Iran

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# Iran, Mullahs, And Drugs #
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You came away with a convoluted perception, and I am not saying that because I want to make you feel bad but I can discern from the remarks, you have been occupying yourself with a cesspool of prevarication concocted by media and a few astray clips — marrying people with information and entertainment and divorcing them from reality. Try to look at the bigger picture rather than imprisoning your conscious with plethora of crafted picture frames flashing on your screen.

According to the recent statistics, 1 out of 8 women in the U.S. are sexually abused, and 1 out of 3 are physically assaulted. A Chinese guy can run with this, waving his hands, claiming America is an “archaic, savage, [and] despicable” place — it’s amazing how quickly people pick up the negative aspect of certain society. Such representation does not mirror the notion of what America has to offer. You see how easily a few numbers can lead to irrational enthusiasm with no merets.

On the other hand, I do not deny the existance of problem or underlying antecedent, but cementing the American society with such sensationalized observation is nothing short of a macabre joke. Yes, there are predicaments but what country doesn’t have to grapple with inequality, class or gender misfortune? I mean, except if you are from Netherland or Denmark 🙂 You are only looking at a small corner of a vast country under myopic vision. And wailing at religion is risible; I’ll explain why later on.

When you impulsively come right out saying, “And this is Iran,” it a clear indication that you are not cognizant of various social and cultural parameters. The reason I say that is because I’ve spent 2/5 of my life there; I know in and out of the culture, people, and complex web of structural aspects of this society.

It would be wrong of me to draw slothful deductions from a few words I read on child labor in India; I haven’t lived there, and I know for the fact, this is not an astute analysis of that country as a whole. Moreover, making conlusions to suit your side out of a thin air is not a constructive critisim, and it only results in emergance of faulty perception. Let me give you a more realistic point of view on this matter.

Corruption, just like any other country in the world, is rampant and ubiquetious in all level of society, predominately among the ruling sector: Mullahs. There is no escaping it, whether it’s democracy, communism, fascism, theocracy, or — it’s part of a political machine. And what all men with power seek? More power. Control over masses. The economical recession and bear market in Iran has had a devastading effect on the majority of people, especially younger generation.

This would clearly precipitate an uneasement and restlessness which would lead to defeasance and ultimately social upheaval. So what Mullahs to do [sic]? Besides massive PR campaign to keep people on their toes (they do a better job here in the U.S. by the way), another sanguiary way to put people in a quiscence state is well… to drug them, literally. Iran is on the crosspath, a bridge so to speak, of all narcotic trafficing from Pacific Rim all the way to central Asia to Europe and the rest of the world.

So the regime in Iran came up with a discreet but diabolical plan to open up a flow of drugs in and out of the country. The numbers speak for themselves — estimations are from 3 up to 5 (or perhaps more) million Iranians are a heavy drug user, around 15% of population. Staggering number of unemployment (30-35% in some places) and readily availabe drugs formulate a deadly potion.

And as for “Pimping for Allah,” the documentary clearly depicts how both women are operating their business independently, free of ascendancy of any “pimp” figure. As a matter of fact, a majority of prostitution activities are taken place under the discrete control of “escort” girl/boy. Of course, there are elements that need to be “lubricated,” mainly the “moral” cops but then again, show me a place where corruption is estranged from the law enforcement.

What I was hoping people to take away from this documentary is to be informed of two social calamities: pervasiveness of narcotics to gag social unrest and prostitution to ironically feed the addiction. Unfortunately, the former was implemented under CIA’s baby project. The latter is no brainer. A crack whore (excuse my dragatory slang here) would do anything to get her/his next fix and staying in an abusive relationship shouldn’t be a surprise. we have tons of reports on domestice abuse here too.

Please, do not take these statements as a sign of support for the regime, far from it. I had two of my close relatives butchered by these remorseless absolutists. Religion in Iran is just a pernicious mask designed to subjugate the masses, enshroud the corruption, and upholding the claws of dominance on the nation. Following this path, from the theological point of view, faith exuviates its philosophical gist — it becomes linguistically and semantically vacant.

Show me an Akhoond that does not engage in debauchery or indulge in binge drinking (oh ya, it happens more than you think). You see, when it comes to power, you are free to even do away from religion and still manage to bestow your authoritarian agenda upon people, i.e. Stalian-style totalitarism anyone? I’ll wrap this later on… If I was still here.

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http://www.butterfliesandwheels.com/articleprint.php?num=258

It is important to mention that the word “thug” in Iran is not completely synonymous to what in the West refers to people with a schizoid relationship with violence. Thugs in Iran are not soccer hooligans, rednecks, skinheads or any similar western group of violent, furiously nationalistic, xenophobic and racist young men who enjoy destroying property and hurting people, finding “absolute completeness” in the havoc they wreak. Thugs in the West may even be employed in high-paying blue-collar jobs.

Bully thugs with a religious identity can be recruited in IRI’s Security Forces or are systematically used in the organised pro-regime militias called plainclothes (lebas shakhsi) to intimidate IRI’s opponents or beat anti-regime’s demonstrators up. Therefore, a number of IRI’s Security Forces, who now arrest thugs, are in fact the recruited ex-thugs. They now accuse the non-recruited thugs of violence, robbery, drugs, whereas these could be indeed applied to them too, if they were not recruited by the regime.

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http://www.servat.unibe.ch/icl/ir00000_.html
Article 44 [Sectors]

(1) The economy of the Islamic Republic of Iran is to consist of three sectors: state, cooperative, and private, and is to be based on systematic and sound planning.
(2) The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams, and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and adMinistered by the State.
(3) The cooperative sector is to include cooperative companies and enterprises concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria.
(4) The private sector consists of those activities concerned with agriculture, animal husbandry, industry, trade, and services that supplement the economic activities of the state and cooperative sectors.
(5) Ownership in each of these three sectors is protected by the laws of the Islamic Republic, in so far as this ownership is in conformity with the other articles of this chapter, does not go beyond the bounds of Islamic law, contributes to the economic growth and progress of the country and does not harm society.
(6) The scope of each of these sectors as well as the regulations and conditions governing their operation, will be specified by law.

http://www.imf.org/external/np/sec/pn/2006/pn0634.htm

IMF Executive Board Concludes 2005 Article IV Consultation with the Islamic Republic of Iran
Public Information Notice (PIN) No. 06/34
March 27, 2006

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 10, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Islamic Republic of Iran.1

Background

During the Third Five-Year Development Plan (TFYDP, 2000/01-2004/05), real GDP growth reached 5½ percent a year on average, unemployment declined, and macroeconomic indicators improved significantly, supported by favorable oil market conditions. By increasing the openness of the economy and removing major obstacles to trade and investment, the reforms introduced in the period 2000/01-2002/03 contributed significantly to this strong performance. Many challenges, however, lie ahead. The economy remains heavily dependent on oil and demographic dynamics will put increasing pressure on the labor market in the coming years. Expansionary fiscal and monetary policies have kept inflation relatively high at about 15 percent. Extensive administrative controls, widespread subsidies, and labor market regulations impose substantial efficiency costs.

On the back of favorable external conditions and an expansionary policy stance, growth resumed in 2005/06 after a temporary slowdown in the previous year. Activity has been strong, mostly in the non-hydrocarbon sector, and real GDP growth is expected to accelerate to about 6 percent in 2005/06. Unemployment, however, has continued to hover around 11 percent. Reflecting the impact of improved weather conditions on food prices, the price freeze on certain goods and services, and some exchange rate appreciation, inflation is expected to decline to 13 percent in 2005/06.

Government spending, particularly on subsidies, has continued to increase on the back of higher oil revenue, and the non-oil deficit is expected to remain high. As external developments became increasingly favorable and fiscal policy remained expansionary, the central bank allowed the exchange rate to appreciate in nominal effective terms in 2005/06. However, export growth continued apace and the current account surplus is projected to rise to 6½ percent of GDP, with international reserves reaching about $47 billion by year’s end, equivalent to 9½ months of next year’s imports of goods and nonfactor services. External debt remains low.

As oil-related inflows grew larger, and fiscal policy remained expansionary, the central bank increased its unsterilized purchases of foreign currency to limit the exchange rate appreciation. The monetary impact of these purchases was only partially offset by a tightening of the banks’ access to the central bank credit facility, while the use of its participation papers (central bank bonds complying with Islamic finance principles) was not sufficient to mop up excess liquidity. Overall, the desired slowdown in money growth was not achieved. After having experienced rapid growth in previous years, the stock market lost about 20 percent of its value in 2005/06, reflecting uncertainty in connection with the presidential election and the negotiations on Iran’s nuclear program.

Progress on structural reforms has been uneven. While financial system reform has continued, no decision has been taken on the key reform of energy subsidies, despite the increasing economic and environmental costs of the current system. The amendment of article 44 of the constitution—which delineates the domains of activity of the public sector, the cooperative sector, and the private sector—opens the door to the privatization of both financial and nonfinancial enterprises. Although this change is an important legal step, the scope and modalities of actual privatization plans are yet to be determined.

The short-term outlook is relatively favorable. Economic activity will continue to be boosted by high oil prices, although inflation could start rising again, unless the policy stimulus is reigned in. Reflecting large current account surpluses, the external debt would decline. In the medium term, however, prospects look challenging. Oil price volatility and capacity constraints in the oil sector, international tensions over the nuclear issue, and the possibility of a prolonged period of “wait and see” on the part of the private sector could adversely affect the economic outlook.

Executive Board Assessment

Executive Directors observed that real GDP growth has been robust in 2005/06 and the external position has strengthened as a result of the structural reforms implemented at the beginning of the TFYDP, favorable oil market conditions, and an expansionary policy stance. However, Directors expressed concern over the persistent high inflation that hurts the poor and fixed-income earners, the slower pace of structural reforms, and the vulnerability of the economy to a potential decline in oil prices. Directors considered that the key medium-term challenge will be to sustain high growth rates in the non-oil sector to increase employment opportunities and improve the living standard of the population. To address this challenge in an effective and sustainable way, it will be crucial to reduce inflation significantly by tightening financial policies and to accelerate the momentum for structural reforms to stimulate private sector development, lessen the dependence on the oil sector, and enhance economic efficiency, consistent with the objectives of the Fourth Five-Year Development Plan (FFYDP).

Directors noted that the substantial pro-cyclical fiscal stimulus in recent years has contributed to maintaining double-digit inflation, and underscored the need to reduce the pace of fiscal expansion and to build up precautionary savings in the Oil Stabilization Fund (OSF), consistent with the original objectives in the OSF legislation. In this context, Directors cautioned against using OSF resources to further increase government spending, as envisaged in the proposed budget for 2006/07. They recommended instead a vigorous fiscal consolidation with a reduction in government outlays in relation to GDP and implementation of revenue-enhancing measures through a broadening of the tax base and an accelerated pace of introduction of the Value Added Tax, which has been in the preparation stage for a number of years. Moreover, Directors emphasized the need for fiscal policy to be anchored within a medium-term framework to help reduce its pro-cyclicality and improve policy coordination. Directors noted with concern the size of the growing and ill-targeted subsidies, particularly on energy, which have harmful economic and environmental consequences. They welcomed the indications that the authorities plan to gradually phase out implicit energy subsidies and reduce explicit subsidies, in order to enhance economic efficiency and channel resources toward more productive uses. Accordingly, Directors urged an expeditious design and implementation of a phased program of overhauling the system, with clear time-bound reduction targets, as well as an efficient social safety net to protect the vulnerable groups.

Directors called for a tightening and a more effective use of monetary policy instruments to lower inflation to single-digit levels, consistent with the FFYDP. They welcomed the reduction in access to the central bank’s overdraft facility and increased use of central bank participation papers, and encouraged a more active use of the open deposit account. While welcoming the recent steps, as well as the measures to increase the operational independence of the central bank under the FFYDP, Directors expressed concern about the new requirement of parliamentary approval for the issuance of central bank participation papers, which limits the flexibility of central bank operations in managing domestic liquidity. They noted that administrative controls on the rates of return charged on bank loans and on central bank participation papers and the continuation of directed credit hinders financial intermediation. Directors urged the authorities to remove these administrative controls and allow the rates of return to be market-determined to strengthen financial intermediation. More generally, Directors noted that a credible and successful disinflation effort will require a clearer mandate for the central bank and more effective policy instruments at its disposal. They considered that the upcoming review of the central bank law offers a good opportunity to address these issues in a decisive manner. The authorities were commended for enacting Anti-Money Laundering/Combating Financing of Terrorism legislation, and were urged to implement it expeditiously.

Directors noted that the exchange rate had been allowed to appreciate somewhat, reflecting more favorable external conditions, but, given that the fiscal stance continues to impart an expansionary impulse to the economy, they stressed the need for greater exchange rate flexibility to help contain inflationary pressures. Looking forward, Directors emphasized that the concerns on the exchange rate policy for competitiveness should be addressed by reinvigorating implementation of structural reforms and major improvements in the business climate.

Directors welcomed the progress made in establishing a risk-based supervision framework and other reforms aimed at improving the functioning of financial markets. However, they expressed concern that the continued increase in nonperforming loans and the rapid credit growth could exacerbate potential weaknesses in the financial system. Directors encouraged the authorities to further strengthen the supervision of banks, insurance companies, and securities markets. They commended the authorities for licensing additional private banks and insurance companies and encouraged them to continue opening up the banking sector to private sector participation, including through privatization, which had been made possible by the amendment to Article 44 of the constitution.

Directors underscored the importance of fostering private sector development to sustain strong growth and employment creation. They encouraged the authorities to focus on reducing the administrative and regulatory burden on private sector activities, removing barriers to competition, streamlining labor market regulations, and removing other impediments to efficiency, and accelerating the implementation of the privatization program.

Directors urged prompt action to eliminate the residual exchange restriction on the making of payments and transfers for current transactions, and welcomed the authorities’ commitment in this regard.

Directors recognized the progress made in improving data quality and transparency. In particular, they were encouraged by the identification of subsidies in the central government budget. Directors stressed, however, that more work is needed to ensure an adequate and timely monitoring of public sector operations. Accordingly, they encouraged the authorities to develop a consolidated public sector balance sheet with possible technical assistance from the World Bank and the IMF. They urged the authorities to complete the requirements for full compliance with the Special Data Dissemination Standard.

Islamic Republic of Iran: Selected Economic Indicators
2000/2001 2001/2002 2002/2003 2003/04 2004/05

Real GDP growth (factor cost, percentage change)
5.0 3.3 7.4 6.7 4.8

CPI inflation (period average, percentage change)
12.6 11.4 15.8 15.6 15.2

Unemployment rate (percent)
14.1 14.7 12.2 11.2 10.3

Central government balance (percent of GDP)
8.7 1.8 -2.4 -0.1 -0.4

Broad money growth (percentage change)
30.5 25.8 30.1 26.2 29.8

Current account balance (percent of GDP)
13.1 5.3 3.1 0.6 2.5

Overall external balance (percent of GDP)
6.9 3.9 4.1 2.1 5.2

Gross international reserves (billions of U. S. dollars)
12,176 16,616 20,965 24,675 32,993

Public and publicly guaranteed external debt (billions of U.S. dollars)
7,953 7,215 9,250 12,100 16,831

Exchange rate (period average, rials per U.S. dollar)
8,078 1/ 7,921 1/ 7,967 8,282 8,719

http://www.auswaertiges-amt.de/diplo/de/Laenderinformationen/Iran/Wirtschaf t.html (translate it with google if you don’t read German)

It states that the real inflation rate is currently around 30% (much higher than when Ahmadinejad took office) and the real unemployment rate is roughly 20 %.

Iran’s unemployment rate is now 15 percent (11.20 percent in 2006). Youth makes up a large proportion of the unemployed.

Official figures say youth aged 15 to 19 account for 39 percent of the country’s active work force and the unemployment rate stands at about 34 percent among the age groups of 15 to 19 years old and at about 16 percent among the 25 to 29 years age group.

According to some statistics of 2003, about 20,000 teenagers live on the streets of Iran’s larger cities, but most of them reside in Tehran. The problem has been fuelled by poverty and aggravated by the economic crisis.

http://hdrstats.undp.org/countries/data_sheets/cty_ds_IRN.html

Population living below $2 a day (%), 1990-2005 7.3

https://www.cia.gov/library/publications/the-world-factbook/geos/ir.html#Econ

Unemployment rate: 11% according to the Iranian government (June 2007)
Population below poverty line: 18% (2007 est.)

http://www.rferl.org/featuresarticle/2004/03/a9c57806-f880-499f-b309-3d13eb5fef1c.html

Iran’s official unemployment rate is about 13 percent. But economists estimate the real figure is more than 20 percent.

According to official estimates, unemployment is especially rife among Iran’s youth and women, where jobless rates can soar as high as 30 percent.

“[Iran] wanted to have an army of 20 million. And as a result, they encouraged pregnancy and the rate of population increased from something like 1.7 to 4, 4.5. As a result, the population of Iran has doubled during the last 25 years. So this increasing population is far from what the economy can absorb, and at the same time the policies that have been followed since the end of the war have nothing to propose in terms of absorbing this extra population,” Rashidi said.

Furthermore, he says, Iran’s investments in industry and agriculture have not been planned to produce the greatest number of jobs possible.

“In other words, the industrial policy has been concentrated in industries absorbing a lot of capital with little labor. For example, you spend a lot of money for steel production or the metallurgy industry and the rate of employment does not go as far as the capital is concerned. So the policy in industry, agriculture has not been conducive to absorb this extra population,” Rashidi said.

Rashidi says that most new jobs are being created in the private sector or on the grey market, and therefore do not contribute to reducing overall unemployment rates or raising production rates.

According to the International Monetary Fund, Iran has the world’s highest rate of brain drain.

http://www.payvand.com/news/04/mar/1066.html

An Iranian labor official said in Tehran on Monday that in Iran the unemployment rate among women is twice that of men, IRNA reported.

The country’s unemployment rate is 11.8 percent, while women unemployment stands at 21.2 percent, the labor official underlined. Youth unemployment is also a major policy challenge for officials.

Thirty-one percent of Iranian youth in the 15 to 29 years age group, are either unemployed or lack a suitable job, said an official here on Saturday.

http://www.benadorassociates.com/article/19413

The foreign debt has reached almost 30 percent of Iran’s GDP. Thousands of Iranians have sold their kidneys to make the ends meet. Some families have even traded their young daughters to human traffickers. Iran’s massive flux of rising oil income has only helped to finance a gigantic multi-faceted WMD program and a growing infrastructure of terror around the Middle East

“Iran treats roughly half of their population like sub-human shit”

That’s a far end of exaggeration. It’s as stereotypical and pompous remark as a Pakistani teenage boy claims half the population in the U.S. rag out in whorish attire without having a through understanding of intricate complexity of various cultural parameters. Until you haven’t spent a few years in a certain culture, don’t put on a tin foil hat and tout on your gratuitous presupposition.

“90% population below the poverty line”

Do you even comprehend the implication of such statement or you just regurgitate every piece of trash you happen to pick up on the Internet? Do you know anything about political quibbling employed by politician of various spectrums? In this day and age, there is no excuse to obviate an iota of research to minimize the introduction of disinformation.

hdrstats .undp. org/countries/data_sheets/cty_ds_IRN. html

Population living below $2 a day (%), 1990-2005 7.3

w w w .cia. gov/library/publications/the-world-factbook/geos/ir. html#Econ

Unemployment rate: 11% according to the Iranian government (June 2007)
Population below poverty line: 18% (2007 est.)

Mindless gabber doesn’t take you far in life.

“delinquency in WMD proliferation”

Another concocted mantra by warmongers, wasn’t Iraq enough for you people? Pandering on topics that have been long abandoned by the very people who ballyhooed it in the first place is the revisionist to political schmaltz.

We already have Israel, Pakistan, India, and American submarines with nuclear warheads swimmingly find their way throughout the region. Let’s begin our clean up from the mess we are already in first.

“harboring thugs and fugitives”

Thugs as in unofficially hired low-lives to repress the voice of dissent or thugs as in unemployed class of society driven to mischievousness? The same people who were employed by British and American time after time during pre-revolution now trained to carry out the dirty work of mullahs.

“no respect for country borders”

Part of political agenda established by almost all countries, nothing new here. Can you say U.S. – Iraq? Global interventionist’s mind of fascism is quick to connive their own actions.

“hard drug use in young people”

It’s bad… It’s worse than what I had initially anticipated. Poverty and unemployment compounded by the state-run mafia regime’s injection of drug into society or blunt permission for the traffickers to flow the cargoes through country… Ya, it’s bad.

“religion mixed with politics”

And that’s why evangelical conservativism is running unchecked in this country? The similarities are uncanny, we are heading towards theocracy and most of us are drooling on our pillows of impassivity.

http://87.107.85.223/documents/document/12429/12430/Exportation-According-to-Country-of-Destination-Part-1.aspx
Weight and Value of Exportation According to Country of Destination (2006)

http://www.hrw.org/reports/1997/iran/Iran-06.htm

http://www.exportcontrolblog.com/blog/2005/06/next_time_you_b.html
US embargo on Iranian Aviation

http://www.foreignpolicy.com/story/cms.php?story_id=4350&page=4
The Failed States Index 2008
Inflation Nations
Page 5 of 9

When prices soar, weak states are in for a wealth of trouble.

Surging oil prices, soaring food costs, a declining dollar—money simply doesn’t buy what it used to. Although most economists argue that a little inflation is good for greasing the wheels of economic growth, it’s easy to see how rapid increases in the cost of basic goods can cause chaos. Countries with high levels of inflation are also the world’s weakest, according to data from the Heritage Foundation’s Index of Economic Freedom. That’s perhaps most clear in Zimbabwe, where the International Monetary Fund recently pegged inflation at an absurd 150,000 percent. At that rate, bread bought in the morning might be twice as expensive in the afternoon. Clearly, that’s no recipe for stability.

3rd worst inflation

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http://www.youtube.com/watch?v=FlB6t30Je_g
December 30, 2009
Khamenei & AN

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http://mellat.majlis.ir/archive/1383/10/15/law.htm
http://mellat.majlis.ir/CONSTITUTION/ENGLISH.HTM
The Constitution of the Islamic Republic of Iran

http://jurist.law.pitt.edu/world/iran.htm
onstitution, Government & Legislation

* Iranian Constitution
* Government of Iran
* Presidency of the Islamic Republic of Iran
* Majlis Shura Islami

http://www.ibchamber.org/lawreg/constitution.htm

http://www.alaviandassociates.com/documents/constitution.pdf

http://www.sazegara.net/english/archives/2007/02/changing_the_constitution_is_t.html

Article 177 of the constitution of the Islamic Republic of Iran lays out the possibility of revising the Constitution, but the form and content of this revision can only be determined by the Supreme Leader. “The Leader issues a decree to the President after consultation with the Nation’s Exigency Council stipulating the amendments or additions to be made by the Council for Revision of the constitution which consists of…”

Most members of this council are the members of the Council of Guardians, the heads of the three branches of government, and the permanent members of the Nation’s Exigency Council. Ten members are also selected by the Supreme Leader. This composition clearly points to the fact that the Council for Revision of the Constitution is controlled by the Supreme Leader, although any decisions after being approved by the Supreme Leader have to be endorsed in a national referendum.

In any case, the decision to introduce a change in the Constitution, the stages of realizing this change, and its final form are all subject to the whims of the Supreme Leader. The principal problem with the Constitution is the unlimited powers of the Supreme Leader who cannot be held accountable for his actions. In fact, the Constitution has legitimized the tyranny of one person in the name of Leadership. There is no way to reform or improve the Constitution because the Supreme Leader can curb, influence, and dictate all the possible changes within it.

English

http://www.servat.unibe.ch/icl/ir00000_.html
http://www.servat.unibe.ch/icl/ir00t___.html
http://www.iranonline.com/iran/iran-info/Government/constitution.html
http://www.alaviandassociates.com/documents/constitution.pdf
http://www.aghayan.com/iranconst.htm

Farsi

http://mellat.majlis.ir/archive/1383/10/15/law.htm

http://www.unhcr.org/cgi-bin/texis/vtx/refworld/rwmain?docid=3ae6b51b8
Islamic Penal Law in Iran [Islamic Republic of Iran].

http://www.parstimes.com/law/Iran_law.html
Iran Law – very comprehensive

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http://www.butterfliesandwheels.com/articleprint.php?num=258

A report by the United Nations has found that Iran has the highest drug addiction rate in the world. “According to the U.N. World Drug Report for 2005, Iran has the highest proportion of opiate addicts in the world — 2.8 percent of the population over age 15”, the report said. “With a population of about 70 million and some government agencies putting the number of regular users close to 4 million, Iran has no real competition as world leader in per capita addiction to opiates, including heroin.”

The report added that a government poll had shown that almost 80 percent of Iranians believed that there was a direct link between unemployment and drug addiction. According to Iranian National Centre for Addiction Studies, 20 percent of Iran’s adult population was “somehow involved in drug abuse”.

Many Iranians describe high drug availability as evidence of a plot by the regime. “If they could create enough jobs, enough entertainment, why would people turn to drugs?” It is not only the lack of policy and management, but the interests of corrupt state mafia whose sales in Iran made up a 10 billion dollar market last year, nearly three quarters of the total revenue from Iran’s oil market during the same period.

http://www.rferl.org/featuresarticle/2007/02/3211ca3d-0016-452c-bca6-176944dd067b.html
Iran: Officials Lay Out Ongoing Antidrug Measures By Vahid Sepehri
February 15, 2007

The head of Iran’s Antidrug Headquarters warned on February 11 that Iranian youngsters are increasingly using recreational drugs in the form of pills. Fada Hussein Maleki urged officials to work together and explore new avenues to fight drug use in Iran.

Iranian officials regularly lament the inflow of drugs into Iran from neighboring Afghanistan, and the obvious failure to stop drug production there.

Maleki echoed those concerns, telling the council that increasing opium cultivation in Afghanistan is “a serious threat.” He noted growing numbers of Afghan opium addicts and higher cultivation of opium poppies.

Dealing with Drug Users

Hamedan Province’s chief health-care official, Akbar Mir-Arab, also spoke of efforts in the province to reduce the addict population, which include the activities of 25 public and private rehabilitation centers. A provincial police chief, Ali Rustai, told the same meeting that nearly 15,000 people had been arrested on drug-related offenses in Hamedan in the previous 10 months, IRNA reported.

A “special police operation” recently targeted drugs and other smuggled goods in the eastern Khorasan-i Razavi Province, which is in Iran’s troublesome and dangerous eastern frontier region

Treatment

Iran’s state Welfare Organization’s prevention and addiction-treatment department claims that 8 percent of the population is addicted to drugs, “Mardom-Salari” reported on June 22. An official in the same department, Mehrdad Ehterami, noted that Iran sees 90,000 new drug addicts every year, with more than 180,000 people treated for addiction in the state or private sector. He listed 51 government facilities, 457 private outpatient centers, and an additional 26 transition centers that exist to combat the problem.

http://youtube.com/watch?v=fttlX9SpbZY
March 2006
At the instigation of President Ahmadinejad, Iran’s theocratic government has adopted a surprising drugs policy. It’s radical and stands in stark contrast to many Western drugs policies.

In a squalid back alley in Tehran, addicts are shooting up. “I have no hope in my life any more”, despairs one. Iran has the highest heroin addiction rate in the world. No other country even comes close. Back in the days of Ayatollah Khomeini, addicts were executed. But faced with an HIV epidemic, the current government has adopted a more enlightened approach. “People think the current government is more conservative and fundamentalist. But it supports our programmes much more than previous governments”, states drugs counsellor, Bijan Nassirimanesh. Addicts are now treated as patients not criminals. The state subsidises free syringes, medical care and treatment programmes. “The needle exchange programme has massively brought down the number of HIV cases”, praises one addict. And it’s a policy that has the long term support of Ahmadinejad. “When Ahmadinejad was mayor of Tehran, he ordered the city authorities to build 40 drop-in centres. Now that he’s President, he’s always talking about methadone treatment.”

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http://www.nationalinterest.org/Article.aspx?id=22602
The Revolution Will Be Mercantilized
by Ali Ansari

12.21.2009

SOME YEARS back on a research trip to Iran, I met a young man who had been conscripted into the Islamic Revolutionary Guard Corps (IRGC). Commenting on his obviously secular upbringing, I was both intrigued and sympathetic. Yet contrary to all expectations, I found him not only sanguine but also somewhat relieved. He explained that the Guards were not what he had expected. For all their very public piety, they were by far the most relaxed and laid back of the military organizations in the Islamic Republic. The Guards had even implemented a form of flexible work hours. God forbid, had he gone into the regular military he might have been expected to adhere to a strict work regimen. It was all highly unorthodox and reassuringly Iranian. The IRGC wasn’t a disciplined military organization in the Western sense of the term; it was a network, a brotherhood, in which personalities and connections mattered far more than structures. This did not make it necessarily less effective or indeed less dangerous as an instrument of coercion—the lack of transparent rules might, in fact, make it more so—but it was certainly a different type of beast.

Though the IRGC started its life as a defender of the revolution, over time the organization has become increasingly involved in commercial interests. Divisions within the Revolutionary Guard, particularly between its veterans and their heirs, have deepened. Now in bed with an increasingly radicalized elite in Iran, the IRGC seems to be less about protecting the people of the country and more about protecting its own material interests. Iran is rapidly becoming a security state.

THE IRGC was formed in the heat of the Islamic Revolution; a voluntary paramilitary force of revolutionary devotees dedicated to the defense of the ideals of this uprising against Shah Mohammad Reza Pahlavi, who was to be dethroned in favor of an Islamic republic. The Guards were intended to provide a popular counterweight to the regular armed forces, which were widely seen as a creation of the shah’s government and loyal to his cause. Ironically, Mohammad Reza Shah never fully trusted the senior officers within his armed forces and took measures to ensure they could not launch a coup—with the consequence that when he failed to provide leadership, the ranks of the military found themselves adrift in the turmoil of the revolution. Though they were never quite the threat that either the shah or the revolutionaries perceived them to be, for the Guard Corps, the armed forces were an alien being, organized as it was with all the accoutrements of a tightly run military structure.

The new “military” organization of the IRGC was to be something quite different: a brotherhood of the Iranian sansculottes, an organic military force that shunned all the normal paraphernalia of the regular armed forces. It was a haphazard entity, making up for its lack of organization with revolutionary zeal. And indeed, when the Iran-Iraq war started, the IRGC was largely responsible for blunting Baghdad’s attack and providing bitter resistance in the early months of the conflict. It was this image of resistance that soon translated into the mythology of the Revolutionary Guard both among the guardsmen and the public alike: defenders of a country at war, the only barrier between victory and defeat. Like their French revolutionary predecessors, this people’s army became intimately identified with battle. It is a mythology the Guards have enthusiastically preserved and extended—for good reason.

As the war fighting went on, the IRGC and the regular military had to work increasingly closely with one another. The Guards undoubtedly conducted themselves with great courage during the initial stages of that bloody conflagration, and were essential to the defense of the country at a time when the regular armed forces were in disarray following the desertion, purges and execution of many senior officers as the new Iranian state looked to free itself of the shah’s sympathizers, but it soon became clear that the war could not be conducted effectively with the Guards alone. And this was true in spite of the fact that they were supported by Basij militia (composed of additional volunteers who, being either too young or too old, were not technically eligible for service in either the Guard Corps or the army).

Eventually, even the IRGC had to resort to conscription, which continues to refill their ranks to this day. And successful military operations against Iraq ended up coming from a growing collaboration between the two military wings and their newly drafted membership. While every effort was made to emphasize the role of the Revolutionary Guard, the truth had to be increasingly acknowledged that the regular military had a skill set which was both necessary and useful. At the same time, for the duration of the war, the Guards jealously protected their independence and grew in time to become a parallel military structure complete with their own naval and air-force section.

The end of the war for the Guards, as for much of Iran, was something of an anticlimax. Iran had not been defeated, but despite the best efforts of the authorities, it proved difficult to convince people that Iran had achieved a victory. This naturally rebounded on the mythology of the fighting forces, who responded to such social ambivalence by stressing that it wasn’t the winning that mattered, but the taking part. The process of fighting itself was invigorating and purifying, highlighting, as it did, all the best qualities of the austere Muslim fighting man. Such mythologies were to become even more important in light of the changes that were to be imposed during the presidency of Ali Akbar Hashemi Rafsanjani (1989–1997).

RAFSANJANI INCORPORATED the Revolutionary Guard into the regular military structure, and ranks were introduced. The changes were bitterly resisted; many veterans felt it detracted from the whole point of the Guards, which was supposed to be a volunteer organization lacking the professionalism and ideological detachment of a uniformed military. Yet like many of Rafsanjani’s reforms, the long-term consequences were in direct opposition to his intentions. There is little doubt that Rafsanjani wanted to bring the Guard Corps within the military structure, so that the organization could no longer continue in its revolutionary mind-set, standing outside government control and scrutiny, and professing loyalty to the supreme leader rather than the president. Over the following decade, however, the Revolutionary Guard and their radicalized political ethos began to increasingly permeate (however incompletely) the regular military.

BE THAT as it may, it was Rafsanjani’s other key reform that ultimately proved more transformational to the IRGC. At the end of the Iran-Iraq war, Iran’s economy was in disarray. Accordingly, the Rafsanjani administration focused on economic reconstruction. Iran may not have been bankrupt, but neither was it awash with money. The economy had obviously contracted, and the state had to contend not only with a burgeoning population in search of employment but also with a bloated military and state sector. The government could no longer afford, and had no need, for such an extensive military and civil service. But its revolutionary ideology and the imperative to provide a home fit for heroes precluded any possibility of simple demobilization. There was no private sector to speak of, and while economic diversification had been a mantra of successive Iranian governments—even before the revolution—the truth was that the Iranian economy was growing increasingly dependent on its one great natural resource: oil. Rafsanjani’s solution to this crisis was to encourage entrepreneurship among various state organizations. Some key institutions, such as the Revolutionary Guard, were provided with a cut of oil income as seed money to catapult them into commerce and private enterprise. This should have allowed them to make enough money to provide for themselves, rather than looking to the government for funds. But such start-up costs became a regular feature of the off-kilter relationship between the state and its subsidiaries. The Revolutionary Guard was about to open for business.

FOR ALL their elite pretensions, the Guard Corps has always tended to reflect wider social developments. As commercialization and a mercantilist attitude increasingly dominated Iranian society in the aftermath of the war, so too did the IRGC reflect this sea change, acquiring a taste for business and trade. The oil income provided by Rafsanjani gave the IRGC access to hard currency (dollars) and the Guards, along with others in similarly privileged positions, were able to make a hefty profit by simply taking advantage of the subsidized exchange rates, and the cheap dollars this afforded them, to import goods and sell them to the Iranian public at the market rate for a huge profit. When this was coupled with political access and a network that spanned the entire Islamic Republic, competition proved increasingly easy to sideline and profits easier to make. Further, Rafsanjani’s plan to promote entrepreneurship placed members of the IRGC in senior management positions at major Iranian businesses. Mohsen Rafiqdoost, one of the IRGC’s former senior commanders, for example, was appointed head of the Foundation of the Oppressed. Ostensibly a charitable trust linked to the Iranian state, the foundation controls a number of private companies, making it one of the largest (and most profitable) commercial institutions in Iran.

NOW, IT took some time for this process to dominate all other activities, but the IRGC was well on the way to a corrupt and endemic profiteering habit. And there were early warning signs of the problems to come. In a disturbing bit of irony, when the Ministry of Intelligence was sent to investigate corruption, it suddenly realized how easy it was for a well-placed, unaccountable state organization to make money, and thus it promptly fell to temptation.

When Rafsanjani left office in 1997, he was indeed succeeded by a reformist, Mohammad Khatami, who briefly attempted to clean up the racket with an extensive purge. But many of those undesirables simply transferred into other emerging intelligence organizations within the judiciary and, crucially, the Guards.

In fact, to cut costs, the Basij, who were themselves incorporated into the IRGC command structure, were instructed to make their money from fines on people breaking sumptuary laws. It soon became apparent that basijis were becoming dependent on this income and, by extension, on a regular supply of misguided and “corrupted” individuals. If everyone became a “good Muslim” overnight, who on earth would they fine? The trick was to constantly change the rules, at times relaxing them until a sufficient quota of women painted their nails, for instance, before abruptly tightening them up. This cycle became as regular as the seasons in Iran, and the butt of many jokes, more so because the authorities pretended that this annual scam was prompted by religious adherence.

The Guards themselves became involved in similar schemes to do with satellite dishes, which were periodically outlawed because of the access they allowed to corrupting influences from the outside world. The Guards, however, took matters to another level entirely. It was widely suspected that they were involved in the illegal importation and even production of satellite dishes, which they would then sell, seize and resell. Similar suspicions abounded about the distribution of drugs, in particular opium, the traditional leisure drug of choice in Iran.

Such activities did little to enhance the Guards’ reputation among Iranians. Since many of the younger generation had no particular memory of the battle scars and war stories of the ’80s, they had nothing to judge the Guards by other than their corrupt and manipulative thievery. Even Revolutionary Guard veterans were increasingly critical of a corps which seemed to have become so smitten with material profit that they had forgotten the ideals for which the revolution had been fought. It is indeed a moot question whether the Guards have become a business conglomerate, more eager to defend their vast investment portfolio than the ideals of the revolution, and by extension, whether we can accurately talk of the militarization of Iranian society, rather than the mercantilization of the revolution.

IN AN odd turn of events, however, the IRGC was slowly to become re-radicalized in its politics, even as it continued to ratchet up its involvement in Iran’s commercial sector. A change was made at the top of the IRGC command structure. Though the intention was to liberalize the Corps, moving it away from the habits of old, the result was exactly the opposite. In 1997, Yahya Rahim Safavi replaced Mohsen Rezai as commander of the IRGC. Rezai had occupied the post since 1981, commanding the Guards through the war and overseeing the changes to the ethos of the group, which started with Rafsanjani’s reforms and were solidified by the will to profit. He had become a fixture on the political landscape, regarded by many as a staunch conservative and something of an anachronism. As Rezai moved sideways into the Expediency Council, his replacement was seen as a breath of fresh air. And Safavi was even described in some accounts as an “intellectual” who could oversee the reform of the IRGC. But Rezai’s replacement in actuality signified a more deleterious change to the substance of the Guards.

The new commander had neither the authority nor the political will to resist the shift to the Right, which was being imposed on the IRGC by conservative elements within the Iranian government. This development took place against the grain of the body of the Guards themselves—conscripts as they were—who had voted overwhelmingly for Khatami in 1997. Indeed, many veterans went on to become the vanguard of Khatami’s reform movement. But the conservative leadership, coalescing around Supreme Leader Ayatollah Khamenei, felt threatened by the energetic reformers and decided to consolidate its control over key institutions to prevent further reformist advances. The judiciary and the Guardian Council were already bastions of conservative power. The Revolutionary Guard and the Basij were to be purged of any reformist sympathies and become guardians, not so much of the revolution, but of a particularly hard-line interpretation of that revolution personified by the supreme leader.

The leadership of the Guards was increasingly dominated by those whose loyalty was first and foremost to the concept of the velayat-e faqih, or the guardianship of the jurist, which serves as the legal foundation of Iran’s constitution and the source of the supreme leader’s authority. Safavi, the onetime intellectual, was no exception. He jumped aboard the hard-line bandwagon to survive and perhaps even prosper, and his response to student protests at the end of the nineties gave an inkling of the menace to come. Increasingly anxious about the demonstrations and the verbal attacks on Khamenei, the Revolutionary Guard commanders issued a barely veiled threat to Khatami that he ought to restore order, or otherwise they would. This was an extraordinary intervention and one that Khatami publicly dismissed, but privately took very seriously. He pointedly reminded the Guards that the founder of the Islamic Republic, Ayatollah Khomeini, had explicitly stated that the military should never interfere in politics, and whatever the wishes of the current supreme leader may be, this overstepped their bounds. The crisis was averted. The reformists went on to win a landslide in the parliamentary elections in 2000, but this only reinforced conservative convictions that they must do more to prevent what they regarded as the corruption of the revolution.

Biding their time, the Guards expanded their portfolio of economic enterprises in order to increase their financial independence from the government and to avoid any unnecessary scrutiny of their activities. Tiring of the old system of commissions, the Guards turned to establishing front companies through which they could actually take ownership of different sectors of the economy. By the end of the 1990s, there was a clear shift in gear. The IRGC was in business—big time—and it was protecting those interests with increased political muscle and influence on the right.

THE RIGHT provided the IRGC with the opportunity to get further into profitability, and gave the Guards political and ideological cover. The price was that the IRGC would align with the right wing in Iran. As reformism faltered, and the new conservatism, known domestically as “Principle-ism,” began to take shape, the Guards likewise benefited from dramatic changes in the international arena, most obviously the catastrophe of 9/11 and its aftermath. Khatami’s “dialogue of civilizations” now seemed dangerously incongruous with the more aggressive American posture in the Middle East. President Bush’s fateful decision to label Iran as part of the “axis of evil” effectively sealed the fate of Khatami’s attempts to build bridges and opened the way for the Guards, who consequently even attempted to impose martial law.

Further opportunities came along with the invasion of Iraq in 2003. Finally, the Guards, and more specifically their external division, the Quds Brigade (which was long involved in developing Islamist networks abroad, including Hezbollah, which it was instrumental in establishing), now had something concrete to do. The problems of demobilization that had affected the Iranian state since 1988 now seemed irrelevant. Iran was feuding with America and fighting to gain influence in Iraq, and the Guards now appeared to have a function which most Iranians could appreciate. With the election of Ahmadinejad, their grip on power became firm indeed.

MAHMOUD AHMADINEJAD was the hard-line conservative (Principle-ist) answer to Khatami; a man who would exploit the same popular tools (most obviously, the mass media) to mobilize the electorate around a radically new interpretation of the Islamic Republic. And central to the overall strategy were the Guards. While Khatami had always sought to limit their reach, whether in Iran or beyond its borders, Ahmadinejad effectively let them off the leash. Claiming to be a simple basiji who served with the Guard Corps during the Iran-Iraq conflict, Ahmadinejad championed the war mythology of the Guards while reinforcing their economic position. Most importantly, at least for the West, he gave them free rein in their foreign activities, and Iraq, far from being a civilian concern, effectively became an extension of the burgeoning IRGC military-commercial complex.

The IRGC benefited, in very simple terms, from a largesse of money and a proximity to power. Under the shelter provided by a perceived American threat, the Guards began to take increasing control not only over foreign-policy and security concerns (Iraq), but also, more damagingly, over domestic issues through a calculated and largely constructed fear of a velvet revolution. The exaggeration of perceived dangers at home and abroad ensured that domestic criticism remained muted, though a number of commentators, including the influential reformist thinker Saeed Hajjarian, warned about the dangers of an emergent “garrison state.”

The argument that Iranian politics have become militarized makes the issue far too black and white. In fact, the IRGC has come to be in bed with a hard-line establishment made up of the Supreme Leader Ayatollah Khamenei, Ahmadinejad and his clique, and even some journalists and clerics, meaning that the Right has coopted the IRGC as much as the IRGC has coopted them. This relationship between the hard-liners and the IRGC is long in the making, though it has been made far worse by Ahmadinejad’s arrival on the scene. We must remember this was started by Rafsanjani, when the moves into the political economy of the country were not initiated by the Guards though they have undoubtedly become enthusiastic participants. But what this means is that the IRGC is not a military junta. The Iranian state does not face a military coup in the traditional sense of the term. A more accurate categorization of Iran might be to call it the securitization of the state around the needs of an increasingly bloated business conglomerate, which confuses its own interests with those of the nation. This was in effect not the garrison state Hajjarian had warned about, but instead a mafia state writ large.

EMPOWERED BY a war mythology, reinforced by a largely constructed fear of foreign subversion and given free rein by the Ahmadinejad administration, the IRGC effectively indulged itself in an extensive extortion racket. A good example is the IRGC’s intervention in and seizure of the Imam Khomeini airport project. The airport had been developed as a replacement for the old Tehran Mehrabad airport and was intended to provide the capital with an international airport worthy of its stature. Like many projects in Iran, its construction was long overdue and eagerly anticipated. However as it neared completion, the Guards suddenly decided the company overseeing its construction, and particularly the internal communications networks, was suspect and needed investigating. The company and its Turkish partners were alleged to have some connection with Israel that the Guards argued was contrary to national security. They thus proceeded to tear up the entire communication network of the airport, and consequently, to much general embarrassment, delayed the opening of the facility by some months. Few believed the security argument, suggesting instead that the reason behind the preemptory intervention was far more mundane; the Guards had been excluded from a share of the project and took umbrage.

If traditional arguments proved increasingly incredible to the public, the Guards resorted, as did their political allies, to an ideology of religious authoritarianism that brooked no scrutiny and required no justification. This shift required another change at the top. Safavi was replaced by Mohammad Ali Jafari, a field commander rather than an “intellectual,” and one who could be relied upon to act on his convictions. The consequences of all these developments were to become brutally apparent in the run-up and aftermath of the tenth presidential election on June 12, 2009.

THE HARD-LINE establishment, of course whose most controversial leader is the Supreme Leader Ayatollah Khamenei—as he is supposed to refrain from interfering in the electoral process—had made it quite clear that its preference would be a second term for Ahmadinejad. Although Khamenei found it prudent to qualify his comments, the military brass saw no reason to be so shy. There was considerable sensitivity among the Iranian electorate over the role of the military, in particular the IRGC and the Basij, and there were widespread allegations that the IRGC and the Basij had manipulated the vote that had brought Ahmadinejad to power in 2005. This time, Ahmadinejad’s challengers noted, they would be vigilant. Despite the mounting controversy, as election day approached and the prospect of an Ahmadinejad loss loomed, statements of intent became even more explicit. Jafari warned that a “velvet revolution” would not be tolerated. One suspects that the motivation for such comments came as much, if not more, from a fear of economic exposure as it did from any perceived foreign-inspired threat.

True to form, when the unprecedented demonstrations erupted after the disputed election, the IRGC and the Basij were unleashed upon an increasingly irreverent public. Yet what remains striking about this repression (to date) has been the unsystematic and eclectic manner in which it has been implemented. The aim appears to have been to inculcate a sense of fear and anarchy rather than order (as evidenced by the widespread destruction of property by security forces), the idea apparently being that a widespread fear of anarchy will itself lead to order as ordinary Iranians grow anxious about the consequences of chaos. But this is not a military strategy born of a disciplined organization. On the contrary, this is a strategy born of paranoia. It is also a tactic which seeks to maximize the real limitations on power through the use of terror. It does not reflect an organization that is either cohesive or united, but one in which pockets of ideological fanaticism exist. Moreover, where this fanaticism has wavered, it has been reinforced by large amounts of money; money which, as on previous occasions, is tied to performance and which can only be paid in times of crisis. This perverse paradox has not gone unnoticed. Such are the realities of the mafia state.

THE GUARDS are increasingly taking control of Iran and seeking to shape the direction of the revolution they were sworn to protect. No longer satisfied that its civilian masters are up to the task, the IRGC has marginalized those who it judges to be weak or infected with the materialism of the West. The irony of this position, given its own extensive business interests, is not lost on the Iranian population. Nor, more importantly, is it lost on many of the IRGC’s own veterans and members of a conservative establishment who are critical of reform, but equally aghast at what the IRGC has become.

There is a deep contradiction within the Guard Corps between those who support a conservative notion of the state and those who support such an ideology more as a means of protecting their own interests—and violently when necessary. Nobody represents this dilemma better than the former commander of the Guards, Mohsen Rezai, who ran against Ahmadinejad as a conservative candidate in the 2009 presidential election. His acute criticism of Ahmadinejad’s (former basiji that he is) foreign and economic policies, both during the campaign and the crisis that has followed the dubious election, reminds us that the contemporary Guards, for all their apparent political success, remain a fractured, divisive and controversial institution. It indeed remains unclear how many Guardsmen voted for Rezai and his conservative beliefs, Mir Hussein Moussavi and his reformist views, or Ahmadinejad the Principle-ist.

Much as with the last shah, who doubted the loyalty of his army and worried about a coup, the reliability of the Guards in a prolonged crisis is questionable. If it is not a coup that concerns the ruling elite, there are undoubtedly fears of a countercoup led by Revolutionary Guard commanders who dislike Ahmadinejad and do not buy into a confrontational foreign policy which would certainly place them on the front lines of any conflict. Because of the divisions within the Guards themselves, should they rise up against Ahmadinejad (certainly a plausible scenario), it is unclear whether he will be deposed by those within the Guard Corps who do not find him conservative enough, or by those who do not support his aggressive approach to international affairs.

And even further splits within the IRGC are clear. Will they remain a force that safeguards the people, or instead look after their own interests? The repression that has followed the election crisis, and the apparent zeal with which senior Guard Corps commanders have spoken of their willingness to exercise maximum force has only increased the divergence between this “people’s army” and the people. Grand Ayatollah Montazeri—Khomeini’s former heir and the leading dissident cleric in Qom—bluntly summed up the state of affairs thusly: the Basij (and by extension their IRGC commanders) are no longer serving God, but Satan.

But for all their threats to exercise maximum force, much of the government-sponsored violence over the last few months—although possibly directed and supported by the IRGC—has been implemented by elements within the Basij. The IRGC has yet to exercise a systematic use of force, reflecting the Guards’ awareness that this would signify the crossing of a redline, and one which could well bring about unsustainable tensions within the organization itself. Many of the old-generation Guards object to crude force used against the people.

Because of these fissures within the IRGC, which are of course clear to all those involved, the hard-line clique now removes and marginalizes anyone who is considered of dubious loyalty to the wider (theological) project. Safavi, the former head of the IRGC and current special adviser to the supreme leader, for example, recently reinsured his safety by categorically supporting the notion that Ayatollah Khamenei is the Hidden Imam’s representative and in his absence can effectively exercise absolute power. Though seen as dangerous nonsense by most senior clerics (including Montazeri), statements of this nature are intended to show loyalty and commitment to, and complicity in, a particular idea of power. Those who do not adhere to this view are being purged, and recent indications are that many of the remaining old-generation Guards are being retired and replaced with new believers. This creates a dangerous polarization of views in the wider society, with a governing establishment made up of clerics, politicians and the IRGC poised on a pyramid whose base is becoming increasingly narrow and unstable. The Guards are but one aspect of a broader hard-line seizure of power. And these hard-liners are surrounded by a newly disenfranchised and discontented “ex-elite.”

The immediate consequence for the Iranian state is the reinforcement of a self-perpetuating paranoia, enhanced and exaggerated by the development of a security apparatus dependent on informants, and fueled by the extensive distribution of money and largesse through a tightly controlled patronage network. This is a security state, not a militarized state. All the flaws and weaknesses in the political-economic structure of the Islamic Republic are being reinforced and extended. And this is coupled with a governing elite of “true believers” that is not only shrinking but also has no desire or inclination to accommodate or compromise.

Faced with an increasingly belligerent opposition, its instinct will be to turn inward, using money and repression to keep society in line—tried and tested methods that the elite will have convinced themselves will work again. Of course, this is not a long-term, or indeed a medium-term, solution to the crisis of the Islamic Republic. With economic difficulties mounting (the impeding removal of subsidies due to prove a major shock to the system), the governing elite will turn increasingly to foreign policy and a nationalist cause (e.g., the nuclear crisis) to rally the people. Unfortunately for them, Iranians are no longer so easily convinced of their credentials. Crisis within the Iranian state will only grow.

http://tehranbureau.com/irgc-arrest-mousavi-khatami/

IRGC: Arrest Mousavi, Khatami, and others

jalili20090730150608828 IRGC: Arrest Mousavi, Khatami, and others

By MUHAMMAD SAHIMI in Los Angeles | 10 Aug 2009

[TEHRAN BUREAU] Comment Brigadier General Yadollah Javani, head of the political directorate of the Islamic Revolution Guards Corps (IRGC), the backbone of Iran’s military, has called for the arrest, trial and punishment of Mir Hossein Mousavi and Mahdi Karroubi, the two reformist candidates in Iran’s June 12 presidential election, Mohammad Khatami and Ayatollah Mohammad Mousavi Khoeiniha, a leading leftist cleric and leader of the leftist Association of Combatant Clerics (ACC).

Writing in Sobh-e Sadegh (True Dawn), a weekly that is the mouthpiece of the IRGC, Javani, a leading hardline IRGC commander said,

The Imam [Ayatollah Ruhollah Khomeini] believed that the preservation of our Islamic system is our most important duty, and, so far, a heavy price for the protection of this Godly system has been paid by the Muslim and revolutionary nation of Iran. Therefore, any group or person, regardless of their track record and position in the past, who, along with the United States, the Great Satan, wants to change this system and install a non-Islamic system in its place, must be considered to be committing treason and, therefore, must be punished.

In the indictment by the prosecutor [read in the show trials] it is explicitly stated that, based on credible documents, as well as the confessions of the accused and those arrested in the riots after the 10th [presidential] election, a faction with the support of the United States attempted to use the presidential election to state a velvet coup in Iran.

General Javani and other hardliners refer to the peaceful protests after the rigged election, which turned bloody after security forces killed several demonstrators, as “riots.” He then added,

The indictment states that,“according to the recovered documents and confessions of the accused, the recent events and riots had been planned in advance, and had been carried out according to a timetable.” The question is, who are the main people responsible for the coup, and what is their main goal in carrying out the coup?

Based on the present documents and the undeniable evidence, should we not arrest the main people [Khatami, Mousavi, Karroubi, and Khoeiniha] who were responsible for the coup, put them on trial, and punish them? Ignoring [what has happened] under the guise of the interest of the system will result in irreparable harm [to the system], and putting out the fire [that has been set by the people responsible for the coup] will require the trial of the main people responsible for it, and revealing their true identities to the Muslim and revolutionary people of Iran. It is time for the judiciary, and the intelligence and security officials to be alert.

