Saturday, January 07, 2017
The Curious World of Donald Trump’s Private Russian Connections James S. Henry
Did the American people really know they were putting such a "well-connected" guy in the White House?
Intro by David Cay Johnston
Pulitizer-Prize winning author, The Making of Donald Trump.
Throughout Donald Trump's presidential campaign, he expressed glowing admiration for Russian leader Vladimir Putin. Many of Trump's adoring comments were utterly gratuitous. After his Electoral College victory, Trump continued praising the former head of the KGB while dismissing the finding of all 17 American national security agencies that Putin had directed Russian government interference to help Trump in the 2016 American presidential election.
As veteran investigative economist and journalist Jim Henry shows below, a robust public record helps to explain the fealty of Trump and his family to this murderous autocrat and the network of Russian oligarchs.
Putin and his billionaire friends have plundered the wealth of their own people. They have also run numerous schemes to defraud governments and investors in the United States and Europe. From public records, using his renowned analytical skills, Henry shows what the mainstream news media in United States have failed to report in any meaningful way: for at least three decades Donald Trump has profited from his connections to the Russian oligarchs, whose own fortunes now depend on their continued fealty to Putin.
We don't know the full relationship between Donald Trump, the Trump family and their enterprises with the network of the world– class criminals known as the Russian oligarchs. Henry acknowledges that his article poses more questions than answers, establishes more connections than full explanations. But what Henry does show should prompt every American to rise up in defense of their country, to demand a thorough out in the open Congressional investigation with no holds barred. The national security of United States of America and of peace around the world, especially in Europe, may depend on how thoroughly we understand the rich network of relationships between the 45th president and the Russian oligarchy. When Donald Trump chooses to exercise, or not exercise, his power to restrain Putin's drive to invade independent countries and seize their wealth, as well as to loot countries beyond his control, Americans need to know in whose interest the president 's acting or looking the other way.
“Tell me who you walk with and I’ll tell you who you are.”
“I’ve always been blessed with a kind of intuition about people that allows me to sense who the sleazy guys are, and I stay far away.”
—Donald Trump, Surviving at the Top
Even before the November 8 election, many leading Democrats were vociferously demanding that the FBI disclose the fruits of its investigations into Putin-backed Russian hackers. Instead FBI Director Comey decided to temporarily revive his zombie-like investigation of Hillary’s emails. That decision may well have had an important impact on the election, but it did nothing to resolve the allegations about Putin. Even now, after the CIA has disclosed an abstract of its own still-secret investigation, it is fair to say that we still lack the cyberspace equivalent of a smoking gun.
Fortunately, however, for those of us who are curious about Trump’s Russian connections, there is another readily accessible body of published and other Internet material that has so far received surprisingly little attention. This suggests that whatever the nature of President-elect Donald Trump’s relationship with President Putin, he has certainly managed to accumulate direct and indirect connections with a far-flung private Russian/FSU network of outright mobsters, oligarchs, fraudsters, and kleptocrats.
Any one of these connections might have occurred at random. But the overall pattern is a veritable Star Wars bar scene of unsavory characters, with Donald Trump seated right in the middle. The analytical challenge is to map this network—a task that most journalists and law enforcement agencies, focused on individual cases, have failed to do.
Of course, to label this network “private” may be a stretch, given that in Putin’s Russia, even the toughest mobsters learn the hard way to maintain a respectful relationship with the “New Tsar.” But here the central question pertains to our new Tsar. Did the American people really know they were putting such a “well-connected” guy in the White House?
The Big Picture: Kleptocracy and Capital Flight
A few of Donald Trump’s connections to oligarchs and assorted thugs have already received sporadic press attention -- for example, former Trump campaign manager Paul Manafort’s reported relationship with exiled Ukrainian oligarch Dmytro Firtash. But no one has pulled the connections together, used them to identify still more relationships, and developed an image of the overall patterns.
Nor has anyone related these cases to one of the most central facts about modern Russia: its emergence since the 1990s as a world-class kleptocracy, second only to China as a source of illicit capital and criminal loot, with more than $1.3 trillion of net offshore “flight wealth” as of 2016.
This tidal wave of illicit capital is hardly just Putin’s doing. It is in fact a symptom of one of the most epic failures in modern political economy -- one for which the West bears a great deal of responsibility. This is the failure, in the wake of the Soviet Union’s collapse in the late 1980s, to ensure that Russia acquires the kind of strong, middle-class-centric economic and political base that is required for democratic capitalism, the rule of law, and stable, peaceful relationships with its neighbors.
Instead, from 1992 to the Russian debt crisis of August 1998, the West in general—and the U.S. Treasury, USAID, the State Department, the IMF/World Bank, the ERDB, and many leading economists in particular—actively promoted and, indeed, helped to finance one of the most massive transfers of public wealth into private hands that the world has ever seen.
For example, Russia’s 1992 “voucher privatization” program permitted a tiny elite of former state-owned company managers and party apparatchiks to acquire control over a vast number of public enterprises, often with the help of outright mobsters. A majority of Gazprom, the state energy company that controlled a third of the world’s gas reserves, was sold for $230 million; Russia’s entire national electric grid was privatized for $630 million; ZIL, Russia's largest auto company, went for about $4 million; ports, ships, oil, iron and steel, aluminum, much of the high-tech arms and airlines industries, the world’s largest diamond mines, and most of Russia’s banking system also went for a song.
In 1994–96, under the infamous “loans-for-shares” program, Russia privatized 150 state-owned companies for just $12 billion, most of which was loaned to a handful of well-connected buyers by the state—and indirectly by the World Bank and the IMF. The principal beneficiaries of this “privatization”—actually, cartelization—were initially just 25 or so budding oligarchs with the insider connections to buy these properties and the muscle to hold them. The happy few who made personal fortunes from this feeding frenzy —in a sense, the very first of the new kleptocrats—not only included numerous Russian officials, but also leading gringo investors/advisers, Harvard professors, USAID advisers, and bankers at Credit Suisse First Boston and other Wall Street investment banks. As the renowned development economist Alex Gerschenkron, an authority on Russian development, once said, "If we were in Vienna, we would have said, "We wish we could play it on the piano!"
For the vast majority of ordinary Russian citizens, this extreme re-concentration of wealth coincided with nothing less than a full-scale 1930s-type depression, a sudden “shock therapy”-induced rise in domestic price levels that wiped out the private savings of millions, rampant lawlessness, a public health crisis, and a sharp decline in life expectancy and birth rates.
Sadly, this neoliberal “market reform” policy package that was introduced at a Stalin-like pace from 1992 to late 1998 was not only condoned but partly designed and financed by senior Clinton Administration officials, neoliberal economists, and innumerable USAID, World Bank, and IMF officials. The few dissenting voices included some of the West's best economic brains -- Nobel laureates like James Tobin, Kenneth Arrow, Lawrence Klein, and Joseph Stiglitz. They also included Moscow University’s Sergei Glaziev, who now serves as President Putin’s chief economic advisor. Unfortunately, they were no match for the folks with the cash.
There was also an important intervention in Russian politics. In January 1996 a secret team of professional U.S. political consultants arrived in Moscow to discover that, as CNN put it back then, “The only thing voters like less than Boris Yeltsin is the prospect of upheaval.” The experts' solution was one of earliest "Our brand is crisis" campaign strategies, in which Yeltsin was “spun” as the only alternative to "chaos." To support him, in March 1996 the IMF also pitched in with $10.1 billion of new loans, on top of $17.3 billion of IMF/World Bank loans that had already been made.
With all this outside help, plus ample contributions from Russia’s new elite, Yeltsin went from just 8 percent approval in the January 1996 polls to a 54-41 percent victory over the Communist Party candidate, Gennady Zyuganov, in the second round of the July 1996 election. At the time, mainstream media like Time and the New York Times were delighted. Very few outside Russia questioned the wisdom of this blatant intervention in post-Soviet Russia’s first democratic election, or the West's right to do it in order to protect itself.
By the late 1990s the actual chaos that resulted from Yeltsin's warped policies had laid the foundations for a strong counterrevolution, including the rise of ex-KGB officer Putin and a massive outpouring of oligarchic flight capital that has continued virtually up to the present. For ordinary Russians, as noted, this was disastrous. But for many banks, private bankers, hedge funds, law firms, and accounting firms, for leading oil companies like ExxonMobil and BP, as well as for needy borrowers like the Trump Organization the opportunity to feed on post-Soviet spoils was a godsend. This was vulture capitalism at its worst.
The nine-lived Trump, in particular, had just suffered a string of six successive bankruptcies. So the massive illicit outflows from Russia and oil-rich FSU members like Kazahkstan and Azerbaijan from the mid-1990s provided precisely the kind of undiscriminating investors that he needed. These outflows arrived at just the right time to fund several of Trump's post-2000 high-risk real estate and casino ventures – most of which failed. As Donald Trump, Jr., executive vice president of development and acquisitions for the Trump Organization, told the “Bridging U.S. and Emerging Markets Real Estate” conference in Manhattan in September 2008, on the basis, he said, of his own “half dozen trips to Russia in 18 months”:
"[I]n terms of high-end product influx into the United States, Russians make up a pretty disproportionate cross-section of a lot of our assets; say in Dubai, and certainly with our project in SoHo and anywhere in New York. We see a lot of money pouring in from Russia."
All this helps to explain one of the most intriguing puzzles about Donald Trump’s long, turbulent business career: how he managed to keep financing it, despite a dismal track record of failed projects.
According to the “official story,” this was simply due to a combination of brilliant deal-making, Trump’s gold-plated brand, and raw animal spirits – with $916 million of creative tax dodging as a kicker. But this official story is hokum. The truth is that, since the late 1990s, Trump was also greatly assisted by these abundant new sources of global finance, especially from "submerging markets" like Russia
This suggests that neither Trump nor Putin is an “uncaused cause.” They are not evil twins, exactly, but they are both byproducts of the same neoliberal policy scams that were peddled to Russia’s struggling new democracy.
A Guided Tour of Trump's Russian/FSU Connections
The following roundup of Trump’s Russo-Soviet business connections is based on published sources, interviews with former law enforcement staff and other experts in the United States, the United Kingdom, and Iceland, searches of online corporate registries, and a detailed analysis of offshore company data from the Panama Papers. Given the sheer scope of Trump’s activities, there are undoubtedly other worthy cases, but our interest here is in overall patterns.
Note that none of the activities and business connections related here necessarily involved criminal conduct. While several key players do have criminal records, few of their prolific business dealings have been thoroughly investigated, and of course they all deserve the presumption of innocence. Furthermore, several of these players reside in countries where activities like bribery, tax dodging, and other financial chicanery are either not illegal or are rarely prosecuted. As former British Chancellor of the Exchequer Denis Healey once said, when it comes to financial chicanery, the difference between “legal” and “illegal” is often just “the width of a prison wall.”
So why spend time collecting and reviewing material that may either not point to anything illegal and or in some cases may even be impossible to verify? Because, we submit, the mere fact that such assertions are widely made is of legitimate public interest in its own right. In other words, when it comes to evaluating the probity of senior public officials, the public has the right to know about any material allegations—true, false, or, most commonly, unprovable—about their business partners and associates, so long as this information is clearly labeled as unverified.
Furthermore, the individual case-based approach to investigations employed by most investigative journalists and law enforcement often misses the big picture: the global networks of influence and finance, licit and illicit, that exist among business people, investors, kleptocrats, organized criminals, and politicians, as well as the "enablers" -- banks, accounting firms, law firms, and havens.
Any particular component of these networks might easily disappear without making any difference. But the networks live on. It is these shadowy transnational networks that really deserve scrutiny.
Bayrock Group LLC—Kazakhstan and Tevfik Arif
We’ll begin our tour of Trump's Russian/FSU connections with several business relationships that evolved out of the curious case of Bayrock Group LLC, a spectacularly unsuccessful New York real estate development company that surfaced in the early 2000s and, by 2014, had all but disappeared except for a few lawsuits. As of 2007, Bayrock and its partners reportedly had more than $2 billion of Trump-branded deals in the works. But most of these either never materialized or were miserable failures, for reasons that will soon become obvious.
Bayrock’s “white elephants” included the 46-story Trump SoHo condo-hotel on Spring Street in New York City, for which the principle developer was a partnership formed by Bayrock and FL Group, an Icelandic investment company. Completed in 2010, the SoHo soon became the subject of prolonged civil litigation by disgruntled condo buyers. The building was foreclosed by creditors and resold in 2014 after more than $3 million of customer down payments had to be refunded. Similarly, Bayrock’s Trump International Hotel & Tower in Fort Lauderdale was foreclosed and resold in 2012, while at least three other Trump-branded properties in the United States, plus many other “project concepts” that Bayrock had contemplated, from Istanbul and Kiev to Moscow and Warsaw, also never happened.
Carelessness about due diligence with respect to potential partners and associates is one of Donald Trump’s more predictable qualities. Acting on the seat of the pants, he had hooked up with Bayrock rather quickly in 2005, becoming an 18 percent minority equity partner in the Trump SoHo, and agreeing to license his brand and manage the building.
Exhibit A in the panoply of former Trump business partners is Bayrock’s former Chairman, Tevfik Arif (aka Arifov), an émigré from Kazakhstan who reportedly took up residence in Brooklyn in the 1990s. Trump also had extensive contacts with another key Bayrock Russian-American from Brooklyn, Felix Sater (aka Satter), discussed below. Trump has lately had some difficulty recalling very much about either Arif or Sater. But this is hardly surprising, given what we now know about them. Trump described his introduction to Bayrock in a 2013 deposition for a lawsuit that was brought by investors in the Fort Lauderdale project, one of Trump’s first with Bayrock: “Well, we had a tenant in …Trump Tower called Bayrock, and Bayrock was interested in getting us into deals.”
According to several reports, Tevfik Arif was originally from Kazakhstan, a Soviet republic until 1992. Born in 1950, Arif worked for 17 years in the Soviet Ministry of Commerce and Trade, serving as Deputy Director of Hotel Management by the time of the Soviet Union’s collapse. In the early 1990s he relocated to Turkey, where he reportedly helped to develop properties for the Rixos Hotel chain. Not long thereafter he relocated to Brooklyn, founded Bayrock, opened an office in the Trump Tower, and started to pursue projects with Trump and other investors.
Tevfik Arif was not Bayrock’s only connection to Kazakhstan. A 2007 Bayrock investor presentation refers to Alexander Mashevich’s “Eurasia Group” as a strategic partner for Bayrock’s equity finance. Together with two other prominent Kazakh billionaires, Patokh Chodiev (aka “Shodiyev”) and Alijan Ibragimov, Mashkevich reportedly ran the “Eurasian Natural Resources Cooperation.” In Kazakhstan these three are sometimes referred to as “the Trio.”
The Trio has apparently worked together ever since Gorbachev's late 1980s perestroika in metals and other natural resources. It was during this period that they first acquired a significant degree of control over Kazakhstan’s vast mineral and gas reserves. Naturally they found it useful to become friends with Nursaltan Nazarbayev, Kazakhstan’s long-time ruler. Indeed, State Department cables leaked by Wikileaks in November 2010 describe a close relationship between “the Trio” and the seemingly-perpetual Nazarbayev kleptocracy.
In any case, the Trio has recently attracted the attention of many other investigators and news outlets, including the September 11 Commission Report, the Guardian, Forbes, and the Wall Street Journal. In addition to resource grabbing, the litany of the Trio's alleged activities include money laundering, bribery, and racketeering. In 2005, according to U.S. State Department cables released by Wikileaks, Chodiev (referred to in a State Department cable as “Fatokh Shodiyev”) was recorded on video attending the birthday of reputed Uzbek mob boss Salim Abduvaliyeva and presenting him with a $10,000 “gift” or “tribute.”
According to the Belgian newspaper Le Soir, Chodiev and Mashkevich also became close associates of a curious Russian-Canadian businessman, Boris J. Birshtein. who happens to have been the father-in-law of another key Russian-Canadian business associate of Donald Trump in Toronto. We will return to Birshtein below.
The Trio also turn up in the April 2016 Panama Papers database as the apparent beneficial owners of a Cook Islands company, “International Financial Limited.”  The Belgian newspapers Het Laatste Nieuws, Le Soir, and La Libre Belgique have reported that Chodiev paid €23 million to obtain a “Class B” banking license for this same company, permitting it to make international currency trades. In the words of a leading Belgian financial regulator, that would “make all money laundering undetectable.”
The Panama Papers also indicate that some of Arif’s connections at the Rixos Hotel Group may have ties to Kazakhstan. For example, one offshore company listed in the Panama Papers database, “Group Rixos Hotel,” reportedly acts as an intermediary for four BVI offshore companies. Rixos Hotel’s CEO, Fettah Tamince, is listed as having been a shareholder for two of these companies, while a shareholder in another—“Hazara Asset Management”—had the same name as the son of a recent Kazakhstan Minister for Sports and Tourism. As of 2012, this Kazakh official was described as the third-most influential deputy in the country’s Mazhilis (the lower house of Parliament), in a Forbes-Kazakhstan article.
According to a 2015 lawsuit against Bayrock by Jody Kriss, one of its former employees, Bayrock started to receive millions of dollars in equity contributions in 2004, supposedly by way of Arif’s brother in Russia, who allegedly “had access to cash accounts at a chromium refinery in Kazakhstan.”
This as-yet unproven allegation might well just be an attempt by the plaintiff to extract a more attractive settlement from Bayrock and its original principals. But it is also consistent with fact that chromium is indeed one of the Kazakh natural resources that is reportedly controlled by the Trio.
As for Arif, his most recent visible brush with the law came in 2010, when he and other members of Bayrock’s Eurasian Trio were arrested together in Turkey during a police raid on a suspected prostitution ring, according to the Israeli daily Yediot Ahronot.
At the time, Turkish investigators reportedly asserted that Arif might be the head of a criminal organization that was trafficking in Russian and Ukrainian escorts, allegedly including some as young as 13. According to these assertions, big-ticket clients were making their selections by way of a modeling agency website, with Arif allegedly handling the logistics. Especially galling to Turkish authorities, the preferred venue was reportedly a yacht that had once belonged to the widely-revered Turkish leader Atatürk. It was also alleged that Arif may have also provided lodging for young women at Rixos Group hotels.
According to Russian media, two senior Kazakh officials were also arrested during this incident, although the Turkish Foreign Ministry quickly dismissed this allegation as “groundless.” In the end, all the charges against Arif resulting from this incident were dismissed in 2012 by Turkish courts, and his spokespeople have subsequently denied all involvement.
Finally, despite Bayrock’s demise and these other legal entanglements, Arif has apparently remained active. For example, Bloomberg reports that, as of 2013, he, his son, and Rixos Hotels’ CEO Fettah Tamince had partnered to pursue the rather controversial business of advancing funds to cash-strapped high-profile soccer players, in exchange for a share of their future marketing revenues and team transfer fees. In the case of Arif and his partners, this new-wave form of indentured servitude was reportedly implemented by way of a UK- and Malta-based hedge fund, Doyen Capital LLP. Because this practice is subject to innumerable potential abuses, including the possibility of subjecting athletes or clubs to undue pressure to sign over valuable rights and fees, UEFA, Europe’s governing soccer body, wants to ban it. But FIFA, the notorious global football regulator, has been customarily slow to act. To date, Doyen Capital LLP has reportedly taken financial gambles on several well-known players, including the Brazilian star Neymar.
The Case of Bayrock LLC—Felix Sater
Our second exhibit is Felix Sater, the senior Bayrock executive introduced earlier. This is the fellow who worked at Bayrock from 2002 to 2008 and negotiated several important deals with the Trump Organization and other investors. When Trump was asked who at Bayrock had brought him the Fort Lauderdale project in the 2013 deposition cited above, he replied: “It could have been Felix Sater, it could have been—I really don’t know who it might have been, but somebody from Bayrock.” 
Although Sater left Bayrock in 2008, by 2010 he was reportedly back in Trump Tower as a “senior advisor” to the Trump Organization – at least on his business card -- with his own office in the building.
Sater has also testified under oath that he had escorted Donald Trump, Jr. and Ivanka Trump around Moscow in 2006, had met frequently with Donald over several years, and had once flown with him to Colorado. And although this might easily have been staged, he is also reported to have visited Trump Tower in July 2016 and made a personal $5,400 contribution to Trump’s campaign.
Whatever Felix Sater has been up to recently, the key point is that by 2002, at the latest, Tevfik Arif decided to hire him as Bayrock’s COO and managing director. This was despite the fact that by then Felix had already compiled an astonishing track record as a professional criminal, with multiple felony pleas and convictions, extensive connections to organized crime, and — the ultimate prize —a virtual “get out of jail free card,” based on an informant relationship with the FBI and the CIA that is vaguely reminiscent of Whitey Bulger.
Sater, a Brooklyn resident like Arif, was born in Russia in 1966. He reportedly emigrated with his family to the United States in the mid-1970s and settled in “Little Odessa.” It seems that his father, Mikhael Sheferovsky (aka Michael Sater), may have been engaged in Russian mob activity before he arrived in the United States. According to a certified U.S. Supreme Court petition, Felix Sater’s FBI handler stated that he “was well familiar with the crimes of Sater and his (Sater’s) father, a (Semion) Mogilevich crime syndicate boss.”  A 1998 FBI report reportedly said Mogilevich’s organization had “approximately 250 members,” and was involved in trafficking nuclear materials, weapons and more as well as money laundering. (See below.)
