Thursday, July 1, 2010


Any ONE fundamental error in neoclassical theory should be sufficient reason to reject conclusions based upon that theory. Here are five fundamental errors in the theory:

#1. A fundamentally incorrect "method": the economist uses "correlation" and "post hoc, ergo propter hoc" (after-the-fact) reasoning, rather than the "scientific method".

#2. A fundamentally inverted worldview: the economist sees the environment as a subsystem of the economy, rather than the other way around. In other words, economists are trained to believe that natural resources come from "markets" rather than the "environment". The corollary is that "man-made capital" can substitute for "natural capital". But the First Law of thermodynamics tells us there is no "creation" -- there is no such thing as "man-made capital". Thus, ALL capital is "natural capital", and the economy is 100% dependent on the "environment" for everything.

#3. A fundamentally incorrect view of "money": the economist sees "money" as nothing more than a medium of exchange, rather than as social power -- or "political power". But even the casual observer can see that money is social power because it "empowers" people to buy and do the things they want -- including buying and doing other people: politics.

If employers have the freedom to pay workers less "political power", then they will retain more political power for themselves. Money is, in a word, "coercion", and "economic efficiency" is correctly seen as a political concept designed to conserve social power for those who have it -- to make the politically powerful, even more powerful, and the politically weak, even weaker.

#4. A fundamentally incorrect view of his raison d'etre: the economist sees "Homo economicus" as a "Bayesian utility maximizer", rather than "Homo sapiens" as a "primate". In other words, contemporary economics and econometrics is WRONG from the bottom up -- and economists know it. The entire discipline of economics is based on a lie -- and economists know it. Moreover, if human behavior is not the result of mathematical calculation -- and it isn't -- then in principle, economists will NEVER get it right.

#5. A fundamentally incorrect view of economic élan vital: the economist sees economic activity as a function of infinite "money creation", rather than a function of finite "energy stocks" and finite "energy flows". In fact, the economy is 100% dependent on available energy -- it always has been, and it always will be. See a synopsis of the current energy situation at .

Bush admits that Iraq Had Nothing To Do With 9/11

Click this link ......

Senator Carl Levin Fiddling With War While Detroit Burns

General Petreaus is being confirmed today as the new commander of the war in Afghanistan. His confirmation hearing in Senate Armed Services Committee on Tuesday, chaired by Senator Carl Levin, was noteworthy only because of the Senators’ refusal to ask critical questions about the 9-year-old war that has claimed the lives of over 1,000 soldiers and countless Afghans. The only debate in the hearing centered on whether there should be a timeline of July 2011 to begin the drawdown of US forces, or whether our commitment should be open-ended. Questioning the war itself, as the majority of Americans now do, was only done by the CODEPINK activists in the audience, who were constantly threatened with arrest as they held up signs saying “New General, Old Graveyard”, “Obama’s Vietnam” or simply “No More War!”

There was, however, one heated exchange the media missed because it happened just after the hearing ended. As Senator Levin was leaving the room, CODEPINK members, just back from the U.S. Social Forum in Detroit, confronted the Senator from Michigan. “Senator, how can you spend $33 billion more for an unwinnable war when your hometown of Detroit is falling apart?” said CODEPINKer Tighe Barry, who is from Detroit. “Shame on you, Senator. We need jobs in Detroit, not more bombs in Afghanistan,” said Joan Stallard.

It was the only time the Senator lost his cool. Shaking his finger at the protesters, he yelled, “I live in Detroit. You don’t know what you’re talking about. Detroit’s problems have nothing to do with the war.”

But wasting billions of dollars on more killing in Afghanistan means starving our cities of financial resources, and Detroit is a tragic example of this trade-off. With the tanking of the auto industry and government neglect, Detroit now looks and feels like a war zone. Tens of thousands of homes and businesses have been abandoned and are left crumbling. Unemployment is higher than any major U.S. city, crime and drugs are rampant, and the dilapidated high schools have a shocking dropout rate of 38%.

With all its factories and skilled labor, Detroit could have become the epicenter of good, green jobs for a 21st century economy. With the help of government investment and incentives, Detroit could be churning out electric vehicles and cars that get 100 miles per gallon. It could be building the components for high-speed rail, wind turbines and solar panels. The Motor City could have been in the driver’s seat, steering the country out of its economic depression.

Instead, Detroit is careening off the cliff and elected official like Senator Levin are throwing trillions of dollars into a bloated military budget and unwinnable wars. Detroit’s own citizens—the ones who have not yet abandoned the city—have been forced to pay for their own demise. In the past decade, residents of Detroit have paid $1.8 billion for wars in Iraq and Afghanistan. Taxpayers in Senator Levin’s home state of Michigan have been forced to pay $27.8 billion in war spending since 2001.

That same money could have retrained tens of thousands of workers for green jobs and retooled dying factories. It could have paid for 390,000 teachers and librarians or provided 5,000,000 Pell grants so students could get the new skills they need for the new economy. It could have alleviated Detroit’s devastating 40% poverty rate by providing healthcare for 4 million low-income people or meals to 27 million poor seniors. Instead, our “leaders” have chosen to feed the war machine.

So the next time Senator Levin, or any elected officials, tells us there is no connection between our economic crisis and the war, give ‘em a piece of your mind. Better yet, call your rep today (212-225-3121), as they are poised to steal another $33 billion from our cities and send it off to Afghanistan. Tell them to stop destroying our country—and Afghanistan. Tell them that from Detroit to Kabul, we need jobs, not bombs.

Who Will Pay - Wall Street Or Main Street?