General Javani then added,

After the arrest of some of the rioters and active agents in the headquarters and offices of the coup agents [meaning the campaigns of Mousavi and Karroubi], some people tried to get them released and prevent clarification of the problems [what had happened]. Because the Second Khordad Front was concerned that the confessions of the arrested people will be broadcast, they tried, with the help of some of the clerics and the political and legal elites, to claim that the confessions before the trials have no legal value or validity, and also tried to prevent broadcasting the confessions. Now that the first public session of the court has been held and, in addition to accepting their charges in the indictment, [Mohammad Ali] Abtahi and [Mohammad] Atrianfar have made important confessions [in the court], the main people responsible for the failed project [the “coup”] and their allies are making absurd statements in order to explain away the confessions.

Khordad 2 (May 23) is the day in 1997 that Mohammad Khatami was elected president by a landslide. The coalition of the reformist parties that support him throughout his presidency is known in Iran as the Second Khordad Front. General Javani is referring to the “confessions” that Mohammad Ali Abtahi, a former vice president to Mr. Khatami, and Mohammad Atrianfar, a leading reformist journalist who was active in the campaign of Mir hossein Mousavi, made in court on Saturday July 25. General Javani then continued,

The initial goal of the velvet coup was to gain political power, while the final goal was the transformation of the Islamic system into a secular one, which, with God’s help, people’s alertness, wisdom of the Supreme Leader, and the efforts and sacrifices of the police and military, [the coup] was defeated.

Those who, during the Second Khordad period [1997-2005], failed to destroy the Islamic basis of the political system and secularize the country re-emerged with a new plan using Mir Hossein [Mousavi] as a person who is a follower of the Imam’s line and defender of the Islamic values. In his initial campaign Mousavi tried to introduce himself [to the public] as someone who is independent of the [reformist] extremists and the Second Khordad Coalition, but with the passage of time it became clear that Mousavi is the main candidate of the Second Khordad groups.

Together with Major General Mohammad Ali (Aziz) Jafari, the top commander of the IRGC, General Javani has taken a tough line toward the reformists and their allies. Ever since General Jafari was appointed the top commander of the IRGC in 2006, he and General Javani have been warning about the possibility of a “velvet coup” akin to what happened in Georgia and Ukraine in 2003 and 2004. General Javani regularly writes in Sobh-e Sadegh, and his articles usually reflect the thinking of the hardline supporters of Mahmoud Ahmadinejad in the IRGC.

Generals Javani and Jafari have had a regular presence in the political developments of Iran. They regularly issue warnings about supposed foreign intervention in Iran’s internal affairs. In another article in the Sobh-e Sadegh on June 10, two days before the presidential election, General Javani had warned about the possibility of a velvet revolution (which has now been renamed the velvet coup, after Khatami accused the IRGC of staging a velvet coup against the will of the people), and accused the reformers of being the operatives.

While Mousavi, Karroubi, and Khatami are currently recognized as the leaders of the resistance against the rigged election, and are being constantly attacked by the hardliners, General Javani has also included Ayatollah Mousavi Khoeiniha as a culprit. The ACC led by Khoeiniha has issued several extremely tough-worded statements, accusing the IRGC and their supporters of vast fraud, in order to be able to declare Ahmadinejad the winner of the election. The ACC has also harshly criticized the violent crackdown on the peaceful demonstrators, the murder of scores of those arrested, and the show trials of the reformists, and has also declared the second term of Ahmadinejad as illegitimate and illegal. It is against this background that General Javani has demanded the arrest of Khoeiniha, along with Mousavi, Karroubi, and Khatami.

An interesting twist to this is that, a day before General Javani’s article was published, the same accusations and demands made by him were also attributed to General Jafari. But, the IRGC issued a statement quickly, denying that General Jafari had made the same accusations and demands. Whether General Javani has published the article with it being approved by General Jafari, or whether the contradiction between General Jafari’s denial and General Javani’s article reflects some divisions among the IRGC top commanders, or whether it is simply part of an intriguing good-cop bad-cop game by the IRGC, is unclear at this point.

The threat to arrest the main leaders of the reformists appears, at least at this stage, to be simply a scare tactic, in order to force them into silence. They have been outspoken about the show trials, which has made the hardliners uncomfortable. The hardliners are well aware of the respect and prestige that Khatami enjoys at the international level, and the outcry that his arrest will generate. In addition, any attempt to arrest any one of them is sure to spark large-scale demonstrations that may well be very bloody.

http://current.com/items/76972552_basijis-irans-culture-cops.htm
Basijis: Iran’s Culture Cops (VIDEO) – The militia backing up Ahmadinejad
August 28, 2007

July 21, 2009
Islamic Guards Emerge as Key Power Bloc in Splintered Iran
By MICHAEL SLACKMAN

CAIRO — As Iran’s political elite and clerical establishment splinter over the election crisis, the nation’s most powerful economic, social and political institution — the Islamic Revolutionary Guards Corps — has emerged as a driving force behind efforts to crush a still-defiant opposition movement.

From its origin 30 years ago as an ideologically driven militia force serving Islamic revolutionary leaders, the corps has grown to assume an increasingly assertive role in virtually every aspect of Iranian society.

And its aggressive drive to silence dissenting views has led many political analysts to describe the events surrounding the June 12 presidential election as a military coup.

“It is not a theocracy anymore,” said Rasool Nafisi, an expert in Iranian affairs and a co-author of an exhaustive study of the corps for the RAND Corporation. “It is a regular military security government with a facade of a Shiite clerical system.”

The corps has become a vast military-based conglomerate, with control of Iran’s missile batteries, oversight of its nuclear program and a multibillion-dollar business empire that reaches into nearly every sector of the economy. It runs laser eye-surgery clinics, manufactures cars, builds roads and bridges, develops gas and oil fields and controls black-market smuggling, experts say.

Its fortune and its sense of entitlement have reportedly grown under President Mahmoud Ahmadinejad. Since 2005, when he took office, companies affiliated with the Revolutionary Guards have been awarded more than 750 government contracts in construction and oil and gas projects, Iranian press reports document. And all of its finances stay off the budget, free from any state oversight or need to provide an accounting to Parliament.

The corps’s alumni hold dozens of seats in Parliament and top government posts. Mr. Ahmadinejad is a former member, as are the speaker of Parliament, Ali Larijani, and the mayor of Tehran, Mohammad Baqer Qalibaf. And the influence of the Revolutionary Guards reaches deep into the education system, where it indoctrinates students in loyalty to the state, and into the state-controlled media, where it guides television and radio programming.

“They are the proponents of an authoritarian modernization, convinced that the clergy should continue supplying the legitimation for the regime as a sort of military chaplains, but definitely not run the show,” said a political scientist who worked in Iran for years, but asked not to be identified to avoid antagonizing the authorities.

They are so influential partly because they present a public front of unity in a state where power has always been fractured. By contrast, clerics have many different agendas and factions. Nonetheless, there are glimmers of fractures underneath the corps’s opaque and disciplined surface.

Political analysts said that behind the scenes there were internal disagreements about the handling of the election and the demonstrations against disputed results that gave a second term to Mr. Ahmadinejad.

“I have received reports, at least part of the top commanders in the Revolutionary Guards are not happy with what is going on,” said Muhammad Sahimi, a professor at the University of Southern California, who says he has a network of contacts around the country. “There are even reports of some who have protested.”

Even a former commander in the corps, Mohsen Rezai, who served for 16 years, decided to challenge the status quo by running for president this year, and he openly complained of the government’s failure to investigate accusations of vote-rigging.

One political analyst said that many of the rank and file were known to have voted for Mohammad Khatami, an outspoken reformer, when he was first elected president in 1997.

The corps is not large. It has as many as 130,000 members and runs five armed branches that are independent from the much bigger national military. It commands its own ground force, navy, air force and intelligence service. The United Nations Security Council has linked its officials to Iran’s nuclear program. The West suspects Iran of trying to build nuclear weapons, an allegation the government has denied.

The corps’s two best-known subsidiaries are the secretive Quds Force, which has carried out operations in other countries, including the training and arming of the Hezbollah militia in Lebanon; and the Basij militia. The Basiji, who experts say were incorporated under the corps’s leadership only two years ago, now include millions of volunteer vigilantes used to crack down on election protests and dissidents.

Members of the Revolutionary Guards and their families receive privileged status at every level, which benefits them in university admissions and in the distribution of subsidized commodities, experts said.

Mr. Nafisi, the RAND report co-author, said a former commander in the corps estimated that all the corps and Basiji members, together with their families, added up to a potential voting bloc of millions of people. “This new machinery of election was quite important in bringing Ahmadinejad forward,” Mr. Nafisi said.

Within this bloc is a core of military elites who have displaced — and at times clashed with — the clerical revolutionaries who worked beside Ayatollah Ruhollah Khomeini in founding the Islamic republic. They are the second generation of revolutionaries, ideologically united and contemptuous of first-generation clerics like former President Ali Akbar Hashemi Rafsanjani, and of reformers and those eager to engage with the West. The corps has even trained its own clerics.

In an essay describing the rise of the Revolutionary Guards phenomenon, Professor Sahimi drew a portrait of the new elite: he said they were leaders in their mid-50s who as young men joined the corps and fought two wars: one against Iraq in the 1980s and another to force out the Mujahedeen Khalq, which the United States considers a terrorist organization and which is now based in Iraq.

The corps then split into two groups. One was convinced that Iran needed a chance to develop politically and socially; the other, which emerged the victor, was intent on maintaining strict control. Mr. Nafisi said the country’s supreme leader, Ayatollah Ali Khamenei, was close to that second group.

“He went to the war front several times, more than any other commander,” Mr. Nafisi said. “He made personal contact with many commanders, got to know them and earned their loyalty. Now all the people in charge were basically assigned to him at the time of war.”

Today, the corps has expanded its role and reach. Its financial interests have, for example, been linked directly to the government’s foreign policy. Iran may well have remained silent on the attacks on Uighur Muslims in China this month in part because Beijing is one of the main trading partners with the corps.

Shortly after the Iran-Iraq war, Mr. Rafsanjani, then the president, encouraged the corps to use its engineers to bolster its own budget and to help rebuild the country. Since then, a Revolutionary Guards company, Khatam al-Anbia, has become one of Iran’s largest contractors in industrial and development projects, according to the RAND report. Its contracts with the government, including projects like the construction of a Tehran subway line, hydroelectric dams, ports and railway systems, are carried out by the company’s subsidiaries or are parceled out to private companies.

What is less quantifiable is the corps’s black-market smuggling activity, which has helped feed the nation’s appetite for products banned by sanctions, while also enriching the corps. The Rand report quoted one member of Iran’s Parliament who estimated that the Revolutionary Guards might do as much as $12 billion in black-market business annually.

In his will, Ayatollah Khomeini asked that the military stay out of politics, and senior Revolutionary Guards officials have been careful to defend themselves against accusations of political meddling after the June 12 election. But Gen. Yadollah Javani, director of the corps’s political arm, warned the public that there was no room for dissent.

“Today, no one is impartial,” he said, according to the official news agency IRNA. “There are two currents: those who defend and support the revolution and the establishment, and those who are trying to topple it.”

Nazila Fathi contributed reporting from Toronto, and Neil MacFarquhar from the United Nations.

http://www.rferl.org/content/Irans_Basij_Force_Mainstay_Of_Domestic_Security/1357081.html
Iran’s Basij Force — The Mainstay Of Domestic Security
December 07, 2008
By Hossein Aryan

The Basij is subdivided into five units: the Pupil Basij, the Student Basij, the University Basij, the Public Service Basij, and the Tribal Basij. The diverse range of these units is indicative of the various roles of the force and the fact that the aim of the Basij is to reinforce support for the current regime through, among other things, promoting its interpretation of Islamic values.

Basij members on review in Tehran on November 27
Members of the younger Pupil Basij are aged between 12-15 and those of the elder Pupil Basij between 15-18. There are special summer camps for members of the Pupil Basij. These two sub-sections of the Pupil Basij are similar to the “young pioneers” and Komsomol in the Soviet Union. In other words, they constitute a mass youth movement that helps to encourage regime support from an early age.

The backbone of the Basij comprises 2,500 Al-Zahra (for women) and Ashura battalions, numbering 300–350 personnel each. The IRGC aims to arm 30 percent of these battalions with semi-heavy and heavy weapons. However, all members of the battalions are trained to use light arms and rifles. Since Major General Mohammad Ali Jafari assumed command of the IRGC on September 1, 2007, the Basij have received extensive organizational and logistical support by the Revolutionary Guards that has enabled it to form 30,000 new combat cells, each of them 15-20 members strong, named Karbala and Zolfaqar. These units cooperate closely with the army of the IRGC.

The mission of the Basij as a whole can be broadly defined as helping to maintain law and order; enforcing ideological and Islamic values and combating the “Western cultural onslaught”; assisting the IRGC in defending the country against foreign threats; and involvement in state-run economic projects.

In terms of maintaining law and order, Basij members act as “morality police” in towns and cities by enforcing the wearing of the hijab; arresting women for violating the dress code; prohibiting male-female fraternization; monitoring citizens’ activities; confiscating satellite dishes and “obscene” material; intelligence gathering; and even harassing government critics and intellectuals. Basij volunteers also act as bailiffs for local courts.

During this year’s Basij Week, one of the commanders of the IRGC, Abdollah Eraqi, stressed that after a long lapse, the Basij will again start patrolling the streets of Tehran to help police maintain the Islamic dress code and arrest hardened criminals.

Doing The Dirty Work

It is noteworthy that the organizational structure of Basij units and the training they receive varies from one province to another, according to the nature and severity of the potential threats identified by the IRGC and Basij commanders in different regions. Basij members in the border provinces of Khuzestan and Sistan va Baluchistan perform different duties to those stationed in central Iran.

Female Basij members have led crackdowns on women’s dress.
In Sistan va Baluchistan and Khorasan, which border Pakistan and Afghanistan, respectively, Basij members are deployed against drug traffickers, while in the province of Khuzestan, adjacent to Iraq, they carry out border-guard duties, and in the littoral provinces of Hormuzgan and Bushehr, they assist the IRGC’s naval forces in combating the smuggling of banned goods from the Arabian Peninsula.

The Ashura battalions of the Basij are regularly trained in riot-control tactics and how to deal with domestic uprisings. Basij members played a central role in breaking up the widespread student riots in Tehran in 1999. They were also instrumental in quelling several outbreaks of ethnic unrest in the oil-rich province of Khuzestan, which is home to the majority of Iran’s ethnic-Arab population.

Since the Basij was directly subordinated to Major General Jafari last year, it has been given legal authority to engage in economic projects. Earlier this year, at the initiative of President Mahmud Ahmadinejad’s government, the Majlis passed a law to the effect that government construction and economic projects can be contracted to the Basij. Several members of the Majlis vehemently criticized this law, arguing that it violates Article 44 of the constitution, but to no avail.

Lacking the necessary skills to implement such projects, the Basij is likely to solicit help from the IRGC, which has extensive experience in this area. The IRGC is, after all, the third-wealthiest organization in Iran after the National Iranian Oil Company and the Imam Reza Endowment (named after the eighth Shi’ite imam).

Playing Politics

The Basij also plays a key role in preserving the political status quo. Although the constitution bans members of the IRGC and the Basij from involvement in politics, Basij support contributed to Ahmadinejad’s victory in the 2005 presidential election. The Basij under the tutelage of the IRGC was also heavily involved in the March 2008 parliamentary elections, during which Basij and IRGC commanders openly backed Ahmadinejad’s principalists (osulgarayan). In February 2008, Major General Jafari said that “the principlists are in control of the executive and legislative branches and, God willing, the judiciary will soon follow suit.” Hasan Taeb, then deputy commander of the Basij, similarly stressed that Basij members should have a “maximum presence” in the elections.

Taeb, who is now Basij commander, said during this year’s Basij Week that his organization will not interfere in next year’s presidential vote. However, history suggests that both the IRGC and the Basij will ultimately follow the orders of Supreme Leader Ayatollah Ali Khamenei and senior clerics, given that the commanders of both forces firmly believe that political interference is justified on revolutionary grounds. An IRGC commander told former Intelligence Minister Ali Yunesi in early May: “We joined the [Revolutionary] Guards in order to interfere. During the [Iran-Iraq] War, we interfered in politics and we do so now because it is an act of revolution.”

Those plans to co-opt the Basij and the IRGC underline the primary concern of the Iranian leadership, which is deflecting and countering internal threats and preserving domestic political stability at a time when grave economic problems, including high inflation and growing poverty and unemployment, have undermined support for Ahmadinejad and triggered a series of domestic uprisings among reformers, students, and ethnic minorities.

Given the convoluted power structure of Iranian politics, Ayatollah Khamenei is increasing looking toward the former IRGC commanders, as well as the IRGC and the Basij, to help maintain his position as de facto the most powerful man in Iran, neutralize popular dissatisfaction over the deteriorating economic situation, stifle demands for political reform, and undercut pressure related to the nuclear issue.

There is no guarantee that Ahmadinejad will be reelected president next June. But even if he is not, domestic tensions are likely to persist, enhancing the role of the Basij as guarantor of political stability.

http://www.globalsecurity.org/intell/world/iran/basij.htm
Niruyeh Moghavemat Basij
Mobilisation Resistance Force

The Pasdaran was given the mandate of organizing a large people’s militia, the Basij, in 1980. Islamic Revolution Guards (Vezarat-e Sepah Pasdaran-e Enqelab-e Islamic) is in charge of the paramilitary national Mobilization of the Oppressed (Baseej-e Mostazafan) Organisation. It is from Basij ranks that volunteers were drawn to launch “human wave” attacks against the Iraqis, particularly around Basra.

The precise size of the Basij is an open question. Basij membership comprises mainly boys, old men, and those who recently finished their military service. Article 151 of the Constitution says the government is obligated to provide military-training facilities for everyone in the country, in accordance with the precepts of Islam under which all individuals should have the ability to take up arms in defense of their country

Iranian officials frequently cite a figure of 20 million, but this appears to be an exaggeration based on revolutionary leader Ayatollah Ruhollah Khomeini’s November 1979 decree creating the Basij. Khomeini said at the time that “a country with 20 million youths must have 20 million riflemen or a military with 20 million soldiers; such a country will never be destroyed.” In a 1985 Iranian News Agency report, Hojjatoleslam Rahmani, head of the Basij forces of the Pasdaran, was quoted as stating that there were close to 3 million volunteers in the paramilitary force receiving training in some 11,000 centers.

General Yahya Rahim-Safavi, the commander of the IRGC, predicted that in the Third Five-Year Development Plan (2000-04) the number of Basijis will expand to 15 million (9 million men, 6 million women) to better counter potential domestic and foreign threats. While apparently falling short of the goal outlined in the plan, Basij commander Brigadier General Mohammad Hejazi estimated the number of Basij personnel at 10.3 million in March 2004 and 11 million in March 2005. Basij commander General Mohammad Hejazi said on 14 September 2005 that the Basij has more than 11 million members across the country.

Other estimates place the force at 400,000. There are about 90,000 active-duty Basij members who are full-time uniformed personnel; they are joined by up to 300,000 reservists. The Basij can mobilize up to 1 million men. This includes members of the University Basij, Student Basij, and the former tribal levies incorporated into the Basij (aka Tribal Basij). Middle-school-aged members of the Student Basij are called Seekers (Puyandegan), and high-school members are called the Vanguard (Pishgaman).

The Niruyeh Moghavemat Basij – the Mobilisation Resistance Force – was the strong right arm of Ayatollah Khomeini. Its volunteers were martyred in their tens of thousands in the Iran-Iraq war, and were given the role of moral police at home. The supreme leader’s equally conservative successor, Ayatollah Ali Khamenei, has been careful not to let any of Iran’s overlapping security forces fall under the control of his elected rival.

Ashura Brigades were reportedly created in 1993 after anti-government riots erupted in various Iranian cities. In 1998 they consisted of 17,000 Islamic militia men and women, and were composed of elements of the Revolutionary Guards and the Baseej volunteer militia.

The Basij, or Baseej paramilitary volunteer forces, come under the control of the Revolutionary Guards. They have been active in monitoring the activities of citizens, enforcing the hijab and arresting women for violating the dress code, and seizing ‘indecent’ material and satellite dish antennae. In May 1999 the Minister of Islamic Culture and Guidance stated in public remarks that the Government might support an easing of the satellite ban. However, Supreme Leader Khamenei, who makes the ultimate determination on issues that involve radio and television broadcasting, quickly criticised any potential change as amounting to “surrender” to Western culture, effectively ending any further debate of the idea. The “Special Basijis” are not permitted to participate in political parties or groups, although other members of the Basij can belong to political associations if they are not on a Basij mission and do not use the name or resources of the Basij for the association. Basijis can participate in specialist or trade associations.

Hezbollahi “partisans of God” consist of religious zealots who consider themselves as preservers of the Revolution. They have been active in harassing government critics and intellectuals, have firebombed bookstores and disrupted meetings. They are said to gather at the invitation of the state-affiliated media and generally act without meaningful police restraint or fear of persecution.

President Mohammad Khatami told the cabinet on 22 November 2000 that “the Basij is a progressive force which seeks to play a better role in maintaining religious faith among its allies, and acquiring greater knowledge and skills.” The deputy commander of the Islamic Revolution Guards Corps, Brigadier-General Mohammad Baqer Zolqadr, made comments in a similar vein at the annual Basij Supreme Association for Political Studies and Analysis gathering. He told the audience that the Basij pursued military activities in the first decade after the revolution because the main threat facing Iran at the time was a military one. Now, Zolqadr explained, the Basij will become “involved anywhere if the country’s security, goals, or national interests are threatened.” A statement issued by the Basij Center at the Science and Technology University on 23 November 2000 explained how this will be accomplished : “The Basij Resistance Force is equipped with the most modern and up-to-date weapons and is undergoing the most advanced training. It is making such achievements that if the enemy finds out it will tremble and have a heart attack.” The Basij demonstrated what it would do in case that faile during 23 November 2000 civil defense exercises, when armed Basijis took up positions in the streets and along strategic locations.

The Basij Resistance Force appeared to be undergoing something of a revival under the administration of President Mahmud Ahmadinejad. This could be connected with the organization’s alleged role in securing votes for Ahmadinejad during the presidential campaign and on election day. Ahmadinejad appointed Hojatoleslam Heidar Moslehi, the supreme leader’s representative to the Basij, as an adviser in mid-August 2005. But the revival — along with changes in the paramilitary organization’s senior leadership — could also be connected with preparations for possible civil unrest. In late September 2005, the Basij staged a series of urban defense exercises across the country. General Mirahmadi, the first deputy commander of the Basij, announced in Tehran that the creation of 2,000 Ashura battalions within the Basij will enhance Iran’s defensive capabilities. Ashura units have riot-control responsibilities.

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/18/AR2009061804131.html
Militia Adds Fear To Time of Unrest

By Tara Bahrampour
Washington Post Staff Writer
Friday, June 19, 2009

One of the more dramatic video clips from Iran this week showed a man in an upper-floor window firing onto demonstrators outside a building near Tehran’s Azadi Square, killing at least one and wounding others.

The building was a base for the Basij, a semiofficial force of volunteers on whom the government has relied for years to enforce a variety of laws and religious codes. Protesters have accused them of committing much of this week’s violence, saying they have raided university dorms, beaten women and smashed their way into private homes. Many said they fear the Basij will be used to carry out even worse violence as the protests continue.

But although the Basiji loom large in the minds of their countrymen, Iranians and analysts interviewed said it is hard to pin down the number of members, their precise activities and whether they are all as loyal to hard-line government factions as many believe.

Joining the Basij can be as simple as going to a local mosque and receiving a membership card. Training and membership are often informal, said Gary Sick, an Iran expert at Columbia University’s School of International and Public Affairs, adding that some who carry out activities associated with the Basij may not be official members. “If the Basiji are given a job, like to go break up a dormitory, and they call up their friends and say ‘Let’s go hit those sissy college kids,’ it wouldn’t surprise me a bit,” he said.

The term, which means “mobilization,” originally referred to people too young or too old to join the army during Iran’s eight-year war against Iraq. Then-leader Ayatollah Ruhollah Khomeini called for 20 million Iranians — half the country’s population at the time — to volunteer. Many were preteens and teenagers who, swept up in a religion-infused passion, famously walked onto minefields, unarmed, allegedly with plastic keys to heaven around their necks.

After the war, they became known for enforcing moral codes. For years, the word “Basiji” has struck fear into the hearts of more secularized Iranians, who know them as young men who stop them on the street for failing to follow the dress code or fraternizing with the opposite sex.

Like the Revolutionary Guard Corps, the religious militia with which they are affiliated, the Basiji are “people who can get their rifles and guns to come and defend the revolution” if necessary, said Mohsen Sazegara, a co-founder of the Revolutionary Guard and now president of the Washington-based Research Institute for Contemporary Iran. Sazegara said that although the Basij claims 12 million members, he thinks the number is around 500,000.

Critics of the Basiji say they are largely poor, uneducated and motivated in part by envy of their wealthier or more successful compatriots.

But that characterization is not always true, said Afshin Molavi, a Washington-based Iran analyst at the New America Foundation who spent time with Basiji while researching a book.

“The Basiji volunteer militia . . . are not monolithic,” he said, adding that while some fit the more hard-core and violent pattern, others become involved more casually. “They’re religious, that they have certain ways of dressing, like you never tuck your shirt in, or you wear Palestinian-style kaffiyeh, and it’s kind of a social identity.”

“Some of the finest people I met in Iran were members of the Basiji, and some of the worst people I met in Iran were members of the Basiji,” he said. “But among the more hard-core there is a core intolerance for Iranians who have adopted a more modern and secular lifestyle that they view as Western.”

The less hard-core members may be a wild card in upcoming days, Sazegara said.

He said many were “ordinary young people” who may feel conflicted about this week’s events. Some of them, he said, may have voted for Mir Hossein Mousavi, the defeated presidential candidate who has called on his supporters to protest the election, while still believing strongly in the country’s supreme leader, Ayatollah Ali Khamenei.

The conflict extends beyond the Basij, he said, adding that former colleagues in the Revolutionary Guard have called him expressing misgivings about the election.

Sazegara also cautioned against confusing the Basij with other, more professional and organized, militia, including those associated with the Ministry of Intelligence.

“Many of their friends and family are on the other side,” he said. “If the regime thinks they can use them to suppress the people and kill the people, they are going to have a hard time.”

http://www.aftabnews.ir/vdcgww97.ak97n4prra.html

· “Mr. Ja’fari has made a statement which was a source of wonder for me. He has defined the Basij as two organizations in which one part is the armed wing of the Basij which is a part of the military forces and dependent on the military and must not intervene in elections. But another part of the Basij which is mostly involved in relief operations and cultural affairs can engage in elections without problem. This is a new definition and it seems that every single day we must hear new and ever stranger things…

· We have only one general Basij and the Imam [Khomeini] said being a member of the Basij ‘is a source of pride for me.’ The Supreme Leader, Mr. Hashemi, everyone says he is member of the Basij. But the Basij which is under the command of Mr. Ja’fari, what group is that which is headed by him? Such statements within the military system is sends a signal…

· I say to the honorable brother with the greatest respect and politeness, the Basij in its general definition 60 percent of which is composed of free people and 40 percent of which is composed of members of the Armed Forces such as the Guards, the Army, soldiers and the Law Enforcement Forces who were obliged to go to the front. Thousands of people from different classes were expedited to the front and became martyrs. They too were members of the Basij. But today there is no war and the Basij is supervised by the Armed Forces and the Guards which is a source of pride to the nation among the midst of which it has developed. They belong to the armed forces and there is no meaning in their intervention in politics…

· I have been a member of the Basij for more than 48 years. Most certainly Mr. Ja’fari was a child back then. But one must say that the Basij [member] who is under the command of Mr. Ja’fari is a part of the armed forces…I have come to participate in an election without interventions of the Basij and the armed forces or rogue forces. A free election where everyone aims for victory. Don’t make such threats. You make the people more sensitive…

· If there is the slightest irregularity, I’ll stand firm and will not leave the arena. We will react. The consequences are the responsibility of the dear brothers who do not consider the circumstances to their liking, have sensed danger and chant songs for themselves. They claim the Basij is made of two parts. Gradually it will probably become four parts, and six parts after that…There is only one Basij and it is the one which is under your command. No one is so honorable that he can lose some of it. Don’t divide the Basij so they show up at the ballot and threaten the people or threaten them at rallies.”

http://www.roozonline.com/english/news/newsitem/article/2008/october/27//special-basij-units-formed.html
October 27, 2008
Special Basij Units Formed
Esfandiar Saffari

In Order to Confront “Soft and Semi-Hard” Threats – 2008.10.28

The commanders of Revolutionary Guards ground forces and Basij operations announced simultaneously that they are forming special new “Imam Hussein” units composed of members of the Basij.

The Basij commander of operations, Brigadier General Ahmad Zolghadr announced during the latest military maneuver by the Revolutionary Guards that new special and expert air force, ground force and navy units would be formed from selected members of the “Ashura” and “Al-Zahra” brigades across the country.

Quoting Zolghadr, Sobh-e Sadegh weekly, the mouthpiece for the political division of the Revolutionary Guards wrote, “Basij members are selected to serve in these special units based on their physical fitness and will undergo various expert training sessions which would lead to a significant leap in Basij’s capability.”

He also added that units with expertise in aviation of small and light airplanes, special martial arts, sea navigation, parachuting from helicopters and planes, utilizing motorcycles in combat, scuba diving in ocean, and various other air, sea and land skills would be among the units formed.

According to Zolghard, special aviation schools would be set up in all of the country’s provinces in order to train the new special Basij units.

This high ranking Revolutionary Guards commander noted “preempting attacks by enemies” as the goal behind forming these special units, adding that the new structure of the Revolutionary Guars and Basij has afforded the institutions to be present in cultural, development and Jihad scenes.

According to the Revolutionary Guards commander of ground forces, more than 600 special Imam Hussein units would be formed by the end of the Iranian year 1387. Mohammad Jafar Asadi also noted regarding the role of responsibility of the Basij and the new special units formed from Basij members, “The responsibility of Basij across the country is to confront soft and semi-hard threats so long armed conflict erupts, meaning that if threats are of soft or semi-hard kind, the Basij is entrusted with the responsibility to confront them, but if armed activity is required to confront such threats, the Revolutionary Guards ground forces are responsible for confronting them.

This top Revolutionary Guards official also called on the Basij to combat what he dubbed “cultural and social threats,” noting that because enemies wish to undermine the Islamic Republic using new and various tactics in cultural, economic, political and social arenas, the Basij must utilize its high capabilities to enter the above mentioned fields and subvert the enemies’ goals.

Structural changes began in the Revolutionary Guards ever since the appointment of Mohammad Ali (Aziz) Jafari as the head of the body by the Islamic Republic Supreme Leader and continue with the incorporation of Ashura and Al-Zahra brigades of the Basij into the Revolutionary Guards.

The Ashura and Al-Zahra brigades were formed in the mid 1990s from selected members of the Basij in order to combat urban and street protests and demonstrations.

The Revolutionary Guards has also set up and trained “Zolfaghar” and “Karbala” brigades across the country. These are special, independent units of Basij and Guards members, which are described by Basij commander Hussein Taeb as being the Revolutionary Guards “claws in combating foreign enemies.” Recently Taeb placed the number of anti-riot Ashura and Al-Zahra units across the country at 2500.

The new Revolutionary Guards ground forces commander, Mohammad Jafar Asadi, noted in his latest interview that protecting the interior of the country is the responsibility of the Basij, while protecting the regime is the responsibility of the Revolutionary Guards, adding that the two forces would be incorporated in case of a foreign attack, emphasizing that “under the restructuring plan, when necessary to confront foreign aggression, the ground forces, air force, navy and Basij would be incorporated into a united force, because the Revolutionary Guards has one main responsibility which is to protect the Islamic Revolution and its achievements and principles.”

The State Security Forces had previously set up special units in Iran in order to combat internal protests and demonstrations.

http://www.nytimes.com/2009/06/19/world/middleeast/19basij.html
Shadowy Iranian Vigilantes Vow Bolder Action
By NEIL MacFARQUHAR
Published: June 18, 2009

“It is the special brigades of the Revolutionary Guards who right now, especially at night, trap young demonstrators and kill them,” said Mohsen Sazegara, an Iranian exile who helped write the charter for the newly formed Revolutionary Guards in 1979 when he was a young aide to Ayatollah Ruhollah Khomeini. “That is one way the regime avoids the responsibility for these murders. It can say, ‘We don’t know who they are.’ ”

http://www.rand.org/pubs/monographs/2008/RAND_MG821.pdf

The Rise of
the Pasdaran
Assessing the Domestic Roles of Iran’s
Islamic Revolutionary Guards Corps

http://www.cfr.org/publication/14324/
Iran’s Revolutionary Guards by: Greg Bruno, Staff Writer
Updated: October 25, 2007

The Inception, Duties and Structure

The Islamic Revolutionary Guard Corps, or Pasdaran in Farsi, was formed by former Supreme Leader Ayatollah Khomeini in the aftermath of the 1979 Islamic Revolution. It was originally created as a “people’s army” similar to the U.S. National Guard; commanders report directly to the supreme leader, Iran’s top decision-maker. Iran’s president appoints military leaders of the guard but has little influence on day-to-day operations. Current forces consist of naval, air, and ground components, and total roughly 125,000 fighters.

The Revolutionary Guards’ primary role is internal security, but experts say the force assists Iran’s regular army, which has about 350,000 soldiers, with external defenses. Border skirmishes during the Iran-Iraq war in the 1980s helped transform the guard into a conventional fighting force organized in a command authority similar to Western armies; some analysts compare it to the “old Bolshevik Red Army.” According to the International Institute for Strategic Studies, which publishes an annual assessment of the world’s militaries, the guards also control Iran’s Basij Resistance Force, an all-volunteer paramilitary wing of roughly one million conscripts.

Bruce Riedel, a senior fellow at the Brookings Institution and a former CIA analyst during the Islamic uprisings, says the Revolutionary Guards were created as a “counterweight to the regular military, and to protect the revolution against a possible coup.”

Quds Special Forces

The Quds Force, a paramilitary arm of the Revolutionary Guards with less than a thousand people, emerged as the de facto external-affairs branch during the expansion. Its mandate was to conduct foreign-policy missions—beginning with Iraq’s Kurdish region—and forge relationships with Shiite and Kurdish groups. Riedel says a Quds unit was deployed to Lebanon in 1982, where it helped in the genesis of Hezbollah.

Economic Influence

The Los Angeles Times estimates the group, tasked with rebuilding the country after the war with Iraq, now has ties to over one hundred companies that control roughly $12 billion in construction and engineering capital.

Mohsen Sazegara (http://www.sazegara.net/english), a founding member of the Revolutionary Guards and U.S.-based Iranian dissident, says though the original charter of the elite force was to create a “people’s army,” years of political and military changes have transformed the unit into a massive money machine. Sazegara says the guards’ business dealings range from construction and manufacturing to illegal importation of alcohol. “

http://www.washingtoninstitute.org/templateC05.php?CID=2649
Iran’s Revolutionary Guards Corps, Inc. By Mehdi Khalaji
August 17, 2007

Structure and Duties

Apart from being a military force with naval, air, and ground components organized in parallel to the conventional Iranian military, the Revolutionary Guards are the spine of the current political structure and a major player in the Iranian economy.

the Islamic Republic has evolved into a “garrison state,” to use an American political science term, in which the military dominates political, economic, and cultural life, and preserves the regime from domestic rather than external opponents.

The Revolutionary Guards also possess their own large and capable intelligence agency. The “Unit of Reservation of Information” exists in parallel with and is quite influential within the Ministry of Intelligence.

Former Pasdaran in Politics

Khamenei has appointed many former Revolutionary Guards commanders to top political positions, blurring the line between military and civil authority. Former IRGC senior officers hold significant positions throughout the Iranian government: the president, Mahmoud Ahmadinezhad; the secretary of the Supreme Council of National Security, Ali Larijani; the head of state television and radio services, Ezzatolah Zarghami; the secretary of the Expediency Council (charged with interpreting policy when the president and Majlis disagree), Mohsen Rezai; and the head of the powerful Mostazafan Foundation, Mohammad Farouzandeh; as well as several cabinet ministers and many members of parliament (Majlis).

Economical Influence

Speaking at a ceremony announcing a $1.3 billion no-bid contract between Iran’s Oil Ministry and the Khatam al-Anbia firm in June 2006, Revolutionary Guards Brig. Abdurreza Abedzadeh, Khatam al-Anbia’s reconstruction deputy, stated that the company had completed 1,220 industrial and mining projects over the previous sixteen years, with 247 projects currently underway.

Three days later, a $2.4 billion contract was concluded with the Tehran Metro Company between the IRGC-owned National Company of Building working with the Mostazafan Foundation. The Oil Ministry also ceded the fifteenth and sixteenth phases of expansion of the South Pars oil field to Khatam al-Anbia under a $2.5 billion contract.

In July 2007, the Ministry of Energy agreed that Revolutionary Guards contractors would operate all public infrastructures projects involving water, electricity, and bridges in western Iran. All contracts were awarded on a no-bid basis in violation of Iranian law on open bidding processes.

http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/08/19/wiran119.xml
Iranian Guards amass secret fortunes By Philip Sherwell, Sunday Telegraph
Last Updated: 4:01am BST 20/08/2007

Life of Luxury

Behind the façade of a simple, pious existence, they live in mansions in the exclusive hills of northern Teheran with the latest model of BMW or Mercedes Benz in the garage, luxury hand-woven rugs on the floor, wardrobes full of designer clothes and a safe packed with diamond and gold jewellery.

Economical Influence

From the oil and gas industries to chicken farms and apiaries, the Guards have used their power and muscle to take control of major areas of business in Iran.

One former Guards commander to have benefited is Sadeq Mahsouli, 47, an Ahmadinejad confidant. He spent much of his career in the military and security apparatus before using his guards contacts and credentials to build a business in construction and oil trading.

They may not technically be palaces, but his six mansions and estates are estimated to be worth £10 million while his total worth could be as much as £86 million, according to Iranian media reports.

Guards had turned into a “corrupting” and “mafia-like” organisation, which was heavily involved in smuggling goods for the thriving black market. These include alcohol, which is supposedly forbidden but is widely consumed at private parties frequented by the Iranian elite. Much of the smuggling is done through Guards-controlled airports.

Structure

General Yahya Rahim Safavi, the leader of the Guards

http://www.npr.org/templates/story/story.php?storyId=9371072
The Evolution of Iran’s Revolutionary Guard by Renee Montagne
Morning Edition, April 5, 2007

Now associated with the Brookings Institutions Saban Center for Middle East Policy, Reidel says the ayatollah wanted protection against threats by Iran’s regular army, loyal to the previous government, and foreign intelligence agencies, like the CIA.

“Iranian’s had a vivid memory of 1953, when a coup had been launched against a much-less revolutionary government … and put the shah back in power,” Reidel said. “I think you can effectively characterize them [the Revolutionary Guard] as the hardliners within the Islamic Republic.”

In 1980, when Iran and Iraq went to war, the Revolutionary Guard acted as human waves in some of the toughest battles. Hundreds of thousands of fighters perished.

http://www.forward.com/articles/what-was-once-a-revolutionary-guard-is-now-just-a/
What Was Once a Revolutionary Guard Is Now Just a Mafia By Mohsen Sazegara
Fri. Mar 16, 2007

Inception

But on February 1, 1979, we stepped off a plane from France into Tehran, and 10 days later we were in power. Suddenly we had a position to protect, and the model for our people’s army changed dramatically. It seemed more appropriate to emulate such forces as the Swiss Armed Forces, United States National Guard or Israel Defense Forces.

The thought was that if the Islamic Republic had two separate armies with independent command structures, the country could insulate itself against a coup. If ordinary citizens were given military training in preparation for combat, we believed, then any military commander would think twice before contemplating overthrowing the government.

Structure

In the first phase of planning, we envisioned three separate circles on the organizational chart. The first consisted of a small but varied cadre of at most 500 people who were to be permanently employed by the Revolutionary Guard. All command and staff positions, including all the trained personnel destined for senior command in guerilla warfare, were to come from this quarter.

The second circle was to consist of another group of around 500,000 people who were to be recruited on a volunteer or part-time basis from the general public, with a designated mission to serve as commanders of “civilian guerilla groups.”

The third and final circle would encompass as many people as possible from all walks of life — students, workers, bureaucrats, farmers and the like. It was envisioned that each volunteer would receive military training and subsequently be invited to participate in at least one prearranged military exercise each year.

Basij and Quds

The Basij force, which had been created as a volunteer militia to help fight the war with Iraq, was transformed into a unit with paid elements who were tasked with confronting domestic opposition. And in order to carry out the Revolutionary Guard’s bidding in areas outside the country — Lebanon, Palestine, Yemen, Egypt, Sudan and, most importantly, Iraq — the Quds Force was created.

Duties

As originally planned, the Revolutionary Guard was to be, quite literally, a people’s army — not, as it has become, a force separate from the general public, let alone opposed to it. In times of war, the Revolutionary Guard was seen as a force to fight alongside the regular military in the service of the country. In times of peace, it was to tend to its own affairs. In times of need or natural disasters, it was to help out with civil defense and other emergency operations.

During the Iran-Iraq War, the Revolutionary Guard’s commander, Rezai, stated that the Revolutionary Guard must develop units specifically tasked with confronting opposition to the regime.

Mahmoud Ahmadinejad, served with the Ramazan Unit of the Quds Force, participating in Iraq-related operations during the during the Iran-Iraq War.

Transformation

The first deviation began when Mohsen Rezai, Mohammad Bagher Zolghadr and their ilk entered the Revolutionary Guard. Their first major task was to convert the Revolutionary Guard’s information and research unit — which had originally been designed to serve as an analysis and planning unit with, at most, some residual capacity for military intelligence gathering — into an outright security organization with Rezai at its helm.

There is no doubt that responsibility and blame for the six-year extension of the Iran-Iraq War, which needlessly caused so much death and destruction for the Iranian people, rests firmly on the shoulders of the clique of Revolutionary Guard commanders around Rezai and Zolghadr.

These same elements in the Revolutionary Guard, who assumed senior military titles for themselves without having the slightest relevant qualifications, unashamedly planned a number of large-scale offensives after the victory at Khorramshahr. As a consequence of Operations Khaybar, Badr, Karbala 4, Karbala 5 and others, thousands and thousands of young Iranians needlessly suffered. Of the nearly 267,000 Iranian deaths and 500,000 casualties caused by the Iran-Iraq War, more than 90% occurred after Khorramshahr was recaptured and the invading Iraqis expelled from Iranian territory.

In 1985, the Revolutionary Guard was able to obtain Khomeini’s approval for developing air, ground and naval units, thereby acquiring all the properties of a classic military organization.

Intelligent Unit

The Revolutionary Guard also set up a new secret intelligence unit under the auspices of the Judiciary Branch’s security section. In effect a parallel security organization, it operates under the direct supervision of the supreme leader.
The most notorious part of this secret intelligence organization is Prison 325, which the unit runs independently in Evin Prison. I, like other opposition elements, was imprisoned there.

Economical Influence

Today the Revolutionary Guard controls more than 100 different economic enterprises, conducting business under the aegis of either itself or the Basij. Its commercial activities have ranged from importing household goods — at a time when other commercial enterprises were banned from importing some of those goods — to being in charge of car manufacturing companies and assembly plants.

The Revolutionary Guard has also been a major contractor in the construction of oil and gas pipelines, as well as in the importing of Kazakh oil into Iran. And when Iraq was under international sanction by the United Nations Security Council, the Revolutionary Guard was the prime force behind Iranian efforts to help Saddam Hussein and his family smuggle oil out of Iraq, according to personal acquaintances of mine who were involved in the operations.

And since Ahmadinejad moved into the president’s office, contracts for oil pipelines worth more than $7 billion have reportedly been awarded to Revolutionary Guard-affiliated enterprises without any public tenders, at a time when numerous contractors with far more experience and qualifications in their respective fields are struggling with serious financial problems.

Anyone seen as a competitor — political, commercial or otherwise — runs the risk of being put out of commission by intimidation and brute force. As a direct result, a number of Revolutionary Guard commanders have risen to key positions of power in Iran, despite being clearly unqualified.

http://www.globalsecurity.org/military/world/iran/pasdaran.htm

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http://www.huffingtonpost.com/stephen-zunes/why-american-neo-cons-wan_b_216790.html

Stephen Zunes

Chair of Mid-Eastern Studies program at the University of San Francisco
Posted: June 17, 2009 02:46 PM

Why American Neo-Cons Wanted Ahmadinejad to Win
He was rather evasive when it came to specific questions and was not terribly coherent, relying more on platitudes than analysis and would tend to get his facts wrong. In short, he reminded me in many respects of the man who was then serving as our president.

Both Ahmadinejad and George W. Bush used their fundamentalist interpretations of their respective faith traditions to place the world in a Manichean perspective of good versus evil. The certitude of their positions regardless of evidence to the contrary, their sense that they are part of a divine mission, and their largely successful manipulation of their devoutly religious constituents was what put these two nations on such a dangerous confrontational course in recent years.

http://blogs.cqpolitics.com/spytalk/2009/05/iran-secretly-helped-us-bomb-t.html

Iran Secretly Helped U.S. Bomb Taliban Units, Find Al Qaeda

By Jeff Stein | May 28, 2009 9:39 PM | Permalink | Comments (9)
Iran supplied U.S. diplomats with the location of Taliban military units in Afghanistan after the initial bombing campaign in the fall of 2001 failed to rout them, according to former officials in the George W. Bush administration.

The Islamic regime also gave the Bush administration “really substantive cooperation” on al Qaeda after the Sept. 11, 2001 terror attacks, at one point providing Washington with a list of 220 suspects and their whereabouts, said one official, former White House National Security Council Iran expert Hillary Mann Leverett.

Leverett said that in December 2002, after the U.S. gave Tehran the names of five al Qaeda suspects it believed were in Iran, the regime found two, which they delivered to the U.S. air base at Baghram, in Afghanistan.

But the budding relationship died on the vine.

Hardliners in the Bush administration prohibited Mann and Ryan Crocker, two of the principal diplomats dealing with the Iranians, from building on the contacts to pursue al Qaeda.

And then a month later, President Bush labeled Iran part of an “axis of evil,” lumping it with North Korea and Saddam Hussein’s Iraq.

But even then, Leverett said, Tehran continued to provide Washington with intelligence on al Qaeda and expel them from Iran.

“They deported hundreds of [al Qaeda] people,” she said.

At the same time, Bush officials were accusing Iran of harboring al Qaeda terrorists – a claim they and their allies continued to make until the end of the administration.

But Leverett, backed up by other officials, tells an entirely different story.

“The foreign ministry took the evidence – passports, vital information – and gave us pages and even a chart showing the disposition or what they’d done with each person,” broken down by “those who had been turned away at the border, or been detained or deported,” she said.

At one point the Iranian foreign ministry asked the Americans to help it set up “a mechanism” to help it deport Egyptian suspects to Cairo, with which it had no diplomatic relations, Leverett said Thursday by telephone.

But White House hardliners rejected the idea of helping Iran in any way, she said.

“We said, ‘Too bad, you’re evil. You’ll be a target yourself if you don’t just get rid of them.'”

Richard N. Haass, the State Department’s chief of planning at the time, was also frustrated that Bush officials were scuttling Iranian attempts at rapprochement, which he and others believed might have led to a “grand bargain” on other thorny issues.

“We couldn’t get support from the NSC, the Pentagon, from the Vice president’s office. And in every case we ran up against this belief in regime change,” Haass said in a BBC documentary that aired in the U.K. in February.

“Iran and the West” has yet to be televised here, and a spokesperson for PBS, the usual venue for such fare, said the public broadcasting network has no plans to pick it up.

In the third segment of the three-part documentary, Leverett described the Iranians’ secret offer to help the American bombers destroy Taliban units in the fall of 2001.

“The Iranians were willing to do whatever was necessary to help ensure that the U.S. military campaign [against the Taliban] could succeed,” Leverett told the BBC.

She had previously described some of the back channel meetings with Iran in an October 2007 story by John H. Richardson in Esquire magazine.

But neither that nor the BBC’s “Iran and the West” documentary has elicited detectable news media interest here, despite its incessant descriptions of Iran as an uncompromising, implacable foe.

Iran’s hardliners, led by “Holocaust-denying, Israel-hating, America-bashing” Mahmoud Ahmadinejad, appear to hold the upper hand now, but things could change in elections two weeks from now.

Iran’s president in 2001, Mohammad Khatami, sought to get around the hardliners and establish better relations with Washington.

“He had sought reconciliation with America (before), but his political opponents stopped him,” the BBC reported. “With America poised to attack the Taliban, he had a chance to win the argument in the parliament.”

“The Taliban was our enemy,” Khatami explains on the program. “America thought the Taliban was their enemy too. If they toppled the Taliban, it would serve the interests of Iran.”

Iran had discreetly offered help to Washington right after the 9/11 attacks, Leverett and other officials say.

But nothing happened until November.

American heavy bombers had been pounding Taliban units for weeks, but the U.S.-backed Northern Alliance rebels were still bottled up.

One of the Iranians Leverett was meeting with lost his temper over the stalemate, she says. He began pounding the table.

“And then he took out a map, and he unfurled the map on the table, and started to point at targets that the U.S. needed to focus on, particularly in the north,” Mann said. “We took the map to CENTCOM, the US Central Command, and certainly that became the US military strategy.”

Said Colin Powell, Secretary of State at the time: “We took a fourth-world force, the Northern Alliance, riding horses, walking, living off the land, and married them up with a first world air force. And it worked.”

Leverett told Esquire that Khatami’s representatives believed that helping the U.S. defeat the Taliban – and al Qaeda – would help bridge a quarter-century long estrangement marked by hostage taking, terrorism, name calling and outrage over Iran’s clandestine nuclear program.

“They specifically told me time and again that they were doing this because they understood the impact of this attack on the U.S., and they thought that if they helped us unconditionally, that would be the way to change the dynamic for the first time in twenty-five years,” Leverett said.

Obviously, any chance was lost.

Bush officials have refused to discuss the issue. When Leverett submitted a piece she had written for the New York Times about her U.S.-Iran contacts to administration censors, swaths were blacked out. (The Times printed it that way.)

“They said it was classified,” she said by telephone Thursday. “But nothing had ever been written down.”

http://iranianlobby.com/index.php?lang=en&page=articles&mode=view&guest=0&ID=48
Iran’s 2003 Grand Bargain Offer: Secrets, Lies, and Manipulation by Hassan Daioleslam
December 20, 2007

With the fall of two unfriendly neighboring regimes, Tehran’s theocratic regime sensed the opportunity to expand its ideological, political, and military hegemony in the region. On the other hand, the US military presence surrounding Iran and the disclosure of the Iranian nuclear program and its subsequent referral to the UN, were major threats to the Iranian regime’s strategic ambitions.

Sadegh Kharazi, the Iranian ambassador to France asked Tom Guldiman, the Swiss ambassador in Tehran, to take the proposal, known as “Iran’s Grand Bargain Proposal” to US leaders. Accompanied with a short memo written by Guldiman, the one page proposal was faxed to the State Department on May 4th, 2003. A few days later, Ambassador Guldiman came to Washington to deliver the proposal personally.

http://www.american-iranian.org/pubs/articles/The_Grand_Bargain_April-May_2007.pdf

Diplomacy at its Worst by Nicholas D. Kristof
New York Times April 29, 2007

http://select.nytimes.com/2007/04/29/opinion/29kristof.html?_r=1
The First Meeting between Iran Side and American Council

The process began with Afghanistan in 2001-2. Iran and the U.S., both opponents of the Taliban, cooperated closely in stabilizing Afghanistan and providing aid, and unofficial “track two” processes grew to explore opportunities for improved relations.

On the U.S. side, track two involved well-connected former U.S. ambassadors, including Thomas Pickering, Frank Wisner and Nicholas Platt. The Iranian ambassador to the U.N., Javad Zarif, was a central player, as was an Iranian-American professor at Rutgers, Hooshang Amirahmadi, who heads a friendship group called the American Iranian Council.

At a dinner the council sponsored for its board at Ambassador Zarif’s home in September 2002, the group met Iran’s foreign minister, Kamal Kharrazi. According to the notes of Professor Amirahmadi, the foreign minister told the group, “Yes, we are ready to normalize relations,” provided the U.S. made the first move.

the track two participants discussed further steps, including joint U.S.-Iranian cooperation against Saddam Hussein. The State Department and National Security Council were fully briefed, and in 2003 Ambassador Zarif met with two U.S. officials, Ryan Crocker and Zalmay Khalilzad, in a series of meetings in Paris and Geneva.

But Iran also sent its own master text of the proposal to the State Department and, through an intermediary, to the White House. I’ve also posted that document, which Iran regards as the definitive one.

Iranian Concessions

In the master document, Iran talks about ensuring “full transparency” and other measures to assure the U.S. that it will not develop nuclear weapons. Iran offers “active Iranian support for Iraqi stabilization.” Iran also contemplates an end to “any material support to Palestinian
opposition groups” while pressuring Hamas “to stop violent actions against civilians within” Israel (though not the occupied territories). Iran would support the transition of Hezbollah to be a “mere political organization within Lebanon” and endorse the Saudi initiative calling for a twostate solution to the Israeli-Palestinian conflict.

Iran’s Demands

Iran also demanded a lot, including “mutual respect,” abolition of sanctions, access to peaceful nuclear technology and a U.S. statement that Iran did not belong in the “axis of evil.” Many crucial issues, including verification of Iran’s nuclear program, needed to be hammered out. It’s
not clear to me that a grand bargain was reachable, but it was definitely worth pursuing — and still is today.

