Credit Default Swaps: The poison in the system

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May 26, 2009 - Mike Whitney's blog

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In a little more than a decade, Credit Default Swaps (CDS) have ballooned into a multi-billion dollar industry which has changed the fundamental character of the financial system. CDS, which were originally created to reduce potential losses from defaulting bonds, has turned into a cash cow for the big banks, generating mega-profits on, what amounts to, legalized gambling. CDS are the root-cause of systemic risk which connects hundreds of financial institutions together in a lethal daisy-chain that threatens to crash the entire system if one of the main players goes under.

CDS contracts are not cleared on a centralized exchange nor are they government regulated. That means that no one really knows whether issuers of CDS can pay off potential claims or not. It's a Ponzi-insurance racket of the first order. AIG is a good example of a company that gamed the system and then walked away with millions for its efforts. They sold more CDS than they could cover and then--when the debts started piling up around their eyeballs--they trundled off to the Fed for a multi-billion dollar bailout. Fed chief Bernanke later said that he was furious over the AIG's fiasco, but that didn't stop him from shoveling the losses onto the public ledger and making the taxpayer the guarantor for all of AIG's bad bets. Keep in mind, that AIG was selling paper that had zero capital backing, an activity is tantamount to counterfeiting. Still, no one has been indicted or prosecuted in the affair.

CDS have spider-webbed their way into every corner of the financial system lashing-together banks and other financial institutions in a way that if one defaults the others go down too. This is what's really meant by "too big to fail"; a euphemism which refers to the tangle of counterparty deals which has been allowed to spread--regardless of the risk--so that a handful of banksters can rake in obscene profits. CDS has become the bank cartel's golden goose; a no-risk revenue-generating locomotive that accelerates the transfer of public wealth to high-stakes speculators. If it wasn't for the turbo-charged profits from derivatives transactions, many of the banks would have already gone belly up.

From Dr. Ellen Brown:

"Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the "protection buyer" gets a large payoff if the company defaults within a certain period of time, while the "protection seller" collects periodic payments for assuming the risk of default...

In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined."
("Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour", Dr. Ellen Brown, globalresearch.ca)

The numbers boggle the mind, but they are real just the same, as are the losses, which will be eventually shifted onto the taxpayer. That much is certain.

Treasury Secretary Geithner has recently sounded the alarm for more regulation, but it's just another public relations stunt. Geithner is an industry rep whose sole qualification for the job as Treasury Secretary is his unwavering loyalty to the banking establishment. He has no intention of increasing oversight or tightening supervision. All the blather about change is just his way of mollifying the public while he tries to sabotage congressional efforts to re-regulate the derivatives market. In the next few weeks, Geithner will probably roll out a whole new product-line of reforms accompanied with the usual claptrap about free markets, innovation and "protecting the public's interest". It's all fakery; just more tedious sleight-of-hand carried out by agents of the banking industry working from inside the administration.

Swaps originated in the 1980s as a way for financial institutions to hedge against the risk of sudden price movements or interest rate fluctuations. But derivatives trading took an ugly turn after congress passed the Clinton-era Commodity Futures Modernization Act of 2000. The bill triggered a sea-change in the way that CDS were used. Industry sharpies figured out how to expand leverage via complex instruments balanced on smaller and smaller morsels of capital. It's all about maximizing profits with borrowed money. CDS provided the perfect vehicle; after all, with no regulators, it's impossible to know who's got enough money to pay off claims. Besides, gambling on the creditworthiness of bonds for which one has no "insurable interest" can be fun; like taking out an insurance policy on a rivals home and waiting for it to burn down. This is the perverted logic of Wall Street, where every disaster becomes an opportunity for enrichment.

