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HANK PAULSON'S OCTOBER REVOLUTIONWhy This Republican X-Banker Has Decided to (Partially) Socialize Our Entire Banking SystemJames S. Henry "

 "We have made changes, Sire. Yes, it is true, we have made changes. But we have made them at the right time. And the right time is, when there is no other choice."

-- Conservative adviser to King Edward VII, explaining his support for liberal reforms

We may have just reached a critical turning point in American political economy -- not only in our efforts to overcome the burgeoning global banking crisis, but also to overcome the pernicious influence of free-market fundamentalism, which has dominated US economic policy for the last 30 years.

Ironically enough, the person who deserves more credit than anyone else for helping us to reach these goals is our current Treasury Secretary, a lifelong die-hard Republican and former Wall Street king-pin.

Last night, a few hours after the US stock market closed,  the Bush Administration, embodied in Henry M. Paulson,Jr.,  announced that in order to stem the continuing turmoil in capital markets,  in conjunction with other G-7 countries, the US federal government will begin "as soon as we can" to use taxpayer money to buy preferred equity in private financial institutions, especially banks.

Depending on how it is implemented, this could very well amount to a partial nationalization of the entire US banking system by the US Government. Are you paying attention here, Hugo, Fidel, and Evo? 

This marks a very sharp U turn in recent US policy. Indeed, just two weeks ago, in their September 23rd testimony before Congress, Paulson and Federal Reserve Chair Ben Bernanke dismissed such equity investments as a "losing strategy," compared to their preferred scheme, a government-run "reverse auction" to buy up to $700 billion of "toxic" bank assets.

HAIL MARY

This policy U-turn was not due to sudden new insights generated by careful academic analysis or some precise economic model. 

It feels more like a Hail-Mary pass,  coming at the end of  one of the most disastrous weekly stock market performances in US and global history.

That, in turn, was preceded by ten exhausting days of political goat-rodeo and Congressional negotiations over the infamous "$700 billion bailout," on top of the preceding six exhausting months of  more or less ad hoc, increasingly expensive but largely unsuccessful one-off  interventions in money markets and the banking system by the US Treasury, the Federal Reserve, and a myriad other US bank regulators. 

Meanwhile, there has been an even more quirky set of poorly-coordinated improvisational remedies administered by diverse regulators in the UK, Germany, France, Iceland, and Belgium. 

At the end of all this,  fear, uncertainty, and doubt (FUD) have continued to spread across global capital markets, as policymakers stumble into each other, national banking systems compete for deposits, the US Treasury becomes (ironically) a huge depository for safe-haven flight capital, and no one manages to get ahead of the crisis.

If the FUD continued to spread, and global credit remained on lock-down,  the forthcoming global recession -- already likely to plunge real growth in Europe and the US  to zero or less next year, China to 6 - 8 percent or less, and the rest of the developing world to 4-6 percent -- would become dire indeed. 

So one answer to the riddle of Paulson's "sudden conversion" is that he simply had no alternative. Given that ad hoc bailouts, coordinated interest rate cuts, increased deposit insurance, the extension of government insurance and liquidity to money market funds, the commercial paper market, on top of the takeovers of AIG and Fannie/ Freddie, had not done the job, nationaliziation -- really internationalization, since global banks are involved, and other countries will presumably be asked to contribute -- is one of the few arrows left in his quiver.

A GREAT TRADITION

This will hardly be the first US experience with quasi-nationalization. On September 16, the Federal Reserve had effectively "nationalized" the giant insurance company AIG, acquiring 80 percent of its equity in exchange for an $85 billion loan.

Way back in the 1930s and 1940s,  the US Reconstruction Finance Corporation seized and recapitalized many banks. The FDIC has also done this many times since then.

European governments have even longer histories of direct intervention in banking markets.  And several of them moved almost too quickly in the last year to nationalize particular banks -- for example, the UK's Northern Rock in February 2008 and Fortis in September 2008.

Of course, most of these recent cases have involved failing institutions, where the government was a "lender of last resort." As discussed below, Paulson's plan is rather different.

