Thursday, January 31, 2008

American Progress Action Fund

Earlier this week, President Bush signed the National Defense Authorization Act of 2008, which included a statute forbidding the Bush administration from spending taxpayer money "to establish any military installation or base for the purpose of providing for the permanent stationing of United States Armed Forces in Iraq." But Bush quietly attached a signing statement to the law, asserting a unilateral right to disregard the ban on permanent bases in addition to three other measures in the bill. "Provisions of the act...could inhibit the president's ability to carry out his constitutional protect national security," the signing statement read. Reacting to the statement, Center for American Progress Senior Fellow Mark Agrast said, "On the merits, for the president to assert that Congress lacks the authority to say there shouldn't be permanent bases on foreign soil is fanciful at best." Bush's "frequent use of signing statements to advance aggressive theories of executive power has been a hallmark of his presidency," writes the Boston Globe's Charlie Savage, who has authored a book on that topic. In 2006, the American Bar Association condemned signing statements as "contrary to the rule of law and our constitutional separation of powers." Bush's latest signing statement was immediately met with anger on Capitol Hill. "I reject the notion in his signing statement that he can pick and choose which provisions of this law to execute," said House Speaker Nancy Pelosi (D-CA). Sen. Carl Levin (D-MI) added, "Congress has a right to expect that the Administration will faithfully implement all of the provisions" of the law -- "not just the ones the President happens to agree with."

THE POWER TO STAY IN IRAQ FOREVER: Last November, Bush announced that he and Iraqi Prime Minister Nouri al-Maliki had signed a "Declaration of Principles for a Long-Term Relationship of Cooperation and Friendship" that set the parameters for negotiating an "enduring" U.S. occupation of Iraq. The negotiations have drawn fire in part because the administration said it does not intend to designate the declaration as a "treaty," and so will not submit it to Congress for approval. Bush's attempt to waive the ban on permanent bases is seen as one more step in the direction of establishing a long-term U.S. presence in Iraq. "If Bush is allowed to negotiate a treaty with Iraq that binds the United States under international law, the next president will be handcuffed," said John Isaacs, Executive Director of the Council for a Livable World. The Guardian notes that permanent bases "are broadly unpopular with Iraqis, who have voiced fears of an ongoing U.S. occupation." Rep. Lynn Woolsey (D-CA), who has led the push to prevent permanent bases, explained that Bush's statement is "sending a dangerous signal to the people of Iraq that the U.S. has a long-term interest in occupying their country, a move that will only enflame the insurgency." Speaking on the Senate floor yesterday, Sen. Robert Casey (D-PA) said that while administration officials frequently state that they do not intend to permanently occupy Iraq, "this signing statement issued by the President is the clearest signal yet that the Administration wants to hold this option in reserve."

THE POWER TO PROTECT CONTRACTORS: Among the other provisions in the Defense Authorization Act that Bush asserted an unfounded right to ignore were two accountability measures aimed at private security firms accused of wartime abuses. One of these provisions would establish an independent, bipartisan Commission on Wartime Contracting. The Pentagon's inspector general, whose office conducts internal investigations, endorsed the commission's proposal, telling lawmakers in a November meeting, "We're leaning forward in the saddle, we're committed to this." Sen. Jon Tester (D-MT) said, "The idea that the president would stand in the way of a non-partisan, independent committee to look into waste and fraud by companies like Blackwater and Halliburton in Iraq is inexcusable and it's irresponsible, and it ought to ruffle a lot of feathers across the country." The other provision Bush waived would extend whistleblower protections to employees of defense contractors. "The president doesn't have the authority to cancel these rights," said Tom Devine, legal director at the non-profit Government Accountability Project, "unless he sends in troops to stop a jury from hearing whistleblower cases."

THE POWER TO COVER UP: The fourth and last provision of the law that Bush sought to ignore was a requirement of the administration to turn over "any existing intelligence assessment, report, estimate or legal opinion" requested by the leaders of the House and Senate Armed Services committees within 45 days. The New York Times writes, "Clearly, this violates the power that Mr. Bush has given himself to cover up an array of illegal and improper actions, like his decisions to spy on Americans without a warrant, to torture prisoners in violation of the Geneva Conventions and to fire United States attorneys apparently for political reasons."
HUMAN RIGHTS -- MUKASEY CONTINUES TO HEDGE ON WHETHER WATERBOARDING IS TORTURE: Attorney General Michael Mukasey has again hedged on whether waterboarding fits the definition of torture. In a letter to Senate Judiciary Committee Chairman Pat Leahy (D-VT), Mukasey stopped short of offering a clear legal opinion on the harsh interrogation method because he alleged that "the CIA no longer uses the practice on prisoners." Mukasey wrote that a straight answer would not be appropriate because whether waterboarding is torture is "not an easy question." "There are some circumstances where current law would appear clearly to prohibit the use of waterboarding," said Mukasey. "Other circumstances would present a far closer question," he added, although he failed to define those circumstances. Mukasey's letter comes just days after former Director of National Intelligence John Negroponte offered the first clear acknowledgment by a government official that the United States had used waterboarding in terrorism interrogations. In a statement, Leahy offered a stern rebuke for Mukasey's continued dodging. Stating that Mukasey's letter "does not answer the critical questions we have been asking about [waterboarding's] legality," Leahy said that the Attorney General should expect "to be asked serious questions" at a Judiciary Committee hearing today.