Iran’s Proposal for a ‘Grand Bargain’ by Nicholas D. Kristof
New York Times April 28, 2007

The Original Documents Received by the US

These documents from the Swiss ambassador are what American officials received on May 4, 2003, and which they then rejected. Indeed, the Swiss ambassador was even reprimanded for having the temerity to forward the proposal. The Swiss document was published earlier this year on the Washington Post website with an article by Glenn Kessler; the Iranians’ position is that the real proposal is the one they prepared and transmitted, not the Swiss paraphrase.

First Meeting and How Pickering, former US Ambassador isn’t Sure about the Proposal

The unofficial diplomacy got a boost at two meetings at the home of Ambassador Zarif in September 2002, for board members of the American Iranian Council. Mr. Amirahmadi’s notes show that at the first meeting, Tom Pickering – a veteran U.S. ambassador – said that he had just spoken with the State Department and was told that the Bush administration was prepared to normalize relations in some circumstances. Others at the meeting whom I spoke to don’t particularly remember that, one way or the other.

Second Meeting where Iran Expresses Willingness to Work with the US

At a follow-up meeting at Mr. Zarif’s home, Iranian Foreign Minister Kamal Kharrazi met with many of the same people. Mr. Amirahmadi’s notes indicate that initially Mr. Kharrazi was not encouraging but finally said in response to a question: “Yes! We are ready to normalize relations” with the US and prepared to discuss problems that exist between us, but for that to happen we must be able to trust the US and this requires
some initial positive gestures in the part of Washington, particularly a change in tone.

Was the US Department Fully Informed about the Meetings? Yes

By all accounts, the State Department and National Security Council were fully briefed through this period, but different participants disagree about how much of a blessing the State Department gave the process.

Why the US Killed the Proposal: Lack of Iranian Coopration in Providing Info on Terrorists

When the Neo-cons killed the incipient peace process, they did so partly on the basis that Iran had been uncooperative on terrorism. At a meeting in Geneva on terrorism issues, Zalmay Khalilzad (Former United States Ambassador to Iraq and current United States Ambassador to UN) had told Ambassador Zarif that the U.S. had information of a forthcoming terror bombing in the Gulf area. Mr. Khalilzad reportedly asked Iran to interrogate Al Qaeda members in Iranian prisons for information about the incident. Iran apparently dropped the ball (it says it didn’t have enough information) and did not generate any useful intelligence, and the incident turned out to be a suicide truck bombing in Riyadh, Saudi Arabia, on May 12, 2003.

The Consequences of US Rejection of Proposal

It seems diplomatic mismanagement of the highest order for the Bush administration to have rejected that process out of hand, and now to be instead beating the drums of war and considering air strikes on Iranian nuclear sites. The moderate camp in Iran was discouraged and discredited when the U.S. rejected its “grand bargain” proposal.

Personal Memo of Hooshang Amirahmadi, Ph.D.
June 2004

Initial Proposal by the US

October or November 2001: The US proposes to Iran that they should directly negotiate over Iraq within the Committee set out for Afghanistan. Bush calls Iran Axis of Evil.

Conditions in which Iran CounterProposed

February 2002: Iran makes a counterproposal for direct negotiations over Iraq within the framework of 5+6 (five Permanent Members of the UN Security Council plus Iran. Turkey, Saudi Arabia, Kuwait, Jordan, and Syria). The proposal was sent to the State Department via the UN Secretary-General, Mr. Kofi Anan. The US rejected the idea because they did not want to involve Russia and China in the negotiations.

Gathering of US Diplomats for the negotiation

March 2002: AIC organized a major event in Washington that brought Senators Joe Biden, Chuck Hagel, Robert Torricelli, and Zalmy Khalilzad.

First Meeting

September 2002: A select number of AIC Boards meet Ambassador Zarif at his residence (including, Tom Pickering, Frank Wisner, Hooshang Amirahmadi, and Richard Murphy). Zarif was also informed that the US is seeking to open up the channels of communication for normalizing the relation between two countries. AIC was trying to set up a meeting in which both sides can simultuously announce their mutual willingness to engage in dialoge.

Second Meeting

September 2002: A select group of AIC Board members meet Iran’s Foreign Minster, Dr. Kamal Kharrazi, at the residence of Dr. Zarif. Kharrazi announced that Iran desires to normalize relations. Pickering delivers the message to the State department.

Proposal Constructed by AIC

October 2002: We developed a proposal for US-Iran Cooperation over Iraq. I then met Zalmy Khalilzad in his NSC office in the White House to convey the normalization desire of Iran, our plan to hold a conference for simultaneous expression of intentions to normalize

Continual of Talks

September-November 2002: I met Ryan Crocker and others in State Department. Exchanged views and information about what might be done to engage the two sides. Pickering was the main contact with the Department to convince Bill Burns to engage US in the negotations.

January 2003: Ambassador Zarif meets Ambassador Ryan Crocker (of the State Department) in Paris. They discuss ways that the two governments could cooperate over Iraq.

Discussion on Iraq

March 2003, April: Ambassador Zarif meets Zalmy Khalilzad (a director of the National Security Council) and Ryan Crocker in Geneva. They discuss cooperation on Iraq. The US is now very close to invading Iraq. Dr. Zarif had tried to explain to Ambassador Khalilzad what could happen after the US invades Iraq

The Iran Side Works on the Proposal

May 1, 2003: Per Zarif, Iran’s FM receives a “proposal from the State Department. Zarif is in Tehran and uses the opportunity to modify the Iran side of the proposal.

Meeting in Geneva and Disolvement of Negotiation after Bombing Attack in SA

May 3, 2003: Ambassador Zarif meets Ambassador Zalmy Khalilzad and Ambassador Ryan Crocker in Geneva. The US delegation is headed by Dr. Khalilzad. The US has already invaded Iraq and is in control of its Government. The situation begins to deteriorate in Iraq along the line predicted by Zarif.

During this meeting, Khalilzad tells Zarif that the US has learned that a terrorist bombing incident is planned to happen in the Persian Gulf area. He asks that Iranian Government utilize members of Al-Qaeda in Iranian prisons for information on the planned incident. The incident happened on May 12 in Riyadh, Saudi Arabia.

The Swiss Ambassador Delivers the Proposal to Washington

May 4, 2003: The Grand Bargain proposal is faxed to the US Government. On May 4, Tim Guldimann, the Swiss Ambassador in Tehran, authenticates the proposal.

How Ne-cons Set to Damper the Negotations by Accusations that Iran’s Lack of Cooperation in Fighting Terrorism

May 24, 2003: The planned meeting between Zarif and Khalilzad did not take place. Zarif went to Geneva for the meeting but Khalilzad did not show up. In Zarif’s view, the neocons have orchestrated the accusation against Iran so that they could derail Zarif-Khalilzad negotiations.

After the Zarif-Khalilzad meetings ended, the accusations also stopped! (Note, as per Zarif, while he was meeting Khalilzad, neo-cons were sending him message asking that he should talk to them (he named Richard Pearl in particular – who was at the time Chairman of the Defense Policy Board in the Pentagon).

Personal Memo of Hooshang Amirahmadi, Ph.D.
November 2002
Meetings with Dr. Zarif, Dr. Kharrazi, NSC and State Department Staff
Meeting with Dr. Javad Zarif, September 2002

Reasons to Open up Dialoge with Iran

Dr. Zarif is considered both more liberal and better informed about the legal problems facing Iran globally and in relation to the United States. Americans also know Dr. Zarif well as they have worked with him in many occasions including in Bonn, Germany, when the two nations discussed the formation of the post-Taliban regime in Afghanistan.

Initial Meeting

I proposed that Dr. Zarif and a small number of AIC Board of Directors meet. That meeting took place in September 2002 at the Ambassador’s
residence. Present were Ambassador Thomas Pickering, Ambassador Frank Wisner, Ambassador Nick Platt, Ambassador Bill Miller, Ambassador Richard Murphy, Mr. Hassan Nemazee, and Professor Hooshang Amirahmadi.

Nature of Badwill from the American Camp

Washington often responds negatively to Iran’s gestures of goodwill. The Afghan case is a recent example. Iran helped the US and was expecting
rewards, but instead Tehran became evil. He gave several other examples of Iran’s goodwill gestures, including the signals Tehran has been sending regarding a possible US-Iran cooperation on ousting Saddam Hussein (e.g., sending Ayatollah Hakim’s son to Washington with Iranian diplomatic passport).

Anti-Iranian Sentiment by Israeli Lobbies

Ambassador Murphy reminded Dr. Zarif that while Israeli lobbies are powerful, part of the complain about Iran comes directly from Israel and by the leadership in Tel Aviv.

Bush Admin Willingness to Normalize Relation

Tom reported that before he comes to the meeting, he spoke to the State Department and was told that the Bush administration is prepared to normalize and discuss ways of arriving at such an eventuality.

Methods in which the US was Contemplating to Achieve Normalization

Tom then put the main proposal of the night on the table. For the US and Iran to work and normalize relations, three things need to happen: one, they must accept and decide to normalize relations (political will); two, they must find the right approach to come together; and three, they must focus on substantive issues requiring immediate attention.

Meeting with FM Dr. Kamal Kharrazi, September 2002

Members Present in the Meeting

This dinner meeting, organized by AIC, was held in the same residence and among the participants five were from the previous meeting with Dr. Zarif: Ambassadors Pickering, Platt, Wisner, Miller and I. Two US senators had their people sitting at the table as well (Senators Biden and Senator Hagel).

Iran’s Willingness to Go on with the Dialogue

I asked if the Minister had anything positive to say, and asked a pointed question: “Dr. Kharrazi, please tell us in clearest possible
language if Iran wishes to normalize relations with the US.” He stayed quite for a while and then responded: “Yes! We are ready to normalize relations” with the US and prepared to discuss problems that exist between us, but for that to happen we must be able to trust the US and this requires some initial positive gestures in the part of Washington, particularly a change in tone.

“Iran had always insisted that they were for the normalization of the CONDITIONS for a dialogue.”

Meeting with Khalilzad and Approval of “AIC’s” Proposal by the US

At the conclusion of that meeting, Dr. Khalilzad told me that “in principle, there is no problem with the proposal,” but he must consult with his superiors before a definitive answer is given. He asked for a few days. I asked him to also speak to Ambassador Pickering, which he subsequently did. Per Tom’s report to me, he was positively inclined toward our proposal.

Discussions with the State Department, September and October 2002

Public Speech to Roll the Negotiation

We expect to hold a conference where the two sides will come and talk about Iraq in the larger context of regional security. The parties will share lectures 48 hours in advance and they hope to have their official statements “proportionally positive.”

Iran:Time for a New Approach Report of an Independent Task Force
Sponsored by the Council on Foreign Relations

RECENT U.S. POLICY TOWARD TEHRAN

How Iran is getting around the sanctions

With respect to Tehran, the efficacy of this approach was undermined by Iran’s concurrent efforts to rebuild its relations with its neighbors and major international actors, including Europe, China, and Japan.

Clinton’s frustration and lack of outcome from lessening the containment

In the late 1990s, the appearance of political liberalization in Iran persuaded the Clinton administration to discontinue the Iranian component of “dual containment.”

the US’ disengagement and re-engagement in post 9/11, simply using Iran for strategic purposes without regard to the notion of normalization

The most dramatic development in U.S.-Iranian relations during this period was President Bush’s decision to include Iran, along with Iraq and North Korea, in his construct of an “axis of evil” in his January 2002 State of the Union address. The reference came in response to the discovery of a weapons cache reportedly supplied by Iran en route to the Palestinian Authority, but it undercut several months of tacit cooperation between Washington and Tehran on the war and the post-conflict stabilization of Afghanistan.

US elements playing with Iran-US policy like a wind-up toy

Differing views in Washington generated occasionally glaring inconsistencies in U.S. positions. In the aftermath of the ouster of Saddam Hussein, for example, the Pentagon publicly flirted with utilizing an Iraq-based Iranian opposition group as a vanguard force against Tehran over the protests of the State Department, which had designated the group as a foreign terrorist organization in 1997.

Regime change through eastern Eruope method of uprooting communism does not work with Iran

Persuaded that revolutionary change was imminent in Iran, the administration sought to influence Iran’s internal order, relying on the model of the east European transition from communism. However, the neat totalitarian dichotomy between the regime and the people does not exist in the Islamic Republic, and, as a result, frequent, vocal appeals to the “Iranian people” only strengthened the cause of clerical reactionaries and left regime opponents vulnerable to charges of being Washington’s “fifth column.”

Engaging with Iran with no restriction does not serve US interest

Direct dialogue approached candidly and without restrictions on issues of mutual concern would serve Iran’s interests. And establishing connections with Iranian society would directly benefit U.S. national objectives of enhancing the stability and security of this critical region.

Recommendation on the US part in how to initiate and go about dealing with Iran

For these reasons, we advocate that Washington propose a compartmentalized process of dialogue, confidence building, and incremental engagement. The United States should identify the discrete set of issues on which critical U.S. and Iranian interests converge and must be prepared to try to make progress along separate tracks, even while considerable differences remain in other areas.

Implementating a broader methods in normalization of relation like with China and Russia

Instead of aspiring to a detailed road map of rapprochement, as previous U.S. administrations have recommended, the executive branch should consider outlining a more simple mechanism for framing formal dialogue with Iran. A basic statement of principles, along the lines of the 1972 Shanghai Communiqué signed by the United States and China

No regime change rhetorics

In dealing with Iran, the United States should relinquish the rhetoric of regime change. Such language inevitably evokes the problematic history of U.S. involvement with the 1953 coup that unseated Iranian Prime Minister Mohammad Mossadeq.

http://www.prospect.org/cs/articles?articleId=11539
Burnt Offering

How a 2003 secret overture from Tehran might have led to a deal on Iran’s nuclear capacity — if the Bush administration hadn’t rebuffed it.
Gareth Porter | May 21, 2006

Armitage tendencies to work on Iran issues from the get-go and hiring Haass

Armitage had lived in Tehran for several months in 1975 as part of a Pentagon team trying to restrain the shah’s arms purchases, and he was “very interested” in Iran, according to Powell’s chief of staff, Lawrence Wilkerson. One of the reasons Armitage brought Middle East specialist Richard Haass into the department as head of the Office of Policy Planning, Wilkerson says, was to work on a new policy toward Iran.

Iran’s willingness to fight along the US against Al-Quaida

Within weeks, Iran, Syria, Libya, and Sudan all approached the United States through various channels to offer their help in the fight against al-Qaeda. “The Iranians said we don’t like al-Qaeda any better than you, and we have assets in Afghanistan that could be useful,” Flynt Leverett, a career CIA analyst who was then at the State Department as a counter-terrorism expert, recalls.

The Iranians, who had been working for years with the main anti-Taliban coalition, the Northern Alliance, also advised the Americans about how to negotiate the major ethnic and political fault lines in the country.

In early December, at a conference in Bonn to set up a post-Taliban Afghan government, Iran pressed its allies in the Northern Alliance to limit their demands for ministerial seats and even made sure antiterrorism language was included in the agreement, according to U.S. Special Envoy James Dobbins. “The Bonn Conference would not have been successful without [Iran’s] cooperation,” he says. “They had real contacts with the players on the ground in Afghanistan, and they proposed to use that influence in continuing coordination with the United States.”

The strategy advocated by Haass and Leverett, with the encouragement of Armitage and Powell, was to use the new desire of states still listed as sponsors of terrorism — especially Iran and Syria — to cooperate with the United States to press for larger changes in policy.

Initial opposition to mount a rhetorical attack on iran by the state department defeated by neocon

The inclusion of Iran in the “axis of evil” was at first opposed by then-National Security Adviser Condoleezza Rice and her deputy, Stephen J. Hadley, because, as Hadley told journalist Bob Woodward, Iran, unlike Iraq or North Korea, had a “complicated political structure with a democratically elected president.”

duality in Rice’s behavior

Rice had already earned a reputation among national security officials for always staying in Bush’s good graces by taking whatever position she believed he would favor. “She would guess which way the President would go and make sure that’s where she came out,” says Wilkerson, who watched her operate for four years. “She would be an advocate up to a point, but her advocacy would cease as soon as she sniffed the President’s position.”

Players in instigating the hostile policies towards Iran especially William Luti (http://rightweb.irc-online.org/profile/1278.html) and Douglas Feith

Vice President Dick Cheney and Defense Secretary Donald Rumsfeld led the neoconservative push for regime change. But it was Douglas Feith, the abrasive and aggressively pro-Israel undersecretary of defense for policy, who was responsible for developing the details of the policy. Feith had two staff members, Larry Franklin and Harold Rhode, who spoke Farsi, and a third, William Luti, whom one former U.S. official recalls being “downright irrational” on anything having to do with Iran. A former intelligence official who worked on the Middle East said, “I’ve had a couple of Israeli generals tell me off the record that they think Luti is insane.”

Neocons point of contacts, usually consisted of arms dealers and non-officials

In December 2001, Feith secretly dispatched Franklin and Rhode to Rome to meet with Manucher Ghorbanifar (http://en.wikipedia.org/wiki/Manucher_Ghorbanifar), the shady Iranian arms dealer in the Iran-Contra affair, and other Iranians. Administration officials later told Warren P. Strobel of the Knight Ridder media chain that they had learned that among those Iranians were representatives of the Mujahadeen e Khalq (MEK), a paramilitary organization Saddam had used for acts of terror against non-Sunni Iraqis and Iran.

The meeting concerned a secret offer from reportedly dissident Iranian officials to provide information relevant to the War on Terrorism and Iran’s relationship with terrorists in Afghanistan.

Decision not to share any information regarding terrorism with Iran unless they come forward with it

In rules for dealing with Iran and Syria, referred to informally as the “Hadley Rules,” the committee further decreed that there could be no sharing of intelligence information or any other cooperation on al-Qaeda, although the states in question could be asked to provide information or other cooperation unilaterally. The new rules put U.S. policy toward Iran in a straitjacket requiring that Iran could never be treated as a sovereign equal on any issue.

How the proposal by the US was incepted and what it was changed to (regime change)

In early 2002, Leverett worked on a draft National Security Presidential Decision (NSPD) calling for diplomatic engagement. But Feith’s staff came up with their own revised version of the draft, which turned into a policy of regime change, according to Leverett.

Dis
information by the US and intentional policies of discrediting Iran

When the administration requested that the Iranian government send more guards to the Afghan border to intercept al-Qaeda cadres, Iran did so. And when Washington asked Iran to look out for specific al-Qaeda leaders who had entered Iran, Iran put a hold on their visas.

The effect of the Bush administration’s signals of hostility was to discredit the idea of cooperation with Washington as a means of obtaining U.S. concessions to Iranian interests. Reflecting the mood in Tehran, in May 2002, Supreme Leader Ayatollah Ali Khamenei denounced the idea of negotiations with the United States as useless.

Why did Iran helped out anyway? Fear of being the next target when the US began plans to invade Iraq

Trita Parsi, a specialist on Iranian foreign policy at the Johns Hopkins School of Advanced International Studies who has had extensive interviews with officials of Iran’s Supreme National Security Council as well as the Foreign Ministry, says, They believed if they didn’t do something, Iran would be next.

Iranian’s leverage for the negotations

In early 2003, the Iranians believed they had three new sources of bargaining leverage with Washington: the huge potential influence in a post-Saddam Iraq of the Iranian-trained and anti-American Iraqi Shiite political parties and military organizations in exile in Iran; the Bush administration’s growing concern about Iran’s nuclear program; and the U.S. desire to interrogate the al-Qaeda leaders Iran had captured in 2002.

The Iran’s proposal was approved by the highest ranking officials

Iran’s then-ambassador to France, Sadegh Kharrazi, the nephew of then-Foreign Minister Kamal Kharrazi, drafted the document, which was approved by the highest authorities in the Iranian system, including the Supreme National Security Council and Supreme Leader Khamenei himself, according to a letter accompanying the document from the Swiss ambassador in Tehran, Tim Guldimann, who served as an intermediary.

Iran’s offer to cooperate with regards to Al-Quaida and US assistance in eradicating MEK

The proposal offered “decisive action against any terrorists (above all, al-Qaeda) in Iranian territory” and “full cooperation and exchange of all relevant information.” It also indicated, however, that Iran wanted from the United States the “pursuit of anti-Iranian terrorists, above all MKO” — the Iranian acronym for the Mujihedeen e Khalq (MEK), which had fought alongside Iraqi troops in the war against Iran and was on the U.S. list of terrorist organizations — and support for repatriation of their members in Iraq as well as actions against the organization in the United States.

According to Leverett, Zarif informed Khalilzad that Iran would hand over the names of senior al-Qaeda cadres detained in Iran in return for the names of the MEK cadres and troops who had been captured by U.S. forces in Iraq.

Iran’s guarantee in cooperating with the IAEA and requesting assistance in acquiring nuclear technology from the west

To meet the U.S. concern about an Iranian nuclear weapons program, the document offered to accept much tighter controls by the International Atomic Energy Agency (IAEA) in exchange for “full access to peaceful nuclear technology.” It proposed “full transparency for security [assurance] that there are no Iranian endeavors to develop or possess WMD” and “full cooperation with IAEA based on Iranian adoption of all relevant instruments (93+2 and all further IAEA protocols).”

Support of Saudi initiative and cease supporting the militant who oppose it and asking Hizbulla to become more political rather than a miliary wing

The Iranian proposal also offered a sweeping reorientation of Iranian policy toward Israel. But the document offered “acceptance of the Arab League Beirut declaration (Saudi initiative, two-states approach).” The March 2002 declaration had embraced the land-for-peace principle and a comprehensive peace with Israel in return for Israel’s withdrawal to 1967 lines.

“pressure on these organizations to stop violent actions against civilians within borders of 1967.” Finally it proposed “action on Hizbollah to become a mere political organization within Lebanon.” That package of proposals was a clear bid for removal of Iran from the list of state sponsors of terrorism.

Helping the US in post-Saddam era and asking for democratically elected government

It offered “coordination of Iranian influence for activity supporting political stabilization and the establishment of democratic institutions and a nonreligious government.” In return, the Iranians wanted “democratic and fully representative government in Iraq” (meaning a government chosen by popular election, which would allow its Shiite allies to gain power)

Iran also saught for an end to hostility towards the country by the US

The list of Iranian aims also included an end to U.S. “hostile behavior and rectification of status of Iran in the U.S.,” including its removal from the “axis of evil” and the “terrorism list,” and an end to all economic sanctions against Iran.

Bush administration didn’t want to get engaged in a “risky” negotiation and diminish their reputation, especially Powell’s

“The State Department knew it had no chance at the interagency level of arguing the case for it successfully,” he says. “They weren’t going to waste Powell’s rapidly diminishing capital on something that unlikely.”

The outcome of discussion among the principals — Bush, Cheney, Rumsfeld, and Powell — was that State was instructed to ignore the proposal and to reprimand Guldimann for having passed it on. “It was literally a few days,” Leverett recalls, between the arrival of the Iranian proposal and the dispatch of the message of displeasure with the Swiss ambassador.

Disagreements in labeling MEK along side Al-Quaida

Bush is said to have responded, “But we say there is no such thing as a good terrorist,” according to Leverett. Although Bush did not approve an al-Qaeda-MEK deal, he did approve the disarming of the MEK who had surrendered to U.S. troops in Iraq, as the State Department requested, and allowed State to continue the talks in Geneva.

How the bombing in Saudi Arabia was blamed on Iran’s posession of Al-Quaida members in the country

But on May 12, 2003, a terrorist bombing in Ryadh killed eight Americans and 26 Saudis. Rumsfeld and Feith seized the occasion to regain the initiative on Iran. Three days later, Rumsfeld declared, “We know there are senior al-Qaeda in Iran & presumably not an ungoverned area.” The following day someone obviously reflecting Rumsfeld’s views gave David Martin of CBS News an exclusive story. “U.S. officials say they have evidence the bombings in Saudi Arabia and other attacks still in the works were planned and directed by senior al-Qaeda operatives who have found safe haven in Iran,” Martin reported.

Shady evidence to link Iran to the incident and it was shut down by Rumsfeld and Cheney

Contrary to Rumsfeld’s disingenuous statement, U.S. intelligence did not conclude that the government knew where the al-Qaeda members from Afghanistan were located in Iran. “The Iran experts agreed that, even if al-Qaeda had come in and out of Iran, it didn’t mean the Iranian government was complicit,” recalls Wilkerson. “There were parts of Iran where the government would not know what was going on.” within a few days, Rumsfeld and Cheney had persuaded Bush to cancel the May 21 meeting with Iranian officials.

How Feith saught to bring an end to Iran using MEK and Powell’s involvement with the issue

The neoconservatives had hopes of taking advantage of this break to advance the plan developed by Feith and his staff for regime change in Iran. It called for a covert operation in Iran using the MEK (reconstituted under a new name) for armed forays into Iran. But Bush seems to have balked at getting in bed with the MEK.

Seeing an opening, Powell became personally involved in heading off the use of the MEK against Iran. Powell pursued the MEK issue with both Rice and Rumsfeld “on a number of occasions,” according to Wilkerson. When he learned that Rumsfeld had prevailed on the military in May to leave the MEK with most of its arms and to allow it to move freely in and out of its camp north of Baghdad, Powell wrote a stiff letter to Rumsfeld reminding him that the MEK were U.S. captives, not allies.

The US using Al-Quaida as a condition to initiate the dialogue

But the U.S. stance toward Iran was still stuck in an imperial mode of making unilateral demands on Tehran for further cooperation on al-Qaeda as a condition for further talks. In October 2003, Armitage said in congressional testimony that the United States would be open to a wide-ranging dialogue, but only after Iran had agreed to “turn over or share intelligence about all al-Qaeda members and leaders.”

US lack of information on MEK to appease Iran and restrained of range of actions due to Hadley Rules

Meanwhile, the State Department cracked down on the MEK in the United States as a terrorist organization, but it could offer no information to Tehran on the MEK in return for such intelligence cooperation, as Iran had proposed. It was still constrained by the Hadley Rules from engaging in any reciprocity with Iran.

http://www.washingtonpost.com/ac2/wp-dyn/A52673-2004Oct21
Afghanistan, Iraq: Two Wars Collide By Barton Gellman and Dafna Linzer
Friday, October 22, 2004; Page A01

What hand Iran revealed with regards to Al-Quaida detainees

Diplomats from Tehran and Washington had been meeting quietly all winter in New York and Bonn. They found common interests against the Taliban, Iran’s bitter enemy. Iranian envoys notified their U.S. counterparts about the 290 arrests and proposed to cooperate against al Qaeda as well. The U.S. delegation sought instructions from Washington.

Zarif passed the papers to U.N. Secretary General Kofi Annan, who passed them in turn to Washington. Neatly arranged inside were photos of 290 men and copies of their travel documents. Iran said they were al Qaeda members, arrested as they tried to cross the rugged border from Afghanistan. Most were Saudi, a fact that two officials said Saudi Arabia’s government asked Iran to conceal. All had been expelled to their home countries.

Neocons said no and Hadley laid the ground rule: no compremise with Iran because they will look at it as reward

Representatives of Cheney and Defense Secretary Donald H. Rumsfeld fought back. Any engagement, they argued, would legitimate Iran and other historic state sponsors of terrorism such as Syria. In the last weeks of 2001, the Deputies Committee adopted what came to be called “Hadley Rules,” after deputy national security adviser Stephen J. Hadley, who chaired the meeting. The document said the United States would accept tactical information about terrorists from countries on the “state sponsors” list but offer nothing in return. Bush’s State of the Union speech the next month linked Iran to Iraq and North Korea as “terrorist allies.

What Iran asked for

Iran, in turn, asked the United States, among other things, to question four Taliban prisoners held at Guantanamo Bay. They were suspects in the 1998 slayings of nine Iranian diplomats in Kabul.

http://www.alternet.org/waroniraq/65846/
http://www.truthdig.com/report/item/20071022_on_the_eve_of_destruction/
Bush’s World War III ‘Solution’ By Scott Ritter, Truthdig.
Posted October 23, 2007

Why was Iran’s offer declined?

Hadley is a long-established neoconservative thinker who has for the most part operated “in the shadows” when it comes to the formulation of Iran policy in the Bush administration. In 2001, following the 9/11 terrorist attacks on the United States, Hadley (then the deputy national security adviser) instituted what has been referred to as the “Hadley Rules,” a corollary of which is that no move will be made which alters the ideological positioning of Iran as a mortal enemy of the United States. These “rules” shut down every effort undertaken by Iran to seek a moderation of relations between it and the United States, and prohibited American policymakers from responding favorably to Iranian offers to assist with the fight against al-Qaida; they also blocked the grand offer of May 2003 in which Iran outlined a dramatic diplomatic initiative, including a normalization of relations with Israel. The Hadley Rules are at play today, in an even more nefarious manner, with the National Security Council becoming involved in the muzzling of former Bush administration officials who are speaking out on the issue of Iran. Hadley is blocking Flynt Leverett, formerly of the National Security Council, from publishing an Op-Ed piece critical of the Bush administration on the grounds that any insight into the machinations of policymaking (or lack thereof) somehow strengthens Iran’s hand. Leverett’s article would simply underscore the fact that the Bush administration has spurned every opportunity to improve relations with Iran while deliberately exaggerating the threat to U.S. interests posed by the Iranian theocracy.

http://www.antiwar.com/orig/porter.php?articleid=10535
Rove Said to Have Received 2003 Iranian Proposal by Gareth Porter
February 17, 2007

* Karl gets the copy of proposal via Bob Ney

Karl Rove, then White House deputy chief of staff for President George W. Bush, received a copy of the secret Iranian proposal for negotiations with the United States from former Republican Congressman Bob Ney in early May 2003.

* Bob Ney goes to jail for his link with Abramov

Ney, who pleaded guilty last year and was sentenced to prison in January for his role in the Jack Abramov lobbying scandal, was named by former aide Trita Parsi as an intermediary who took a copy of the Iranian proposal to the White House.

* Karl got the proposal around the same time when state department received it

Parsi said the proposal was delivered to Rove the same week that the State Department received it by fax, which was on or about May 4, 2003, according to the cover letter accompanying it.

* Why Ney was chosen?

Ney was chosen by Swiss Ambassador in Tehran Tim Guldimann to carry the Iranian proposal to the White House, according to Parsi, because he knew the Ohio Congressman to be the only Farsi-speaking member of Congress and particularly interested in Iran.

* Who knew about the proposal? Rice denies seeing it back in 2003

Secretary of State Condoleezza Rice denied in Congressional testimony last week that she had seen the Iranian offer in 2003 and even chastised former State Department, National Security Council and Central Intelligence Agency official Flynt Leverett for having failed to bring it to her attention at the time.

* Accusing the Swiss embassador Guldimann acting on his own discretion

The new account of the transmission of a second copy of the Iranian proposal to the White House coincided with the release Wednesday of both the actual text of the proposal as received in Washington and of the cover memo by Ambassador Guldimann which accompanied it. The two documents contradict the suggestion by Rice and by other State Department officials that Guldimann was acting on his own in forwarding the proposal, and that it did not reflect the intentions of the Iranian government.

Memos revealed that Guldimann had not altered the documents and it was confirmed by Kharrazi

The memo from Guldimann, dated May 4, confirms previous reports that the Iranian proposal was drafted by the Iranian Ambassador in Paris Sadeq Kharrazi, in consultation with Guldimann but only after extensive discussions between Kharrazi and the three top figures in Iranian foreign policy: Supreme Leader Ali Khamenei, then President Mohammad Khatami and his Foreign Minister Kamal Kharrazi.

As the memo notes, Ambassador Kharrazi, a former deputy foreign minister, was extremely well connected to the very top level of Iranian leadership. Khamenei’s son is married to his sister, and the foreign minister is his uncle.

Kharrazi’s involvement in constructing the proposal

According to Kharrazi’s account, the three leaders agreed on “85%-90%” of the draft roadmap, with the president and foreign minister voicing no objection and Khamenei raising “some reservations as for some points.” Guldimann reported in his memo that Kharrazi asked him at a meeting on May 2 to make “some minor changes in the previous draft,” especially on the Middle East peace process.

How was the proposal asked to be delivered? Secrecy in case if things doesn’t go as plan

Guldimann’s memo reports that Kharrazi told him all three leaders supported the initiative. But the Iranian diplomat asked him if he could pass the proposal “very confidentially to someone very high in the DoS [Department of State] in order to get to know the U.S. reaction on it.” He also warned that, “if the initiative failed, and if anything about the new Iranian flexibility outline in it became known, they would – also for internal reasons – not be bound by it.”

http://www.washingtonpost.com/wp-dyn/content/article/2007/02/13/AR2007021301363.html
http://www.washingtonpost.com/wp-srv/world/documents/us_iran_1roadmap.pdf
2003 Memo Says Iranian Leaders Backed Talks By Glenn Kessler
Wednesday, February 14, 2007

“I got the clear impression that there is a strong will of the regime to tackle the problem with the U.S. now and to try it with this initiative,” Tim Guldimann, the ambassador, wrote in a cover letter that was faxed to the State Department on May 4, 2003. Guldimann attached a one-page Iranian document labeled “Roadmap” that listed U.S. and Iranian aims for potential negotiations, putting on the table such issues as an end to Iran’s support for anti-Israeli militants, action against terrorist groups on Iranian soil and acceptance of Israel’s right to exist.

Armitage stated Iran had placed too much on the table for effective negotiation

Former deputy secretary of state Richard L. Armitage is quoted in this week’s issue of Newsweek saying that the administration “couldn’t determine what was the Iranians’ and what was the Swiss ambassador’s” in the proposal, adding that his impression at the time was that the Iranians “were trying to put too much on the table” for effective negotiations.

http://www.sourcewatch.org/index.php?title=Bob_Ney#Corrupt_actions_to_aid_airplane_sale_to_Iran
http://www.sourcewatch.org/images/f/ff/Ney_2003_London_form.jpg
Bob Ney – Corrupt actions to aid airplane sale to Iran

Ohio Rep. Robert Ney personally lobbied the then Secretary of State Colin Powell to relax U.S. sanctions on Iran. Who asked him to? A convicted airplane broker who had just taken the congressman and a top aide on an expense-paid trip to London, NEWSWEEK has learned. Ney’s lawyer confirmed to NEWSWEEK that federal prosecutors have subpoenaed records on Ney’s February 2003 trip paid for by Nigel Winfield, a thrice-convicted felon who ran a company in Cyprus called FN Aviation. Winfield was seeking to sell U.S.-made airplane spare parts to the Iranian government—a deal that would have needed special permits because of U.S. sanctions against Tehran. (http://www.exportcontrolblog.com/blog/2006/01/ney_tried_to_he.html)

Ney got a deal to push for removal of sanction against iranian aviation via a felon intermidary

In January 2006, Newsweek reported that Ney’s lawyer confirmed that federal prosecutors have subpoenaed records on an expenses paid February 2003 trip to London that Ney and a top aide took. The trip was paid for by “Nigel Winfield, a thrice-convicted felon who ran a company in Cyprus called FN Aviation. Winfield was seeking to sell U.S.-made airplane spare parts to the Iranian government—a deal that would have needed special permits because of U.S. sanctions against Tehran,” and that “Ney personally lobbied the then Secretary of State Colin Powell to relax U.S. sanctions on Iran.”

Al-Zayat had been trying to sell U.S.-made airplanes and airplane parts to Iran and, through FN Aviation, hired two DC-based lobbyists to seek an exemption from the Iran arms embargo to allow the sale and to gain a visa to enter the U.S.

Players

One of the lobbyists was Roy Coffee of the O’Connor & Hannan firm, which was paid $220,000 for its services between its hire on February 20, 2003 its terminatino at the end of that year, according to lobbying disclosure forms filed with the Senate.

The other lobbyist was David DiStefano, who was paid $20,000 from his retention at the beginning of 2003 until the end of that year.

http://www.talkingpointsmemo.com/docs/ney-fact-basis/?resultpage=1&
The Factual Basis for Bob Ney’s Plea Agreement
09-15-2006

http://baztab.com/news/24835.php

http://frontburner.dmagazine.com/archives/013069.html
RE: A LAWYER IN TROUBLE

About a week ago, Tim posted a DMN article about two lobbyists hired by the Dallas lawfirm of Locke Liddell & Sapp getting into hot water because of dealings with Iran. One of those lobbyists, Roy Coffee, gave the News a “no comment,” which hurt his image. Now, after his client has signed a release, he can comment. And does so. At length. His 2,800-word statement is after the jump.

Our efforts on behalf of FN Avaition were to pursue a humanitarian exemption to the Iran-Libyan Sanctions Act (ILSA)for spare parts for civilian commercial aircraft and possibly new civilian commercial aircraft. We were not attempting to make an end run around the sanctions act for military parts. Neither Dave nor I would ever have worked on such a proposition.

We approached Mr. Ney about FN’s request because he has a long history of interest in the Middle East – he lived in Iran before the revolution and later in Saudi Arabia. He has a passion for the Iranian people that is inspiring.

Our trip to London was at our clients request. It was a very quick 3-day trip to London and back with a series of meetings at FN Aviation’s London offices. We flew through the night on Thursday night arriving Friday morning and returned on Sunday.

Other than traveling to London to meet with our clients, we never asked Mr. Ney to do anything in his official capacity. Reports in Newsweek that we asked him to call Secretary of State Colin Powell are innacurate. The Administration’s view of Iran – “Axis of Evil” – was well known and without first securing Congressional support, we knew that there was no way to get the Administration to grant an exemption. While Mr. Ney has spoken repeatedly with Administration officials regarding Iran through the years, he has made it clear to the press that he never took any action with regards to FN Aviation.

http://www.armscontrolwonk.com/1083/irans-march-2003-offer
Iran’s May 2003 Offer – Actually copies of documents

http://www.youtube.com/watch?v=SVGqDfX_pgA
Conversations with History – Trita Parsi

Conversations host Harry Kreisler welcomes Trita Parsi,President of the National Iranian American Council, for a discussion of the struggle for
power in the Middle East. Drawing on the perspective of the Realist School of International Relations Theory, he focuses on the region’s dominant powers–Israel and Iran–and examines the evolution of their relations with each other and with the United States, the world’s only superpower.

http://www.american-iranian.org/pubs/aicinsight/insightmarch04.pdf

http://www.nytimes.com/packages/pdf/opinion/20070429_iran-memo-red.pdf
http://www.nytimes.com/packages/pdf/opinion/20070429_iran-memo-3.pdf
http://www.nytimes.com/packages/pdf/opinion/20070429_iran-memo-expurgated.pdf
http://www.nytimes.com/packages/pdf/opinion/20070429_chronology.pdf
http://kristof.blogs.nytimes.com/2007/04/28/irans-proposal-for-a-grand-bargain/
April 28, 2007, 8:44 pm
Iran’s Proposal for a ‘Grand Bargain’
By Nicholas D. Kristof

In Sunday’s column I lay out the attempts to reach a “grand bargain” between the U.S. and Iran, before Bush administration hard-liners killed the effort in 2003. Here I’m providing more background and the full documents.

The most crucial documents are the Iranian proposals for a “grand bargain” with the U.S. Iran apparently was partly reassured by the bustle of diplomacy in 2001-2003, while also nervous at what it saw as U.S. swagger into Iraq and Afghanistan – and taken aback by President Bush’s hostility to Tehran, as reflected in Iran’s selection for the “axis of evil.”

This document is the original draft version of the “grand bargain,” but its parentage is uncertain. For political reasons, doves in both the U.S. and in Iran prefer to present the grand bargain idea as originating on the other side, for neither wants to signal any political weakness. So this document arrived in the Iranian Foreign Ministry and purported to come from the U.S.; it was described as a U.S. initiative, but I can’t find anyone in the U.S. who acknowledges having prepared it. In any case, this was the starting point.

Then Ambassador Zarif edited it – his changes are in red in this document, and this is the one I would strongly encourage you to read. It was approved as the master statement of the Iranian position. Iran faxed it to the State Department and sent it, through an intermediary, to the White House. Here’s a final, clean version, as it was trasnmitted.

I can’t verify that the Iranian versions were received, or at least reviewed by senior officials. The Bush administration instead seemed to focus on a two-page document that came from the Swiss ambassador to Iran at the time, who looked after American interests there. That was a cover letter and a paraphrase of the Iranian documents cited above. These documents from the Swiss ambassador are what American officials received on May 4, 2003, and which they then rejected. Indeed, the Swiss ambassador was even reprimanded for having the temerity to forward the proposal. The Swiss document was published earlier this year on the Washington Post website with an article by Glenn Kessler; the Iranians’ position is that the real proposal is the one they prepared and transmitted, not the Swiss paraphrase.

These proposals were an outgrowth of a burst of diplomacy, both official and unofficial, in the fall of 2001 as the U.S. and Iran cooperated against their mutual enemy, the Taliban. For background, here is a partial chronology prepared by Hooshang Amirahmadi, head of the American Iranian Council.

The unofficial diplomacy got a boost at two meetings at the home of Ambassador Zarif in September 2002, for board members of the American Iranian Council. Mr. Amirahmadi’s notes show that at the first meeting, Tom Pickering – a veteran U.S. ambassador – said that he had just spoken with the State Department and was told that the Bush administration was prepared to normalize relations in some circumstances. Others at the meeting whom I spoke to don’t particularly remember that, one way or the other. Mr. Pickering himself says he doesn’t remember it, or whom he might have spoken to in the State Department, but he says that if it is in the notes he doesn’t contest it.

At a follow-up meeting at Mr. Zarif’s home, Iranian Foreign Minister Kamal Kharrazi met with many of the same people. Mr. Amirahmadi’s notes indicate that initially Mr. Kharrazi was not encouraging but finally said in response to a question:

“Yes! We are ready to normalize relations” with the US and prepared to discuss problems that exist between us, but for that to happen we must be able to trust the US and this requires some initial positive gestures in the part of Washington, particularly a change in tone.

In the months afterward, there were further discussions about how to proceed to nurture improved U.S.-Iranian relations. One proposal was for a conference at which each would publicly discuss normalization; another was for cooperation against Saddam Hussein. By all accounts, the State Department and National Security Council were fully briefed through this period, but different participants disagree about how much of a blessing the State Department gave the process. One participant said it had enough approval that it was in effect “track one-and-a-half,” while another participant said he didn’t see much Bush administration support at all. To add to the confusion, there were several track-two processes going on at the same time, and they were not all fully briefed on the others. Here is a memo that Mr. Amirahmadi wrote to himself in November 2002, incorporating his meeting notes and describing the events of that fall as he saw them.

When the Neo-cons killed the incipient peace process, they did so partly on the basis that Iran had been uncooperative on terrorism. At a meeting in Geneva on terrorism issues, Zalmay Khalilzad had told Ambassador Zarif that the U.S. had information of a forthcoming terror bombing in the Gulf area. Mr. Khalilzad reportedly asked Iran to interrogate Al Qaeda members in Iranian prisons for information about the incident. Iran apparently dropped the ball (it says it didn’t have enough information) and did not generate any useful intelligence, and the incident turned out to be a suicide truck bombing in Riyadh, Saudi Arabia, on May 12, 2003.

As I wrote in my column, I’m not sure that the diplomacy would have led to a “grand bargain” — there would have been very tough negotiating ahead. But the Iranian proposal was promising and certainly should have been followed up. It seems diplomatic mismanagement of the highest order for the Bush administration to have rejected that process out of hand, and now to be instead beating the drums of war and considering air strikes on Iranian nuclear sites.

The moderate camp in Iran was discouraged and discredited when the U.S. rejected its “grand bargain” proposal. But there is still a chance that Iran’s May 2003 proposal could be revived as a basis for new talks that aim for normalizing U.S.-Iranian relations. And if there isn’t room for a “grand bargain,” there may at least be an opportunity for a mini-bargain. Condi Rice seems more willing to negotiate with Iran than other principals in the administration, so let’s hope she pursues this path.

I’d welcome your comments below on this episode in U.S.-Iranian relations.

http://www.usdoj.gov/opa/pr/2007/January/07_crm_027.html
Former Congressman Robert W. Ney Sentenced to 30 Months in Prison for Corruption Crimes

http://www.access.gpo.gov/nara/cfr/waisidx_05/31cfr560_05.html
CHAPTER V–OFFICE OF FOREIGN ASSETS CONTROL, DEPARTMENT OF THE TREASURY
PART 560–IRANIAN TRANSACTIONS REGULATIONS

http://edocket.access.gpo.gov/cfr_2006/julqtr/pdf/31cfr560.530.pdf
Such is the case with exports related to aircraft safety, or, as the Iranian Transactions Regulations put it:

§ 560.527 Rescheduling existing loans.
Specific licenses may be issued on a case-by-case basis for rescheduling loans or otherwise extending the maturities of existing loans, and for charging fees or interest at commercially reasonable rates, in connection therewith, provided that no new funds or credits are thereby transferred or extended to Iran or the Government of Iran.

§ 560.528 Aircraft safety.
Specific licenses may be issued on a case-by-case basis for the exportation and reexportation of goods, services, and technology to insure the safety of civil aviation and safe operation of U.S.-origin commercial passenger aircraft.

http://www.exportcontrolblog.com/blog/2006/01/ney_tried_to_he.html

http://aimpoints.hq.af.mil/display.cfm?id=25003
Iran, Iraq, China top list of U.S. enemies, poll says
BY: Associated Press, San Diego Union-Tribune
04/01/2008

http://www.gallup.com/poll/105835/North-Korea-Drops-Top-Three-US-Enemies.aspx
North Korea Drops Out of Top Three U.S. “Enemies”
by Lydia Saad

Iran topped the list, with 25 percent naming it when asked which country is the greatest U.S. enemy, according to the Gallup Poll. Iraq came next at 22 percent, then China with 14 percent.

Gallup first asked the question in early 2001, before the terrorist attacks of Sept. 11. At the time, Iraq was seen as the biggest foe, followed by China and Iran.

The United States itself was named as the United States’ fifth-worst enemy, cited by 3 percent. Tied for fifth place was Afghanistan. Pakistan and Russia were cited by 2 percent, and Venezuela by 1 percent. The poll was conducted from Feb. 11-14 and involved telephone interviews with 1,007 adults.

This video is a clear example of how devolutionary Iranian culture is. Occasional outbursts to incite chaos and avoid dialectical discussion on issues that are in exigency of vetting. The same bald guy who peevishly interrupts the conference is the same guy who if given a chance as an official would order mass genocide of half million of his own people. Anyone who has done a decent amount of research on Iran’s 2003 offer to open up channels of communication knows how neo-cons and…

… their agents pulled the plug on reformists and paved the away to hardliners. Adhering to the same old failed policy of containment is the prime reason behind a gradual deteriation of situation on both side of the fence. You don’t suffocate the regime by such tenet but rather fuel it. You rot the sanguinary elements by giving a voice to reformists, no matter how far their ideology may indeed be unsatisfactory to the ideal democaric goal we seek.

http://iranvajahan.net/cgi-bin/news.pl?l=en&y=2008&m=04&d=02&a=6
The Iranian Web of Influence in the United States
April 02, 2008
FrontPageMagazine.com
Hassan Daioleslam

The principal firm among these is Balli Group PLC based in London. Iranian brothers Vahid and Hassan Alaghband own the company. Balli owns a private bank and numerous major enterprises inside Iran with strong ties to the Iranian regime. It is well understood that no company can reach the Balli’s success and status in Iran without direct support of Mafia Dons inside the mullah’s circle of power. The ramifications of selling a few used aircrafts to Iran transcends beyond the criminal act of a few merchants circumventing international sanctions to make hundreds of millions of dollars. It is a symptom of the broadening of the Mullah’s web of influence in the US.

A year later, Ney’s Iranian advisor, Trita Parsi, became the president of an organization called the National Iranian American Council (NIAC). As I have explained in detail,8 Parsi and his Iran based partner Siamak Namazi, unmasked a roadmap in 1999 to create an Iranian lobby in the US to influence the Congress.

To this date, NIAC has not diverted a bit from the roadmap. Namizi, along with his father, brother and sister, are notorious proprietors of numerous key enterprises in Iran facilitating the mullahs’ financial and business affairs. The NIAC’s role in lobbying for relieving pressure off Tehran’s rulers, under the disguise of empowering Iranian-Americans, is now well exposed. Even the Iranian pro-government newspaper Aftab, described these activities as the “Iranian lobby” acting as the regime’s “unofficial diplomacy.”

Abbas Maleki, the Iranian deputy foreign minister under Rafsanjani, advisor to the Supreme Leader and one of the chief organizers of Iranian lobby in the US, was one of the key speakers. Hassan Alaghband from Balli group was another key speaker and one of the main supporters of the event. Namazi is certainly a known figure in the Mullah’s lobby machinery in the West. Following the trails from this meeting leads to the discovery of the broadening web of influence of mullahs in the US involving some new players and many of the familiar faces of the Mafia web. (http://www.i-aim.org/content/en/video-entrepreneurship/video-entrepreneurship.aspx)

The Iranian lobby in the US is financially fed by sources that are conspicuously tangled with Tehran’s interests. One jaw dropping example: Vahid Alaghband (the elder brother) is a major donor (among very few) and an “ambassador and supporter extraordinaire” of US based Parsa foundation

http://www.atimes.com/atimes/Middle_East/JC27Ak04.html

US moves towards engaging Iran
By M K Bhadrakumar
Mar 27, 2008

* Kissinger calls for unconditional talks with Iran

For the first time, Kissinger called for unconditional talks with Iran. That is a remarkable shift in his position. Kissinger used to maintain that the legacy of the hostage crisis during the Iranian revolution in 1979 and “the messianic aspect of the Iranian regime” represented huge obstacles to diplomacy, and combining with “Persian imperial tradition” and “contemporary Islamic fervor”, a collision with the US became almost unavoidable. Interestingly, Kissinger’s call was also echoed by Dennis Ross, who used to be a key negotiator in the Middle East, and carries much respect in Israel.

* Bush has backed away from previous sharply critical of regime in Tehran and mostly focused on reform that’s much needed in Iran but without mention of regime change. The only precondition mentioned was for Iranian to decided to cease the enrichment of Uranium.

Bush’s interviews with the government-supported Voice of America and Radio Farda, especially the latter, were a masterly piece in political overture. He held out none of the customary threats against Iran. This time, there was not even the trademark insistence that “all options are on the table”. There were no barbs aimed at President Mahmud Ahmadinejad. Least of all, there were no calls for a regime change in Tehran. Bush simply said something that he might as well have said about Saudi Arabia or Egypt. As he put it, “So this is a regime and a society that’s got a long way to go [in reform].”

Bush spoke of the evolution of the Iranian regime’s character rather than its overthrow. The criticism, if any, of Iranian government policies approached nowhere near the diatribes of the past. There was none of the boastful claims that the US would work toward isolating Iran in its region and beyond. In fact, Bush acknowledged, “There’s a chance that the US and Iran can reconcile their differences, but the [Iranian] government is going to have to make different choices. And one [such choice] is to verifiably suspend the enrichment of uranium, at which time there is a way forward.”

* The U.S. employs divide and rule methodology — beefing up Sunni militias under shadow of rising against foreign fighters to undermine Shiit majorities/government down the road.

But after a recent visit to Iran, prominent US author and commentator Selig Harrison wrote in The Boston Globe newspaper, “Tehran is seething over what it sees as a new ‘divide and rule’ US strategy designed to make Iraq a permanent US protectorate”. He was referring to the current US strategy of building up rival Sunni militias – euphemistically called the “Sunni Awakening” – so as to fence in the Shi’ite-dominated government in Baghdad. The Sunni militias presently number some 90,000 US-equipped fighters, each paid $300 per month. But, as Harrison recounted his conversations in Iran, “The message was clear: Unless [US General David] Petraeus drastically cuts back the Sunni militias, Tehran will unleash the Shi’ite militias against US forces again.”

* Iran can surely stir up the Shiit’s unless the U.S. puts on the table an offer that would address Iran’s interests.

Sunday’s violence, conceivably, may be a harbinger of things to come unless the US accommodates Iranian interests. It may have displayed that Iran has the will and the capacity to remain the dominant influence in Iraq with or without a stable government in Baghdad and with or without US acquiescence.

Harrison sums up his impressions following talks with interlocutors in the Iranian government: “Iran and the US have a common interest in a stable Iraq … Before cooperating to stabilize Iraq, however, Iran wants assurances that the US will not use it as a base for covert action and military attacks against the Islamic Republic and will gradually phase out its combat troops. Cooperation will endure only if Washington lets the Shi’ites enforce the terms for the new ethnic equation in Iraq and, above all, if it recognizes Iran’s right by virtue of geography and history to have a bigger say in Iraq’s destiny than its other immediate neighbors, not to mention the faraway United States.”

* The Revolutionary Guard is consolidating its economic and political power and muscling reformists out of the scene. Even the Supreme leader now praises the president on nuclear issues and Rafsanjani realizing reformists are more likely to be disintegrated, has been talking to Ahmadinejad.

In effect, the “reformist’ coalition has become a spent force and is now likely to disintegrate. Already by end-February, Rafsanjani seems to have sensed this defeat of “black Shi’ism” by “red Shi’ism”. He quickly changed tack and made up with Ahmadinejad. The ultimate clincher, of course, was the extraordinary gesture of Supreme Leader Ayatollah Ali Khamenei to publicly voice support of Ahmadinejad. Addressing the powerful Assembly of Experts (headed by Rafsanjani) on February 26, Khamenei praised the role of Ahmadinejad for “great success” on the nuclear issue. Later in the evening on the same day, Rafsanjani visited Ahmadinejad.

* With hardliners solidifying their position in the country and running everyone out as a sole power house, does that mean the U.S. has no other choice to engage them or would stick to the containment strategy. At the same time,

The real issue now is whether the emboldened leadership in Tehran shares the Bush administration’s sense of urgency. It will carefully weigh its options. Foreign Minister Manouchehr Mottaki announced on Monday that Tehran “recently requested for membership” of the Shanghai Cooperation Organization (SCO). Ahmadinejad will be attending the SCO’s summit in Dushanbe, Tajikistan. Meanwhile, Iran’s proposal to Russia to form a gas cartel is set to take off at a meeting of gas-producing countries in Moscow in June.