Even farther back, in the early 19th century, states like Virginia and Pennsylvania often invested directly in state-chartered banks to set them up and keep them going. Those were not especially happy experiences with government ownership.

But this is hardly a great time for champions of private capital markets to be quibbling about the efficiency costs of government intervention -- private markets in the US alone have just lost $7 trillion of market cap in the last year, including $3 trillion in the last 3 weeks. And the global "opportunity cost" of the crisis is probably at least twice this high.     

A GLOBAL RECOVERY FUND?

 If done right,   Paulson's PIP  (Public Investment Program) will be much broader,  more proactive and more innovative than previous bank nationalizations.

For example, one idea would be to establish a "Global Recovery Fund," permitting fresh private capital, "sovereign wealth funds" like those in Norway and the UAE, and European, Latin and Asian countries that have a clear stake in restoring the world's financial sector to health to invest alongside the US Treasury.

Even, Heaven help us, the IMF and the World Bank's IFC might participate in such a fund.  They have run out of developing country crises to solve, are looking for a new role, and have $billions in untapped credit lines. 

Such an approach would help to share the heavy burden placed on US taxpayers, and make this program more politically palatable than the TARP bailout proved to be.

A global fund would also help to diversify investment risks across many more countries and banks. 

Indeed, the USG and its new partners might even become lenders of far-from-last resort, clearing the way for threatened but essentially-healthy institutions  to survive the financial contagion, raise much more private capital as well, and, most important, turn each and every  new $1 of equity into $10 to $15 of new lending.

If the fund is successful in reviving the world's financial system, and restoring banks to financial health, taxpayers and investors will no doubt all be paid back handsomely. But the most important benefits may be the "hidden" ones -- the catastrophic losses that would be avoided by preventing further chaos and market decline.

This is very different from Paulson's original TARP buy-back scheme, which promised to boost bank equity informally by way of overpaying for toxic assets with highly-uncertain values. 

Ironically, that approach just rewards those companies with the very worst  portfolios and lending practices,  while enabling much less increased lending.

Indeed, TARP's only comparative advantage seems to have been that by avoiding direct government investment in the private sector, it did not violate any red lines of so-called free-market conservatives.

In hindsight, however, given TARP's birth pains, plus the fact that the market value of all US publicly-traded stocks fell from $12.9 trillion on September 19 to $9.2 trillion in the three weeks after Paulson Plan I was announced.

So respecting this neoliberal ideological taboo may well have just cost US investors -- most of whom are taxpayers -- at least $1 to $2 trillion of  market value that might have been saved with an immediate recapitalization plan.

With that much extra dough,  we could almost afford to wage another Iraq-scale war somewhere. 

BUSH SPEAKS: "HOW DID WE EVER GET IN THIS MESS? WHERE HAVE I BEEN?"James S. Henry

Last night on national television, Comrade Bush presented his own miniature 14-minute "Cliff Notes" version of the roots of the current US financial crisis, and a heart-rending appeal for the most generous act to date of his Administration, the $700 billion blank-check Wall Street bailout. 

By now the man has established a bit of a pattern --  customarily trying to scare us all into granting him unlimited powers,  while arguing that there is simply no alternative to whatever bitter pill he happens to be pushing at the moment. 

You are of course free to believe him if you like. Hundreds do.

IMPROVEMENTS

In fact, as we argued yesterday, there are all sorts of improvements to be made to the proposed Whale of a Bailout package.   

These include things like, at a minimum, (1) equity investment and warrants for taxpayers, to provide some upside returns in proportion to the risks we are taking on any purchases of bank assets; (2) stronger oversight; (3) more assistance for the millions of Americans who are experiencing home foreclosures; (4) compensation ceilings, clawbacks, and stiff progressive tax rates on incomes over $1 million and estates over $10 million, to offset the cost of all this; (5) a Financial Products Safety Commission; (6) a new Treasury-backed competitive insurance market for mortgage securities,  available to banks and homeowners; (7) expanded FDIC reserve fund rather than buy "toxic" bank securities up now, set up an  -- since all the "I-banks" are commercial banks now, anyway; (8) a new installment of the 1932 Pecora Commission, complete with subpoena power, to investigate the origins of the crisis and hold people accountable.