But Michael Sater may have been less ambitious than his son. His only reported U.S. criminal conviction came in 2000, when he pled guilty to two felony counts for extorting Brooklyn restaurants, grocery stores, and clinics. He was released with three years’ probation. Interestingly, the U.S. Attorney for the Eastern District of New York who handled that case at the time was Ms. Loretta Lynch, who succeeded Eric Holder as US Attorney General in 2014. Back in 2000, she was also overseeing a budding informant relationship and a plea bargain with Michael’s son Felix, which may help to explain the father's sentence.
By then young Felix Sater was already well on his way to a career as a prototypical Russian-American mobster. In 1991 he stabbed a commodity trader in the face with a margarita glass stem in a Manhattan bar, severing a nerve. He was convicted of a felony and sent to prison. As Trump tells it, Sater simply “got into a barroom fight, which a lot of people do.” The sentence for this felony conviction could not have been very long, because by 1993 27-year-old Felix was already a trader in a brand new Brooklyn-based commodity firm called “White Rock Partners,” an innovative joint venture among four New York crime families and the Russian mob aimed at bringing state-of-the art financial fraud to Wall Street.
Five years later, in 1998, Felix Sater pled guilty to stock racketeering, as one of 19 U.S.-and Russian mob-connected traders who participated in a $40 million “pump and dump” securities fraud scheme. Facing twenty years in Federal prison, Sater and Gennady Klotsman, a fellow Russian-American who'd been with him on the night of the Manhattan bar fight, turned "snitch" and helped the Department of Justice prosecute their co-conspirators. Reportedly, so did Salvatore Lauria, another "trader” involved in the scheme. According to the Jody Kriss lawsuit, Lauria later joined Bayrock as an off-the-books paid “consultant.” Initially their cooperation, which lasted from 1998 until at least late 2001, was kept secret, until it was inadvertently revealed in a March 2000 press release by U.S. Attorney Lynch.
Unfortunately for Sater, about the same time the NYPD also reportedly discovered that he'd had been running a money-laundering scheme and illicit gun sales out of a Manhattan storage locker. He and Klotsman fled to Russia. However, according to the New York Times, citing Klotsman and Lauria, soon after the events of September 11, 2001 the ever-creative Sater succeeded in brokering information about the black market for Stinger anti-aircraft missiles to the CIA and the FBI. According to Klotsman, this strategy “bought Felix his freedom,” allowing him to return to Brooklyn. It is still not clear precisely what information Sater actually provided, but in 2015 US Attorney General Loretta Lynch publicly commended him for sharing information that she described as “crucial to national security.”
Meanwhile, Sater’s sentence for his financial crimes continued to be deferred even after his official cooperation in that case ceased in late 2001. His files remained sealed, and he managed to avoid any sentencing for those crimes at all until October 23, 2009. When he finally appeared before the Eastern District's Judge I. Leo Glasser, Felix received a $25,000 fine, no jail time, and no probation, in a quiet proceeding that attracted no press attention. Some compared this sentence to Judge Glasser's earlier sentence of Mafia hit man “Sammy the Bull” Gravano to 4.5 years for 19 murders, in exchange for “cooperating against John Gotti.”
In any case, between 2002 and 2008, when Felix Sater finally left Bayrock LLC, and well beyond, his ability to avoid jail and conceal his criminal roots enabled him to enjoy a lucrative new career as Bayrock’s chief operating officer. In that position, he was in charge of negotiating aggressive property deals all over the planet, even while—according to lawsuits by former Bayrock investors — engaging in still more financial fraud. The only apparent difference was that he changed his name from “Sater” to “Satter.” 
As for Sater’s pal Klotsman, the past few years have not been kind. As of December 2016 he is in a Russian penal colony, working off a ten-year sentence for a failed $2.8 million Moscow diamond heist in August 2010. In 2016 Klotsman was reportedly placed on a “top-ten list” of Americans that the Russians were willing to exchange for high-value Russian prisoners in U.S. custody, like the infamous arms dealer Viktor Bout. So far there have been no takers. But with Donald Trump as President, who knows?
The Case of Iceland’s FL Group
One of the most serious frauds alleged in the recent Bayrock lawsuit involves FL Group, an Icelandic private investment fund that is really a saga all its own.
Iceland is not usually thought of as a major offshore financial center. It is a small snowy island in the North Atlantic, closer to Greenland than to the UK or Europe, with only 330,000 citizens and a total GDP of just $17 billion. Twenty years ago, its main exports were cod and aluminum – with the imported bauxite smelted there to take advantage of the island's low electricity costs.
But in the 1990s Iceland’s tiny neoliberal political elite had what they all told themselves was a brilliant idea: "Let's privatize our state-owned banks, deregulate capital markets, and turn them loose on the world!" By the time all three of the resulting privatized banks, as well as FL Group, failed in 2008, the combined bank loan portfolio amounted to more than 12.5 times Iceland’s GDP -- the highest country debt ratio in the entire world.
For purposes of our story, the most interesting thing about Iceland is that, long before this crisis hit and utterly bankrupted FL Group, our two key Russian/FSU/Brooklyn mobster-mavens, Arif and Sater, had somehow stumbled on this obscure Iceland fund. Indeed, in early 2007 they persuaded FL Group to invest $50 million in a project to build the Trump SoHo in mid-town Manhattan.
According to the Kriss lawsuit, at the same time, FL Group and Bayrock’s Felix Sater also agreed in principle to pursue up to an additional $2 billion in other Trump-related deals. The Kriss lawsuit further alleges that FL Group (FLG) also agreed to work with Bayrock to facilitate outright tax fraud on more than $250 million of potential earnings. In particular, it alleges that FLG agreed to provide the $50 million in exchange for a 62 percent stake in the four Bayrock Trump projects, but Bayrock would structure the contract as a “loan.” This meant that Bayrock would not have to pay taxes on the initial proceeds, while FLG’s anticipated $250 million of dividends would be channeled through a Delaware company and characterized as “interest payments,” allowing Bayrock to avoid up to $100 million in taxes. For tax purposes, Bayrock would pretend that their actual partner was a Delaware partnership that it had formed with FLG, “FLG Property I LLC,” rather than FLG itself.
The Trump Organization has denied any involvement with FLG. However, as an equity partner in the Trump SoHo, with a significant 18 percent equity stake in this one deal alone, Donald Trump himself had to sign off on the Bayrock-FLG deal.
This raises many questions. Most of these will have to await the outcome of the Kriss litigation, which might well take years, especially now that Trump is President. But several of these questions just leap off the page.
First, how much did President-elect Trump know about the partners and the inner workings of this deal? After all, he had a significant equity stake in it, unlike many of his “brand-name only” deals, and it was also supposed to finance several of his most important East Coast properties.
Second, how did the FL Group and Bayrock come together to do this dodgy deal in the first place? One former FL Group manager alleges that the deal arrived by accident, a “relatively small deal" was nothing special on either side. The Kriss lawsuit, on the other hand, alleges that FLG was a well-known source of easy money from dodgy sources like Kazakhstan and Russia, and that other Bayrock players with criminal histories— like Salvatore Lauria, for example—were involved in making the introductions.
At this stage the evidence with respect to this second question is incomplete. But there are already some interesting indications that FL Group’s willingness to generously finance Bayrock’s peculiar Russian/FSU/Brooklyn team, its rather poorly-conceived Trump projects, and its purported tax dodging were not simply due to Icelandic backwardness. There is much more for us to know about Iceland’s “special” relationship with Russian finance. In this regard, there are several puzzles to be resolved.
First, it turns out that FL Group, Iceland’s largest private investment fund until it crashed in 2008, had several owners/investors with deep Russian business connections, including several key investors in all three top Iceland banks.
Second, it turns out that FL Group had constructed an incredible maze of cross-shareholding, lending, and cross-derivatives relationships with all these major banks, as illustrated by the following snapshot of cross-shareholding among Iceland’s financial institutions and companies as of 2008.
This thicket of cross-dealing made it almost impossible to regulate “control fraud,” where insiders at leading financial institutions went on a self-serving binge, borrowing and lending to finance risky investments of all kinds. It became difficult to determine which institutions were net borrowers or investors, as the concentration of ownership and self-dealing in the financial system just soared.
Third, FL Group make a variety of peculiar loans to Russian-connected oligarchs as well as to Bayrock. For example, as discussed below, Alex Shnaider, the Russian-Canadian billionaire who later became Donald Trump’s Toronto business partner, secured a €45.8 million loan to buy a yacht from Kaupthing Bank during the same period, while a company
Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 2008
belonging to another Russian billionaire who reportedly owns an important vodka franchise got an even larger loan.
Fourth, Iceland’s largest banks also made a series of extraordinary loans to Russian interests during the run-up to the 2008 crisis. For example, one of Russia’s wealthiest oligarchs, a close friend of President Putin, nearly managed to secure at least €400 million (or, some say, up to 4 times that much) from Kaupthing, Iceland’s largest bank, in late September 2008, just as the financial crisis was breaking wide open. This bank also had important direct and indirect investments in FL Group. Indeed, until December 2006, it is reported to have employed the FL Group private equity manager who allegedly negotiated Felix Sater’s $50 million deal in early 2007.
Fifth, there are unconfirmed accounts of a secret U.S. Federal Reserve report that unnamed Iceland banks were being used for Russian money laundering. Furthermore, Kaupthing Bank’s repeated requests to open a New York branch in 2007–08 were rejected by the Fed. Similar unconfirmed rumors repeatedly appeared in Danish and German publications, as did allegations about the supposed Kazakh origins of FLG’s cash to be “laundered” in the Kriss lawsuit.
Sixth, there is the peculiar fact is that when Iceland’s banks went belly-up in October 2008, their private banking subsidiaries in Luxembourg, which were managing at least €8 billion of private assets, were suddenly seized by Luxembourg banking authorities and transferred to a new bank, Banque Havilland. This happened so fast that Iceland’s Central Bank was prevented from learning anything about the identities or portfolio sizes of the Iceland banks’ private offshore clients. But again, there were rumors of some important Russian names.
Finally, there is the rather odd phone call that Russia’s Ambassador to Iceland made to Iceland’s Prime Minister at 6:45 a.m. on October 7, 2008, the day after the financial crisis hit Iceland. According to the PM's own account, the Russian Ambassador informed him that then Prime-Minister Putin was willing to consider offering Iceland a €4 billion Russian bailout.
Of course this alleged Putin offer was modified not long thereafter to a willingness to entertain an Icelandic negotiating team in Moscow. By the time the Iceland team got to Moscow later that year, Russia’s willingness to lend had cooled, and Iceland ended up accepting a $2.1 billion IMF "stabilization package" instead. But according to a member of the negotiating team, the reasons for the reversal are still a mystery. Perhaps Putin had reconsidered because he simply decided that Russia had to worry about its own considerable financial problems. Or perhaps he had discovered that Iceland’s banks had indeed been very generous to Russian interests on the lending side, while -- given Luxembourg’s fact actions -- any Russian private wealth invested in Iceland banks was already safe.
On the other hand, there may be a simpler explanation for Iceland’s peculiar generosity to sketchy partners like Bayrock. After all, right up to the last minute before the October 2008 meltdown, the whole world had awarded Iceland AAA ratings – depositors queued up in London to open high-yield Iceland bank accounts, its bank stocks were booming, and the compensation paid to its financiers was off the charts. So why would anyone worry about making a few more dubious deals?
Overall, therefore, with respect to these odd “Russia-Iceland” connections, the proverbial jury is still out. But all these Icelandic puzzles are intriguing and bear further investigation.
The Case of the Trump Toronto Tower and Hotel—Alex Shnaider
Our fourth case study of Trump's business associates concerns the 48-year-old Russian-Canadian billionaire Alex Shnaider, who co-financed the seventy-story Trump Tower and Hotel, Canada’s tallest building. It opened in Toronto in 2012. Unfortunately, like so many of Trump’s other Russia/FSU-financed projects, this massive Toronto condo-hotel project went belly-up this November and has now entered foreclosure.
According to an online profile of Shnaider by a Ukrainian news agency, Alex Shnaider was born in Leningrad in 1968, the son of "Евсей Шнайдер," or "Evsei Shnaider" in Russian. A recent Forbes article says that he and his family emigrated to Israel from Russia when he was four and then relocated to Toronto when he was 13-14. The Ukrainian news agency says that Alex's familly soon established "one of the most successful stories in Toronto's Russian quarter, " and that young Alex, with "an entrepreneurial streak," "helped his father Evsei Shnaider in the business, placing goods on the shelves and wiping floors."
Eventually that proved to be a great decision – Shnaider prospered in the New World. Much of this was no doubt due to raw talent. But it also appears that for a time he got significant helping hand from his (now reportedly x) father-in-law, another colorful Russian-Canadian, Boris J. Birshtein.
Originally from Lithuania, Birshtein, now about 69, has been a Canadian citizen since at least 1982. He resided in Zurich for a time in the early 1990s, but then returned to Toronto and New York. One of his key companies was called Seabeco SA, a "trading" company that was registered in Zurich in December 1982. By the early 1990s Birshtein and his partners had started many other Seabeco-related companies in a wide variety of locations, inclding Antwerp, Toronto, Winnipeg, Moscow, Delaware, Panama,  and Zurich. Several of these are still active. He often staffed them with directors and officers from a far-flung network of Russians, emissaries from other FSU countries like Kirgizstan and Moldova, and recent Russia/FSU emigres to Canada.
According to the Financial Times and the FBI, in addition to running Seabeco, Birshtein was a close business associate of Sergei Mikhaylov, the reputed head of Solntsevskaya Bratva, the Russian mob's largest branch, and the world’s highest-grossing organized crime group as of 2014, according to Fortune.  A 1996 FBI intelligence report cited by the FT claims that Birshtein hosted a meeting in his Tel Aviv office for Mikhaylov, the Ukrainian-born Semion Mogilevich, and several other leaders of the Russo/FSU mafia, in order to discuss “the sharing interests in Ukraine.” A subsequent 1998 FBI Intelligence report on the "Semion Mogilevich Organization" repeated the same charge, and described Mogilevich's successful attempts at gaining control over Ukraine privatization assets. This FT article also described how Birshtein and his associates had acquired extraordinary influence with key Ukraine officials, including President Leonid Kuchma, with the help of up to $5 million of payoffs. Citing Swiss and Belgian investigators, the FT also claimed that Birshtein and Mikhaylov jointly controlled a Belgian company called MAB International in the early 1990s. During that period, those same investigators reportedly observed transfers worth millions of dollars between accounts held by Mikhaylov, Birshtein, and Alexander Volkov, Seabeco's representative in Ukraine.
In 1993, the Yeltsin government reportedly accused Birshtein of illegally exporting seven million tons of Russian oil and laundering the proceeds. Dmytro Iakoubovski, a former associate of Birshtein’s who had also moved to Toronto, was said to be cooperating with the Russian investigation. One night a gunman fired three shots into Iakoubovski’s home, leaving a note warning him to cease his cooperation, according to a New York Times article published that year. As noted above, according to the Belgian newspaper Le Soir, two members of Bayrock’s Eurasian Trio were also involved in Seabeco during this period as well—Patokh Chodiev and Alexander Mashkevich. Chodiev reportedly first met Birshtein through the Soviet Foreign Ministry, and then went on to run Seabeco’s Moscow office before joining its Belgium office in 1991. Le Soir further claims that Mashkevich worked for Seabeco too, and that this was actually how he and Chodiev had first met.
All this is fascinating, but what about the connections between Birshtein and Trump's Toronto business associate, Alex Shnaider? Again, the leads we have are tantalizing.The Toronto Globe and Mail reported that in 1991, while enrolled in law school, young Alex Shnaider started working for Birshtein at Seabeco’s Zurich headquarters, where he was reportedly introduced to steel trading. Evidently this was much more than just a job; the Zurich company registry lists "Alex Shnaider" as a Director of "Seabeco Metals AG" from March 1993 to January 1994. 
In 1994, according to this account, reportedly left Seabeco in January 1994 to start his own trading company in Antwerp, in partnership with a Belgian trader-partner. Curiously, Le Soir also says that Mikhaylov and Birshtein co-founded MAB International in Antwerp in January 1994. Is it far-fetched to suspect that Alex Shnaider and mob boss Mikhaylov might have crossed paths, since they were both in the same city and they were both close to Shnaider’s father-in-law?
According to Forbes, soon after Shnaider moved to Antwerp, he started visiting the factories of his steel trading partners in Ukraine. His favorite client was the Zaporizhstal steel mill, the Ukraine's fourth largest. At the Zaporizhstal mill he reportedly met Eduard Shifrin (aka Shyfrin), a metals trader with a Ph.D. in metallurgical engineering. Together they founded Midland Resource Holdings Ltd. in 1994.
As the Forbes piece argues, with privatization sweeping Eastern Europe, private investors were jockeying to buy up the government’s shares in Zaprozhstal. But most traders lacked the financial backing and political connectons to accumulate large risky positions. Shnaider and Shifrin, in contrast, started buying up shares without limit, as if their pockets and connections were very deep. By 2001 they had purchased 93 percent of the plant for about $70 million, a stake that would be worth much more just five years later, when Shnaider reportedly turned down a $1.2 billion offer.
Today Midland Resources Holdings Ltd. reportedly generates more than $4 billion a year of revenue and has numerous subsidiaries all across Eastern Europe. Shnaider also reportedly owns Talon International Development, the firm that oversaw construction of the Trump hotel-tower in Toronto. All this wealth apparently helped Iceland's FL Group decide that it could afford to extend a €48.5 million loan to Alex Shnaider in 2008 to buy a yacht. 
As of December 2016, a search of the Panama Papers database found no less than 28 offshore companies that have been associated with “Midland Resources Holding Limited.” According to the database, "Midland Resources Holding Limited" was a shareholder in at least two of these companies, alongside an individual named “Oleg Sheykhametov.” The two companies, Olave Equities Limited and Colley International Marketing SA, were both registered and active in the British Virgin Islands from 2007–10. A Russian restaurateur by that same name reportedly runs a sushi franchise owned by two other alleged Solntsevskaya mob associates, Lev Kvetnoy and Andrei Skoch, both of whom are pictured below with Sergei Mikhaylov below. Of course mere inclusion in such a group photo is no evidence of any wrong-doing. (INSERT Picture Link here: https://www.theguardian.com/world/2012/nov/28/man-behind-megafon.) According to Forbes, Kvetnoy is the 55th richest person in Russia and Skoch, now a deputy in the Russian Duma, is the 18th. 
Finally, it is also intriguing to note that Bori Birshtein is also listed as the President of "ME Moldova Enterprises AG," a Zurich-based company" that was founded in November1992, transferred to the canton of Schwyz in September 1994, and liquidated and cancelled in January 1999. Birshstein was a member of the company's board of directors from November 1992 to January 1994, when he became its President. At that point he was succeeded as President in June 1994 by one "Evsei Shnaider, Canadian citizen, resident in Zurich," who was also listed as Director of the company in September 1994. " Evsei Schnaider" is also listed in the Panama registry as a Treasurer and Director of "The Seabeco Group Inc," formed on December 6, 1991, and as Treasurer and Director of Seabeco Security International Inc.," formed on December 10, 1991. As of December 2016, both companies are still in existence. Boris Birstein is listed as President and Director of both companies.
The Case of Paul Manafort’s Ukrainian Oligarchs
Our fifth Trump associate profile concerns the Russo/Ukrainian connections of Paul Manafort, the former Washington lobbyist who served as Donald Trump’s national campaign director from April 2016 to August 2016. Manafort’s partner, Rick Davis, also served as national campaign manager for Senator John McCain in 2008, so this may not just be a Trump association.
One of Manafort’s biggest clients was the dubious pro-Russian Ukrainian billionaire Dmytro Firtash. By his own admission, Firtash maintains strong ties with a recurrent figure on this scene, the reputed Ukrainian/Russian mob boss Semion Mogilevich. His most important other links are almost certainly to Putin. Otherwise it is difficult to explain how this former used-car salesman could gain a lock on trading goods for gas in Turkmenstan and also become a lynchpin investor in the Swiss company RosUrEnergo, which controls Gazprom's gas sales to Europe
In 2008, Manafort teamed up with a former manager of the Trump Organization to purchase the Drake Hotel in New York for up to $850 million, with Firtash agreeing to invest $112 million. According to a lawsuit brought against Manafort and Firtash, the key point of the deal was not to make a carefully-planned investment in real estate, but to simply launder part of the huge profits that Firtash had skimmed while brokering dodgy natural gas deals between Russia and Ukraine, with Mogilevich acting as a “silent partner.”
Ultimately Firtash pulled out of this Drake Hotel deal. The reasons are unclear – it has been suggestd that he needed to focus on the 2015 collapse and nationalization of his Group DF's Bank Nadra back home in the Ukraine. But it certainly doesn't appear to have changed his behiavor. Since 2014 there have been a spate of other Firtash-related prosecutions, with the US try to extradict from Austria in order to stand trial on allegations that his vast spidernet "Group DF" had paid $18.5 million in bribes to Indian officials to secure mining licenses. The Austrian court, knowing Firtash like a brother, required him to put up a record-busting €125 mm bail while he awaits a decision.  And just last month, Spain has also tried to extradite Firtash on a separate money laundering case, involving washing €10 million through Spanish property investments.
After Firtash pulled out of the deal, Manafort reportedly turned to Trump, but he declined to engage. Manafort stepped down as Trump’s campaign manager in August of 2016 in response to press investigations into his ties not only to Firtash, but to the Ukraine's previous pro-Russian Yanukovych government, which had been deposed by a uprising in 2014. However, following the November 8 election, Manafort reportedly returned to advise Trump on staffing his new administration. He got an assist from Putin -- on November 30 a spokeswoman for the Russian Foreign Ministry accused Ukraine of leaking stories about Manafort in an effort to hurt Trump.