ADMINISTRATION -- METHODIST MINISTERS TRY 'LAST DITCH EFFORT' TO BLOCK BUSH LIBRARY: In Nov. 2006, the New York Daily News reported that President Bush and "his truest believers" were launching "an eye-popping half-billion-dollar drive" to secure Southern Methodist University (SMU) as the home for the Bush presidential library and policy think tank. The idea was met with protests from SMU students, faculty, and staff, who wrote that they would "regret to see SMU enshrine attitudes and actions widely deemed as ethically outrageous." Now Methodist ministers "are mounting a last-ditch effort to block" the project. They argue that "church rules require that an agreement be submitted to the 290 elected delegates of the church's South Central Jurisdiction"; one minister predicted that about 35 percent of the delegates would oppose the library. A Methodist petition opposing the library boasts after only two weeks the signatures of 14 bishops, more than 600 United Methodist clergy, and more than 9,000 members of Methodist churches in the United States and Canada. The ministers object to Bush's "pre-emptive, first- strike war," his policies that "reward the rich, while punishing the poor," and "the torture of prisoners."

IRAQ -- TROOP REDUCTIONS MAY HALT AS U.S. OUTPOSTS IN BAGHDAD EXPAND: Last September, President Bush announced that the United States would withdraw five brigades from Iraq by mid-2008. While the first brigade began its departure last November, on Jan. 17, Defense Secretary Robert Gates said that "all available evidence" suggests that plans to withdraw the other four brigades remained on track, leaving 15 brigades in Iraq by July. Now "the Bush administration is sending strong signals that U.S. troop reductions in Iraq will slow or stop altogether this summer, a move that would jeopardize hopes of relieving strain on the Army and Marine Corps." While Gen. David Petraeus has said he is "concerned" about a "rush" to 10 brigades by the end of the year, "the Army in particular wants additional reductions to enable it to shorten Iraq tours from 15 months to 12 months. The longer tours are among pressures that Army leaders fear could break the force." At the same time, Maj. Gen. Jeffery W. Hammond, commander of U.S. forces in Baghdad, recently announced "plans to boost the number of neighborhood outposts across the [Iraqi] capital by more than 30 percent this year."

Memorandum of Justification for Waiver of Section 1083 of the National Defense Authorization Act for Fiscal Year 2008 with Respect to Iraq

Section 1083 of the National Defense Authorization Act for Fiscal Year 2008 (the “Act”) amends the Foreign Sovereign Immunities Act, which establishes a framework for lawsuits against foreign countries and their agencies and instrumentalities under U.S. law. Immediately upon enactment, Section 1083 would put at risk substantial Iraqi assets in the United States that are crucial to Iraq’s recovery efforts –- including the Development Fund for Iraq, the assets of the Central Bank of Iraq held by the Federal Reserve Bank of New York, and assets of Iraqi agencies or instrumentalities used in commercial transactions in the United States. Section 1083 would also expose Iraq to potential new liability by undoing judgments favorable to Iraq, by foreclosing available defenses on which Iraq has relied, and by creating a new Federal cause of action backed by punitive damages. Any and all provisions of section 1083 may adversely affect Iraq or its agencies or instrumentalities, by exposing Iraq or its agencies or instrumentalities to liability in United States courts and by entangling their assets in litigation. Such burdens would undermine the national security and foreign policy interests of the United States, including by weakening the ability of the democratically-elected government of Iraq to use Iraqi funds to promote political and economic progress and further develop its security forces.

Section 1083(d)(1)-(3) of the Act ..........continued

Tuesday, January 29, 2008

The Trillion Dollar Secret

By John Riley
Chief Strategist

For the past year or so, the investment world has been wrapped up in their version of a steroid scandal - the sub-prime mortgage mess. Banks are taking write-offs in the tens of billions and estimates are that write-offs will reach as high as $100 billion before long. CEO’s are losing their jobs and having to settle for multi-million dollar pensions. (Don’t you feel bad for them?)