There is a solution to this mess and it doesn't require a complete ban on CDS. There needs to be strict regulatory oversight of all issuers of CDS to make sure they are sufficiently capitalized, and there needs to be a central clearing-platform for all trades. That's it. Geithner is trying to torpedo the reform-effort by proposing bogus fixes that preserve the banks monopoly on the derivatives issuance. He's the banks main water-carrier. Now we can see why the financial industry is consistently the largest contributor of any group to political campaigns. They need friends in high places to continue their scams without interruption.

"Too big to fail" is a snappy PR slogan, but it's largely a myth. No financial institution is too big for the government to take into conservatorship; to put the bad assets up for auction, replace the management and restructure the debt. It's been done before and it can be done again. The real problem is separating healthy financial institutions from insolvent ones now that the whole system is stitched together in a complex net of counterparty deals. Credit default swaps form the bulk of those transactions, which makes them the main source of systemic risk. To fix the problem, current contracts must be either unwound or allowed to lapse, while new contracts must be traded on a central clearinghouse where regulators can decide whether sellers are adequately capitalized or not. The Fed's solution--underwriting the entire financial system to prevent another Lehman Bros.-- doesn't address the fundamental problem. It just puts more pressure on the dollar,
which is already beginning to buckle. The question is whether Congress will do the people's work and pass the laws that are needed to re-regulate the system or wait until there's another massive systemwide meltdown. There is a remedy, but it requires action, and fast. Without course-correction, the prospect of a derivatives Chernobyl gets bigger by the day.

The Silence of MoveOn

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Tom Hayden
May 27, 2009 - The Nation

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The most powerful grassroots organization of the peace movement, MoveOn, remains silent as the American wars in Iraq, Afghanistan and Pakistan simmer or escalate.

Then he met with Obama in February, Jason Ruben, executive director of MoveOn, told the president it was "the moment to go big," then indicated that MoveOn would not oppose the $94 billion war supplemental request, nor the 21,000 additional troops to Afghanistan, nor the increased civilian casualties from the mounting number of Predator attacks.
What was MoveOn's explanation for abandoning the peace movement in a meeting with a president the peace movement was key to electing? According to Ruben and MoveOn, it was the preference of its millions of members, as ascertained by house meetings and polls.

The evidence, however, is otherwise. Last December 17, 48.3 percent of MoveOn members listed "end the war in Iraq" as a 2009 goal, after healthcare (64.9 percent), economic recovery and job creation (62.1 percent) and building a green economy/stopping climate change (49.6 percent--only 1.5 percent above Iraq.) This was at a moment when most Americans believed the Iraq War was ending. Afghanistan and Pakistan were not listed among top goals which members could vote on.

Then on May 22 MoveOn surveyed its members once again, listing ten possible campaigns for the organization. "Keep up the pressure to the end the war in Iraq" was listed ninth among the options.

Again, Afghanistan and Pakistan were not on the MoveOn list of options.

Nor was Guantánamo nor the administration's torture policies. ("Investigate the Bush Administration" was the first option.)

MoveOn is supposed to be an Internet version of participatory democracy, but the organization's decision-making structure apparently assures that the membership is voiceless on the question of these long wars.

What if they included an option like "demanding a diplomatic settlement and opposing a quagmire in Afghanistan and Pakistan"? Or "shifting from a priority on military spending to civilian spending on food, medicine and schools?"

This is no small matter. MoveOn has collected a privately held list of 5 million names, most of them strong peace advocates. The organization's membership contributed an unprecedented $180 million for the federal election cycle in 2004-2006. Those resources, now squelched or sequestered, mean that the most vital organization in the American peace movement is missing in action.

What to do? There is no point raving and ranting against MoveOn. The only path is in organizing a dialogue with the membership, over the Internet, and having faith that their voices will turn the organization to oppose these escalating occupations. The same approach is necessary towards other vital organs of the peace movement including rank-and-file Democrat activists and the post-election Obama organization (Organizing for America) through a persistent, bottom-up campaign to renew the peace movement as a powerful force in civil society.