The Case of “Well-Connected” Russia/FSU Mobsters
Finally, several other interesting Russo/FSU connections have a more residential flavor, but they are a source of very important leads about the Trump network.
Indeed, partly because it has no prying co-op board, Trump Tower in New York has received press attention for including among its many honest residents tax-dodgers, bribers, arms dealers, convicted cocaine traffickers, and corrupt former FIFA officials. 
One typical example involves the alleged Russian mobster Anatoly Golubchik, who went to prison in 2014 for running an illegal gambling ring out of Trump Tower -- not only the headquarters of the Trump Organization but also the former headquarters of Bayrock Group LLC. This operation reportedly took up the entire 51st floor. Also reportedly involved in it was the alleged mobster Alimzhan Tokhtakhounov,  who has the distinction of making the Forbes 2008 list of the World’s Ten Most Wanted Criminals, and whose organization the FBI believed to be tied to Mogilevich’s. Even as this gambling ring was still operating in Trump Tower, Tokhtakhounov reportedly travelled to Moscow to attend Donald Trump’s 2013 Miss Universe contest as a special VIP.
In the Panama Papers database we do find the name “Anatoly Golubchik.” Interestingly, his particular offshore company, "Lytton Ventures Inc.,"  shares a corporate director, Stanley Williams, with a company that may well be connected to our old friend Semion Mogilevich, the Russian mafia’s alleged “Boss of Bosses” who has appeared so frequently above. Thus Lytton Ventures Inc. shares this particular director with another company that is held under the name of “Galina Telesh.” According to the Organized Crime and Corruption Reporting Project, multiple offshore companies belonging to Semion Mogilevich have been registered under this same name -- which just happens to be that of Mogilevich’s first wife.
A 2003 indictment of Mogilevich also mentions two offshore companies that he is said to have owned, with names that include the terms “Arbat” and “Arigon.” The same corporate director shared by Golubchik and Telesh also happens to be a director of a company called Westix Ltd., which shares its Moscow address with “Arigon Overseas” and “Arbat Capital.” And another company with that same director appears to belong to Dariga Nazarbayeva, the eldest daughter of Nursultan Nazarbayev, the long-lived President of Kazakhstan. Dariga is expected to take his place if he ever decides to leave office or proves to be mortal.
Lastly, Dmytro Firtash—the Mogilevich pal and Manafort client that we met earlier—also turns up in the Panama Papers database, as part of Galina Telesh’s network neighborhood. A director of Telesh’s “Barlow Investing,” Vasliki Andreou, was also a nominee director of a Cyprus company called “Toromont Ltd.,” while another Toromont Ltd. nominee director, Annex Holdings Ltd., a St. Kitts company, is also listed as a shareholder in Firtash’s Group DF Ltd., along with Firtash himself. And Group DF’s CEO, who allegedly worked with Manafort to channel Firtash’s funding into the Drake Hotel venture, is also listed in the Panama Papers database as a Group DF shareholder. Moreover, a 2006 Financial Times investigation identified three other offshore companies that are linked to both Firtash and Telesh.
Of course, all of these curious relationships may just be meaningless coincidences. After all, the director shared by Telesh and Golubchik is also listed in the same role for more than 200 other companies, and more than a thousand companies besides Arbat Capital and Arigon Overseas share Westix’s corporate address. In the burgeoning land of offshore havens and shell-game corporate citizenship, there is no such thing as overcrowding. The appropriate way to view all this evidence is to regard it as "Socratic:" raising important unanswered questions – not providing definite answers.
In any case, returning to Trump's relationships through Trump Tower, another odd one involves the 1990s-vintage fraudulent company YBM Magnex International. YBM, ostensibly a world-class manufacturer of industrial magnets, was founded indirectly in Newtown, Bucks County, Pennsylvania in 1995 by the "boss of bosses," Semion Mogilevich, Moscow’s “brainy Don.”
This is a fellow with an incredible history, even if only one-half of what has been written about him is true.  Unfortunately, we have to focus here only on the bits that are most relevant.. Born in Kiev, and now a citizen of Israel as well as the Ukraine and Russia, Semion, now 70, is a lifelong criminal. But he boasts an undergraduate economics degree from Lviv University, and is reported to take special pride in designing sophisticated, virtually undetectable financial frauds that take years to put in place. To pull them off, he often relies on the human frailties of top bankers, stock brokers, accountants, business magnates, and key politicians.
In YBM’s case, for a mere $2.4 million in bribes, Semion and his henchmen spent years in the 1990s launching a product-free, fictitious company on the still-badly under-regulated Toronto Stock Exchange. Along the way they succeeded in securing the support of several leading Toronto business people and a former Ontario Province Premier to sit on YBM’s board. They also paid the “Big Four” accounting firm Deloitte Touche very handsomely to issue glowing audits. By mid-1998, YBM’s stock price had gone from less than $.10 to $20, and Semion cashed out at least $18 million—a relatively big fraud for its day—before the FBI raid its YBM's corporate headquarters. When it did so, it found piles of bogus invoices for magnets, but no magnets. 
In 2003, Mogilevich was indicted in Philadelphia on 45 felony counts for this $150 million stock fraud. But there is no extradition treaty between the United States and Russia, and no chance that Russia will ever extradite Semion voluntarily; he is arguably a national treasure, especially now. Acknowledging these realities, or perhaps for other reasons, the FBI quietly removed Mogilevich from its Top Ten Most Wanted list in 2015, where he had resided for the previous six years.
For our purposes, one of the most interesting things to note about this YBM Magnex case is that its CEO was a Russian-American named Jacob Bogatin, who was also indicted in the Philadelphia case. His brother David had served in the Soviet Army in a North Vietnamese anti-aircraft unit, helping to shoot down American jet pilots like Senator John McCain. Since the early 1990s, David Bogatin was considered by the FBI to be one of the key members of Semion Mogilevich’s Russian organized crime family in the United States, with a long string of convictions for big-ticket Mogilevich-type offenses like financial fraud and tax dodging.
At one point, David Bogatin owned five separate condos in Trump Tower that Donald Trump had reportedly sold to him personally. And Vyacheslav Ivankov, another key Mogilevich lieutenant in the United States during the 1990s, also resided for a time at Trump Tower, and reportedly had in his personal phone book the private telephone and fax numbers for the Trump Organization’s office in that building.
So what have we learned from this deep dive into the network of Donald Trump's Russian/FSU connections?
¶ First, the President-Elect really is very "well-connected," with an extensive network of unsavory global underground connections that may well be unprecedented in White House history. In choosing his associates, evidently Donald Trump only pays cursory attention to questions of background, character and integrity.
¶ Second, Donald Trump has also literally spent decades cultivating senior relationships of all kinds with Russia and the FSU. And public and private senior Russian figures of all kinds have likewise spent decades cultivating him, not only as a business partner, but as a "useful idiot."
After all, on September 1, 1987 (!), Trump was already willing to spend a $94,801 on full-page ads in the Boston Globe, the Washington Post, and the New York Times, calling for the US to stop spending money to defend Japan, Europe, and the Persian Gulf, "an area of only marginal significance to the US for its oil supplies, but one upon which Japan and others are almost totally dependent.''
This is one key reason why just this week, Robert Gates, a registered Republican who has served Secretary of Defense under Presidents from both parties, as well as Director and Deputy Director of the CIA, critized the response of Congress and the White House to the alleged Putin-backed hacking as far too "laid back." 
¶ Third, even beyond questions of illegality, the public clearly has a right to know much more than it already does about the nature of such global connections. As our opening quote from Cervantes suggests, these relationships are probably a pretty good leading indicator of how Presidents will behave once in office.
Unfortunately, for many reasons, this year American voters never really got the chance to decide whether such low connections and entanglements belong at the world’s high peak of official power. In the waning days of the Obama Administration, with the Electoral College about to ratify Trump's election and Congress in recess, it is too late to establish the kind of bipartisan 9/11-type commission that would be needed to explore these connections in detail.
¶ Finally, the long-run consequence of careless interventions in other countries is that they often come back to haunt us. In Russia's case, it just has.
James S. Henry, Esq. is an investigative economist and lawyer who has written widely about offshore and onshore tax havens, kleptocracy, and pirate banking. He is the author of The Blood Bankers (Basic Books, 2003,2005), a classic investigation of where the money went that was loaned to key debtor countries in the 1970s-1990s. He is a Senior Fellow at the Columbia University's Center on Sustainable Investment, a Global Justice Fellow at Yale, a Senior Advisor at the Tax Justice Network, and a member of the New York Bar. He has pursued frontline investigations of odious debt, flight capital, and corruption in more than 50 developing countries, including Russia, China, South Africa, Brazil, the Philippines, Argentina, Venezuela, Nicaragua, Mexico, and Panama.
 Author’s estimates; see globalhavenindustry.com for more details.
 For an overview and critical discussion, see http://prutland.faculty.wesleyan.edu/files/2015/08/The-role-of-the-IMF-in-Russia.pdf.
 See Lawrence Klein and Marshall Pomer, Russia's Economic Transition Gone Awry (Stanford U. Press, 2002); see also James S. Henry and Marshall Pomer, "A Pile of Ruble," The New Republic, 1998, 219 (10), 20-21.
 See this Washington Post report, which counts just six bankruptcies to the Trump Organization’s credit, but excludes failed projects like the Trump SoHo, the Toronto condo-hotel, the Fort Lauderdale condo-hotel, and many others Trump was a minority investor or had simply licensed his brand.
 “I dealt mostly with Tevfik,” he said in 2007 http://www.thedailybeast.com/articles/2011/05/26/inside-donald-trumps-empire-why-he-wont-run-for-president.html
 Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 15. https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n19/mode/2up.
 See also Salihovic, Elnur, Major Players in the Muslim Business World, p.107
 See also http://www.sahistory.org.za/sites/default/files/file%20uploads%20/alastair_fraser_miles_larmer_zambia_mining_anbook4you.pdf; http://www.brusselstimes.com/belgium/3302/the-belgian-billionaire-georges-forrest-denies-any-involvement-in-kazakhgate; http://archives.lesoir.be/le-parquet-de-bruxelles-enquete-kazakhgate-tractebel-co_t-19991228-Z0HNTZ.html.
 According to the Panama Papers database, "International Financial Limited" was registered on April 3, 1998, but is no longer active today, although no precise deregistration date is available. See https://offshoreleaks.icij.org/nodes/167402.
According to the Panama Papers, “Group Rixos Hotel” is still active company, while three of the four companies it serves were struck off in 2007 and the fourth, Hazara Asset Management, in 2013.
 See also  http://turizmguncel.com/haber/savarona-zanlilari-sorgulanirken-ismailov-adliyeye-gitti-h3325.html;  http://www.legrandsoir.info/Machkevitch-et-ses-complices-blanchis-par-la-justice-turque.html.
 Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 16. https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n19/mode/2up.
The exact date that Sater joined Bayrock is unclear. A New York Times article says 2003, but this appears to be too late. Sater says 1999, but this is much too early. A certified petition filed with the U.S. Supreme Court places the time around 2002, which is more consistent with Sater’s other activities during this period, including his cooperation with the Department of Justice on the Coppa case in 1998–2001, and his foreign travel.
 See https://www.ft.com/content/549ddfaa-5fa5-11e6-b38c-7b39cbb1138a; http://www.nytimes.com/2016/04/06/us/politics/donald-trump-soho-settlement.html; https://www.washingtonpost.com/politics/former-mafia-linked-figure-describes-association-with-trump/2016/05/17/cec6c2c6-16d3-11e6-aa55-670cabef46e0_story.html
;  http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf. Note that previous accounts of Sater's activities have overlooked the role that this very permissive relationship with federal law enforcement, especially the FBI, may have played in encouraging Sater's subsequent risk-taking and financial crimes. See http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf.
 Sater’s 1998 case, never formally sealed, was U.S. v. Sater, 98-CR-1101 (E.D.N.Y.) The case in which Sater secretly informed was U.S. v. Coppa, 00-CR-196 (E.D.N.Y.). See also http://www.thedailybeast.com/articles/2016/11/06/trump-s-russia-towers-he-just-can-t-get-them-up.html.
 http://www.nytimes.com/2007/12/17/nyregion/17trump.html. Sater also may have taken other steps to conceal his criminal past. According to the 2015 lawsuit filed by x Bayrocker Jody Kriss, Arif agreed to pay Sater his $1 million salary under the table, allowing Sater to pretend that he lacked resources to compensate any victims of his prior financial frauds. See Kriss v. Bayrock, pp. 2, 18, at https://assets.documentcloud.org/documents/2638421/Kriss-v-Bayrock-Complaint.pdf The lawsuit also alleges that Sater may have held a majority of Bayrock's ownership, but that Arif, Sater and other Bayrock officers may have conspired to hide this by listing Arif as the sole owner on offering documents.
 See https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n153/mode/2up, 155.
 "Former FL Group manager," interview with London, August 2016. Sigrun Davidsdottir, Iceland journalist.
 See "Report of the Special Investigation Commission on the 2008 Financial Crisis." (April 12, 2010), available at http://www.rna.is/eldri-nefndir/addragandi-og-orsakir-falls-islensku-bankanna-2008/skyrsla-nefndarinnar/english/.
 These loans are disclosed in the Kaupthing Bank's "Corporate Credit – Disclosure of Large Exposures > €40 mm." loan book, September 15, 2008. This document was disclosed by Wikileaks in 2009 See http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5968231/Kaupthing-leak-exposes-loans.html; http://file.wikileaks.info/leak/kaupthing-bank-before-crash-2008.pdf, p.145 (€79.5mm construction yacht loan to Russian vodka magnate Yuri Shefler's Serena Equity Ltd.; p. 208: (€45.8 mm yacht construction loan to Canadian-Russian billionaire Alex Shnaider's Filbert Pacific Ltd..
 Kriss lawsuit, op. cit.; author's analysis of Kaupthing/ FL G employees published career histories.
 Author's interview, "Iceland Economist," Reykjavik, July 2016.
 http://uniad.com.ua/main/940-dose-aleksa-shnajdera-sovladelca-zaporozhstali.html. The passage in Russian, with the father's name underlined, is as follows: "Родители Алекса Шнайдера владели одним из первых успешных русских магазинов в русском квартале Торонто. Алекс помогал в бизнесе отцу – Евсею Шнайдеру, расставляя на полках товар и протирая полы. С юных лет в Алексе зрела предпринимательская жилка. Живя с родителями, он стал занимать деньги у их друзей и торговать тканями и электроникой с разваливающимися в конце 80-х годов советскими предприятиями." "Евсею Шнайде
ру" is the dative case of "Евсей Шнайдер," or "Evsei Shnaider," the father's name in Russian.
 The Zurich company registry (http://www.zefix.ch/info/ger/ZH020.htm) reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. It entered liquidation on May 5, 1999, in Arth, handled by the Swiss trustee Paul Barth. The Zurich company registry listed "Boris Joseph Birshtein, Canadian citizen, resident in Toronto," as the President of Seabeco Kirgizstan AG in 1992, while "Boris Joseph Birshtein, Canadian citizen, resident in Zurich," was listed as the company's President in 1993. "Boris Birshtein" is also listed as the President and director of a 1991 Panama company, The Seabeco Group, Inc. as of December 6 1991. See below.
 The Zurich company registry reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. According to the registry, it entered liquidation on May 5, 1999. See also https://groups.google.com/forum/#!topic/soc.culture.ukrainian/1mtgIacNtMw. The liquidation was handled by the Swiss trustee Paul Barth, in Arth.
 For Seabeco's Antwerp subsidiary, see http://archives.lesoir.be/mafia-russe-la-justice-suisse-fond-sur-anvers-et-bruxel_t-19970317-Z0DFVX.html.
 "Royal HTM Group, Inc." of Toronto, (Canadian Federal Corporation # 624476-9), owned 50-50 by Birshtein and his nephew. See https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpDtls.html?corpId=6244769&V_TOKEN=1481946919835&crpNm=Royal%20HTM%20Group,%20Inc.&crpNmbr=&bsNmbr= .
 Birshtein was a director of Seabeco Capital Inc. (Canadian Federal Incorporatio # 248194-4,) a Winnipeg company created 6/2/1989 and dissolved 12/22/1992 )https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpDtls.html?corpId=2481944&V_TOKEN=1481931998238&crpNm=Seabeco&crpNmbr=&bsNmbr=
 Since 1998, Boris Birshtein (Toronto) has also served as Chairman, CEO, and a principle shareholder of "Trimol Group Inc.," a publicly-traded Delaware company that trades over the counter. (Symbol: TMOL). Its product line is supposedly "computerized photo identification and database management system utilized in the production of variety of secure essential government identification documents." See https://www.bloomberg.com/quote/TMOL:US; https://www.sec.gov/Archives/edgar/data/1011733/0000950123-98-005826.txt.
However, according to Trimol's July 2015 10-K (http://www.wikinvest.com/stock/Trimol_Group_Inc_(TMOL)/Filing/10-K/2015/10-K/D20069370) the company has only had one customer, the former FSU member Moldova, with which Trimol's wholly-owned subsidiary Intercomsoft concluded a contract in 1996 for the producton of a National Passport and Population Registration system. That contract was not renewed in 2006, and the subsidiary and Trimol have had no revenues since then. Accordingly, as of 2016 Trimol has only two part time employees, its two principle shareholders, Birshtein and his nephew, who, directly and indirectly account for 79 percent of Trimol's shares outstanding. According to the July 2015 10-K, Birshtein, in particular, owned 54 percent of TMOL's outstanding 78.3 million shares, including 3.9 million by way of "Magnum Associates, Inc.," which the 10-K says only has Birshtein as a shareholder, and 34.7 million by way of yet another Canadian company, "Royal HTM Group, Inc." of Ontario (Canadian Federal Corporation # 624476-9), which is owned 50-50 by Birshtein and a nephew. It is interesting to note according to the Panama Papers database, a Panama company called "Magnum Associates Inc. was incorporated on December 10, 1987, and struck off on March 10, 1989. See https://offshoreleaks.icij.org/nodes/10213728. As of December 2016, TMOL's stock price was zero.
 See the case of Trimol Group Inc above. The Seabeco Group, Inc., a Panama company that was formed in December 1991, apparently still exists. Boris J. Birshtein is listed as this company's Director and President. See "The Seabeco Group Inc." registered in Panama by Morgan Y Morgan, 1991-12.06, with "Numero de Ficha" 254192, http://ohuiginn.net/panama/company/id/254192; https://opencorporates.com/companies/pa/254192.
 As of December 2016, the Zurich company registry (http://www.zefix.ch/info/ger/ZH020.htm) listed a Zurich company called "Conim Investment AG" (CH-020.3.002.334-7) was originally formed in May 1992, and in January 1995 was transferred to Arth, in the Canton of Schwyz, where it is still in existence. (CHE-102.029.498). This is confirmed by the Schwyz Canton registery: https://sz.chregister.ch/cr-portal/auszug/auszug.xhtml?uid=CHE-102.029.498. According to these registries, Conim Investment AG is the successor company to two other Zurich campanies, "Seabeco Kirgizstan AG,"formed in 1992, and "KD Kirgizstan Development AG," its direct successor. (http://zh.powernet.ch/webservices/net/HRG/HRG.asmx/getHRGHTML?chnr=CH-020.3.002.334-7&amt=020&toBeModified=0&validOnly=0&lang=1&sort=).
The Swiss federal company registry also reports the following Swiss companies in which Boris J.Birshtein has been an officer and or director, all of which are now in liquidation: (1) Seabeco Trade and Finance AG (CH-020.3.002.179-4, 4/3/92-11/30/98 ), ; (2) Seabeco SA (CHE-104.863.207,12/16/82-5/9/99) ; (3) Seabeco Metals AG (4/3/92-6/11/96); (4) BNB Trading AG (CH-020.3.002.181-9, 1/10/92-11/19/98 ); and (5) ME Moldova Enterprises AG (CH-020.3.003.104-1, 11/10/92-9/16/94). All of these liquidations were handled by the same trustee, Paul Barth in Arth.
 As of December 2016, active Birshtein companies include "Conim Investment AG" (CH-020.3.002.334-7) in the Swiss Canton of Schwyz and he Seabeco Group, Inc. in Panama.
 For example, the Zurich and Schwyz company registries indicates that the following have been board members of Birshtein companies: (1) Seabeco Trade and Finance AG: Iouri Orlov (citizen of Russia, resident of Moscow), Alexander Griaznov (citizen of Russia, resident of Basserdorf Switzerland), and Igor Filippov (citizen of Russia, resident of Basel). (2) ME Moldova Enterprises: Andrei Keptein (citizen of FSU/ Moldova; Evsei Shnaider (Russian émigré to Canada); (3) Seabeco Kirigizstan/ Conim Investment AG: Sanjarbek Almatov (citizen of Bishkek, FSU/ Kirgizstan), Toursounbek Tchynguychev (citizen of Bishkek, FSU/Kirgizstan), Evsei Shnaider (Russian émigré to Canada); (4) BNB Trading AG: Yuri Spivak (Russian émigré to Canada; (5) Seabeco Metals AG: Alex Shnaider (Russian émigré to Canada).
 Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at http://willzuzak.ca/lp/clover01.html See also Misha Glenny, 2009. McMafia: A Journey Through the Global Criminal Underworld. (New York: Vintage Books), 63-65.
 See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf.