Wall Street banks have been saved from bankruptcy by governments that are now going bankrupt themselves; but the banks are not returning the favor. Instead, they are engaged in a class war, insisting that the squeezed middle class be even further squeezed to balance over-stressed government budgets. All the perks are going to Wall Street, while Main Street slips into debt slavery. Wall Street needs to be made to pay its fair share, but how?
The financial reform bill agreed to on June 25 may have carved out some protections for consumers, but for Goldman Sachs and the derivatives lobby, the bill was a clear win, leaving the Wall Street gambling business intact. In a June 25 Newsweek article titled "Financial Reform Makes Biggest Banks Stronger," Michael Hirsh wrote that the bill "effectively anoints the existing banking elite. The bill makes it likely that they will be the future giants of banking as well."
The federal government and Federal Reserve have advanced literally trillions of dollars to save the big Wall Street players, to the point where the government's own credit rating is in jeopardy; but Wall Street has not had to pay for the cleanup. Instead, the states and the citizens have been left to pick up the tab. On June 17,Time featured an article by David von Drehle titled "Inside the Dire Financial State of the States," reporting that most states are now facing persistent budget shortfalls of a sort not seen since the 1930s. Unlike the Wall Street banks, which can borrow at the phenomenally low fed funds rate of .2% and plow that money back into speculation, states don't have ready access to credit lines. They have to borrow through bond issues, and many states are so close to bankruptcy that their municipal bond ratings are collapsing. Worse, states are not legally allowed to default. Unlike the federal government, which can go into debt indefinitely, states must balance their budgets; and they cannot issue their own currencies. That puts them in the same position as Greece and other debt-strapped European Union countries, which are forbidden under EU rules either to issue their own currencies or to borrow from their own central banks.
States, of course, don't even have their own state-owned banks, with one exception -- North Dakota. North Dakota is also the only state now sporting a budget surplus, and it has the lowest unemployment and mortgage delinquency rates in the country. As von Drehle observes, "It's a swell time to be North Dakota."
But most states are dealing with serious, chronic defaults, putting them in the same debt trap as Greece: they are being forced to lay off workers, sell public assets, and look for ways to squeeze more taxes out of an already over-taxed populace. And their situation is slated to get worse, since the federal government's stimulus package will soon be cut, along with assistance to the states.
The federal government is not only leaving the states high and dry but is threatening to impose even more taxes on their beleaguered citizens. Paul Volcker, former Federal Reserve Chairman and current White House economic adviser, said in April that Congress needs to consider a Value Added Tax (VAT) - a tax on various stages of production of consumer goods. A VAT of 17.5% is now imposed in Britain, and 20% is being proposed; while some EU countries already have a VAT as high as 25%. In Europe, at least the citizens get something for their money, including federally-funded health care; but that is not likely to happen in the U.S., where even a "public option" in health care is no longer on the agenda. The VAT hits the lower and middle classes particularly hard, since they spend most of their incomes on consumables. The rich, on the other hand, put much of their money into speculative trades, and those sales are not currently taxed.
Business Cycle or Class War?
Ismael Hossein-Zadehi, who teaches economics at Drake University in Iowa, calls the whole economic crisis a class war. What is being billed as public debt began as the private debt of financial speculators who offloaded it onto the public. The governments that bailed out these insolvent speculators then became insolvent themselves; but the bailed-out banks, rather than lending a helping hand in return, have demanded their pound of flesh, with payment in full. The perpetrators are blaming the victims and insisting on "fiscal responsibility." Wall Street bankers are dictating the terms of repayment for debts they themselves incurred.
"Fiscal responsibility" means cutting spending, something that is inherently deflationary during a recession, as seen in the disastrous Depression-era policies of President Herbert Hoover. Not that it was solely a Republican error. In 1937, President Franklin Roosevelt also cut public spending, tipping the economy back into recession. Spending cuts cause tax revenues to shrink, which results in more spending cuts. Contrary to what we have been told, national governments are not like households. They do not have to balance their budgets and "live within their means," because they have the means to increase the money supply. They not only have the means, but they must engage in public spending when the private economy is shrinking, in order to keep the wheels of the economy turning. Virtually all money now originates as bank-created credit or debt; and today the money supply has been shrinking at a rate not seen since the 1930s, because the banking crisis has made credit harder and harder to get.
Instead of "reflating" the collapsed economy, however, national governments are insisting on "fiscal responsibility;" and the responsibility is all being put on the states and the laboring and producing classes. The financial speculators who caused the debacle are largely getting off scott free. They not only pay no tax on the purchase and sale of their "financial products," but they pay very little in the way of income taxes. Goldman Sachs paid an effective income tax rate of only 1% in 2008. Prof Hossein-Zadehi writes:
It is increasingly becoming clear that the working majority around the world face a common enemy: an unproductive financial oligarchy that, like parasites, sucks the economic blood out of the working people, simply by trading and/or betting on claims of ownership. . . . The real question is when the working people and other victims of the unjust debt burden will grasp the gravity of this challenge, and rise to the critical task of breaking free from the shackles of debt and depression.
Working people don't rise to the task because they have been propagandized into believing that "fiscal austerity" is something that needs to be done in order to save their children from an even worse fate. What actually needs to happen in a deflationary collapse is to spend more money into the system, not pull it back out by paying off the federal debt; but the money needs to go into the real economy - into factories, farms, businesses, housing, transportation, sustainable energy systems, health care, education. Instead, the stimulus money has been hijacked, diverted into cleaning up the toxic balance sheets of the financial gamblers who propelled the economy into its perilous dive.
Evening Up the Score
While Congress caters to the banks, the states have been left to fend for themselves. Where is the money to come from to pull off the impossible feat of balancing their budgets? Bleeding a VAT tax out of an already-anemic working class is more likely to kill the patient than to alleviate the disease. A more viable and equitable solution would be to tap into the only major market left on the planet that is not now subject to a sales tax - the "financial products" that are the stock in trade of the robust financial sector itself.
A financial transaction tax on speculative trading is sometimes called a "Tobin tax," after the man who first proposed it, Nobel laureate economist James Tobin. The revenue potential of a Tobin tax is huge. The Bank for International Settlements reported in 2008 that total annual derivatives trades were $1.14 quadrillion (a quadrillion is a thousand trillion). That figure was probably low, since over-the-counter trades are unreported and their magnitude is unknown. A mere 1% tax on $1 quadrillion in trades would generate $10 trillion annually in public funds. That is only for derivatives. There are also stocks, bonds and other financial trades to throw in the mix; and more than half of this trading occurs in the United States.
A Tobin tax would not generate these huge sums year after year, because it would largely kill the computerized high-frequency program trades that now compose 70% of stock market purchases. But that is a worthy end in itself. The sudden, thousand-point drop in the Dow Industrial Average on May 6 showed the world how vulnerable the stock market is to manipulation by these sophisticated market gamblers. The whole high-frequency trading business needs to be stopped, in order to protect legitimate investors using the stock market for the purposes for which it was designed: to raise capital for businesses. As Mark Cubanobserved in a May 9 article titled "What Business Is Wall Street In?":
Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. . . . My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether it's through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won't come from traders trying to hack the financial system for a few pennies per trade.
Besides protecting legitimate savers and investors by exempting stock held five years or more, they could be exempted from a Tobin tax on total stock purchases of under $1 million per year. That would make the tax literally a millionaire's tax -- and a small one at that, at only 1% per trade.
At the G20 summit in Toronto last weekend, a financial transaction tax was discussed and supported by France and Germany but was opposed by the U.S. and Canada, although nothing binding was resolved. However, the states do not have to wait for the federal government or the G20 to act. They could levy a Tobin tax themselves. Objection might be made that the Wall Street speculators would take their revenues and go elsewhere, but big banks and brokerages have branches in every major city in every state. They are hardly likely to pack up their tents and leave lucrative centers of business. Nor can it be argued that we should cater to the pirates who are looting our stock markets because they are paying us a nice bribe, because they aren't even paying a bribe. Financial trades do not currently generate tax revenues.
Two Green Party candidates for governor, Laura Wells in California and Rich Whitney in Illinois, have included a state-imposed Tobin tax in their platforms. Both are also campaigning for state-owned banks in their states, on the model of the Bank of North Dakota. People around the world look to the United States for boldness and innovation, and California and Illinois are two of the hardest hit states in the nation. If those states manage to turn their economies around, they could establish a model for economic sovereignty globally.

Goldman admits it had bigger role in AIG deals

McClatchy first raised the issue of Goldman's secret bets last year.

WASHINGTON — Reversing its oft-repeated position that it was acting only on behalf of its clients in its exotic dealings with the American International Group, Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market.

A senior Goldman executive disclosed the "bilateral" wagers on subprime mortgages in an interview with McClatchy, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an "intermediary" responding to its clients' demands.

The official, who Goldman made available to McClatchy on the condition he remain anonymous, declined to reveal how much money Goldman reaped from its trades with AIG.

However, the wagers were part of a package of deals that had a face value of $3 billion, and in a recent settlement, AIG agreed to pay Goldman between $1.5 billion and $2 billion. AIG's losses on those deals, for which Goldman is thought to have paid less than $10 million, were ultimately borne by taxpayers as part of the government's bailout of the insurer.

Goldman's proprietary trades with AIG in 2005 and 2006 are among those that many members of Congress sought unsuccessfully to ban during recent negotiations for tougher federal regulation of the financial industry.

A McClatchy examination, including a review of public records and interviews with present and former Wall Street executives, casts doubt on several of Goldman's claims about its dealings with AIG, which at the time was the world's largest insurer.

For example:

_ The latest disclosure undercuts Goldman's repeated insistence during the past year that it acted merely on behalf of clients when it bought $20 billion in exotic insurance from AIG.

_ Although Goldman has steadfastly maintained that it had "no material exposure" to AIG if the insurer had gone bankrupt, in fact the firm could have lost money if the government hadn't allowed the insurer to pay $92 billion of American taxpayers' money to U.S. and European financial institutions whose risky business practices helped cause the global financial collapse.

_ Goldman took several aggressive steps — including demanding billions in cash collateral — against AIG that suggest to some experts that it had inside information about AIG's shaky financial condition and therefore an edge over its competitors. While former Bush administration officials said AIG was financially sound and merely faced a cash squeeze at the time of the bailout, McClatchy has reported that the insurer was swamped with massive liabilities and was a candidate for bankruptcy.

A spokesman for Goldman, Michael DuVally, said that the firm followed its "standard approach to risk management" in its dealings with AIG.

"We had no special insight into AIG's financial condition but, as we do with all exposure, we acted prudently to protect our firm and its shareholders from the risk of a loss. Most right-thinking people would surely believe that this was an appropriate way for a bank to manage its affairs."

He said that Goldman didn't have "direct economic exposure to AIG."

The relationship between Goldman and AIG has drawn intense scrutiny over the past year because several Goldman alumni held senior Treasury Department jobs when the Bush administration guaranteed as much as $182 billion to bail out AIG, $12.9 billion of which AIG paid to Goldman, the most money it paid any U.S. bank.