(For more details, here is the testimony that Dr. Brent Blackwelder, Friends of the Earth, and I submitted to Rep. Frank's House Financial Services Committee yesterday: BAILOUT.pdf)

ALTERNATIVES

Even more important, the President's central claim that there is no alternative to this bitter pill is a triple whopper with cheese.    

As the IMF -- not our favorite institution, but it does know a thing or two about recapitalizing broken banking sectors --  has suggested just this week, long-term "swaps" of mortgage-backed securities for government bonds could be used to clean up the banks' balance sheets while completely sparing  taxpayers the risks of a huge loss on the $billions of toxic assets we'll soon be owning. 

There are also numerous other approaches  to broken-banking sector restructuring  that have been employed by governments all over the planet in more than 124 banking sector crises since 1970 -- for example, in Chile, Korea, Germany, Mexico, and  Japan.

Doesn't anyone else find it odd that none of this expertise is being put to use?

Or that, with losses on complex derivative and structured securities at the core of this debacle, and thousands of "quants" from MIT and Wharton on Wall Street, we cannot design some simple security vehicles to help taxpayers reduce their personal or collective exposure to its potential costs? 

Perhaps Bush & Co. are not familiar with the IMF or the World Bank/ IFC's "Capital Markets Group." Perhaps Secretary Paulson never bothered to understand the first thing about derivatives and options during his 32 years at Goldman Sachs.   

For their information, the World Bank/ IMF/ IFC  are located at 700 19th St. NW, Washington D.C., three blocks from the White House.

Their staffs are not especially busy at the moment -- indeed,  15 percent of the IMF's professionals are being laid off, so they may have some time to help out.

We've been assured by the Bush Administration, however, that the IMF's assistance is not really needed at this point.

"What are we," Bush asks,  "Some sort of two-bit corrupt, debt-ridden plutocracy  that can't manage its own affairs?"

STAMPEDE

Indeed, the President,  Secretary Paulson, and a weird new assortment of  bottom-feeding Wall Street investors  (Omaha's Warren Buffet, Tokyo's Nomura Holdings and Mitsubishi UJF), and, of course, those who are still left on Wall Street itself are in a white heat to get this deal done, and are trying to create a stampede. 

They are also clearly not interested in improving the bailout. They just want our money -- and a loosey-goosey, behind-closed-doors process for distributing it that hasn't even been designed yet.

Unlike US taxpayers, Buffet, who is reportedly investing $5 billion in Goldman Sachs, was saavy enough to get preferred shares and warrants for his money -- worth up to 8 percent of the premier bank's share.

At that rate, just think how much Wall Street real estate our  $700 billion would buy -- if only Paulson and Bernanke and the US Congress would follow in Buffet's footsteps and insist on some equity and warrants in exchange for a bailout. 

SOCIALISM FOR BANKERS, SAVAGE CAPITALISM FOR EVERYONE ELSE? Bailout Jeopardizes Entire Progressive AgendaJames S. Henry

"“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” --  Warren Buffet, June 2008

Ladies and gentlemen: pardon my intemperance,  but it is high time for some moral outrage --  and a little good old-fashioned class warfare as well, at least in the sense of a return to seriously-progressive taxation. 

After all, as this week's record-setting Wall Street bailout with taxpayer money demonstrates once again,  those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us -- the middle classes, workers and the poor -- whenever it suits their interests.

At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington DC,  the CEOs and speculators who created this mess, and the top 10 percent of the wealth distribution that owns 85 percent of financial stocks, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with the bill -- in a bum's rush toward a cockamamie solution.

This time they have gone too far. 

As discussed below, the cost of this bailout could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens across both major parties have been demanding.

Some kind of bailout may indeed be necessary from the standpoint of managing so-called "systemic" risk to the financial system.

But it should come at a price -- a hefty part of which should be paid by the tiny elite that was most responsible for creating this mess in the first place.

THE "GET REAL" NEW DEAL

To make sure that real economic reform is still feasible, we need to demand a "Get Real/ New Deal" from Congress right now. 