Who to blame for this mess will be the subject of a myriad of Congressional hearings in the future. After spending millions investigating the whole sub-prime disaster, they will come to this simple conclusion: lenders got too aggressive and borrowers got in over their heads. In other words, risky loans ended up being risky. What a surprise!

But there is a secret right in front of everybody that the Fed, Wall Street and the banking industry wants to make sure investors don’t notice. It is the incredible growth in derivatives. If you think the sub-prime problem is big, you ain’t seen nothing yet.

According to the Comptroller of the Currency, total Derivatives in the top 25 banks in the US amount to about 180 Trillion dollars. Not billion, trillion. 1000 times a billion.

Source: Comptroller of the Currency, 3rd Quarter 2007 Format: CIS

To put this in perspective, the US GDP for the 3rd quarter of 2007 was about 11 Trillion dollars. So they are playing a game with a pool of fictional money that is 16 times bigger than our economy.

Let that sink in.

Now that you are interested, here’s some background info so you can get a grasp on what is going on.

What are Derivatives?
Derivatives are private contracts (bets) between financial institutions. They can be on the direction of commodities, the stock markets or currencies, but the banks’ favorites are interest rates. (You can go to the Comptroller of the Currency website to get their quarterly reports and see for yourself what Wall Street hopes you never see.)

(For those of you that are derivative experts, I am not going to go into an in-depth discussion of derivatives and all of their various types and uses. Nor am I going to get into the specific mechanisms of how they trade, how they are leveraged up to astronomical amounts and what notional means. This report is for investors, not derivative experts. It will be equivalent to explaining how a car works by saying your car goes when you hit the gas and stops when you hit the brakes. The details of how the gas pedal is attached to the linkage that controls the carburetor or how the brakes slow the car are left out and we completely ignored the transmission. If you want to learn the specifics of derivatives, the Comptroller of the Currency’s website is a good place to start.)

The scariest part of derivatives is their leverage. Like exchange traded options, derivative contracts can control assets for only a fraction of the contract value. The banks take the leverage to an extreme and have very little in assets backing up their derivative portfolios. According to the Comptroller, the top 25 banks have assets that only amount to about 6% of the Notional Value of their derivatives. JP Morgan, the biggest player in derivatives, has assets backing up its portfolio of only 1.60%.

What happens if the value of the portfolio were to change by 2%, what happens to the banks' assets? And with all of the recent scandals in Real Estate and other "creative strategies" the banks have been employing recently, how do we even know if their asset numbers are correct? Is it possible that the $1.40 Trillion in assets JP Morgan claims is somewhat less, thanks to writeoffs and bad real estate?

Derivatives have barely any regulation on them. For years, Congress tried and Greenspan stood in the way. Banks barely mention them in the annual reports except for a footnote.

Thanks to the lack of regulation, derivatives have grown dramatically. There has been a 473% increase in the Notional Value of derivatives at the top 25 banks since 1999.

And why not? They can produce billions in almost free revenues to the banks. Free revenues? Yes.

Source: Comptroller of the Currency, 3rd Quarter 2007 Format: CIS
JP Morgan is the biggest player in derivatives in the US.
They have only 1.60% of the derivatives backed by the bank's assets.

Why do Banks use Derivatives?
Here’s how they work. According to some sophisticated formulas and theories, if you make opposite bets with 2 different trading partners, you can capture the difference in the middle and get virtually risk free profits. If your 2 bets cancel each other out, then whatever is left over in the middle is profit, with zero risk.

Let’s say I bet with bank A that interest rates are going to go up. And I bet with bank B that they are going to go down. Both cancel each other out. But thanks to various strike prices and durations, we can get a small amount of difference in what I sell one contract for and what I buy the first one for. That difference is the whole game. The pennies I make in the middle are free. So I can keep them and make lots of money if I do it big enough.

According to the Comptroller, about 85% of all banks derivatives are this type. Which leaves 15% not. 15%, is not a lot, right. Not until you figure 15% of the 179 Trillion is $26.85 Trillion, still more than double the US economy! And more than double the amount of all the banks’ assets put together.

Here’s where the fun begins. Remember the example above? Well that is not really what they do. Some derivatives do not offset each other directly because the computer models tell them they may have some over correlations in other areas.

Let’s say that the bank wants to hedge the Yen against the Dollar. With one bank, they may sell the Dollar versus the Yen and with the other, buy the Dollar versus the… Euro. Euro? Maybe their computer Model has told them that buying the Euro might give them a small advantage, hedging the yen bet actually better than the yen itself.

Well you and I both know that this is foolish. The only thing that could possibly hedge the Yen bet would be the Yen. But their computer models are very sophisticated, working with all sorts of data input and constructing all sorts of scenarios to determine the least risky way to go.