On Wednesday and Thursday, a congressional panel investigating the causes of the financial crisis plans to question current and former senior Goldman and AIG officials, including Joseph Cassano, the former head of the London-based AIG unit that covered $72 billion in bets against risky home mortgages — wagers that cost U.S. taxpayers tens of billions of dollars when the housing bubble burst.

The proprietary trades at issue were carried out using private contracts known as credit-default swaps, essentially bets on the performance of designated securities and traded in murky, loosely regulated markets with little disclosure about who placed wagers, who won and who lost.

Documents emerging from the AIG bailout and a Senate investigation of Goldman's secret bets against the housing market while it sold off tens of billions of dollars in mortgage-backed securities — first reported by McClatchy in November — have provided a window into some of these dealings.

Until now, however, Goldman has said that the insurance-like contracts it bought from AIG from 2004 to 2006 — deals that have cost the insurer some $15 billion — were made to offset similar swaps the investment bank had written for clients who wanted to bet on a housing downturn.

The companies have revealed few details of some $6 billion in so-called synthetic deals, in which the parties bet on the performance of designated securities that neither side purchased.

A person familiar with the matter, who declined to be identified because of its sensitivity, said that additional synthetic swap contracts between AIG and Goldman with a face value of $3 billion have yet to be unwound by the teams of specialists tasked with scaling down AIG's more than $2 trillion in exotic risks.

The proprietary trades occurred in the same Abacus series of synthetic securities that Goldman bundled offshore, according to the senior Goldman official. Another one of those 16 deals prompted the government to sue Goldman on civil fraud charges in April.

Goldman also has long asserted that it was holding $10 billion in collateral and "hedges" and thus had "no material exposure" in the event that the government had allowed AIG's parent to go bankrupt in the fall of 2008, rather rescuing it.

The emerging details of Goldman's offshore dealings, however, also call that into question.

AIG doled out tens of billions of dollars of the bailout money to pay off mortgage-related swaps with U.S. and European financial institutions at their full face value, a decision made by the Federal Reserve Bank of New York that triggered a public furor.

The bailout enabled major financial institutions to honor billions of dollars in swap bets that they'd made with each other, especially in offshore deals that were pegged to the performance of loans to homebuyers with shaky credit.

DuVally declined to say how much money Goldman had at stake if the value of these securities sank further and the big banks couldn't make good on their bets amid frozen credit markets.

According to court documents and a person who's seen records of some of the offshore deals, investment banks Morgan Stanley and Merrill Lynch, as well as large European banks, wrote protection for Goldman on these deals totaling hundreds of millions of dollars.

In addition, The New York Times reported earlier this year that Goldman cut a deal with the Societe Generale in which the French bank paid Goldman a portion of the $11 billion it collected from the AIG bailout.

DuVally denied that Societe Generale and Goldman had a deal regarding the French bank's payout from AIG, but he declined to say whether Goldman collected a large sum from the French bank.

Because Goldman was holding $7.5 billion in collateral from AIG and had placed $2.5 billion in other hedges, DuVally said, it "did not have direct economic exposure to AIG" in the event that the insurer's parent had been left to bankruptcy.

"That said, we have always acknowledged that if a failure of AIG had resulted in the collapse of the financial system, we would have suffered just like every other financial institution," he said.

DuVally declined to say who selected the securities for Goldman's Abacus deals with AIG.

AIG's chief executive, Robert Benmosche, was asked at the company's recent annual meeting whether it would seek to sue any banks for loading swap deals with securities on junk mortgages likely to default.

Benmosche said that the firm is reviewing "all activities from that period" and, "to the extent we find something wrong that harmed AIG inappropriately, our legal staff will take appropriate action."

It's unclear when Goldman first suspected that AIG was at risk of a colossal meltdown, but the storied investment bank moved more nimbly than any other financial institution to shield itself.

As the home mortgage securities lost value over a 14-month period beginning in the summer of 2007, Goldman's huge swap portfolio gained value. Under the terms of the contracts, Goldman began in July 2007 to demand that AIG post billions of dollars in cash as collateral.

DuVally said that Goldman had no inside information about AIG's finances, and merely protected itself by enforcing contract language that required the insurer to post cash whenever the mortgage securities underlying the bets lost value.

"Our direct knowledge of AIG's financial condition was limited to the company's public disclosures," DuVally said.

However, some experts are skeptical of that, especially because Goldman responded to AIG's refusal to meet all its demands for $10 billion in collateral by placing $2.5 billion in hedges — most of them bets on an AIG bankruptcy.

Sylvain Raynes, an expert on structured securities of the types that AIG insured, said it's "implausible that Goldman can say 'I had no idea that AIG was in dire straits or in weak financial condition.'"

Raynes, a co-author of the newly published book "Elements of Structured Finance" and a former Goldman employee, said that a standard clause in the swaps contracts left open to discussion whether the company writing protection must post collateral. The buyer of coverage typically could demand to see financial information, including the number of similar positions held, he said.

"If you see the (company) has entered into 150 credit-default swaps totaling $65 billion, and that all of them are the same type as your credit-default swaps, you know that they have taken huge amounts of risk and have very little capital to back that up," Raynes said.

"Unless you really want to close your eyes, you have to know what their condition is. If you don't know, then you're not doing your job, and I have too much respect for Goldman to say they are not doing their job."

DuVally said, however, that Goldman wasn't told about other swaps that AIG had written and didn't have access to AIG's internal financial information.

Goldman had served as an investment adviser for the insurer since as far back as 1987 and as recently as 2006, setting up offshore companies affiliated with AIG that served as loosely regulated reinsurers.

AIG's insurance subsidiaries shined up their balance sheets by shifting hundreds of millions of dollars in liabilities to reinsurers, including some of those formed with Goldman's assistance.

Federal prosecutors and state regulators eventually nailed AIG for falsifying its financial statements and for using so-called "sidecar" companies to help Pittsburgh-based PNC Financial Corp. and an Indiana firm, Brightpoint Inc., hide liabilities. AIG paid more than $1.7 billion on to settle those and other charges in 2004 and 2006. Goldman wasn't implicated.

For years, Goldman and AIG have shared the same auditor, PricewaterhouseCoopers, a firm that AIG retained even after the SEC in 2006 directed it to find "an independent auditor."

They're also represented by the same New York law firm, Sullivan & Cromwell, which boasted on its website of its "significant experience in offshore reinsurance matters." The firm's senior chairman, Rodgin Cohen, is known as one of Wall Street's most formidable attorneys.

In August 2008, weeks before the rescue, AIG's newly installed chief executive, Robert Willumstad, invited senior officials of several major banks, including Goldman, Deutsche Bank, Lehman Brothers and Credit Suisse, to a meeting to see whether there was any way to reduce the insurer's huge portfolio of mortgage-related swaps.

Documents from Blackrock, a financial services firm that was assisting the Federal Reserve Bank of New York with the bailout, show that Goldman offered to negotiate a settlement on some of the swaps, but the two sides were too far apart on valuation of the securities to cut a deal.

DuVally said that Goldman offered only to settle for payment of its estimate of the market value of the swaps, which had appreciated sharply due to the securities' decline in value. To do so would have required AIG to book a massive loss.

On Aug. 18, 2008, Goldman's equity research department delivered another blow to AIG, issuing a sharply negative report on the insurer and lowering its target price for AIG shares to $23 from $30. The Goldman report heightened concerns among credit ratings agencies about AIG's condition, Willumstad said in an interview.

By September 2008, AIG was besieged with a chorus of collateral demands from other banks and a threat from credit ratings agencies to downgrade the insurer, an action that triggered more collateral calls and prompted Treasury Secretary Henry Paulson, a former Goldman chief executive, and Federal Reserve Chairman Ben Bernanke to initiate a bailout to prevent a meltdown of the global financial markets.


McClatchy's Pulitzer-nominated probe of the financial crisis

Low Road to High Finance: McClatchy's investigation of Goldman Sachs

Goldman's White House connections raise eyebrows

SEC's Goldman charges could be just the beginning

SEC charges Goldman Sachs with fraud in subprime deal

In U.S. Bailout of A.I.G., Forgiveness for Big Banks

At the end of the American International Group’s annual meeting last month, a shareholder approached the microphone with a question for Robert Benmosche, the insurer’s chief executive.