At a minimum, this Get Real/New Deal package should include measures like:  (1) the restoration of stiff progressive income and estate taxes on the top 1 percent of the population (with net incomes over $500,000 a year and estates over $5 million) -- especially on excessive CEO and hedge fund manager compensation; (2) much more aggressive enforcement and tougher penalties against big-ticket corporate and individual tax dodgers; (3) tougher regulation of financial institutions  -- possibly by a new agency that, unlike the US Federal Reserve, the SEC, and the US Treasury, is not "captive" to the industry; (4)  a crackdown on the offshore havens that have been used by leading banks, corporations,  and hedge funds to circumvent our securities and tax laws; and (5) the immediate revision of the punitive bankruptcy law that Congress enacted in 2005 at the behest of this now-bankrupt elite.

We also need (6) a National Commission to investigate the root causes of this financial crisis from top to bottom, and actually (unlike the hapless, ineffectual 9/11 Commission) hold people accountable.

Over time, this progressive Real/ New Deal would help raise the hundreds of billions of new tax revenue that will be needed to offset the costs of this bailout.

It is essential if the Federal Government is to be able to afford key reforms like health insurance, clean energy, and investments in education.

These may not matter very much to Wall Street executives, financial analysts, Treasury and Federal Reserve executives, or the more than 120-130 Members of Congress and 40-45 US Senators who earn more than $1 million a year -- and are already covered by a generous "national health care" package of their own design. But these  are the key "systemic risks" that ordinary Americans face. 

These reforms may sound ambitious. So is the bailout.  And the reforms that we are discussing are only fair.

After all, we the American people have been  the very model of forgiveness and understanding lately. 

We have tolerated and footed the bill for stolen elections,  highly-preventable terrorist attacks, gross mismanagement of "natural" disasters, prolonged, poorly conceived, costly wars, rampant high-level corruption, pervasive violations of the US Constitution,  and the systematic looting of the Treasury by politically-connected defense contractors, oil companies, oligopolistic cable TV and telecommunications firms, hedge fund operators, big-ticket tax evaders,  and our top classes in general. 

Does "class" still matter in America?  You betcha -- perhaps more than ever. But enough is enough.  Call your Congressperson now.  Demand a"Get Real/ New Deal" qualifier to the bailout package before it is too late.

(c) SubmergingMarkets, 2008

"ATTACK OF THE GLOBAL PIRATE BANKERS!"The Great White Sharks at UBS and LGTJames S. Henry

(Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)

"For what is the crime of burgling a bank, compared with the crime of building one?"
-- Brecht

The Hearing

Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.

Thursday's standing-room-only hearing on tax haven banks and tax compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber

The theatrics included videotaped testimony by Heinrich Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.

There were also several other potential witnesses whose importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.

His lawyer, the renowned Washington fixer Robert S. Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)

Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.

LGT Group declined to follow UBS's contrite example and also failed to appear.

Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.")

While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.

While they were on the subject of offshore abuses, the Senate might also have wanted to depose former top McCain fundraiser James Courter, who also resigned last week, after it was disclosed that his telecom firm, IDT, had been fined $1.3 million by the FCC for using a haven company in the Turks and Caicos to pay bribes to former Haitian President Jean-Bertrand Aristide.

The Cases

This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.

UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.

This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.

To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.

Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.

In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.

Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.

With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.

As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.

The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.

LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.

As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.

In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.

THE EDUCATION OF DR. PHIL GRAMMUBS Role Raises Basic Questions About McCain's Key Economic AdviserJames S. Henry

John McCain has long since admitted that he has a great deal to learn when it comes to economics.  But it turns out that his own chief economic advisor,  former US Senator Dr. Phil Gramm, has also needed rather expensive retraining lately. Unfortunately this has been acquired mainly at the expense of millions of US home buyers, honest taxpayers, former Enron employees, and would-be enforcers of our (bank-driven,  loophole-ridden) anti-money laundering laws.