 Toronto Star, Aug 28, 1993 “Boris knows everyone,”
 See Zurich corporate registry for "Seabeco Metals AG" (CH-020.3.002.181-9), formed 4/3/92 and liquidated 6/11/96.
 See Kaupthing Bank, "Loan Book, September 2008," wikileaks: https://wikileaks.org/wiki/Financial_collapse:_Confidential_exposure_analysis_of_205_companies_each_owing_above_EUR45M_to_Icelandic_bank_Kaupthing,_26_Sep_2008
The Panama Papers database provides an address for “Midland Resources Holding Limited" (https://offshoreleaks.icij.org/nodes/12085103) that exactly matches the company's corporate address in Guernsey, as noted by Bloomberg's corporate data base. Here are the 28 companies that are associated with Midland in database:
Aligory Business Ltd., https://offshoreleaks.icij.org/nodes/10127460;
Anglesey Business Ltd., https://offshoreleaks.icij.org/nodes/10123508;
Blue Industrial Skies Inc., https://offshoreleaks.icij.org/nodes/10130255;
Cl 850 Aviation Holdings Ltd., https://offshoreleaks.icij.org/nodes/10122735;
Cl 850 Aircraft Investments Ltd., https://offshoreleaks.icij.org/nodes/10122774;
Caray Business Inc., https://offshoreleaks.icij.org/nodes/10131819;
Challenger Aircraft Company Limited, https://offshoreleaks.icij.org/nodes/12155627;
Colley International Marketing S.A., https://offshoreleaks.icij.org/nodes/10123599;
East International Realty Ltd., https://offshoreleaks.icij.org/nodes/10122122;
Filbert Pacific Limited, https://offshoreleaks.icij.org/nodes/10199822;
Gorlane Business Inc., https://offshoreleaks.icij.org/nodes/10210594;
Jabar Incorporated, https://offshoreleaks.icij.org/nodes/10110254;
Jervois Holdings Inc.( https://offshoreleaks.icij.org/nodes/12125131) ,
Kerryhill Investments Corp., https://offshoreleaks.icij.org/nodes/10103732;
Leaterby International Investments Corp., https://offshoreleaks.icij.org/nodes/10202817
Maddocks Equities Ltd.,( https://offshoreleaks.icij.org/nodes/12085103,
Maverfin Holding Inc.( https://offshoreleaks.icij.org/nodes/12130837),
Midland Maritime Holding Ltd.( https://offshoreleaks.icij.org/nodes/12136120),
Midland River-Sea Holding Ltd. (https://offshoreleaks.icij.org/nodes/12136120),
Midland Drybulk Holding Ltd.( https://offshoreleaks.icij.org/nodes/12136120),
Midland Fundco Ltd. (https://offshoreleaks.icij.org/nodes/12136120),
Norson Investments Corp.( https://offshoreleaks.icij.org/nodes/12130837),
Orlion Business Incorporated, https://offshoreleaks.icij.org/nodes/12155627
Perseus Global Inc., https://offshoreleaks.icij.org/nodes/10111891;
Sellana Investments Global Corp., https://offshoreleaks.icij.org/nodes/12155627
Stogan Assets Incorporated, https://offshoreleaks.icij.org/nodes/10206109
Toomish Asset Ltd., https://offshoreleaks.icij.org/nodes/10128146.
 With the address "11 First Tverskaya-Yamskaya Street; apt. 42; Moscow; Russia." https://offshoreleaks.icij.org/nodes/10123599;; https://offshoreleaks.icij.org/nodes/12078236; https://offshoreleaks.icij.org/nodes/10125740.
 As for the Midland-related offshore vehicles still listed as active, one shareholder in two of them -- -- Stogan Assets Incorporated and Blue Sky Industries Inc. -- happens to have the same name as Russia’s Deputy Culture Minister Gregory Pirumov, reportedly arrested in March 2016 on embezzlement charges. The “Gregory Pirumov” in the Panama Papers (https://offshoreleaks.icij.org/nodes/250440) has a registered address in Moscow (4 Beregkovskaia Quay; 121059), as do the reported agents of these two companies: "Global Secretary Services Ltd. Mal. Tolmachevskiy pereulok 10 Office No.3 Moscow, Russia 119017 Attention: Katya Skupova)." See https://panamadb.org/entity/stogan-assets-incorporated_189367. A "Georgy Pirumov" is also listed separately in the Panama Papers as having been a shareholder in the same two companies (https://offshoreleaks.icij.org/nodes/10206109; https://offshoreleaks.icij.org/nodes/12111401.) For what it is worth, in September 2016, one "Georgy Pirumov" was convicted in Moscow of "illegally taking over a building in Gogolevsky Boulevard," and sentenced to 20 months in a minimum-security correctional facility. See The Investigative Committee of the Russian Federation, Sept 15, 2016, http://en.sledcom.ru/news/item/1067178/. At this point, however, we need to emphasize that there is still plenty that needs to be investigated -- we cannot yet confirm whether "Georgy" and "Gregory" are the same person, whether they are related, how they might be related to Shnaider's Mineral Resources, or whether they are the same people named in the articles just noted above about criminal prosecutions.
 See Schwyz canton corporate registry, https://sz.chregister.ch/cr-portal/suche/suche.xhtml, ""ME Moldova Enterprises AG," CH-130.0.007.159-5.
 Ibid, footnotes 58 and 59.
 A.K.A. "Tochtachunov." See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf., 1.
According to the Panama Papers, as of December 2016, Lytton Ventures Inc., incorporated in 2006, was still an active company but its registration jurisdiction was listed as "unknown." See https://offshoreleaks.icij.org/nodes/207427.
 For Telesh’s company the director’s name is given as “Stanley Williams,” as compared with “Stanley Edward Williams” in Golubchik’s, but they have the same address. See https://offshoreleaks.icij.org/nodes/196083. Telesh’s company, Barlow Investing, was incorporated in 2004. In the PP database, as of December 2016 its status was “Transferred Out,” although its de-registration date and registration jurisdiction are unknown.
 In the Panama Papers, Telesh’s company and Golubchik’s reportedly have the same director, one Stanley Williams. Williams is also reportedly a director of Westix, which shares its address with two other offshore companies that use corporate names that Mogilevich has reportedly used at least twice each in the past. Arbat Capital, registered in 2003, was still active as of December 2016, as was Arigon Overseas, registered in 2007.
 See the diagram below.
These three offshore companies are not in the Panama Papers data base. https://www.ft.com/content/29f06170-12a2-11db-aecf-0000779e2340. Firtash acknowledged these connections to Telesh but still told FT reporters that he didn’t know her. The three companies identified in the report are (1) Highrock Holdings, which Firtash and Telesh each reportedly owned 1/3rd of, and where Firtash served as director beginning in 2001; (2) Agatheas Holdings, where Firtash apparently replaced Telesh as director in 2003; and (3) Elmstad Trading, a Cyprus company owned by Firtash which in 2002 transferred the shares of a Russian company named Rinvey to Telesh and two other people: one of them Firtash’s lawyer and the other the wife of a reputed Mogilevich business partner. See also http://foreignpolicy.com/2014/03/19/married-to-the-ukrainian-mob/.
 On Mogilevich, see, for example, http://rumafia.com/en/eksklyuziv/kidala-vseya-strany-pervaya-chast.html.
 See also FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization; Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf.
David Cay Johnston, interview with the author, November 2016. Wayne Barrett, Trump: The Greatest Show on Earth: The Deals, the Downfall, the Reinvention (Regan Arts, 2016).
Johnston, interview; see also http://russianmafiagangster.blogspot.com/2012/12/the-superpower-of-crime.html.  In another interesting coincidence, the President of YBM Magnex was also reportedly a financial director of Highrock in the late 1990s, before Manafort-client Dmytro Firtash joined the company as a director in 2001. See note 151. http://foreignpolicy.com/2014/03/19/married-to-the-ukrainian-mob/.
Wednesday, August 04, 2010
TAX OFFSHORE LOOT! A Modest Proposal for Improving Global Tax Justice NOW James S. Henry
(Note: The following article also recently appeared in Forbes.)
How can we get the world's wealthiest scoundrels – arms dealers, dictators, drug barons, tax evaders – to help us pay for the soaring costs of deficits, disaster relief, climate change, and development?
Simple: levy a modest withholding tax on untaxed private offshore loot
Many above-ground economies around the world are struggling, but the global economic underground is booming. By my estimate, there's $15 to $20 trillion of private wealth sitting offshore in bank accounts, brokerage accounts, and hedge fund portfolios, completely untaxed.
Much of this offshore wealth derives from capital flight and the proceeds of past and present tax evasion. Another key source is crime. At least a third comes from developing countries -- more than their outstanding foreign debt. This wealth is incredible concentrated. Nearly half of it is owned by 91,000 people -- 0.001% of the world's population. Ninety percent is owned by the planet's wealthiest 10 million people.
This "global scofflaw tax" could be used to help pay our own staggering unpaid bills for debt service, retirement insurance, and heath care, as well as the developing world's bills for disaster relief and climate change.
By reducing incentives for capital flight and tax evasion, a tax on illicit, anonymous wealth would also help countries to depend less heavily on debt, inflationary finance, and regressive taxes.
Is it feasible? Yes. The majority of these assets are managed by the top 50 global banks. As of September 2009, these banks accounted for $8.1 trillion of all offshore assets under management -- 72% of the offshore industry's total. The top 10 banks manage 40 percent.
In other words, the real "tax haven" problem is not tiny island havens on the periphery of the system. The real problem is the global "pirate banking" industry, with an assist by the best lawyers, accountants, and lobbyists money can buy. At its core are the world's true tax havens: institutions like JPMorganChase, UBS, Credit Suisse, Citigroup, Morgan Stanley, HSBC, Deutsche Bank, Barclay's, Bank of America, BNP Paribas, Pictet & Cie, Goldman Sachs, and ABN Amro. They are all based, not in picturesque principalities or remote tropical paradises, but in New York, London, Amsterdam, Zurich, Geneva, Frankfurt, Hong Kong, and Singapore. They fall firmly under the jurisdiction of First World government agencies.
Capital may be "mobile," but it rarely travels without an escort. For decades these institutions have operated "Capital Flight Air," recruiting clients and teaching them how to hide wealth offshore, launder it, and access it remotely.
Now they are going to help us tax it.
These highly-visible institutions should be required to withhold a modest 0.5% tax, prorated each quarter, on the value of their clients' assets – which they already track on a daily basis. The proceeds could be turned over to First World tax authorities, with a disproportionate share dedicated to development aid.
Only anonymous wealth should be taxed. If the beneficial owners can show they're paying taxes on their offshore assets back home, they can claim rebates. Most will just pay up.
But that's a long war. The haven system has taken decades to build, and it will probably take decades to dismantle. Right now there's something simple that OECD countries can do to collect badly-needed revenue from the world's wealthiest crooks – no questions asked.
Wednesday, May 12, 2010
Is Medical Care In Haiti Really Better Now Than Before the Quake? James S.Henry
(HEUH,Port au Prince, May 12, 2010)
On Monday AP carried a story, unfortunately replayed with no editing by the Huffington Post , which baldly claimed that medical care in Haiti is now actually much better and more accessible than it was before the January 12th quake.
Having spent much of the past week in Haiti visiting nurses, doctors, and medical workers at the main hospital and leading clinics in Port au Prince, as well as several of the largest camps here, I've concluded that this report is, at best, highly misleading.
At worst, it is yet another striking example of sloppy AP reporting and the virtually-unedited brave new world of "fast food" Internet journalism.
While the supply of medical care in Haiti has indeed increased since January, mainly because of the temporary influx of foreign volunteers and donations, the fact is that the demand for most kinds of care has increased even more.
For example, in the aftermath of the quake, there was an immediate need to treat traumatic injuries and perform amputations. That need, which had not really existed before Haiti, naturally got most of the world's attention.
However, according to more than a dozen nurses, doctors and health workers at HEUH, the main hospital in PauP, and at the leading clinic at the 50,000 person Camp Jean-Louis, this hardly means the country's medical needs are now being better served than before the quake.
The need for the kind of high-visibility, "ER-" type fly-in care has now been replaced by a surge in other maladies, which may be less visually-dramatic to international TV audiences, but no less life-threatening.
Unfortunately, treating these other less glamorous quake-related medical consequences demands a longer term commitment -- plus basic improvements in nutrition and community health that are -- like Adam Smith's "invisible hand" -- for the most part still nowhere to be seen.
For example, since the quake, there's been a sharp rise in under-5 age mortality and physical illnesses and injuries. These include not only infectious diseases like malaria, typhus, and diptheria, but also tetanus (from rubble), accidental poisoning toxic, injuries due to fires.
I spoke with medical workers at Partners in Health, a leading NGO that has been active in Haiti since the mid 1980s, and now operates 15 clinics here, including 4 in PauP. They attribute this surge in infant illness and injuries to the dire living conditions for the 1.412 million (as of this week) still living in temporary shelters. They also attribute many of the health problems they are seeing for kids and adults alike to the increasing prevalance of hunger and malnutrition in the camps. And that, in turn, is due in large measure to the total inadequacy of Government/NGO food and water distribution -- right up to the present.
The PIH clinic workers that I spoke with also report that there has been a serious increase in mental health problems, due to the quake's unusual capacity to inflict severe simultaneous traumas: the sudden loss, not only of one's loved ones and many friends, but also of shelter, job, savings, community, and sense of security. PIH mental health workers described patients who have recurrent feelings that the ground is shaking, irrepressible memories of the sights and smells of death and destruction, acute fears about entering buildings, nightmares and daymares about searching for the missing.
0f course before the quake, this country had a grand total of 17 psychiatrists, only 9 of whom were public doctors, to serve a population of at least 8.5 million. There were more Haitian mental health workers in any one of New York, Miami, Boston, and Montreal than in all of Haiti.
Now, after the quake, dedicated NGOs like Partners in Health are indeed working hard to beef up their community mental health efforts -- PIH will launch mental health services at up to 4 of its clinics this year.
However, even PIH freely admits that they are just beginning to scratch the service -- and to understand how vast the need is for post-traumatic therapy on a community-wide scale as a result of the quake. This will require a long-term commitment on all sides.
It would also be really helpful if foreign journalists would make a long-term commitment to really understanding this country, rather than treating it as an endless source of "unexpected natural disasters" and "amazing recoveries."
Sent via BlackBerry by AT&T
Thursday, May 06, 2010
THE GOLDMAN SACHS CASE Part III: "Jokers to My Right" James S. Henry
Well, la gente Americano may not know the difference between a synthetic CDO and a snow shovel, but the masses are clearly frothing for a taste of banquero al la brasa, fresh from the spit.
"Financial reform," whatever that means, is now far more popular than "health care reform." And it has only recently become even more so, in the wake of all the recent investigations and prosecutions -- Warren Buffett might say "persecutions" -- of the "demon bank" Goldman Sachs.
Evidently the masses' appetite for banker blood was only slightly sated by the SEC's April 16th civil charges against Goldman, Senator Levin's 11-hour show-trial of senior Goldman officials on April 27, and the "entirely coincidental" announcement on April 30th that the US Justice Department -- which is under strong political pressure to bring more fraud cases to trial, but also tends to screw them up -- has launched a criminal investigation into Goldman's mortgage trading.
In the wake of this populist uprising, Senate Republicans have suddenly adopted "financial reform" as their cause too, allowing the Senate to commence debate this week on Senator Dodd's 1600-page reform bill.
However, this promises to be a lengthy process. While reform proponents like US PIRG and Americans for Financial Reform were hoping for final action as early as this week, Senator Reid now expects to have a Senate bill by Memorial Day at the earliest, and Obama only expects to be able to sign a bill by September.
That's just two months ahead of the fall 2010 elections, so there's not much room for error. But the beleaguered Democrats may just be figuring that they'd rather bash banks than run on their rather mixed track record on health care reform, unemployment, climate change, and offshore drilling, let alone -- Wodin forbid -- immigration reform.
In any case, Senator Dodd's bill has now been through more permutations than a Greek budget forecast. The latest one discards the $50 billion bank restructuring fund as well as new reporting requirements that would helped to spot abusive lending practices.
These concessions apparently were part of retiring Senator Chris Dodd's Grail-like
quest for that elusive 60th (Republican) vote -- rumored to be hidden away and guarded by an ancient secret order known as "Maine Republicans."
A GOAT RODEO
Meanwhile, behind the scenes, leading Republicans, aided by several Democrats from big-bank states like New York, California, and Illinois, and countless lobbyists, have been trying to weaken other key provisions in the bill, which was already pretty tame to begin with.
The most important measures at issue pertain to derivatives and proprietary trading, the power of the new Consumer Financial Products Bureau (especially, according to Senator Shelby, the Federal Reserve's shameless power grab over orthodontists), the regulation of large "non-banks," and (interestingly, from a states' rights perspective) the power of states to preempt federal regulation.
On the other hand, the bill has also inspired dozens of amendments from a cross-section of Senators who appear to be genuinely concerned -- even apart from the opportunities for grandstanding -- that the Dodd bill isn't nearly hard-hitting enough.
Some of these amendments are purely populist anger-management devices that don't really have much to do with preventing future financial crises.
These include Senator Sanders' proposals to revive usury laws and audit the Federal Reserve, a proposal by Senators Barbara Boxer and Jim Webb for a one-time surtax on bank bonuses, Senator Mark Udall's proposal for free credit reports, and Senator Tom Harkin's proposal to cap ATM fees.
The very first amendment adopted was also in this performative utterance category: Senator Barbara Boxer's bold declaration that "no taxpayer funds shall be used" to prevent the liquidation of any financial company in "receivership."
Cynics were quick to point out that in any real banking crisis, this kind of broad promise would be unenforceable, since it would also be among the very first measures to be repealed.
Other proposed amendments sound like more serious attempts at structural reform.
These include the Brown-Kaufman amendment that tries to limit the number of "too big to fail" institutions by placing upper limits on the share of system-wide insured deposits and other liabilities held by any one bank holding company, and the Merkley-Levin amendment, which attempts to "ban" proprietary trading and hedge fund investments by US banks, and also defines tougher fiduciary standards for market-makers.
But so far neither of these measures has received the imprimatur of the Senate Banking Committee, let alone Senator Reid. This means that for all practical purposes they are may amount to escape valves for venting popular steam, but little more.
This is especially true, given the delayed schedule that Reid, Dodd, and the Obama Administration seem to have accepted, which will relieve the pressure for such reforms.
Furthermore, upon closer inspection, both proposals leave much to be desired. Indeed, one gets the distinct impression that they dreamed up by Hill staffers on the midnight shift to appease the latest cause célèbre,
For example, the Brown-Kaufman amendment, highly touted by chic liberal "banking experts" like Simon Johnson, doesn't mandate the seizure and breakup of any particular large-scale financial institutions directly. Nor does empower the FTC to set tougher standards for competition in this industry, as it might have done, or even specify what kind of industry structure would be desirable from the standpoint of avoiding banking crises.
To a large extent that simply reflects the paucity of knowledge about the relationship between structure and behavior in financial services. As a bootstrap, the amendment specifies arbitrary caps on bank activities that may or may not be related to actual misbehavior -- for example, the share of "insured deposits" managed by any one bank holding company (≤ 10%), and the ratio of "non-deposit liabilities to US GDP" (≤ 2%).
This has arbitrary consequences. Under the limits in the amendment, for example, Wells Fargo and Citigroup, the # 4 and #1 banks in the country by asset size, would nearly avoid any breakup, while JPMorgan and BankAmerica would feel much more pressure.
Meanwhile, evil Goldman Sachs' minimal .3% shares under both limits would leave it plenty of room to grow -- perhaps even by acquiring the extra share that the "Big Four" would have to spin off.
Furthermore, even the largest US institutions might be able to avoid the caps by devoting more attention to large-scale private banking customers, whose deposits and other investments would avoid these regulations, or by conducting more of their risky business through offshore banking centers.
Indeed, this also suggests a key problem with the Merkley-Levin amendment as well: it is a US solo act. It completely ignores the fact that even our largest banks, and the US financial system as a whole, are part of a competitive global financial market.
As this week's Greco-European financial crisis has underscored, to be effective, bank regulation and structural reform must be conducted on a coordinated international basis. Unilateral initiatives only drive bad behavior to the myriad of under-regulated offshore and onshore financial centers.
From this perspective, I'm surprised that Senator Levin, a long-time critic of offshore financial centers, has proceed in such a ham-handed way with this. This was his year to finally round up global support to crack down on offshore centers -- a precondition for effective global bank regulation. Instead he decided to target Goldman and pursue this wayward, sloppy attempt at unilateral reform -- as if the Isle of Man, Guernsey, Jersey, Bermuda, and the Cayman Islands, let alone London and Zurich and Singapore and Hong Kong, are not waiting in the wings.
WHAT HAVE WE LEARNED?
CONSOLIDATION (UNDER BOTH PARTIES)
First, as shown in the above chart, the US banking industry has indeed undergone a major structural transformation, especially December 1992. The following 15 years became the era of Wild West banking, when all the lessons that should have been learned from the Third World debt crisis were forgotten. It became an era of rampant deregulation, rising US public and private debt levels, and asset speculation.
The impacts on financial structure were far reaching and rapid. Back in December 1992, there were more than 13,500 banks, and the top four US banks accounted for less than 10 percent of the sector's jobs.