Source: Comptroller of the Currency, 3rd Quarter 2007 Format: CIS
Since the end of 1999, the assets backing derivatives at the major banks has dropped from a shockingly low 11% to just about 6%. And the question you have to ask yourself - How much of those assets are real? How much of those assets are inflated real estate in New England or California? How much less is actually backing these derivatives?

What Could Go Wrong?
This is just what Long Term Capital (LTC) did back in the late 90’s. Remember them? They were the hedge fund that utilized the Black Scholes options model to run its derivative hedge fund to the point of bankruptcy. The fellas that ran LTC were only Nobel Prize winners (in economics) and the Black Scholes model was heralded as “the answer”. It is still used today.

What they failed to do was to have all of the bases covered. A funny thing happened - a sovereign nation wasn’t supposed to default on it debt. But Russia didn’t know the rules and so when they defaulted in the late 90’s, LTC went in the dumper.

These rules are going to become more important later on.

The Fed to the Rescue
So along came Alan Greenspan on his white horse to the rescue. He assembled a group of Wall Street bankers in a room and blessed the billions of dollars they each anteed up to help bail out LTC. It was about $100 billion total.

As Alan Greenspan told Congress months later in explaining why the Fed bailed out a private hedge fund, he told Congress that if he hadn’t, the entire financial structure of the US would have been in jeopardy. And this was just one little hedge fund with only about $100 billion. Imagine what damage JPMorgan could do with 92 trillion of derivatives.

So that brings us back to the rules and what is going on today.

Choice Between Two Bad Options
Without going into details, the US Dollar is toast. (Too much debt, out of control trade deficit, too much currency creation…) The housing market isn’t getting any better any time soon and the consumer is keeping his hands in his pockets. Along with that, overseas consumption is driving up inflation over here.

So with the sharp declines in the market and the obviously slowing economy, the Feds are looking to give us a present, a stimulus package. (read more about it in Irish Coffee)

The stimulus package is inflationary. It will kick the Dollar even further down. It will lower rates and everybody knows that is good for the economy and will save the day. (Not really, read article mentioned above)

But the Fed has to make a decision, lower rates and save the banks, but ignite inflation and kill the Dollar, or let the banks cave in under the weight of some bad derivatives but stave off inflation for a bit and protect the Dollar.

I think the Fed has determined that a bank failure would cause more damage to the economy than the collapse of the Dollar and higher inflation. I think they look at the decline of the Dollar so far and tell themselves, it hasn’t killed us yet.

Monetary World View
We’ve discussed this before (Money, Money) and its importance comes clear now. There are a number of economic theories that economists espouse. One that most of Wall Street and the Fed shares is their Monetary World View. Regardless of what you call it, it is the belief that interest rates control all things economic. Raise rates and the economy slows. Lower rates and the economy revives.

Without getting into the pro’s and cons, this is the basis for much of what they believe. And because of this, banks are comfortable putting trillions of dollars into interest rate strategies and derivatives that rely on this theory.

It is vitally important that the Fed continues to play the game as laid out by the Monetary World View. If they were to deviate, say raising rates to protect the Dollar at a time when the economy was slowing, it could be disastrous, since the banks would have been betting trillions on lower rates to rev up the economy. This then could put certain banks in jeopardy of failure as some have a little as 3% of their assets backing up the mountain of derivatives.

And forget about surprise moves. The Fed signals well in advance any expected turn in policy. A sudden shift could cause a bank to be left out on the wrong side of a $100 billion derivative. Big oops.

When thinking about the next Fed move, consider the implications of a 180 trillion dollar mistake. And even if you eliminate the derivatives that are netted out, that still leaves a pool more than double the size of the US economy.

Who is the Fed working for? Who is the Fed most concerned about? Who is the Fed likely to consider before making any moves. Given the choice between a Dollar crash or a major bank failure and closure, which do you think the Fed fears most? If you think the Fed doesn’t take the bank’s derivatives holdings into consideration, you have not been paying attention. It seems everything the Fed has been proposing since the summer is designed to throw the Dollar under the bus and let inflation run. All to protect the banks.

The sub-prime disaster is a drop in the bucket compared to the massive derivative monster in the banks. Don’t think the Fed doesn’t know this.

Investment Implications
Investors need to have exposure to investments that can benefit from higher inflation. These would include gold and commodities. TIPs could also benefit from higher inflation.

They also should hedge their Dollar positions with strategies to benefit from a declining Dollar.

Lastly, a big problem at a major bank could happen at anytime, but I highly doubt it will. Still, having a hedge position on the US markets is advisable. I think it will take a long time to unwind any problems at the banks and the unwinding could put a long term strain on the US stock markets. Longer term hedges like bear market funds should be a better long term choice to profit from the market decline.