* Russia has interest in Iran to use the deals to expand its resource extraction from the Caspian Sea to counter U.S. hegomony in the Central Asia. In addition, the gas pipe that would rally Iran’s natural resources to Europe can be another pawn used to play against the U.S..

Tehran will surely estimate that Russia-US disputes are hard to settle; that Russia has major commercial interests in Iran; that Moscow needs Iran’s endorsement of a multinational arrangement to exploit the Caspian Sea’s energy resources.

Tehran remains on the lookout for a shift in the US stance on the Nabucco gas pipeline sourcing Iranian gas via Turkey for the European market. Last week, Switzerland’s Elektrizitaetshesellschaft Laufenburg signed a 25-year deal with the National Iranian Gas Export Company for the delivery of 5.5 billion cubic meters of Iranian gas annually. The agreement was signed during the visit of the Swiss Foreign Minister Micheline Calmy-Rey to Tehran.

The Nabucco pipeline is a planned natural gas pipeline that will transport natural gas from Turkey to Austria, via Bulgaria, Romania, and Hungary. It will run from Erzurum in Turkey to Baumgarten an der March, a major natural gas hub in Austria. Some consider the pipeline as a diversion from the current methods of importing natural gas solely from Russia. The project is backed by the European Union. The 3,300 kilometre (2,050 mile) Nabucco pipeline will bring gas from the Caspian region, with much of its supplies coming from Azerbaijan.

Without Nabucco, the US strategy to reduce Europe’s dependence on Russian gas supplies will remain a pipedream, and without Iranian gas, Nabucco itself makes little sense, while Nabucco will be Iran’s passport to integration with Europe.

“The Superpower Syndrome”:

In their mutual zealotry, Islamist and American leaders seem to act in concert. Each in its excess nurtures the apocalypticism of the other, resulting in a malignant synergy.”

inlukh, please. I just showed Khatami praising a notorious executioner and torturer Assadollah Lajevardi. I put the quote up for everyone to see. Khatami praised Hezbollah and called for Israel’s destruction. Khatami is just better at the duping the west game. Under Khatami, repression in Iran continued. I see you believe the Grand bargain hoax. Even Guldimann who brought the memo [it was his proposal, not Iran’s] acknowledged that Iran agreed to 85-90%, not a 100%.

Once again the evil hands of murderers martyred one [Assadollah Lajevardi, the notorious executioner] of the hard-working soldiers of
the Revolution and a servant of the people and the state. The
government of the Islamic Republic of Iran will use all its resources
to fight the wicked terrorists and calls on the intelligence and security
officials to identify vigilantly the perpetrators of this crime as soon
as possible to have them punished for their heinous deed.
-Mohammad Khatami

Inlukh, let me say more on the “grand bargain.” It’s propaganda spread by leftists and Tehran apologists, many of who believe the myth that the MEK is a terrorist cult. There was no sign that Iran was actually doing what Guldimann’s memo said they do. Iran still supported terrorism. I don’t think that Iran was going to end its support for terrorism or recognize Israel’s right to exist. The US bombed MEK bases in Iraq in exchange for Iran not to meddle in Iraq. But Iran meddled in Iraq anyway.

* Argh! You obviously shamelessly copied the excerpt from “The Myth of Moderation” article, by Mohammad Mohaddessin, a NCRI wing of MEK. I consider any publication materialized by these lunch sack puppets a tantamount to an Al Quaeda’s pamphlet aimed at recruiting in the impoverished region of Pakistan-Afghanistan border. You go skim over Rajavi’s garbage and yodel that you are somehow “informed”? *scoff* You are long away from McDonald’s homie.

Anyone who considers MEK a valid replacement for the current regime is a neophyte who is undeserved of any rational response. MEK is well known for their commingle of ultra-fundamentalism, cultism, and sadistic ideology. No wonder 99% of Iranians living in or out of the country vehemently oppose MEK’s nefarious agenda; if the choice was to come down between the current regime and MEK, unequivocally, people would go with the former. That should speak volume to their border line manic status quo.

And you somehow expect me to take a faceless blogger’s rant on face value when he apparently does not have an ensemble of rudimentary understanding of the subject? Dog, you barge in here, bare foot, start skiing on everyone’s piss while regurgitating such pabulum of sputum as an evidence to your misguided presumptions, all for what? Scoring points with your failed Muppet’s ideologue Zionists!

Then you parrot off of another blog entry of yours (“Take for MEK and NCRI off Terror List”) — posted on MEK website — where you cry foul over a preposterous accusation of American forces “bombing” MEK! Not to mention, the American forces, retroactively, have been permitting these goons to retain their compound for the last 6 years. Yet you sophomorically employ a panoply of intellectual somersault reasoning to deduce bizarre conclusions that they are somehow being prosecuted by the US!

Of course, considering the post being hosted on the MEK website, there should be no doubt over symbiotic sycophancy that is embraced by the parties involved. Lajevardi was a butcher, no question about it. However, it is apparent that your youth, inexperience, and bonafide zeal are impeding you from examining the events through the lens of objectivity.

You have to possess an in depth understanding of the inner working of the Iran’s current establishment to realize that such dialogue is simply a part of the regime’s “formality.” The very excerpt quoted was announced right after Lajevardi assassination” by the “MEK” members so Khatami was naturally to declare such assertive comeuppance for their arrest. You don’t expect a president of some country to stand by idle while his citizen, good or bad, be sprayed with bullets, do you?

In reality, Khatami was not involved in any of activities this individual was engaged in back in the 80’s nor he had, during his presidency, a significant jurisprudence authority over the deeds of the shadowy government that ran/runs the country. The role of the presidency in Iran is, in many respects, restrictive in nature compare to the overwhelming power house of compartmentalized cliques of mullahs influencing a range of decisions made for the country.

They called for his conviction over a handshake with two female foreigners for crying out loud. The only exception is when the ruling administration is directly attached to the sphere of influence (e.g. Rafsanjani), otherwise, the predominance, in actuality, is meagerly limited. You are simply purporting the usual guilt-by-association fallacy to garner sentimental support for your faulty assumptions.

In “retrospect,” Khatami’s candidacy, although it wasn’t a bed of roses nor a bastion of equity, was a “step in a right direction” — as oppose to many who came before or after him. Only a simpleton-minded cretin pipe dreams about an overnight transformation of country in which the underlying antecedent of turmoil stems from not a singular source but rather across the board garden variety of elements constantly shifting alliances to further their sphere of influence for personal aggrandizement.

And as for your declarative platter over Iran’s proposal being a “hoax,” after reading “The Myth Of A Generous Offer,” it becomes abundantly clear that the petulant kids like you are, somehow, trapped in their little myopic bubble of naivety, Googling a few inadequate articles, distorting facts while drawing absurd conclusions from the limited information gathered.

The events that led to the negotiation between Iran, intermediary parties, and the US, in 2002-2003, are fairly well documented; even many of the conservative think tanks have done analysis on the subject matter. You see, when I read through your hodgepodge of garble where you bounce around from a disjointed topic to the next, it becomes obvious that your crusade falls into such a vat of crazy, it is nearly impossible to comment on, namely…

a) this whole process was a hoax, which pretty much contradicts the successive allegations made by you or perhaps Benny boy is either a cerebral handicap or English is not his native language (my guess is the former)

b) Guldimann devised a “memo” (like the one that gets passed around in the work office) which defeats the entire established common sense that dictates a foreign minister of some odd country does not inscribe a game plan on behalf of another country (more on this later)

c) bloviating over lack of “100%” confirmation of entire “initial” negotiation terms, hence the tag “negotiation” (read: give and take)

d) requesting to expound on the topic of Grand Bargain then doing a 180 and dissenting whether MEK is or is not a cult sect (indication of incoherency in thought processing)

e) extrapolating on hypothetical arguments while ignoring the reality of the situation that since the arbitration did not take place in the first place, neither of the parties has a fiduciary obligation to adhere to the proposed terms (can you say DUHHHH!)

The entire sophistry of your mishmash suffers from the misrepresentation of a few piecemeal documents that you poorly comprehended in the first place, resorting to partial promulgation of evidence, forgoing an array of vital facts that can be easily verified while rewriting the original clauses by fabricating false assertions.

Let me bring you up to speed: the proposal was indeed whipped up by the nephew of Kharrazi, then foreign minister of Iran, “after” a few rounds of mid-level mitigation which, to your own admission, received a seal of approval by the highest authoritative figures in the foreign relation policies. The ambassador Guldimann simply attached a “cover letter” to summarize the proposal as a “roadmap” in which he explicitly mentions Khatami and Kharrazi were present to verify “every word of this paper.”

He was then asked to find a channel to remit the proposal to the high ranking official in DoS and the White House (e.g. Bob Ney) who he ultimately, after faxing the proposal, delivered it personally to the State Department. Your brouhaha over 100% inclusiveness of the proposal is brash because, first of all, it was a subsequential reaction from Tehran at the “initial” roadmap BEFORE a composition of the proposal, and second, no negotiation is achieved with the total assent of all parties.

I highly suggest examining professor Amirahmadi’s notes who was, for most part, present in all the meetings involving the conferring parties. Then spend some time reading over Parsi’s papers who has diligently documented the details of the Bush administration’s reaction and ultimate rejection of the presented opportunity to advance yet another failed neo-conservative agenda.

Your little dalliance into the complex political sphere of Iran is risible and criminally uneducated. You have clearly illustrated your lack of ability to see a bigger picture while merely pandering to one’s confirmation bias by nit picking the pednatic. There are literally 100’s of schoraly analysis on this topic and I am not going to spoon feed you. Spend a year study the subject then bother responding.

You are terribly outmatched and out of your element and it shows. In either case, it would be in everyone’s best interest if you stop pompously brand yourself as “an expert on the Middle east, radical Islam, Israel, Iran and Iran’s democratic opposition.” Pfft! You have a long way to go in life kiddo. So go, go, and keep going… bye.

P.S. Next time when you plan to response, do us a favor and stop copy/pasting the exact words out of your own “psedu-articles.” It mandates desperation.
P.P.S. Do some grammar and spell check before submitting an article. Good grief, you are bleeding all over place.
P.P.P.S. Your style of writing is trite and repititive rather than espousing a fusion of new ideas backed by concrete evidence.
P.P.P.P.S. Casual inference — stop utilizing that fallacy in your writings.

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http://www.jamestown.org/docs/Jamestown-IranContributionIraq.pdf
Iran’s Contribution to the Civil War in Iraq

While the press debates whether or not there is a civil war in Iraq, there is a strong history
of Iranian-sponsored unrest in Iraq that continues to the present. Captured Iraqi
intelligence documents, now maintained by the Foreign Military Studies Office, show Iran’s deep
penetration in Iraqi society and institutions. Iran clandestinely supported the U.S. invasion of
Iraq and took measures to turn it to her advantage.

The Iranian government maintained armed formations, such as the Badr Corps, inside Iraq
prior to the U.S. invasion. While Saddam Hussein felt that he could dissuade a U.S. invasion
through world opinion and the United Nations, Iran anticipated and welcomed the U.S. invasion
since it would destroy her chief enemy in the region.

Iran has now moved covertly and overtly onto Iraq to subvert Iraqi institutions and eventually
to assume total control. Iran has now entered a wider and more dangerous game by subverting
the Iraqi police and armed forces into a “greater Shia” cause, which Iran hopes will lead to the
fragmentation of Iraq and the inoration of oil–rich Shia lands into Iran.

http://www.cfr.org/publication/12521/irans_involvement_in_iraq.html?breadcrumb=%2F
Iran’s Involvement in Iraq by Lionel Beehner and Greg Bruno, Staff Writer

Updated: March 3, 2008

Iran has sent more than two thousand religious students and scholars to the holy cities of Najaf and Karbala. One-third of them belong to Iranian intelligence (PDF) and some are operatives sent to Shiite shrines to influence voters ahead of elections, writes Mounir Elkhamri, a military analyst for the Foreign Military Studies Office at Fort Leavenworth, Kansas.

Iran has emerged as one of Iraq’s largest trading partners, with Iranian exports to Iraq topping $1.8 billion (PDF) in 2006, according to the Iranian Custom Administration, up from $800 million in 2004.

A free-trade zone in southern Iraq has brought a surge of Iranian goods into shops in Basra, including kerosene and cooking gas. Anoushiravan Ehteshami, a professor of international relations at Britain’s University of Durham, says southern Iraq is the only place outside of Iran where Iranian currency—the rial—is used. “That demonstrates Tehran’s economic influence on its neighbor,”

Ehteshami told Radio Free Europe/Radio Liberty. Iran is constructing a highway to link Basra with Iranian commercial centers across the border. Tehran also plans to build a branch of its national bank in Baghdad and provide assistance for Iraq’s economic reconstruction, according to Hassan Kazemi-Qomi, Iran’s ambassador to Iraq.

http://www.usip.org/pubs/specialreports/sr156.html
http://www.usip.org/pubs/specialreports/sr156.pdf
Iran and Iraq The Shia Connection, Soft Power, and the Nuclear Factor

Although alleged Iranian support for some insurgent actions appears to contradict its open stance of supporting legitimate Shiite-backed political groups, such activity highlights broader Iranian intentions of covering all its bases in Iraq in the event of a serious downturn in relations with both the United States and a future Iraqi government.

Most of all, Iran does not want to see a new threat from Iraq re-emerge. The threat could be manifested in a number of ways: by a Shiite-Sunni civil war, the establishment of an independent Kurdish state in northern Iraq, the establishment of a rival Shiite clerical government, or the establishment of a united government that is closely allied with the United States.

What Mullah’s Want

Tehran’s mullahs have shown anxiety about a strong, pro-Western government in Baghdad that could offer permanent basing rights to U.S. forces and perhaps even have relations with Israel. But the conservative mullahs are also concerned, although more ambivalent, about the emergence of a strong Shiite-dominated clerical government in Baghdad.

The complexities of the Shiite religion suggest that there would be rivalry between the clerical establishments, with Iraq’s powerful religious centers of Najaf and Karbala eventually providing alternative sources of theological discourses to Qom, the religious center of Iran; yet this could be the case even without a clerical government in Baghdad. What Iran would prefer to see ideally in Iraq is a friendly neighbor that presents no discernable threat to its clerical regime either militarily or politically.

Iran has supported the efforts of Sistani, viewing him as an integral part of maintaining stability in Iraq. As time progresses, though, and the potential for Sistani to rival Iran for leadership of the Shiite religious world grows, Iran’s stance may shift.

Iran and Fear of Talibanization of Pakistan

During this period, Iranian officials’ greatest fear was that Pakistan’s leadership would eventually become “Talibanized”—if, for example, the Musharraf government were overthrown by younger, more radical military officers sympathetic to the Taliban and its philosophy—and that they would face an extremist Sunni regime with nuclear weapons on Iran’s border.

http://www.crisisgroup.org/home/index.cfm?l=1&id=3328
Iran in Iraq: How Much Influence?

21 March 2005

Shiit Group Won in Election with Iranian Backing

More recently, the triumph in the January 2005 elections for Iraq’s transitional national assembly of the Shiite-based United Iraqi Alliance (UIA) and, in particular, of three parties within it with long-standing ties to the Iranian regime — the Supreme Council for the Islamic Revolution in Iraq (SCIRI), Al-Da’wa and Al-Da’wa – Tanzim al-Iraq — appeared to vindicate the views of those who suspect an Iranian effort to install a loyal, theocratic government.

Evidence for Meddling?

In fact, there is no indication that Iranian electoral manipulation is anything more than speculation or that the Shiites’ victory was anything other than the political translation of their demographic predominance. Nor has any concrete evidence been presented to bolster the claim that Iran is either actively promoting the insurgency or seeking to maximise instability.

Iran’s Goal

Tehran’s priority is to prevent Iraq from re-emerging as a threat, whether of a military, political or ideological nature, and whether deriving from its failure (its collapse into civil war or the emergence of an independent Iraqi Kurdistan with huge implications for Iran’s disaffected Kurdish minority) or success (its consolidation as an alternative democratic or religious model appealing to Iran’s disaffected citizens).

Iran consequently is intent on preserving Iraq’s territorial integrity, avoiding all-out instability, encouraging a Shiite-dominated, friendly government, and, importantly, keeping the U.S. preoccupied and at bay. This has entailed a complex three-pronged strategy:

encouraging electoral democracy (as a means of producing Shiite rule)
promoting a degree of chaos but of a manageable kind (in order to generate protracted but controllable disorder)
investing in a wide array of diverse, often competing Iraqi actors (to minimise risks in any conceivable outcome).

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http://www.comw.org/pda/fulltext/03sahimi.html

Iran’s Nuclear Program

6-part series by Muhammad Sahimi published in Payvand

Part I: Its History, 02 October 2003

Part II: Are Nuclear Reactors Necessary?, 03 October 2003

Part III: The Emerging Crisis, 06 October 2003

Part IV: Economic Analysis of the Program, 07 December 2004

Part V: From the United States Offering Iran Uranium Enrichment Technology to Suggestions for Creating Catastrophic Industrial Failure, 22 December 2004

Part VI: The European Union’s Proposal, Iran’s Defiance, and the Emerging Crisis, 09 September 2005
Part I: Its History

On February 9, 2003, Iran’s program and efforts for building sophisticated facilities at Natanz and and several other cities that would eventually produce enriched uranium were revealed. President Mohammad Khatami announced the existence of the Natanz (and other) facilities on Iran’s television and invited the International Atomic Energy Agency (IAEA) to visit them. Then, in late February, Dr. Mohammad El Baradei, the head of IAEA, accompanied by a team of inspectors, visited Iran. Since then, the IAEA’s experts and inspectors have visited Iran several more times. A preliminary report was published in July, with a follow up report on August 26. On September 12, 2003, the IAEA gave Iran an ultimatum to reveal all the details of its nuclear activities by October 31, 2003.

Iran’s nuclear program and activities, though discussed for many years, have come into sharp focus since the February announcement. The information and data that have been obtained by the IAEA, after visiting the Natanz facility and a few other locations, have surprised the United States, the European Union, Russia, and Japan. Similar to the Clinton administration, the Bush administrtation has been suspicious of Iran’s nuclear program, arguing that, having vast oil and natural gas reserves, Iran hardly needs nuclear energy. Hence, the Bush administration argues that the primary purpose of Iran’s nuclear program is developing nuclear weapons. The EU, which is negotiating with Iran extensive economic and cultural agreements; Russia, which is completing construction of nuclear reactors in Bushehr and hoping to build many more reactors in Iran, and Japan, which is hoping to sign a lucrative oil agreement with Iran for developing Iran’s huge Azaadegaan oil field (the largest oil field in the Middle East), have all pressed Iran hard, demanding that it reveal all the secret details of its nuclear program and facilities.

Note that, according to the original IAEA safeguard agreements, Iran did not have to declare the start of construction of the Natanz facility. These agreements stipulate that, only 180 days before introducing any nuclear material, does Iran have to declare the existence of the facility. Therefore, construction of the undeclared Natanz facility was NOT illegal. In addition, the Nuclear Non-proliferation Treaty (NPT) allows Iran to legally build any nuclear facility, including one for uranium enrichment, so long as it is intended for peaceful purposes. Moreover, the NPT allows the member states to withdraw from the agreement, subject to giving a 90 days notice to the IAEA, if they believe that abiding by the terms of the NPT threatens their national security (in the language of the NPT, if it is in their “Supreme Interest”).

Aside from the political confrontation that the revelations about Iran’s nuclear program have created between Iran on one hand, and the US and her allies on the other hand, the questions that I believe we Iranians must ask and debate, are: Does Iran need nuclear energy, and is acquiring it in its national interests? Before starting to debate these all-important questions, however, we must first decouple Iran’s need for nuclear energy from its alleged or real intentions for producing nuclear weapons.

This article represents the first of a three-part series in which these two important questions are discussed, and Iran’s nuclear program is described and analyzed in detail. In the present article, the history of Iran’s program for nuclear research and development is reviewed. The significance of this review is twofold. (1) History shows that the US and her allies were in fact the driving force behind the birth of Iran’s nuclear program in the late 1960s and early 1970s. (2) It is also particularly important to recognize that since the late 1980s, when Iran restarted its nuclear program, the US and her allies have been given every opportunity to participate in the development and construction of nuclear reactors in Iran, which would have provided them with significant control on the reactors and their products, but that they have always refused to do so.

Although various portions of Part I (the present article) have been published before, it may be useful to put all the pieces together in order to present a cohesive and brief review of the historty of Iran’s nuclear program, and to make it available through an easily-accesible web site. In this author’s opinion, this may be particularly useful for the young generation of Iranians who may be interested in this history, and the important role that the US played in the birth of Iran’s nuclear program.

Part II will discuss why Iran must stop relying almost exclusively on oil and gas as her sole sources of energy, and start developing alternative sources, the most advanced of which are nuclear reactors. There are compelling economical, social, and environmental reasons for seeking alternative sources of energy for Iran, which will be described in detail in Part II.

Part III will describe, in simple terms, how violations of the NPT are detected, and what the major issues are at the center of the dispute between Iran and the IAEA. The dispute – some call it a crisis – is in fact mostly between Iran on one hand, and the US and some of her allies on the other hand, with the IAEA being used as a tool in a political battle.

Before embarking on this task, we must recognize that the development of adequate energy resources is a highly important part of the national interests of every nation which, by their very definition, transcend the political system that governs a nation. Both Democratic and Replublican administrations in the US, and their allies, such as Britain, have waged wars, invaded and occupied oil-producing countries, and engineered coups to overthrow the legal, often democratically-elected, governments of oil-producing countries in order to control the world’s oil reserves. They have always justified their deed solely based on protecting their national interests and national security. We only need to recall what happened in Iran in 1953, after Dr. Mohammad Mosaddegh nationalized Iran’s oil industry, and the recent invasion and occupation of Iraq by the US and Britain, to understand this. The same principles are also applicable to Iran, namely, that she has a fundamental right for securing adequate energy resources – the engine for her development and advancement.

Iran’s foray into nuclear research and development began in the mid 1960s under the auspices of the US within the framework of bilateral agreements between the two countries. The first significant nuclear facility built by the Shah was the Tehran Nuclear Research Center (TNRC), founded in 1967, housed at Tehran University, and run by Atomic Energy Organization of Iran (AEOI). This Center has always been one of Iran’s primary open nuclear research facilities. It has a safeguarded 5-megawatt nuclear research reactor that was supplied by the US in 1967. The reactor can produce up to 600 grams of plutonium per year in its spent fuel.

Iran signed the NPT on July 1, 1968. After the Treaty was ratified by the Majles, it went into effect on March 5, 1970. In the language of Article IV of the Treaty, the NPT recognized Iran’s “inalienable right to develop research, production and use of nuclear energy for peaceful proposes without discrimination, and acquire equipment, materials, and scientific and technological information.” The events of the early 1970s were, however, instrumental in shaping and accelerating the development of Iran’s nuclear program. The 1973 war between the Arab countries and Israel, and the subsequent huge increase in the price of oil, provided the Shah’s government with considerable resources for Iran’s development. At that time, a study by the influential Stanford Research Institute concluded that Iran would need, by the year 1990, an electrical capacity of about 20,000-megawatt.

According to declassified confidential US Government documents posted on the Digital National Security Archive (see the article, “The US-Iran Nuclear Dispute: Dr Mohamed El Baradei’s Mission Possible to Iran,” by Drs. A. Etemad and N. Meshkati, published on July 13, 2003, in the Iran News), in the mid-1970s, the US encouraged Iran to expand her non-oil energy base, suggested to the Shah that Iran needed not one but SEVERAL nuclear reactors to acquire the electrical capacity that the Stanford Research Institute had proposed, and expressed interest in the US companies participating in Iran’s nuclear energy projects. Building these reactors, and selling the weapons that the Shah was procuring from the US in the 1970s, were, of course, a good way for the US to recover the cost of the oil that she was buying from Iran.

Since the Shah never read or heard an American proposal that he did not like, he started an ambitious program for building many (presumably as many as TWENTY THREE) nuclear reactors. Hence, his government awarded a contract to Kraftwerk Union (a subsidiary of Siemens) of (West) Germany to construct two Siemens 1,200-megawatt nuclear reactors at Bushehr. The work for doing so began in 1974. In 1975, the Massachusetts Institute of Technology signed a contract with the AEOI for providing training for the first cadre of Iranian nuclear engineers, and the Iranian-Indian nuclear cooperation treaty was also signed (India is now a nuclear power). In addition, the Nuclear Technology Center at Esfahan (Isfahan) was founded in the mid-1970s with the French assistance in order to provide training for the personnel that would be working with the Bushehr reactors. The Esfahan Center currently operates four small nuclear research reactors, all supplied by China.

According to the same declassified document mentioned above, in an address to the symposium, “The US and Iran, An Increasing Partnership,” held in October 1977, Mr. Sydney Sober, a representative of the US State Department, declared that the Shah’s government was going to purchase EIGHT nuclear reactors from the US for generating electricity. On July 10, 1978, only seven months before the victory of the Islamic Revolution in Iran, the final draft of the US-Iran Nuclear Energy Agreement was signed. The agreement was supposed to facilitate cooperation in the field of nuclear energy and to govern the export and transfer of equipment and material to Iran’s nuclear energy program. Iran was also to receive American technology and help in searching for uranium deposits.

The Shah’s government had also envisioned building two nuclear reactors and a power plant in Darkhovin, on the Karoon River, south of the city of Ahvaz. Iran signed, in 1974, a contract with the French company Framatome to build two 950 megawatt pressurized reactors at that site. Framatome did survey the area and began site preparation. However, construction had not yet started when the government of Prime Minister Mehdi Bazargan cancelled the contract after the Islamic revolution in 1979. In 1992, Iran signed an agreement with China for building the reactors in Darkhovin, but the terms of the agreement have not yet been carried out by China. Given the proximity of the site to the border with Iraq, it is probably not prudent to proceed with that project at that particular site.

The Shah’s government also obtained uranium materials from South Africa in the 1970s. According to Dr. Akbar Etemad, who was the founder and first President of the Atomic Energy Organization of Iran from 1974 to 1978, the TNRC carried out experiments in which plutonium was extracted from spent fuel using chemical agents (see, A. Etemad, “Iran,” in, “European Non-Proliferation Policy,” edited by H. Mueller, Oxford University Press, 1987, page 9). Note that the only use for plutonium is in a nuclear bomb. It is also believed that the Shah assembled at the TNRC a nuclear weapon design team. Asadollah Alam, the long-time Imperial Court Minister and the Shah’s close confidant, wrote in his memoires that the Shah had envisioned Iran having nuclear weapons.

In February 1979, when the Islamic Revolution toppled the Shah’s government, the Bushehr-1 (that is, reactor 1) was 90% complete and 60% of its equipment had been installed, while Bushehr-2 was 50% complete. Had the 1979 Revolution not happened, the Kraftwerk Union would have continued its work in all likelihood with the cooperation of the US corporation Bechtel Power, which was its joint-venture partner in many power plant projects around the world. The government of Prime Minister Mehdi Bazargan then decided that Iran did not need nuclear energy, and therefore the work at Bushehr was halted after the victory of the Revolution in February 1979. The German firm had left Iran earlier, anyway.

During its war with Iran, Iraq bombed the Bushehr site six times (in March 1984, February 1985, March 1985, July 1986, and twice in November 1987), which destroyed the entire core area of both reactors. According to officials of Technischer Ueberwachungsverein, Germany’s National Reactor Inspectorate, before the bombings, Bushehr-1 could have been completed in about three years. Note, however, that, at the time of the bombings, none of the main equipments had been installed, and in fact two steam generators (that use the heat from the reactors to produce steam to be used in power generators) were stored in Italy, while the pressure vessel for Bushehr-1 was stored in Germany.

The Revolution and its aftermath, and the eight-year war with Iraq which resulted in colossal damage to Iran’s infrastructure, reduced temporarily Iran’s thirst for electricity. After the war with Iraq ended, however, Iran began to rethink her position regarding nuclear energy and technology, although it would not be unreasonable to believe that Iraq’s savage bombing of Iran’s main population and industrial centers, and the missile attacks that it carried out against Tehran during 1986-1987, also motivated Iran’s leaders to think about nuclear technology. The first reconstruction and development plan proposed and carried out by President Hashemi Rafsanjani’s government, coupled with Iran’s chronic shortage of electricity that went back to the early 1970s, and the rapid growth of her population, were three major reasons for Iran to restart her neclear program for obtaining electricity.

Rafsanjani’s government first approached Kraftwerk Union to complete the Bushehr project. However, under the US pressure, Kraftwerk Union refused. Iran then asked Germany to allow Kraftwerk to ship the reactor components and technical documentation that it had paid for, citing a 1982 International Commerce Commission (ICC) ruling under which Siemens was obligated to deliver all plant materials and components stored outside Iran, but the German government still refused to do so. In response, Iran filed a lawsuit in August 1996 with the ICC, asking for $5.4 billion in compensation for Germany’s failure to comply with the 1982 ruling. The issue is still unsettled.

In the late 1980s, a consortium of companies from Argentina, Germany and Spain submitted a proposal to Iran to complete the Bushehr-1 reactor, but huge pressure by the US stopped the deal. The US pressure also stopped in 1990 Spain’s National Institute of Industry and Nuclear Equipment to complete the Bushehr project. Iran also tried, unsuccessfully, to procure components for the Bushehr reactors, but her attempts were blunted by the US. For example, in 1993, Iran tried to acquire eight steam condensers, built by the Italian firm Ansaldo under the Kraftwerk Union contract, but they were seized by the Italian government. The Czech firm Skoda Plzen also discussed supplying reactor components to Iran, but, under the US pressure, negotiations were cancelled in 1994. Iran was also not successful in her attempt to buy nuclear power reactor components from an unfinished reactor of Polland.

After years of searching in the West for a supplier to complete her first nuclear power plant, Iran turned to the Soviet Union and then Russia. She signed, in March 1990, her first protocol on the Bushehr project with the Soviet Union. The agreement called on Moscow to complete the Bushehr project and build additional two reactors in Iran, but financial problems delayed the deal.

China, in 1991, provided Iran with uranium hexafluoride (a uranium compound, which is gaseous state, and used for enriching uranium; see Part III) which is, however, under the IAEA safeguard. In addition, Iran recently acknowleged that she also received (again in 1991) from China 1,000 kgr of natural uranium hexafluoride, 400 kgr of uranium tetrafluoride, and 400 kgr of uranium dioxide, without reporting them to the IAEA. Although the amount of the (until-recently undeclared) uranium compounds is small, what has been done with them is more indicative of the real intentions behind obtaining the materials. In 1993, the AEOI and the Russian Ministry of Atomic Energy signed an agreement for the construction of two Russian reactors at Bushehr, but the contract was never carried out as Iran was facing major financial problems.

Finally, Iran signed, in January 1995, a contract with the Russian Ministry of Atomic Energy to finish the reactors at Bushehr. These reactors will be under the IAEA safeguards, and will be capable of producing up to 180 kgr/year of plutonium in their spent fuel. The agreement called for Russia to complete the first reactor at Bushehr within four years, although it is still unfinished; to provide a 30-50 megawatt thermal light-water research reactor, 2,000 tons of natural uranium, and training for about 15 Iranian nuclear scientists per year. Iran and Russia also agreed to discuss the construction of a gas centrifuge uranium-enrichment facility in Iran. However, in May 1995, the US announced that it had convinced Russia to cancel the centrifuge agreement, although Russia later denied that the agreement with Iran ever existed! The light-water research reactor deal has also been cancelled.

After the 1995 agreement was signed by Iran and Russia, the Clinton administration tried, unsuccessfully, to convince Russia to cancel the agreement, but its entreaties were rebuffed by Russia which saw the Bushehr project as an openning for her ailing nuclear industry to get itself into the international market. Having failed in its attempts, the Clinton administration then began charging that the plutonium that the reactors would produce would be used by Iran for making nuclear weapons. However, this issue is also being addressed by Iran and Russia, since they are negotiating an agreement by which the nuclear wastes from the Bushehr reactors would be returned to Russia which has a large facility for storing the wastes in southern Siberia (although Russian environmental laws appear to forbid storing nuclear wastes of another country in Russia), but no agreement has been reached yet. It was reported recently that Iran has demanded payments for returning the spent fuel to Russia, contending that she pays to buy the fuel from Russia in the first place, and therefore she should also be paid for the spent fuel. If ture, this would be an absurd demand, because if Russia is to pay for Iran’s nuclear wastes, she should also be paid for keeping Iran’s nuclear wastes! The issue of who should pay whom appears to be the only obstacle to reaching an agreement between Iran and Russia concerning the nuclear wastes.

After it appeared that the plutonium issue would be addressed by Russia, the US, under huge pressure by Israel, began claiming that, while the Bushehr reactors cannot be directly used for making nuclear weapons, they will train a generation of Iranian scientists and engineers for operating the reactor, which in turn will prepare Iran for making nuclear weapons. Is there any merit to this charge? Having a nuclear reactor is NOT necessary for obtaining the necessary know-how for developing a nuclear bomb (although it certainly helps). The best example is provided by Iraq. Israel bombed and destroyed Iraq’s only nuclear reactor at Osirak in 1981, before it started operating, yet when its nuclear weapon program was discovered after the 1991 Gulf war, Iraq was only months away from making a nuclear bomb!

Most experts believe that the completion of the Bushehr project by Russia is a highly complex task: As mentioned earlier, the Kraftwerk Union has not provided any technical documents to either Iran or Russia. Since Russia plans to install a reactor, her engineers must modify what Kraftwerk Union had left behind to accomodate the Russian reactor and its support system, which differ in many significant ways from the German reactor. For example, the structure of the steam generators in the Russian reactors is significantly different from the original German reactors. The reactor is supposed to start operating in early 2004.

In addition to the what has been described so far, Iran does have a few other nuclear facilities. One is the Bonaab Atomic Energy Research Center (which is south of city of Tabriz), which is a research center for applications of nuclear technology in agriculture. In addition, Center for Agricultural Research and Nuclear Medicine at Karaj (near Tehran) was inaugurated on in May 1991, and is run by the AEOI. None of these is, however, considered to be for military applications.

This concludes the review of the history of Iran’s nuclear program. The review reveals three important facts:

(1) Nuclear research, facilities, and reactors, and even the vision for Iran having nuclear weapons, were all conceived and initiated by the Shah and his government, with the direct assistance and encouragement by the US and her allies. This is very much similar to what happened in Israel, which developed her arsenal of nuclear weapons with the direct help of the US and France. They were not conceived or initiated after the Revolution. In fact, for the first few years after the Revolution, Iran rejected nuclear reactors!

(2) It is clear that the US and her allies have had many opportunities to complete the Bushehr project, or to participate in the construction of other nuclear reactors, and, hence, to have significant control on the reactors, but they have always refused to take part.

(3) In addition, the US and her allies could have participated in the Bushehr project by helping Iran improve the safety of the reactors there and, hence, have influence on their operations. As pointed out by Drs. Etemad and Meshkati (see their article cited earlier), there is good precedence for this: The Temelin nuclear power plant in the Czech Republic, the construction of which began during the Soviet Union, when the former communist government was in power in Czechoslovakia, but was halted in 1992. In 1994, with a $317 million loan guarantee from the United States Export-Import Bank, an American company, Westinghouse Electric Corporation, participated in completing the Temelin’s reactors.

Hence, there is no way of avoiding the conclusion that the real goal of the United States is dismantling Iran’s nuclear infrastructure, regardless of its orientation, and to despatch Iran to the era of nuclear, scientific and technological illiteracy, which is in violation of the letter and spirit of the NPT.

Part II of this series will discuss why Iran must stop relying exclusively on oil and gas, and develop alternative sources of energy, and in particular nuclear energy.

Original URL: http://www.payvand.com/news/03/oct/1015.html

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Part II: Are Nuclear Reactors Necessary?

In the present article, Part II of a three-part series, the need for building nuclear reactors in Iran is analyzed. As was pointed out in Part I, in the opinion of this author, the questions that we Iranians must ask and debate, are: Does Iran need nuclear energy, and is acquiring it in her national interests? It was also pointed out that one must decouple Iran’s need for nuclear energy which, as argued in this article, is completely legitimate on economical, social, and environmental grounds, from her alleged or real intentions for producing nuclear weapons.

Recall that the main argument of the United States against nuclear energy for Iran is that, Iran has vast oil and gas reserves, and hence she needs no nuclear reactor. This argument is, in general, not necessarily valid. Many countries that are rich in fossil energy resources, including Britain and Russia (both oil exporters), rely on nuclear power for a significant portion of their energy needs, while Germany, France, Japan, and many other countries, which have no oil or natural gas reserves, have not abandoned nuclear power in favor of more imported oil and gas, even though they can certainly afford this. There are currently 1118 nuclear reactors in the world of which 280 are for nuclear research, while another 400 are used in ships and submarines for producing power. The remaining 438 nuclear reactors are used for generating electricity, of which 104 are in the US, 59 in France, 53 in Japan, 29 in Russia, and 19 are in Germany. Between 1974, when Iran signed her first agreement for building nuclear reactors, and 2000, use of nuclear reactors for generating electricity has increased by a factor of 12!

In the particular case of Iran, the US argument that Iran needs no nuclear energy has no validity at all. While it is true that Iran does have vast oil and gas reserves, she also needs alternative energy sources. I argue that Iran’s needs for such alternatives are glaring and indisputable, and I base my arguments on economical, social, and environmental considerations.

We first, however, consider the case for alternative sources of energy on general grounds:

Most of the world’s major oil exporters, such as Iran, are developing nations. Thus, these countries must confront the challenge of their demographic explosion without possessing many of the necessary tools, which are strong state structures, rapidly-growing economies, large amounts of investment capitals, numerous entrepreneurs, engineers and inventors, and infrastructres that are reasonably advanced. In fact, we live in a world in which technology and capital are in the countries that are energy-hungry – those that have no major oil reserves of their own (for example, Germany, France, and Japan) or have at best indeaquate sources (for example, the US) – whereas the population growth and social and political turbulence are in the developing countries that are major oil producers (such as Iran, Saudi Arabia, Mexico, Iraq, etc.).

At the same time, oil is a non-renewable national wealth of Iran (and other oil exporters). Once it is produced and exported, it can never be regenerated. One cannot expect Iran (and other oil-exporting countries) to deplete her non-renewable national wealth recklessly, without receiving any lasting products or benefits in return, but this will happen if Iran’s sources for energy are not diversified, and she continues to rely almost exclusively on oil and gas for everything from the only source of energy to her annual budget. Except for Norway, every major oil exporter (including Russia) relies heavily on its revenue from oil sales, so much so that if the oil price stays too low for too long, we may have social instability and even revolution in these countries. What would happen to these countries if all of their recoverable oil and gas are rapidly depleted over a few decades, which would be the case if they rely on oil and gas for everything from their annual budget to energy sources?

In addition, a set of practical issues, which are important to the industrialized nations (notably in the Western hemisphere), must be addressed: What would happen to the West’s huge chemical industry that uses oil- and gas-derived materials for its production and is an important source of jobs, if the world’s oil and gas reserves are depleted too quickly? What would be the fate of the German plastic factories and the US polymer producers (plastics and polymers are some of the most heavily used materials in the world) that get their raw materials from the same source, and to the enormous petrochemical complexes around the world, if oil and gas resources are quickly depleted? Is it not better to develop alternative sources of energy, and use oil and gas more slowly and in more useful ways, by producing oil- and gas-derived materials and products that have much added values? If the answer to this question is yes, then why can Iran not use this argument?

Next, consider the case for alternative energy sources from an economical view point:

Iran’s 60 major oil fields are mostly old, with some being depleted altogether. From 1979 until 1997 no major investment was made in Iran’s oil industry. A study in 1998 concluded that, out of the 60 oil fields, 57 of them need major technical studies, repairs, upgrading, and repressurizing which would require, over a 15 year period, $40 billion! Although, since 1997, Iran has had considerable success in attracting foreign capital for its offshore oil and gas reserves, it is still far behind other oil exporting countries of the Middle East in terms of developing her fossil energy resources. Iran has not even been able to increase her oil production to the pre-Revolution level of 5.5 million barrels/day. If Iran cannot upgrade her oil facilities and industry on a timely manner, it will lose her market share. While there is no doubt that the solution to the urgent problem of upgrading Iran’s oil industry is partly political, lack of any solution will have deep implications for Iran’s future, which are discussed shortly.

At the same time, since early 1990s, Iran’s consumption of oil has been increasing at an alarming rate of 8% per year, and her total energy consumption has increased from 1.6 quadrillion Btu (quads) in 1980 to more than 5.5 quads at present – an increase of more than 280%. If this trend continues, Iran will become a net oil importer by 2010, a gigantic catastrophe for a country which relies on oil for 80% of her foreign currency and 45% of her total annual budget. If that happens, how will Iran be able to feed her population, estimated to reach 100 million by 2025, and also spend on her development and national security? The fact is that, despite considerable efforts over the past 30 years, Iran’s industrial output, aside from her oil industry, accounts for only 15% of her gross domestic product.

In one of the rare occasions that he said something profound, the Shah once stated that a barrel of oil is too precious (he used the word “sharif” in Persian to describe oil) to be used for generating electricity. Paraphrasing him, I would say that a million cubic feet of gas is too precious to burn; natural gas should be used for generating huge amounts of petrochemical products with much added values, which is precisely what Iran has been trying to do: Iran curently produces about $2.7 billion/year worth of petrochemical products. At the same time, in 40-50 years, when oil will no longer be the major source of energy and will be replaced by gas, Iran (the gas reserves of which will last for at least 200 years) will be in an excellent position to be the main supplier to Asia and Europe. Therefore, why should Iran use her hard-earned oil and gas for generating electricity, if she can develop alternative sources of energy?

Looking at this issue from another angle, it is estimated that Iran’s known uranium ore reserves can produce as much electricity as 45 BILLION barrels of oil. This is a huge amount by any criterion, but particularly so if we only recall that Iran’s known oil reserves are currently estimated to be about 96 billion barrels. In other words, if we can extract all of Iran’s known oil reserves (a remote possibility!) and use about half of them just for producing electricity, we will generate as much electricity as what Iran’s presently-known uranium deposits can produce! It would therefore be absolutely foolish not to do this!

Consider this problem from a third angle: Iran’s present installed electrical capacity is more than the 20,000 megawatt that had been predicted for 1990. However, Iran’s annual growth in demand for electricity is 5-8%. Hence, it is estimated that, by the year 2010, Iran will need another 7,000-megawatt of electricity which, ignoring all other factors (see above and below), and even under the best possible circumstances, namely, immediate lifting of the US sanctions against Iran and flow of vast investment capital into Iran’s oil and gas industry, cannot be produced by oil and gas alone. Therefore, the question is: What is Iran supposed to do?

One of the main arguments that some of the experts on nuclear weapons present against Iran having nuclear energy is that, it is not economical for Iran to generate electricity using nuclear reactors, because she has vast gas reserves which can be used for producing electricity. To support their arguments, these experts usually cite studies that estimate that the cost to finish the Bushehr nuclear reactors will be $1,000 per installed kilowatt, while the electricity from natural gas-fired power plants costs $600-800 per kilowatt. However, such arguments are not valid. In addition to the necessity of,

(1) using the gas for producing petrochemical products with much added values (see above);

(2) preserving much of Iran’s gas reserves for her future generations and to position Iran in 40-50 years as the main supplier of energy to Europe and Asia, and

(3) avoiding the severe adverse effect of burning gas and the resulting carbon emission which is the major culprit in global warming and the greenhouse effect (see below),

the above estimates are simply wrong, because they do not take into account the huge costs of the medical care for people who suffer from the diseases caused by pollution of the environment by oil and gas, as well as the damage to nature caused by carbon emission and the resulting global warming.

In 1990, in a seminar at Gustave E. von Grunebaum Center for Near Eastern Studies of the University of California in Los Angeles (the complete content of that seminar was published later; see, M. Sahimi, “How Much do We Pay for a Barrel of Oil?” in, “Proceedings of the Third International Conference on Non-Renewable Energy Sources,” Tehran, Iran, December 1993; see also, M. Sahimi, “Factors Affecting the Development of Fossil Energy Resources of Developing Countries,” in, “United States-Third World Relations in the New World Order,” edited by A.P. Grammy and C.K. Bragg, Nova Science Publishers, New York, 1996, page 361), this author stated that:

“Typical estimates for the cost of producing electricity and other forms of energy using oil and gas are only based on their market prices. However, these prices reflect only the cost of producing oil and gas (including the costs of of labor and materials used for their extraction from underground reservoirs) and of transporting them to the consumer. But some of the costs of consuming oil and gas are not directly included in our energy bill, nor are they paid for by the companies that sell us energy. These are the hidden costs of oil and gas that we pay indirectly for the health problems caused by air, water and soil pollution resulting from using oil and gas, environmental degradation caused by carbon emission and global warming, and acid rains. Since the producers and consumers do not pay directly for such costs, society as a whole must pay for them. Thus, although such costs are hidden, they are real. For example, according to the American Lung Association, health costs, including, for example, lost potential income, of air pollution alone are estimated to be about $50 billion a year, and the main culprit for air pollution is the fossil fuels, mainly oil and gas, our primary source of energy. Estimating the possible cost of the damage inflicted on Earth by global warming, caused by carbon emission that is the direct result of burning oil AND gas, is currently impossible.”

If we take into account such costs, then the cost of producing electricity from gas (and oil) will be much larger than the commercial estimates usually quoted, and very much comparable with what it costs to generate it using nuclear reactors. A recent study by Professors John Deutch and Ernest Moniz of, respectively, the chemistry and physics departments of the Massachusetts Institute of Technology reached a similiar conclusion (see, the New York Times, the Op-Ed page, Thursday August 14, 2003).

Consider now the case for alternative sources of energy in terms of Iran’s population growth and her social dynamics:

Since the 1979 Revolution, Iran’s population has more than doubled, from 32 to nearly 70 million, while her oil production is only 70% of the pre-Revolution level. This then begs the following question: Why is it that the US and her allies believed, in the 1970s, that Iran needed nuclear reactors and nuclear energy, when Iran’s population was less than half of the present and her oil production was much more than now, but they now argue that Iran does not need nuclear energy? How do the US and her allies suggest Iran should feed, house and educate her population, create jobs for her army of educated people, and develop the country, all with oil and gas alone, while she has very significant uranium deposits that can be used for generating electricity?

Consider the case for alternative energy sources from an environmental view point:

Iran is beset by huge environmental problems that have been caused by oil and gas consumption, problems that are reaching catastrophic scales. Although Iran established a Department of Environment in 1971, and even though Article 50 of her current Constitution states that, “In the Islamic Republic of Iran protection of the environment, in which present and future generations should enjoy a transcendent social life, is regarded as a public duty,” 8 years of war with Iraq, economic sanctions, careless (with respect to the environment) development after the War, and the 120% increase in the population, have kept the goal of cleaning the environment and maintaining it that way on the back-burner. However, the environment and its health can no longer be neglected.

Since 1980, carbon emissions in Iran have risen by 240%, from 33.1 million metric tons emitted in 1980 to more than 85 million metric tons at present. Note that, whether we use oil (which causes severe pollution problems) or gas (which, compared with oil and coal, is considered as a relatively clean source of energy), carbon emission cannot be avoided. This emission is one of the main culprits behind air pollution in Tehran and all other major cities of Iran that has reached catastrophic levels, so much so that the elementary schools must be closed on many days. Long term effects of the polluted air are blamed for causing 17,000 deaths every year in Tehran alone, as well as causing severe problems for people with asthma, heart, and skin conditions. The cost of medical care for such illnesses is reaching astronomical levels.

Polluted air also severely damages soil and groundwater resources by contaminating the rain water. At the same time, Iran’s industrial base, using oil and gas for energy, generates wastes that contaminate a large number of rivers and coastal waters and threaten drinking water supplies. These are separate from oil spills in the Persian Gulf and pollution in the Caspian Sea that continue to contaminate the waters. These are all caused by the fact that, Iran’s renewable energy consumption, including hydropower, solar, wind, tide, and geothermal, account for only 2% of its total energy consumption, with the rest supplied by oil and gas.

What are, or can be, alternative sources of energy for Iran? Surely, given Iran’s vast central desert, solar power can potentially be very useful for generating electricity and energy. However, this technology is not yet well-developed. In certain parts of Iran, geothermal sources can also be used for generating electricity, but Iran has just started exploring this possibility, and it will take at least 15 years to develop this at any significant scale. That leaves nuclear reactors, which will not solve her chronic shortage of electricity, nor will they solve all of Iran’s pollution problems, but they do represent the first important step in diversifying Iran’s sources for energy.

Nuclear reactors do have their own problems. One is their management which has to be at a very high level so that the chances of accidents, similar to those that happened in Three-Mile Island in the US (in 1979) and in Chernobyl in Russia (in 1986), will be minimal. In addition, one must deal with protecting and storing the nuclear wastes produced by the reactors which would be radioactive for at least tens of thousands of years. But, these problems are generally believed to be manageable.

In Part III of this series, the dispute between Iran and the International Atomic Energy Agency will be described and analyzed.

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Part III: The Emerging Crisis

This article is the last of a three-part series on Iran’s nuclear program. In this Part, the dispute – many consider it a crisis – between Iran and the International Atomic Energy Agency (IAEA) is described.

Recall that after the February announcement of President Mohammad Khatami regarding the construction of the facilities in Natanz for uranium enrichment, and other associated plants needed for this purpose, Dr. Mohammad El Baradei, the head of IAEA, accompanied by a team of inspectors, visited Iran. Since then, the IAEA’s inspectors and experts have visited Iran several more times. A preliminary report was published in July, with a follow-up one on August 26.

Before the revelations about the Natanz facility, there had been reports for years that Iran had sought, albeit unsuccessfully, the uranium enrichment technology, both in the international market and from the Russian Ministry of Atomic Energy. Although not definitively established yet, it now appears that the Natanz facility is similar to what Pakistan had built for its nuclear program in the 1980s. Various reports indicate, however, that the Natanz facility is in fact far more sophisticated than both Pakistan’s and what was discovered in Iraq after its defeat in the 1991 Persian Gulf war.

The process of converting uranium ore to enriched uranium is actually long and very complex. It has been known for many years that Iran has natural uranium reserves, in the form of uranium ore. In 1985, the Atomic Energy Organization of Iran (AEOI) located over 5,000 metric tons of uranium ore in the desert in eastern part of Yazd province. This represents one of the largest deposits of uranium ore in the Middle East. The ore must first undergo a semiprocess to be converted to a powder, usually called the yellowcake. Iran is building a facility in Ardakan for this purpose. The yellowcake is then further processed to produce uranium hexafluoride (UF_6) which is in gaseous state. The facility for doing this is being built in Esfahan (Isfahan). Uranium has two important isotopes (that is, two slightly different versions of it with slightly different atomic masses) which are uranium-235 and uranium-238 (the numbers represent the atomic masses). It is uranium-238 that may be used in making nuclear weapons, but also in nuclear reactors. The Esfahan facility will also produce uranium oxide and uranium metal, both of which have civilian as well as military applications.

The Natanz facility is equipped with the instruments for what is currently considered to be the standard uranium-enrichment technique, namely, a large number of centrifuges that spin uranium hexafluoride gas at very high speeds. Under such conditions, centrifugal forces help separate the lighter uranium-235 hexafluoride from the heavier uranium-238 hexafluoride. The facility has a pilot gas centrifuge plant that, by the end of 2003, is supposed to house 1000 centrifuges (at the time of the IAEA visit in February, there were 160 centrifuges in the facility), and a large-scale production plant which will house up to 50,000 centrifuges, the installation of which (which is supposed to begin in 2005) will take up to 10 years. Such a facility would then have the capability for producing enough uranium for annual consumption of a nuclear reactor of the Bushehr-type. Note that only 10 countries have access to the centrifuge technology.

Development of a uranium-enrichment facility is an important step (but not the only one) towards making nuclear weapons. For example, the Natanz facility, when complete and in full operation, could produce 500 kgr/year of weapon-grade uranium. As it typically takes about 20 kgr of enriched uranium to make a single nuclear bomb, the produced uranium would be enough to make about 25 bombs every year. We must, however, keep in mind that a uranium-enrichment facility is also utilized for peaceful purposes it can produce low-grade enriched uranium for use in nuclear reactors.

Since, typically, one first tests whether a single centrifuge with a small quantity of uranium hexafluoride works before installing hundreds (or even thousands) of them, one might suspect that Iran does have at least a small amount of enriched uranium, not declared to the IAEA, which, if true, would imply that Iran is in serious violation of the NPT that it signed in 1968. However, such tests can also be carried out by computer simulations and modelling. Recall that even nuclear explosions are simulated completely realistically, and therefore, in principle, one does not need a physical test to check whether the centrifuges work. Whether this is the case in the present situation is not clear.

It was reported on July 18 that the IAEA inspectors had detected the trace of enriched uranium in the samples taken at Natanz, but Iran said that the source of the trace is the equipments brought to Natanz from elsewhere and bought on the international market. Subsequently, it was announced on September 25 that a trace amount of enriched uranium has also been detected at Kaalaa-ye (Kalaye is usually used in the english press) Electric Company in the northwest suburb of Tehran, a non-nuclear site (the Company produces watches, as well as certain components for the centrifuges) that the IAEA suspects Iran is using for her nuclear enrichment activities. Since Iran had declared to the IAEA that the instruments at Natanz had been stored at the Kaalaa-ye Electric site before being transported to Natanz, and given that no trace of enriched uranium has been detected anywhere else in Iran, the Kaalaa-ye Electric discovery may actually confirm Iran’s contention regarding the origin of the enriched uranium. But, once again, the situation is not clear, unless Iran provides the IAEA a list of suppliers that provided her with the instruments and equipments.

