on Monday.
The Brazilian president is expected to meet with the Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei during his visit.
According to IRNA, Brazilian and Iranian officials signed eleven memorandums of understanding on Sunday to promote bilateral cooperation in the fields of economy, agriculture, and industry.
Brazil, a non-permanent member of the United Nations Security Council, has been making efforts to break the deadlock over Iran’s nuclear program and help reach an agreement on a fuel swap deal.
The G15 is made up of countries from Asia, Africa, and Latin America with a common goal of economic growth.
Earlier on Saturday, foreign ministers from the group of 15 met to discuss measures to tackle the global economic crisis.
Envirocan’s own study undercuts national biodiesel plan
Canadian Trucking Alliance | May 14, 2010
OTTAWA — Another study casts some doubt on the net benefits of biodiesel — this one a government study in Canada — and a group of carriers are using it to question Ottawa’s plan to implement a biodiesel mandate in this country.
According to the Canadian Trucking Alliance, a study conducted in 2009 by EcoRessources Consultants (ERC) for Environment Canada, takes some of the wind out of the national biodiesel proposal.
The study, obtained by the CTA, concludes that the societal costs of a proposed federal two-per cent biodiesel (B2) mandate would outweigh the benefits by a factor of five.
CTA had called for a cost-benefit analysis to raise awareness of the issues confronting the trucking industry should a biodiesel mandate be introduced.
The ERC study, says CTA, adds credence to concerns that such a policy is really a boost to the farming industry masked as an environmental initiative.
Plus, there are still a number of operability issues associated with biodiesel that are unresolved, says the carrier group.
There have been several studies in recent years that show the environmental impact of producing biodiesel — by clearing crop land and forestry and shifting food supply to the fuel market — would undercut most, if not all, of biodiesel’s carbon reduction benefits.
According to ERC, “the total incremental cost to society of the proposed biodiesel regulation for on-road use would be $4.5 billion between 2011 and 2035, whereas the benefits, in the form of reduced GHG emissions, are valued at only a tad over $860 million.”
“On a regional basis, Western Canada would take the biggest cost hit at about $1.8 billion, followed by Ontario at $1.3 billion and Quebec at more than $450 million,” points out CTA.
The trucking industry, the single largest consumer of diesel, would ultimately be burdened with the bulk of the incremental costs.
ERC also said it was “probable” that higher and more volatile fuel prices may be experienced in the first few years after introduction the biodiesel mandate.
David Bradley, CTA’s president and CEO, says “the study only adds to the questions that exist over why the federal government would pursue a biodiesel mandate.”
Greece’s woes a chance to bury Turk-Greek rivalry?
Reuters | May 15, 2010
ANKARA/ATHENS — Greece’s debt crisis may lead to improved ties with its old rival Turkey as the prime ministers of the two countries meet to discuss issues from cuts in defense spending, to financial crisis management.
Turkey’s Prime Minister Tayyip Erdogan visits Athens on Friday for talks with his Greek counterpart George Papandreou in what Turkish and Greek officials hope will bring a new era in relations between the often feuding Aegean neighbors.
With debt-choked Greece undergoing austerity measures, both Ankara and Athens have said they want to achieve the goal of demilitarizing the Aegean as a way of cutting defense spending.
“Neither the people of Greece or Turkey need new submarines or fighter jets,” Turkey’s EU Affairs Minister Egemen Bagis said, noting the contradiction of two NATO members spending billions on defense to counter potential threat from each other.
Greece, which spends more of its gross domestic product on the military than any other European Union country, has said it also wants to reduce regional tensions with Turkey.
“In order for our people to enjoy the benefits of arms spending reductions, we must first erase the threats and create the necessary trust,” said Gregory Delavekouras, Greek Foreign Ministry spokesman.
“This meeting will deepen and widen the cooperation between our two countries,” Delavekouras said.
Western officials and economists have advocated a reduction of Greece’s armed forces as a way of reducing spending.
Greece’s Deputy Defense Minister Panos Beglitis said in March that overall defense spending in recent years was as high as 5.6 percent of GDP, about 13.4 billion euros ($17 billion). The target for this year is to cut below 3 percent of GDP.