Already by 1998, there was a decided increase in this concentration level, to more than 20 percent. Today there are fewer than 8000 banks. The top 4 alone -- Citigroup, JPMorganChase, Bank of America, and Wells Fargo -- now employ more than 800,000 people, over 40 percent of the US total. Indeed, together with the failed banks they acquired, the top four banks have accounted for almost all the sector's employment growth; the rest of the sector has shrunk.
Tiny Goldman has also been growing, but it now only accounts for about 18,900, less than 10 percent of any one of the top four.
This growing concentration is also reflected in most key US banking markets, especially the markets for deposits, overall bank loans, real estate loans in general, home mortgages, and credit derivatives. As indicated, in each of these markets, the market share commanded by top four banks has increased from less than 10 percent in 1992 to 40-50 percent or more by 2010. In the case of the credit derivatives market, the share now approaches 90 percent.
Nor has this increasing concentration been accounted for by superior performance. Indeed, the "big four" also now account for more than 78 percent of all bad home mortgages -- behind in payments, or suspended entirely. While some of that is accounted for by the acquisition of failing institutions, most of it is not.
THE ECONOMICS OF GOLDMAN BASHING
Third, once again, for the sake of Goldman bashers in the audience, as indicated above, its share of each of these key market indicators is trivial. Even in credit derivatives, the segment for which Goldman has taken such a beating, its market share today is just 8 percent, compared to the "Big Four's" commanding 88 percent. And Goldman's share of real estate loans, home loans, insured and uninsured bank deposits, and bad home mortgages are even lower.
Just to pick one example: today the "top 4" banks have more than $204 billion of bad home loans, compared with Goldman's $0.0 of such loans.
From this standpoint, the Levin hearings were a stellar example of completely ignoring industry economics. They singled out a smaller, more successful, widely-envied target for political scapegoating, while ignoring the much more economically much more important financial giants.
THE MORTGAGE-INDUSTRIAL COMPLEX
The key driver on the domestic side of all these developments is a political-economy complex that in the long run has had perhaps as profound an influence on our nation's political and economic system as the legendary "military industrial" complex. This is what we've called (in the first chart above) the "US mortgage-industrial complex," including financial institutions, real estate firms, and insurance companies. From 1992 to 2010, in comparable $2010, this industry spent an average of $2793 per day per US Senator and Congressman on federal campaign contributions and lobbying -- far more than the corresponding levels in the 1970s and 1980s.
Except for the insurance industry -- where health care reform efforts by Clinton and Obama tilted the giving -- Democrats and Republicans have more or less divided this kitty pretty evenly. It is also important to note that more than 71 percent of total federal spending by these industries from 1990 to 2010 was on lobbyists, not campaign contributions. While cases like the recent Citizens United decision may affect this balance,
Furthermore, within the financial services industry, the top four US banks alone have accounted for at least 20 percent of all spending on federal lobbying and campaign contributions (in comparable $2010) from 1992 to 2010. Investment banks as a group -- including Goldman, Lehman Brothers, Bear Stearns, Morgan Stanley, UBS, Credit Suisse, and their key predecessors, especially Paine Webber and Dean Witter -- added another 8 percent. But once again, by comparison, and contrary to its reputation as the premier political operator in Washington, Goldman Sach's share of total "real" spending on lobbying and contributions was relatively small -- just 2.2 percent.
This was just 40 percent of what Citigroup spent, and less than 60 percent of what JPMorganChase spent during this same period.
C'mon guys -- Is it any really wonder that Jamie Dimon gets invited to the Obama White House for dinner while Lloyd Blankfein gets served for dinner on a spit up on the Hill?
Ironically, if it were just a question of a given institution's loyalty to the Democratic Party, Goldman -- and indeed Lehman Brothers and Bear Stearns as well -- would have clearly had the inside edge. As shown below, these investment firms clearly preferred Democrats over the long haul.
Ironically, to paraphrase Senator Levin, especially in Goldman's case the Democratic Party appears at least so far to have "put its own interests and profits" first, basically turning a blind eye -- at least so far -- to the substantially much larger potential misbehavior of the "big four."
Meanwhile, when President Obama traveled to New York two weeks ago to give a speech on the urgent need for financial reform, the peripatetic Mr. Dimon could be found in Chicago. He was rumored to have met with CME and/or Board of Trade executives to prepare to invest in an exciting new "derivatives exchange," should JPMorgan need to transfer its substantial share of that business -- several times Goldman's market share, even in credit derivatives -- to an open exchange.
JOKERS TO MY RIGHT
So all this concentration of political and economic power in US financial markets would appear to make a strong prima facie case for a serious structural reform, perhaps even along the lines of the Brown-Kaufman amendment, n'est pas? Unfortunately, no.
As we argued earlier, that amendment sets very crude targets that bear little immediate relationship to bank misbehavior or even political influence. At worst, the caps might just force bad behavior like risky derivatives and hedge fund investing offshore. And the bill's current caps would, at best, just force banks like Cit, JPM, and BankAmerica to shed less than 10 percent of their market shares, setting them back to -- say -- 2005 levels.
In other words, they're not a substitute for effective regulation. But that puts us back in the chicken-egg problem with "regulatory capture."
My own particular solution to these dilemmas is suggested by the following chart -- although it also suggests
that the most opportune time to implement it has already come and gone. In terms of the current banal American political discourse, it would be probably be quickly dismissed as 'socialist," although that term is such a catch-all that it has really become virtually useless, except as a device for red-baiting timid liberals.
THE CHILEAN MODEL
So don't take my word for it; let's ask the ghost of Chile's General Pinochet, whom I'm quite certain no one ever accused of being a "socialist," at least not to his face. For years he was best known among economists as one of the key political proponents of Milton Friedman's so-called "Chicago School" of ultra-free market economics. But in February 1983, during a severe crisis when all the banks in Chile failed, Pinochet showed that he could be quite pragmatic -- with a little arm-twisting from from leading US banks, which threatened to cut off his trade lines if he didn't nationalize the banks' debts.
So, after swearing up and down that private debts and private banks would never be nationalized, Pinochet's government did so. Three to six years later, after restructuring the banks and cleaning them up, and privatizing their substantial investments in other companies, they were sold back to the Chilean people and the private sector -- for a nice profit. (Similar policies were also followed by "socialist" Sweden in the case of a 1990s banking crisis, but the Pinochet example provides a more instructive example for so-called conservatives. Much earlier, General Douglas MacArthur, a lifelong Republican, also employed similar pragmatic tactics in restructuring Japanese banks in the early 1950s.)
Now this is the plan that the US Treasury (under Paulson and then Geithner) might have adopted in the Fall 2008 - Spring 2010, if only it had not been so hide-bound -- and in the case of the Obama Administration, so wary of being termed a "socialist."
In hindsight, the economics of such a pragmatic temporary government takeover and reprivatization would have been compelling. At its market low in March 2009, the combined "market cap" of the "big four" banks was just $120 billion -- including $5 billion for Citi and $15 billion for Bank of American. This was a mere fraction of the capital and loans that were ultimately provided to them. (At that point Goldman's market cap had fallen to $37 billion from $80 billion a year earlier -- not as steep a decline as the giants, but clearly no picnic for its shareholders, either.)
Only a year later, while the "demon bank" Goldman has recovered to more or less where it was in June 2008, before the crisis, the market cap of the "top four" US banks is now nearly six times higher than its low in March 2009, and, indeed, at an all time high -- well above both previous peaks.
Too bad the US taxpayers have only captured a small fraction of that $500 billion industry gain.
Too bad the US Treasury hasn't exercized strong "socialist" control over these institutions, changing the way they behavior directly, and restructuring them in the interests of the economy as a whole before selling them back to the private sector.
Too bad that "big four" lobbyists are now back in force on the ground in Washington DC, influencing the fine print of the "financial reform" bill in ways that we will probably only understand years hence. Despite its woes, undoubtedly this will be a bumper year for political spending by the financial services industry.
Of course, President Obama IS now being widely demonized as a "socialist" -- anyway.
(c)JSH, SubmergingMarkets, 2010
Tuesday, April 27, 2010
THE GOLDMAN SACHS CASE Part II: "The Crucible" James S. Henry
Whatever the ultimate legal merits of the SEC's case against Goldman Sachs -- and those appear to me to be questionable at best --
its most important contributions are being made right now. They are not judicial, but political.
(1) If anyone needs the benefit of the new "financial literacy" program proposed by S.3217, Senator Dodd's proposed financial reform bill, it is the US Senate. Many members of the Senate -- and by extension, the House -- don't seem to understand very basic things about the structure and role of private capital markets, finance, and business economics, let alone global competition. In the world's largest capitalist economy, this level of ignorance on behalf of our political elite is really mind-boggling.
(2) After 18 months of intensive investigation, the US Senate's Permanent Subcommittee on Investigations and the SEC have not so far been able to find anything that is clearly illegal to pin on Goldman Sachs.
(3) On the other hand, on the secondary trading side of Goldman's business, Goldman traders clearly have "market maker" ethics, not investment adviser ethics. They've grown accustomed simply to providing market liquidity for whatever securities clients happen to want -- or can be persuaded to want, even if Goldman is taking opposite positions at the very same time in the very same securities.
For example, regardless of what Goldman's own sales people felt about the terrible quality of the synthetic CDOs they were selling in 2007 -- including many securities packaged out of "stated income" mortgages -- they continued to sell anything for which there was a current price.
Goldman's trader culture simply doesn't buy the notion that market
makers have any "duty to serve the best interests of their clients. In competitive world, this amoral culture may well be essential to being a successful "market maker," and Goldman is one of the most successful secondary traders in the world However, if we expect some higher standard of behavior toward clients, this is likely to require new rules; Goldman will never get there on its own.
Of course, in a highly competitive global market, any such rnew ules might just cause this entire business to move offshore, to London, Hong Kong, Singapore, or any number of other offshore financial centers.
(4) With great respect to Michael Lewis, the notion that Goldman Sachs engaged in a hugely profitable "big short" in 2007-2008, in the sense of secretly betting systematically against the same securities that it was underwriting for its clients, is easily overstated. Goldman's investment portfolio in mortgage securities turned negative in early 2007, was net short all year long in 2007, and at times had up to $13 billion of gross shorts, the bank's net profits from all this shorting that year was $500 mllion to $1 billion. The following year, 2008, its mortgage portfolio lost $1.8 billion
(5) There appears to be enormous pent-up rage and ressentiment in the country at large, right now, driven by the financial crisis, the slow recovery, high unemployment, and the loss of homes and pensions, on the one hand, and the widespread perception that banks not only created the crisis, but have also profited immensely from it. Most people may not know a CDO from a dustpan, but there is a very disturbing tendency to seek scapegoats, dividing the world into villains and victims. Ironically, the most obvious targets include companies like Goldman Sachs, one of our most successful, better-managed, if trader-ridden companies.
(7) On the other hand, these other major private banks, plus Lehman Brothers and Bear Stearns, were by far the largest players in the private mortgage market. If they had followed Goldman's risk management, accounting, disclosure, and leverage practices, the worst of this crisis might well have been avoided. Indeed, it appears that one reason these generally much larger firms did not adopt such practices was because -- unlike Goldman -- they genuinely believed they were "too big to fail."
(8) Going forward, the real problem with Goldman market was not, by and large, illegal behavior, but an excess of perfectly legal behavior that may well be socially unproductive and way under-regulated. Especially in a world where other countries have fallen behind in the move to update their financial regulations, dealing with this problem will require much more than lawsuits and investigative hearings.
IN THE DARK TRUNKS...
Today's hearings probably came as close to fireworks as investment banking and "structured finance" ever gets. In one corner there was Goldman Sach's slightly shaken, but still-unbent CEO Lloyd C. Blankfein (Harvard '75/ HLS '78).
There was also Blankfein's articulate, amiable life-time Goldman employee David Viniar (HBS '80); the now-notorious, side-lined 31-year old Goldman VP Fabrice P. (aka "fabulous Fab") Tourre (Stanford M.S. '01), architect of the particular "synthetic CDO" at the heart of the SEC case; and several other past and present stars from the "devil bank's" specialists in mortgage banking.
Ring-side support for the Goldman front line was provided by a hand-picked team of very high-priced trainer/coaches. This included former Democratic House Speaker Richard Gephardt, former Reagan Chief of Staff Ken Duberstein, and Janice O'Connell (aka "Puerta Giratoria"), a former key aid to Senator Dodd.
Senator Dodd, the retiring Chair of the Senate Banking Committee, has been working since November on S.3217, an epic 1600-page bill that Senate Republicans (with perhaps a little help from Fed staffers who opposed the bill) have just prevented from coming to a vote.
Of course Goldman has also hired Obama's own former chief counsel Gregory Craig as a key member of its defense team.
Once taken seriously as a "liberal" Democratic Presidential candidate, Gephardt has gone the way of all flesh, and is now completely preoccupied with serving such worthy clients as Peabody Energy, the world's largest private coal company; NAPEO, an association of "professional employer organizations" that is trying to dis-intermediate what little remains of labor rights for outsourced workers; UnitedHealthCare, a stalwart opponent of the "public option" in health care reform; and of course, Goldman Sachs, which has also employed the prosaic Missourian to pitch the (really insidious) idea of "infrastructure privatization" all over the country to cash-strapped state and local governments.IN THE WHITE TRUNKS..
In the other corner is the aging heavyweight champion from Michigan. Senator Levin (Harvard Law '59), is a low-key but tenacious warrior, with a mean-right hook; Goldman would do well not to underestimate him. He's a veteran critic, investigator, and opponent of global financial chicanery, dirty banks, and tax havens -- except perhaps when it comes to GM's captive leasing shells and re-insurance companies in the Cayman Islands and Bermuda (Heh, even a Dem's gotta eat!)
Sen. Levin is backed up by several knowledgeable, tough cross-examiners, especially Democratic Sen. Kaufman of Delaware and Republican Senator Collins of Maine. On the other hand, Republican Senators McCain and Sen Tom Coburn were a bit more "understanding" of Goldman's basic amoral attitude toward market-making.
In handicapping this contest, some observers predicted that the best and brightest from our nation's leading investment bank would basically roll over the "old folks" from the Senate.
In the first few hours, however, it quickly became clear that the bankers were a little under-prepared for the Senators' often-times impatient, hard-nosed tone, especially from former Prosecutor Levin, Collins, and Kaufman.
Nor were they prepared for the widespread, if perhaps naive and even "Midwestern" view that there was just something fundamentally wrong with the lines Goldman drew between pure "market-making" and providing investment advice.
For example, Sen. Levin was a real rat terrier on the question of whether it was ethical for Goldman market-makers in 2007 to be aggressively pushing clients like Bear Stearns to buy a CDO security called "Timberwolf" that Goldman's own internal analysts had called "shitty." Meanwhile, Goldman's ABS group was shorting Bear by buying puts. The panel of five present or former Goldman executives had trouble recognizing that there was any problem at all -- given the fact that, from a legal standpoint, Goldman had fully informed these clients about the risks they were taking.
For another $2 billion "Hudson" CDO deal that Goldman sold from its inventory, the firm's own sales people characterized the product as "junk," and indicated that more sophisticated customers might not buy it. Yet, according to Senator Levin, Goldman's selling documents for a portion of the sale characterized the deal as one where Goldman's interests and the client's interests were "aligned" because Goldman retained an equity interest in the Hudson package. In Senator Levin's view, this "retention" was misleading, simply because Goldman took time to sell down its position.
On the question of the Abacus transaction at the core of the SEC law suit, Sen. Levin was able to establish that the Goldman's Tourre never told the German bank that invested in the deal that John Paulson, the hedge fund manager who helped choose the portfolio, although he claimed to have told portfolio selection manager ACA. Oddly enough, from what we heard about other "raw deals" today for the first time, this now appears to have been perhaps the weakest deal for SEC to attack.
Similarly, Senator Collins pressed a group of Goldman securities "market-makers" very hard about whether or not they felt they had a "duty" to work in the "best interests of their clients." The responses she received indicated that these Goldman executives, while insisting on the organization's high ethical standards, also simply "did not get" the point that there might be some higher ethical, let alone legal, duties to clients, for pure market makers, beyond just providing them with legally-required disclosure.
Senator Levin claimed that these hearings have been in the works for more than a year. He says that it is just sheer coincidence that they are occurring soon after the SEC decided to file its case by a narrow 3-2 party lines vote, and right when Senator Dodd's reform bill just happens to be on the verge of being introduced.
Other sources indicate that Levin's investigation had been scheduled to continue through May, and that it was abruptly rescheduled after the SEC vote.
Furthermore, for someone who is supposedly holding hearings to gather facts and find out what was really went on, Senator Levin had already formed quite a few strong opinions prior to hearing from any witnesses -- as shown in his latest press release.
But so what? Even if he's was a little simplistic, filled with anti-bank animus, and eager to portray the financial crisis as a kind of morality play, and even if there's no big payoff other than the theatrics, it was definitely kind of fun to watch the "show trial" -- finally see someone asking big bankers tough questions under oath. After all, regardless of what "caused" the financial crisis and its interminable aftermath, it is pretty clear who is paying for it -- and it is certainly was neither these Senators nor the bankers in the dock.
( Stay tuned for Part III, which takes a closer look the Goldman Sachs case in light of these hearings, and consider the broader question of other "big bank" roles in the crisis.)
(c) JSHenry, SubmergingMarkets (2010)
Thursday, April 22, 2010
THE GOLDMAN SACHS CASE Part I: "Clowns to the Left of Me" James S. Henry
Well, we no longer have to worry only about corrupt bankers in Kyrgystan. Ever since the Goldman Sachs case erupted last week, there's been plenty of fresh banker blood in the water right here at home, with scores of financial pundits, professors-cum-prosecutors, and political piranha swirling around the wounded giants in the banking industry as if they were a herd of cattle crossing a tributary on the upper Rio Negro.
This feeding frenzy was precipitated by last Friday's surprising SEC announcement of civil fraud charges against Goldman Sachs -- heretofore by far the most profitable, highly-respected, and, indeed, public-spirited US investment bank.
Despite -- or more likely because of -- Goldman Sach's relatively clean track record and illustrious credentials, many commentators have assumed a certain Madame Defarge pose, reigning down censure and derision from the penultimate rungs of
their mobile moral pedestals.
Over the weekend, for example, Huffington featured a
half dozen vituperative columns on the subject, including a Vanity Fair contributing editor's feverish claim that the whole affair was somehow
deeply connected to one high-level
Wall Street marriage, and
host's denunciation of Goldman for refusing to appear on his show --
his show ! There was also a plea from Madame Ariana for criminal
In fact, this is a case where, as we'll see in Part III, the SEC's civil charges against Goldman Sachs are not only highly debatable, but largely beside the point.
Meanwhile, Bob Kuttner, another Huffy perennial, and one of our most prolific popularizers of conventional liberal dogma, asserted that Goldman demonstrates conclusively that Wall Street en tout is nothing but an on-going criminal enterprise, up to its eyeballs in outright fraud.
In a lurch toward financial Ludditism, Bob figuratively placed his hands on his hips, stomped his feet, and demanded nothing less than a "radical simplification of the
financial system" -- leaving it to the reader's imagination to determine just what the hell that means.
Will we still be permitted to use ATMs, checking accounts and paper currency, or will we all soon have to return to wampum beads and n-party barter?
Elsewhere, the Daily Beast published a de facto job application from Harvard Law's Prof. Alan Dershowitz -- otherwise well known in the legal profession as "He whose key clients are either fabulously wealthy or innocent."
Prof. Dershowitz argues -- quite rightly -- that Goldman' behavior, while no doubt
morally reprehensible, was also by no means clearly illegal. On the other hand, he also says the law is so vague that hedge fund investor Paulson might even be charged with conspiracy to commit fraud.
Well, ok -- except for the article's faint suggestion that for a modest fee, our country's finest criminal lawyer may just be available to help explain all this to a judge -- and also to argue that "only a tiny fraction of investment bankers who abuse their clients actually commit murder."
Finally, there is the omni-present, virtually unavoidable Simon Johnson, a Peterson Institute Fellow, MIT B-school prof, book author, "public intellectual," and "contributing business editor" at Huffington.
This week has been Prof. Johnson's heure de gloire, and he is living it to the fullest.
All week long he could be found at all hours on nearly every cable news channel and web site, pitching his own increasingly Puritanical, if not neo-Manichean views of the banking crisis and Goldman's role in it.
At first, Prof. Johnson merely expressed
delight that the US had finally reached its "Pecora moment" --
referring to the 1933-34 US
Senate investigation of Wall Street that, indeed, makes the modest
$8 million Angelides
like a California '68 love-in.
But by mid-week he'd had moved on to a much harsher assessment.
Not only is Goldman guilty as sin, but hedge fund investor John Paulson, one of the key parties to the Goldman transaction, deserves to be "banned for life" from the securities industry. If necessary, Johnson says, the US Congress should even pass an ex post facto bill of attainder!
He may therefore not be aware that the US Constitution (Article 1, Section 9) has explicitly prohibited both ex post facto laws and bills of attainder (legislative decrees that punish a single individual or group without trial) ever since 1788.
Just this month, a US federal district court in New York struck down Congressional sanctions that singled out ACORN, the community organizing group on precisely these grounds. The case is now on appeal.
Indeed, even in the UK, there have been no bills of attainder since 1798.
Despite Prof. Johnson's limited grasp of US or even UK law, and his Draconian appetites, I've actually grown rather fond of him lately -- or at least more understanding.
This is partly because since he left
the IMF in September 2008, he's apparently had a kind of road-to-Damacus epiphany.
He now realizes, as if for the first time, the enormous carnage that has been inflicted by a comparative handful of giant global banks, as well as the huge potential rewards of decrying these outrages from the roof tops.