Fortunately for our clients, none of this is a surprise to us at Cornerstone. Our portfolios are already structured to benefit from the wonderful scenario described above.


Questions? Comments? Observations? Or for more information Click here

House Of Cards: The Mortgage Mess

Jan. 27, 2008
(CBS) It was another nervous week for the world's financial markets and for Wall Street. In the last six months, Americans have seen their investments shrink, their property values plummet, and the country edge closer towards a recession. At the heart of the problem is something called the subprime mortgage crisis, which began last summer and continues to ricochet through the economy.

It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.

And as correspondent Steve Kroft reports, it started in places like Stockton, Calif.

Stockton is a city of 280,000 people in the Central Valley; 80 miles east of San Francisco and 80 miles north of San Jose. In many ways, this is ground zero for the current financial crisis and a microcosm of everything that went wrong.

A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.

Real estate agent Kevin Moran represents 102 properties and says all of them are in foreclosure.

Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses.

"If you see a 'for sale' sign in this neighborhood, that probably is a sign of distress, right?" Kroft asks.

"I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains.

The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O’Toole's Web site,, which tracks distressed properties in Stockton and other California communities.

"The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender."

As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over.

"Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole.

"We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts.

Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000.

Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy.

"What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets.

"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.

"When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains.

Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.

But Jerry Abbott, who runs the Coldwell Banker office in Stockton, says it didn’t concern the borrowers, many of whom were getting mortgages for more than their houses were actually worth.

"They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."

"So, they were getting paid to buy a house?" Kroft asks.

"They were getting paid to buy a house. Yes. Yeah," Abbott says.

And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans.

"Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says.

Abbott says borrowers got the money, without a down payment.

Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I,'" Grant says.

"And he got a cut, too?" Kroft asks.

"Yes, oh, yes. Everyone gets a cut," Grant says.

Almost all of the people involved in the transactions made huge amounts of money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.

Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.

"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.

It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.

All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.

It’s not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200.

"Did you understand any of this?" Kroft asks.

"No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork.

"But you knew this was a big decision, right? You were borrowing hundreds of thousands of dollars," Kroft remarks.

"I didn't really look at it like that," Fontenot says.

"How did you look at it?" Kroft asks.

"I looked at it as far as my family. I can get my family off of this block," he replies.

"And that we could pay the payments that she said that we could pay," Fontenot's wife Kim adds. "But after it was all said and done, and the paperwork was drawn up, it was something different."

But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn't do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them.

"The house keeps going down, payments keep going up. Where's the logic in that? And how can we fix it? I mean, that's what this whole thing's about for us is how can we fix this? And if we can't fix it, then what do we do?" Matt Valdez asks.

"Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense," Stephanie Valdez adds.

"That's what you agreed to do when you bought the house," Kroft points out.

"Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way," Stephanie Valdez replies.

"You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?" Kroft asks.

"You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?" she says.

There is a certain cold logic to just walking away.

Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.

"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.

"Just a business decision," Kroft says.

"A business decision that has to be made," Moran agrees.

"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.

Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table."

"What do you mean?" Kroft asks.

"Lenders and borrowers," Grant says. "Everyone was gaming the system."

That is not to suggest that there aren’t huge losers in all this and much suffering and particularly hard-working people who have lost their dream. Home values are plummeting, and the housing sector - one of the largest and most vital parts of the American economy - has ground to a standstill, pushing the country towards recession.

The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them.

"That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says.

The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them.

"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says.

"How much on the dollar, do ya think?" Kroft asks.

"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.

Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."

Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety."

It’s that anxiety that spooked the world’s stock markets last week, that and the knowledge that things are likely to get worse, at least for a while.

"Still houses going into foreclosure?" Kroft asks Kevin Moran.

"Yeah. I don't think we're 40 percent into this. I think we've got a long way to go," he predicts.

There’s already a two-year supply of properties on the market in Stockton and so many foreclosures that real estate agent Cesar Diaz decided to start the "Repo Bus" to take bargain hunters and bottom feeders on a weekly tour to see some of them. He got the idea from the Hollywood tour of the stars' homes.

The day Kroft went along, there were two busloads checking out houses that are now 70 percent cheaper than they were when the crisis began. The consensus seemed to be prices are going to drop still further. Not particularly encouraging news for the past two chairmen of the Federal Reserve Board.

"Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."

"It's still spreading?" Kroft asks.

"Yeah," Grant says.

In the past few months, Wall Street's top investment banks have written off more than $120 billion in losses related mortgage backed securities, and some are now under new management.

Two of the fired CEO's responsible for the biggest losses rode off into the sunset with some free money of their own. Charles Prince of Citigroup collected $29 million on his way out the door; Stan O'Neal of Merrill Lynch left with $161 million.