According to the International Strategic Studies group Turkey spent $9.9 billion on defense in 2009 and $10.2 billion in 2008, but with its economy forecast to grow faster than any in the EU this year, Ankara’s need to make cuts is not as great.
With wide experience of financial disasters and IMF bailout packages, Turkey has said it is happy to share its expertise with Greece on surviving a debt crisis a decade ago.
In the first official visit by a Turkish prime minister since 2004, Erdogan accompanied by 10 ministers and 80 businessmen.
“We need to give a fresh momentum to Turkish-Greek relations and to carry them to a whole new level of cooperation which will contribute to issues that seemed problematic between the two countries,” Turkey’s Economy Minister Ali Babacan said.
Greece and Turkey nearly came to blows in 1996 over an uninhabited Aegean islet. The two have skirmished over Turkey’s occupation of Cyprus and territorial rights in the Aegean.
But ties improved since 1999, when earthquakes in both countries sparked spontaneous outpouring of aid and prompted their leaders to improve relations and sign accords.
Erdogan is likely to solicit Papandreou’s help to help push a solution for the reunification of the divided island of Cyprus, long an obstacle to Turkey’s EU membership aspirations.
Greece says it wants to see changes in behavior from Turkey in areas such as overflights and air space violations.
“We openly and clearly support Turkey’s EU accession but we want to see concrete signs that some behaviors have changed,” a Greek Foreign Ministry official said.
Semih Sediz, a columnist for Radikal, a liberal Turkish daily, said that despite their history, Turkey and Greece have ironically found sympathy for each other in times of crisis.
Earthquakes, Great Depression deprivations or persecution from military juntas have provoked Turkish-Greek empathy.
“There is a lot of empathy in Turkey for Greece right now,” now,” Sediz said. “We know a lot about IMFs, belt-tightening, union unrest, all those things. We’ve been down that road.”
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Book Review
Shattered Dreams: The HPV Vaccine Exposed (2019)
By Christina England – 30 Q&As – Book Review & Summary
Lies are Unbekoming | September 4, 2026
… Gardasil received FDA fast-track approval in 2006, Cervarix followed in 2009, and Gardasil 9 was approved in December 2014 with more than double the aluminium adjuvant content of the original. The commercial context is specific. Merck was about to lose patent protection on Zocor and faced $18 billion in Vioxx injury claims from a cardiovascular drug the company had marketed while suppressing its own data showing a five-times increase in heart attacks. Analysts projected the global HPV vaccine market at $4 billion by 2011, contingent on government-funded national programs for teenage girls. The 1986 National Childhood Vaccine Injury Act had already granted manufacturers complete liability immunity. By 2013, Japan had withdrawn its HPV vaccine recommendation after cataloguing severe adverse reactions in hundreds of girls. No Western government followed. The establishment position across the UK, US, Australia, and most of Europe held, and still holds, that the vaccines are safe and effective, that reported injuries are coincidental, and that cervical cancer prevention justifies the program. The book was published into this position, not against a vacuum.
Shattered Dreams sits alongside Mary Holland’s The HPV Vaccine On Trial and Viera Scheibner’s foundational vaccination work as part of the documented record on what has been done to a generation of teenage girls under the banner of cancer prevention. The full summary unpacks three specific findings: that Merck used the aluminium adjuvant itself as the “placebo” control in 92.5% of trial subjects, making it structurally impossible to detect excess reactions from the adjuvant; that Dr. Sin Hang Lee found HPV DNA fragments bound to aluminium in every one of sixteen Gardasil samples tested, and in the blood and spleen of a New Zealand girl six months after her third dose; and that in every country with high vaccination coverage, including Australia, the UK, Norway, and Sweden, cervical cancer rates have stopped declining and started rising specifically in the vaccinated cohort. Martínez-Lavín’s 2017 calculation puts the number needed to seriously harm with Gardasil 9 at 140, and the number needed to vaccinate to prevent one case at 1,757. Thirteen young women are seriously harmed for every one who benefits. The vaccine was approved on the basis of trials that could not detect what the trials were supposed to detect, and it is still being given to twelve-year-olds today. … Read full review
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