GRAMM CRACKERS

Gramm, a somewhat goofy-looking, deceptively slow-talking business economist from Georgia, spent 12 years teaching economics at Texas A&M before getting elected to Congress as a conservative Democrat in 1978. By 1982 he'd switched sides, joining the Reagan Revolution to become of the Republican Party's most outspoken champions of deregulation, tax cuts, and spending controls -- so long as this didn't affect his pet interest groups.

In the next two decades,  Dr. Gramm was perhaps the Senate's leading proponent of  financial services deregulation, weakened restrictions commodity trading, credit cards, consumer banking, and predatory lending practices.  As chairman of the Senate Banking Committee from 1996 to 2000, he was a key author of legislation that eliminated most of the legal barriers between US banks, brokerages, investment banks, and insurance companies that had been in place since the 1930s. He was also a determined opponent of tougher IRS tax enforcement and a principal author of a 2000 law that exempted companies like Enron from regulation for online energy trading activities. This made sound economic sense. Phil's wife Wendy was a member of Enron's board, and Enron was Phil's largest corporate contributor in the 1990s.

In 2000-2002, both before and after 9/11, Phil also became the key opponent of tougher anti-money laundering regulations, and -- not coincidentally-- one of the largest recipients of contributions from the powerful financial services lobby. Among independent journalists, all this helped to make him known by a variety of sobriquets, including "Foreclosure Phil," "Slick Philly," and "The Personal Messenger from the Bank of Antigua."

U-BS-er

This track record stood Dr. Gramm in good stead when it came time to seek new employment in 2003, after the Republicans lost control of the Senate.  Naturally enough,  he gravitated toward his friends in the global private banking industry, whose noble calling it is to gather the assets of the world's wealthiest people and protect and conceal them from taxes, regulation, and expropriation, not to mention  embittered family members, ex-lovers and business partners,  and each other.   

Since 2002, Dr. Gramm has served as Vice Chairman of UBS Investment Bank, which is owned by UBS AG, the largest Swiss bank, the world's 16th largest commercial bank,  and the world's largest private asset manager, with more than 80,000 employees and offices in 50 countries.

Even after joining McCain's campaign during the summer of 2007, Dr. Gramm continued to serve as a registered Washington lobbyist for UBS  until April 2008, lobbying Congress to maintain weak restrictions on sub-prime lending and predatory lending.

BAD TIMING

In hindsight, Dr. Gramm's recent crusade for even more financial freedom turned out to be  ill-timed,  for several reasons.

First, this was hardly the moment for even more financial deregulation than the US had already experienced in the 1990s. After 2002, on Dr. Gramm's watch, UBS became one of the most world's aggressive banks, helping to foment and finance the sub-prime lending crisis that has already cost nearly three million Americans their homes, generated more than $250 billion in bank losses, and driven a $7.7 trillion hole in global equity markets.

Since November 2007 UBS alone has written off $37 billions in mortgage-related assets, the largest write-off for any bank.  In March 2008, Peter Wuffli,  UBS AG's CEO, was forced to resign, and its stock price plummeted to the lowest level since 2002.

Second, it now turns out that Dr.Gramm's  colleagues at the bank have also been up to their eyeballs in another dubious business:  helping more than 20,000 wealthy American tax cheats hide their wealth offshore and commit outright tax fraud, cheating the IRS out of tens of $billions in tax revenue.

Bolivia's Growing Regional ConflictJames S. Henry and Donald K. Ranvaud

The new year is already off to a turbulent start in Bolivia. During the week of January 7 to 15, up to six thousands supporters of President Evo Morales' MAS party-- mainly cocaleros from the Chapare coca-growing region,  campesinos, and indigenous groups --  showed up in Cochabamba,  Bolivia's third largest city of 800,000,  in the country's center. 

They had come to demand the resignation of Cochabamba's   right-wing Governor, Manfred Villa-Reyes, who has become an outspoken supporter of the "autonomista" movement, which is seeking greater "states rights" for the country's nine provinces -- especially the wealthier, "whiter" eastern and southern provinces of Beni, Pando, Santa Cruz, and Tarija, where most of Bolivia's natural gas and richest farms are located.