“I’d like to know, what does A.I.G. plan to do with Goldman Sachs?” he asked. “Are you going to get — recoup — some of our money that was given to them?”

Mr. Benmosche, steward of an insurer brought to its knees two years ago after making too many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, A.I.G. has precious few.

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

This month, an Australian hedge fund sued Goldman on similar grounds. Goldman is contesting the suit and denies any wrongdoing. A spokesman for A.I.G. declined to comment about any plans to sue Goldman or any other banks with which it worked. A Goldman spokesman said that his firm believed that “all aspects of our relationship with A.I.G. were appropriate.”

A Legal Waiver

Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.

The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2009 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Regulators at the New York Fed declined to comment on the legal waiver but disagreed with that viewpoint.

“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. “This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies.”

This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.

About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G.

A Goldman spokesman said that he did not agree with that report’s assertion, noting that his firm considered itself to be insulated from possible losses on its A.I.G. deals.

Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground and, for that reason, regulators’ actions during the financial crisis need continued scrutiny. “We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,” he said.

Under the new legislation, the Federal Deposit Insurance Corporation will have the power to untangle the financial affairs of troubled entities, but bailed-out companies will pay most of their trading partners 100 cents on the dollar for outstanding contracts. (In some cases, the government will be able to recoup some of those payments later on, which the Treasury Department says will protect taxpayers’ interest. )

Sheila C. Bair, the chairwoman of the F.D.I.C., has said that trading partners should be forced to accept discounts in the middle of a bailout.

Regardless of the financial parameters of bailouts, analysts also say that real financial reform should require regulators to demonstrate much more independence from the firms they monitor.

This article has been revised to reflect the following correction:

Correction: July 1, 2010

An article on Wednesday about the leniency shown to big banks during the bailout of the American International Group misstated the year that the federal government bailed out the automaker Chrysler. It was 2009, not 2008.

Alex Jones Shown Birgitta Jonsdottir Wikileaks 06 29 10

Alex welcomes back to the show Birgitta Jonsdottir, a member of the Icelandic Parliament representing the Citizens' Movement, but now representing The Movement. Her district is the Reykjavík South Constituency. She is also a writer, artist, activist, web developer, designer, and a spokeswoman for the website Wikileaks.

Download /listen HERE

Wikileaks Starts Twitter War with Pentagon

Whistleblower website has released a classified US military video

Personal Story: How I Ended Up In A G20 Jail

Michael Talbot
Photo by Michael Talbot,

I've been working for CityNews for the past 9 years. I have no criminal record, have never been charged with a crime and have no affiliations to any group of protesters, or activists.

I spent a considerable amount of time on Saturday breathlessly running alongside black bloc anarchists, documenting an unprecedented reign of destruction on the streets of Toronto. I saw them congregate and collaborate in the early afternoon hours, hatching a heinous plan that would leave indelible scars on our city, both financial and psychological. I saw them lob rocks at retreating police, smash and burn cruisers, spray-paint numerous structures with revolutionary slogans, and shatter windows with a seemingly insatiable appetite. I saw them target members of the media, myself included, with taunts, sticks and rocks.

What I didn’t see Saturday were any arrests taking place while this violence was occurring. If the security agenda on Saturday was to prevent the black bloc from reaching the G20 security fence, it was a success. But throughout a large portion of the downtown core a frightening ‘anything goes’ aura had spread.

On Sunday, I followed and took pictures of a peaceful march down King Street and up Bay towards Queen, to its final ill-fated destination at the intersection of Queen and Spadina. I saw no one in disguise. I saw no violence, vandalism, or hostility. Smiling demonstrators chanted, danced, and walked together.

The crowd was comprised of the young and elderly, men and women, and families with young children. It was what any sensible law-abiding citizen likely imagined a G20 march was supposed to be --- an expression of solidarity and hope for a better world.

Despite this obvious contradiction, I soon saw riot police closing in. I saw their jet black batons, their massive shields and tear gas guns. I saw numerous arrests being made, and in the end I saw first hand the inner workings of the makeshift G20 prison on Eastern Avenue.

This is how I became a G20 jailbird.

After the surge of adrenaline subsided and the strange awe and disgust I felt towards Saturday’s violence began to dissipate, I wasn’t quite sure what Sunday would hold. For much of the day I walked around the downtown core, snapping photos of cleanup efforts and boarded-up stores. Despite an early scuffle outside the makeshift jail on Eastern Avenue, it was turning out to be a fairly quiet day. There were, however, reports that police were randomly searching backpacks and rounding up numerous people deemed ‘suspicious’. While walking along Wellesley towards Queen’s Park a black van rolled up beside me. I was questioned by police, forced to show identification and my backpack was searched before I was allowed to proceed.

Queen’s Park was quiet, with no more than a dozen or so scattered protesters, so I headed back to the newsroom, thinking the action for the most part was over.

After briefly cooling down at CityNews, I headed off to what appeared to be a non-confrontational gathering at King and Bay. Before leaving I told our web producer that I would check out this event, which I didn’t think would amount to much, and then likely head home, happy to put a close to a tumultuous, exhausting weekend. By the time I arrived the crowd was walking up Bay towards Queen. Once on Queen, the march was halted by a group of bicycle police blocking the street in front of City Hall. After a brief standoff, during which the crowd chanted, ‘Let Us Through’, police conceded, letting the group continue.

This was marked by a brief celebration, with the protesters cheering on a perceived symbol of victory. The celebration would prove to be premature.

Police reassembled at Queen and Spadina, where the group once again came to a standstill. The protesters were in no way prepared for what would eventually unfold, as most were smiling, posing for photos, flashing peace signs, dancing, doing somersaults and sitting in a group chanting. From the south of Spadina more officers soon arrived.

Just as it dawned on me that the mood and atmosphere was rapidly changing, ominous storm clouds began to roll in. As it got darker, more officers flooded out of buses in full riot gear.

Around this time I ran into rattled CityNews reporter Francis D’Souza, who seemed to sense that the peaceful vibe was about to be obliterated. He pleaded with me to ‘put my earplugs in’, fearing the dreaded sound cannon was about to be deployed. I followed his advice, and for that reason I can’t be certain if police, as Toronto Police Chief Bill Blair suggested, verbally offered the crowd at least three opportunities to disperse, but I personally did not hear them, and several people I would ultimately be detained with also claimed they were not given the opportunity to flee once police had us closed in.

With each second the noose was tightening and it wasn't long before we were trapped. It was a classic Catch 22. Officers seemed to be directing us to disperse, but there was no path to do so, and they wouldn't budge. From all four directions, the menacing walls were closing in.

A strange sense of resignation overcame me when I realized I couldn’t get out and the riot troops were edging closer and closer to us from all angles.

As the gravity of the situation sunk in and the sniff of impending violence began to permeate the air, I approached the line of police and tried to explain that I was a member of the media. Due to a death in my family I was off work when the official accreditation process went through, so I had no official G20 pass, but I offered a business card noting my role as a reporter/photographer for At the same time, one wouldn’t think they would need a press pass to walk down a city street in a peaceful manner, whether they are taking photos for a website or protesting. Unimpressed with my plea, the officer clutched me by the arm and pulled me behind the line, pushing me down. He informed me that I was being arrested for conspiracy to commit mischief and proceeded to zip tie my arms tightly behind my back.

I was ushered away from the crowd and seated on the curb with dozens of other detainees while a second officer searched me extensively. My wallet, camera and assorted belongings were bagged up and tagged. As a precautionary measure I had a set of swimming goggles and a bandanna in my jacket pocket, my only defence against the tear gas which Toronto police had previously deployed. The officer informed me that if I was wearing the bandanna during the protest I would have been charged with Wearing A Disguise.

As I sat pondering my situation I watched an officer slam another individual down to the cement. I was brought to my feet and led to a painfully slow moving line where suspects were photographed and processed one at a time. Then it started fiercely pouring. I stood in the rain for at least 40 minutes, although I’ve heard some endured the record-setting torrential downpour for several hours before being carted away via bus, police vehicle, or paddy wagon, shivering in soaked clothing.