How are nuclear facilities monitored and violations of the NPT discovered? Inspections of nuclear facilities include the use of a powerful technique, called the isotopic detection, which, in essence, is a method for monitoring the environment and anything that might contaminate it. This technique is based on the facts that, (1) extremely small quantities of a material always escape a process or an industrial plant, and (2) that an equipped laboratory can readily identify the isotopic ratio of a sample that contains extremely small, albeit measureable, amounts of a material, even if it is as small as a billionth of a gram.

Nuclear physics predicts that the ratio of uranium-235 to uranium-238 is essentially the same everywhere. Therefore, when the isotopic detection technique is applied to samples containing uranium, those with ratios lower than the theoretically-predicted value would most probably indicate illegal (from the NPT stand) uranium-enrichment activity. The same technique can be used for detecting any amount of plutonium that is in excess of what is (theoretically) expected, which would then suggest the existence of a reprocessing program for nuclear wastes generated by nuclear reactors, from which plutonium is extracted. This technique is used, under the NPT, in the declared nuclear facilities of the NPT signatories.

As a reaction to the discovery of Iraq’s program for developing nuclear weapons, that was discovered by the United Nations inspectors in 1991 after Iraq’s defeat in the second Gulf war, the IAEA decided to develop and implement additional procedures for enhancing nuclear safeguards. At the time, the IAEA hoped to have these additional procedures or protocols in place two years later, hence the name “93+2” that is sometimes used to refer to this matter. The Additional Protocol was developed in 1996, and has since been signed by 78 countries (out of the 183 countries that have signed the NPT). Thirty three of these countries, mostly small nations, have also ratified the signing of the additional protocol by their national parliaments, and hence implementing it, although these countries cannot really afford to develop nuclear bomb! Most importantly, the Additional Protocol has not been adopted by the US, its most forceful advocate when it comes to OTHER countries!

The Additional Protocol also gives the IAEA the authority to inspect any facility of any nation that has signed the Protocol, even those that, seemingly, have nothing to do with a nuclear program, any time that the IAEA wishes. This is a problematic aspect of the Additional Protocol, as inspection of non-nuclear facilities may be interpreted as an infringement on the national sovereignty of a country under inspection. However, since Iran’s facilities have been under inspections for years, this should be a minor issue.

On Friday September 12, 2003, the 35-member governing board of the IAEA gave Iran an ultimatum until October 31 to prove that her nuclear program is strictly for peaceful purposes, by providing all the deatils of her nuclear program. Iran’s reaction was mixed: On one hand, she reacted with indignation, calling the ultimatum “premature” and “unfair,” while stating, on the other hand, that she will continue working with the IAEA.

It should be pointed out that even Ms. Melissa Fleming, the spokeswoman for the IAEA, conceded that the ultimatum was “highly unusual” in that it was adopted WITHOUT A VOTE. At the same time, the IAEA itself had conceded that Iran had expanded her cooperation with the Agency, even allowing many sites that are not covered by the NPT, such as the Kaalaa-ye Electric Company, to be inspected. Therefore, the ultimatum has much to do with Iran’s poor international standing and isolation, which are, of course, justified.

At the same time, the US is once again using an important international organization to advance her agenda, damaging in the process the credibility and effectiveness of the organization, only a few months after doing the same to the United Nations during the debate over invasion of Iraq (and now going back to it asking for help!). France and Germany, at odds with the US over invasion and occupation of Iraq, but eager to mend their relations with the US, also have joined her in calling on Iran to immediately sign the Additional Protocol, and to reveal all of the details of her nuclear program.

Before analyzing the present situation between Iran and the IAEA, we must keep in mind that,

(1) according to the original IAEA safeguard agreements, Iran was not obligated to declare the start of construction of the Natanz facility. These agreements stipulate that, only 180 days before introducing any nuclear material, does Iran have to declare the existence of the facility. Therefore, construction of the undeclared Natanz facility is NOT by itself a vilation of the NPT.

(2) The NPT does allow Iran to legally build any nuclear facility, including one for uranium enrichment, so long as it is declared to, and safeguarded by, the IAEA, and is intended for peaceful purposes.

Keeping these important points in mind, the problematic aspects of Iran’s nuclear program, so far as the IAEA is concerned, are as follows.

(a) The origin of the trace amounts of highly-enriched uranium at Natanz and Kaalaa-ye Electric Company near Tehran is not yet clear. This was already described and discussed above.

(b) Iran declared to the IAEA that since approximately seven weeks ago, she has begun some uranium enrichment activities at Natanz using a single centrifuge. Since this was declared to the IAEA, and because the Natanz facility is now monitored by the IAEA, this activity does not represent a violation of the NPT (although, given the current international conditions, some may regard the timing of this as unfortunate). The important point of contention is: How can Iran be so sure that the centrifuges at Natanz work with high levels of reliability, if no prior (undeclared) tests have been carried out? Iran has countered that she has used modelling and simulation, mentioned above, which is plausible, but does not, of course, exclude the possibility of actual physical tests.

(c) The IAEA has demanded that Iran provide it with all the details of the work at Kaalaa-ye Electric Company. Iran has provided some (but presumably not all) of the details, and has allowed the facility to be visited by the IAEA inspectors, even though this inspection is not covered by the NPT, although, at first, Iran refused to grant the IAEA the permission to visit this site. If Iran does sign the Additional Protocol, then she would have to completely open the facility to the IAEA inspectors.

(d) As mentioned in Part I, in 1991, Iran received from China 1,000 kgr of natural uranium hexafluoride, 400 kgr of uranium tetrafluoride (UF_4), and 400 kgr of uranium dioxide (UO_2), without reporting them to the IAEA. The question then is: What happened to these uranium compounds? Iran has declared that some of the compounds have been converted to other uranium compounds, some of which have medical applications, while others may be of dual use. Given that Iranian medical scientists who work in Iran have published the results of their research involving such uranium compounds, Iran’s explanation is plausible, but does not provide an explanation for the fate of all the undecalred uranium compounds.

In this author’s opinion, none of these problems is intractable, and so far as their scientific and technological aspects are concerned, can be addressed to the satisfaction of the IAEA. The main problem, in this author’s opinion, is that much of the dispute with the IAEA is political, rather than scientific or technological. To see this, consider the following indisputable facts:

(1) As recognized by the NPT, peaceful use of nuclear technology, and in particular nuclear energy, is Iran’s fundamental right, so long as her nuclear program is completely transparent to the IAEA.

(2) Article 22 of the agreement between Iran and the IAEA allows for an “arbitral tribunal,” if there is still any dispute after Iran provides sufficients details of her nuclear program to the IAEA. Therefore, October 31, 2003 is not necessarily a rigid deadline.

(3) The United States has a selective non-proliferation policy. She allows Pakistan, a country that created the Taliban and her population has provided sanctuary to Osama bin Laden and his terrorisat group; a country whose military is still controlled to a large extent by extremist elements, to develop nuclear weapons. The US has assisted Israel to develop an impressive arsenal of nuclear weapons; has exported nuclear technology to China, and has offered a deal to North Korea regarding her nuclear reactors. The US does not pressure Pakistan, India and Israel to sign the NPT and its Additional Protocol. A little-known fact is that, in early 1995, the German government proposed a plan whereby Kraftwerk Union (a subsidiary of Siemens) would complete construction of the Bushehr reactors (see Part I of this series), subject to Iran’s agreeing to extra non-proliferation verification procedures similar to those that the United States negotiated with North Korea, and Iran agreed with the plan. But, once again, immense pressure by the United States scuttled the plan, after which Iran turned to Russia for completion of the Bushehr reactors.

A few other important points must be mentioned here:

(a) In this author’s opinion, if acquiring nuclear reactors is in Iran’s national interests (see Part II), so is signing the Additional Protocol. However, it is completely reasonable to expect that, in return for signing the Protocol and openning the nation to the IAEA inspections, Iran should obtain access to advanced nuclear technology, which should, however, be monitored and safeguarded by the IAEA. The fact remains that Russian nuclear reactors are inferior to those made in the West. Britain, France, and Germany have already promised to help Iran.

(b) However, in this author’s opinion, signing the Additional Protocol, while necessary, may not be sufficient by itself to protect Iran’s nuclear assets since this author believes that, unless the US invades and occupies Iran and installs a completely puppet regime in Tehran, she will continue pressuring Iran, using her nuclear program as a pretext, regardless of the future political developments in Iran. Thus, Iran’s aim, in this author’s opinion, must be addressing the demands of the IAEA with which the European Union also agrees, and to open up all of her facilities to inspections.

(c) The present Iranian leadership, both elected and unelected, must recognize that it has been given no mandate to deprive Iran’s furure generations of the most advanced technology, namely, nuclear technology, by acting against Iran’s national interests, including resisting stubbornly the legitimate demands by the IAEA. While giving Iran, a sovereign nation, an ultimatum is repugnant, there are many legitimate issues that must be addressed.

(d) It is highly important how Iran responds to the IAEA reasonable demands. She can react by dragging her feet, without having any active, efficient, and logical diplomacy, which will eventually result in agreeing to all the IAEA demands but under highly unfavorable circumstances, hence bringing about severe set backs to Iran’s nuclear program, if nothing else (which could include economic sanctions and military threat). Alternatively, Iran can come forward with all the details of her nuclear program, while being firm in demanding assistance for acquiring advanced nuclear technology, in which case the EU, Russia, Japan and the non-aligned countries may help Iran.

(e) Unless Iran addresses the issues that the IAEA has raised, and signs the Additional Protocol on nuclear inspections, she will not only fail in her goal of building a network of nuclear reactors, but will also be under severe international pressure. Iran has already felt this pressure: Japan has slowed down negotiations for development of the Azaadegaan oil field (the largest field in the Middle East with estimated reserves of 26-30 billion barrels of oil), and the Shell Oil Company has withdrawn from negotiations for developing the same field. Under severe international pressure, the task of building a network of nuclear reactors will be set back for many years, if not decades.

With Israel’s help, the apartheid regime of South Africa developed extensive nuclear facilities, and even made 16 nuclear bombs. The sixteen nuclear bombs could not, however, prevent the demise of the South African racist regime. While after establishment of a democratic system, the South Arfican government of President Nelson Mandela gave up volunteerly its nuclear bombs, the nuclear technology and know-how, developed during the apartheid regime, now belong to a democratic country and all South Africans.

Nothing protects Iran’s national security and interests better than acceptance of her political system and government by Iranian people, which would happen only if a truly democratic system is established in Iran. At the same time, Iran’s nuclear infrastructure is part of her national asset, belonging to all Iranians, regardless of their political inclinations. It is ultimately up to Iranian people, like their South African counterparts, to decide the fate of their country’s nuclear technology, once such a democratic system is established.

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Part IV: Economic Analysis of the Program

Introduction

Over the past two years, Iran’s program for constructing the complete cycle for producing enriched uranium – the fuel for nuclear reactors and nuclear power plants (NPPs) – has been the subject of intense discussions. Over this period, the experts and inspectors of the International Atomic Energy Agency (IAEA) have been visiting Iran on a regular basis to inspect its nuclear facilities. The information and data that have been collected by the IAEA on Iran’s nuclear energy program have revealed sustained and determined efforts by Iran since 1985 for developing an advanced program for producing enriched uranium. The Bush administrtation has been arguing that the primary purpose of Iran’s nuclear program is developing nuclear weapons. The European Union (EU), which has very extensive commercial relations with Iran; Russia, which is completing the construction of a NPP in Bushehr (on the shores of the Persian Gulf), and Japan, which has signed a lucrative oil agreement with Iran for developing Iran’s giant Azaadegaan oil field, have all pressed Iran hard, demanding that it reveal all the details of it nuclear program.

The Board of Governors (BOG) of the IAEA has had periodic special meetings to review the progress in assessing Iran’s nuclear program. In its latest special meeting on Iran, which was held on Monday November 29, 2004, the IAEA reported to the BOG its latest findings on Iran’s program, and due to the agreement that Iran recently signed with the EU troika – Britain, France, and Germany – for suspending its uranium enrichment program, no further special meeting of the BOG of the IAEA has been scheduled; that is, Iran’s case before the BOG has gone back to being a normal, un-urgent case for now.

In a series of articles that were posted on Payvand in early October 2003, the author prsented a brief history of Iran’s nuclear program (Part I); described the general outlines of the arguments that may justify Iran’s nuclear energy program as economically viable (Part II), and explained the crisis that was emerging at that time in the relationship between Iran and the IAEA (Part III). This article and Part V continue the discussions that were begun in the first three parts of the series and expand on them.

When Part II of this series was first posted in October 2003, many colleagues and readers of the article urged the author to quantify the arguments presented in that article that were supportive of Iran’s nuclear energy program as an economically viable program. The goal of the present article is just that: analyzing Iran’s program for generating nuclear energy in the context of its energy needs over the next two decades, and carrying out an economical analysis to quantify and support the arguments that were first presented in Part II, using the latest and most accurate statistics on Iran’s energy consumption and production currently available.

Another goal of the present article is to debunk – hopefully for the last time – the “argument” that the US neo-conservatives have been making, namely, that given Iran’s vast oil and gas reserves, it does not need nuclear energy. The neo-conservatives and their allies, ranging from Israel to Iran’s anti-democratic forces (from the group that makes new “discoveries” on Iran’s program on a weekly basis to the monarchists), are the last group that are still hanging onto this argument! The analysis and arguments presented in Part II (and its short version published in the International Herald Tribune on October 14, 2003), as well as those presented by numerous others, have already made their impact: Iran’s nuclear energy program has been transformed from one not needed by, or suitable for, Iran to a one for which the EU is willing to GUARANTEE the supply of nuclear fuels, provided that Iran “suspends” indefinitely its uranium enrichment program!

At the same time, it should be pointed out that when, under the US encouragement (some say pressure), Iran’s nuclear energy program was started by the Shah in 1974,

(a) Iran’s population was less than half of the present 70 million;

(b) its oil production was about 5.8 million barrels (MB) per day, compared with the present average daily production of 3.9 MB/day;

(c) it exported about 5 MB/day of oil, compared with the present average daily export of 2.6 MB/day;

(d) its energy consumption was less than one-fourth of the present;

(e) the Shah’s government was burning Iran’s natural gas for elimination, simply because it had no use for it, and,

(f) unlike now, Iran’s oil reservoirs were not in decline, needing re-pressurization (see below) by natural gas injection.

In short, Iran did not need AT THAT TIME to generate electricity using NPPs. This then begs the question: Why is it that, given its present conditions which can justify use of NPPs for producing electricity (see below), the neo-conservatives and their allies believe that Iran does not need nuclear energy, whereas the US strongly pushed the Shah in the 1970s to build NPPs when Iran had no need for them (see Part V)?

In Part V of the series, the important role that the US and its European allies played in starting Iran’s nuclear program will be discussed in considerable details. In particular, we will review the history of the US involvement with Iran’s nuclear program to show, based on the newly accessed documents, that not only the US strongly encouraged the Shah to buy NPPs from the US, but was also willing to offer Iran, as a sweetener for the deal, the complete facilities for uranium enrichment if Iran agrees to buy eight US-manufactured NPPs! This should be compared with the present state of affairs whereby the US and the EU are trying to stop Iran from utilizing its uranium enrichment facilities and offer, instead, to supply Iran the enriched uranium for its NPPs! In addition, we briefly review the positions of some of the leading neo-conservatives in the US regarding Iran’s nuclear energy program which reveal the extent to which they are willing to go, in terms of inflicting on Iran civilian casualties and economic destruction, to stop it from starting to operate the Bushehr reactor. In the opinion of the author, giving wide exposure to this position of the neo-conservatives is particularly important, since Iran’s anti-democratic forces are the neo-conservatives allies.

To begin the discussion, we must first decouple Iran’s need for nuclear energy from its perceived or real intentions for producing nuclear weapons, since constructing NPPs does not necessarily indicate any intention for making nuclear weapons. Recall that when Iraq’s program for making nuclear weapons was discovered by the IAEA after the Persian Gulf war of 1990-1991, it did not have a single nuclear reactor; its only reactor, under construction at Osirak, had been demolished by Israel’s bombing in 1981. The apartheid regime of South Africa produced 16 nuclear bombs in the 1980s, without having a single nuclear reactor!

More specifically, the goal of the present article is twofold.

(a) We describe Iran’s energy needs over the next two decades when its population may reach 100 million, and the resources that it will and must have in order to secure adequate energy supplies. It is universally recognized that energy security, which includes securing adequate and DIVERSIFIED energy resources, is a highly important part of any nation’s national interests which, by their very definition, transcend the political system that governs a nation. Iran, as a sovereign nation, has a fundamental right to diversify and develop its energy resources – the engine for its economic and social development.

(b) Why Iran must stop relying on oil and natural gas as its main sources of energy, and begin developing alternative sources, is discussed next. We show that, in addition to being in its long-term national interests, there are compelling economical, environmental and technological reasons for Iran to seek out alternative sources of energy, instead of relying so heavily on the fossil fuels. Moreover, we argue that a nuclear energy program has many other benefits for Iran in terms of the necessary technology that must be imported into the country, and the educated class of people that will run Iran’s nuclear industry.

Whether Iran is trying to make nuclear weapons is beyond the scope of this article and, therefore, will not be discussed.

Iran’s Energy Consumption and Resources

Iran’s population is currently estimated to be close to 70 million, about 70% of which is below the age of 30. This should be compared with Iran’s population of 30 million when the Shah started Iran’s program for building NPPs in 1974. Most estimates indicate that Iran’s population may reach 100 million by 2025.

According to reliable statistics (provided by not only Iran’s Ministry of Power, but also by International Energy Agency, the British Petroleum Annual Statistics, etc.), between 1977 and 2003, Iran’s rate of energy consumption has on average increased 5.5% per year, from an equivalent amount of 181 MB to about 740 MB of crude oil. Moreover, since the end of Iran-Iraq war in 1988, Iran’s oil consumption has had an annual growth rate of about 8%, while the supply of energy from all of its sources has had an annual growth rate of 6%, hence barely keeping up with energy consumption. Between 1977 and 2001, the electricity production has been experiencing an average annual growth rate of 8.5%. Iran currently produces 31,000 megawatt (MW) of electricity. Most importantly, in 1977 Iran consumed 29.6 MB of crude oil to generate electricity, whereas 265 MB of oil were used in 2003 for the same purpose, representing an average annual growth rate of 8.8%.

If the above trend continues and crude oil is not replaced by another energy source, and if Iran does not increase its oil production significantly, it may become a net IMPORTER of oil over the next decade, a huge catastrophe for a country that obtains 80% of its total export earnings, 45% of its total annual budget, and about 15% of its GDP from exporting oil. It is estimated that during 2004 the average price of Iran’s crude oil will be about $30/barrel. It is noteworthy that Iran earns about $900 million/year for every $1/barrel increase in the price of its oil. We now describe in more details Iran’s various energy sources.

Oil Reserves

Over the past decade, major discoveries by the National Iranian Oil Company (NIOC) have increased Iran’s proven and recoverable oil reserves to about 131 billion barrels, up from 93 billion barrels in 1993. This represents about 11.4% of the world’s proven oil reserves, making Iran second only to Saudi Arabia. During the first six months of 2004, Iran produced about 4.1 MB/day, up from an average of 3.9 MB/day in 2003. Iran’s SUSTAINABLE oil production is about 4 MB/day. About 70% of Iran’s oil (2.8 MB/day) is produced by 9 giant onshore fields, with the offshore fields (in the Persian Gulf) producing another 0.675 MB/day (17% of the total production). Note that Iran was producing about 5.8 MB/day of oil during the last two years of the Shah in 1977-78, but has never exceeded, on an average basis, 3.9 MB/day since the Islamic Revolution, while its population has increased by 130%. Iran’s OPEC quota is 3.817 MB/day. Its oil exports average about 2.6 MB/day, mainly to China, Europe, Japan, and South Korea.

Iran spends $3 billion/year to subsidize the price of oil products for its domestic consumption. Another $2-3 billion/year is spent on IMPORTING some oil products (mainly gasoline). To counter the rising rate of consumption of gasoline (10.5% per year), Iran has doubled its price over the past 2 years.

Iran plans to increase its oil production to 7 MB/day by 2025. This would need about $60 billion in foreign investment. Since President Khatami was elected in 1997, Iran has succeeded in attracting about $20 billion in foreign investment for its oil and gas sectors, with its lion share going to the natural gas sector (see below). Since Iran’s Constitution prohibits granting of oil rights on a concessionary or direct equity basis, Iran’s main mechanism for granting contracts is the Buy-Back scheme, whereby the contractor pays for all the investments, receives compensation from NIOC in the form of an allocated production share, and transfers the operation of the field to NIOC after a fixed period. This arrangement has been criticized domestically (mainly for its guaranteed high rates of return, which is typically 15-18%, and was over 20% for the first 2-3 contracts), and has not made many foreign oil companies very happy either, as they may not be allowed to develop their discovery, let alone operating them. In addition, the short terms of such contracts (typically 5-7 years) are disliked by oil companies. As a result, in January 2004, Iran announced major modifications to the Buy-Back scheme by extending the length of such contracts to as many as 25 years, while allowing for continued involvement of the oil companies after a field’s operation is transferred to NIOC.

Natural Gas

Iran possesses about 942 trillion cubic feet (TCF) in proven natural gas reserves – 15.2% of the world’s proven reserves – second only to Russia. Of these, about 62% are in mostly undeveloped non-associated fields (associated gas is what one finds in oil reservoirs). Iran’s major gas fields include the giant South Pars (with reserves of 280-500 TCF) in the Persian Gulf which is the largest gas field in the world. This field also contains over 17 billion barrels of gas condensates (liquids). In addition, many of Iran’s oil fields produce large amounts of (associated) gas. Iran’s natural gas production in 2002 was about 2.7 TCF.

Natural gas has increasingly become the main source of energy in Iran. Whereas in 1977 it represented only 8.4% of Iran’s energy consumption, it now accounts for more than 53% and is rapidly increasing. This statistics alone should debunk the argument of opponents of Iran’s nuclear energy program that it has not tried to use its natural gas a source of energy.

Iran has given the highest priority to development of South Pars field, since it shares it with Qatar. The field is supposed to be developed in 28 phases; 16 phases are currently active. Developing South Pars has attracted over $15 billion in foreign investments, and has generated at least 30,000 new engineering and supporting technical jobs in Iran. In addition to natural gas, gas condensate production from the field should reach about 220,000 barrels/day by 2005, and 630,000 barrels/day by 2015. When South Pars is fully developed, Iran will earn over $11 billion/year for at least 30 years from this field ALONE.

Between 35% to 40% of all the produced natural gas is injected into many of Iran’s giant but aging oil fields for pressure maintenance and secondary oil production (see below). The rest is either exported by pipelines or as liquefied natural gas, or is consumed domestically. Iran exports natural gas to Turkey, and has signed agreements, or is negotiating, to sell gas to Armenia, Azerbaijan, China, Georgia, India, Pakistan, South Korea, Taiwan, and the United Arab Emirate. It is also actively seeking to export gas to Europe through Turkey and Greece (an agreement with Greece has been signed), hoping to export 300 billion CF/year of gas by 2007.

Iran also uses its natural gas as feedstock to develop its petrochemical industry, which currently produces nearly $2.7 billion in petrochemical products for domestic consumption and exporting. This generates much added values for Iran’s natural gas, hence justifying its use for a set of projects for downstream and commodities production, rather than just burning it as a source of energy. We will come back to this point shortly.

Electric Power

Currently, Iran has a capacity of about 31,000 MW of electricity, of which more than 75% is generated by natural gas plants, 7% by hydroelectric, and 18% by oil-fired plants. The corresponding percentages worldwide are, respectively, 17%, 17% and 8% [1]. Iran currently consumes about 28,000 MW of electricity (the rest of the electrical capacity is exported). The demand for electric power is growing at an annual rate of 8%. Thus, Iran projects needing 70,000 MW of electricity by 2021, of which it plans to produce 7,000 MW by NPPs, representing 10% of its electric power. Currently, 19% of the world’s electricity is generated by NPPs, and the IAEA estimates that this will reach 27% by 2030 (see below for further discussions).

Iran does have large potential for hydroelectric power generation, estimated to be about 20,000 MW/year. It is currently building 7 hydroelectric power plants, representing over 63% of its current power generation projects, that will generate by 2007 over 8020 MW of electricity. By 2021 some 14,000 MW of electricity will be generated by hydroelectric power, projected to represent 20% of Iran’s electrical capacity. In addition, Iran has some potential for generating electricity from geothermal sources, with its first geothermal power plant going online recently near Ardabil, in northwestern Iran. Several small photovoltaic units that generate electricity are operating in rural areas of Iran.

Nuclear Energy Program

As mentioned above, by 2021 Iran wishes to generate at least 10% of its electricity by NPPs. However, constructing the NPPs is only part of the plan. Iran also wishes to possess the full nuclear fuel cycle for producing enriched uranium, as its has very significant natural uranium reserves in the form of uranium ore. The main reserves are in Saaghand, 300 miles south of Tehran in the Yazd Province (representing one of the largest deposits of uranium ore in the Middle East), and near Bandar Abbas. During 1993-1994, the Beijing Research Institute of Uranium Geology of China aided Iran with uranium mine exploration and operation, but Iran appears now to be self-sufficient in the required expertise.

It is estimated that Iran’s known uranium ore reserves can produce as much electricity as 43 billion barrels of oil. This is a huge amount by any criterion, but particularly so if we only recall that if we extract ALL of Iran’s known recoverable oil reserves (a remote possibility!) and use fully one-third of them only for generating electricity, we will generate as much electricity as what Iran’s presently-known uranium deposits can produce!

The uranium ore is first converted to a powder, usually called the yellowcake. Iran is building plants in Ardakan and Bandar Abbas for this purpose. The yellowcake is then further processed to produce gaseous uranium tetra- and then hexafluoride. The facility for doing so is in Isfahan, which can also produce uranium oxide and uranium metal, the main components of nuclear fuel.

The Natanz facility is to be equipped with the standard uranium-enrichment instrument, namely, a large number of cascaded centrifuges that spin uranium hexafluoride gas at very high speeds and separate the lighter uranium-235 hexafluoride from the heavier uranium-238 hexafluoride. Of every 1000 uranium atoms only 7 are uranium-235. It is uranium-235 which is used in nuclear reactors and also nuclear bombs. Hence, one must have a large number of cascaded centrifuges to produce enough uranium-235. The Natanz facility has a pilot gas centrifuge plant that currently houses nearly 1300 centrifuges, and a large-scale production plant which will house up to 50,000 centrifuges, the installation of which (to begin in 2005) will take up to 10 years. Such a facility would then have the capability for producing enough uranium for annual consumption of a nuclear reactor of the Bushehr-type (producing 1000 MW of electricity). We note that about 20 countries around the globe are active in uranium enrichment.

Three companies, Kaalaa-ye Electric, Pars Taraash, and Faraayand Technique, can produce parts for the centrifuges that are to be used for enriching uranium. Iran also has nuclear waste disposal sites near Qom (Ghom), Karaj, and Anarak. There are three other nuclear facilities in Iran which represent research institutions, and are not directly related to uranium enrichment. It must be emphasized that the IAEA has been monitoring all of Iran’s known nuclear facilities.

The Case for Nuclear Energy

The main argument of the critics of Iran’s nuclear energy program is that, it has vast oil and gas reserves, hence needing no nuclear energy. The argument is mostly hot rhetoric. Canada and Russia, both major oil exporters, rely on NPPs for a significant portion of their electricity needs. Russia has vast oil and gas reserves (its gas reserves represent about a quarter of the world’s known reserves), and Canada exports 1.5 MB of oil to the US every day, yet they both continue building NPPs. Between 1974, when Iran signed its first agreement for building NPPs, and 2000, use of NPPs for generating electricity in the world has increased by a factor of 12! In particular, France is now producing most of its electricity using NPPs.

At the same time, construction of NPPs in Iran is completely consistent with the general trends in Asia. According to the IAEA [2], 23 of the last 31 NPPs connected to the world’s power grid have been built in Asia. Of the NPPs currently under construction, 18 of 27 are located in Asia, generating 78% more electricity by 2015 than 1995. In addition, according to the IAEA analysis [2], subject to certain reasonable assumptions, by 2030 27% of the world’s electricity will be generated by NPPs, compared with the current rate of 19%. Even in the US, the Bush Administration has been talking about a nuclear power renaissance, and the US nuclear industry has been calling for construction of 50 NPPs by 2020 [3].

However, aside from the above general arguments, one can completely justify Iran’s nuclear energy program based on economic, environmental, NUCLEAR EXTERNALITIES, and Iran’s long-term national interests. In what follows we discuss each of these aspects.

The Economics of Iran’s Nuclear Energy Program

If oil is to be used for generating electricity, then, for every 1000 MW of electricity, Iran must use between 20 to 25 MB of crude oil per year, depending on the oil quality. This implies that, for an average price of $25/barrel (currently the oil prce is much higher, and will presumably remain so for many years to come), Iran will lose $500-625 million/year in oil exports, which should be compared with the operating cost of about $140 million/year for a NPP generating the same amount of electricity. In 2003 alone, Iran used 265 MB of crude oil to generate 18% of its electricity. With a 2003 average price of $26/barrel, this represents $6.89 billion worth of oil exports for A SINGLE YEAR, a staggering figure that can pay for complete construction of at least two Bushehr-type (1000 MW) reactors and their operations for several years at the current prices! When we consider this over the useful life of a NPP (say, 50 years), not only Iran can replace the oil-generated electricity with that generated by NPPs, it will save tens of billions of dollars. Note that constructing NPPs in Iran should, under normal circumstances, be considerably cheaper than in the US or the EU, as the labor force is much cheaper in Iran, and many expensive legal and regulatory aspects of constructing a NPP in the US [4] do not simply exist in Iran.

Burning oil to generate electricity also creates severe environmental problems, as it has been doing in Iran, with very significant economic consequences which will be described in the next section.

Now consider natural gas power plants. As we already pointed out, Iran has already made great strides in using natural gas for its energy needs, with 75\% of its electricity, and 53% of all of its energy consumption being supplied by natural gas, hence debunking, once again, the main argument of the neo-conservatives and other opponents of Iran’s nuclear energy program that Iran has not made the necessary effort to use its natural gas for its energy needs. At the same time, there are other areas of needs for natural gas that have priorities that may even be higher than using it for generating electricity, some of which are as follows.

(a) The author has been involved in computer modelling of oil and gas reservoirs for over 25 years [5]. A study in 1998 concluded that, out of Iran’s 60 oil fields (at that time), 57 of them needed major technical studies, repairs, upgrading, and repressurizing by natural gas (the author was a member of the group that studied this issue and reached the above conclusion). A typical Iranian oil reservoir is fractured, and is of carbonate-type with a very tight rock matrix. It is well-known that injection of huge amounts of natural gas into almost all of Iran’s oil reservoirs is practically the only way of maintaining their pressure to produce oil (a process called secondary recovery). Water injection, another common method of pressure maintenance in oil reservoirs, is not suitable for most of Iran’s oil reservoirs [5]. Since, over time, the pressure will decline, the amount of injected gas must also increase to keep pace (at some point gas injection alone will not be effective anymore, and one must start what is usually called the tertiary recovery process). Currently, 35%-40% of all of Iran’s natural gas production must be injected into its giant but aging oil reservoirs, without which the production of most, if not all, of them will rapidly decline.

At the same time, consider the following: If the natural gas that one burns annually to produce 1000 MW of electricity (the amount that the Bushehr reactor will produce) is injected into a typical Iranian oil reservoir, it will increase the reservoir’s production by at least a few thousand barrels/day, depending on the reservoir’s geology and history of production. The earning from exporting the extra oil can pay for and cover part of the operating cost of a 1000 MW reactor ($140 million/year) and reduce its operating cost to a level that makes it economically competitive with the cost of a gas power plant, estimated to be $60-70 million/year, while not polluting the environment by burning oil or natural gas.

We must also remember that, (1) the natural gas that is injected into Iran’s oil reservoirs is largely recovered, hence making it even more economical to use NPPs to produce electricity and use the gas for pressurizing the oil reservoirs, and (2) NPPs have ZERO emission of carbons and other pollutants into the air, whereas fossil fuels, including natural gas, emit large amounts of carbon.

(b) As pointed out above, most of Iran’s gas fields contain also huge amounts of liquefied natural gas (LNG). Natural gas can also be easily converted to LNG, which is sold at a price much higher than that of natural gas itself. However, the OPEC treats LNG similar to crude oil when determining quota for its members, and as a member of OPEC Iran cannot exceed its quota. Therefore, natural gas production cannot be increased arbitrarily to compensate for the gas that used domestically [6].

(c) As mentioned earlier, Iran is already exporting natural gas to several of its neighbors, and is actively seeking exporting very large amounts of gas to Europe. This is all part of a new emerging global market – natural gas – which is going to have [7] great impact on the world economy with geopolitical implications. By saving as much natural gas as possible for export, Iran will be in a very strong position in this emerging market to play a role similar to that of Saudi Arabia in the oil market, given its gas reserves.

(d) Iran is developing its petrochemical industry, for which the main feedstock is natural gas. The added value generated by producing petrochemical products (which can be up to 100%, depending on the products) – not to mention the jobs and industrial base that it creates, and the foreign currency income that it generates – is much greater than what Iran may gain by simply burning huge amounts of gas to generate electricity. In fact, the world’s $500 billion petrochemical industry has been developed precisely for this reason: The added value that one gains from converting natural gas to downstream petrochemical products which, in Iran’s case which has vast gas reserves and cheap labor force and energy resources, cannot be ignored.

(e) Unlike the popular belief, burning natural gas does contribute to degradation of the environment – by producing and releasing carbon into the atmosphere and contributing to the Greenhouse effect and global warming. This will be further discussed in the next section.

Environmental Problems Caused by Fossil Energy Usage

“The more we look to the future, the more we can expect countries to be considering the potential benefits that expanding nuclear power has to offer for the global environment and for economic growth….”

The above are what Dr. Mohamed ElBaradei, IAEA Director General, said [2] in advance of a gathering of 500 nuclear power experts in Moscow from 27 June – 2 July, 2004, marking the 50th anniversary of the start of the first NPP. Dr. ElBaradei points out an important fact: NPPs DO NOT POLLUTE THE ENVIRONMENT ON A REGULAR BASIS, but that is exactly what oil and other fossil fuels have been doing to Iran for years. If one is to obtain a true estimate of the cost of using oil, and even natural gas, as sources of energy, one must take into account the huge cost of the medical care for people who suffer from the diseases caused by pollution of the environment by oil and natural gas, as well as their damage to Nature. As early as 1990, in a seminar at Gustave E. von Grunebaum Center for Near Eastern Studies of the University of California in Los Angeles the author stated that [8],

“Typical estimates for the cost of producing electricity and other forms of energy using oil and gas are only based on their market prices. These prices reflect only the cost of producing oil (and gas) and of transporting them to the consumer. However, some of the costs of consuming fossil energy are not directly included in our energy bill, nor are they paid for by the producers. These are the HIDDEN, but real, costs that the society pays indirectly for the health problems caused by air, water and soil pollution r esulting from using fossil energy, environmental degradation caused by carbon emission and global warming, and acid rains. For example, according to the American Lung Association, total health costs, including lost potential income, of air pollution alone are estimated to be about $50 billion/year. The main culprit for air pollution is the fossil fuels, mainly oil, our primary source of energy. Evaluating the economics of the damage inflicted on Earth by global warming, caused by carbon emission that is the direct result of burning oil and natural gas, is currently impossible.”

Supplying energy to the world releases six billion metric tons of carbon into the atmosphere every year, with Iran contributing her share. Iran is beset by huge environmental problems, caused by oil and gas consumption, that are reaching catastrophic scales. Although Article 50 of Iran’s current Constitution states that, “In the Islamic Republic of Iran protection of the environment, in which present and future generations should enjoy a transcendent social life, is regarded as a public duty,” various reasons kept in the back-burner the goal of cleaning the environment and maintaining it that way.

Since 1980, carbon emission in Iran has risen by 240%, from 33.1 million metric tons emitted in 1980 to more than 85 million metric tons at present. Note that, whether oil or natural gas is used, carbon emission cannot be avoided. This emission is one of the main culprits behind air pollution in Tehran and all other major cities of Iran that has reached catastrophic levels, so much so that the elementary schools must be closed on many days. According to Iran’s Ministry of Health, and the Organization for Protection of the Environment, long-term effects of the polluted air are responsible, directly or indirectly, for causing 17,000 deaths/year in Tehran alone, as well as causing severe problems for people with asthma, heart, and skin conditions. The cost of medical care for such illnesses is reaching, by Iran’s standards, astronomical levels. Generating electricity by NPPs does not directly address such problems, but it does reduce the pollution and environmental degradation caused by burning oil and (in the long-run) natural gas.

Polluted air also severely damages soil and groundwater resources by contaminating the rain water. At the same time, Iran’s industrial base, using fossil fuels for energy, generates wastes that contaminate a large number of rivers and coastal waters and threaten drinking water supplies. Iran is actually reaching the stage which is characterized by chronic shortage of clean water – believed by many to be the cause of many future wars in the Middle East.

A recent study by John Deutch and Ernest Moniz of the Massachusetts Institute of Technology [9] argued that even in the US, if certain technological advances are made (expecting to achieve these advances is entirely reasonable), and subject to a modest tax on the carbon emitted into the atmosphere, the cost of generating electricity by NPPs will become competitive with that of gas power plants.

Finally, strict environmental regulations and public opposition have prevented development of significant oil reserves in the US (for example, in Alaska). At the same time, Western European countries have been discouraging use of oil and gas, with some moving towards NPPs. Since 1980, France has increased its production of electricity from NPP by 80% and reduced its oil consumption by 10%. But, the same countries that are reluctant to use oil and gas because they fear damage to their environment, demand Iran to burn oil and gas to generate electricity!

Nuclear Externalities

Externalities are said to arise when decisions of some economic agents affect the interests of other economic agents [10]. A good example is provided by the US space program in the 1960s. Although the program was intended for (and succeeded in) landing men on the Moon, it also resulted in tens of thousands of inventions and technological advances that we now use in our every day lives. What are the externalities of nuclear technology for Iran? One can list at least four major catagories [11]. Iran’s nuclear program will result in,

(a) development and nurturing of new and unprecedented capabilities for building technological infrastructures;

(b) cross-fertilization and diversion of nuclear-related know-how, research and development, and supply chain to Iran’s other industries, and other branches of science, such as medicine and agriculture;

(c) added-value and versatility of nuclear technology-related training, and

(d) creation of new cadre of managers of technology, technocrats, and organizational system culture.

In the author’s opinion, nuclear externalities alone justify a nuclear energy program for Iran. Our contention is perhaps best described by Perkovich who declared that [12],

“Nuclear establishments can be seen as avatars of modernity, national prowess, and power, and the leaders of these establishments are well-positioned to pursuade (political) leaders and public to give them rein and bring greatness to their nations.”

Iran’s Long-Term National Interests

Iran must confront the challenge of its demographic explosion without having access to many of the necessary tools, which are strong state structures, large amounts of investment capitals, and industrial infrastructres that are reasonably advanced. At the same time, oil and natural gas are Iran’s non-renewable national wealth. Once they are burned, they can never be recovered. One cannot expect Iran to recklessly deplete its non-renewable national wealth without receiving any lasting benefits in return, but this will happen if Iran’s energy sources are not diversified, and it continues to rely almost exclusively on oil and natural gas as almost the only sources of energy.

Since the 1979 Revolution, Iran’s population has more than doubled, from 30 to nearly 70 million, while its present oil production is only 70% of the pre-Revolution level. As pointed out in the Introduction, the question is: Why is it that the US and its allies believed in the 1970s that Iran needed NPPs, when its population was less than half of the present; its oil production was much more than now; its natural gas was being burned uselessly; its energy consumption was about a quarter of the present, and when, unlike today, its oil reservoirs were not in desperate need of natural gas injection, but that, now, Iran does not need alternative sources, including nuclear energy? How should Iran feed, house and educate its rapidly growing population, create jobs for its army of educated people, and develop its infrastructure and industrial base, mostly based on its income from exporting oil and gas, but also use the SAME resources to satisfy its ever increasing energy needs?

The Challenges of Nuclear Energy

To be fair, we must also recognize that NPPs do have their own problems:

(a) Nuclear power plants require high initial capital cost and investment. However, given nuclear externalities and other benefits of nuclear energy described above, the high cost is completely justified in Iran’s case.

(b) The second problem of NPPs is their safety which must be at a very high level so that the chances of accidents, similar to those that happened in Three-Mile Island in the US (in 1979) and in Chernobyl in Ukraine (in 1986), will be minimal. The aforementioned MIT report [9] called for maintaining the current standards of “less than one serious release of radioactivity accident for 50 years from all fuel cycle activity,” which “should be possible with the new light-water reactor plants” (that is, the reactors that use the heat from nuclear reactions in a nuclear reactor to generate steam for use in a power plant). The fact is that the safety of NPPs is a recurring problem. Even J apan, an advanced industrialized nation, has had many nuclear accidents. Therefore, the nuclear industry can no longer ignore this problem, or claim that it has addressed it in a satisfactory manner.

(c) One must also address the problem of safely storing the nuclear wastes produced by NPPs which will be radioactive for at least tens of thousands of years.

Renewable Energy Sources for Iran?

Iran does have potential for generating significant amounts of electricity using renewable sources (although, in some way, nuclear energy may also be considered as a renewable source). One is hydroelectric which, as pointed out above, should provide 20% of Iran’s electricity by 2021. Iran’s central desert has the potential to produce some energy using solar technology, but the technology is not advanced enough to act as a major supplier, at least not yet or in the near future. There is also some potential for geothermal energy, but its extent is limited. Altogether, such alternative methods cannot provide more than 25% percent of Iran’s energy needs, at least over the next two decades.

Conclusion

Iran’s goal of generating, by 2021, 10% of its electricity by NPPS, 20% by hydroelectric, 65% by natural gas, and 5% by other sources is rational and economically justified. The benefits of diversifying Iran’s energy sources, and in particular resorting to nuclear power plants for a fraction of Iran’s needed electricity, far outweight any possible drawback that it might have, although the author cannot conceive one.

References

[1] The Role of Renewables in Future Energy Directions, International Energy Agency report (October 2002).

[2] See the IAEA Press Release

[3] See, Physics Today (April 2002), p. 54.

[4] G. Rothwell, Triggering Nuclear Development: What Construction Cost Might Prompt Orders for New Nuclear Power Plants in Texas, Public Utilities Fortnightly (May 2004), p. 47.

[5] M. Sahimi, Flow and Transport in Porous Media and Fractured Rock, 1st ed. (VCH, Weinheim, Germany, 1995); 2nd ed. (to be published in 2005).

[6] See also W.O. Beeman and T.R. Stauffer, Is Iran Building Nukes? An Economic Analysis, Pacific News Services.

[7] D. Yergin and M. Stoppard, The Next Prize, Foreign Affairs, vol. 82 (No. 6), 103 (2003).

[8] For expanded content of that seminar see, M. Sahimi, How Much do We Pay for a Barrel of Oil? in, Proceedings of the Third International Conference on Non-Renewable Energy Sources, Tehran, Iran (December 1993), p. 127, and, M. Sahimi, Factors Affecting the Development of Fossil Energy Resources of Developing Countries, in, United States-Third World Relations in the New World Order, edited by A.P. Grammy and C.K. Bragg (Nova Science Publishers, New York, 1996), p. 361.

[9] J.M. Deutch and E. Moniz, The Future of Nuclear Power; see also, Physics Today (December 2003), p. 34.

[10] J. Hirshleifer, Price Theory and Applications, 2nd ed. (Prentice Hall, Englewood Cliffe, 1980).

[11] N. Meshkati, The Nuclear Question, paper presented at symposium on, Politics and Governance in a Changing Iran, Hoover Institution, Stanford University, Stanford, California (November 31, 2003).

[12] G. Perkovich, Nuclear Power and Nuclear Weapons in India, Pakistan, and Iran, in, Nuclear Power and the Spread of Nuclear Weapons: Can We Have One without the Other, edited by P.L. Leventhal, S. Tanzer, and S. Dolley (Brassey’s, Washington, 2002), p. 196.

Original URL: http://www.payvand.com/news/04/dec/1056.html

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Part V: From the United States Offering Iran Uranium Enrichment Technology to Suggestions for Creating Catastrophic Industrial Failure

Introduction

In a series of articles that were posted on Payvand in October 2003, the author provided a brief history of Iran’s nuclear program (Part I); described the general outline of the arguments that justify for Iran nuclear energy as an economically viable source of energy (Part II), and explained the crisis that was emerging at that time in the relationship between Iran and the International Atomic Energy Agency (IAEA) (Part III). In Part IV, posted on Payvand on December 7, 2004, the author presented a detailed economical analysis of Iran’s nuclear energy program.

The goal of the present article is twofold:

(a) We describe in detail the key role that the US played in the 1970s in starting Iran’s nuclear program. We show that not only did the US push the Shah to buy nuclear power plants (NPPs) from the US, but was also willing to offer Iran the technology for uranium enrichment if Iran agrees to buy eight US-manufactured NPPs. This should be compared with the present state of affairs whereby the US and its European allies are pressuring Iran to refrain from utilizing its uranium enrichment facilities and, instead, import enriched uranium for its NPP.

(b) We then compare what we describe in (a) with the present positions of the US neoconservatives and their sympathizers, which reveal the extent to which they are willing to inflict CIVILIAN casualties and economic damage on Iran to stop it from starting the Bushehr reactor.

Giving wide public exposure to the neoconservatives’ and their sympathizers’ thinking is, in the author’s opinion, particularly important since, as the author has pointed out in his articles over the past three years, Iran’s main antidemocratic forces – the monarchists and cultists – have aligned themselves with these groups. Therefore, it is essential to learn more about the fantasies of the neoconservatives and their sympathizers, which in turn will help us become more informed about the true face and colour of their Iranian allies who are willing to do anything to grab power in Iran.

The United States-Iran Nuclear Relations in the 1970s

It was presumably 1955 when the first discussions on developing a nuclear program for Iran took place. The first concrete step, however, was taken in 1957 when the US signed an agreement with Iran [1] on civilian nuclear cooperation. This was promoted as part of the US Atoms for Peace Program that was supposed to provide technical assistance to the signatories, as well as leasing them enriched uranium, and carrying out joint research on the peaceful use of nuclear energy. In the same year, the Central Treaty Organization (CENTO), that consisted of Iran, Pakistan, Turkey, Iraq, Britain, and the US moved its Institute of Nuclear Science from Baghdad to Tehran (after General Abdolkarim Ghassem’s military coup d’etat in 1958, Iraq withdrew from CENTO).

In 1959 the Shah ordered establishment of a nuclear research center at Tehran University, Tehran Nuclear Research Center (TNRC), and began negotiating with the US to purchase a 5-megawatt (MW) reactor for the Center. To this date, the Center remains one of Iran’s main nuclear research organizations.

In the late 1950s the US Joint Chiefs of Staff wanted to store nuclear bombs in Iran (presumably due to the victory of the Cuban revolution, the rise of Fiedel Castro to power, and the support that he began receiving from the Soviet Union). In February 1961, shortly after President John F. Kennedy took office, the US State Department opposed the JCOS suggestion; it was never carried out [2].

In September 1967 Iran received from the US 5.54 kgr of enriched uranium, of which 5.16 kgr contained fissile uranium isotopes (which could, in principle, be used in a nuclear bomb), to use in its research reactor at TNRC. In addition, Iran received 112 kgr of plutonium, 104 kgr of which were fissile isotopes [3]. The safeguarded 5 MW nuclear research reactor, a pool-type, water-moderated reactor that was supplied to Iran by the US firm GA Technologies started full operations at TNRC in November 1967, using 5.58 kgr of 93% enriched uranium. The fuel was provided by the US firm United Nuclear Corporation. In addition, the US supplied Iran hot cells which are [4], “heavily shielded rooms with remotely operated arms used to chemically separate material irradiated in the research reactor, possibly including plutonium laden ‘targets’.” On July 1, 1968, the first day that the Nuclear Non-proliferation Treaty (NPT) was opened for signature, Iran signed the Treaty. It was ratified by the Majles (the Iranian parliament) on February 2, 1970.

The US-Iran agreement, Cooperation Concerning Civil Uses of Atoms, that had been signed in 1957 (see above) was extended on March 13, 1969 for another 10 years. The first announcement on Iran’s intention for obtaining NPPs was made in December 18, 1972 [5], when Iran’s Ministry of Water and Power began a feasibility study for constructing a NPP in southern Iran.

The 1973 war between the Arab countries and Israel, and the subsequent huge increase in the price of oil, provided the Shah’s government with considerable resources. In fact, 1974 proved to be a very busy year for Iran’s atomic energy program! The Shah had originally envisioned Iran to produce, by 1990, 10,000 MW of electricity by NPPs. However, a 1974 study by the Stanford Research Institute concluded that Iran would need, by 1994, to produce 20,000 MW of electricity by NPPs. Thus, in March 1974 the Shah announced [6] plans for generating 23,000 MW of electricity, “as soon as possible,” using up to 23 NPPs, with a target date of 1994. To achieve his goal, the Shah established the Atomic Energy Organization of Iran (AEOI), appointed Dr. Akbar Etemad, a Swiss-trained physicist, as its first chief, and announced that the AEOI, like everything else, would be run directly under his command.

The Shah had proposed to the US for many years the establishment of a Joint Economic Commission (JEC) for regulating and expanding Iran’s commercial relations between the two countries. Up until 1974, the US had always turned down the Shah’s suggestion on the ground that, having a free-market economy, the US government had no role to play in the commercial relations with Iran. Instead, the Shah had established many such JECs with the communist countries. However, after the severe increase in the price of oil during 1973-1974, the US was looking for a way to recoup billions of dollars that it was spending on importing oil and, therefore, it suddenly became very interested in establishing a JEC with Iran! In a SECRET letter, dated April 13, 1974, to Amir Assadollah Alam, the long-time Imperial Court Minister and confidante of the Shah, Mr. Richard Helms, the then US ambassador to Iran, wrote [7]:

“On March 14 and April 4, 1974 I discussed in audience with His Imperial Majesty my Government’s genuine interest in finding ways to deepen and broaden the already strong ties between the Imperial Government of Iran and the United States. I am pleased to describe to you in more comprehensive detail my Government’s views on ways in which we can mutually enrich the relationships between our Governments. I would Greatly appreciate this message being forwarded to its High Destination….. Secretary [of State Henry A.] Kissinger looks forward yo discussing these matters personally with His Imperial Majesty at a fairly early date….”

Mr. Helms then went on to suggest the establishment of a JEC, the same commission that the US had resisted for years (!):

“There is considerable scope for expanded cooperations between our countries in the economic field. In order to provide proper focus and suitable high-level official guidance, we suggest the establishment of a Joint Economic Commission at the Cabinet level. For our part, we contemplate that the United States member of the Commission would be the Secretary of Treasury….”

Mr. Helms then proposed the formation of several working groups that “could address general areas of concern or specific projects,” including technology transfer, petrochemical development, communications, and political and security matters. But the first and most important working group that he proposed was the NUCLEAR ENERGY PRODUCTION GROUP, for which he wrote,

“We have noted the priority that His Imperial Majesty gives to developing alternative means of energy production through nuclear power. This is clearly an area in which we might most usefully begin on a specific program of cooperation and collaboration. Accordingly, we suggest that this be the first working group under our Joint Economic Commission. The Chairman of the Atomic Energy Commission is prepared at an early date to visit Tehran with a team of experts to discuss ways and means by which we can most actively cooperate in this field based on our own experience.”

As pointed out in detail in Part IV of this series, the fact is that constructing NPPs in Iran in the 1970s had no economic justification whatsoever. This had made the Shah very sensitive to the critics’ criticism – which had considerable validity – that nuclear contracts were being imposed on Iran by the US. Mr. Alam, the Shah’s confidante, also expressed his grave concerns to him by telling him that [8],

“It is not in the interest of Shahanshah’s Independent National Policy that such suggestions [Mr. Helm’s] be proposed and be called a contract,” to which the Shah responded [8], “We will expand our relations that we already have, and nothing more,”

just as Mr. Helms had suggested to the Shah in their private meeting and mentioned in his letter to Mr. Alam (see the next paragraph). Even from the US perspective, although the Shah was its close ally at that time, selling Iran nuclear technology was also a very sensitive subject, hence the secret nature of Mr. Helms’ letter to Mr. Alam. The sensitivity can be seen in a paragraph of his letter where, under the title PUBLIC ANNOUNCEMENTS, he stated that,

“In the ordinary course of events, our joint initiatives in the fields mentioned above will naturally receive a certain amount of attention. Some general reference to our expanded cooperation might well take place during Secretary [of State Henry A.] Kissinger’s next visit, but it is my personal view that we should handle these joint endeavors as natural outgrowths of the already close and friendly relations between the Imperial Government of Iran and the United States…..”

At the end of his letter, Mr. Helms emphasized the US eagerness to participate in Iran’s nuclear program:

“The Secretary [of State Henry A. Kissinger] has asked me to underline emphatically the seriousness of our purpose and our desire to move forward vigorously in appropriate ways….”

In May 1974, Dr. D.L. Ray, the Chairman of the US Atomic Energy Commission, travelled to Iran during which he mentioned the possibility of establishing REGIONAL uranium enrichment and reprocessing facilities for Iran.

The next month, the Shah declared that Iran will have nuclear weapons, “without a doubt and sooner than one would think” [9]. The Shah first backed off [10], but later on qualified his earlier statement, saying [11] that Iran has

“no intention of acquiring nuclear weapons but if small states began building them, then Iran might have to reconsider its policy”!