As shown in this exclusive video footage from Cochabamba (See Parts I and Part II). shot by Bolivian film crews working under the direction of  our colleague, award-winning Hollywood producer Donald K.Ranvaud (The Constant Gardener, City of God, Central Station, etc.), the MAS supporters encountered a fierce reaction from the city's middle-class residents and pro-autonomista forces, including a crowd of more than well-organized thousand stick-waiving people who reportedly attacked the cocaleros and campesinos aggressively on January 13th. In the ensuing conflict, at least two people were killed and more than 150 were injured.

By Saturday January 14th, calm had returned to the city. Governor Manfred returned from Santa Cruz, where he had apparently fled out of concerns for his own safety, and  Evo Morales also returned from Nicaragua, where he had been attending Daniel Ortega's inauguration. Steps have been taken on all sides to pacify the situation.

However, as we'll discuss below, the potential for renewed conflict is very high. This is not only because none of the fundamental economic and political causes of the conflict have been addressed. It is also because on all sides,  Bolivia's political leaders have not exactly shown the capacity for compromise and the maturity that will be essential to avoid a "lose lose" outcome for Bolivians of all backgrounds and social classes.   

HOW DID GENERAL PINOCHET GET SO RICH?James S. Henry

Most assessments of General Pinochet, pro and con, acknowledge his responsibility for thousands of grevious human rights violations. But there is growing evidence that his criminality did not stop there -- as it rarely does when governments are vested with unfettered authority, whether in the name of “national security,” religious truth, or just raw personal power.

As noted in our lead article on the General’s legacy, only in the last three years have historians come appreciate just how far-reaching and systematic was  his regime's involvement in criminal activity -- partly just because its political opponents had been systematically eliminated, so that there were few limits on Pinochet's power. 

As we’ll see, Pinochet was no exception to the “absolute power corrupts” cliché.

Indeed, there is strong evidence that leading members of his regime were deeply involved in a wide range of crimes for profit, including diversions of public funds, tax evasion, money laundering, bribery, illegal arms exports, falsification of identity documents, drug trafficking, money laundering, and murder-for-profit.

There is also strong evidence that “mi General” and his family profited handsomely from such crimes.

From this angle, Pinochet’s death in early December probably saved him and his family from convictions,  stiff penalties and fines in the six criminal prosecutions and more than 300 civil suits still pending against him – for charges ranging from the misuse of public funds and tax evasion to torture and murder. 

But at least there was a modicum of justice. The General’s extensive crimes apparently contributed to Chile's decision to deny him  an official state funeral.  And -- the ultimate insult -- the Chilean Army also returned his ashes, refusing to bury them at the huge Lenin-like tomb that he’d built for himself at the Escuela Militar.

SOURCING THE MONEY

This evidence provides the key to the puzzle posed by all the recent revelations (especially since the US Senate Permanent Investigations Committee's July 2004 report on Riggs Bank) regarding the large personal fortune that Pinochet and his family accumulated during his 17-year reign – now estimated at at least $31 million in US and Swiss bank accounts and total family wealth of at least $100 million -- plus as much as $211 million more if the October 2006 allegations about 9.62 tons of Pinochet gold at HSBC hold up in the on-going investigation.

BEST BUDDIES

The evidence about Pinochet’s arms deals also helps us to understand another one of his many interesting attributes – why the Baroness Margaret Thatcher, in particular, was so “deeply saddened” by his death.

It turns out that Pinochet was no stranger to arms deals involving British companies like British Aerospace, Rolls Royce, and Royal Ordnance  -- companies that Mark Thatcher, the Baroness' only son, had also worked for as a highly-paid  "intermediario" on huge, lucrative arms deals (for example,  the $40 billion 1985 "Al Yamamah" aircraft deal, which involved hundreds of millions in payoffs. ) Indeed, when Pinochet was detained in London in October 1998, the reason he'd gone there in the first place was not his "health," but to facilitate another arms deal.
 
SCHIZOPHRENIA

Curiously, while even the General’s most ardent admirers acknowledge his many human rights violations, they have been much more reluctant to admit there were other criminal activities.