Produced By L. Franklin Devine and Jennifer MacDonald
© MMVIII, CBS Interactive Inc. All Rights Reserved.

Sunday, January 27, 2008

Why does the US need more than 725 overseas bases?

Sent: Saturday, January 26, 2008 7:55 PM

> Source:
> Why All the Foreign Bases?
> March 17, 2006
> by Sam Baker
> On May 14, 2005 the Associated Press reported Bulgaria's announcement
> it
> would provide three new military bases to the US. General James
Jones, the
> top
> commander of US and NATO troops in Europe, said that he would propose
> the US
> Congress "four or five Bulgarian military facilities for use by US
> forces." More
> recently, the US announced plans for new bases in Romania.
> Why does the US need new military bases in Bulgaria and Romania?
> to
> Chalmers Johnson, in his book "The Sorrows of Empire," America
> possesses
> more than 725 overseas bases. This incredible estimate comes from two
> official
> sources: The Department of Defense's "Base Structure Report," and
> "Worldwide
> Manpower Distribution by Geographical Area." Johnson claims that the
> figure is
> actually an underestimate, because many bases are "secret" or
> not
> listed on official books. As an example, Johnson quotes several
> who cite
> at least six US installations in Israel which are either operating or
> under
> construction.
> During the Cold War, it was argued that the US needed forward basing
> strategic areas of the world to counter the Soviet position, and
> Soviet
> expansion. But the US continues to aggressively pursue more bases in
> far-flung
> areas of the globe, despite the fact that the Cold War has been over
> more
> than a decade. American officials have explained that the new bases
> Bulgaria
> and Romania are part of a broader US strategy of shifting troops
based in
> Western Europe further east. In other words, now that the Soviet
Union has
> collapsed, America is aggressively expanding into its former sphere
> influence
> by recruiting former Soviet satellites into NATO, and garrisoning
> with
> bases and troops. In fact, since 9/11 alone the US has acquired at
> 14 new
> bases in Eastern Europe, Afghanistan, Kyrgyzstan, the Persian Gulf,
> Pakistan, and was evicted from a recently procured base in
> This
> figure does not include the newly-announced Bulgarian and Romanian
> Are we to believe that the US needs more military bases worldwide –
> less –
> now that the Cold War is over?
> Apparently so. Thomas Donnelly, an archetype neoconservative
> recently published a pamphlet entitled "The Military We Need,"
> at
> Among other things, he argues for the
> of
> "new networks of overseas bases," and a "semipermanent ring of
> forts'
> along the American security perimeter from West Africa to East Asia."
> Counterpunch, Winslow T. Wheeler quoted Donnelly at a speech before
> neoconservative American Enterprise Institute as saying the US
> includes the area defined in the Monroe Doctrine. In Donnelly's mind,
> US has
> apparently already annexed the Caribbean and Central America.
> Since the end of the Cold War, the US has acquired a plethora of new
> throughout the Persian Gulf. Some observers believe that these bases
> obtained to "secure" a strategic commodity – oil. While oil
security was
> certainly a main concern of the first Gulf War, US bases in the
> East are
> actually generating the very insecurity – in the forms of terrorism
> insurgency – that they supposedly exist to combat. Certainly, there
> no
> terrorist or insurgent attacks on Iraqi oil facilities before that
> was
> invaded, occupied, and garrisoned with US bases and troops.
> Bin
> Laden cited US military occupation of Saudi Arabia as a key reason
> Al-Qaida
> attacks against US interests. Another problem with the "oil security"
> thesis is
> that America only had two permanent bases (both naval) operating in
> entire
> region during the Cold War, when the Middle East faced the threat of
> invasion by
> the Soviet Union – one in Bahrain, and the other on the Indian
Ocean i
> sland of Diego Garcia, 3340 miles from Baghdad.
> The invasion and occupation of Iraq is, of course, another
> offered
> for the buildup of US bases in the region. The question then becomes
> the war
> was necessary in the first place. One answer is that the US seeks
> dominance over
> the few "rogue states" in the area who refuse to follow dictates from
> Washington. Before the second Gulf War began, Atlanta
> columnist Jay Bookman wrote "Why does the administration seem
> about
> an exit strategy from Iraq once Saddam is toppled? Because we won't
> leaving.
> Having conquered Iraq, the United States will create permanent
> bases in
> that country from which to dominate the Middle East, including
> Iran." The bases Bookman portended have already been built, and Iran
> faces a
> likely referral to the UN Security Council.
> The invasion of Iraq wasn't the first occasion for US imperialism in
> region.
> In 1963, the CIA backed a Ba'athist coup in Iraq which resulted in
> assassination of then Prime Minister Abdel-Karim Kassem and many
others on
> a
> CIA-supplied hit list. These actions paved the way for Ba'ath
> Saddam
> Hussein to assume direct dictatorship of the country by 1979. By the