The officer assigned to me was quite cordial and friendly, and admitted that if it were up to him I would not have been arrested. This offered little comfort when my pic was snapped at the side of the road and I was led into the claustrophobic confines of the paddy wagon, equipped with several two-person compartments.

As I stepped into the wagon I could hear an officer mocking the sopping wet detainees, chanting, ‘Whose streets? Our streets!”, mimicking a chant that the G20 protesters shouted throughout the weekend. I took a mental note when I heard another brag that the more arrests they make, the more funding they will receive.

Once inside the wagon, the doors were slammed shut and I sat in the dark, my glasses soaked and streaked and made small talk with the person beside me. His name was Ryan. He informed me that he was 20-years-old, from Mississauga, and attended the protest with his girlfriend, who was also arrested. He was confused about what he was being charged with. “Breach of something,” he mumbled. “I gotta work at 8am tomorrow, you think I’ll be out by then?”

At this point my shoulders began to cramp and my hand was becoming numb from the plastic cuffs cutting off my circulation. After what seemed like an eternity the vehicle began to move. We were tossed about with every turn. The position of my arms behind my back made it difficult to breathe and the close quarters of the wagon exacerbated the problem. To take my mind off my physical discomfort and mounting anxiety I began to imagine that I was a high profile mafia member finally corralled after years on the lam, or maybe Christopher "Dudus" Coke or Pablo Escobar. I chuckled to myself when I realized that with my foggy specs and propensity to hyperventilate, I'm probably closer to Piggy from Lord of the Flies, than an international gangster.

Welcome To The Eastern Avenue Prison

The first thing you notice when you arrive at the Eastern Avenue makeshift jail is the raucous cheering of other prisoners. Whenever a new set of prisoners arrive, or one is released, this eruption takes place. I can also hear random shouts, "Where is my phone call!", or "I need water!"

At this point my mind is trying to paint a picture of what awaits me, but from inside the dark damp wagon it sounds frightening and wild.

The wagons have two sets of doors. When the first door is opened I’m offered not only a refreshing hint of fresh air, but my first peek at the warehouse detention centre through the tiny metal holes on the second door. I peer out into the prison, but can’t see much aside from three orange porta-potties with no doors on them. Occasionally I see a young girl sheepishly enter and struggle with her zipper while cuffed. Officers are milling about, and dozens of plastic bags containing our property are sprawled out on the floor. I wonder if my camera is damaged, or if my photos of the protest have been deleted.

I can faintly hear the officers discussing their plan to separate the ‘criminals’ from the ‘breaches’. I assume this means those who are being charged with a criminal offense as opposed to those who are facing a less serious charge of breach of peace, but I'm not certain. I'm also not certain where I stand legally, and I begin to wonder if I'll have a criminal record and when I'll get out. For at least 45 minutes we remain parked and seated in the wagon, during which time I develop a nervous case of psychosomatic stomach cramps. I wonder what will happen if I have to relieve my bowels.

At this point Ryan and I begin to question the two people in the adjacent wagon compartment. We can't see them, but we can hear their muffled voices through a partition.

"What do you see?"

The answer is grim.


"What kind of cages? How many people are in them?" we probe.

"They are, dog cages. There's about 20 or 30 people in them."

Time ticks slowly as I summon the bulk of my emotional strength, struggling to not lose it after being confined in such a small place for so long. I feel close to screaming, 'Let me the **** out!', but realize that any signs of distress or aggression will only make my situation worse.

Suddenly a chant breaks out.

"The People, United, Will Never Be Defeated!"

"The People, United, Will Never Be Defeated!"

It's the prisoners again, and I can't help but wonder if they are comprised mainly of peaceful protesters caught up in questionable arrests, or Saturday's militant anarchists who detest mainstream media and could potentially turn on me if my affiliation is revealed. I put on my best tough guy imitation when the door to the wagon is mercifully opened, but I soon realize it won't be necessary to puff my chest out too far. Scanning the room I see numerous cages filled with mostly young, scared, shivering kids. Not many look older than 25. A few look slightly menacing, but most appear to be victims of Sunday's largely indiscriminate mass arrests. There's an entire cage filled with young girls who would look far more appropriate at a Justin Bieber concert than in a cage which should be reserved for hardcore rioters.

With great relief my zip cuffs are removed and I'm placed in regulation steel handcuffs which are put in front of my body. The relief on my aching shoulders is immediate. An officer leads me towards my cell, and as I'm led out in front of the other prisoners they begin to cheer. I don't know how to respond to this, and simply nod before joining the fray inside my assigned cage. The cheers seem to offer the detainees some sort of psychological comfort, as though we are all in this together, and I suppose we are.

I immediately recognize a bartender from a downtown Toronto pub that I used to frequent and we exchange stories. He was at the rally with his girlfriend and is equally shocked that he's been arrested and detained. The cage has one porta-pottie with no door. People are sprawled about all over, laying on the filthy floor. Many are shivering uncontrollably after being stuck in the rain for so long.

Each prisoner is given a number which is sported on a bracelet and occasionally an officer walks along and calls out your number, which usually indicates an impending release. It's akin to a lottery for your freedom. The first to be released from our cage is a young guy with short cropped hair, about 20. He smiles widely when he's walked out and the requisite cheers erupt from the rest of the cages. A few short minutes later, however, he's back, telling us that he's been charged with a criminal offence for having brass knuckles. He also tells us that we are in one of the 'criminal cages', insinuating that we are facing charges and will be in custody for hours. The few who may actually deserve such a fate sit silently on the floor while the rest of us wonder aloud what we could possibly be charged with. My bartender friend begins to ponder if the corkscrew that was in his bag is being considered a 'weapon', and I remind him that there's nothing illegal about sipping a bit of vino. My attempt at levity doesn't erase the look of concern on his face, neither do revelations that some prisoners have been detained for up to 20 hours. Food and water are scarce and rarely offered I'm told. No one that I spoke to has been able to make a phone call, and many wonder if they'll be at work in the morning.

I believe I was arrested around 6:30pm on Sunday. I was released unconditionally around 11:30pm. I was just starting to resign myself to the fact that I could spend the night when my number was called. I jumped up and said a few brief goodbyes to the rest of prisoners, some of whom I now shared a strange bond with. As I was led away the room erupted as usual and this time I raised my cuffed hands. It was my way of saying goodbye, and good luck to those who don't belong there. For those who destroyed property and took part in the violence that disgraced our city, I felt no sympathy or allegiance.

When I first entered the warehouse, I thought the one room I was contained in represented the entire population, but as a female officer roughly led me towards the final check out area I was astonished at how many different holding rooms there were. It was like a labyrinth, with numerous rooms filled with cages of different sizes. I assume more violent, possibly inebriated prisoners were kept in solo cells. As I walked out I saw a cage with two young guys in it, one was violently crying with his head buried in his arms while his cellmate stared blankly. A dazed girl looked up at me and flashed me a peace sign. The last person I saw was a sinewy shirtless man with caked blood on his head doing Tai Chi alone in his cage.

Before I'm led out I'm asked a few questions to confirm my identity and I'm finally un-cuffed. Before being released my photo is taken again and an officer warns me not to visit any more G20-related rallies or protests, and stresses that if I'm seen at any I will be brought back for a more extended stay.

The doors are finally opened. It's still raining. I can see all the live eye trucks from various news stations. I toss my bag of belongings over my shoulder and start heading back out into the night, reliving my last few surreal hours. A group of supporters camped outside the prison offer me a round of applause that I sheepishly acknowledge. Someone hands me a drinking box. I start walking, soaking in the sounds of the night --- distant sirens and the faint echo of prisoners cheering as another wagon rolls in.

Final Thoughts

Like many, I've heard numerous theories concerning G20 security. Some believe that police 'allowed' much of Saturday's destruction to justify the billion dollar price tag, and that police vehicles that were torched were planted and abandoned by the authorities for that very purpose. There are also theories circulating that police 'agent provocateurs' were running among the black bloc. There doesn't appear to be any solid evidence proving either theory.

As far as my own experience, I may not have the sophistication, access to information, or wisdom to answer most of my own questions, but after spending a weekend on the streets in the midst of the mayhem and after being arrested and detained for several hours without being charged with a crime, I believe I have the right to pose a few questions.