According to Dr. Akbar Etemad (the first Chief of the AEOI from 1974 to 1978), the TNRC carried out experiments in which plutonium was extracted from spent fuel using chemical agents [12]. Note that the most important use for plutonium is in a nuclear bomb. It is also believed that the Shah had assembled at the TNRC a nuclear weapon design team. According to Mr. Alam [13], in the mid 1970s the Shah ordered the establishment of a “University of Military Sciences and Technology.” The mission of this university, which was supposed to be in Esfahan and controlled solely by Iran’s armed forces, was to carry out research and development in the area of chemical and nuclear weapons. The Shah had even authorized stealing the necessary science and technology from other countries, if need be, in order for Iran to fully acquire the know-how of making chemical and nuclear weapons. None of these activities did, of course, provoke any reaction by the US.

On March 3, 1975, Iran and the US signed an agreement worth about $15 billion, according to which the US was, among other things, to build EIGHT NPPs in Iran with a total capacity of about 8,000 MW. The agreement was signed by the US Secretary of State Henry A. Kissinger, and Iran’s Finance Minister Mr. Houshang Ansari. The fuel for the reactors was to be supplied by the US.

On March 14, 1975, in National Security Study Memorandum 219 signed by Mr. Henry A. Kissinger, President Gerald R. Ford directed [14]

“a study of the issues involved in reaching an acceptable agreement with the Government of Iran which would allow nuclear commerce between the countries – – specifically, the sale of the U.S. nuclear reactors and materials, Iranian investment in the U.S. enrichment facilities, and other appropriate nuclear transactions in the future.”

About a month later, President Ford instructed the US negotiators to offer Iran uranium enrichment and reprocessing facilities. Specifically, National Security Decision Memorandum 292, dated April 22, 1975 and signed by Mr. Kissinger, stated [15] that the US shall

“- – Permit U.S. materials to be fabricated into fuel in Iran for use in its own reactors and for pass-through to third countries with whom we have Agreement.”

In addition, the US was willing to allow Iran to invest in the US uranium enrichment facility (Iran had proposed investing $2.75 billion in an enrichment facility in the US [16]). This is stated in the Memorandum [15]: The U.S. shall

“- – Agree to set the fuel ceiling at a level reflecting the approximate number of nuclear reactors planned for purchase from the U.S. suppliers. We would, as a fallbak, be prepared to increase the ceiling to cover Iran’s full nuclear reactor requirement under the proviso that the fuel represents Iran’s entitlement from their proposed investment in an enrichment facility in the U.S….”

The US was also willing to allow Iran to reprocess the spent fuels [15] (whic produce plutonium): The US shall

“Continue to require U.S. approval for reprocessing of U.S. supplied fuel, while indicating that the establishment of a multinational reprocessing plant would be an important factor favoring such approval….”

Around the same time, the Massachusetts Institute of Technology signed a contract with Iran for providing training for Iranian nuclear engineers. At that time, the AEOI had a staff of about 150 nuclear physicists, about half of whom were from Argentina. The Shah increased the 1976 budget of Iran’s AEOI to $1 billion from about $31 million in 1975.

In National Security Decision Memorandum 324, dated April 20, 1976 and signed by General Brent Scowcroft, President Ford authorized the following negotiation position for the US with Iran. The US side should [17]:

“Seek a strong political commitment from Iran to pursue the multinational/binational reprocessing plant concept, according the U.S. the opportunity to participate in the project…..”

Note that when President Ford was offering Iran such nuclear concessions, Dick Cheney, the present Vice President, was the White House Chief of Staff, and Mr. Donald Rumsfeld was the US Defence Secretary. Therefore, the same Donald Rumsfeld who was closely involved with pursuing a nuclear deal with Iran in the 1976, and the same Donald Rumsfeld who went to Baghdad in December 1983 to inform Saddam Hussein that the US, although officially neutral in the Iran-Iraq war, was going to tilt towards Iraq (after which the US provided strong military and intelligence support to Saddam Hussein), now has a leading role in the invasion of Iraq and threatening Iran with military strikes.

Around the same time, Mr. Jeffrey Eerkens, a US uranium enrichment expert, travelled to Iran to obtain funding for an invention of his for a special laser that could be used for uranium enrichment. In fact, Mr. Eerkens obtained in 1978 a license from the US Department of Energy to sell four lasers to Iran [18]. The lasers were shipped to Iran in October 1978 (only five months before Islamic Revolution’s victory!). The IAEA reported recently that Iran had experimented with this technique about 10 years ago. However, apparently, the Eerkens lasers proved to be unworkable as a uranium enrichment instrument [19].

On April 12, 1977, Iran and the US signed an agreement to exchange nuclear technology and cooperate in nuclear safety. In an address to the symposium [20], “The US and Iran, An Increasing Partnership,” held in October 1977, Mr. Sydney Sober, a representative of the US State Department, declared that the Shah’s government was going to purchase EIGHT nuclear reactors from the US for generating electricity.

During his now-famous trip to Tehran on January 1, 1978, President Jimmy Carter and the Shah reached a new bilateral agreement for nuclear cooperation. The US agreed to grant Iran “most favored nation” status for reprocessing of spent nuclear fuels. Iran agreed to buy 6-8 light-water nuclear reactors from the US (subject to approval by the US Congress).

On July 10, 1978 (only 7 months before the Islamic Revolution’s victory) the draft of the US-Iran Nuclear Energy Agreement was signed. The agreement was supposed to facilitate cooperation in the field of nuclear energy and to govern the export and transfer of equipment and material to Iran’s nuclear energy program. Iran was also to receive American technology and help in searching for uranium deposits [21]. On October 18, 1978, James R. Schlesinger, the US Energy Secretary, sent the agreement to President Carter for his signature. By then, however, Islamic Revolution had swept Iran, and the Shah had informed the US Ambassador Richard Sullivan that his plans for NPPs were on hold. Finally, in early 1979, the US stopped its supply of highly enriched uranium to Iran. Since Iran started its nuclear energy program in the early 1980s, the US has been completely hostile towards it.

The Neoconservatives’ Fantasies for Dealing with Iran’s Nuclear Program

We now move the clock forward for about 30 years to the present times to see what the neocons and their sympathizers are saying about Iran’s nuclear energy program. We begin with a quote about the neocons [22]:

“The neocons hate two things: To be wrong and to be ignored.”

It is now an indisputable fact that Iraq did not have any weapons of mass destruction, including nuclear weapons. But, that never stopped the neocons and their sympathizers from advocating invasion of Iraq, which ultimately succeeded when the invasion began in March 2003. The disaster in Iraq has not, however, discouraged the necons and their sympathizers. They now have fantasies about Iran as if Iranians are not already suffering enough in the hands of Tehran’s right wing. Too many articles are being published by the necons and their sympathizers describing their fantasies about Iran. All one has to do is taking a look at what such publications as the Weekly Standard, the National Review, the editorial pages of the Wall Street Journal, the Times of London, the Washington Times, and many other publications and websites contain about Iran, or do a Google search on Messrs Michael Ledeen, Michael Rubin, Reuel Marc Gerecht, and others. The goal of this part of the article is not to review what they write about Iran – it will take books to do so – but only to provide clues to neocons’ and their sympathizers’ thinking and their “action plans” for Iran’s nuclear energy facilities, and compare them with the US policy towards Iran’s nuclear program in the 1970s.

Before doing so, however, the author would like to point out that, having been a member of the Union of Concerned Scientists for nearly two decades – an organization dedicated to educating the public about the dangers of weapons of mass destruction, including nuclear weapons – he is only too aware of the danger that such weapons pose against the world, if they are in the hands of extremists. Therefore, the question is NOT whether Iran, under its present political conditions, should or should not have nuclear weapons. Rather, the point of this part of the article is to give wider public exposure to the neocons’ and their sympathizers’ fantasies about Iran, particularly among Iranians. Since they know very well that Iran is not Iraq to be overrun, and because they were bitten by “allies” such as Ahmad Chalabi and are well-aware that their Iranian allies – the monarchists and cultists – have no base of support inside Iran, they have begun having fantasies!

Exposing the neocons’ and their sympathizers’ fantasies is also important from another perspective: When it comes to opposing the spread of nuclear weapons (and it is not even certain yet whether Iran is trying to develop nuclear weapons), the US has a double standard. Aside from Israel’s arsenal (which includes biological, chemical, and nuclear weapons) which no US politician dares to question or even officially acknowledge, the US does not oppose Pakistan’s nuclear arsenal – an immense threat to the stability of that part of the world, because Pakistan is an essentially failed State in a chaotic state. Its nuclear-armed military, populated by Islamic extremists, created the Taliban and still shields many of its leaders. Osama bin Laden could not have hidden for so long without the support of at least some elements of Pakistan’s military. Pakistan has a sectarian war in which its majority sunni population has been murdering the shiite minority, and its schools teach Islamic radicalism. Abdul Ghadeer Khan, the founder and owner of Pakistan’s nuclear supermarket, could not have operated freely for so long without the support of at least some elements of Pakistan’s military. Even now, Pakistan does not allow any foreigners, including experts and inspectors of the IAEA, to interview Mr. Khan. However, instead of trying to alleviate this dangerous situation, the US has granted Pakistan “special friend” status.

But, the US double standards do not end with Israel and Pakistan. The US has exported nuclear technology to China; has offered a non-aggresion pact and economic incentives to North Korea, and never objected to Argentine and South Africa (which developed 16 nuclear bombs in the 1980s) acquiring nuclear technology and know-how. It was recently announced that South Korea and Taiwan both have been involved with enriching uranium, producing plutonium, and even nuclear bomb making, yet the revelation did not provoke any reaction by the US. Brazil, a signatory to the NPT, had until very recently refused to allow the IAEA full inspection of its uranium enrichment facilities that are under construction, yet, although Brazil provided nuclear materials to Saddam Hussein’s regime in the 1980s, Secretary of State Colin L. Powell declared on October 5, 2004, that Brazil’s behavior “does not concern the US.”

Here, we review the positions of two pundits regarding Iran’s nuclear energy program. They are not at the American Enterprise Institute, the hotbed of neoconservatism, and may not consider themselves as neoconservative pundits. However, as we show below, their positions resonate nicely with those of the neocons.

The first pundit whose “positions” regarding Iran’s nuclear energy facilities we would like to discuss is Mr. Michael Eisenstadt, a senior fellow at The Washington Institute. In a recent book chapter [23] entitled, “The Challenges of U.S. Preventive Military Action,” Mr. Eisenstadt suggested the following covert actions, among others, against Iran’s nuclear facilities (see pages 121 and 122 of Ref. [23]) (the emphasis with capital letters is mine):

“harassment or MURDER of key Iranian SCIENTISTS or technicians;”

“introduction of FATAL DESIGN FLAWS into critical reactor, centrifuge, or weapons components during their production, to ensure CATASTROPHIC FAILURE DURING USE;”

“introduction of destructive viruses into Iranian computer systems controlling the production of components or the operation of facilities;”

“damage or destruction of critical facilities through SABOTAGE…”

There are at least three important aspects of the above covert options to consider:

(a) One wonders whether Mr. Eisenstadt’s suggestion for murdering Iranian scientists or technicians is not tantamount to state-sponsored terrorism. If so, it appears that in Mr. Eisenstadt’s view terrorism is committed only by weaker countries or groups against powerful nations!

(b) Likewise, it appears that Mr. Eisenstadt does not consider sabotage as either state-sponsored terrorism, or against international laws. It appears that in his view, international laws are good only so long as they advance the interests of powerful nations!

(c) It is completely clear that Mr. Eisenstadt has no notion of what constitutes a catastrophic failure in an industrial complex. We are talking about a system which includes nuclear reactors and nuclear materials. Any catastrophic accident or system failure in any large-scale industrial complex, let alone a nuclear complex, is one that has immense consequences in terms of loss of lives, long-term health problems, human suffering, and economic and environmental damage. We only need to recall what happened in Bhopal, India – a non-nuclear accident – and in Chernobyl, Ukraine – a nuclear accident – to see the consequences of a catastrophic industrial failure. The people of those areas are still paying with their lives the cost of those accidents, with Chernobyl’s total casualty reaching over 30,000.

To further boost his case for the type of covert actions he was proposing, Mr. Eisenstadt stated that [23],

“it might not be possible for Iranian authorities to determine, for instance, whether the death of a scientist was due to natural or un-natural causes, or whether damage to a critical facility was due to an industrial accident or sabotage.”

Consider the reasoning: Mr. Eisenstadt seems to be of the opinion that the people who run Iran’s nuclear program know nothing about anything. He appears to have forgotten that the same Iranian authorities managed to set up the complete cycle for enriching uranium over a period of 18 years and hide it from the world.

It came to the author’s attention that Mr. Eisenstadt, in an e-mail that he sent to the panelists of the panel, “Assessing the Iranian Nuclear Program: Technical Capabilities and Intent,” which was part of a workshop entitled, “Iran’s Nuclear Program” (held on Tuesday November 9, 2004, at the Woodrow Wilson International Center for Scholars in Washington, D.C.), tried to put a spin on what he had stated in his article quoted above. In that panel Mr. Eisenstadt’s proposal for creating a catastrophic failure was questioned and criticized by Professor Najmedin Meshkati of the University of Southern California, an internationally-recognized authority on safety of nuclear reactors. In response to Professor Meshkati’s criticism, Mr. Eisenstadt stated the following [24] in his e-mail:

“Had I been there [in the panel] I would have pointed out that the term ‘catastrophic failure’ is used in industry to describe ‘failure, often sudden and without warning, that jeopardizes the acceptable performance of an entire system or assembly.’ (This definition is from the ChemIndustry.com website, which describes itself as the worldwide search engine of the chemical industry). “Catastrophic” refers to how the failure affects the operation of the system, not its impact on the people operating the facility or living in its vicinity. There are no doubt ways to sabotage a nuclear power plant (if one were inclined to do so and had appropriate access) to prevent reactor start-up or to force it to shut-down without creating a hazard to the work force or the peoples of the region.”

The author has been involved with the chemical and petroleum industry for thirty years. In addition to being a professor of chemical engineering, carrying out research (funded by leading funding agencies in the US) and publishing extensively (over 220 papers and 4 books) in these areas, the author has also been, and currently is, a consultant to many industrial coorporations. Mr. Eisenstadt’s “clarification” is, in the author’s opinion, nothing but hair spiting and distorting what is widely known, and does nothing but adding insult to the injury of his original suggestions. The suggestion that one can cause catastrophic failure in a nuclear facility “without creating a hazard to the work force or to the peoples of the region” is absolutely outrageous.

Perhaps one of the best responses to the “clarification” of Mr. Eisenstadt, and his claim that he was only discussing some possibilities, was given by Dr. Guive Mirfendereski, an international laws expert and a frequent commentator on Iran and the Middle East. In an e-mail to Mr. Eisenstadt, Dr. Mirfendereski wrote [25]:

“You are not in a scientific conference where all manner of theories are proposed, or in a sci-fi convention. Since the conditions of flawlessness of execution are never met, a catastrophic failure will produce catastrophic consequences. To even suggest such a thing in theory is reckless and without regard to the human toll that it will engender. Assume that the catastrophic failure occurs in Bushehr and before you know it the Iranians [who work there] fail to manage the failure properly – the Bhopal or Chernobyl style cloud or waterborne contamination then begins to waft over into the Persian Gulf and the neighboring countries, which include Bahrain, Qatar, Kuwait, and Iraq, where we [the US] have troops and will have for a foreseeable future. Will you then stand up and say, oops we goofed, the intel was faulty? Instead of coming up with Agent-Orange type solution inspired by an over-exaggerated sense of Bond-esque machismo, maybe the time has come for you and your cohorts to talk about befriending a country without whose friendship in the past twenty-odd years we [the US] have managed to screw up everything we touched in the Middle East – ironically to the ultimate detriment of the welfare of the citizens of a certain country that wags our [the US’] national policy.”

The depth of Mr. Eisenstadt’s lack of understanding of what is happening in the Middle East and what his proposals might do to that region can be seen where he states in his article that [23]:

“Successful U.S. prevention would require exceptionally complete intelligence; near flawless military execution; and deft post-strike diplomacy to mitigate an anti-American nationalist backlash, deter retaliation, and, most importantly, ensure that military action does not poison pro-American sentiment or derail the movement for political change in Iran. The complex, daunting, and somewhat contradictory nature of these challenges (e.g., successful prevention could harm short-term prospects for political change and complicate long-term prospects for rapprochement with a new Iran) only underscores the importance of exhausting diplomatic options before giving serious consideration to military action.”

In other words, Mr. Eisenstadt believes that the US can cause a catastrophic failure in Iran’s nuclear energy facilities, with unforeseen human, economic, and environmental consequences, but if the US only has “deft post-strike diplomacy” it can prevent a backlash and piosoning of pro-American sentiment, or derailment of the movement for political change in Iran. What Mr. Eisenstadt is saying is, in fact, rehashing of what all the neocons have been saying: That the reason for the anti-US feelings in the Middle East is just bad public relations, and has nothing to do with what the US has actually been doing there. In other words, as a Bush Administration official recently stated, the US should “create reality” as it goes ahead with its policies in the Middle East.

The second pundit whose position regarding Iran’s nuclear energy facilities we discuss is Mr. Patrick Clawson. He is deputy director of the Washington Institute for Near East Policy, a pro-Israel think tank. Similar to Mr. Eisenstadt, Mr. Clawson has been advocating sabotage, and creating industrial accidents in Iran’s nuclear energy facilities. In a recent article Mr. Clawson stated that [26]:

“In an ideal world, the United States could disrupt Iran’s nuclear program through covert means, such as corrupting software programs.”

In another recent article [27] Mr. Clawson was quoted as going further, stating that:

“The idea that the only contingency plan available is to use U.S. air raids is not true. Given the shoddy design of the Russian nuclear plants whose blueprints Iran is using for its facilities, one could well imagine that there could be catastrophic industrial accidents.”

However, it was in the Workshop in Washington (mentioned above) that Mr. Clawson stated his position most “eloquently.” His remarks followed up Mr. Henry Sokolski’s response to Professor Najmedin Meshkati’s inquiry about suggestion for sabotaging Iran’s nuclear system and Mr. Eisenstadt’s written statements quoted above. The following remarks were transcribed verbatim from the C-SPAN live and then re-broadcast of the Workshop on Iran’s Nuclear Program. Mr. Clawson said (the emphasis with capital letters are the author’s) [28]:

“Look, if we could find a way in which we could introduce computer viruses which caused the complete shutdown of the Bushehr system before it became operational, that would be DELIGHTFUL.”

“If we could find ways in which these very complicated centrifuges, which are spinning at such high speeds, could develop stability problems and fly apart, and the cascade [of the centrifuges] could be DESTROYED, I think that would be DELIGHTFUL.”

The readers surely note that empty centrifuges do not spin! They only spin at high speeds when they contain uranium hexafluoride which is in gaseous state. So, destroying the cascade of the centrifuges only implies rapidly spreading the uranium compound everywhere, from which Mr. Clawson would derive delight. He continued:

“And, indeed, if we could find a way to create an industrial accident of the scale of the Three Mile Island which did not cause a single fatality, which would prevent Bushehr from becoming operational, I think that would also be very HELPFUL.”

So, the contention is that a nuclear accident of the type and scale of the Three Mile Island would not cause any fatality! Clearly, Mr. Clawson has not done his homework. The author invites Mr. Clawson and the interested readers to watch the award-winning video, “Three Mile Island Revisited” [29]. To quote, the video

“directly challenges the claim of the nuclear industry and government that ‘no one died’ from the core meltdown of the Three Mile Island nuclear power plant in 1979, America’s worst nuclear disaster. Through the testimony of area residents and scientific experts, the documentary presents compelling evidence that cancer deaths and birth defects increased in the area surrounding the Pennsylvania plant.”

The author also suggests that Mr. Clawson and the interested readers read, “People Died at Three Mile Island,” chapter 14 of a seminal book [30] to learn about the chilling facts about this nuclear accident, from birth defects and increased rate of child mortality, to increased cancer deaths in that area.

Mr. Clawson then continued,

“So, there are a whole variety of mechanisms that could be used to stop Iran’s nuclear program, that would be much less dangerous than some of the other methods that we are talking about. We are talking about military strikes. I hate to tell you this, but military strikes kill people, and that fact we have to take into consideration.”

So, Mr. Clawson was apparently worried about loss of human lives as a result of military strikes. But he immediately revealed his true colour (if he already had not by making the statement about a Three Mile Island-type of accident):

“If we could find ways to bring about industrial accidents, that offer good prospects of not endangering human life, but may UNFORTUNATELY CAUSE SOME COLLATERAL DAMAGE, then that’s a plan that we have to consider.”

Therefore, Mr. Clawson immediately contradicted himself and conceded that industrial accidents of the type he is talking about do cause some (how much?) collateral damage.

After the 1995 agreement was signed by Iran and Russia for completing the Bushehr reactor, the Clinton administration began charging that the plutonium that one can extract from the nuclear waste that the reactor would produce could be used by Iran for making nuclear weapons. However, this issue was addressed by Iran and Russia, when they negotiated an agreement by which the nuclear wastes from the Bushehr reactor would be returned to Russia. In fact, the Bushehr reactor, at which most of Messrs Eisenstadt and Clawson fury and covert plans are aimed, is believed by many experts to be incapable of producing plutonium suitable for making a nuclear bomb. For example, according to Thomas Stauffer [31],

“The reactor at Bushehr is the wrong kind of nuclear reactor for producing weapons-grade fissile material. It will produce the wrong kind of plutonium…. It can be operated only in the wrong way with regard to yielding plutonium, and it is the wrong kind of reactor as well, in the sense that a facility such as Iran’s is easily amenable to close surveillance, not lending itself at all to any covert diversion – of even the wrong kind of plutonium.”

However, the neocons and their sympathizers would have none of these. The only thing that would satisfy this group is the complete destruction of Iran’s nuclear energy facility, regardless of its human, environmental and economic consequences. Thus, having “successfully” completed their “Project for the New Iraqi Century,” the neocons and their sympathizers have begun having fantasies about Iran. We already have neocons among Iran’s right wing in Tehran who have been trying to suppress Iran’s democratic movement. We should look forward to seeing Iranian neo-monarchists and neo-cultists as well, the US neocons’ natural allies.

Conclusion

It is clear that the Frankstein that the US now calls Iran’s nuclear program was conceived by the Shah and his government, with the direct assistance and strong encouragement (many believe pressure) by the US. Not only did the US want the Shah to develop nuclear infrastructure and build nuclear reactors (hence inspiring him to start the work for building nuclear bombs), but also offered him uranium enrichment technology, the main point of contention between the US and its European allies, and Iran. That was, of course, because the Shah was the US’ dictator, having put him in power after he had been run out of Iran in 1953. The present reactionary right wing in Tehran is home grown. That appears to be the main difference between the Shah and his regime and Tehran’s present right wingers.

Nearly 27 years ago, when the author moved to the US for his graduate studies at the University of Minnesota in Minneapolis, the neocons and pundits such as Messrs Clawson and Eisenstadt were considered as belonging to fringe groups on the far right. Today, such groups are gradually becoming the “mainstream” of the American politics. With the neocons being in power for the next four years, we may have to develop new meanings for “fringe groups,” “far right,” etc. In that case, the author shudders at the thought of what the new “fringe groups” or the “far right” may constitute, if the lunatic neocons represent the “mainstream.”

References:

[1] US Department of State, “Atoms for Peace Agreement with Iran,” Department of State Bulletin 36 (April 15, 1957).

[2] G.A. Morgan, “The Current Internal Political Situation in Iran,” in Digital National Security Archive, secret internal paper dated February 11, 1961. http://nsarchive.chadwyck.com

[3] Digital National Security Archive, January 29, 1980, “US Supplied Nuclear Material to Iran.” http://nsarchive.chadwyck.com

[4] D. Albright, “An Iranian Bomb?,” The Bulletin of Atomic Scientists, vol. 51, No. 1 (January 1995).

[5] “Nuclear Plant Study Started,” Kayhan International (December 19, 1972).

[6] Tehran Magazine (March 18, 1974), page 2.

[7] A.A. Alam, “Alam’s Diaries”, Volume 4, edited by A. Alikhani (Maziar Press, Tehran, 2001), pp. 54-58. Mr. Alam had left a copy of the letter with his diaries, which is reprinted in the book. These documents may also be found in, “Issues and Talking Points: Intensified Bilateral Cooperation,” Department of State Briefing in Digital National Security Archive; nsarchive.chadwyck.com

[8] A.A. Alam, “Alam’s Diaries”, Volume 4, edited by A. Alikhani (Maziar Press, Tehran, 2001), page 7.

[9] “More Fingers on Nuclear Trigger?” Christian Science Monitor (June 25, 1974).

[10] According to Ref. [9], Iran’s embassy in France issued a statement, denying that the Shah made that statement.

[11] Der Spiegel, February 8, 1975.

[12] A. Etemad, “Iran,” in, “European Non-Proliferation Policy,” edited by H. Mueller (Oxford University Press, London, 1987), page 9.

[13] A.A. Alam, “Alam’s Diaries”, Volume 1, edited by A. Alikhani (Maziar Press, Tehran, 2001), page 107.

[14] See President Gerald R. Ford’s Presidential Documents at http://www.fordlibrarymuseum.gov/library/document/nsdmnssm/nsdmnssm.htm

[15] See President Gerald R. Ford’s Presidential Documents at http://www.fordlibrarymuseum.gov/library/document/nsdmnssm/nsdmnssm.htm

[16] Department of State Secret Report, “Current Foreign Relations: US-Iran Commission cements bilateral ties; Iran and Iraq agree to settle differences.” See, http://nsarchive.chadwyck.com.

[17] See President Gerald R. Ford’s Presidential Documents at http://www.fordlibrarymuseum.gov/library/document/nsdmnssm/nsdmnssm.htm

[18] L.S. Spector, “Going Nuclear: The Spread of Nuclear Weapons 1986-1987” (Ballinger Publishing, Cambridge, 1987), page 46.

[19] L.S. Spector and J.R. Smith, “Nuclear Ambitions: The Spread of Nuclear Weapons, 1989-1990” (Westview Press, Boulder, 1990), page 205.

[20] A. Etemad and N. Meshkati, “The US-Iran Nuclear Dispute: Dr Mohamed ElBaradei’s Mission Possible to Iran,” Iran News (July 13, 2003).

[21] Department of State Memorandum, “Iran: The US-Iran Nuclear Energy Agreement,” October 20, 1978.

[22] This beautiful and insightful quote is not the author’s. He read it in an article but, unfortunately, could not locate its original source. The author would be grateful to any reader who can provide him with the original source of the quote.

[23] “Checking Iran’s Nuclear Ambitions,” edited by H. Sokolski and P. Clawson (Carlisle, PA, U.S. Army War College, 2004). The document can be accessed on-line at: http://www.carlisle.army.mil/ssi/pdffiles/00359.pdf. Those readers who may feel depressed after reading Mr. Eisenstadt’s chapter in this book, may consider reading the chapter by Mr. Rob Sobhani for some relief and entertainment. (That chapter is, however, the subject of a forthcoming article by the author.)

[24] The author is grateful to Professor Najm Meshkati for sharing with him the e-mail on December 6, 2004.

[25] The author is grateful to Dr. Guive Mirfendereski for granting him permission, on December 6, 2004, to quote him here.

[26] P. Clawson, “How to Rein in Iran Without Bombing It,” the Los Angeles Times (Friday October 15, 2004).

[27] S. Efron, “U.S. Options Few in Feud With Iran,” the Los Angeles Times (Monday December 13, 2004).

[28] The author is grateful to Professor Najm Meshkati for his invaluable help with transcribing what Mr. Clawson stated.

[29] The video was produced by Steve Jambeck and Karl Grossman, and is about 30 minutes long.

[30] H. Wasserman and N. Solomon (with R. Alvarez and E. Walters), “Killing Our Own, the Disaster of America’s Experience with Atomic Radiation” (Dell Publishing Co., New York, 1982).

[31] T.R. Stauffer, “Unlike Dimona, Iran’s Bushehr Reactor Not Useful for Weapons-Grade Plutonium,” Washington Report on Middle East Affairs (September 2003), p. 28; see, http://www.washington-report.org/archives/sept03/0309028.html.

Original URL: http://www.payvand.com/news/04/dec/1186.html

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Part VI: The European Union’s Proposal, Iran’s Defiance, and the Emerging Crisis

Introduction

Since February 2003 Iran’s program for constructing the complete cycle for producing enriched uranium – the fuel for nuclear reactors and nuclear power plants (NPPs) – has been the subject of intense international debates. Over this period, the experts and inspectors of the International Atomic Energy Agency (IAEA) have been visiting Iran on a regular basis to inspect its nuclear facilities. The information and data that have been collected by the IAEA have revealed sustained and determined efforts by Iran since 1985 for constructing the complete cycle for producing enriched uranium. The Bush administrtation has been arguing that the primary purpose of Iran’s nuclear program is developing nuclear weapons. The European Union (EU), which has very extensive commercial relations with Iran; Russia, which is completing the construction of a NPP in Bushehr (on the shores of the Persian Gulf), and Japan, which has signed a lucrative oil agreement with Iran for developing Iran’s giant Azaadegaan oil field, have all pressed Iran hard, demanding that it reveal all the details of its nuclear program.

In a series of articles that were posted on Payvand.com in October 2003, the author provided a brief history of Iran’s nuclear program (Part I); described in broad terms the reasons that justify Iran’s nuclear energy program as economically, politically, and environmentally viable (Part II), and explained the crisis that was emerging at that time (October 2003) in the relationship between Iran and the IAEA (Part III). In Part IV, posted on Payvand.com on December 7, 2004, the author presented a detailed economical, political, and environmental analysis of Iran’s nuclear energy program, using the most reliable statistics on Iran’s current energy consumption and resources. Part V, posted on December 22, 2004, described in detail the key role that the United States (US) played from the 1950s to the 1970s in starting Iran’s nuclear program. We showed that not only did the US push the Shah to buy its NPPs, but also offered Iran the technology for uranium enrichment and reprocessing of spent nuclear reactor fuel if Iran agreed to buy eight US-manufactured NPPs, assertions that were repeated later on in an article published in the Washington Post [1]. We also compared the history of the US involvement with Iran’s nuclear program with the current thinking of the neo-conservatives and their sympathizers on how to prevent the Bushehr reactor from operating, a reactor that, under no conceivable circumstances, can be used for making a nuclear bomb [2].

A major goal of the series has been to debunk the “argument” that the US neo-conservatives and their allies have been making, namely, that given Iran’s vast oil and gas reserves, it does not need nuclear energy. The neo-conservatives and their allies, ranging from Israel to Iran’s anti-democratic groups (from the terrorist cultist group to the monarchists) and quasi-democratic groups (those whose words wish seemingly nothing for Iran but a secular democratic republic, but whose deeds indicate otherwise [3]) are the only groups that are still hanging onto this absurd argument [4]. The analysis presented in Parts II and IV of this series (and their short versions published elsewhere [5,6]) have made their impact: Iran’s nuclear energy program has been transformed from one perceived not to be needed by, or suitable for, Iran to one for which the EU is willing to GUARANTEE the supply of nuclear fuels and advanced nuclear technology (see below), provided that Iran gives up its right for having the complete cycle for producing enriched uranium.

Another goal of this series has been to inform the public, especially the Iranians who live outside Iran, about the benefits and perils of the nuclear energy program that the present Iranian government is pursuing. At the same time, giving wide public exposure to the neoconservatives’ thinking about Iran is particularly important.

The Board of Governors (BOG) of the IAEA has had periodic special meetings to review the progress in assessing Iran’s nuclear program. In its special meeting held on Monday November 29, 2004, the IAEA reported to the BOG its latest findings on Iran’s program, and due to the Paris agreement that Iran had signed with the EU troika – Britain, France, and Germany – for suspending its uranium enrichment program, no further special meeting of the BOG of the IAEA was supposed to be scheduled; that is, Iran’s case before the BOG was supposed to have gone back to being a normal, un-urgent case.

However, as usual, recent developments have taken unexpected turns, as a result of which Iran’s case before the BOG of the IAEA has, once again, become special. The reason for the latest twist in this saga is that, in mid August, after Iran rejected the long-awaited proposal by the EU troika for curtailment of its uranium enrichment activity in return for economic and political concessions (see below), it restarted the Esfahan facility for converting uranium yellow cake to uranium tetra- and hexafluoride – gaseous compounds (at elevated temperatures) that are used to produce enriched uranium. However, Iran relaunched the process after informing the IAEA which is now monitoring the Esfahan facility. The relaunch of the Esfahan facility was against the Paris agreement according to which Iran was obligated not to start any part of the complete cycle for producing enriched uranium, so long as it was negotiating with the EU troika.

It must be emphasized that producing uranium tetra- and hexafluoride is NOT considered by the IAEA as part of the uranium enrichment process. But, in the highly politicized and polarized environment that exists between Iran, the EU troika, and the US (which has worsened since the election of Mr. Mahmoud Ahmadinejad as Iran’s new President), even a process as harmless, by itself, as producing uranium compounds causes much tension. We must also realize that the production of tetra- and hexafluoride in Esfahan is apparently still beset by technical problems. Various reports indicate that the uranium compounds produced there are not suitable for enrichment (see below).

In response to Iran’s action, the EU troika has angrily suspended its negotiations with Iran, taking the case back before the BOG of the IAEA, and threatening Iran with a referral to the United Nations Security Council. We must, however, realize that the only valid basis for referring Iran to the Security Council is its breach of the nuclear non-proliferation regime as described in the NPT. However, the IAEA has yet to find any evidence that Iran was or is engaged in a nuclear weapons program. In fact, the IAEA just announced that its tests vindicated Iran’s claims that traces of highly enriched uranium found two years ago at Iran’s nuclear facilities are from the equipment imported from Pakistani (see below).

The goal of the present part of the series is twofold:

(1) We describe the developments that have led to the present state of affairs between Iran and the EU troika. In the author’s opinion, much has been made of the proposal that the EU troika has submitted to Iran, whereas a careful reading of the proposal reveals that while Iran is being asked to give up some of its fundamental rights under the NPT agreement, when it comes to the most important part of an overall agreement between the EU troika and Iran, namely, the security aspects, the EU proposal falls severely short; it does not offer Iran any concrete security guarantees. At the same time, there has been little discussion of what the author considers a reasonable proposal that Iran made last March to its EU counterparts regarding its nuclear fuel cycle, which was, however, ignored completely by the EU troika and the US.

(2) We then discuss whether it is in Iran’s national interest to start its full nuclear fuel cycle without reaching a formal agreement with the EU troika and, through them, the US.

Fall 2003: Iran’s Weak Position and the Sa’d Abaad Agreement

On October 21, 2003, Iran signed the Sa’d Abaad agreement with the European troika. According to this agreement,

“The Iranian authorities reaffirmed that nuclear weapons have no place in Iran’s defence doctrine and that its nuclear programme and activities have been exclusively in the peaceful domain. They reiterated Iran’s commitment to the nuclear non-proliferation regime and informed the ministers that:

a. The Iranian Government has decided to engage in full co-operation with the IAEA to address and resolve through full transparency all requirements and outstanding issues of the Agency and clarify and correct any possible failures and deficiencies within the IAEA.

b. To promote confidence with a view to removing existing barriers for co-operation in the nuclear field:

i. having received the necessary clarifications, the Iranian Government has decided to sign the IAEA Additional Protocol and commence ratification procedures. As a confirmation of its good intentions the Iranian Government will continue to co-operate with the Agency in accordance with the Protocol in advance of its ratification.

ii. while Iran has a right within the nuclear non-proliferation regime to develop nuclear energy for peaceful purposes it has decided voluntarily to suspend all uranium enrichment and reprocessing activities as defined by the IAEA…”

These were important PRACTICAL concessions made by Iran. What did Iran gain in return? According to the agreement,

“The Foreign Ministers of Britain, France and Germany welcomed the decisions of the Iranian Government and informed the Iranian authorities that:

Their governments recognise the right of Iran to enjoy peaceful use of nuclear energy in accordance with the nuclear Non-Proliferation Treaty.

a. In their view the Additional Protocol is in no way intended to undermine the sovereignty, national dignity or national security of its State Parties….”

which are nothing but stating the rights that Iran already enjoyed under the Nuclear Non-proliferation Treaty (NPT). Therefore, in essence, Iran gained nothing practical by signing the Sa’d Abaad Agreement, except postponing a serious confrontation with the West. The question then is, why was Iran willing to sign such an agreement which was clearly indicative of its weak position (at that time)? Several factors contributed to Iran’s decision to sign the Sa’d Abaad Agreement, some of which are as follows.

(1) Iran had not told the world about its nuclear energy program for 18 years. Although in terms of Iran’s legal obligations towards the NPT, hidding the nuclear facilities was NOT illegal [7], the fact is that the world was suspicious of Iran. At the same time, even if Iran was, or still is, trying to make a nuclear bomb (and this is still unclear), most experts agree that it is still years away from achieving this goal [8], simply because Iran does not appear to have solved all the technical problems regarding the enrichment process (see below). Therefore, temporary transparency and openness could help Iran learn more about the process.

(2) In October 2003 the US and Britain had appeared to be the absolute victors in Iraq. Saddam Hussein’s regime had been overthrown swiftly, and there was not yet any strong indication that the Sunnies, together with foreign terrorists, would fight back and create the mess that Iraq is today. President Bush had already declared “the end of major combat operations,” and had boasted about “mission accomplished.” His approval rating was high, and there was still strong support by a majority of Americans for invasion of Iraq. In short, Mr. Bush’s “faith-based propaganda” [9] was still working, and had not broken down yet.

(3) The claim that Iraq had a “robust nuclear program” [10] was still believable. The search for the program had only begun recently, and many believed that it would be discovered sooner or later. Therefore, why would the world not believe the same claim about Iran?

(4) The energy market, and in particular the oil market, was not nearly as hot as what it is today. The oil price was in the $30 range (compared with the $60 range today), and there was still considerable oil excess capacity, implying that if Iran’s oil exports were eliminated, other oil exporters could increase their production and compensate for the loss, just as they had done for Iraq’s production. Moreover, there was “serious” talk of increasing Iraq’s oil production to 4 million barrel/day, which has, of course, never materialized.

(5) Internally, the Majles, Iran’s parliament, was still controlled by vocal reformists some of whom did not want any nuclear energy program (for example, some members of the Islamic Revolution Mojahedin Organization, and the Islamic Iran Participation Front), while the rest, although supporting the program, were advocating complete transparency in dealing with the IAEA (with which the author agrees completely). Moreover, Mr. Mohammad Khatami was still Iran’s President, a man who wanted to make detente with the West not confront it.

In summary, Iran was in an extremely weak situation, and HAD TO sign the Sa’d Abaad Agreement.

Summer 2005: Iran’s Strong and Defiant Position

What has changed in little less two years that has made Iran confident (or, perhaps, overconfident) that it can confront the West and come out ahead? Consider the following:

(1) Unlike Fall 2003, the world now knows much about Iran’s nuclear program. Yes, there are still serious issues to be resolved (see below), but the fact is that the IAEA has not been able to find any credible evidence – a smoking gun so to speak – that would indicate that Iran is trying to make a nuclear bomb.

(2) Unlike Fall 2003, the insurgency in Iraq is in full swing with no end in sight, which has resulted in high US casualties, as well as huge civilian casualties among the Iraqi population. Even the Taliban are making a come back in Afghanistan. President Bush’s approval rating has tumbled to high thirties or low forties, some of the lowest by any president. Nearly two-third of Americans now believe that the invasion of Iraq was a mistake, and that it has made the US LESS secure.

(3) No nuclear weapon, or any “robust program” for making them, was ever discovered in Iraq. Given that right before the invasion the IAEA had declared that there was no such program in Iraq, and that it has also failed to find the same in Iran, it would be difficult to believe that Iran is making a nuclear bomb unless, of course, new dramatic evidence is uncovered.

(4) The oil market is in turmoil. The oil price is in the neighbourhood of $70/barrel, and there is almost no excess capacity in other oil exporting nations left to compensate for Iran’s exports – currently about 2.7 million barrel/day – if they are lost due to a confrontation between Iran and the US. At the same time, Iran will make about $60-70 billion in exports, and its foreign debts and obligations are minimal, only about $10 billion. In short, Iran’s vulnerability to a worldwide economic sanction (as unlikely as it is) could not be any less.

(5) Through relatively democratic elections, a Shiite-dominated government is now ruling Iraq, led by men who spent years in Iran in exile. When Iraq’s Prime Minister, Dr. Ebrahim Al-Jafari, who speaks Persian fluently, visited Iran recently, he put a wreath on Ayatollah Khomeini’s grave. He admitted Iraq’s responsibility and fault for starting the Iran-Iraq war in 1980, and asked Iran to help it train its armed forces. When Mr. Kamal Kharrazi, Iran’s (former) Foreign Minister, visited Iraq recently, he visited Ayatollah Ali Sistani, the most powerful man in Iraq, if not in the entire Shiite world. Ayatollah Sistani has never granted an audience to any Western official. At the same time, radical Iranian elements and factions can create immense problems in Iraq, way beyond what is currently happening there.

(6) China and India, the two most populous nations, have signed huge contracts with Iran, worth well over $100 billion, to import oil and gas from Iran, hence making them dependent on Iran. India is the largest democracy in the world, while China is the up-and-coming superpower. Hence, these countries provide Iran with political support. In particular, it is plausible (but not certain) that China may veto any resolution against Iran, if its nuclear energy program is referred to the UN Security Council. Russia might do the same, since it has great stake in its nuclear copperation with Iran. But, their veto is not by any means guaranteed.

(7) The emergence of the Shanghai Cooperation Organization (SCO), consisting of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. The SCO goes back to 1996 when China initiated the Shanghai Five, which included all the current SCO members except for Uzbekistan. The purpose of SCO is to form a network of cooperation among the member States, including military security, economic development, trade and cultural exchange. In its most recent meeting on July 5, 2005, the SCO invited Iran to participate as an observer, which Iran did. Iran is likely to join the SCO sometime in the near future, which will provide it with further political support. The SCO has started asserting itself and flexing its political muscles, with Uzbekistan recently asking the US to evacuate its military forces out of the country, which the US will do soon. Clearly, if the US troops leave Central Asia, it will be an important positive development for Iran.

(8) Iran has started receiving the proceeds from its oil exports in Euro rather than dollar. Over a period time, it will stop receiving dollar altogether, and will completely switch to Euro. This will not only provide more financial stability and security for Iran’s foreign exchange reserves, but also will have a negative impact on the oil market in New York.

(9) Internally, the Majles, the presidency, the armed forces, and the judiciary are all controlled by Iran’s right wing. Although Iran’s right itself is factionalized, but history indicates that when it comes to a common enemy, it becomes completely united.

Thus, Iran is in a strong position which explains its belligerence and defiance. At the same time, unlike what is claimed in the Western Press, Iran’s defiance is NOT due to the election of Mr. Ahmadinejad as its new president, rather, as the above discussion should make it clear, is due mostly to the international developments.

Iran’s Proposal to the EU Troika

In addition to the above, what contributes to Iran’s position strong is the following. For sometime Iran was focused on providing the EU troika with the “objective guarantees” of the peaceful nature of its nuclear program. In fact, on March 23, 2005, Iran submitted to the EU troika a plan of objetive guarantees with the following elements [11]:

(1) Spent reactor fuels will not be reprocessed by Iran, so that no plutonium can be extracted to be used for bomb making.

(2) Iran will forego plutonium production through a heavy water reactor.

(3) Only low-enriched uranium will be produced.

(4) A limit will be imposed on the enrichment level, to be used solely as fuel for reactors.

(5) A limit will be imposed on the amount of enrichment, restricting it to what is needed for Iran’s reactors.

(6) All the low-enriched uranium will be converted immediately to fuel rods for use in reactors (fuel rods cannot be further enriched).

(7) The number of centrifuges in Natanz can be limited, at least at the beginning. The full operation of the fuel cycle will be incremental, beginning with the least sensitive part, such as uranium conversion.

(8) The IAEA will have permanent on-site presence at all the facilities for uranium conversion and enrichment.

Items (1)-(7) that Iran has offered to limit, or to give up altogether, are actually allowed by Article IV of the NPT. Therefore, any objective person who is even remotely familiar with producing fuels for nuclear reactors would agree that what Iran proposed in March 2005 was a substantial, if not complete, step towards providing the EU troika and the US with the “objective guarantees” that they are supposedly looking for. In fact, item (8) goes even beyond the provisions of the Additional Protocol on the NPT that Iran signed in December 2003, and has been implementing ever since. At the minimum, Iran’s proposal could have been the basis for further negotiations. But, the EU negotiators never responded to Iran’s offer; they simply ignored it, hence demonstrating their nations’ utter arrogance [12].

The Proposal of the EU Troika to Iran

The long-awaited proposal by the EU troika, “The Framework for a Long-Term Agreement,” was submitted to Iran in early August. In the author’s opinion, the proposal does contain several important elements. For example,

(1) it tries to force Iran to commit to combating terrorism (article 9), hence stopping many adventuresome aspects of Iran’s foreign policy over the past twenty five years, such as supporting radical groups in the Middle East, which have done nothing but grossly damaging Iran’s national interests;

(2) it recognizes Iran’s right to developing the infrastructure for peaceful use of nuclear energy and research (articles 14 and 15) (these rights have, however, been recognized by the NPT);

(3) it recognizes Iran’s right to have access to “international nuclear technology market” (article 18);

(4) it offers to provide expert help for safety aspects of Iran’s program (article 20b);

(5) it offers to facilitate Iran’s access to the international market for nuclear reactors fuels (article 23);

(6) it offers to help Iran develop a “buffer store” of 5 years of fuel supplies for the reactors in case either the supplies dry up, or the suppliers refuse to provide Iran more fuels for the reactors (article 30), and

(7) it proposes a mechanism for addressing the situation that arises in (6) (articles 27-29), although the mechanism is tedious.

However, certain aspects of the EU proposal are either against the existing international agreements, or their language is vague and leaves a lot to be desired. For example, the proposal demands that Iran (emphasis with capital letters added)

“make a legally binding commitment not to withdraw from the NPT and to keep all Iranian nuclear facilities under IAEA safeguarded UNDER ALL CIRCUMSTANCES” (article 36a).

The commitment not to withdraw from the NPT is even against the NPT itself, which allows the member States to withdraw from the agreement, subject to giving a 90 days notice to the IAEA, if the States believe that abiding by the terms of the NPT threatens their national security, and withdrawing from the NPT is in their “Supreme Interest.”

At the same time, why is Iran’s case so different that requires new skewed interpretation of the NPT’s provisions, or creating new obligations for Iran that do not even exist in the international agreements regarding nuclear weapons? If Iran has violated certain aspects of the Safeguards Agreement by not reporting to the IAEA what it has been doing (which is still a matter of debate), it has not been the LONE violator. Over the past year alone, the IAEA has reported that South Korea, Taiwan, and Egypt have, at various times, violated the provisions of the NPT by secretly engaging in experiments on uranium enrichment and even bomb making. Brazil, a country that provided nuclear assistance to Saddam Hussein’s regime in the 1980, refused, for a long time, granting permission to the IAEA to visit and inspect its uranium enrichment facilities under construction. Where is the international outcry over these violations?

Therefore, if Iran is to make a commitment not to withdraw from the NPT, the logical first step is to revise the terms of the NPT agreement, so that the commitment would become binding for ALL the member States, not just Iran. In addition, the revisions must address the all important issue of what to do about nuclear powers that are NOT signatories to the NPT, namely, India, Israel, and Pakistan, all in Iran’s vicinity, with the latter two posing great threats to Iran’s national security.

In addition, the “Political and Security Co-Operation” section of the EU proposal leaves a lot to be desired. Let us review a portion of it (article 4):

“Within the context of an overall agreement and Iran’s fulfilment of its obligations under the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), the United Kingdom and France would be prepared to reaffirm to Iran the unilateral security assurances given on 6 April 1995, and referred to in United Nations Security-Council Resolution 984 (1995). Specifically:

the United Kingdom and the French Republic would reaffirm to Iran that they will not use nuclear weapons against non-nuclear weapon States Parties to the Treaty on the Non-Proliferation of Nuclear Weapons except in the case of an invasion or ANY attack on them, their dependent territories, their armed forces, or other troops, their allies or on a State towards which they have a security commitment, carried out or sustained by such a non-nuclear-weapon State in association or alliance with a nuclear-weapon State….”

Such guarantees actually leave open the possibility of a nuclear or even non-nuclear attack on Iran because, as is clear in the above paragraph, immediately after promising not to attack Iran, a long list of “exceptional” cases which can provoke an attack is mentioned. Moreover, Iraq was invaded and occupied not through a nuclear attack, but by conventional forces. So, the question is, where is the guarantee that Britain and France (and, for that matter, Germany) will not participate in a war similar to the invasion of Iraq using conventional forces?

Even if full guarantees, with no ifs, buts, and exceptions, are provided, where is the guarantee that the US will not attack Iran? Where is the guarantee that its proxies, such as Israel, will not attack Iran? The proposal is silent about these aspects, except where it states that (article 4b):

“the United Kingdom and the French Republic would recall and reaffirm, as Permanent Members of the Security Council, to seek immediate Security Council action to provide assistance, in accordance with the Charter [of the UN], to any non-nuclear State, party to Treaty on the Non-Proliferation of Nuclear Weapons, that is a victim of an act of aggression or an object of a threat of aggression in which nuclear weapons are used.”

In other words, the proposal guarantees nothing when it comes to the use of conventional forces, and even in the case of an aggression in which nuclear weapons are used, all the EU troika will do will be seeking “immediate Security Council action,” presumably after tens (if not hundreds) of thousands of innocent people have already perished during the aggression.

The New IAEA Report and its Absurd Demands

As mentioned above, two years ago the EU troika insisted through the Sa’d Abaad Agreement that Iran must “voluntarily” sign the Additional Protocol to the NPT, which Iran did and began implementing. But, in his September 3, 2005 report to the BOG of the IAEA [13] entitled, “Implementation of the NPT Safeguards Agreement in the Islamic Republic of Iran”, Dr. Mohamed ElBaradei, chief of the IAEA, has reported on the following item:

(1) Iran has submitted to the IAEA comprehensive declarations with respect to its nuclear facilities, including design information (article 5).

(2) In view of Iran’s steady cooperation and increasing transparency, resolving the outstanding concerns (see below), the IAEA believes that Iran’s nuclear issue “would be followed up as matters of routine safeguards” (article 6).

(3) Other than some delays and slowness in providing information on the design aspects, “no additional failures have been identified” by the IAEA (article 8).

(4) Certain aspects of Iran’s previous declarations, especially the “outstanding issue” of the sources of contamination of Iran’s equipment with high-enriched uranium which has turned out to be Pakistan (as had been widely believed), have been verified (article 12).

(5) Several Iranian “transparency measures,” well beyond the Additional Protocol, are reported, including allowing inspection access to Iran’s military bases (article 37).

(6) The report cites “good progress” in Iran’s “corrective measures” since October 2003 (article 43).

(7) The report declares that, “all the declared nuclear material in Iran has been accounted for, and therefore such material has not been diverted to prohibited activities” (article 51).

(8) The report confirms again again that Iran’s uranium enrichment facilities at Natanz have remained suspended; that the converted uranium had been relocated to safe storages, and that the uranium hexafluoride “remained under agency seals” (article 59).

(9) It admits that, “the agency’s legal authority to pursue the verification of possible nuclear weapons-related activity is limited” (article 49).

This is, of course, a basic problem of the non-proliferation regime which transcends Iran, but is being selectively applied to Iran. After admitting this general shortcoming, the report states that Iran’s transparency (emphasis with capital letters added)

(10) “should extend beyond the formal requirements of the Safeguards Agreement and Additional Protocol and include ACCESS TO INDIVIDUALS, documentation related to procurement, dual-use equipment, certain MILITARY-OWNED WORKSHOPS and research and development locations” (article 50).

Such demands are clearly pure political pressure far beyond any requirements demanded by the NPT and its Additional Protocol. In fact, Iran is being asked to comply with demands that are reminiscent of what Iraq was being asked to do in the months leading to its illegal invasion by the US and Britain. In essence, what the report is demanding is that Iran should reveal its sensitive military information. If Iran were to go along, where would the demand list end?

In addition, it is not even clear why, with so many positive aspects of Iran’s cooperation with the IAEA reported by the IAEA, Iran should accede to such additional demands. This is particularly baffling in view of the IAEA’s own discovery about Iran’s deals with Pakistan’s Abdul Ghadeer Khan, indicating that Iran turned down his offers of nuclear-weapons designs in the 1980s, which should reinforce Iran’s position that it is not interested in acquiring nuclear weapons. What happened to President Bush’s declaration at the National Defense University on February 11, 2004 that, “I propose that by next year, only States that have signed the Additional Protocol be allowed to import equipment for their civil nuclear programs”?

Lack of Mutual Trust and the Emerging Crisis

Given the above, the question is: What is REALLY at issue in the confrontation between Iran, the EU troika, and the US? The issue, as Dillip Hiro [14] put it, is:

“Do Third World countries have the right to develop and use all nuclear technology, including enrichment, as authorized by the Nuclear Non-proliferation Treaty, or not?”

Iran believes that the answer is an unequivocal “Yes,” and is not alone in its stance: The Non-Aligned Movement, which has a membership of 116 nations (and includes such important nations with nuclear technology as Brazil, India, and South Africa), agrees. So, whether intended or not, Iran has become the champion of the developing nations, willing to stand up to the Western world. Moreover, whether we like it or not, Iran’s stance has won it quiet admiration by Non-Aligned nations, as they fear that the limitations that the EU and the US are trying to impose on Iran could be extended to them eventually.

The EU troika does not deny the right. But it (and the US) wants Iran to give up its rights under the NPT FOREVER (article 34 of the EU proposal) in return for the commitments described above.