This is not a simple matter of an organizational oligarchy manipulating its membership, although the avoidance by MoveOn's leadership is a troubling sign. There is genuine confusion over Afghanistan and Pakistan among the rank and file. The economic crisis has averted attention away from the battlefront. Many who voted for Obama understandably will give him the benefit of the doubt, for now.

Silence sends a message. The de facto MoveOn support for the $94 billion war supplemental reverberates up the ladder of power. Feeling no pressure, Congressional leadership has abdicated its critical oversight function over the expanding wars, not even allowing members to vote for a December report on possible exit strategies. In the end, a gutsy sixty voted against HR 2346 on May 14, but many defected to vote for the war spending, including Neil Abercrombie, Jerry Nadler, David Obey, Xavier Becerra, Lois Capps, Maurice Hinchey, Jesse Jackson, Sheila Jackson-Lee, Patrick Kennedy, Charles Rangel, Lucille Roybal-Allard, Loretta Sanchez, Rosa De Lauro, Bennie Thompson, Jerry McNerney, Robert Wexler and Henry Waxman. (Bill Delahunt, Linda Sanchez and Pete Stark were not recorded.)

If there were significant pressures from networks like MoveOn in their Congressional districts, the opposition vote might have approached 85.

Appropriations chair David Obey in essence granted Obama a one-year pass to show results in Afghanistan. If the war appears to be a quagmire by then, he claimed, the Democrats will become more critical. Speaker Nancy Pelosi delivered the same message; according to the Washington Examiner, May 6: "There won't be any more war supplementals, so my message to my members is, this is it." Pelosi's words were carefully parsed, saying that the White House would not be allowed another supplemental form of appropriation, which is different from an actual pledge to oppose war funding.

This one-year pass means that the grassroots peace movement has a few months to light a fire and reawaken pressure from below on the Congress and president. In the meantime, here are some predictions for the coming year:

• Iraq: Will Obama keep his pledge to withdraw combat forces from Iraq on a sixteen-month timetable, and all forces by 2011? At this point, the pace is slowing, and the deadline being somewhat extended, under pressure from US commanders on the ground. Sunnis are threatening to resume their insurgency if the al-Maliki regime fails to incorporate them into the political and security structures. The president insists however, that he is only making adjustments to a timetable that is on track. Prognosis: Precarious.

• Afghanistan: Will the Obama troop escalation deepen the quagmire or become a successful surge against the Taliban by next year? Another 21,000 troops and advisers are on their way to the battlefield. Civilian casualties are mounting, causing the besieged Karzai government to complain. Preventive detention of Afghans will only expand. US deaths, now over 600, are sure to increase this summer. Taliban may hold out and redeploy in order to stretch US forces thin. Prognosis: Escalation into quagmire.

• Pakistan: US policies have driven Al Qaeda from Afghanistan into Pakistan's tribal areas, where the United States is attacking with Predators and turning Pakistan's US-funded armed forces towards counterinsurgency. Public opinion is being inflamed against the US intervention. Prognosis: An expanding American war in Pakistan with greater threats to American security.

• Iran: With or without US complicity, Israel may attack Iran early next year, with unforeseeable consequences in Iraq and Afghanistan. Prognosis: Crisis will intensify.

• Global: The United States will fail to attract more combat troops to fight in Afghanistan and Pakistan from Europe or elsewhere, causing pressure to increase for a non-military negotiated solution. Prognosis: Obama still popular, US still isolated.

• Budget priorities: Iraq, Afghanistan and Pakistan will deeply threaten the administration's ability to succeed on the domestic front with stimulus spending, healthcare, education and alternative energy. Prognosis: false hope for "guns and butter" all over again.

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Tom Hayden is a former state senator and leader of Sixties peace, justice and environmental movements. He currently teaches at PitzerCollege in Los Angeles. His books include The Port Huron Statement [new edition], Street Wars and The Zapatista Reader.