But that 1+ year was more than enough time for him to leave a lasting impression at the IMF.
He is still fondly remembered at the IMF not
only for having entirely
missed the 2007-08 mortgage crisis even as it was unfolding, but also for deciding in
July 2008, less than 3 months before the entire global financial system nearly collapsed, to sharply increase
the IMF's growth forecast for both 2008 and 2009.
That was just one month before the otherwise-feckless Bush SEC initiated the 18-month investigation of Goldman Sachs that ultimately led to last week's charges.
If and when the Goldman Sachs case ever comes to trial, therefore, it may be interesting for Goldman's attorneys -- perhaps Prof. Dershowitz -- to consider calling Prof. Johnson as a witness for the defense.
After all, he probably qualifies as an expert on the heart-rending experience of just how difficult it was even for highly-trained experts to have clear peripheral vision, much less perfect foresight, back in the heady days of the real estate boom.
In Prof. Johnson's case, these included IMF senior management, executive directors, and a myriad of country officials who were all pressuring the IMF to inflate its forecasts back in 2008, just as housing markets and financial markets were beginning to crumble.
In July 2008, on Prof. Johnson's watch, they temporarily prevailed.
From this angle, the IMF Chief Economist's role might even be compared to that of a certain young Goldman Sachs VP.
Even in the dark days ahead, therefore, Goldman Sachs execs have at least a few consolations.
First, they can remind themselves that there were very damn few heroes in this sordid tale -- journalists, politicians, public intellectuals, and economists included.
Indeed, Brooklyn-born investor John Paulson may turn out to have been, if not quite a "hero," at least one of the few relatively straightforward and consistent players in the lot.
At least in his own investing, he consistently opposed the systematic distortions about the housing miracle and the exaggerate forecasts -- dare one say frauds? -- that institutions the US Treasury, the Federal Reserve, and Prof. Johnson's own IMF employed in the final stage of the real estate bubble, in a failed attempt to achieve a 'soft landing.'
Second, while it may be hard for us to imagine, things might actually have turned out a whole lot worse.
Goldman Sachs might well have relied on Prof.
Johnson's sophisticated, bullish forecasts rather than on John Paulson's intuitive short-side skepticism.
How much money would Goldman's clients, investors, and the rest of us have lost then?
© JSH, SubmergingMarkets, 2010.
Tuesday, March 09, 2010
THE ROBIN HOOD TAX
Why Doesn't Obama Support This Very Modest Progressive Tax? Just Guess Who Opposes It! James S. Henry
THE ROBIN HOOD TAX
While we wait patiently for any signs whatsoever of progressive change in America, progress is still being made, deo gratis, elsewhere. Of course this is no thanks to the banker-minded Spartans who still occupy the Trojan Horse that is become the US Treasury Department.
Today the European Parliament adopted a resolution supporting the kind of global financial transactions tax that is discussed in the extraordinary performance by Bill Nighy below. For more information about the European action, please follow this link.
Tax Justice Network International,
Global Financial Integrity,
have all been working hard to support this proposal. They could use your active involvement and support -- right now.
As the Puritan minister Stephan Marshall once said in a sermon addressed to Parliament in 1641, "You have great works to do, the planting of a new heaven and a new earth among us, and great works have great enemies."
(If for some odd reason the video does not appear below, please travel here to get it.)
Monday, October 26, 2009
"WHAT MIDDLE CLASS"? Global Wealth Inequality (2007-08 Average) James S. Henry and Brent Blackwelder (Click chart)
Friday, October 02, 2009
Pittsburgh's State of Siege
Suppressiing Dissent With High-Priced Cop Toys James S. Henry
Pittsburgh's State of Siege
You didn't hear much about it from any major US news organizations, but there was a very disturbing case of gratuitous police-led violence and intimidation at the G20 Summit in Pittsburgh on September 23rd-25th, 2009. Perhaps the only consolation is that it allowed those of us who were there to get a close look at some of the disturbing "brave new world: technologies for anti-democratic crowd control. These were initially developed by the US military to fight terrorists on the high seas and abroad, in places like Afghanistan, Somalia, and Iraq, but are now coming home to roost. Indeed, ironically enough, this is one of the few remaining global growth industries where the US is still the undisputed world leader, as we'll see below.
One local newspaper account described the events at the Pittsburgh G20 as a "clash" between the police, protesters, and college students.
Indeed, a handful of storefronts were reportedly broken on Thursday September 24 by a few unknown vandals.
However, based on our own visit to the summit, interviews with several students and other eye witnesses, and a careful review of the significant amount of video footage that is available online, the only real "clash" that occurred in Pittsburgh on September 23-25, 2009, was between lawless policing and the Bill of Rights.
The most aggressive large-scale policing abuses occurred from 9 pm to 11:30 pm on Friday September 25th near Schenley Park, in the middle of the University of Pittsburgh campus. This was miles away from the downtown area where the G20 had met, and, in any case, it was hours after the G20 had ended.
This particular case of aggressive policing -- "Hammer and Anvil," as the operation was described on police scanners -- was clearly not just a matter of a few "bad apples."
Rather, it appears to have been part of a willful, highly-organized, one-sided, rather high-tech experiment or training exercise in very aggressive crowd control by nothing less than a really scary uniformed mob.
New York police sometimes describe their firemen counterparts, tongue in cheek, as "robbers with boots." In this case we have no hesitation at all in describing this uniformed mob in Pittsburgh as "assailants with badges."
Their actions resulted in the unlawful suppression of the civil rights of hundreds of otherwise-peaceful students who were just "hanging out with their friends on a Friday night in Oakland," or attending a free jazz/blues concert in Schenley Park.
Essentially they got trapped in a cyclone of conflicting and inconsistent police directives to "leave the area." The result was nearly 200 arrests, gassings, beatings, and the deployment of dogs and rubber bullets against dozens of innocent people.
In addition to the students, this aggressive policing also assaulted the civil rights of a small number of relatively-peaceful protesters and quite a few ordinary Pittsburgh residents, most of whom were as innocent as bystanders can possibly be these days.
Why did this occur? In addition to whatever top-down "experiment" or training action was being conducted there appears to have been an extraordinary amojnt of pent-up police frustration and anger. For example, one student overheard a policeman piling out of a rented Budget van near Schenley Park around 9:50 PM Friday.
The officer was heard to exclaim, "Time to kick some ass!"
This is disturbing, but perhaps not all that surprising. After all, thousands of police had basically stood around for days in riot gear, sweltering in the "Indian Summer" heat, dealing with the tensions associated with potential terrorist attacks as well as all the hassles of managing large-scale protest marches, even if peaceful.There was also the inevitable tensions of social class and culture among police, Guardsman, and college students.
On the other hand, precisely because such tensions are so predictable, those in direct command or higher political office, and, indeed University officials, should have acted forcefully to corral them.
JOIN THE CLUB
All this means that Pittsburgh has unfortunately now joined the growing list of cities around the world that have experienced such serious conflicts -- mainly in connection with economic summits or national political conventions.
The list of summit frays includes this summer's G-8 in Italy, last Spring's G20 in London, the September '08 RNC in Minneapolis, the '04 RNC in New York City, Miami's Free Trade Area of the Americas Summit (11/03),
Quebec (4/01), Naples (3/01), Montreal (10/00),
Prague 9/00), Washington D.C. (4/00), the November '99 WTO
"Battle in Seattle," the J18 in London (6/99), Madrid (10/1994), and Berlin (9/88).
President Obama had originally selected Pittsburgh for the G20 because he hoped to showcase its recovery since the 1980s, especially in the last few years, under a Democratic Mayor, in a Democratic state that he barely carried in the 2008 Presidential contest.
In seeking to explain such events, therefore, it alway helps to keep a firm eye on the question -- whose interests did really this serve?
In retrospect, the failure of these leaders to control the police at the G20 has created a serious blemish on the city's reputation for good government. It may have also to some extent undermined Obama’s relations with college students and other activists who worked so hard for his election in this key state. And it certainly did not help the reputation of the Democratic Party in Pittsburgh or Pensylvania at large.
To journalists like me who happened to have been in Beijing in May 1989, during the buildup to the June 4th massacre in Tiananmen Square, Pittsburgh also bears an interesting resemblance. The analogy may sound a little strained, but bear with me.
(1) As in Beijing, there was a very large deputized police force from all over the country. These included over 1000 police "volunteers" (out of 4000 total police and 2500 National Guardsmen) who were ported in just for the G20.
According to the conventional wisdom, not being from the same community is likely to reduce your inhibitions when it comes to macing and kicking the crap out of unarmed, defenseless young people.
The guest policeman also included several hundred police who were under the command of Miami Police Chief John F. Timoney, pioneer of the infamous "Miami model"
for suppressing protest that was first deployed at the Miami Free Trade Area of the Americas Conference in November 2003. (Here’s the Miami model checklist, most of which was repeated in Pittsburgh.)
As one writer has observed, Timoney, who also served as Police Chief in Philadelphia, "(L)iterally transformed the city into a police state war zone with tanks,
blockades and “non-lethal” (but severely damaging) artillery."
(2) As in Beijing, In Pittsburgh there were no identifying badges on officers' uniforms, and they also refused to provide any identifying personal information in response to questions. Several photographers also complained about receiving threats and actual damage to their cameras.
(3) As in Beijing, there was simply no direct contest between the power of the security forces once they mobilized, and those of the unarmed students. The only kind of victory that the students could possibly have one in both cases was a moral one -- by essentially sacrificing their bodies and their rights to a tidal wave of repression.
Indeed, the "clash" theory of these events looks even odder once we take into account the fact that on Friday night in Pittsburgh, for example, unarmed students and protesters faced hundreds of police in full riot gear, armed for bear with equipped muzzled attack dogs, gas, smoke canisters, rubber bullets, bean-bag shotguns, pepper pellets, long-range pepper spray, at least four UH-60 Black Hawk helicopters (courtesty of New York Governor Patterson and his National Guard's 3-142nd Assault Helicopter Battalion unit), plus several brand new "acoustic cannons" (see below). There were also probably dozens of undercover agents provocateurs -- at least three of whom were actually "outed" by the students.
The police were also actively monitoring student communications on web sites like Twitter.
From this angle, a key difference with Bejing in 1989 was that the Chinese authorities felt genuinely threatened by the growth of student power and the democracy movement, and feared being ousted,from power. and were therefore able to justify their brutality as part of a zero-sum game. In the case of Pittsburgh, whatever police violence occurred was entirely gratuitous.
"I hereby declare this to be an unlawful assembly. I order all those assembled to immediately disburse. You must leave the immediate vicinity. If you remain in this immediate vicinity, you will be in violation of the Pennsylvania crimes code, no matter what your purpose is. You must leave. If you do not disburse, you may be arrested and/or subject to other police action. Other police action may include actual physical removal, the use of riot control agents, and/or less lethal munitions, which could risk of injury to those who remain."
The fact is that this warning was itself completely unlawful. Putting on the NYCLU lawyer's hat for a moment, absent a "clear and present danger" to the public peace, these threats violated the First Amendment's explicit recognition of right to "peacefully assemble.”
In effect, the fact is that the police and National Guard in Pittsburgh temporarily seized control over public streets, parks, and other public spaces, and exercised it arbitrarily. By the time the victims of these outrageous civil rights infringements have their day in court, the damage will have been long since done.
GLOBAL COP TOYS Police behavior at all these global summits has evolved over time into a rather high-tech affair that would make Iranian crowd control experts turn bright green with envy. For example, last week's G20 featured one of the largest US deployments ever against civilian demonstrators of "LRADS," or acoustic cannons. These sophisticated "phase array" device s emit a targeted 30-degree beam of 100+decibel sound that is effective up to several hundred yards, and is potentially very harmful to the human ear. Manufactured by San Diego's tiny American Technology Corporation (NASDQ: ATCO), the $37,500 so-call "500X" version of the sound cannon that was used in Pittsburg was developed at the behest of the US military, reportedly in response to the USS Cole incident in 2000, to help the Navy repel hostile forces at sea. The Pittsburgh units were apparently purchased by local sheriffs' departments across the country with the help of recent grants from the US Department of Homeland Security. Officially the grants have been justtified in the name of improving communications with the public, by permitting clearer voice channels (!), but that's a cover story -- the true purpose is crowd control. ( Roll tape: LRAD-500X_SDCo_Sheriff1). Other recent ATCO customers include the US Army (for "force protection" in Iraq and Afghanistan), and the US Navy and the navies of Japan and Singapore, for communicating with potentially-hostile vessels at sea. In 2008 ATCO flogged its wares at the biannual China Police Forum, Asia's largest mart for police security equipment. Obviously China would make a terrific reference customer, since it is one of the global front-runners in the brutal suppression of mass dissent. Until recently the most widely-publicized use of LRADS had been against Somali pirates. The devices have also been deployed against "insurgents" by the US military in Fallujah, by the increasingly-unpopular, anything-but-democratic regime of Mikhail Saakashvili in the Republic of Georgia, and by New York City at the RNC in 2005. Just two weeks before the Pittsburgh G20, they turned up in San Diego, where the Sheriff's Department provoked controversy by stationing them near a Congressional town hall forum -- just in case. This growing use of LRADs for domestic crowd control in the US is worrisome, not only because it is a potent anti-civil liberties weapon, because -- just like tasers, rubber bullets, OC gas, and other so-called "non-lethal but actually just "less lethal" weapons" -- they can cause serious injuries to ears, and perhaps even provoke strokes. In the last decade the non-lethal weapons arena has exploded, and the US appears to be far ahead, assisted by ample R&D grants and purchase contracts from organizations like the Department of Justice's "National Institute of Justice," DHS's multi-billion dollar Homeland Security Grant Program, the U.S Coast Guard, and the Security Advanced Research Projects Agency, and DOD's Joint Non-Lethal Weapons Directorate (JNLWD) Program. The industry has also been aided by key contractors like ATCO, spearheaded by legendary engineer, inventor, and entrepreneur "Woody" Norris; and Penn State's Advanced Research Lab -- home of the Institute for Emerging Defense Technologies. NIJ also works closely with police organizations like PERF, and international organizations like the UK's Home Office Scientific Development Branch. In the first instance, the development of such non-lethal technologies is usually justified by their potential for providing an alternative to heavier weaponry, thereby reducing civilian casualties in combat situations. The fact that the US military now has at least 750 military bases around the world, and has also recently been playing an important "military policing" role in countries like Somalia, Haiti, Bosnia, Iraq, and Afghanistan, underscored DOD's rationale for these technologies. The problem is that just as in the case of the LRAD, once developed, it is very difficult to wall such technologies out of the US, or restrict them to "pro-civilian/pro-democratic" uses, like providing clearer amplification for outdoor announcements. Even aside from their technical merits, the competitive nature of the global law enforcement equipment industry virtually insures that every tin-horn US sheriff, as well as every Chinese party boss in Urumqi, will soon have access to these very latest tools in the arsenal for suppressing dissent. The ultimate irony, of course, is that the first generation of all these powerful new free speech suppressors have all been developed, not by authoritarian China, Iran, Burma or North Korea, but by US, ostensibly still the leader of the "Free World." TOYS IN THE PIPELINE So what's in store for those who are on the front lines of popular dissent?
We assume that some of the juiciest details are classified. But even a cursory review of public sources reveals that the following new crowd-control technologies may soon be
coming to an economic summit near you.
(See this recent UK review for more details.). ▣
"Area Denial Systems." This is a powerful new "directed-energy" device that generates a precise, targeted beam of "millimeter waves," producing an "intolerable heating sensation on an adversary's skin."
Under development by the US military since at least the late 1980s, this class of "non-lethal" weapons is now close to field deployment. Its key advantage over LRADs is that it has about ten times the range. Raytheon is already supplying its "Silent Guardian" version of the system to the US Army.
The next step required to bring this product to the police market will be to make it smaller and more mobile. According to this week's
a new highly-portable, battery-powered version of the system, called the
will soon become available -- though it has yet to show that demonstrate conclusively that it is within the bounds of the
UN Binding Protocol on Laser Weapons.
▣ New Riot-Control Chemicals and Delivery Systems. Subject to the dicey question of whether these new "calmative," drug-like agents are outside the boundaries of the 1993 Chemical Weapons Convention (to which the US and 187 other countries are signatories), these would not irritate their targets, unlike pepper spray or tear gas, but calm them down. ▣ Glue Guns. If all else fails, UK's Home Office reports that another approach to "less- lethal" crowd control weaponry is also making progress -- a gigantic glue gun that sprays at least some 30 feet, bemingling its target audience in one huge adhesive dissident-ball. Apparently still unsolved is the question of precisely what becomes of all those who are stuck together, or how the police avoid becoming entangled with them. But undoubtedly millions of pounds are being devoted to solving these issues even as we speak. SUMMARY I went to Pittsburgh last week on behalf of Tax Justice Network, a global NGO that is concerned about the harmful impacts that tax havens and dodgy behavior by First World banks, MNCs, lawyers, and accountants are having, especially on developing countries. I was under no illusion that the reforms we were rather politely advocating would quickly be adopted, but at least we'd say our piece, if anyone cared to listen. I came away with the depressing sense that the G20 summit, like its many predecessors, was never intended to be a listening post for independent, outside opinions. But even worse, it had actually become, in practice, an excuse for the criminalization of dissent in capital cities all over the globe, even in those that are nominally the most free, by way of the vast new security measures that it requires and subsidizes,and the repressive tactics that it legitimized. In this day and age, of course, we are told that almost any amount of security is too little. And this heightened sense of insecurity is certainly not aided by having the world's top 20 leaders regularly shuffling from pitstop to pitstop, trying to conduct the world’s business from a traveling roadshow. But I was struck by just how unnecessary, senseless, and counterproductive almost all of the repressive policing tactics deployed in Pittsburgh really were -- how they ran roughshod over many of our most precious freedoms, freedoms that we are supposedly trying to protect. And to what a degree whatever “terrorists” there are out there have already won, by succeeding in creating a society that is really is often ruled by fear instead of justice, by force instead of discourse. ***
Rather than, say, simply allowing the overwhelmingly non-violent demonstrators and students at that peaceful Friday night blues concert to have their say, instead some 200 people were arrested and scores were gassed, clubbed, rubber-bulleted, and imprinted with galling memories that will last a lifetime. The City of Pittsburgh and its residents will certainly be fighting criminal cases and civil rights law suits for years to come. I supposed we are meant to be consoled by the fact that, as the New York Times chose to emphasize this week, things are much more repressive in Guinea.
So perhaps it is time to establish a permanent location for all these global summits. Perhaps one of the Caribbean tax havens, like Antigua or St. Kitts, would do -- journalists always like the sun, and after TJN gets done with them, these havens are going to need to find a new calling anyway!
Police behavior at all these global summits has evolved over time into a rather high-tech affair that would make Iranian crowd control experts turn bright green with envy.
For example, last week's G20 featured one of the largest US deployments ever against civilian demonstrators of "LRADS," or acoustic cannons.
These sophisticated "phase array" device s emit a targeted 30-degree beam of 100+decibel sound that is effective up to several hundred yards, and is potentially very harmful to the human ear.
Manufactured by San Diego's tiny American Technology Corporation (NASDQ: ATCO), the $37,500 so-call "500X" version of the sound cannon that was used in Pittsburg was developed at the behest of the US military, reportedly in response to the USS Cole incident in 2000, to help the Navy repel hostile forces at sea.
The Pittsburgh units were apparently purchased by local sheriffs' departments across the country with the help of recent grants from the US Department of Homeland Security. Officially the grants have been justtified in the name of improving communications with the public, by permitting clearer voice channels (!), but that's a cover story -- the true purpose is crowd control. ( Roll tape: LRAD-500X_SDCo_Sheriff1).
Other recent ATCO customers include the US Army (for "force protection" in Iraq and Afghanistan), and the US Navy and the navies of Japan and Singapore, for communicating with potentially-hostile vessels at sea.
In 2008 ATCO flogged its wares at the biannual China Police Forum, Asia's largest mart for police security equipment. Obviously China would make a terrific reference customer, since it is one of the global front-runners in the brutal suppression of mass dissent.
Until recently the most widely-publicized use of LRADS had been against Somali pirates. The devices have also been deployed against "insurgents" by the US military in Fallujah, by the increasingly-unpopular, anything-but-democratic regime of Mikhail Saakashvili in the Republic of Georgia, and by New York City at the RNC in 2005.
Just two weeks before the Pittsburgh G20, they turned up in San Diego, where the Sheriff's Department provoked controversy by stationing them near a Congressional town hall forum -- just in case.
This growing use of LRADs for domestic crowd control in the US is worrisome, not only because it is a potent anti-civil liberties weapon, because -- just like tasers, rubber bullets, OC gas, and other so-called "non-lethal but actually just "less lethal" weapons" -- they can cause serious injuries to ears, and perhaps even provoke strokes.TECHNOLOGY BLOWBACK
In the last decade the non-lethal weapons arena has exploded, and the US appears to be far ahead, assisted by ample R&D grants and purchase contracts from organizations like the Department of Justice's "National Institute of Justice," DHS's multi-billion dollar Homeland Security Grant Program, the U.S Coast Guard, and the Security Advanced Research Projects Agency, and DOD's Joint Non-Lethal Weapons Directorate (JNLWD) Program.
The industry has also been aided by key contractors like ATCO, spearheaded by legendary engineer, inventor, and entrepreneur "Woody" Norris; and Penn State's Advanced Research Lab -- home of the Institute for Emerging Defense Technologies. NIJ also works closely with police organizations like PERF, and international organizations like the UK's Home Office Scientific Development Branch.