Why do the EU and the US want Iran to give up its right for having the complete cycle for producing enriched uranium? Their main argument is that, since Iran hid its nuclear energy program for 18 years, it has, in essence, given up that right. In essence, it is, more than anything else, an issue of trust between two hostile sides. As President Bush stated in a news conference on April 28, 2005, at the White House,

“America recognises that we cannot trust the Iranians when it comes to enriching uranium . . . they should not be allowed to enrich uranium.”

In the author’s opinion, there is not much merit to the argument that, “we do not trust Iran because it hid its nuclear program.” To see why consider the following:

(1) As explained in Part II of this series, beginning in 1982, Iran started pursuing Germany to complete the reactors in Bushehr. It tried any and all the reasonable (and some not so reasonable) approaches in order to get Germany live up to its obligations; it never succeeded. If anything, Iran’s efforts were indicating clearly to the West that it WAS pursuing a nuclear program. At the same time, the (West) German intelligence agency was the first to declare in 1984 that, “Iran was only TWO YEARS away from a nuclear bomb” [15].

(2) As noted in Ref. [6], under the provisions of the Safeguard Agreement of IAEA, building the Natanz facility and not declaring it were NOT illegal (though they were clandestine), so long as 180 days before introducing any nuclear materials into the facility Iran notified the IAEA, which Iran did long before the 180 days period. As has been emphasized in this series of articles, the difference between being clandestine and illegal has not been understood in the Western press; constructing the Natanz facility is constantly referred to as Iran’s “breach of its obligations.”

(3) The truth is that the EU troika and the US do not wish Iran to have the uranium enrichment facilities, REGARDLESS of what Iran does or does not. To see this one only needs to consider Iran’s proposal of March 2005. At the same time, does anyone really believe that if, in 1985, Iran had declared its intention for constructing its present enrichment facilities, the US and the EU troika would have rushed in to help it, or even allowed Iran to proceed? It is difficult, if not impossible, to imagine any scenario under which this would have happened. So, the issue is not one of hiding something, rather not wanting Iran to possess the enrichment facilities and technology under any circumstances.

However, Iran’s reactionary right has done too many things to make the world suspicious or distrustful of Iran, some of which, in the author’s opinion, are as follows.

(1) The hardliners have suppressed Iran’s democratic movement and violated, on a steady and consistent basis, the personal, social, political, and economical rights of Iranians. In fact, in the author’s opinion, lost in the international fury over Iran’s nuclear energy program has been the fact that, respect for human rights and a democratic political system are the most effective deterrent against the threat that any aspiring nuclear power run by an undemocratic government may pose to the world. When the US strongly pushed the Shah to start Iran’s nuclear energy program at a time that it had no economic justification (see Parts II and IV of this series), instead of pushing him to undertake meaningful political reforms, it helped creating the Frankstein now called Iran’s nuclear program.

A democratic political system in Iran greatly reduces and even eliminates the threat that its nuclear program may pose to the world because, in the author’s opinion, the danger per se is not that Iran may have nuclear weapons (which it does not), but that some of its most important power centers and decision-making process are shrouded with secrecy. A free press in Iran – a pillar of human rights – will reveal nuclear adventures that Iran’s hidden power centers may pursue against Iran’s national interests [16].

Since 1970s, when the Shah started Iran’s nuclear program, India, South Africa, North Korea, Pakistan, and Israel have joined the nuclear club. In the 1980s South Africa’s apartheid regime produced nuclear bombs, but the democratic government of Nelson Mandella dismantled them. India, has developed a nuclear arsenal, but not many perceive world’s largest democracy as a threat to the world. The same is true about Israel.

But, North Korea’s nuclear arsenal is a threat because its regime is highly secretive and its leader a recluse. Pakistan’s nuclear arsenal is extremely dangerous (even if the US does not acknowledge it) because Pakistan is an essentially failed State. Its nuclear-armed military, populated by Islamic extremists, created the Taliban which supported Osama bin Laden. Pakistan has a sectarian war in which the majority Sunni population has been murdering the Shiite minority, and many of its schools teach Islamic radicalism. Could Abdul Ghadeer Khan, the founder and owner of Pakistan’s nuclear supermarket, have operated freely for so long without the support of some elements of its military? Could he have operated in a democratic Pakistan with a free press to reveal the depth of his dangerous enterprise?

Aside from the nature of Iran’s hardliners which cannot be conducive to building trust between Iran and the international community, several questions about Iran’s nuclear energy program remain unresolved:

(2) When did Iran obtain the design for the advanced P-2 centrifuges? Why did it not pursue its construction? or, has it?

(3) Why did Iran experiment for sometime uranium enrichment using lasers? Surely, laser enrichment is not economical, and can be justified only in the framework of a military program for which there is no limit to the budget that can be spent.

(4) Why was the Bandar Abbas uranium mine not declared to the IAEA for quite some time? How much uranium deposits does Iran possess, any way [17]?

(5) At least three companies – Kaalaa-ye Electric, Pars Taraash, and Faraayand Technic – supposedly having nothing to do with Iran’s nuclear program – have turned out to be providing support for it. Iran must be prepared to address the issue of such companies in a systematic way, because it is likely that the IAEA will press Iran on this issue in the future.

But, this is not the complete story, but only half of it. The lack of trust between Iran, the EU, and the US is also due to the other half of the story, which is about the “guarantees” given by France, Germany, and the US to Iran that later on turned out to be “non-binding.” Consider the following (which represents just the tip of the iceberg) [18]:

(1) As described in Part I and mentioned above, Germany was supposed to build two nuclear reactors in Bushehr. The construction of the reactors was begun and made considerable progress. But Germany stopped the work after the Iranian Revolution. It neither paid Iran back what it owed, nor did it finish building the reactors, nor delivered the parts that had already been purchased and paid for.

(2) Iran paid in 1975 $1 billion to buy 10% of Eurodif, a French company that produces enriched uranium. In return Iran was supposed to receive enriched uranium for its reactors, but has never received any. France was also supposed to construct nuclear reactors in Khuzestan province, but it never did.

(3) The Shah spent billions of dollars in the 1970s to purchase US made weapons. The US was obligated to provide Iran with the spare parts for the weapons. But, when the Iran-Iraq war began, the US refused to supply Iran with the spare parts which had already been paid for. But the US did not stop there. Donald Rumsfeld travelled to Baghdad in December 1983, had a friendly meeting with Saddam Hussein, and informed him that the US, although officially neutral, was going to “tilt” towards Iraq. The US then started supplying Iraq with detailed information on troops movement in Iran, and other valuable information.

(4) Historical factors also play important roles in the distrust of the Europeans by Iran. The Golestan and Turkmenchaay Treaties, signed in 1811 and 1827 between Iran and Russia, forced Iran to give up, under force, a large portion of its historical territories. Later on in 1867, the British empire did the same to Iran when it used force to separate Afghanistan from Iran. The 1953 coup d’etat overthrew the government of Iran’s national hero, Dr. Mohammad Mosaddegh. These historial events, with gigantic implications, have left deep scars on Iran’s historial memory.

Therefore, the lack of trust between Iran, the EU, and the US is mutual. While the EU nations have many good reasons to distrust Iran, they also have a track record of promises that they had made to, and obligations that they had towards, Iran, which were broken and violated later on.

Iran’s Technical Problems: A Reason for Caution

While the Western Press has been trying to create a menacing image of Iran’s nuclear energy program, now that the Esfahan facility has started operating again, the reality, which should prevent the EU from panicking, is quite different. The fact is that Iran faces many difficulties in operating both the Esfahan and Natanz facilities [19,20], with the latter facility being currently sealed, anyway. Iran had major problems with the Esfahan facility in 2004 when it produced uranium hexafluoride, which was unsuitable for enrichment because it contained impurities that prevent its enrichment. Another problem is obtaining suitable materials for handling and storing uranium hexafluoride, which is in a solid state at room temperature, but makes a transition to the gaseous state at about 135 F. Whether Iran has overcome such difficulties is not known yet. A third problem Iran is facing is about its centrifuge facility at Natanz. Apparently, Iran has been unable to keep the centrifuges running for a sufficient length of time at the required speeds.

At the same time, most experts believe that the IAEA inspections and safeguards will prevent Iran from directly using facilities declared to the IAEA for its weapons program (if one exists), so long as Iran does not withdraw from the NPT. A November 2004 report by the CIA supported these assertions. However, if Iran’s program is referred to the Security Council, and the Council imposes tough sanctions against Iran (the possibility of which AT PRESENT is remote), Iran may withdraw from the NPT and expel its inspectors. Then, what Iran’s hardliners do next is anybody’s guess. It is not in the interest of the world to arrive at such a frightening moment.

Summary: Is Defiance in Iran’s National Interest?

In the author’s opinion, although Iran’s current position is very strong, it is not in its national interest to be referred to the UN Security Council. The reason is threefold:

(1) Although Russia and China are both opposed to referring Iran’s nuclear program to the United Nations Security Council, their veto of a resolution against Iran is NOT guaranteed. An approved resolution, even if it is mild, will be used by the War Party in the US as an exuse for staging military attack against Iran.

(2) If the Security Council does pass some resolution against Iran, it will have the legitimacy of the UN and, therefore, Iran will be isolated. In short, Iran must realize that, (i) it cannot afford to lose in the court of public opinion, and (2) while it might win the current battles with the EU troika, it may lose the ultimate war at the Security Council.

(3) Although Iran is entitled to having the complete cycle for producing enriched uranium, it does not have any urgent need for it. The fuel for the Bushehr reactor has been guaranteed by Russia, and any new reactor to be constructed in Iran is years away. Thus, once again, there is no need to put Iran in a position where the War Party in the US may become tempted to attack it, which would inflict immeasurable damage on Iran’s industrial and population centers. Protecting Iran against such attacks is far more important than having the cycle for enriching uranium: Without a prosperous and safe Iran it makes no sense to speak of uranium enrichment.

At the same time, the EU and the US must also realize the following:

(1) Referring Iran to the Security Council is not in the interest of the international community, because in that case Iran may carry out its threat of withdrawing from the NPT. That would destroy the already troubled non-proliferation regime and, instead of full transparency, the IAEA will find Iran back in the pre-2003 era.

(2) In addition to being economically viable and necessary, Iran’s nuclear energy program also has to do with nationalism and pride. If the EU and the US ignore this aspect, it will cause lasting repercussions, setting back the relations between Iran, the US, and the EU for a long time.

(3) In the author’s opinion, the way to address the problem of Iran’s nuclear program is not by threatening it with military strikes, but by providing Iran with incentives to move towards a democratic and transparent political system which would make its nuclear program benign. The Achiles’ heel of Iran’s hardliners is not their possible violation of Iran’s international nuclear obligations that may drag them before the Security Council to bring about their eventual fall, but their violation of human rights of Iranians, including suffocating Iran’s independent press.

(4) It is no accident that Iran’s nuclear program began accelerating in 1997 when Mohammad Khatami was elected president, and began implementing a program of reform and more transparency. Since then, instead of helping Iran’s fledgling democratic movement, which would have inevitably led to transparency in its nuclear program, the US has been hurting it. Whereas Mr. Khatami proposed people-to-people dialogue between the US and Iran, the US has prevented Iranian scholars and authors from publishing their work in the US. Whereas Iran greatly helped the US in the war in Afghanistan, the US bestowed upon it the “honour” of being a member of “Axis of Evil!” In return for the overwhelming victory of Iran’s democratic forces in the 2000 elections for the Majles, the US lifted sanctions against importing Iranian pistachios! The US repeats the claim that Iran does not need nuclear energy because it has plenty of oil and natural gas, yet it has blocked the US oil companies to invest in Iran’s oil industry. It is because of such contradictions in the US policy towards Iran that it is difficult for ANY Iranian leader to trust the US.

The proposals by Iran and the EU both have many positive elements. The Natanz facility remains suspended and sealed, and Iran faces many technical difficulties to operate a complete uranium enrichment cycle. Hence, there is no reason for the EU to panic just because the conversion of the yellow cake to uranium tetra- and hexafluoride, which the IAEA does not even consider as part of an enrichment process, has started. Through patience, flexibility, and mutual understanding, the two proposals can be combined into one coherent proposal that satisfies Iran’s aspirations and the EU’s and the US’ concerns.

References and notes

[1] See, Dafna Linzer, “Past Arguments Don’t Square with Current Iran Policy,” the Washington Post, March 27, 2005.

[2] See Parts IV and V of this series for detailed discussions of this point. See also, T.R. Stauffer, “Unlike Dimona, Iran’s Bushehr Reactor Not Useful for Weapons-Grade Plutonium,” Washington Report on Middle East Affairs (September 2003), p. 28, as well as, http://www.washington-report.org/archives/sept03/0309028.html

[3] A good example of such quasi-democratic groups is an Iranian political journalist based in Europe and his cohorts in Los Angeles. They repeat, VERBATIM, whatever non-sense the neo-conservatives claim about Iraq and Iran. The same people had a “joyous” (sickening to the author though) scream on an Iranian satellite TV channel on March 19, 2003 – the day the US and Britain began their illegal invasion of Iraq – stating their hope and dream that, “Iran will soon have such a day.” What has been happening in Iraq since then has not, of course, made them reconsider their “wish,” simply because they do not understand a simple fact: Without defending Iran’s national interests, it is meaningless to speak of democracy and human rights.

[4] On July 5, 2005, at a joint news conference with France’s Foreign Minister Philippe Douste-Blazy, Secretary of State Condoleezza Rice said, “the United States does not see the need for a civilian nuclear program in oil-rich Iran,” despite the fact that in the same news conference she said that the US strongly supports the EU-Iran neogotiations, and that the EU has recognized Iran’s right and need for NPPs. To read about the news conference see, http://www.state.gov/secretary/rm/2005/48932.htm

[5] M. Sahimi, P. Mojtahedzadeh, and K.L. Afrasiabi, “Iran Needs Nuclear Reactors,” International Herald Tribune, October 14, 2003.

[6] M. Sahimi, “Forced to Fuel: Iran’s Nuclear Energy Program,” Harvard International Review, Volume XXVI (No. 4), Winter 2005, p. 42.

[7] According to the original IAEA Safeguard agreements, Iran was not obligated to declare the start of construction of the Natanz facility for uranium enrichment. These agreements stipulate that, only 180 days before introducing any nuclear material, must Iran declare the existence of the facility. Therefore, construction of the undeclared Natanz facility is NOT by itself a violation of the NPT. In addition, the NPT does allow Iran to legally build any nuclear facility, including one for uranium enrichment, so long as it is declared to, and safeguarded by, the IAEA, and is intended for peaceful purposes.

[8] The latest US National Intelligence Estimate on Iran’s nuclear program states that Iran is about 10 years away from making a nuclear bomb. See, Dafna Linzer, “Iran Is Judged 10 Years From Nuclear Bomb,” The Washington Post, August 1, 2005. To view the article, see, http://www.washingtonpost.com/wp-dyn/content/article/2005/08/01/AR2005080101453.html See also Refs. [19] and [20] below.

[9] This phrase was taken from F. Rich’s column, “Falluja Floods the Superdome,” The New York Times, September 4, 2005.

[10] This is the phrase that Vice President Dick Cheney used frequently prior to invasion of Iraq.

[11] Excellent discussions of Iran’s proposal are given by G. Prather (a physicist who has worked in the Departments of Energy and Defence). See, for example, “What the Neo-Crazies Knew,” August 13, 2005, in http://www.antiwar.com/prather/?article=6269 See also Prather’s August 8, 2005 article, “EU vs. Iran: Who’s Right?” at http://www.antiwar.com/prather/?article=6901

[12] See also, T. Parsi, “Europe’s Mendacity Doomed Iran Talks to Failure,” the Financial Times of London, August 30, 2005. To view the article, see news.ft.com/cms/s/0cfd2c90-1980-11da-804e-00000e2511c8.html

[13] For a thorough analysis of the IAEA report see, K.L. Afrasiabi, “ElBaradei’s Report Deconstructed,” September 7, 2005, at atimes.com/atimes/Middle_East/GI07Ak05.html

[14] Dillip Hiro, “Iran’s Nuclear Ambitions,” the Nation Magazine, September 12, 2005. To view the article see, http://www.thenation.com/doc/20050912/hiro

[15] D. Leglu, Liberation (Paris), April 29, 1984.

[16] See also, Shirin Ebadi and M. Sahimi, “In the Mullahs’ Shadow,” the Wall Street Journal, June 15, 2005.

[17] Estimates on Iran’s natural uranium deposits vary widely. They range anywhere from enough deposits to produce fuel for only one 1000 MW reactor for 6-7 years, which is what the US claims (hence pointing out that such small deposits do not justify an enrichment program, unless it is for military purposes), to much larger amounts cited in Part II of this series. The true amount is likely to be something in between.

[18] See also, F. Mokhtari, “Coping with Iran’s Nuclear Ambitions,” the Los Angeles Times, August 22, 2005. To view the article see, http://www.latimes.com/opinion/printedition/california/la-oe-mokhtari22aug22,1, 1689359.story?coll=la-headlines-pe-california

[19] P. Kerr, “Back to Normal, Iran Nuclear Abilities Limited,” Arms Control Association, September 6, 2005. To view the article see, http://www.armscontrol.org/act/2005_09/IranLimits.asp?print/act/2005_09/IranLimits.asp

[20] See also, A. Cowell, “Nuclear Weapon is Years off for Iran, Research Panel Says,” the New York Times, Wednesday September 8, 2005, p. A11.

Original URL: http://www.payvand.com/news/05/sep/1070.html

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About the author: Muhammad Sahimi is Professor of Chemical Engineering and Materials Science, and NIOC Professor of Petroleum Engineering at the University of Southern California in Los Angeles. Since 1986 he has been a member of the Union of Concerned Scientists – an organization dedicated to preventing the spread of nuclear weapons – and a contributor to its Partners for Earth Program. He has also been a visiting professor in Australia, Europe, and the Middle East, and a consultant to many energy firms around the world. In addition to his scientific work, his political articles have appeared as book chapters, on various websites, and in such publications as the Los Angeles Times and the Wall Street Journal.
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1957 Iran and the United States sign a nuclear cooperation agreement.

1967 United States supplies Iran with a five-megawatt (MW) light-water reactor and related laboratories at the Tehran Nuclear Research Center.

1968 Iran signs the Nuclear Nonproliferation Treaty (NPT), which it ratifies in 1970.

1970s Shah Mohammad Reza Pahlavi signs a series of deals for nuclear technology with the United States (1974), Germany (1976), and France (1977).

1974 Establishment of the Atomic Energy Organization of Iran under Dr. Akbar Etemad, who announces plans to generate 23,000 MW of nuclear energy within twenty years and acquire a full nuclear fuel cycle.

1976 Iran signs contracts with the German company Kraftwerk Union AG (KWU) for twin 1,300 MW light-water reactors to be built near the city of Bushehr, and with the French company Framatome for twin 900 MW light-water reactors to be built on the Karun River.

1979 Islamic Revolution. Nuclear plans are stalled; Ayatollah Khomeini disavows nuclear weapons for the Islamic Republic. Tehran gets into financial disputes with Germany’s KWU, which suspended work on the two Bushehr nuclear reactors; at the time, construction on one reactor was complete and the core nuclear components were ready for shipment.

1980–88 Iran-Iraq War slows progress on nuclear program.

1984 Iraqi warplanes attack Bushehr nuclear complex; the bombing reportedly did not damage the reactor.

1991 China ships just over a ton of natural uranium in various compounds, allowing Iran to carry out undeclared conversion and enrichment experiments throughout the 1990s.

1995 Iran signs a deal with Russia to complete the nuclear reactors at Bushehr.

1995 President Clinton imposes oil and trade sanctions on Iran for seeking to acquire nuclear arms and for undermining the Middle East peace process.

Mid-1990s Pakistan sells Tehran designs, technical drawings, and components for high-speed gas centrifuges used in uranium enrichment.

1996 Congress passes the Iran-Libya Sanctions Act.

February 2002 International Atomic Energy Agency (IAEA) report declares existing and planned nuclear facilities are dedicated to civilian purposes.

August 2002 Iranian political exiles claim that Tehran has constructed a uranium enrichment facility at Natanz and a heavy-water plant at Arak, both of which are suspected of contributing to a weapons development program; Tehran again announces plans to develop a nuclear fuel cycle.

December 2002 Washington analyzes satellite-reconnaissance photos of Natanz and Arak facilities and declares that they are integral to Iran’s “across-the-board pursuit of weapons of mass destruction.” Iran accedes to IAEA request to inspect nuclear facilities.

February 2003 Iranian president Mohammad Khatami announces that Iran is pursuing nuclear fuel cycle. IAEA director-general Mohammed ElBaradei travels to Tehran to inquire about future nuclear plans.

June 2003 ElBaradei reports that Iran fails to meet obligations under Safeguards Agreement by not fully disclosing nuclear activities and imposes October 31 deadline for full disclosure, urges Tehran to agree to more intrusive inspections of the country’s nuclear facilities.

August 2003 IAEA discovers traces of highly enriched weapons- grade uranium at Natanz facility; Tehran later argues that the traces were residual material from Pakistani-supplied equipment.

September 2003 Iran agrees to voluntary NPT Additional Protocol for more intrusive IAEA inspections regime after the agency discovers more traces of enriched uranium at various facilities.

October 21, 2003 EU-3 (Britain, France, and Germany) brokers deal with Iran to cease production of enriched uranium and to formally sign Additional Protocol.

November 2003 IAEA’s ElBaradei claims there is no evidence of Iranian nuclear weapons program; Washington disagrees. Tehran acknowledges producing plutonium, and IAEA invokes censure of the country but makes no sanctions recommendations.

December 18, 2003 Iran signs the Additional Protocol at IAEA headquarters in Vienna.

February 2004 Iran is reported to have purchased nuclear weapons technology from Abdul Qadeer Khan, the “godfather of Pakistan’s nuclear bomb.” IAEA report claims that Iran conducted experiments with fissile material that can be used to trigger nuclear bomb chain reaction. Tehran does not respond to charges but says again that it will cease uranium enrichment program; subsequent inspections fail to show that Tehran has halted uranium enrichment.

March 2004 IAEA urges Tehran to disclose its entire nuclear program by June 1.

June 2004 IAEA criticizes Tehran for attempting to purchase uranium-enrichment equipment and for not cooperating with the agency’s inspectors.

September 2004 Tehran announces it has resumed “large-scale” enrichment program; IAEA orders Iran to stop and to reveal all of its nuclear activities by November 25. U.S. secretary of state Colin Powell asks the UN Security Council to impose sanctions.

November 2004 EU-3 discusses deal with Iran offering trade and nuclear energy incentives in return for Iran’s abandonment of its alleged weapons program. IAEA issues a resolution to Iran to implement the NPT Safeguards Agreement and to abandon all nuclear activities until further inspection. Iran again agrees to cease uranium-enrichment activities for an indefinite period.

January 2005 Tehran allows IAEA inspectors to visit the clandestine nuclear site at Parchin.

February 2005 President Khatami says Iran will never give up nuclear technology but stresses it is for peaceful purposes only. Russia backs Tehran and signs a deal to supply fuel to Bushehr reactor. Defense Intelligence Agency director Vice Admiral Lowell E. Jacoby testifies before Congress that Iran is within five years of having the capability of producing a nuclear weapon—the same estimate U.S. officials have provided since 1995.

March 2005 Iran denies IAEA inspection access at Parchin nuclear facility.

April 2005 Tehran says it plans to resume uranium conversion at Isfahan facility. United States sells Israel special “bunker buster” bombs; some observers suggest that Israel might use the weapons on Iranian underground nuclear-research facilities.

May 2005 European Union says that Tehran’s resumption of uranium enrichment program would cancel trade and energy package being negotiated by EU-3. Tehran waits to see package’s details.

August 2, 2005 In a lead story, The Washington Post says that a recent classified U.S. National Intelligence Estimate determined that Iran is now ten years away from a nuclear weapon–production capability.

August 5, 2005 The EU-3 presents Tehran with a thirty-one-page document offering Tehran economic incentives and security guarantees in exchange for Iran’s abandoning plans to pursue a full nuclear fuel cycle.

August 8, 2005 Tehran rejects EU-3 deal as “absurd, demeaning, and self-congratulatory,” and vows that Tehran will resume an “irreversible” enrichment program, as is its right under the NPT’s Article IV.

August 10, 2005 Iranian technicians break UN seals on equipment at Isfahan plant under the supervision of IAEA inspectors; Tehran notifies the agency that it is resuming uranium conversion at the site. IAEA installs surveillance cameras at site to verify that no uranium is diverted.

August 11, 2005 IAEA adopts resolution drafted by the EU-3 calling on Iran to halt nuclear reprocessing activity at Isfahan.

September 2, 2005 An IAEA report says that Iran has produced seven tons of uranium hexafluoride—the gaseous compound that is spun in special centrifuges to produce enriched uranium—since activity resumed at the Isfahan plant. The report highlights Iran’s eighteen years of clandestine nuclear activity and says that the agency is still unable “to conclude that there are no undeclared nuclear materials or activities in Iran”; the report calls for “access to individuals, documentation related to procurement . . . certain military-owned workshops, and research and development locations.”

September 17, 2005 In a defiant speech before the UN General Assembly, Iranian president Mahmoud Ahmadinejad announces that his country will not relinquish its “right to pursue peaceful nuclear energy”; U.S. officials consider asking for IAEA vote to refer the Iranian matter to the UN Security Council for imposition of sanctions against Iran.

September 24, 2005 IAEA Board of Governors passes a resolution stating that Iran’s transparency on its nuclear program is “indispensable and overdue.” Stopping short of referring Iran to the United Nations, the resolution notes that outstanding issues are “within the competence of the [UN] Security Council.”

http://www.atimes.com/atimes/Middle_East/JC04Ak03.html
The ‘laptop of mass destruction’
By Gareth Porter

http://www.armscontrolwonk.com/1083/irans-march-2003-offer
Iran’s plans to enrich uranium involved no subterfuge until the US prevented it. In fact IAEA inspectors visited Iran’s uranium mines in 1992, and the discovery of uranium was openly announced in 1982, and in 1983 the US prevented the IAEA from entering into technical cooperations with Iran to develop the fuel cycle. That’s when Iran started going underground. So, if anyone has violated the NPT, it is the US. And while Iran was forced to resort to subterfuge to obtain centrifuge parts which resulted in breaches of their safeguards agreements (not the same as NPT violations) the IAEA determined that none of the undeclared activity was related to a weapons program. Finally, note that several other countries have been caught conducting secret nuclear experiments—S. Korea, Egypt among them—and yet no one is claiming that they magically lost their rights under the NPT. The IAEA and the NPT have remedying mechanisms, and Iran has abided by them according to the IAEA. Iran has even exceeded its NPT obligations in many instances. However, nothing in the NPT or the IAEA Charter or Statutes permit the US/EU to deprive other NPT signatories of their rights. And in fact the Iranians have specifically offered to allow more stringent inspections of their enrichment plants despite your statement. And as for the economics, the Stanford Research Institute advised the Shah that Iran had to diversify its energy resources in the 1970s, and nothing has changed since then except that Iran’s oil has been depleted even more whilst Iran’s population has tripled, making diversification even more necessary.

http://www.globalsecurity.org/wmd/library/news/iran/2006/iran-060421-usia02.htm
21 April 2006
Researchers Find Iranian Nuclear Program Economically Wasteful

Study suggests program inconsistent with Iran’s resources, energy needs

By David Shelby

http://www.dni.gov/press_releases/20071203_release.pdf

A. We judge with high confidence that in fall 2003, Tehran halted its nuclear weapons
program1; we also assess with moderate-to-high confidence that Tehran at a minimum is
keeping open the option to develop nuclear weapons. We judge with high confidence
that the halt, and Tehran’s announcement of its decision to suspend its declared uranium
enrichment program and sign an Additional Protocol to its Nuclear Non-Proliferation
Treaty Safeguards Agreement, was directed primarily in response to increasing
international scrutiny and pressure resulting from exposure of Iran’s previously
undeclared nuclear work.
• We assess with high confidence that until fall 2003, Iranian military entities were
working under government direction to develop nuclear weapons.
• We judge with high confidence that the halt lasted at least several years. (Because of
intelligence gaps discussed elsewhere in this Estimate, however, DOE and the NIC
assess with only moderate confidence that the halt to those activities represents a halt
to Iran’s entire nuclear weapons program.)
• We assess with moderate confidence Tehran had not restarted its nuclear weapons
program as of mid-2007, but we do not know whether it currently intends to develop
nuclear weapons.
• We continue to assess with moderate-to-high confidence that Iran does not currently
have a nuclear weapon.
• Tehran’s decision to halt its nuclear weapons program suggests it is less determined
to develop nuclear weapons than we have been judging since 2005. Our assessment
that the program probably was halted primarily in response to international pressure
suggests Iran may be more vulnerable to influence on the issue than we judged
previously.
B. We continue to assess with low confidence that Iran probably has imported at least
some weapons-usable fissile material, but still judge with moderate-to-high confidence it
has not obtained enough for a nuclear weapon. We cannot rule out that Iran has acquired
from abroad—or will acquire in the future—a nuclear weapon or enough fissile material
for a weapon. Barring such acquisitions, if Iran wants to have nuclear weapons it would
need to produce sufficient amounts of fissile material indigenously—which we judge
with high confidence it has not yet done.

http://carnegieendowment.org/publications/index.cfm?fa=view&id=22601&prog=zgp&proj=znpp
Nuclear Security Spending: Assessing Costs, Examining Priorities
Stephen I. Schwartz, Deepti Choubey Carnegie Endowment Report, January 2009

The United States spent over $52 billion on nuclear weapons and related programs in fiscal year 2008, but only 10 percent of that went toward preventing a nuclear attack through slowing and reversing the proliferation of nuclear weapons and technology. That is the main finding of Nuclear Security Spending: Assessing Costs, Examining Priorities, a new study that uses publicly available documents and extensive interviews with government officials and experts to calculate the U.S. nuclear security “budget.” The United States has never tracked nuclear weapons-related spending comprehensively, hindering effective oversight and weighing of priorities in nuclear security policy.

The lack of comprehensive accounting impairs balancing of priorities and fosters the impression that the United States is more interested in preserving and upgrading its nuclear arsenal than in reducing and eliminating the growing threats of nuclear proliferation and limited nuclear or radiological attack. Because classified expenditures and some other relevant costs are omitted from the analysis, total actual spending is significantly higher.

Key Conclusions

* Only 1.3 percent ($700 million) of the nuclear security budget was devoted to preparing for the consequences of a nuclear or radiological attack.

* Another 56 percent of the total went toward operating, sustaining, and upgrading the U.S. nuclear arsenal.

* Nuclear security consumes $13 billion more than international diplomacy and foreign assistance; nearly double what the United States allots for general science, space, and technology; and 14 times what the Department of Energy (DOE) budgets for all energy-related research and development.

* Nuclear weapons and weapons-related programs account for at least 67 percent of DOE’s budget, 8.5 percent of the FBI’s budget, 7.1 percent of the Department of Defense budget, and 1.7 percent of the Department of Homeland Security’s budget.

Policy Recommendations

* Require the executive branch to submit both an unclassified and a classified annual accounting of all nuclear weapons-related spending. Without an accurate understanding of the costs of nuclear spending, Congress and the executive branch cannot conduct essential oversight or devise the most effective policy.

* Place greater emphasis on programs that secure and prevent the proliferation of nuclear weapons, weapons material, technology, and expertise.

* Develop better measures to explain and quantify nuclear weapons-related intelligence expenditures. Greater transparency and insight could lead to a more effective allocation of intelligence assets.

* Release an accurate accounting of the number of veterans who have received or been denied compensation and care for radiation exposure during atmospheric nuclear tests between 1946 and 1962, along with the total cost of such compensation and care.

The authors conclude:

“Implementing these recommendations will increase understanding and accountability, which in turn will lead to greater public support for critical nuclear security programs and a more effective allocation of public resources. When combined with a new focus on nuclear issues, including the Obama administration’s forthcoming Nuclear Posture Review, these efforts will help ensure that political and financial priorities are properly aligned.”

About the Authors
Stephen I. Schwartz is the editor of The Nonproliferation Review, published by the James Martin Center for Nonproliferation Studies at the Monterey Institute of International Studies, the largest nongovernmental organization in the United States devoted exclusively to research and training on nonproliferation issues. He is also the editor and coauthor of Atomic Audit: The Costs and Consequences of U.S. Nuclear Weapons since 1940 (Brookings Institution Press, 1998), the authoritative chronicle of historical expenditures associated with the U.S. nuclear weapons program. Schwartz has previously served as publisher and executive director of the Bulletin of the Atomic Scientists, and as a guest scholar with the Foreign Policy Studies Program at the Brookings Institution.

Deepti Choubey is deputy director of the Nonproliferation Program at the Carnegie Endowment. Her research interests include the calculations of non–nuclear-weapon states, how much the U.S. spends on nuclear security, and the role of nonproliferation for long-term U.S. foreign policy. Prior to joining the Carnegie Endowment in 2006, Choubey was director of the Peace and Security Initiative (PSI) for the Ploughshares Fund.

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# Wipe Out Israel Misquote #
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“the imam said this regime occupying jerusalem must vanish from the page of time.”

Bravo, I was sincerely losing my hopes in you. So first of all, he didn’t say those words, he was “quoting” some other douche bag — in a context of time. Second, he is calling for a regime [Zionist] change, not a “fatwa” to end the Israel. It’s as if I say, drive Talibans out of such and such region; I am not certainly implying to “wipe” out Afghanistan, the country, DO I? Same goes the other way around: If I claim that I wish for a regime change in Iran, that does not constitute of annihilation of Iranian people, DOES IT? HINT: NO. Where the fuck did someone get the word “map” mixed in there anyway? It’s obvious, your precious corporate media is spinning everything to cook up distorted misinformation and spoon feed it to a cretinous sucker like you. So you can finally have something to bitch about this weekend. Even the NY Times backed away from this translation. You just made fool of yourself, take your ignominious sorry ass back to where you come from.

“are you sure you meant to call mr. ahmadinejad another douchebag?”

Go back and get your GED moron. Do I have to elaborate word by word of my every utterance? He [Ahmadinejad] quoting another douchebag [Khomeini] — do I have to spoon feed you everything?

“vanish from the page of time…” AND… you swallowed the rest of context. Your half-ass attempt for taking words out of context is risible. “Vanich from the page of time ____” fill-in the blank: “my kitty?” “wallaby’s grotesque deformed third nipple?” You are so fucking out of it that even took the subject out of the sentence, holding it up and saying this guy is about to “vanish” _SOMETHING_. What does he want to vanish? No, not your grade school diploma, the Zionist regime.

“what could be a bigger problem than mr. ahmadinejad’s al-taqiyya in everything he says for release in america but not in iran?”

There is not title Mr. and there is no al-fuckyou. Do you watch Spanish soap opera all day long? Quit doing that, then come here maybe I can make you understand how to deal with your childhood issues.

“as a good muslim and true servant of allah”

HAHA! You called a mullah-boy a “good Muslim.” Oh man, that’s actually hilarious. “Servant of Allah…” haha. That’s as if you claim a televangelist is a “true” Christian. Quit sucking on your pacifier…

“the remark was never taken out of context”

Oh, so misquoting is more valid than taking out of context? You lose. I suggest you brush up on your religious hermeneutics before you try to interpret a prophetic statement.

“would you be concerned if someone said, the regime of iran ‘must vanish from the page of time?'”

*sigh* Didn’t I just give you that EXACT analogy? Repitition is a clear indication that one is losing the argument, and he knows it.

“what does ‘risible’ mean?”

risible \RIZ-uh-buhl\, adjective:
1. Capable of laughing; disposed to laugh.
2. Exciting or provoking laughter; worthy of laughter; laughable; amusing.

Remember what I said about spoon feeding you? Stop embarrassing yourself. Oh ya, I forgot, in the U.S., parents get one of those “honor student” stickers when a kid is graduated from the grade school. I bet yours robbed you from that epsecial moment, didn’t they?

“i have no idea who mr. ahmadinejad quoted. regardless, we have the same estimation of the ayatollah.”

Then why don’t you just shut your mouth sealed with a venereal wartz. You don’t even know what the title ayatollah designated for or else you wouldn’t have slapped it on a dead mullah.

“validity is immaterial. “misquoting” is the truth. “taking our of context” is not.”

Your statement is linguistically and semantically vacant — talking about infinitly absolute negativity. You admitted to such grotesque misquotation, now you are desperately trying to play a run-around game to save your pathetic intigrity — you lost, get over it.

“why is almost every muslim afraid to discuss al-taqiyyah with an infidel”

You shooting yourself in the nuts. Mr. anarchist here wants to indulge himself in a mullah’s pants. Why is it almost every inbreed low-life wallows in his failed assumption that the opposition voice must come from an Islamic source? I am not, and I can care less about your fasination with Islamic word games. Quit farting around and rejoin the communal of humanity.

“i used to eat iranian pistachios.”

No wonder you suffer from mild form of retardation. It’s “masturbation” you grammar Nazi. Why is it that your responses are 20 mintues apart from the first one? Occupied with Mrs. Palmer and her five slut daughters? Stick to your underage Japanese hentia masturbatory sessions. Second, there are no Iranian produced pistachios in the U.S. unless you are back stabbing your own country by dealing directly with Iranian suppliers. Your sorry ass probably meant to say Californian pistachio.

“as with mr. ahmadinejad at columbia”

Why is that You keep schmoozing to your “buddy” with titles like “Mr.?” You know what they say, Ahmadinejad’s ex-boyfriend was an American. I wonder who could have been?

“i’m not wealthy or deceitful enough to be a mullah.”

Ya, but you are qualified for euthanasia.

http://www.informationclearinghouse.info/article12790.htm
Does Iran’s President Want Israel Wiped Off The Map – Does He Deny The Holocaust?

An analysis of media rhetoric on its way to war against Iran – Commenting on the alleged statements of Iran’s President Ahmadinejad .

By Anneliese Fikentscher and Andreas Neumann
Translation to English: Erik Appleby

http://plateauofiran.files.wordpress.com/2008/04/ahmadinejad-nozionism.jpg

http://transcripts.cnn.com/TRANSCRIPTS/0604/02/le.01.html
CNN LATE EDITION WITH WOLF BLITZER

Interview With Vicente Fox; Interview With Hoshyar Zebari

Aired April 2, 2006 – 11:00 ET

BLITZER: I have to wrap this up, but I want to get your response to this issue of Israel because it’s become such a prominent issue in this whole discussion over nuclear plans that Iran may or may not have. This is what the president of Iran, Mahmoud Ahmadinejad, said on October 26 at that World Without Zionism conference.

He said, “Israel must be wiped off the map of the world, and god willing, with the force of god behind it, we shall soon experience a world without the United States and Zionists.”

You understand why people in the West, especially here in the United States, are so concerned about your program, your nuclear program, given those kinds of direct threats against Israel, which happens to be a strong ally of the United States.

SOLTANIEH: I want to very briefly remind you that the policy of Islamic Republic of Iran and according to spirit and letter of our constitution is against any sort of school of thought or regime such as apartheid, Zionism, racism, and this is a matter of principle.

Therefore, what you are talking about as apartheid was disappeared and it could not be accepted by civilized world, this Zionism and aggression of racism is also condemned.

BLITZER: Does your support for the removal of Zionism mean you want to see Israel destroyed?

SOLTANIEH: I have already explained to you and reflected to you the policy echoed by our supreme leader.

It means that if in that region, the divine religion followers of the Jews, Christians and Muslims, that all three are very respectful — and we have Jews in Iran, which are peacefully living and they are represented in our parliament, they are fully respected — if they come with the Palestinians, homeless Palestinians, to come and through following the democratic process will decide on a government and live in peace as they were living a thousand years of coexistence of these divine religions, Iran will support because we are looking for and we support peaceful settlement of the whole issue and peaceful coexistence of these divine religions in the Middle East. Let’s hope for the peace.

BLITZER: But should there be a state of Israel?

SOLTANIEH: I think I’ve already answered to you. If Israel is a synonym and will give the indication of Zionism mentality, no.

But if you are going to conclude that we have said the people there have to be removed or we they have to be massacred or so, this is fabricated, unfortunate selective approach to what the mentality and policy of Islamic Republic of Iran is. I have to correct, and I did so.

http://english.khamenei.ir//index.php?option=com_content&task=view&id=73&Itemid=4
Leader’s Speech to Government Officials on the Eid-al-Fitr
04/11/2005

We hold a fair and logical stance on the issue of Palestine. Several decades ago, Egyptian statesman Gamal Abdel Nasser, who was the most popular Arab personality, stated in his slogans that the Egyptians would throw the Jewish usurpers of Palestine into the sea. Some years later, Saddam Hussein, the most hated Arab figure, said that he would put half of the Palestinian land on fire. But we would not approve of either of these two remarks.

We believe, according to our Islamic principles, that neither throwing the Jews into the sea nor putting the Palestinian land on fire is logical and reasonable. Our position is that the Palestinian people should regain their rights. Palestine belongs to Palestinians, and the fate of Palestine should also be determined by the Palestinian people.

The issue of Palestine is a criterion for judging how truthful those claiming to support democracy and human rights are in their claims. The Islamic Republic of Iran has presented a fair and logical solution to this issue. We have suggested that all native Palestinians, whether they are Muslims, Christians or Jews, should be allowed to take part in a general referendum before the eyes of the world and decide on a Palestinian government. Any government that is the result of this referendum will be a legitimate government.

http://www.dominicantoday.com/dr/world/2006/5/8/13207/Peres-says-that-Iran-can-also-be-wiped-off-the-map
Peres says that Iran ‘can also be wiped off the map’
World – 8 May 2006, 2:41 PM

Jerusalem.– Vice Premier Shimon Peres said Monday in an interview to Reuters that “the president of Iran should remember that Iran can also be wiped off the map,” Army Radio reported.

http://www.time.com/time/magazine/article/0,9171,1535777-2,00.html
“We Do Not Need Attacks”
By SCOTT MACLEOD

Sunday, Sep. 17, 2006

TIME: You have been quoted as saying Israel should be wiped off the map. Was that merely rhetoric, or do you mean it?

Ahmadinejad: People in the world are free to think the way they wish. We do not insist they should change their views. Our position toward the Palestinian question is clear: we say that a nation has been displaced from its own land. Palestinian people are killed in their own lands, by those who are not original inhabitants, and they have come from far areas of the world and have occupied those homes. Our suggestion is that the 5 million Palestinian refugees come back to their homes, and then the entire people on those lands hold a referendum and choose their own system of government. This is a democratic and popular way. Do you have any other suggestions?

TIME: Do you believe the Jewish people have a right to their own state?

Ahmadinejad: We do not oppose it. In any country in which the people are ready to vote for the Jews to come to power, it is up to them. In our country, the Jews are living and they are represented in our Parliament. But Zionists are different from Jews.

TIME: Have you considered that Iranian Jews are hurt by your comments denying that 6 million Jews were killed in the Holocaust?

Ahmadinejad: As to the Holocaust, I just raised a few questions. And I didn’t receive any answers to my questions. I said that during World War II, around 60 million were killed. All were human beings and had their own dignities. Why only 6 million? And if it had happened, then it is a historical event. Then why do they not allow independent research?

http://www.reuters.com/article/worldNews/idUSHOS43245220080514?feedType=RSS&feedName=worldNews
Iran’s Ahmadinejad says Israel “dying”
Wed May 14, 2008 11:35am EDT

“The Zionist regime is dying,” Ahmadinejad said in a speech in the northern city of Gorgan, referring to Israel. “The criminals imagine that by holding celebrations … they can save the Zionist regime from death.”

“They should know that regional nations hate this fake and criminal regime and if the smallest and briefest chance is given to regional nations they will destroy (it),” said Ahmadinejad, who often rails against Israel and the United States.

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http://www.globalsecurity.org/military/world/iran/index.html
Iran Military Guide

http://bp1.blogger.com/_d9AzDb4aoDo/R19z4Rcb_HI/AAAAAAAAAIo/2yrNeoBKYac/s1600-h/hejab.jpg
There is no compulsary in Hijab

http://www.militaryphotos.net/forums/showthread.php?t=129494
Bluffer’s Guide: Fortress Iran
Planeman 02/2008

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http://www.democracynow.org/2008/9/26/iranian_president_mahmoud_ahmedinejad_on_iran
September 26, 2008

Iranian President Mahmoud Ahmadinejad on Iran-Iraq Relations, Iran’s Persecution of Gays and the Future of Israel-Palestine
AMY GOODMAN: July 19th is a day that is honored around the world, where two gay teenagers, Iranian teens, were hung. This is a picture of them hanging. They were two young men, named Mahmoud Asgari and Ayaz Marhoni. Do you think gay men and lesbians should die in Iran?

PRESIDENT MAHMOUD AHMADINEJAD: [translated] No, there is no law for their execution in Iran. Either they were drug traffickers or they had killed someone else. Those who kill someone else or engage in acts of rape could be punished by execution. Otherwise, homosexuals are not even known who they are to be hung, in the second place. So, we don’t have executions of homosexuals. Of course, we consider it an abhorrent act, but it is not punished through capital punishment. It’s basically an immoral act. There are a lot of acts that can be immoral, but there’s no capital punishment for them.

I don’t know where you obtained these pictures from. Either they’re a network of drug traffickers or some other—or people who generally might have killed someone else. You know that we take our sort of social security seriously, because it’s important. What would you do in the United States if someone picked up a gun and killed a bunch of people? If there is a person to complain, then there’s capital punishment awaiting the person. Or drug traffickers, if they carry above a certain amount, volume, of drugs with them, they can be executed in Iran.

http://www.youtube.com/watch?v=9b4uK2MXIh0
Gays and transsexuals party

http://query.nytimes.com/gst/fullpage.html?res=9E0DE0D91F3DF931A3575BC0A9629C8B63
As Repression Eases, More Iranians Change Their Sex By NAZILA FATHI
Published: August 2, 2004

http://www.guardian.co.uk/world/2005/jul/27/gayrights.iran
Wednesday July 27 2005

A fatwa for freedomMaryam Molkara was a woman trapped in a man’s body. She was also living under Islamic law in the Iran of Ayatollah Khomeini. Yet, as Robert Tait reports, her determination to confront the hallowed leader has made Tehran the unlikely sex-change capital of the world

http://hrw.org/english/docs/2006/01/25/iran12535.htm
United Nations: U.S. Aligned With Iran in Anti-Gay Vote
Rice Must Explain Repressive UN Ban on LGBT Rights Groups

This vote is an aggressive assault by the U.S. government on the right of sexual minorities to be heard. It is astonishing that the Bush administration would align itself with Sudan, China, Iran and Zimbabwe in a coalition of the homophobic

http://www.foxnews.com/story/0,2933,301043,00.html
Ahmadinejad Says Comments About Gays Were Misunderstood
Tuesday, October 30, 2007

Kalhor told Reuters that Ahmadinejad did not intend to imply that there are no homosexuals in Iran. Rather, he said, the president wanted to say that homosexuality is not as common as it is in the West because of cultural and religious differences.

http://www.iranica.com/articles/v12f4/v12f4026c.html#Persian

A sharp contrast exists between the treatment of homosexuality in Islamic law, on the one hand (see ii. above), and its reflection in Persian literature, particularly poetry (the chief vehicle of Persian literary expression), on the other. From the dawn of Persian poetry in the ninth century all through to the twentieth century, not only was homosexuality condoned in Persian poetry, but in fact homoeroticism formed almost the only amatory subject of Persian ghazals (short sonnet-like lyrics) and the main topic of much of Persian love poetry.

http://365gay.com/Newscon07/11/111307iran.htm
Iranian Official Confirms Gay Executions by 365Gay.com Newscenter Staff
Posted: November 13, 2007

In 2005 two young men hanged in a public square in northern Iran after were alleged to have been found guilty of homosexuality. (story) The government claimed they had been convicted of kidnapping and raping a male teen.

http://news.bbc.co.uk/2/hi/middle_east/7130380.stm
Iranian hanged after verdict stay
Thursday, 6 December 2007

Amnesty says five minors have been executed in Iran in 2007 An Iranian man has been hanged for rape despite his alleged victims withdrawing their accusations and a judicial review being ordered into the sentence. Makwan Mouloudzadeh, 20, had been found guilty of raping three teenage boys when he was 13 years old

http://gayswithoutborders.wordpress.com/2007/12/05/iran-makwan-mouloodzadeh-was-executed-in-kermanshah-central-prison-at-5-am-this-morning/
Iran: Makwan Moloudzadeh Was Executed in Kermanshah Central Prison at 5 a.m., This Morning, December 5, 2007

Mr. Mouloodzadeh was a 21-year-old Iranian citizen who was accused of committing anal rape (ighab) with other young boys when he was 13 years old. However, at Mr. Mouloodzadeh’s trial, all the witnesses retracted their pre-trial testimonies, claiming to have lied to the authorities under duress. Makvan also told the court that his confession was made under coercion and pleaded not guilty. On June 7, 2007, the Seventh District Criminal Court of Kermanshah in Western Iran found him guilty and sentenced him to death. Despite his lawyer’s appeal, the Supreme Court upheld his death sentence on August 1, 2007. The case caused an international uproar, and prompted a letter writing campaign by IGLHRC and similar actions by Amnesty International, Human Rights Watch, Outrage! and Everyone Group.

http://current.com/items/76312142_transsexuality_in_iran
Transsexuality in Iran
May 31, 2006

http://www.ecoi.net/file_upload/mv100_cois2001-irn.pdf
UNHCR/ACCORD: 7th European Country of Origin Information Seminar
Berlin, 11-12 June 2001 – Final report

There have been reported instances of stoning in the past few years. However, the last report of the UN Special Representative for Iran (dated 8 September 2000) indicates that stoning appears finally to be declining in Iran. In March 2000, the press quoted the Ministry of Justice spokesperson as stating that stoning may not be in the country’s interest, and that the Head of the Judiciary believes that it should avoid acts which could insult and taint the country’s image. (for recent cases of stoning please see p. 24-25 of this report)

Although homosexuality is never spoken about and thus a hidden issue, in practice it is not difficult to encounter homosexuals in Iran. There are special parks in Tehran, known as homosexual meeting places. There are also a large number of transvestites walking around in North Tehran. Furthermore, sex changes are permitted in Iran and operations are frequently and openly carried out. A different sexual orientation may, however,
create problems. Still, homosexuality is practised every day, and as long as this happens behind closed doors within your own four walls, and as long as people do not intend to proselytize ‘transvestitism’ or homosexuality, they will most likely remain unharmed.

From a legal point of view it is important to take a look at Iranian law (the Islamic Punishment Act), which carries the following provisions for homosexual acts:

Art. 110: The prescribed punishment for homosexual relations in case of intercourse is execution and the mode of the execution is at the discretion of the religious judge.

Art. 111: Homosexual intercourse leads to execution provided that both the active and the passive party are of age, sane and consenting.

Art. 112: Where a person of age commits homosexual intercourse with an adolescent, the active party shall be executed and the passive party, if he has not been reluctant, shall receive a flogging of up to 74 lashes.

Art. 113: Where an adolescent commits homosexual intercourse with another adolescent, they shall receive a flogging of up to 74 strokes of the whip unless one of them has been reluctant.

Art. 114 to 126 establish how to prove homosexual intercourse.

Art. 127 to 134 relate to lesbian sexual relations. Punishment for sexual intercourse among lesbians is 100 lashes and in case of recidivity (3 times) execution.

So far, UNHCR has not been able to trace any cases of execution only on the grounds of homosexual relations. In fact, the burden of proof is quite high and it would be difficult to prove homosexual liaisons or intercourse. According to some reports in local papers there have been instances of execution of homosexuals. It is not confirmed whether the homosexual act alone led to execution or whether the person was accused on other charges too.

http://www.safraproject.org/Reports/SP_Country_Information_Report_Iran.pdf

Art. 121-122: Tafhiz (the rubbing of the thighs or buttocks) and the like committed by two men is punished by 100 lashes. On the fourth occasion, the punishment is death.

Female sexual relations7

Art. 127: Mosaheqeh (lesbianism) is the homosexuality of women by genitals.

Art 128: The ways of proving lesbianism are the same by which the homosexuality (of men) is proved

Art 129: Punishment for lesbianism is one hundred (100) lashes for each party

Art 130: Punishment for lesbianism will be established vis-à-vis someone who is mature, of sound mind, has free will and intention. Note: In the punishment for lesbianism there will be no distinction between the doer and the subject as well as a Muslim or non-Muslim.

Art 131: If the act of lesbianism is repeated three times and punishment is enforced each time, (a) death sentence will be issues the fourth time.

Art 132: If a lesbian repents before the giving of testimony by the witnesses, the punishment will be quashed; if she does so after the giving of testimony, the punishment will not be quashed.

Art 133: If the act of lesbianism is proved by the confession of the doer and she repents accordingly, the shari’ah judge may request the leader (valie amr) to pardon her.

Art 134: If two women not related by consanguinity stand naked under one cover without necessity, they will be punished to less then (one) hundred (100) lashes (taazir). In case of it?s repetition as well as the repetition of punishment, (one) hundred (100) lashes will be hit the third time.

Evidence & Repentance
Articles 114 to 126 establish how to prove homosexual intercourse. In summary, the required evidence can be any of the following:

– four confessions from the accused, or
– the testimony of four righteous men who witnessed the act, or
– through the knowledge of a Shari’ah judge derived through customary methods?

Articles 125 and 126 further specify that if sodomy, or the lesser crimes referred to above, are proved by confession, and the person concerned repents, the Shari’ah judge may request that he be pardoned. If a person who has committed the lesser crimes, i.e. homosexual activities other than sodomy, repents before the giving of testimony by the witnesses, the punishment is quashed.