> 1980's, the US had restored full diplomatic relations with Iraq, and
> providing assistance to Saddam Hussein in his war with Iran. This
> assistance
> included, but was not limited to, intelligence information, monetary
> loans,
> weapons and munitions grants and sales (including helicopters which
> used to
> launch gas attacks on Kurds), and weapons-grade Anthrax bacterial
> cultures.
> Current and former Secretary of Defense Donald Rumsfeld flew to
Baghdad to
> meet
> with Saddam Hussein personally on at least two occasions during this
> period.
> In 1953, the CIA under Eisenhower backed a successful coup in Iran
> overthrew the constitutionally and democratically elected Mohammad
> Mossadeq –
> who had nationalized British oil interests – and installed an
> puppet,
> shah Mohammed Reza Pahlavi, or the "Shah of Iran." Upon taking power,
> Shah
> awarded American and British oil companies a 40% stake each in a new
> consortium with the rights to pump Iranian oil. To protect their
> and
> repress all dissent, the CIA assisted the shah in the creation of the
> brutal
> SAVAK – a secret police force with unlimited censorship,
> arrest,
> and detention powers. Under the shah's reign, SAVAK operated secret
> prisons,
> institutionalized torture, and murdered thousands of political
> Iran
> remained a US-sponsored totalitarian terror-state ruled by an
> puppet
> until the overthrow of the shah in 1979 and the ushering in of an
> fundamentalist regime under the Ayatollah Khomeini.
> But US interests in the region are not limited to oil dominance or
> political
> control. It is no secret that a cabal of prominent neoconservatives
> operating at
> very high levels within the George W. Bush regime, but also within
> Pentagon,
> various quasi-governmental boards, think tanks, special interest
> and
> political magazines, long lobbied for the US to invade Iraq and
remake the
> entire Middle East over to suit Israel. These neoconservatives share
> passionate attachment to the Jewish state, and some have close
> to
> the Likud party and Israeli leaders such as Ariel Sharon and Benjamin
> Netanyahu.
> The neoconservative agenda for Iraq was made abundantly clear in
> letters
> to the president and congressional leaders, as well as books,
> position
> papers, reports, and other publications written years before 9/11.
> instance,
> in July 1996, neoconservatives Richard Perle, Douglas Feith, David
> Wurmser, and
> others wrote a position paper for Benjamin Netanyahu
> entitled "A Clean Break: A New Strategy for Securing the Realm."
> other
> things, the paper advocated regime change in Iraq, Syria, Lebanon,
> Iran. And
> in a September 2000 report entitled "Rebuilding America's Defenses:
> Strategy,
> Forces, and Resources for a New Century," the neoconservative Project
> the
> New American Century wrote that they were waiting for a "catastrophic
> catalyzing event – like a new Pearl Harbor" to provide an excuse to
> execute
> their agenda. The two disasters which afforded them their opportunity
> the
> election of George W. Bush and the terrorist attacks on 9/11.
> But the involvement of neoconservatives in the decision to invade
Iraq is
> already well-known and well-documented, and a comprehensive analysis
> far
> beyond the scope of this article. The point is simply to illustrate
> whatever the motives for the second Gulf War and virulent spread of
> bases in
> the region – domination of oil, subjugation and control of "rogue
> furthering Israeli interests, or "spreading democracy" for that
matter –
> these
> are imperial motives for imperial actions.
> In addition to building new bases, the US also continues to maintain
> bases
> and security guarantees throughout the world. Bases in South Korea,
half a
> world
> away, were built during the Cold War ostensibly to defend that nation
> against
> attack by North Korea. This was part of a broader effort to "contain
> communism"
> and stop the fulfillment of the "domino theory." But the bases and
> remain
> despite the fact that the Cold War is over and communism is a dying
> ideology. In
> fact, the US has recently taken a more aggressive posture towards
> Korea,
> indicting it as a member of an "axis of evil."
> Interestingly, while the US is building new bases overseas, it is
> bases
> domestically. No overseas bases are slated for closure by the 2005
> Realignment and Closure Commission. Because private defense
> like
> Halliburton source foreign labor when performing overseas base
> the US
> is now, in effect, outsourcing defense-related jobs.
> There is no great mystery regarding the US garrisoning of east and
> Asia,
> Japan, Eastern and Western Europe, Cuba, the Persian Gulf, and many
> areas
> of the globe with hundreds of military bases. The truth of the matter
> that
> America, "the world's only remaining superpower," is actually the
> only
> remaining global empire. And as all empires do, it will continue to
> until
> it is deterred by a rival power, or until it bankrupts the "homeland"
> imperial overstretch and wars. Indeed, the very term "homeland"
> implies
> that there must be an associated "away land" component. This "away
> is the
> US empire abroad.