In the first instance, the development of such non-lethal technologies is usually justified by their potential for providing an alternative to heavier weaponry, thereby reducing civilian casualties in combat situations.
The fact that the US military now has at least 750 military bases around the world, and has also recently been playing an important "military policing" role in countries like Somalia, Haiti, Bosnia, Iraq, and Afghanistan, underscored DOD's rationale for these technologies.
The problem is that just as in the case of the LRAD, once developed, it is very difficult to wall such technologies out of the US, or restrict them to "pro-civilian/pro-democratic" uses, like providing clearer amplification for outdoor announcements.
Even aside from their technical merits, the competitive nature of the global law enforcement equipment industry virtually insures that every tin-horn US sheriff, as well as every Chinese party boss in Urumqi, will soon have access to these very latest tools in the arsenal for suppressing dissent.
The ultimate irony, of course, is that the first generation of all these powerful new free speech suppressors have all been developed, not by authoritarian China, Iran, Burma or North Korea, but by US, ostensibly still the leader of the "Free World."
TOYS IN THE PIPELINE
So what's in store for those who are on the front lines of popular dissent? We assume that some of the juiciest details are classified. But even a cursory review of public sources reveals that the following new crowd-control technologies may soon be coming to an economic summit near you. (See this recent UK review for more details.).
▣ "Area Denial Systems." This is a powerful new "directed-energy" device that generates a precise, targeted beam of "millimeter waves," producing an "intolerable heating sensation on an adversary's skin."
Under development by the US military since at least the late 1980s, this class of "non-lethal" weapons is now close to field deployment. Its key advantage over LRADs is that it has about ten times the range. Raytheon is already supplying its "Silent Guardian" version of the system to the US Army.
The next step required to bring this product to the police market will be to make it smaller and more mobile. According to this week's
a new highly-portable, battery-powered version of the system, called the
will soon become available -- though it has yet to show that demonstrate conclusively that it is within the bounds of the
UN Binding Protocol on Laser Weapons.
▣ New Riot-Control Chemicals and Delivery Systems.
Subject to the dicey question of whether these new "calmative," drug-like agents are outside the boundaries of the 1993 Chemical Weapons Convention (to which the US and 187 other countries are signatories), these would not irritate their targets, unlike pepper spray or tear gas, but calm them down.
▣ Glue Guns. If all else fails, UK's Home Office reports that another approach to "less- lethal" crowd control weaponry is also making progress -- a gigantic glue gun that sprays at least some 30 feet, bemingling its target audience in one huge adhesive dissident-ball.
Apparently still unsolved is the question of precisely what becomes of all those who are stuck together, or how the police avoid becoming entangled with them. But undoubtedly millions of pounds are being devoted to solving these issues even as we speak.
I went to Pittsburgh last week on behalf of Tax Justice Network, a global NGO that is concerned about the harmful impacts that tax havens and dodgy behavior by First World banks, MNCs, lawyers, and accountants are having, especially on developing countries. I was under no illusion that the reforms we were rather politely advocating would quickly be adopted, but at least we'd say our piece, if anyone cared to listen.
I came away with the depressing sense that the G20 summit, like its many predecessors, was never intended to be a listening post for independent, outside opinions. But even worse, it had actually become, in practice, an excuse for the criminalization of dissent in capital cities all over the globe, even in those that are nominally the most free, by way of the vast new security measures that it requires and subsidizes,and the repressive tactics that it legitimized.
In this day and age, of course, we are told that almost any amount of security is too little. And this heightened sense of insecurity is certainly not aided by having the world's top 20 leaders regularly shuffling from pitstop to pitstop, trying to conduct the world’s business from a traveling roadshow.
But I was struck by just how unnecessary, senseless, and counterproductive almost all of the repressive policing tactics deployed in Pittsburgh really were -- how they ran roughshod over many of our most precious freedoms, freedoms that we are supposedly trying to protect. And to what a degree whatever “terrorists” there are out there have already won, by succeeding in creating a society that is really is often ruled by fear instead of justice, by force instead of discourse.
Saturday, February 28, 2009
TOO BIG NOT TO FAIL? James S. Henry
(A version of the following story appeared in the Nation on February 23, 2009, here )
Or has the administration just been fighting the last war,paying far too much attention to ancient history, special interests, political correctness, and its own pre-recession agenda, in its programs to stimulate the economy, fix the banks and providing debt relief to homeowners?.
For lifelong students of the Great Depression like Federal Reserve Chairman Ben Bernanke and Larry Summers, it probably seems that Obama's economics team is on track.
In less than a month, Obama has pushed his record $787 billion stimulus bill through a highly partisan Congress. The resulting projected federal deficits will be even larger as a share of of national income than those incurred under FDR, until World War II. At a time when unemployment is rising sharply, this should be good news for the economy--- if the plan is sufficiently stimulating.
On February 10, Treasury Secretary Timothy Geithner announced a bold, if somewhat imprecise, $2.5 trillion program to relieve US banks of dodgy assets once and for all. Combined with trillions in other loans and guarantees from the US Treasury and the Federal Reserve, this is designed to avoid another costly Great Depression-type error, in which scores of banks were allowed to fail and credit markets seized up. If the plan really is expected to work, that should also be good news for the economy.
Bernanke also concluded from his lengthy studies of the Great Depression that the Federal Reserve had blown it way back then by keeping monetary policy too tight. So ever since last summer he's made the US money supply as loose as loose can be, ballooning the Fed's balance sheet to nearly $1 trillion and driving real interest rates down to zero, while pressuring his counterparts in Europe and Japan to folllow suit.
Obama's team also has emphasized the importance of avoiding the beggar-thy-neighbor "protectionism" of the 1930s--aside from a little "Buy American" language in the stimulus bill and a few remarks from Geithner about China. If loose monetary policy and tighter lips are sufficient for recovery, it should be just around the corner.
Finally, in the course of Obama's drive to pass the stimulus, he traveled to troubled communities in Indiana, Florida and Arizona and heard first-hand that millions of American homeowners and small businesses could use a little financial aid of their own right now. So Obama has committed $275 billion of the remaining TARP/"Financial Stability" funds to this purpose. In principle, this should also be good news for the economy--if we really believe that the plan has what it takes to stem the galloping pace of foreclosures and bankruptcies.
Obama and his team may really believe that their first month in office compares favorably with FDR's in 1933. Historical pitfalls have been avoided, and there has been no shortage of good intentions, optimism and action. The new president has also assembled a team that includes, by its own admission, the nation's brightest economists and its most experienced veterans of the Fed and the Treasury.
But something seems to be missing. During FDR's first few months in office, and well into his second term, he received an overwhelmingly positive response not only from the public at large but also from the stock market, despite the fact that FDR and Wall Street generally detested each other.
In contrast, the reaction of global stock markets and market analysts to Obama's flurry of policy initiatives has been overwhelmingly negative. In the past week alone, since the passage of the stimulus, the announcement of the Geithner plan and the president's new plan for mortgage relief, the stock market has declined more than 10 percent. Indeed, the country's largest banks and auto companies, which were supposed to be the beneficiaries of much of these new programs, are on the brink of bankruptcy.
So what's the problem? Actually there are several problems. The first, as I noted in part one of this series, "The Pseudo Stimulus," there really is much less to Obama's stimulus than meets the eye and far less than will be needed to head off the dramatic increase in unemployment that is fast approaching.
For reasons of political convenience and a desire to move quickly, Obama and his advisors decided to appease a handful of key Republican senators, rather than seize the bully pulpit and rally support around a larger, more direct spending package with more debt relief for homeowners.
Ultimately Obama succeeded in getting just three "moderate" Republican senators and zero House Republicans to support the package. (Eleven House Democrats also voted against it.) These votes were costly. The final bill ended up slashing almost $40 billion from the package, while boosting the share of tax cuts to nearly 40 percent--including almost half of all relief provided in the critical first year when it is essential to get the downturn under control.
Most macroeconomists still believe that under conditions of excess capacity, tax cuts generate much less employment per dollar of lost revenue than almost any kind of spending, because upper-income types will save the proceeds or use them to pay down debts. Furthermore, many of the tax cuts in Obama's bill are regressive, even allowing for his favorites, "Make Work Pay," the earned income credit and child care credit. This means their impact on jobs will be even more limited.
For example, of $214 billion of individual tax cuts in the first two years, $100 billion will go to the top 20 percent, while the bottom 60 percent gets $81 billion. Indeed, for one of the largest single tax cuts in the bill, the $70 billion reduction in the "alternative minimum tax," 70 percent will go to the top 10 percent, while the bottom 60 percent--including most unemployed workers--get .5 percent. So Obama's vaunted plan relies on this premier-class AMT cut, plus another $100 billion of business tax breaks, for 27 percent of its first two years of "stimulus."
On top of this, Republicans like Arlen Specter also have shown that they give no ground to Democrats when it comes to sausage-making. I won't repeat part one's list of trinkets, except to note that almost all the worst projects survived, and indeed were only enhanced by the solons' scrutiny.
As a former Minnesotan I'm all in favor of free WiFi for each and every one of the nation's two million farmers; I've also recently written here in glowing terms about the merits of government- sponsored research and development and "green housing." But this kind of spending has little to do with putting millions of unemployed people--most of whom are in urban areas--back to work.
All told, at least $200 billion of this stimulus spending, on top of the $200 billion of wasteful tax cuts, is not remotely related to the urgent goal of creating as many jobs as possible in the next twelve to eighteen months. The cause of recovery was hijacked by a weird coalition of environmentalists, energy companies, venture capitalists, public-sector unions, state governors, tax-cut nuts and other special interests.
The stimulus program was supposed to realize Obama's declared goal of saving or creating at least 4 million new jobs by 2012--even then, at the average cost of $200,000 per job. According to the Congressional Budget Office, even that level of job creation would only reduce the US unemployment rate by an average of less than one percentage point a year by 2012, for a cumulative reduction of 2.5 to 3 percent relative to the CBO's projections of what unemployment will look like without the program.
By the time the Senate got through with it, Obama's stimulus became much weaker. So most economists now agree that it will be lucky to create or save even an extra 2.5 million jobs by 2012--about a 1.5 to 2 percentage-point cumulative reduction in the official unemployment rate by 2012, at an average cost to taxpayers of $315,000 per job.
The contrast with FDR's focus on spending programs that really did put people back to work, is striking.
THE REAL UNEMPLOYMENT RATE
All the standard measures of unemployment are woefully inadequate, but the shortcomings change with the times. In good times, with tight labor markets, conservative economists find it satisfying to remind us that the degree of "involuntary" unemployment is probably overstated, because workers can afford to game the welfare system--for example, by collecting unemployment insurance while refusing reasonable job offers.
In hard times like these, however, official unemployment rates seriously understate the degree of slack and hardship in labor markets. For example, in addition to the 13 million people now unemployed (that's 8.5 percent of the labor force) another 7.8 million workers report that they are underemployed; at least 2.1 million to 5.9 million more (none of whom are collecting unemployment) say they're not in the labor force because they've given up looking. By another measure, the peak labor force participation rate, established when labor markets were very tight in 1999 and 2000, shows the potential supply of labor not counted as unemployed is even larger--10.6 million right now.
All told, this means by now there are already at least 23 million to 33 million American adults who are already experiencing increased unemployment, up from 13 million to 17 million from a year ago. By the end of 2009, as the official unemployment rate passes 10 percent and the other indicators of slack labor markets grow as well, this figure will swell to 40 million American adults--at least 9 million to 18 million more under-utilized workers than we have now.
A majority of these people have families. Furthermore, the unemployed population constantly turns over, with a median duration of joblessness that now exceeds ten weeks. This means that during the next year, up to one-third of the entire US population will personally encounter someone facing the harsh realities of involuntary unemployment, and perhaps homelessness and poverty as well.
These figures omit several other kinds of "hidden" unemployment that are not recorded in conventional labor force and unemployment statistics: the 1.44 million people on active duty in the military and the unemployment they would face if and when they return to civilian life; the 2.3 million inmates in federal, state and local prisons, all of whom are omitted from labor force and unemployment statistics; and the estimated 8.1 million undocumented workers in the United States who are in the labor force.
In many ways undocumented workers are the most vulnerable victims of the crisis. Most support families either abroad or home. Many also have been working hard here for years and have now lost their jobs, without any unemployment insurance, healthcare, rights to Social Security or other benefits. And since Congress has not been able to agree on a decent immigration reform bill, they may not even be able to count on achieving US citizenship, after years of working and waiting. Now they face a hard choice between remaining here, unemployed, or returning to violent, corruption-ridden "Bantustans" in Mexico, Central America, the Philippines and elsewhere.
It's important to take these factors into account when we consider how this downturn compares with earlier financial crises. Unemployment statistics for the 1930s are difficult to compare with our current situation, given the different statistical procedures employed and the very different demographics in the two eras. But my analysis shows that it is possible that this crisis may turn out to be comparable to the situation in 1933, when unemployment peaked at roughly 25 percent of the US labor force.
This analysis provides a context for assessing Obama's original goal of creating/saving 3 million to 4 million jobs by 2012. The fact is, even that original goal simply wasn't anywhere close to being ambitious enough--and it certainly won't be met under the sadly compromised final "stimulus" plan. The negative reaction of global stock markets markets to Obama's plans so far appears to confirm this. We're going to have to stop the political games and get serious.
GEITHNER'S TARP II
Markets reacted negatively to the plan not because investors necessarily opposed his new toxic asset buyback scheme. Most analysts felt that his long-anticipated statement was long on rhetoric about "stress tests and transparency" but short on digestible content--like being invited to dinner and then served pictures of food.
Indeed, like his website, FinancialStability.gov, Geithner's plan remains under construction. But critics may have missed the point--this lack of detail actually may be a political necessity. If the American people understood just how high a price the Obama adminstration may be willing to pay simply to keep our country's largest failing private banks private, we might need a few more guards at the Winter Palace.
Tim Geithner is not a former Wall Street insider in the Paulson/Rubin mold, nor was he ever for a single day a community organizer. He's an ambitious and cautious policy technocrat, whose lucrative private-sector career and board seats are still in front of him. We'd be hard-pressed to find anyone who, at age 47.5, had already punched more establishment tickets. His grandfather was a Ford Motor executive and Eisenhower adviser; his father is a Ford Foundation officer who raised Tim on three continents. He graduated from Dartmouth and Johns Hopkins, became a consultant for Kissinger Associates, a protégé of Robert Rubin and Larry Summers at Treasury in the 1990s, an IMF policy director in 2001-2003, a Council on Foreign Relations fellow and finally head of the Federal Reserve of New York. As of the end of 2008, he was still a member of the CFR, the Group of Thirty and the Economic Club of New York, organizations not routinely associated with sponsoring deep reforms in post-capitalist economies.
Geithner has seen his share of banking crises firsthand: Mexico in 1995, when the entire banking system had to be re-nationalized; Thailand, Indonesia and Russia in 1997-98; Argentina in 2001; and now the biggest one of all right here. All of the Third World crises just noted ended badly--costly, poorly-managed fiascos that did nothing to enhance the reputations of the US Treasury and the IMF. But perhaps Geithner was just an apparatchik. He worked closely last year with Hank Paulson and Bernanke on Bear Stearns bailout, the Lehman/Merrill decisions, the AIG takeover and TARP I. So he probably understands full well not only the gory details of program design but also two fundamental political realities.
The first is that while nationalizing top-tier global banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, it is still viscerally opposed by most members of the power elite in New York and Washington--including most of his former club members.
The second is that by now, most American taxpayers have simply had it with huge Wall Street bailouts, supine members of Congress, overpaid banker chutzpadiks and high-handed Treasury secretaries. If they were ever asked, there is no way in Naraka that taxpayers would ever approve yet another open-ended injection of public capital into banks--especially one costing three times the entire "stimulus" and three-and-a-half times TARP I.
So the trick is to not ask them. With bank stocks sinking every day, the credit crunch hampering recovery and high expectations about policy changes, Geithner had to say something. But not too much. The whole subtext of his vague announcement was to finesse the question of precisely where all the money would come from. The hope was that this would buy time to line up private capital, perhaps by negotiating some kind of insurance subsidy that would induce it to participate. The hope was that this would do enough to stem the decline in bank stock prices and redirect attention away from the new "N"-word--nationalization.
WELFARE FOR BIG BANKERS
Of this, more than half went to the top fifteen banks in the country. This includes $145 billion of capital injections awarded to Citigroup, Bank of America, JP Morgan and Wells Fargo, the top four US commercial banks; another $10 billion each for Goldman Sachs and Morgan Stanley, two worthy investment banks that decided to become commercial banks to avail themselves of federal aid; and a grand total of $84 billion to the rest of the US banks. There was also $40 billion in capital injections and $113 billion in credit in AIG, the profligate insurance company that sold so many flaky credit derivative swaps to investment banks like Goldman that it pioneered a whole new new "too fraudulent to fail" rule. In addition, by now US banks have also received at least $1.82 trillion of federal loan guarantees and $872 billion in federal loans.
These sums need to be viewed in the context of the staggering amount of government assistance that has recently been provided to private financial institutions all over the world. By February 2008, by my reckoning, banks and insurance companies have already absorbed at least $817 billion of government capital injections, $251 billion of toxic asset purchases, $2.6 trillion of government loans and $5.9 trillion of government debt guarantees. If we added the guarantees for once quasi-private entities like Fannie Mae and Freddie Mac, the loan guarantees double to $10.9 trillion.
To put all this in perspective, the 1980s savings and loan crisis cost taxpayers from $150 billion to $300 billlion in comparable 2007 dollars. The 1998-99 Asian banking crisis cost $400 billion. Japan's prolonged banking crisis in the 1990s cost $750 billion. And the total amount of debt relief received by all Third World countries on the $4 trillion of dodgy foreign debt that they incurred from 1970 to 2006 was just $310 billion.
Those crises are completely over, while this one is still unfolding, so its ultimate cost is still uncertain. Already it is clear that ordinary taxpayers around the world are on the hook for total losses that will easily dwarf all the costs of all these other recent banking crises combined--including $2 trillion to $4 trillion of further bank write-offs beyond the $1 trillion of losses already recognized. Since no government on earth has the surpluses on hand needed to fund such largesse, this means that we will be paying for this bailout one way or another for the rest of our lives, and probably for our children's lives as well, through increased inflation, taxation and reduced government services.
Never has so much been given to so few by many. Yet despite all this public generosity, much of the US banks' recent behavior been execrable. For example, in December we learned that the US Treasury got preferred securities in exchange for the first $254 billion of TARP funds that, right off the bat, were worth $78 billion less than the funds they received.
We've also watched with amazement as they've continued to fund corporate jets and other perks, and as several of the largest recipients of TARP funds have paid extravagant bonuses to senior executives for "performance" in 2008--a year when the banking industry contributed mightily to the tanking of the entire global economy. Nor have most banks been forthcoming about what they've actually done with all the TARP money--except to to concede that they haven't done much new net lending. After all, they say, in this economic environment, with regulators suddenly breathing down their necks about leverage and toxic assets, they are not eager to take risks.
That's all well and good at the micro level, but at the level of the overall economy, we badly need banks to swallow hard and start churning out new loans--and not just to gold-plated borrowers who don't really need the money. Since TARP I funds were not dedicated to new lending, and, indeed, since policy makers like Paulson, Bernanke and (presumably) Geithner decided to leave TARP I's use entirely up to the banks' discretion, this period of extreme largesse and low interest rates has also coincided with tight credit markets--except for well-off corporations and elite borrowers and refinancers, who have actually been the main beneficiaries of Bernanke's low-interest rate policy.
So while both the Federal Reserve and the Treasury have been busy demonstrating that they have finally taken the lessons of the Great Depression to heart, and have been setting records for generosity and loose lending, at the end of the day they still allowed the private banking system to keep its elephant in the hallway, blocking the road to recovery.
Since October 2008, the net worth of the entire US banking system-- all 8,367 domestic-owned US banks--has declined by $420 billion, to just $540 billion. In other words, TARP was one of the worst investment decisions in corporate history--the banks' net worth has declined by more one dollar of equity value for each additional dollar of TARP funds injected.
Indeed, the net worth of two of the largest banks in the system, Citigroup and Bank of America, is now around $30 billion, less than half of the $70 billion in government capital that they have received from TARP I, on top of $424 billion of federal loan guarantees. Not only has their own "value added" during this period evidently been negative. For a fraction of the funds we've given these two banks, we could have stopped begging them to clean up their balance sheets, restructure their mortgages, stop wasting money, change their compensation plans and initiate sensible new lending programs. We could have bought a controlling share, hired new management from the droves of idle bankers now out on the street and re-privatized them at a profit for taxpayers in two to three years--just as successful "turnaround nationalization" programs have done again and again in these situations, from Norway to Chile.
No wonder that growing numbers of critics--not just hard-core lefties and Nobel laureates like Paul Krugman and Joseph Stiglitz but even pragmatic politicians like South Carolina Republican Senator Lindsey Graham--have started to break the taboo and talk explicitly about "nationalization."
But in an important sense the taboo had really already been shattered by TARP I, last year's expansion of FDIC deposit insurance and all the other new federal loan guarantees for the bank. In effect, these already "nationalized" the banks' debts. Now we're just talking about the other side of the balance sheet, where there might at least be some value, if only under new management.
Geithner is hardly unaware of this short-term nationalization approach to the credit crunch, or of the success it has in many other markets. But he has apparently rejected it in favor of a much more costly and uncertain route--establishing a public-private bailout fund that will somehow entice the banks to sell off their lousy assets and still have enough equity left to survive as private entities.