This is partly because Pinochet carefully cultivated the image of being -- in contrast to all other modern dictators, especially those from Latin America -- an austere Prussian type who eschewed personal wealth and served his country out of sheer dedication to Deus, patria, y honor. We recall all the appeals for help with his medical and legal bills when the General was interned in London in the late 1990s –  appeals that some of his more middle-class followers responded to by dipping into precious life savings and selling off the family jewels.

This schizophrenia about Pinochet’s crimes also derives from the sharp distinction that many of his followers draw between selfless and venal crimes.  In their view -- and, at least initially, that of Chile’s Catholic Church -- even his worst crimes against humanity may have been justified in the name of la causa superior – saving Chile from “godless communism.” 

On the other hand, crimes that smack of personal enrichment, the exploitation of arbitrary power, or insider influence are supposedly taboo.

In practice, of course, these boundaries tend to blur, especially with a regime that held absolute power for nearly two decades – and retained many “protectors” long after that.   

CUBA'S HEALTH CARE REVOLUTION, LATIN AMERICA'S HIDDEN HOLOCAUSTSomething for Fidel to Be Proud OfJames S. Henry

While US media conglomerates like Time and Fox have been obsessing for months about whether or not 80-year old Fidel Castro is finally about to meet El Fabricante,  Cuba has been busy setting health records -- helping its 11.4 million citizens achieve lower mortality and longer lives than almost anywhere else in the developing world.

Now that a leading Madrid surgeon has made it clear -- contrary to USG agitprop -- that Fidel is not suffering from terminal cancer, and, indeed, is recovering well from last summer's stomach operation,   perhaps this other Cuban health story will finally receive the attention that it deserves. 

Just this month Cuba announced that its infant mortality rate has reached the First World average of just 5.3 per thousand -- on a par with the latest rates for the UK, Canada and New Zealand, even lower than the 6.7 US average,  and less than half the 14.1 average rate for all African-Americans in the US.

LATIN AMERICA'S HIDDEN HOLOCAUST

Even more to the point, Cuba's infant mortality rate is also the lowest in Latin America and the Caribbean, and indeed, the lowest for any developing country in the world.

The corollary is another important story. This is the fact that while Fidel's tiny, isolated, centrally-planned, highly-inefficient, antediluvian island economy has managed to set record after record on public health, education, poverty reduction, and gender equality since the 1970s,  the "non-revolutionary" rest of Latin America has lagged far behind. Over time, the cumulative impact has been huge.

For example, as we'll see below, if other Latin American and Caribbean countries had simply kept pace with Cuba's percentage improvements in infant mortality from the 1960s to 2005, an additional 6.4 million infants -- an average of 184,000 per year for the region as a whole -- would have survived the first year of childbirth.

In effect, all these "missing children" amount to nothing less than a continuing hidden holocaust -- attributable at least in part to the pro-elite development paths that most of these countries have pursued.

Many of those critics on the Right who like to rail against the deficiencies of Castro's regime -- its admitted lack of US-style national elections and market freedoms, its shortage of big fancy cars and other consumer goods -- also profess to be profoundly concerned about human rights,  the welfare of Elian Gonzalez, "the rights of the unborn," and so forth.

Perhaps they will now bring themselves to admit that at least in one respect, Fidel's Revolution is actually a role model -- and that naked capitalist development also has very high costs. 

This goes a long way to explain why, far from being the pariah that USG has tried to make him, Fidel is today treated with greater respect and admiration throughout Latin America than ever before -- certainly in comparison with former US-backed right-wing thugs like Pinochet, Rios Montt, Banzer, Fujimori, and the Argentine and Brazilian juntas.

Consistent with this, on October 28, 2006, the UN General Assembly voted for the 13th year in a row to condemn the US embargo on Cuba. Every Latin American and Caribbean country voted to support the resolution, joining 179 countries that did so. Only four countries voted against it -- the US, Israel, the Marshall Islands, and Palau.

In any case, whatever the quality of life in Cuba for adults today, the fact is that if you are an unborn infant of average means who somehow gets to decide where in the entire developing world to be born, there's no contest.

(For all the gory statistical details, read on below):