  • With so much money and security intelligence at play during G20, how were black bloc anarchists allowed to run rampant throughout the downtown core on Saturday? If I, along with numerous other photographers, could identify them through their obvious attire and take photos of them before they began their rampage, then why couldn't police be monitoring them and use necessary force to stop them?
  • If, as an officer informed me during my arrest, wearing a bandanna during a protest is a crime (Wearing A Disguise), why couldn't the riot troops who arrested me and dozens of other non-violent individuals target people wearing disguises during Saturday's protest and search and detain them before they could rum amok?
  • If, as police suggest, certain members of the black bloc were infiltrating peaceful protests on Sunday, was it really worth arresting hundreds of innocent people to get to a few bad apples, who by nature would be of little threat when not roving as a large group in disguise, as is the inherent nature of 'black bloc' tactics? It would have been much easier to make these arrests when the black bloc were together donning their easily identifiable black outfits on Saturday.

25 Signs That Almost Everyone Is Expecting An Economic Collapse In 2010

At times like these, it is hardly going out on a limb to say that we are headed for hard economic times. In fact, it seems like almost everyone in the financial world is either declaring that a recession is coming or is busy preparing for one. The truth is that bad economic signs are everywhere. Consumer confidence is plummeting, big banks are hoarding cash, top financial experts are issuing recession warnings and it seems like almost everyone is trying to accumulate as much gold as possible. Now that the G20 nations have all pledged to dramatically cut government spending in an effort to get debt under control, worries about a double-dip recession have reached a fever pitch. So will we see the full-fledged economic collapse that so many analysts are warning of before the end of 2010? Of course it is possible, but it seems much more likely that we will just see the beginning of another recession that could certainly deepen into a depression as we head into 2011 and 2012. There are so many variables and so many moving parts that it is always difficult to predict exactly how things will play out. What does seem virtually certain, however, is that we are heading into a time of extreme economic stress.

The following are 25 signs that almost everyone in the financial world is expecting an economic downturn during the second half of 2010….

#1) The Conference Board’s Consumer Confidence Index declined sharply to 52.9 in June. Most economists had expected that the figure for June would be somewhere around 62. To get an idea of how bad this is, the index was at 100 back during the baseline year of 1985.

#2) Major banks are being instructed to hoard cash in preparation for the next financial crisis.

#3) French bank Societe Generale is forecasting that gold could reach $1,430 an ounce in the third quarter of this year due to fears of a double-dip recession.

#4) Paul Krugman of the New York Times declared in a recent column that we are about to enter “the third depression”.

#5) According to one recent poll, about eight out of every 10 Americans expect the Gulf of Mexico oil spill to damage the U.S. economy and drive up the cost of gas and food.

#6) Mark Zandi, chief economist of Moody’s Analytics, is not optimistic about the chances of avoiding another recession….

“There’s an uncomfortably high probability that we slip back into recession.”

#7) The U.S. Department of Agriculture is forecasting that the number of Americans on food stamps will increase to 43 million in 2011.

#8) George Soros claims that a European recession in the coming months is “almost inevitable”.

#9) Kevin Giddis, the Managing Director of Fixed Income at Morgan Keegan says that a lot of people are making some really large financial bets that a recession is on the way….

“There is big money making big bets that at a minimum we we’ll have a recession if not a depression that could last for years.”

#10) The Center on Budget and Policy Priorities recently said that U.S. states in fiscal 2011 could be facing the worst budget situation that they have experienced since the economic downturn began in 2007.

#11) Federal Reserve Chairman Ben Bernanke is publicly saying that the U.S. unemployment rate is quite likely to remain “high for a while”.

#12) The National League of Cities is warning that large numbers of cities across the U.S. will be facing horrible economic conditions over the next couple of years….

“City budget shortfalls will become more severe over the next two years as tax collections catch up with economic conditions. These will inevitably result in new rounds of layoffs, service cuts, and canceled projects and contracts.”

#13) According to the Wall Street Journal, debates have already begun inside the Federal Reserve about what to do in the event of a “double-dip” recession.

#14) In May, sales of new homes in the United States dropped to the lowest level ever recorded. The truth is that the American people know economic hard times are coming and so they aren’t running out and buying expensive new homes that they can’t afford.

#15) Mike Whitney says that without more “stimulus” from the federal government a recession by the end of 2010 is extremely likely….

“Without another boost of stimulus, the economy will lapse back into recession sometime by the end of 2010.”

#16) One recent poll found that 76 percent of Americans believe that the U.S. economy is still in a recession.

#17) Richard Russell, the famous author of the Dow Theory Letters, is not mincing words about what he believes is headed our way….

“Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.”

#18) The Bank of International Settlements said in its annual report that major banks on both sides of the Atlantic Ocean continue to remain “highly leveraged and still appear to be on life support”.

#19) Mish Shedlock recently raised eyebrows by openly proclaiming that “an economic depression is here”.

#20) Bob Chapman of the International Forecaster is very pessimistic about the state of the world economy as we head into the second half of 2010….

“There is still no question in our minds that Greece was a setup to lead to a deflationary collapse later and the Greek people refused to listen. As a result it is now apparent that Greece is even worse off than the elitists imagined. We do not see European bailouts going any further. The result is the US and UK will follow. Financial Europe is history. You should all keep in mind that this is child’s play. Wait until England and the US go down, perhaps before the end of the year.”

#21) An article on Bloomberg’s website says that 46 U.S. states are facing a ”Greek style” financial crisis.

#22) Charles Cooper at Oriel Securities says that worries about the global economy right now are actually very good for the price of gold….

“Debt on government balance sheets and worries that the world could be heading towards a double-dip recession are driving the gold price higher.”

#23) Richard Suttmeier recently wrote an article for Forbes magazine in which he predicted that we are headed for another dramatic decline in housing prices….

Home prices will decline again with risk of another 50% down to get house prices back to levels of 1999 / 2000.

#24) University of Maryland professor Peter Morici is warning that the decision by European governments to slash their budgets makes the prospect of another recession much more likely….

“Europeans cutting their budgets now could thrust the global economy into a double-dip recession.”

#25) John P. Hussman, fund manager of Hussman Strategic Total Return and Hussman Strategic Growth, has issued a full-fledged recession warning: “Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.”

So in light of all this, what should we all do?

We should all start preparing for difficult times.

Now is a great time to get out of debt, to reduce expenses, to develop additional streams of income and to start storing up food and supplies for when things really fall apart.

After all, you don’t start preparing once the storm has already arrived. You start preparing the moment that you see the first signs of trouble on the horizon.

There is no excuse for not getting yourself prepared. The signs that we are headed towards an economic nightmare are all around us.

Do what you have to do for youself and for your family.

Banks Financing Mexico Gangs Admitted in Wells Fargo Deal

Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

‘Blatant Disregard’

Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.

Since 2006, more than 22,000 people have been killed in drug-related battles that have raged mostly along the 2,000-mile (3,200-kilometer) border that Mexico shares with the U.S. In the Mexican city of Ciudad Juarez, just across the border from El Paso, Texas, 700 people had been murdered this year as of mid- June. Six Juarez police officers were slaughtered by automatic weapons fire in a midday ambush in April.

Rondolfo Torre, the leading candidate for governor in the Mexican border state of Tamaulipas, was gunned down yesterday, less than a week before elections in which violence related to drug trafficking was a central issue.

45,000 Troops

Mexican President Felipe Calderon vowed to crush the drug cartels when he took office in December 2006, and he’s since deployed 45,000 troops to fight the cartels. They’ve had little success.

Among the dead are police, soldiers, journalists and ordinary citizens. The U.S. has pledged Mexico $1.1 billion in the past two years to aid in the fight against narcotics cartels.

In May, President Barack Obama said he’d send 1,200 National Guard troops, adding to the 17,400 agents on the U.S. side of the border to help stem drug traffic and illegal immigration.

Behind the carnage in Mexico is an industry that supplies hundreds of tons of cocaine, heroin, marijuana and methamphetamines to Americans. The cartels have built a network of dealers in 231 U.S. cities from coast to coast, taking in about $39 billion in sales annually, according to the Justice Department.

‘You’re Missing the Point’

Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year -- enough to cover health care for 30.9 million Americans -- in overburdened courts, prisons and hospitals and lost productivity, the department says.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

Cleansing Dirty Cash

Wachovia is just one of the U.S. and European banks that have been used for drug money laundering. For the past two decades, Latin American drug traffickers have gone to U.S. banks to cleanse their dirty cash, says Paul Campo, head of the U.S. Drug Enforcement Administration’s financial crimes unit.