The limitations of this approach are best understood by taking another close look at Citigroup and Bank of America, two of the most troubled institutions in this story. On their most recent balance sheets reported to the FDIC, these two big banks alone accounted for $4.1 trillion of official on-balance-sheet "assets"--mostly loans and federal securities, but also a hefty amount of potentially dodgy mortgage-backed securities and other asset-based securities.
Right off the bat, therefore, at least by the accounting numbers, these two top banks alone now account for more than 30 percent of all the assets outstanding in the entire US banking industry. Indeed, the top fifteen banks account for over 60 percent. This represents an incredible increase in banking industry concentration since the early 1990s, when Citibank and Bank of America held just 7 percent of all US bank assets, and the top fifteen banks held 21 percent.
This increase in industry concentration was hardly an accident. It originated in the desires of bank executives to grow, boosting market share, short-term earnings, stock prices and the executive bonuses driven by those metrics. But it also reflected the gloves-off stance that Congress, regulators and antitrust enforcement took toward bank expansion during this period. And that, in turn, was probably related to the more than $1 billion contributed by the financial services industry, their lobbyists and law firms, to politicians of both major parties since 1990, which turned the Senate Banking Committee the House Financial Services Committee and other key Congressional committees, in effect, into wholly owned subsidiaries of the banking industry.
Now how much might all these assets on the banks' balance sheets actually be worth? There is no active exchange for most bank assets, especially those that are hardest to value in this environment, like mortgage-backed securities. And by law, the banks are permitted to value the assets on their books at "fair market value"--in essence, whatever their accountants tell them they are likely to be worth, given historical experience with loan losses. But the difference between these accounting numbers and today's market value for these assets may be huge--up to half or more of book value. And the banks have a strong incentive to hold on to the loans and hope that things get better, rather than sell them off right now at whatever the market will bear. After all, as soon as they start selling down one loan bundle, they may be required to "mark to market" all similar ones. And the resulting writedowns might well be enough to wipe out all stockholder equity, leading to insolvency.
This whole situation is reminescent of the 1980s Third World debt crisis, when banks like Citibank, Morgan and Chase resisted for years the demands of policy makers and developing countries to write down or sell off the billions of overvalued loans on their books--for no other reason than, as one former Chase banker put it, "a rolling loan gathers no loss." Similar behavior occurred during the prolonged Japanese debt crisis of the 1990s, when banks stubbornly resisted the efforts to get them to "mark to market" because several of them realized they would be bankrupt and no longer with us if they did so.
There's not really much moral culpability here. At ground level, from the standpoint of any individual bank, this behavior is understandable. After all, they have just gone through a period of careless underwriting, and are trying to reduce their loan losses and improve their capital ratios--just like most bank regulators want them to do. The larger banks have balance sheets that are best described as follows: "On the left side (assets), nothing is right; on the right side (deposits and other capital), nothing is left." And since the economy is still slipping at an unpredictable pace all around them, no loan officer is eager to take on more risks. So it is hardly surprising that in the last quarter of 2008, even as the TARP money started to flow, US bank lending suffered its sharpest decline since 1980. It also makes perfect sense for them to resist selling off its loans and securities at what may eventually turn out to have been fire-sale prices.
While all this may be well and good for bankers, however, for rest of us it means that even after all those trillions in federal bailouts and loan guarantees, the economy is still starved for credit. The fact that major banks as a group continue to sit on all these lousy loans at book value, rather than selling them off and writing them down, means that they don't have much room on their balance sheets and in their capital/asset ratios for new loans. So the credit crunch continues. And banks that we eventually may find out were really insolvent may walk around in a trance for months or even years, like a scene from Night of the Living Dead. We're not talking about restoring the loose lending of the 2005-2007 bubble; we're talking about the essential liquidity needed to keep the wheels from coming off, stimulate demand and stem the decline in housing prices.
But these potentially troubled categories of assets only add up to about $1.6 trillion; why is Geithner talking about a $2.5 trillion program? The FDIC's latest statistic a provides a clue. It reveals the dominant role that the country's top banks have also played in issuing derivatives, including not only interest rate and currency swaps, but also in more notorious debt-based over-the-counter derivatives. As of September 2008, JPMorganChase, Citigroup and Bank of America accounted for an incredible 90 percent of $7.9 trillion of these "off-balance sheet" credit derivatives that have been guaranteed by these banks themselves--including $2.6 trillion guaranteed by B of A and Citi. So when Secretary Geithner was talking about running "stress tests"--scenarios for future housing prices, default rates and interest rates--against the balance sheets of particular banks, he was not talking about First Federal of Tuscaloosa or Suffolk County National in Riverhead. They've probably never guaranteed a credit derivative in their lives, much less tucked anything away in some Cayman Island "special purpose vehicle." Clearly, Geithner had his friends on Wall Street in mind.
REALLY A POLITICAL PROBLEM
In short, we have a choice to make: we can spend perhaps $150 billion to $200 billion buying out the equity of a handful of leading banks that have gotten themselves in this mess and reform them. This would involve taking them over immediately, installing new managers, giving their creditors a haircut, writing down the toxic assets (which the government-owned bank could do without fear of market reactions) and then preparing them for privatization when the market recovers.
Or we can follow Secretary Geithner's lead, fiddle around for months, throwing trillions more of government capital, loan guarantees and portfolio insurance at the problem, without any guarantee that the resulting cockamamie approach to creating a "public-private" toxic bank will ever work--while the same old troubled institutions are left standing, no longer encumbered by their dodgy assets perhaps, but still encumbered by dodgy managements.
There are lots of technical issues to be weighed in making this choice. But after reviewing all the objections to the kind of short-term, temporary, partial nationalization, I'm convinced that the most important issues are simply political, a choice between our commitment to a failed, hands-off model of bailouts and banking regulation and decisive, FDR-like action.
It is precisely because it is so hard to value these dodgy assets at all that we are even having this discussion. Given the absence of competitive markets for the assets, the uncertain environment and their dependence on taxpayer subsidies and insurance, the prices established are intrinsically political. Either they will be set so low that banks will have to take such massive writedowns that their shareholder equity will disappear entirely anyway, or--more likely--the prices or insurance arrangements will be set so that even more taxpayer wealth is transferred to these very same top-tier banks.
Meanwhile, the whole economy is hostage to this decision. We have no time to waste. We should get on with it, making use of one of the clearest market signals available in this situation--the current value of Citibank and Bank of America shares.
This argument is not at all anti-market, or necessarily even anti-bank. At their best, private markets, entrepreneurship and innovation are absolutely essential. My real objection is to a very specific kind of bank-dominated political economy. To call this "capitalism" is to have Ayn Rand and Friedrich von Hayek turning somersaults in the crypt. Time and again, this pathological form of pro-bank development has jeopardized the prosperity, stability and innovation of the small businesses, inventors and would-be savers who are the backbone of market economies. Bank-dominated political economies don't really deserve to be called "capitalism," since big bankers have never really been entrepreneurs who are content to stick to the capitalist rules of the game. Instead, they periodically demand the divine right to take unlimited risks, privatize the resulting gains and stick the rest of us with any resulting losses.
It is time for accountability, we are told by our new president. If so, we should start by holding the world's largest banks, hedge funds, insurance companies, mortgage brokers and private equity firms, together with their many friends in accounting, law, public relations, credit rating, central banking and higher office accountable for this crisis--if in no other way than by refusing to award them this even more massive TARP II bailout, permitting them to rob us, once again, with both hands.
Monday, November 03, 2008
INVEST IN INNOVATION!!! Instead of Eating the Seed Corn... James S. Henry and Jim Manzi
We are called the nation of inventors. And we are. We could still claim that title and wear its loftiest honors if we had stopped with the first thing we ever invented, which was human liberty."
-- Mark Twain
(The following is a longer version of a piece that appeared this week in The Nation.)
In the midst of our deepening recession, the US faces another economic crisis that is less visible and dramatic than house foreclosures, bank failures, plant closings, or stock market avalanches, but even more important in the not-really-that-long run: systematic under-investment in technology and innovation.
Indeed, nothing less than our global economic leadership may be at stake because of this underinvestment.
On the other hand, with a little bit of funding, foresight, and determination, we believe that it may be possible to kick-start an innovation revival.
Especially at the federal level, for a modest investment, there’s an opportunity to create a whole new generation of idea-growing, job-creating technology hubs all across the country – perhaps even an “automotive Silicon Valley” in otherwise moribund Detroit.
This revival would not just be about investing more heavily in R&D. Especially in troubled times like these, we need to remind ourselves that innovation has always been a critical American tradition, a crucial part of our patrimony. It is as much a by-product of our political system and cultural norms as of our business and scientific practices.
This patrimony is now at risk, not only from our failure to invest, but also from the failure to reward and honor scientists, technicians, engineers, and inventors above lawyers, bankers, and hedge fund managers, and to recognize the central role that real innovation of all kinds has always played in our story.
For more than two centuries America has led the world in innovation. This has been true not only in science and technology, but also in business management practices, the design of new approaches to service delivery, and, indeed, sports, political institutions and civil rights as well. Over the long haul, this consistent track record of ingenuity and invention, complemented by heavy investments in education and science, has contributed mightily to America’s leadership role in the world economy, to our democratic culture and the prosperity of our people.
Indeed, most students of economic growth now agree that the contribution of technical innovation to US national wealth has been at least as important as that of so-called “natural” resources like abundant farm-land, labor, capital, and energy.
In the post-globalization economy, where access to such resources is being commoditized, innovation has become an even more important source of competitive advantage. In principle, this should be good news for the US. This is not only because of its past successes, but also because innovation-based competition is “win – win,” not “beggar thy neighbor.” Over time, every player in the competitive game stands to benefit from the discoveries made by others.
On the other hand, if the US stakes its future on resource-based competition -- or the kind of low-innovation, “big houses/big debts/big cars” model favored by Detroit, New York, and Houston until very recently -- the competitive game will become “win-lose.” And long-term competitive advantage then shifts to those countries with the largest supply of cheap resources, the lowest taxes, and the cheapest, most oppressed workers -- not a favorable formula for a healthy democracy.
To begin with, virtually every analysis of the “social returns” -- private profits and social benefits, including employment -- to R&D investments finds these returns to be very high. They average at least 30- 50 percent per year or more in real terms, compared with the meager 5-7 percent returns typically generated by the US stock market – or the minus 46 percent returns earned by stocks earned in the last year.
These high returns to R&D are explained by its peculiar nature. Once discovered, new ideas can be used over and over at low – or even zero – marginal cost. So R&D not only boosts productivity in the industries that do research; it also yields “spillover” benefits for other industries. And it speeds up future innovations. There is NOT a finite body of good ideas sitting out there waiting to be mined. Rather, from a knowledge standpoint, we live in an expanding universe, where each new discovery reveals whole new territories to be explored.
Consistent with this, those industries that are the most R&D intensive have also consistently achieved the highest growth rates and profitability, and have also made the largest contributions to skilled employment and high incomes. The notable exceptions -- financial services, lawyering, real estate development, accounting, plus cartelized industries like autos, cable television, and oil and gas -- are ones where clever chicanery, market power, and anti-competitive regulations have permitted vast fortunes to be achieved without much fundamental innovation at all –- until the recent collapse.
THE INNOVATION GAP
These high rewards for investments in R&D also suggest the presence of a substantial innovation spending gap. This is the gap between the current level of R&D spending and the optimal level, from the standpoint of generating growth, employment, and the many other social benefits of new ideas. Indeed, we are so far from the competitive margin that the US might be able to profitably invest several times the current $370 billion per year that US industry and the federal government now spend on R&D without driving “social returns” below the long-term (federal) cost of capital – just 1 percent these days after inflation.
Let’s put it this way: at these interest rates, and the high expected returns, it would cost the US Government just $400 million per year in interest to double its entire current budget for civilian R&D – which might then yield an incremental $12 billion in returns. It’s about time that we realized such high multiples for the country, and not just Wall Street executives.
Yet the recent trend in US R&D investment has been in precisely the opposite direction.
First, while US R&D spending as a share of national income has been relatively high for decades, compared to other Western countries, since the mid-1980s it has stagnated. Indeed, it now is well below the 1960s level, when the Kennedy/ Johnson Administrations’ visionary drive to reach the moon, combined with the arms race and the rise of mainframe computing, produced a sharp boost in US R&D spending.
Federal funding is one key to this gap. While it still accounts for about 28 percent of all US R&D spending, it has recently been especially sluggish. In real terms, the federal budget for basic and applied R&D has fallen for five years in a row, and will continue to slide next year under the budget just approved by Congress.
This recent trend is even more disturbing, once we take into account the fact that nearly 60 percent of the Federal Government’s current $100 billion of R&D funding is devoted to military and “national security” programs at the Pentagon, DOE, and the Department of Homeland Security.
The $42.6 billion left over for non-military research in FY 2009 has to fund everything from DOE’s basic research on alternative energy to the National Institute of Health’s vital medical research program for peer-reviewed science, to NASA’s entire space budget. As a share of national income, non-military budget for R&D now amounts to a paltry .3 per cent – the lowest share since the early 1950s, and just half the average in the late 1970s.
The $43 billion budgeted for all federal civilian R&D pales by comparison with the $700 billion that the US Treasury is injecting into US banks, in return for some combination of non-voting stock, very low dividends, and toxic assets. It also pales by comparison with the $29 billion bailout of Bear Stearns, the $135 billion bailout of AIG, the $200 billion bailout of Fannie Mae and Freddie Mac, let alone the $800 billion cost (to date) of the Iraq War.
But of course that must simply be because government R&D spending is a risky venture whose outcomes are highly uncertain!
DON’T LOOK BACK
The other disturbing point about R&D spending is that American leadership has been slipping. Relative to other countries, the US has long devoted a relatively high share of national income to R&D investment. Even now it still accounts for a disproportionate share of all global R&D -- at least 25 to 34 percent.
However, while US R&D spending has recently stagnated, many
other countries, including key new competitors like China and Malaysia
as well as more mature ones like Korea, Singapore, and the Nordic
block, have been sharply increasing R&D spending. So the gap
between these leading competitors and the US in overall R&D
spending is rapidly shrinking.
Since innovation is by definition a matter of human skill and creativity, not just finance, it also matters that these new competitors have also sharply increased the share of skilled researchers and technicians in their labor forces. The US’ slippage has also been aided by the “hegemon tax” -- the fact that none of these countries spend anywhere near the 50-60 percent share of R&D that the US devotes to military R&D.
Overall, many high-growth developing countries have already grasped a key point about economic national security that the US is still struggling to grasp. This is the fact that, as noted above, the global competitive marathon increasingly depends on productivity, innovation, and scientific skill, not just command over natural resources or vast pools of untutored “hewers of wood and drawers of water.”
Indeed, US companies that once moved offshore simply because of cheaper inputs, lower taxes, and weaker regulation are now finding that it pays to move their R&D centers offshore as well. This is partly because of the growing availability of engineering skills in places like India, China, and Singapore, but it is also because of the higher barriers to immigration that foreign skilled workers have faced in the wake of 9/11. This policy may or may not have had much impact on terrorism, but by forcing these workers to remain at home, it has certainly had a negative impact on our economic security.
TROUBLED WATERS – PRIVATE R&D
These disturbing trends in federal R&D spending have also been reinforced by recent trends in private sector spending. As we saw earlier, private investment now accounts for more than 70 percent of all US R&D. Unfortunately, because of the current financial crisis and the emerging recession, this funding is drying up even as we speak.
This is especially true for venture capital funds that have relied
heavily on so-called “limited partners” like pension funds and
university endowments. Such investors often manage their portfolios
with fixed allocations – reserving, say, 10 to 20 percent of
investments to “alternative investments,” especially the “D” side of
R&D-intensive ventures. Given the stock market’s steep decline,
this approach to portfolio management and the need to rebalance asset
allocations have virtually dictated a steep decline in private R&D
on how deep this recession is, and how much father stock markets fall, this allocation effect will easily trim private R&D spending by 10-20 percent or more – for a budget that is already, as we’ve seen, under-funded.
At the same time, in uncertain times like these, many private
corporations and investors become less patient. – they become much less
willing to invest in the kind of low-probability/ long-lead time
projects that are the essence of basic research. It is hard to
diversify away such project risks, so private capital markets tend to
demand more immediate, sure-fire payoffs just when “capitalism” is most
in need of real breakthroughs.
In the aggregate, this helps to explain why the primitive “Capitalism R 1.0” version of a market economy -- one that relies exclusively on private investment to fund innovation – is likely to grow much more erratically than one that allows government to play a complementary role, stabilizing support for basic research in good times and bad.
WHAT TO DO
So what should we do about the innovation gap?
¶ First of all, we need to make investing in innovation the national priority that it deserves to be – because future US competitiveness depends on it. In the 21st century, as global competition increases, we cannot simply “Wal-Mart” our way to prosperity.
At a minimum, this implies a significant boost in the current
level of R&D funding, especially in civilian funding, and perhaps increased tax credits and other incentives as well.
Of course, such measures would require increased federal spending, precisely at a time when the federal budget is already severely strained. As we’ve seen, however, the current level of spending is so modest that the US is just “one-half bank bailout” away from the kind of increase in R&D funding that is needed. The alternative of just continuing to stagnate should really be characterized as “eating the seed corn.”
¶ Second, like most enterprises, our country really needs a national technology strategy.
This is not a matter of “industrial policy” or “picking winners,” much less of displacing private funding with government venture capital.
Rather, it is matter of figuring out creative new ways to partner with private capital – including philanthropic donors and university endowments. The aim is to multiply the benefits, by focusing on what the government has always done best – replenishing the “seed-corn” with fundamental longer-term research.
This requires a fresh look at the appropriate role of government in innovation. From this angle, the recent financial crisis is not all bad. Given the disastrous example of excessive reliance on under-regulated markets that we’ve just seen, on the one hand, and the relatively successful long-term track record of government R&D on the other, this is an historic opportunity.
WALKING BACKWARDS FROM SUCCESS
It is especially instructive to walk
backwards from the successes realized by several US examples of
public-private collaboration in “technology hubs” like Silicon Valley,
Boston, and Austin Texas.
In all these cases, private venture capital and entrepreneurs were crucial. But the fact is that federal dollars also played a pivotal role. For decades the federal government generously subsidized basic research in fields like engineering, biology, physics, chemistry, and computer science at premier universities like MIT, Harvard, Stanford, Carnegie Mellon, and the University of Texas.
For example, in the case of Stanford, one of Silicon Valley’s
mainstays, the university has received enormous federal research
subsidies ever since the 1940s. Combined with the Valley’s
highly-competitive venture community, this provided the foundations for
a technology hub that has transformed the world, with innovations like
semiconductors, computer graphics, and wireless communications, and
companies like Intel, Apple, and Google.
In the case of Boston, the National Institute of Health has recently played a key role in helping the community become a technology hub for biotech and pharma research. Boston’s new leadership in this arena is based on enormous NIH funding, channeled to peer-reviewed researchers at regional teaching hospitals. Over time, the steady provision of federal tax dollars has supplied the grist for what has since become a self-sustaining innovation mill. Rather than “crowd out” private funding, federal funding has actually galvanized it, providing a base load of support that allowed a strong technical community – the key to any successful hub -- to take root.
The key issue is whether we can replicate new “Bostons” or “Silicon Valleys” in other geographies, targeted towards priority arenas for innovation like energy, health care, the environment, education, and transportation.
Each of these arenas offers a wide range of subfields. For example, in the energy arena, there’s already path-breaking work under way on clean energy, new electric distribution systems, and new forms of automotive and non-automotive transport. In health care, innovations that lower costs (e.g. EMRs) may be just as important as clinical innovations like new devices, treatments, and compounds.
The point is not to dictate precisely what gets worked on, but to marshal the human resources and infrastructure needed for innovation, build the partnerships with private institutions, and insist on excellence.
In this “incubation” approach, for example, we might ask, what conditions would be needed to yield a period of sustained innovation in the automobile sector? Why not reserve, say, just a few percent of the $25 billion that the federal government has already committed to that sector’s “bailout” for the creation of an “automotive Silicon Valley?” In such a hub, just as in Boston and Austin, a virtuous cycle of innovation and product development would be generated. Pockets of entrepreneurial companies would spawn each other, one after another, competing aggressively and helping to free people and capital from big, slow-moving companies. Universities, communities, and corporations would complement each other’s very different styles and skills.
¶ This renewed emphasis on innovation as a source of national competitive advantage also requires us to beef up our education system, in order to deliver tens of thousands of skilled technicians and engineers. As we’ve seen, there’s also a need for immigration reform that provides greater access to foreign-trained skills – an alternative to the current “scarce visa” system, which basically encourages our competitors to staff up their own technology-based industries. In this case, we’re not just eating the seed corn; we’re giving it away.
Finally, the other crucial requirement of an innovation revival is a national culture that reminds young people of their innovation heritage, and encourages them to become engineers, designers, and scientists, rather than just lawyers, accountants, and bankers -- whose preferred form of ingenuity, in Thornstein Veblen’s words, has always been “clever chicanery, or the thwarting thereof.” As we’ve argued, now more than ever, we need to curtail all this chicanery and return to the much better American tradition, innovation on the real side of the economy.
(c) SubmergingMarkets, 2008
Jim Manzi was Chairman of Lotus Development Corporation, and is now Chairman of Thermo Fisher Corporation, a $10 billion life sciences company based in Waltham Massachusetts.