Israel wipes Palestine off the map

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Jeff Koyen
May, 26, 2009 - True/Slant

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For once, we can properly employ the word "literally." As in: Israel literally wiped Palestine off the map last week. Many UK outlets reported this story, but let's cite The Muslim News, for they are certainly the most unbiased:

Posters showing misleading Israeli maps are being removed from London underground stations following a series of protests made to be Britain's Advertising Standards Authority (ASA).

The Palestine Solidarity Campaign (PSC), which led the complaints with Jews for Justice for Palestinians, welcomed the decision as a "victory" in the face of attempts by the Israeli Tourism Ministry to "deliberately deny the existence of Palestine."

"These adverts wiped Palestine off the map. It was particularly grotesque to use this map in an advert for tourism, given that under the Israeli blockade of Gaza, even humanitarian aid staff are denied entry," PSC said.
In a series of letters, British authorities were warned they would be "complicit" in displaying misinformation that "deliberately wiped Palestine off the map."

The Syrian Embassy in London also threatened to take "necessary legal steps" for the removal of the incorrect maps on the posters, which also excluded the occupied Golan Heights.

The posters, which started to appear last week, were due to go up at 150 sites across London in a campaign costing £40,000, but according to the Jewish Chroncile, they were prematurely withdrawn by the Israeli Tourism Ministry before the ASA made a ruling.

Despite reports and headlines to the contrary, the Israeli Tourism Board actually refused to remove the posters. While they admitted to having made a mistake, the ministry's head of marketing administration told the BBC, "We are not tearing anything down." However, they did agree to "fast-forward" the next batch of posters.

In the meantime, stay out of the tube. You know how bomby things can get when Palestinians and Israelis bicker over borders.

Sarah Palin's Outrageous Hypocrisy on Teen Sex

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Palin knew her daughter was having sex in her own house. What does it take to get discredited as a right-wing "family values" merchant these days?

Matt Taibbi
May 27, 2009 - AlterNet

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So step right up and buy your "I'm SEXY enough… to make you wait!" t-shirts, courtesy of the Candie's Foundation — the pro-abstinence group whose ambassador is now America's most famous "Oh, fuck it, it feels better without the rubber" Supermom, Bristol Palin!

So on a flight to London over the weekend I caught the Bristol Palin magazine cover and was blown away. What does it take to get discredited as a moralizing right-wing "family values" merchant these days?

It was one thing when we found out that super-religious governor Palin was letting Bristol's hunkface beef accessory Levi nail her daughter more or less regularly under the family roof. It was another when we found out that the governor's sister-in-law got popped for a B&E while her little daughter was waiting outside in the car. And it was still another thing when we found out that Levi's Mom was going to eat a bust for dealing Oxycontin (and there's apparently a lot behind the governor's interest in that story).

For the most part, none of this stuff is any of our business — we all have family members with issues, although mine tend to leave their kids at home when they go out to commit burglaries to support their drug habits.

But this abstinence thing with Bristol, to me, is just too much. This sort of thing always grosses me out: this country has way too many people who do stuff like this, dragging their helpless minor kids with them on national media tours or publishing lengthy parenting memoirs in which their unwitting babies play starring roles as props in Mom's narcissistic fantasies.

But this goes even beyond that. This poor little kid is going to grow up someday and find out she's been brand-marketed to the human species by Madison Avenue as The Great Mistake.

Bristol's quote about how girls need to close their eyes and imagine spending the rest of their lives with a screaming baby before they have sex — her daughter is someday going to cough that line up, through sobs, in her fourth or fifth year of very expensive therapy. If this little kid isn't hooked on black baggy clothes and cutting by age 11 I'll be shocked.

But beyond that, Bristol's casual statement about deciding not to get married after all, about how it would have been a disaster, I just don't get how this works, politically. How can a Republican presidential candidate (and let's not fool ourselves, Sarah Palin is already that) publicly endorse unwed teen mothering? Am I missing something?

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Matt Taibbi is a writer for Rolling Stone.