Miami-based American Express Bank International paid fines in both 1994 and 2007 after admitting it had failed to spot and report drug dealers laundering money through its accounts. Drug traffickers used accounts at Bank of America in Oklahoma City to buy three planes that carried 10 tons of cocaine, according to Mexican court filings.

Federal agents caught people who work for Mexican cartels depositing illicit funds in Bank of America accounts in Atlanta, Chicago and Brownsville, Texas, from 2002 to 2009. Mexican drug dealers used shell companies to open accounts at London-based HSBC Holdings Plc, Europe’s biggest bank by assets, an investigation by the Mexican Finance Ministry found.

Following Rules

Those two banks weren’t accused of wrongdoing. Bank of America spokeswoman Shirley Norton and HSBC spokesman Roy Caple say laws bar them from discussing specific clients. They say their banks strictly follow the government rules.

“Bank of America takes its anti-money-laundering responsibilities very seriously,” Norton says.

A Mexican judge on Jan. 22 accused the owners of six centros cambiarios, or money changers, in Culiacan and Tijuana of laundering drug funds through their accounts at the Mexican units of Banco Santander SA, Citigroup Inc. and HSBC, according to court documents filed in the case.

The money changers are in jail while being tried. Citigroup, HSBC and Santander, which is the largest Spanish bank by assets, weren’t accused of any wrongdoing. The three banks say Mexican law bars them from commenting on the case, adding that they each carefully enforce anti-money-laundering programs.

HSBC has stopped accepting dollar deposits in Mexico, and Citigroup no longer allows noncustomers to change dollars there. Citigroup detected suspicious activity in the Tijuana accounts, reported it to regulators and closed the accounts, Citigroup spokesman Paulo Carreno says.

Criminal Empires

On June 15, the Mexican Finance Ministry announced it would set limits for banks on cash deposits in dollars.

Mexico’s drug cartels have become multinational criminal enterprises.

Some of the gangs have delved into other illegal activities such as gunrunning, kidnapping and smuggling people across the border, as well as into seemingly legitimate areas such as trucking, travel services and air cargo transport, according to the Justice Department’s National Drug Intelligence Center.

These criminal empires have no choice but to use the global banking system to finance their businesses, Mexican Senator Felipe Gonzalez says.

“With so much cash, the only way to move this money is through the banks,” says Gonzalez, who represents a central Mexican state and chairs the senate public safety committee.

Gonzalez, a member of Calderon’s National Action Party, carries a .38 revolver for personal protection.

“I know this won’t stop the narcos when they come through that door with machine guns,” he says, pointing to the entrance to his office. “But at least I’ll take one with me.”

Subprime Losses

No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern U.S. by 1900. After the Great Depression, some people in North Carolina called the bank “Walk-Over-Ya” because it had foreclosed on farms in the region.

By 2008, Wachovia was the sixth-largest U.S. lender, and it faced $26 billion in losses from subprime mortgage loans. That cost Wachovia Chief Executive Officer Kennedy Thompson his job in June 2008.

Six months later, San Francisco-based Wells Fargo, which dates from 1852, bought Wachovia for $12.7 billion, creating the largest network of bank branches in the U.S. Thompson, who now works for private-equity firm Aquiline Capital Partners LLC in New York, declined to comment.

As Wachovia’s balance sheet was bleeding, its legal woes were mounting. In the three years leading up to Wachovia’s agreement with the Justice Department, grand juries served the bank with 6,700 subpoenas requesting information.

Not Quick Enough

The bank didn’t react quickly enough to the prosecutors’ requests and failed to hire enough investigators, the U.S. Treasury Department said in March. After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program.

Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009.

If Wells Fargo keeps its pledge, the U.S. government will, according to the agreement, drop all charges against the bank in March 2011.

Wells Fargo regrets that some of Wachovia’s former anti- money-laundering efforts fell short, spokeswoman Mary Eshet says. Wells Fargo has invested $42 million in the past three years to improve its anti-money-laundering program and has been working with regulators, she says.

‘Significantly Upgraded’

“We have substantially increased the caliber and number of staff in our international investigations group, and we also significantly upgraded the monitoring software,” Eshet says. The agreement bars the bank from contesting or contradicting the facts in its admission.

The bank declined to answer specific questions, including how much it made by handling $378.4 billion -- including $4 billion of cash-from Mexican exchange companies.

The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts.

No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”

Wachovia’s run-in with federal prosecutors hasn’t troubled investors. Wells Fargo’s stock traded at $30.86 on March 24, up 1 percent in the week after the March 17 agreement was announced.

Moving money is central to the drug trade -- from the cash that people tape to their bodies as they cross the U.S.-Mexican border to the $100,000 wire transfers they send from Mexican exchange houses to big U.S. banks.

‘Doesn’t Stop Anyone’

In Tijuana, 15 miles south of San Diego, Gustavo Rojas has lived for a quarter of a century in a shack in the shadow of the 10-foot-high (3-meter-high) steel border fence that separates the U.S. and Mexico there. He points to holes burrowed under the barrier.

“They go across with drugs and come back with cash,” Rojas, 75, says. “This fence doesn’t stop anyone.”

Drug money moves back and forth across the border in an endless cycle. In the U.S., couriers take the cash from drug sales to Mexico -- as much as $29 billion a year, according to U.S. Immigration and Customs Enforcement. That would be about 319 tons of $100 bills.

They hide it in cars and trucks to smuggle into Mexico. There, cartels pay people to deposit some of the cash into Mexican banks and branches of international banks. The narcos launder much of what’s left through money changers.

The Money Changers

Anyone who has been to Mexico is familiar with these street-corner money changers; Mexican regulators say there are at least 3,000 of them from Tijuana to Cancun, usually displaying large signs advertising the day’s dollar-peso exchange rate.

Mexican banks are regulated by the National Banking and Securities Commission, which has an anti-money-laundering unit; the money changers are policed by Mexico’s Tax Service Administration, which has no such unit.

By law, the money changers have to demand identification from anyone exchanging more than $500. They also have to report transactions higher than $5,000 to regulators.

The cartels get around these requirements by employing legions of individuals -- including relatives, maids and gardeners -- to convert small amounts of dollars into pesos or to make deposits in local banks. After that, cartels wire the money to a multinational bank.

The Smurfs

The people making the small money exchanges are known as Smurfs, after the cartoon characters.

“They can use an army of people like Smurfs and go through $1 million before lunchtime,” says Jerry Robinette, who oversees U.S. Immigration and Customs Enforcement operations along the border in east Texas.

The U.S. Treasury has been warning banks about big Mexican- currency-exchange firms laundering drug money since 1996. By 2004, many U.S. banks had closed their accounts with these companies, which are known as casas de cambio.

Wachovia ignored warnings by regulators and police, according to the deferred-prosecution agreement.

“As early as 2004, Wachovia understood the risk,” the bank admitted in court. “Despite these warnings, Wachovia remained in the business.”

One customer that Wachovia took on in 2004 was Casa de Cambio Puebla SA, a Puebla, Mexico-based currency-exchange company. Pedro Alatorre, who ran a Puebla branch in Mexico City, had created front companies for cartels, according to a pending Mexican criminal case against him.

Federal Indictment

A federal grand jury in Miami indicted Puebla, Alatorre and three other executives in February 2008 for drug trafficking and money laundering. In May 2008, the Justice Department sought extradition of the suspects, saying they used shell firms to launder $720 million through U.S. banks.

Alatorre has been in a Mexican jail for 2 1/2 years. He denies any wrongdoing, his lawyer Mauricio Moreno says. Alatorre has made no court-filed responses in the U.S.

During the period in which Wachovia admitted to moving money out of Mexico for Puebla, couriers carrying clear plastic bags stuffed with cash went to the branch Alatorre ran at the Mexico City airport, according to surveillance reports by Mexican police.

Alatorre opened accounts at HSBC on behalf of front companies, Mexican investigators found.

Puebla executives used the stolen identities of 74 people to launder money through Wachovia accounts, Mexican prosecutors say in court-filed reports.