> Is America really an empire? Empires have taken many forms throughout
> history.
> Empires based on one extreme – the Roman model for instance –
built their
> empires through outright annexation of conquered territories. The
> French, Dutch, and Spanish based their empires upon the institution
> colonization. Dr. Ivan Eland, in his book "The Empire has no Clothes:
> Foreign
> Policy Exposed," has concluded that, structurally, the American
empire is
> modeled on another extreme – that of the ancient Greek city-state
> Sparta
> did not conquer and annex other peoples, with the exception of the
> Rather, it used its superior military prowess to dominate allied
> oligarchic
> factions through its military alliance, the Peloponnesian League.
> de
> facto control over the foreign policy of the Peloponnesian League
gave it
> effective control over the foreign policies of the city-states
> the
> alliance. Sparta demanded that the city-states within its orbit
> their o
> ligarchic form of government, and it reserved the right to impose
> restriction by force. But Sparta did not micromanage the domestic
> of its
> alliance members on a day-to-day basis. In this regard, the Spartan
> of
> empire is one of "looser control" over states comprising an empire.
> Like Sparta, the US has de facto control over the foreign policy of
> military
> alliance, NATO. And presumably, the US would not allow an
> form of
> government to take power in a key strategic ally. In fact, the US has
> sought to
> instigate or prevent regime change in many states it has wanted to
> control,
> whether strategic or non-strategic, allied or non-allied. Examples
> Afghanistan, Cambodia, Chile, Columbia, Cuba, Dominican Republic,
> Grenada, Guam, Guatemala, Haiti, Hawaii, Honduras, Indonesia, Iran,
> Korea,
> Mexico, Nicaragua, Panama, Philippines, Samoa, Serbia, Spain, Taiwan,
> Venezuela,
> and Vietnam, among others.
> But while the US empire resembles Sparta structurally, Eland points
> that in
> its offensive orientation it more closely resembles Athens. Sparta
was a
> defensive, status-quo power that did not seek to enlarge, control
> non-strategic
> non-allied states, or remake the world in its image. Athens did.
> Coincidentally,
> Athenians believed their divine calling in life was to "spread
> The US has also employed other models in building empire. After the
> Spanish-American war, Hawaii, the Panama Canal Zone, Puerto Rico, and
> were
> annexed outright, and the Philippines were subjected to an American
> of
> colonial rule not unlike that employed by European colonial powers at
> time.
> The advent of the Cold War hailed the superpower practice of spawning
> satellites
> and client states. The American empire really represents a
> of
> different approaches to empire building.
> In a sense, the American empire is worldwide. The US dollar, as the
> world's
> reserve currency, allows the US to tax other countries by issuing
> depreciating
> pieces of paper in exchange for real goods and services. Rome imposed
> comparable form of taxation by debasing its gold and silver coinage.
> There are two imperial schools of thought operating within the
> empire.
> The old globalist, Woodrow Wilson, New World Order Establishment,
> consisting of
> both Democrats and Republicans, prefers to disguise the iron fist of
> empire
> beneath a soft velvet glove of multilateralism, alliances, the UN,
> humanitarianism. The new neoconservative imperialists – comprised
> Republicans
> – care little for disguises, subtleties, pretenses, and diplomatic
> niceties.
> While not direct descendants, they are more similar in style to the
> unabashed
> Theodore Roosevelt school of imperialism. They prefer a more
> approach
> to empire, brandishing a naked iron fist devoid of any velvet glove.
> Because
> they are unapologetic hawks – chicken hawks in fact, as they use
> people to
> fight their wars for them while they stack up deferments –
> imperialists seem to relish the thought of using imperial power with
> little
> more glee than their Wilsonian counterparts. Within the Repub
> lican party at least, and for the time being, the neoconservatives
> waxing
> and ascendant, and the old Wilsonian Establishment is waning. But it
> important to recognize that the differences between the two factions
> differences of order, rather than kind. There is no anti-imperial
> constituency
> of any remote political significance operating within the American
> But the mystery of American empire is a lesser conundrum to
> The
> greater mystery is why Americans have never questioned the fact that
> republic has become an empire. Americans, as a people, seem to be
> uniquely
> ignorant in this regard, as every other empire in the annals of
> human
> history was known to be an empire by its own citizens. Thus it would
> that
> Americans have earned quite a historical distinction for themselves,
> happily
> munching away on fast food while watching the latest reality TV
> completely oblivious to the world around them and to their complicity
> their
> own destruction.
> Samuel L. Baker is a Computer Engineering graduate of Auburn
> He
> currently works as a freelance political analyst and commentator.