‘Never Reported’

“Wachovia handled all the transfers, and they never reported any as suspicious,” says Jose Luis Marmolejo, a former head of the Mexican attorney general’s financial crimes unit who is now in private practice.

In November 2005 and January 2006, Wachovia transferred a total of $300,000 from Puebla to a Bank of America account in Oklahoma City, according to information in the Alatorre cases in the U.S. and Mexico.

Drug smugglers used the funds to buy the DC-9 through Oklahoma City aircraft broker U.S. Aircraft Titles Inc., according to financial records cited in the Mexican criminal case. U.S. Aircraft Titles President Sue White declined to comment.

On April 5, 2006, a pilot flew the plane from St. Petersburg, Florida, to Caracas to pick up the cocaine, according to the DEA. Five days later, troops seized the plane in Ciudad del Carmen and burned the drugs at a nearby army base.

‘Wachovia Knew’

“I am sure Wachovia knew what was going on,” says Marmolejo, who oversaw the criminal investigation into Wachovia’s customers. “It went on too long and they made too much money not to have known.”

At Wachovia’s anti-money-laundering unit in London, Woods and his colleague Jim DeFazio, in Charlotte, say they suspected that drug dealers were using the bank to move funds.

Woods, a former Scotland Yard investigator, spotted illegible signatures and other suspicious markings on traveler’s checks from Mexican exchange companies, he said in a September 2008 letter to the U.K. Financial Services Authority. He sent copies of the letter to the DEA and Treasury Department in the U.S.

Woods, 45, says his bosses instructed him to keep quiet and tried to have him fired, according to his letter to the FSA. In one meeting, a bank official insisted Woods shouldn’t have filed suspicious activity reports to the government, as both U.S. and U.K. laws require.

‘I Was Shocked’

“I was shocked by the content and outcome of the meeting and genuinely traumatized,” Woods wrote.

In the U.S., DeFazio, who had been a Federal Bureau of Investigation agent for 21 years, says he told bank executives in 2005 that the DEA was probing the transfers through Wachovia to buy the planes.

Bank executives spurned recommendations to close suspicious accounts, DeFazio, 63, says.

“I think they looked at the money and said, ‘The hell with it. We’re going to bring it in, and look at all the money we’ll make,’” DeFazio says.

DeFazio retired in 2008.

“I didn’t want anything from them,” he says. “I just wanted to get out.”

Woods, who resigned from Wachovia in May 2009, now advises banks on how to combat money laundering. He declined to discuss details of Wachovia’s actions.

U.S. Comptroller of the Currency John Dugan told Woods in a March 19 letter his efforts had helped the U.S. build its case against Wachovia.

‘Great Courage’

“You demonstrated great courage and integrity by speaking up when you saw problems,” Dugan wrote.

It was the Puebla investigation that led U.S. authorities to the broader probe of Wachovia. On May 16, 2007, DEA agents conducted a raid of Wachovia’s international banking offices in Miami. They had a court order to seize Puebla’s accounts.

U.S. prosecutors and investigators then scrutinized the bank’s dealings with Mexican-currency-exchange firms. That led to the March deferred-prosecution agreement.

With Puebla’s Wachovia accounts seized, Alatorre and his partners shifted their laundering scheme to HSBC, according to financial documents cited in the Mexican criminal case against Alatorre.

In the three weeks after the DEA raided Wachovia, two of Alatorre’s front companies, Grupo ETPB SA and Grupo Rahero SC, made 12 cash deposits totaling $1 million at an HSBC Mexican branch, Mexican investigators found.

Another Drug Plane

The funds financed a Beechcraft King Air 200 plane that police seized on Dec. 29, 2007, in Cuernavaca, 50 miles south of Mexico City, according to information in the case against Alatorre.

For years, federal authorities watched as the wife and daughter of Oscar Oropeza, a drug smuggler working for the Matamoros-based Gulf Cartel, deposited stacks of cash at a Bank of America branch on Boca Chica Boulevard in Brownsville, Texas, less than 3 miles from the border.

Investigator Robinette sits in his pickup truck across the street from that branch. It’s a one-story, tan stucco building next to a Kentucky Fried Chicken outlet. Robinette discusses the Oropeza case with Tom Salazar, an agent who investigated the family.

“Everybody in there knew who they were -- the tellers, everyone,” Salazar says. “The bank never came to us, though.”

New Meaning

The Oropeza case gives a new, literal meaning to the term money laundering. Oropeza’s wife, Tina Marie, and daughter Paulina Marie deposited stashes of $20 bills several times a day into Bank of America accounts, Salazar says. Bank employees got to know the Oropezas by the smell of their money.

“I asked the tellers what they were talking about, and they said the money had this sweet smell like Bounce, those sheets you throw into the dryer,” Salazar says. “They told me that when they opened the vault, the smell of Bounce just poured out.”

Oropeza, 48, was arrested 820 miles from Brownsville. On May 31, 2007, police in Saraland, Alabama, stopped him on a traffic violation. Checking his record, they learned of the investigation in Texas.

They searched the van and discovered 84 kilograms (185 pounds) of cocaine hidden under a false floor. That allowed federal agents to freeze Oropeza’s bank accounts and search his marble-floored home in Brownsville, Robinette says. Inside, investigators found a supply of Bounce alongside the clothes dryer.

Guilty Pleas

All three Oropezas pleaded guilty in U.S. District Court in Brownsville to drug and money-laundering charges in March and April 2008. Oscar Oropeza was sentenced to 15 years in prison; his wife was ordered to serve 10 months and his daughter got 6 months.

Bank of America’s Norton says, “We not only fulfilled our regulatory obligation, but we proactively worked with law enforcement on these matters.”

Prosecutors have tried to halt money laundering at American Express Bank International twice. In 1994, the bank, then a subsidiary of New York-based American Express Co., pledged not to allow money laundering again after two employees were convicted in a criminal case involving drug trafficker Juan Garcia Abrego.

In 1994, the bank paid $14 million to settle. Five years later, drug money again flowed through American Express Bank. Between 1999 and 2004, the bank failed to stop clients from laundering $55 million of narcotics funds, the bank admitted in a deferred-prosecution agreement in August 2007.

Western Union

It paid $65 million to the U.S. and promised not to break the law again. The government dismissed the criminal charge a year later. American Express sold the bank to London-based Standard Chartered PLC in February 2008 for $823 million.

Banks aren’t the only financial institutions that have turned a blind eye to drug cartels in moving illicit funds. Western Union Co., the world’s largest money transfer firm, agreed to pay $94 million in February 2010 to settle civil and criminal investigations by the Arizona attorney general’s office.

Undercover state police posing as drug dealers bribed Western Union employees to illegally transfer money, says Cameron Holmes, an assistant attorney general.

“Their allegiance was to the smugglers,” Holmes says. “What they thought about during work was ‘How may I please my highest- spending customers the most?’”

Smudged Fingerprints

Workers in more than 20 Western Union offices allowed the customers to use multiple names, pass fictitious identifications and smudge their fingerprints on documents, investigators say in court records.

“In all the time we did undercover operations, we never once had a bribe turned down,” says Holmes, citing court affidavits.

Western Union has made significant improvements, it complies with anti-money-laundering laws and works closely with regulators and police, spokesman Tom Fitzgerald says.

For four years, Mexican authorities have been fighting a losing battle against the cartels. The police are often two steps behind the criminals. Near the southeastern corner of Texas, in Matamoros, more than 50 combat troops surround a police station.

Officers take two suspected drug traffickers inside for questioning. Nearby, two young men wearing white T-shirts and baggy pants watch and whisper into radios. These are los halcones (the falcons), whose job is to let the cartel bosses know what the police are doing.

‘Only Way’

While the police are outmaneuvered and outgunned, ordinary Mexicans live in fear. Rojas, the man who lives in the Tijuana slum near the border fence, recalls cowering in his home as smugglers shot it out with the police.

“The only way to survive is to stay out of the way and hope the violence, the bullets, don’t come for you,” Rojas says.

To make their criminal enterprises work, the drug cartels of Mexico need to move billions of dollars across borders. That’s how they finance the purchase of drugs, planes, weapons and safe houses, Senator Gonzalez says.

“They are multinational businesses, after all,” says Gonzalez, as he slowly loads his revolver at his desk in his Mexico City office. “And they cannot work without a bank.