Regarding the quashing of penalties as a result of repentance, the UK Home Office?s CIPU report quotes a Canadian IRB report of May 1997, allegedly stating that ?if the accused repents before the witnesses testify, the penalty will be quashed”

lol,I don’t know where you hear that but it is a big fat lie,Iran is the #1 country to hang gays just look it up at the internet,sometime ago an Iranian cleric visited an American university and he said that there were no gays in Iran and that homosexuality was a western disease.

Wow, as an inspiring journalism major, you sure know jack shit about anything unless working at Faux News is what you are aiming for. Shirley honey, I hate to break this to you, but it is not too late to seek another more less ethically challenged career where plausible deniability can be creamed as the tenet of your unfounded credence. I lived 2/5 of my life in Iran and sure hell know far more than someone who passively accepts every piece of trash he happens to read on the Internet.

For crying out loud, even adhering to your failed journalistic approach, a quick look on the Internet should leave no doubts in veracity of my statement. There is no denying that transsexuality, not only isn’t illegal, but actually encouraged by the government. What other country would even come close to that?

current. com/items/76312142_transsexuality_in_iran

guardian .co. uk/world/2005/jul/27/gayrights.iran

Your pointless gabber was debunked.

Now as far as homosexuality, I can attest to the fact that there are many such cliques who congregate at designated parks and homes. In my neighborhood, there was a house famous for gay hangout and a pizza parlor no farther than 15 mins walking distance always packed with gays and lesbians. What you do not cognizant of is that as long as ANY establishment keeps a “low profile” and most importantly is not a critique of the regime, it would not be harassed.

So, it does not matter whether you are running an art center or even a religious establishment, if you go up against the regime, you get sacked. Finally, if your entire preception is shaped around one or two reports, which you have miserably misconstrued, then I suggest you go back and re-read them. The latest execution incident reported was NOT due to homosexual activity but rather an alleged “rape of a MINOR.”

Ya, the perpetrator was a male so was the victime which makes him “gay.” But that doesn’t change the fact that he was hung due to sodomizing a 13-year-old. Iran is not a safe haven for gays but also nothing like what it has been portraited either. As a matter of fact, according to UNHCR, “So far, UNHCR has not been able to trace any cases of execution only on the grounds of homosexual relations.”

ecoi. net/file_upload/mv100_cois2001-irn. pdf

“Iranian cleric visited an American…”

Stop embarrassing yourself with your misinformed, self-congratulatory remarks. He was a president of Iran, Ahmadinejad, and he is NOT a cleric. Second, he did not stay “there are NO homosexuals;” as someone who is verse in Farsi language and knowledge of intentional distortion of information purported by regularly media, I can tell you this, what he said was mistranslated. He claims that homosexualy “is not as common as” it is in the West, which is true.

His notion of homosexuality being a “problem” was clearly stated in his utterance that, “We do not have such ‘problem’.” Just like “wipe out Israel off the map” quote which was taken out of context, this one surely followed the same pattern. Go edcuate yourself and stop schmoozing to the mainstream media.

Oh ya, by the way, if you are inviting gays to this country where Hagee and Robertson are armed to teeth with their anti-gay mentality, go no further than our one and only Westboro Baptist Church:

godhatesfags. com/visual/photos/fagseatpoop. jpg
godhatesfags. com/visual/photos/pedophilerapeenablers. jpg

Or perhaps president Bush who stated he wouldn’t mind homosexuals but he would not allow them to work in his office — talking about blatant discrimination. Since when the US cared about “people” let alone gays. Get off of your high horses man.

By this time many people I am writing to will have
received the calls for July 19 demonstrations to
commemorate what are widely identified as the hangings
of two “gay†teenagers in Mashhad, Iran last year.

Human Rights Watch has spent the last seven months
researching a report on human rights abuses based on
sexual orientation and gender identity in Iran. We
have amassed a great deal of information about the
situation there. We have campaigned against a range
of human rights abuses in Iran for decades (for a
rundown of some of the other issues we’ve addressed,
see http://hrw.org/doc?t=mideast&c=iran). Because some
of that information may be useful to you in deciding
whether or how to participate in these demonstrations;
because HRW has already been cited, not always
accurately, in some of the controversies around the
demonstrations; and because those controversies are
already becoming angry and vituperative, I want to
share some of our perspectives on the claims that are
now being made about Iran: as well as an explanation
of why HRW isn’t endorsing these events.

*FIRST:* The demonstrations revolve around the central
claim that the two young men who were hanged in 2005
were “gay,†were lovers, and were hanged for
consensual homosexual conduct. This claim is largely
based on speculation. Initial accounts in the
Farsi-language press inside and outside Iran—most
notably a detailed story in the local Mashhad
newspaper on the morning before the boys’ execution
in 2005—described how they were convicted of the
rape, at knifepoint, of a 13-year-old boy. The only
reason the claim that the boys were hanged for
consensual homosexual relations gained currency in the
first place was a mistranslation of the initial press
report dealing with the alleged rape. (See below for
details.)

The mistranslation was circulated round the world,
then refuted. I am afraid that while various parties
have let their reputations hang on “proving†the
consequent story of consensual relations, no direct
evidence has been introduced which substantively
supports it. (The best single account of how the story
of “gay hangings†story achieved currency remains
Richard Kim’s, at
http://www.thenation.com/doc/20050815/kim).

From the beginning, HRW has said that:

– It is impossible to reach a final conclusion
about the criminal trial in Mashhad, given the opacity
of the Iranian justice system and the authoritarian
system in general, media censorship included.

– The preponderance of evidence suggested that
the youth were tried on allegations of rape, with the
suggestion that they were tried for consensual
homosexual conduct seemingly based almost entirely on
mistranslations and on cursory news reporting
magnified by the Western press.

– There is no basis for imputing a Westernized
“gay” identity to these youths. We have no idea what
their behavior was or how they would have identified
themselves, given the complexities around identity and
sexuality in Iran.

We have also stressed that:

– The sentence passed on the youths violated human
rights in multiple ways. It deserved the strongest
condemnation. (See our letter to the head of
Iran’s judiciary about the case,
http://hrw.org/english/docs/2005/07/27/iran11487.htm.)

– One case should not be used as a barometer to judge
the level of legal repression of homosexual conduct.

– In Iran, it can be documented that such conduct
incurs both torture and the death penalty. Meaning,
among other things, that no LGBT-identified Iranian
asylum seeker should be sent back there.

(More information about all these issues can be found
immediately following this message.)

A period of several months followed, after the
publicity given Mashhad, during which Iranian
(non-LGBT!) diasporic organizations were desperately
trying to identify virtually every single execution
that happened in Iran as gay-related. The reason was
simple: they suddenly had a naïve but attentive
audience which would pay attention to information
about human rights abuses in Iran.

Some reporters—particular Doug Ireland—seized
uncritically on these stories and painted a picture of
a “intensifying reign of terror†or “pogromâ€
against gay men going on in Iran. None of these cases
were ever proven to involve consensual sex; most
clearly did not. Some of them clearly involved
*heterosexual* rape! While Doug Ireland and others are
claiming that the Ahmedinejad regime is carrying out a
massive crackdown on gays, there is no evidence for
this. The evidence suggests a steady pattern of
police repression over at least a decade, but
assertions that a “pogrom†is now going on are
unfounded in fact.

Why do these details matter, if repression in Iran is
real?

Because crying wolf is a bad strategy for achieving
change. Because if human rights advocates don’t
deal in facts instead of speculation, they lose all
credibility in future crises. Because (as explained
below) these misrepresentations actually work against
the interests of Iranian asylum-seekers abroad who
need real support for their cases, not unproveable
claims. Because a whole campaign of demonstrations
predicated on a single murky case could actually play
into the hands of the Iranian government if these
claims are proven wrong.

Finally, I am deeply disturbed by the apparent
indifference of many people to the alleged rape of a
13-year old. Nothing justifies torture and the death
penalty. They are utterly unacceptable punishments
for any crime. Still, many advocates around the
Mashhad case disagree with this–or feel they cannot
condemn the treatment of the two executed youths
unless they were “gay†in a Western sense, and
demonstrably “innocent.†Some campaigners as a
result simply dismiss the possibility of violent
sexual assault against another child. This is not a
matter to be passed over lightly.

*SECOND*: The tactics and rhetoric of the organizers
behind the demonstrations have often been, from my
perspective, problematic or even misleading. I have,
I should say, great respect for Doug Ireland’s
reporting in the past. Over the last year, he has
conducted individual interviews with Iranian survivors
of torture and abuse which are authentic and
compelling. However, he has also constructed charges
of an ongoing “pogrom†in Iran out of virtually no
evidence. He has misidentified multiple cases as
“gay killings†on little or no basis whatever. His
rhetoric has gotten wide coverage, but it is not
responsible reporting.

Recipients of this e-mail in the US will probably know
Michael Petrelis, another key organizer of the
campaign; those outside the US may not. To call him a
controversial figure in the gay movement would be an
understatement. Over the past few years—for
example—he has repeatedly allied with right-wing
conservative members of Congress in urging them to
defund HIV/AIDS organizations that engage in
programming for gay people which he regards as
“obscene.†I am not sure how he got involved with
the issue of sexual orientation in Iran, but one could
hardly say that his central role inspires confidence
in the agenda.

Over the weekend, judging by the listserve and e-mail
traffic I’ve seen, attacks on people who raise any
questions about the demonstrations have taken on an
increasingly personal, bullying, and vituperative
tone. Organizers have called dissidents
“childish,†“jejune,†and “liars†; it’s
been suggested that they are “sectarian apologists
for the Islamic Republic of Iran.†(I hope I
don’t need to comment on the level of menace
contained in throwing that language at a person of
color in the US in 2006.) While the organizers have
claimed they are open to different agendas for the
demonstrations, organizers have also suggested that
“There is something seriously wrong with someoneâ€
who voices opposition to the death penalty while
questioning the various versions surrounding the
Mashhad case. Human Rights Watch doesn’t propose
to associate itself with these verbal assaults.

In fact, it’s entirely legitimate to ask of these
demonstrations—as of any demonstration—whom they
are targeting and what they are meant to achieve.
Publicity is not, in itself, a strategy. Anybody who
watches the news knows this is a particularly
sensitive moment in US and European relations with
Iran. US pressure on the Ahmedinejad regime has
mainly succeeded in making it enormously popular
internally (popularity which anecdotal accounts
suggest it may actually be reluctant to endanger at
the moment by expanding intrusive morals policing).
Questions about the facts aside, I would feel more
confident about the call for demonstrations if I saw
signs that the principal organizers in the US and UK
acknowledged this context, or had a clearer sense of
how to change, not just challenge, Iranian policy and
law.

HRW has been working closely for months now with the
Persian Gay and Lesbian Organization (PGLO), a group
of largely diasporic LGBT-identified Iranians
providing support for asylum-seekers and increasingly
trying to advocate for change. Our organizations
don’t agree on everything—nor would Human Rights
Watch, unlike some others, claim to speak for
them–but they are incredible and invaluable and have
helped us document other serious and ongoing abuses. I
urge everyone to support them, and I look forward to
their speaking out with a completely independent voice
on these issues. We are considering convening a
meeting of activists and groups involved with the
Iranian situation, possibly in Toronto after our
report is launched, to plan an intelligible course of
action and advocacy for the future. What is
desperately needed now, it seems clear to me, is
coherent thinking about strategy.

*THIRD*: For the organizers of the July 19
demonstrations, changing Western countries’ asylum
policies with regard to LGBT Iranian refugees is a key
demand. We agree. Those policies are brutal. All the
worst features of refugee policies with regard to
sexuality—-an inability to understand the
complexities of identity, an incomprehension of the
closet, a colluding complicity with the social
imposition of secrecy—come to the fore, coupled with
the post 9/11 mistrust of any and all immigrants from
the Muslim world.

Jessica Stern and I have written over 50 affidavits
for Iranian asylum-seekers persecuted on the basis of
sexual orientation and/or gender identity, in over a
dozen countries, since last November. We’ve
listened to terrifying and moving stories. And we
want to make clear that the single-minded focus of
many advocates on the Mashhad case does not help
asylum-seekers. It pins their fates and lives on a
single undetermined case, rather than on an analysis
of the overall situation in Iran. An unfortunate
side-effect of the whole media firestorm has been
that, in the eyes of governments, “proving” what
happened in Mashhad has become the linchpin for
determining states’ obligations to
asylum-seekers–instead of examining Iran’s overall
and provable record on sexual orientation as well as
other issues, and instead of looking at host
countries’ absolute obligation not to return people to
torture.

Most people need no reminder of the photographs that
were circulated showing last year’s execution in
Mashhad. The pictures show with heartrending intensity
the enormity of executing those youths. Yet in such a
murky case the reasons for mourning will differ
according to people’s interpretations of the
facts–whether they think the youths were “gay,”
whether they see them as victims of torture, whether
they condemn the execution of minors or the death
penalty in general. I do wonder somewhat at the sense
I get from some that their sympathies will be shut off
if the youths can’t be identified, in a way that they
can mirror or share, as “gay.” I also wonder at the
apparent reluctance to listen seriously to women’s
rights campaigners (in Iran and elsewhere) who might
have something to say about the very real prevalence
of rape in a highly patriarchal and often-violent
country; or to listen to children’s rights
campaigners, who might have something to say about
taking lightly charges of sexual abuse against
children.

I’m not a position to make a final statement about
that case, or to offer any conclusive recommendation
about what people should do. HRW is going to
concentrate on releasing its report on abuses based on
sexual orientation and gender identity in Iran, and on
advocating around it. We will not be participating in
these demonstrations: they’re predicated on
speculations too broad and representations too
inpugnable for us to join. However, on HRW’s behalf
I simply urge that people think carefully about the
expressed agendas of the proposed demonstrations,
evaluate the facts–and try to consider what an
effective strategy for changing the ongoing violence
in Iran might actually entail.

Finally, I would ask this note not be posted to
listserves. Precisely for the sake of
asylum-seekers’ cases, we are trying to keep the
questions about this from exploding into the public
eye, where it could do further damage to refugees’
prospects.

I am happy to answer questions at any time. Following
are some further details about the Mashhad case, for
those who are interested.

Sincerely,

Scott Long

Director
Lesbian, Gay, Bisexual and Transgender Rights Program
Human Rights Watch
350 Fifth Avenue, 34th Floor
New York, NY USA 10118
Tel. +01 (212) 216-1297
Fax +01 (212) 216-1876
E-mail: lo…@hrw.org

* * * * * * * * * * *

“Un pajaro de papel en el pecho
Dice que el tiempo de los besos no ha llegado.”
–Vicente Aleixandre

MORE DETAILS ABOUT MASHHAD

The one fact we—and the world– knows for certain is
that two youths in their late teens were executed in
the Iranian city of Mashhad on July 19,2005. The
*initial* reports that the youth were being executed
for “being gay” came down to the translation of a
report on the Farsi-language ISNA website. This
article was dated July 19–thus presumably posted
immediately after the executions– and referred in the
3rd paragraph to their crime only as “lavat”
(“sodomy,” from the Quranic story of Lot). This was
the part that was translated and rapidly circulated in
the Western media.

However: both the headline and the lead to the article
actually described the crime as “lavat beh
onf”–sodomy by coercion. “Onf” is an archaic term
and the article doesn’t use the colloquial term for
rape, but Iranian legal sources, and even the people
in the West who were orginally circulating an account
of the crime as solely “lavat,” agree that this is a
term of art for rape (of a male by a male).

Meanwhile, Quds daily, a local Mashhad newspaper, on
the morning of July 19–even before the
executions–contained a detailed account, apparently
based largely on court papers, of their alleged crime,
which was the rape at knifepoint of a 13- year-old
boy.

Because this information was circulated only later,
after the initial account of executions for “sodomy”
had gone round the globe, the appearance was created
that the Iranian government was in some way trying to
replace an “original” report of an execution for
consensual “sodomy” with a smokescreen story of a
rape. In fact, the chronology was the opposite,
though–the rape story came first, then became,
particularly in the West, a story of execution for
“homosexuality.”

This said, and this is important to stress, *even if*
the charge was rape–and even if the proceedings,
which were held in camera and about which we hence
know nothing substantive, could be considered to have
“proven” it–nothing can justify the execution of
people for offenses committed while minors (or, in our
view, the death penalty itself), the torture they
underwent (228 lashes) or the ferocious public
character of the executions. Professor Anna Enayat of
St Antony’s College, Oxford has documented a number
of the peculiarities of the case in comparison to
other alleged rape cases in Iran–the masked
executioners, the unusual interview on the way to the
gallows–which suggest that the youth were executed in
part as a symbolic gesture. As professor Enayat has
communicated to us, though, this doesn’t necessarily
mean the symbolic gesture was directed at homosexual
conduct per se. More likely, it was meant to show how
severely the regime planned to treat moral offenses in
general.

However, one reason for our persistent skepticism
about the subsequent attempts to prove a) that the
youths were “gay,” b) that they were executed for it,
has to do with this chronology. Several committed
themselves to this version at the start; found that
essentially all the reasons they had endorsed it
disappeared when one looked closely at the media
reports; and then, it would appear, started to search,
retrospectively, for other evidence to support the
claims they’d already made. Neither HRW nor anyone
else can say authoritatively that they are wrong or
right in continuing to make those claims. We can only
say that we are still skeptical.

The main evidence subsequently introduced for the
claim that the youth were gay comes from Afdhere Jama,
the editor of Huriyah. According to Afdhere, three
sources inside Mashhad have told him that they saw the
two youths, in the summer of 2003, together at a gay
party in Mashhad.

I have the greatest respect for Afdhere and absolutely
no reason to doubt anything he says. However, his
sources have refused to speak to anyone else,
including human rights investigators. From a
professional standpoint HRW simply can’t adduce a
second- or third-hand account as evidence. Moreover,
even if we did, it would not prove that (as one writer
says) they were “lovers, not rapists.” It wouldn’t
bear on the rape “charge” at all; it wouldn’t even
necessarily prove that they were lovers. It would
prove that they were at a party.

The other key argument is the claim that Iranian
authorities, in cases of lavat or consensual “sodomy,”
routinely add on additional charges of rape or other
crimes, extracting “confessions” to these offenses by
torture if necessary.

This claim has largely arisen since the Mashhad
executions. Given what we have already described as
the opacity of the Iranian justice system–and its
many documented irregularities and persistent
corruption–it is entirely possible. I want, though,
to run through some of the reasons that have been
offered for why the Iranian authorities might do this.

a) It’s claimed that the Iranian authorities have
learned that executing or torturing people for
homosexual conduct will incur criticism from the West
(in particular)and so they want to conceal the fact.
This doesn’t make sense to me. The regime has shown
itself fairly shameless and insusceptible to pressure
in persecuting political dissidents and ethnic and
religious minorities, all of whom have considerable
constituencies of supporters both inside and outside
the country. I don’t see why they should be
particularly embarassed about executing people
“guilty” of same-sex relations–who don’t enjoy such
strong or wide support.

b) It’s claimed that Iranian authorities want to
discredit “gays” (and presumably lesbians, though they
tend to be left out of these arguments altogether) by
smearing them with additional offenses. This also
does not make a lot of sense to me. In the regime’s
intensely moralistic view, as well as in a society
which everyone agrees is intensely patriarchal and
overtly homophobic, the accusation of homosexual
conduct should be smear enough–it is probably worse
than rape in many (not just religious) eyes. (Nor is
it evident why they should single out homosexual
conduct as requiring added opprobrium. But so far as
I know, no one has claimed the regime is at pains to
burden e.g. adulterers with additional charges to
secure their complete discredit.) To the contrary:
the Quranic and social contempt for homosexuality
seems sufficiently great that I’m somewhat surprised
the government doesn’t use lavat (as Ceausescu used
sodomy charges in old Romania) as a smear to discredit
political opponents.

c) It’s claimed that the authorities need to throw on
additional charges because charges of lavat are hard
to prove. This also doesn’t make a tremendous amount
of sense to me.

-First, the claim is predicated on the fact that most
sexual offenses in Iranian shari’a require evidence
from four witnesses to prove: but for sodomy, as for
many other such offenses, the “knowledge of the judge”
(in practice, circumstantial evidence) can substitute,
giving extremely easy scope for convictions.

-Second, this might explain why prosecutors would add
on non-sexual offenses which have a lower standard of
proof; not why they would add charges of rape which
also require, *in principle*, four witnesses.

-Finally, if you can torture people into confessing to
something else such as rape (as you undoubtedly can),
you can torture them into confessing to lavat.

d) It’s claimed that the legal system itself
encourages rape charges in cases of lavat. This could
take several forms: for instance, a participant in
consensual homosexual sex may be encouraged to claim
rape in order, as a “victim,” to escape punishment
which otherwise would strike both partners. Or
prosecutors or judges may simply refuse to believe
that (in particular) a passive partner would
voluntarily incur the “shame,” and may simply assume
one would only submit to it by force. This argument
seems to me entirely believable. I say this based also
my experience elsewhere in the region (e.g. Egypt) and
in other countries where sodomy laws give rise to
extortion and dire misrepresentation.

The problem is that, while as we say this adding-on of
charges seems plausible (particularly for reason d),
it is being presented as a proven fact–and so far as
we know no one has yet shown a single case where it
can be demonstrated as such. We haven’t even seen
instances where family members or other people close
to the case come forward to make the assertion
publicly. The plausibility of argument d) should
certainly give rise to questions about cases where
lavat is coupled with a rape charge—-though hardly
enough to say anyone should throw out an alleged rape
victim’s testimony. But we cannot say without
further evidence that it is a fact of Iranian
practice.

Unfortunately, in the months after the publicity
around Mashhad, a few *non-LGBT* diasporic Iranian
organizations started repeatedly reporting executions
as having been for consensual lavat. Most of these,
so far as we can make out, weren’t. Iran has one of
the highest rates of execution in the world. (Many of
these are for drug-related offenses.) There was a
spike in executions in 2005 even before Ahmedinejad
took office. The sudden attention to one particular
death-penalty case seemed to give exile groups an
opportunity and an audience for talking about the
crisis of the death penalty in Iran, which few people
had paid much attention to before. But in the process
almost any execution for any sexual (or other) offense
seemed to be capable of being called a “gay
killing.†In some of these cases there was
absolutely no reason to suppose they had anything to
do with homosexual conduct. For instance, Iran Focus
reported in September that “Four young men between
the ages of 17 and 23 were hanged in public in the
port city of Bandar Abbas.†Without researching the
cases further, Doug Ireland immediately added these to
his roster of likely gay cases. In fact two of the men
were convicted of breaking into a house for robbery
and of raping a woman; and the other two allegedly
raped three young girls, 10, 7, and 8 years old. Both
HRW and IGLHRC did a statement on one case in Gorgan,
in late 2005, where the first Iranian press reports
indeed suggested that the executed men had a history
of rape and violence, but seemed to distinguish this
from the offense that led to their execution.
However, the Persian Lesbian and Gay Organization
subsequently indicated to us that in their view this
was probably a case of rape.

I should add that most of the gay-identified men (in
particular) whom we asked about the Mashhad case
during HRW’s research said they believed the men had
been hanged for consensual homosexual conduct. This
is not to be taken lightly. However, none of them had
direct knowledge of the case and I don’t discount
the possibility that they reached this conclusion
largely based on the emotional response in the Western
media. I should also note that Iran is extremely rich
in rumor and conspiracy theory. Ervand Abrahamian has
an excellent chapter on this in his collection of
essays “Khomeinism,†and more and more I feel this
should be required reading for anyone trying to
negotiate a way through what Dilip Hiro calls the
Iranian labyrinth.

What we can say is that, regardless of these recent
cases, our research shows clearly that executions for
consensual “sodomy”, tried as such, do take place and
are a serious human rights issue. Surveillance and
detentions by regular police, basiji (religious
police), and other religious parapolice, are common.
People are detained regularly, in raids on private
homes and on cruising areas and as a result of other
forms of surveillance, including internet entrapment
and phone wiretaps. When they are arrested they are
tortured–flat-out, without exception. Sometimes the
torture is the result of a criminal sentence (usually
floggings); sometimes they are beaten severely or
sexually abused in pre-trial detention. Women whose
sexualities do not conform to heterosexual norms face
domestic violence, forced marriage, forced psychiatric
and medical treatment, and other abuses.

I must also stress yet again that the existence of the
death penalty for homosexual conduct, and the
widespread practice of torture, mean that governments
have an *absolute* obligation under international law
not to refoul people back to Iran where they might
face those penalties.

#############################
# #
# Iran & Stoning #
# #
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http://news.bbc.co.uk/2/hi/middle_east/6288156.stm
Iran ‘adulterer’ stoned to death
Tuesday, 10 July 2007

The Iranian judiciary says a man has been stoned to death for adultery – the first time it has confirmed such an execution in five years.
Jafar Kiani was executed last week in a village in north-west Qazvin province.

http://www.ecoi.net/file_upload/mv100_cois2001-irn.pdf
UNHCR/ACCORD: 7th European Country of Origin Information Seminar
Berlin, 11-12 June 2001 – Final report

There have been reported instances of stoning in the past few years. However, the last report of the UN Special Representative for Iran (dated 8 September 2000) indicates that stoning appears finally to be declining in Iran. In March 2000, the press quoted the Ministry of Justice spokesperson as stating that stoning may not be in the country’s interest, and that the Head of the Judiciary believes that it should avoid acts which could insult and taint the country’s image. (for recent cases of stoning please see p. 24-25 of this report)

http://www.awakenedwoman.com/wfafi_stoning.htm

There have been 26 reported cases of stoning to death, 17 of them women. The actual number is much higher.

According to a secret report obtained by an Iranian opposition group from within the regime, there have been 10 cases of stoning in the first six months of 2002. There have been at least three established cases of stoning and four stoning to death verdicts in 2002.

A woman and a man were stoned to death in September in the city of Naghadeh (northwest Iran) after 15 years of imprisonment.

In his last report to the UN General Assembly in August 2001, Prof. Maurice Danby Copithorne, the UN special Representative on Iran reported: “Since January 2001, the Special Representative has received information concerning the stoning of two women and the sentencing to death by stoning of at least one other. According to reports in the press, an unnamed woman was stoned to death at Evin prison, Tehran, on 20 May 2001. The woman, aged 35, was arrested eight years ago on charges of acting in pornographic films. In January 2001, the Supreme Court reportedly upheld the death sentence by public stoning of Maryam Ayoubi, 38, convicted for the murder of her husband. Iranian press reported her stoning to death in Evin prison, Tehran, on 11 July 2001. A third woman, named Robabeh, was also reportedly sentenced to death by stoning in June 2001 for the murder of her husband. The Special Representative has raised these reports with the Government. He urges the Government to remove article 82 (b), concerning stoning, from the Islamic Criminal Code and to undertake a policy of actively suppressing recourse to stoning throughout the country.”

Laws sanctioning stoning to death

Article 83 of Islamic Punishment Act stipulates stoning for adultery for a married man and a married woman.

Article 102 of Islamic Punishment Act stipulates that “for stoning, men should be buried up to their waist and women must be buried up to their chest.”

Article 104 of the Islamic Punishment Act states that when carrying out stoning, “the stone should not be so big as to kill the offender with one or two stones. Nor should it be as small as peddles.”

Article 89 of Islamic Punishment Act stipulates: “If the individual is sentenced to flogging and stoning, flogging is carried out first and stoning is carried out consequently.”

Article 93 of Islamic Punishment Act stipulates stoning women to death for even an ailing women and states: “Whenever a woman who is sick or is even on her period, is sentenced to death or stoning to death, the sentence has to be carried out.”

Article 99 of Islamic Punishment Act stipulates: “Whenever the act of adultery by one individual is confirmed based on his or her own testimony, during the stoning process, the religious judge should throw the first stone and others would follow. But if adultery is confirmed based on the testimony of witnesses, first the witnesses throw stones and then the religious judge and subsequently the others.” In an amendment to this Article, it is stated: “the lack of presence of the religious judge or not throwing the first stones by the religious leader or the witnesses would not prevent the sentence from being carried out; it should be carried out under any circumstances.”

Article 101 of the Act stipulates: “It is adequate that the religious leader should notify people about the time of carrying out stoning and it is required that a number of believers, no less than three, be present at the time of carrying out the sentence.”

Article 107 stipulates: “The presence of witnesses is necessary at the time of carrying out the stoning but their absence would not make it null and void. But if the victim manages to pull him/her out of the ditch, the stoning would be called off.”

#############################
# #
# Prostitution #
# #
#############################

http://news.bbc.co.uk/2/hi/programmes/crossing_continents/7107379.stm
Iranian child victim of prostitution By Julia Rooke
Thursday, 29 November 2007

Sold into prostitution aged nine, condemned by an Iranian judge to hang at 18, Leila was saved by a group of human rights activists.

#############################
# #
# Iran & Divorce #
# #
#############################

http://www.ecoi.net/file_upload/mv100_cois2001-irn.pdf
UNHCR/ACCORD: 7th European Country of Origin Information Seminar
Berlin, 11-12 June 2001 – Final report

Despite the provisions in the Civil Code, whereby a man can divorce his wife whenever he wishes, in practice a man cannot divorce his wife without referring to the Special Family Court in order to register the divorce with divorce registry offices that would require the certificate of irreconcilable differences, issued by the Court or a Court order, denoting that the registry is allowed to carry out the registration (immoral onduct, etc.). It would appear that the divorce rate has increased in the last few years and that the Family Courts are confronted with an increasing number of women seeking divorces.

#############################
# #
# Power in Iran #
# #
#############################

http://news.bbc.co.uk/1/shared/spl/hi/middle_east/03/iran_power/html/guardian_council.stm
GUARDIAN COUNCIL
This is the most influential body in Iran and is currently controlled by conservatives. It consists of six theologians appointed by the Supreme Leader and six jurists nominated by the judiciary and approved by parliament.

Members are elected for six years on a phased basis, so that half the membership changes every three years.

The council has to approve all bills passed by parliament and has the power to veto them if it considers them inconsistent with the constitution and Islamic law. The council can also bar candidates from standing in elections to parliament, the presidency and the Assembly of Experts.

Reformist attempts to reduce the council’s vetting powers have proved unsuccessful and the council banned all but six of more than 1,000 hopefuls in the 2005 elections.

Two more, both reformists, were permitted to stand after the Supreme Leader intervened. All the female candidates were blocked from standing.

http://www.forbes.com/global/2003/0721/024.html
Millionaire Mullahs
Paul Klebnikov, 07.21.03

A looming nuclear threat to the rest of the world, Iran is robbing its own people of prosperity. But the men at the top are getting extremely rich.

Who controls today’s Iran? Certainly not Mohammad Khatami, the twice-elected moderate president, or the reformist parliament. Not even the Supreme Leader Ayatollah Ali Khamenei–a stridently anti-American but unremarkable cleric plucked from the religious ranks 14 years ago to fill the shoes of his giant predecessor, Ayatollah Khomeini–is fully in control. The real power is a handful of clerics and their associates who call the shots behind the curtain and have gotten very rich in the process.

The economy bears more than a little resemblance to the crony capitalism that sprouted from the wreck of the Soviet Union. The 1979 revolution expropriated the assets of foreign investors and the nation’s wealthiest families; oil had long been nationalized, but the mullahs seized virtually everything else of value–banks, hotels, car and chemical companies, makers of drugs and consumer goods. What distinguishes Iran is that many of these assets were given to Islamic charitable foundations, controlled by the clerics. According to businessmen and former foundation executives, the charities now serve as slush funds for the mullahs and their supporters.

He played it smart, aligning himself in the 1960s with factions led by Ayatollah Khomeini, then becoming the go-to guy after the revolution. A hard-liner ideologically, Rafsanjani nonetheless has a pragmatic streak. He convinced Khomeini to end the Iran-Iraq war and broke Iran’s international isolation by establishing trade relations with the Soviet Union, China, Saudi Arabia and the United Arab Emirates. In the 1990s he restarted Iran’s nuclear program.

He is also the father of Iran’s “privatization” program. During his presidency the stock market was revived, some government companies were sold to insiders, foreign trade was liberalized and the oil sector was opened up to private companies. Most of the good properties and contracts, say dissident members of Iran’s Chamber of Commerce, ended up in the hands of mullahs, their associates and, not least, Rafsanjani’s family, who rose from modest origins as pistachio farmers. “They were not rich people, so they worked hard and always tried to help their relatives get ahead,” remembers Reza, a historian who declines to use his last name and who studied with one of Rafsanjani’s brothers at Tehran University in the early 1970s. “When they were in university, two brothers earned money on the side tutoring theological students and preparing their exam papers.”

The 1979 revolution transformed the Rafsanjani clan into commercial pashas. One brother headed the country’s largest copper mine; another took control of the state-owned TV network; a brother-in-law became governor of Kerman province, while a cousin runs an outfit that dominates Iran’s $400 million pistachio export business; a nephew and one of Rafsanjani’s sons took key positions in the Ministry of Oil; another son heads the Tehran Metro construction project (an estimated $700 million spent so far). Today, operating through various foundations and front companies, the family is also believed to control one of Iran’s biggest oil engineering companies, a plant assembling Daewoo automobiles, and Iran’s best private airline (though the Rafsanjanis insist they do not own these assets).

The gossip on the street, going well beyond the observable facts, has the Rafsanjanis stashing billions of dollars in bank accounts in Switzerland and Luxembourg; controlling huge swaths of waterfront in Iran’s free economic zones on the Persian Gulf; and owning whole vacation resorts on the idyllic beaches of Dubai, Goa and Thailand.

Until a few years ago the simplest way to get rich quick was through foreign-currency trades. Easy, if you could get greenbacks at the subsidized import rate of 1,750 rials to the dollar and resell them at the market rate of 8,000 to the dollar. You needed only the right connections for an import license. “I estimate that, over a period of ten years, Iran lost $3 billion to $5 billion annually from this kind of exchange-rate fraud,” says Saeed Laylaz, an economist, now with Iran’s biggest carmaker. “And the lion’s share of that went to about 50 families.”

One of the families benefiting from the foreign trade system was the Asgaroladis, an old Jewish clan of bazaar traders, who converted to Islam several generations ago. Asadollah Asgaroladi exports pistachios, cumin, dried fruit, shrimp and caviar, and imports sugar and home appliances; his fortune is estimated by Iranian bankers to be some $400 million. Asgaroladi had a little help from his older brother, Habibollah, who, as minister of commerce in the 1980s, was in charge of distributing lucrative foreign-trade licenses. (He was also a counterparty to commodities trader and then-fugitive Marc Rich, who helped Iran bypass U.S.-backed sanctions.)

The other side of Iran’s economy belongs to the Islamic foundations, which account for 10% to 20% of the nation’s GDP–$115 billion last year. Known as bonyads, the best-known of these outfits were established from seized property and enterprises by order of Ayatollah Khomeini in the first weeks of his regime. Their mission was to redistribute to the impoverished masses the “illegitimate” wealth accumulated before the revolution by “apostates” and “blood-sucking capitalists.” And, for a decade or so, the foundations shelled out money to build low-income housing and health clinics. But since Khomeini’s death in 1989 they have increasingly forsaken their social welfare functions for straightforward commercial activities.

Until recently they were exempt from taxes, import duties and most government regulation. They had access to subsidized foreign currency and low-interest loans from state-owned banks. And they were not accountable to the Central Bank, the Ministry of Finance or any other government institution. Formally, they are under the jurisdiction of the Supreme Leader; effectively, they operate without any oversight, answerable only to Allah.

According to Shiite Muslim tradition, devout businessmen are expected to donate 20% of profits to their local mosques, which use the money to help the poor. By contrast, many bonyads seem like rackets, extorting money from entrepreneurs. Besides the biggest national outfits, almost every Iranian town has its own bonyad, affiliated with local mullahs. “Many small businessmen complain that as soon as you start to make some money, the leading mullah will come to you and ask for a contribution to his local charity,” says an opposition economist, who declines to give his name. “If you refuse, you will be accused of not being a good Muslim. Some witnesses will turn up to testify that they heard you insult the Prophet Mohammad, and you will be thrown in jail.”

Other charities resemble multinational conglomerates. The Mostazafan & Jambazan Foundation (Foundation for the Oppressed and War Invalids) is the second-largest commercial enterprise in the country, behind the state-owned National Iranian Oil Co. Until recently it was run by a man named Mohsen Rafiqdoost. The son of a vegetable-and-fruit merchant at the Tehran bazaar, Rafiqdoost got his big break in 1979, when he was chosen to drive Ayatollah Khomeini from the airport after his triumphal return from exile in Paris.

Khomeini made him Minister of the Revolutionary Guards to quash internal dissent and smuggle in weapons for the Iran-Iraq war. In 1989, when Rafsanjani became president, Rafiqdoost gained control of the Mostazafan Foundation, which employs up to 400,000 workers and has assets that in all probability exceed $10 billion.

Theoretically the Mostazafan Foundation is a social welfare organization. By 1996 it began taking government funds to cover welfare disbursements; soon it plans to spin off its social responsibilities altogether, leaving behind a purely commercial conglomerate owned by–whom? That is not clear. Why does this foundation exist? “I don’t know–ask Mr. Rafiqdoost,” says Abbas Maleki, a foreign policy adviser to Ayatollah Rafsanjani.

A picture emerges from one Iranian businessman who used to handle the foreign trade deals for one of the big foundations. Organizations like the Mostazafan serve as giant cash boxes, he says, to pay off supporters of the mullahs, whether they’re thousands of peasants bused in to attend religious demonstrations in Tehran or Hezbollah thugs who beat up students. And, not least, the foundations serve as cash cows for their managers.

“It usually works like this,” explains this businessman. “Some foreigner comes in, proposes a deal to the foundation head. The big boss says: ‘Fine. I agree. Work out the details with my administrator.’ So the foreigner goes to see the administrator, who tells him: ‘You know that we have two economies here–official and unofficial. You have to be part of the unofficial economy if you want to be successful. So, you have to deposit the following amount into the following bank account abroad and then the deal will go forward.'”

Today Rafiqdoost heads up the Noor Foundation, which owns apartment blocks and makes an estimated $200 million importing pharmaceuticals, sugar and construction materials

Iran’s foundations are a law unto themselves. The largest “charity” (at least in terms of real estate holdings) is the centuries-old Razavi Foundation, charged with caring for Iran’s most revered shrine–the tomb of Reza, the Eighth Shiite Imam, in the northern city of Mashhad. It is run by one of Iran’s leading hard-line mullahs, Ayatollah Vaez-Tabasi, who prefers to stay out of the public eye but emerges occasionally to urge death to apostates and other opponents of the clerical regime.

The Razavi Foundation owns vast tracts of urban real estate all across Iran, as well as hotels, factories, farms and quarries. Its assets are impossible to value with any precision, since the foundation has never released an inventory of its holdings, but Iranian economists speak of a net asset value of $15 billion or more. The foundation also receives generous contributions from the millions of pilgrims who visit the Mashhad shrine each year.

What happens to annual revenues estimated in the hundreds of millions–perhaps billions–of dollars? Not all of it goes to cover the maintenance costs of mosques, cemeteries, religious schools and libraries. Over the past decade the foundation has bought new businesses and properties, established investment banks (together with investors from Saudi Arabia and the United Arab Emirates) and financed big foreign trade deals.

The driving force behind the commercialization of the Razavi Foundation is Ayatollah Tabasi’s son, Naser, who was put in charge of the Sarakhs Free Trade Zone, on the border with the former Soviet republic of Turkmenistan. In the 1990s the foundation poured hundreds of millions of dollars into this project, funding a rail link between Iran and Turkmenistan, new highways, an international airport, a hotel and office buildings.

Then it all went wrong. In July 2001 Naser Tabasi was dismissed as director of the Free Trade Zone. Two months later he was arrested and charged with fraud in connection with a Dubai-based company called Al-Makasib. The details remain murky, but four months ago the General Court of Tehran acquitted him.

Iran’s most distinguished senior clerics are disgusted by the mullahcrats. Ayatollah Taheri, Friday prayer leader of the city of Isfahan, resigned in protest earlier this year. “When I hear that some of the privileged progeny and special people, some of whom even don cloaks and turbans, are competing amongst themselves to amass the most wealth,” he said, “I am drenched with the sweat of shame.”

Meanwhile the clerical elite has mismanaged the nation into senseless poverty. With 9% of the world’s oil and 15% of its natural gas, Iran should be a very rich country. It has a young, educated population and a long tradition of international commerce. But per capita income today is 7% below what it was before the revolution. Iranian economists estimate capital flight (to Dubai and other safe havens) at up to $3 billion a year.

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http://books.google.com/books?id=hdfLNSnUx-AC&printsec=frontcover&dq=Devil%27s+Game:+How+the+United+States+Helped+Unleash+Fundamentalist+Islam
Devil’s Game: How the United States Helped Unleash Fundamentalist Islam

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The Jews Of Iran
http://www.youtube.com/watch?v=VCBDZfjmPAw
p://www.youtube.com/watch?v=a60pRSZshF8

From the Australian SBS current affairs show “Dateline” hosted by George Negus. Shows the Jews of Iran living freely in Iran…despite what many in the West think. The President of Iran called for an end to the criminal Zionist State of Israel and not the LITERAL wiping off the map of the Jews of Palestine.

Britian has ALWAYS had good relations with Iran no matter who is in power. The U.S also, while on the surface appearing hostile, has been a good supplier of weapons and technology to Iran both directly and through third parties.

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# Mojahedin-E Khalq #
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Bravura performance, but bovine feces from start to finish.

“1- the channel was erased due to the uneducated people posting against mojahedin.”

Oh, just as you thought a bastion of “democracy” couldn’t hold its ground. Funny how democracy only applies to the proponents of one’s ideology but when it comes to someone exposing their sanguinary agenda, they buckle under the pressure and spew the same tyrannical reasoning any dictator employs to silence the voice of dissent. Do you understand the gist of the freedom of speech and expression? I guess not.

“2- Are they as vicious as the regime? How can you say this? What evidence do you have that mojahedin even killed 1 civilian or committed any act of terrorism all together? Surely the European courts would have heard it. If some of the top lawyers in the world were unable to provide this evidence I’m afraid your chance of finding it is slim to none.”

Oh, brother. I am bearing witness to one’s intellectual bankruptcy. Ya, keep telling yourself that the Mujahedin never used “terrorism” to achieve its objective. It must have been someone else — even though the same organization has openly claimed responsibility — who carried out bombings in the 80’s. What are you smoking man, can I have a puff? Are you a cerebral handicap or simply forgot that the Mujahedin is on the “US terrorist list” and rightfully so? They just happened to be a useful puppet for the moment to provide misery intelligent for certain agencies or else their existence would have been vanquished long ago. Never underestimate the power of denial.

“3- They are not as fanatical as any islamic fundamentalist. Would any islamic fundamentalist allow a woman to lead in any position?”

Fundamentalism does not discriminate against genders. These goons are as religious as the mullahs in Iran except their whole tenet stems from cultist mentality with Marxist twist.

“Would they allow women and men to even stand next to eachother”

Your contrite laden apology for these people has no boundaries. What does that have to do with anything anyway? Haven’t you seen the Pasdaran’s female brigades standing next in line with their male counter part? Under what rock did you crawl out lately? At every theatrical charade that the Mujahedin formulates, there is always a gender line drawn in the audience — there is no mingling. Pakistan also had a female president; look where they are now.

“Look at the leader of the PMOI – Maryam Rajavi, a woman. Look at the leading posts within the mojahedin organization, all ran by women.”

Once again, how does that pertain to the initial premise that they are a fundamentalist organization? Your lame brain red herring was noted.

“Their ideology consists of a democratic basis with strong roots of feminism.”

HAHA! That’s what the Khomenie touted prior to the revolution. He consistently denied any desire to take on a political role in the society but look where it got us all. Ya, I’ve seen how their “democratic” process in Mujahedin is truly realized — a throne passed from the husband to the wife, like a modern day feudalism.

“Yes they are muslim, but to say they are fundamentalist muslims is out of the question.”

They are not just Muslim; they are radical Muslim. Their views are skewed and Iran doesn’t need another group of animals rule over them through theocracy. Their ideologies is borrowed from the radical Marxism which is a receipt for disaster when it mixed with radical Islam. Fundamentalism doesn’t just come in one color.

“4- Compulsory donation? I know first hand that donations are voluntary. Don’t even try to fool me on this one.”

Oh, I am sorry, when you are in a cult and systematically incapable of making any critical decision on your own, you aught to do as the master demands: handing your hard earned money to these people so they can construct massive stage shows for their personal self-aggrandizement. It’s a great platform to snake-charm the impressionable minds while funneling the funds into their propaganda wing of the organization — the media. I wasn’t born yesterday sonny boy.

“5- Family is in fact allowed to enter. Yes there are certain restrictions but understandably so. Mojahedin are a milita, there is strict order, rules, and discipline that must be adhered to.”

I am sure they do, like the ones who had traveled from Iran to see their love ones but had them delivered to them in pair of escorts while watchfully examining their conversations. Indeed, conducting a family visitation like a true “free” society. As you said it, they are “militant” who want to rule Iran. Isn’t it the same dilemma Iran is facing right now, Sepah is gradually marginalizing the clerics and paving the road for “military dictatorship?” Now you offer these militant, Marxist, Islamist radicals as the proper replacement? The hell is a matter with you?

“I know this first hand as my cousin is currently in Ashraf and a mojahed.”

I knew you had some affiliation with these radicals or else no one in the right mind would ever defend them with such lengthy response. Tell the idiot cousin of yours to grow more than two brain cells and get the hell out of that circus. I suppose when the family tree has an extensive breadth, gullibility and stupidity are bound to take its hold.

“6- People are allowed to leave whenever they want. This also happened to some people I know and they still support mojahedin. They left for either personal reasons, or because they thought life as a militaman was not for them.”

I am sure they did. It’s just that they were relegated to other serfdom duties. Docile and meek to the wishes of the Mrs. Rajavi. Quick, she is visiting her servile minions, go call all the supporters and dress them up in a monotonous fashion and have them weep conniption when she waves. Worship your false idol for all I care but don’t except the Iran to make another colossal mistake again. I bet you’ve watched her delivers a poignant and emotionally charge speeches and have them memorized by heart. I know every participant is required to do so.

“7- Mojahedin is the largest opposition group to the mullahs. They are the only group capable of grappling with this regime and bringing it to its knees.”

Stalin’s Communist Russia was also the largest opposition against the Nazis, what’s your point? You are trying to promote one wrong over another. Nice try. Mujahedin couldn’t hold their act together for more than a few days in the 80’s. The regime in Iran ever since, and regretfully, has developed militaristic potency that dwarfs the hyped up piffle you muster here.

The system in Iran has been devised in such that not only it can respond to the external threats, but the most dominant force (Revolutionary Guard) is shaped to handle any internal opposition with swift action. That alone pretty much makes the role of the Mujahedin’s militia, who has been reduced to nothing since the invasion of Iraq by the US forces, futile. Iran is not going to be freed militaristically. I don’t even trust these people to guard my deodorant let alone “bringing [the regime] to its knees.” What the hell are you blabbering about? A terrorist act doesn’t bring a well established regime who has rooted into communities through Sepah and Basij to its knees. Get real.

“8- They didn’t join with Saddam. Yes they established a base in Iraq under saddam but they did not engage in joint military maneuvres against the Iranian regime. Mojahedin attacked Iran in 1986 after Khomeini rejected a ceasefire with Iraq. ”

Now you are splitting hair here. Have at least an ensemble of honestly so you can look yourself in the mirror tomorrow morning with the straight face. Of course they didn’t conduct a joint venture operation; they were out there encroaching into Kurdish territories “with” the total financial and logistic aid by Saddam — same difference. Ya, and guess what happened after that? The regime butchered all the prisoners in the span of several months once the war was over. They were just looking for some excuse to purge the country from the opposition groups. Bottom line is Mujahedin helped Saddam and no one will ever forgive them for that treacherous act, period. It’s like expecting Russians to embrace the Red Army soldiers who collaborated with Nazis while 25 million of their countrymen died defeating the invaders. That very fact alone illustrates how far you’ve divorced yourself from reality.

“9- Mojahedin are a large, extremely organized, and potent force. They are playing a strong role in the destabilization of the government.”

Whack, whack, whack! The head of the organization has enslaved these people by brainwashing them with sweet music of radical Marxism and Islamic philosophies. Their effort is simply a euphemistic rationalization to bait for more “feeders” so they can suck their wallet and brain clean.

“Along with the iranian people, Mojahedin are fighting for the same cause – democracy, freedom, and human rights.”

Such pabulum of spiel might fly high in the land of make belief but has no foundation in the chain of reality. There is no freedom when you join a cult let alone adherence to human rights. Mujahedins have engaged in similar tactics as the regime does to extract information from the opposition and there is no doubt in my mind that they would contract the same procedures if they get a chance to take over. But luckily, their biggest demise would come due to their ultra-Marxist view as no sane Western country would want a Communist-oriented government to rule over Iran.

“There is a very strong moral correlation between mojahedin and the people of iran. Mojahedin are in iran.”

Stop the broken tape. You are really disgracing the Iranian people with your prattle. Your arrogance is unimpressive, unconvincing, lack luster, and a complete personification of your abundant ignorance. The next thing that probably is going to come out your mouth is the recent events have been orchestrated by MEK.

“If no one wanted mojahedin in iran, if they had no support, or if they were as cultist and fanatic as you say they are, why is the regime so scared from them?”

You just answered your own run-around question in the panoply of assumptions. They appear to exude the same characteristic as the ruling regime; evil fears evil.

“The reason is because they have support and are the anti-thesis to the ruling mullahs.”

Indeed, the branch Davidian also had some support. Look where they end up: in a burning inferno of cultist hell.

“I am not a mojahedin supporter. I am not a muslim. I don’t believe in some of the things they say. What I do believe in however is that Mojahedin are the only ones that can bring democracy and freedom to Iran. ”

Don’t patronize me with your pronounced credulous simpleton tosh and drivel. There is no democracy in Marxist/Communist/cultist/ultra-Islamic group of intellectually challenged group of peasants who take order from an emotionally disturbed individual. Take your sermon of idioticy some place where people only respond to binary formats.

“If you don’t want to listen to a thing i said about mojahedin that’s fine, but at least listen to me when I say this… You don’t come off as intelligent when you do this.”

Classic cretin mooing while taking a shit the size of a dinner plate! So which is it, not listen to you when you “talk” or listen to you when you “say” it? I’ve noticed incoherency is the instinct you generously exhibit in your fine writing.

http://www.cato.org/pubs/pas/pa578.pdf
P. 6
Dubious Exile Allies
The regime-change thesis might seem more plausible if we had not heard similar arguments in the years leading up to the Iraq war.32 Indeed, the argument for regime change and the strategy embodied in the Iran Freedom Support Act33 are eerily reminiscent of the approach adopted with respect to Iraq between 1998 and 2003. Congress also passed and funded an Iraq Liberation Act during that period. American policymakers swallowed the self-serving propaganda of Ahmed Chalabi and the Iraqi National Congress, which said that with just modest U.S. financial and logistical support Iraqi factions
opposed to Saddam Hussein would be able to overthrow his regime. It has since become apparent that the INC never had more than a meager domestic following.

(Chalabi’s party garnered less than 0.5 percent in the December 2005 parliamentary elections in Iraq.) There are manipulative (and in some cases utterly unsavory) Iranian exiles waiting in the wings to pull the same con game on Washington. 34 They include notorious arms dealer Manucher Ghorbanifar, a shadowy figure in the Iran-Contra scandal during the Reagan administration. 35 Perhaps the most unsavory opposition group is the Mujahideen-e-Khalq (MEK), which even the U.S. State Department considers a terrorist organization.36 The MEK , an organization founded on a combination of Islamism and Marxism, has a long history of terrorism and cult-like behavior.

The MEK is the military wing of the National Council of Resistance of Iran (NCRI), regarded by many neoconservatives as a key ally in the effort to overthrow the Iranian clerical regime. After moving its base of operations from France to Iraq in 1986, the MEK was reportedly funded by Saddam Hussein’s Baathist regime and sent into combat against Iran. It has also been implicated in the killing of American citizens.37 Currently led by a married couple, Masoud and Maryam Rajavi, the organization has increasingly become a cult of personality.38 That reputation does not discourage some neoconservative proponents of regime change from making common cause with MEK activists.39 In May 2003, scholars Daniel Pipes and Patrick Clawson of the Washington Institute for Near East Policy recommended that “when the secretary of state next decides whether or not to re-certify the MEK as a terrorist organization,” that official “should come to the sensible conclusion that it poses
no threat to the security of the United States or its citizens.” Pipes and Clawson went on to praise the MEK as a potential U.S. ally, citing the organization’s “key information” about Iran’s nuclear program and other activities of the Iranian regime.40 In November 2005, Raymond Tanter, a senior fellow at the Washington Institute for Near East Policy, stated that an effective U.S. policy requires working with Iranian opposition groups in general and with the main opposition in particular. The National Council for Resistance of Iran (NCRI) and Mujahedeen-e-Khalq (MEK) are not only the best source for intelligence on Iran’s potential violations of the nonproliferation regime

The NCRI and MEK are also a possible ally of the West in bringing about regime change in Tehran.41 He declared, with little evidence, that the MEK and the NCRI were the only opposition groups the clerical leaders feared. In addition to the dubious wisdom of supporting groups like the NCRI and the MEK, the assurances that significant U.S. military assistance would be unnecessary to effect regime change in Iran should be greeted with skepticism. In the case of Iraq, such assurances were quietly buried when regimechange advocates became impatient with Saddam Hussein’s continuing ability to cling to power. Saddam’s overthrow was carried out by a massive application of U.S. military power, with the much-touted exiles playing the role of embarrassing hangers-on. If the United States adopts a strategy of regime change in Iran, it is likely that an even greater military effort will be required

http://www.youtube.com/watch?v=F-BQyu2d1Ok
http://www.youtube.com/watch?v=un0t_4qzIlk

http://piroozmishavim.blogfa.com/

http://www.ghandchi.com/187-mojahedin.htm
What about mojAhedin-e Khalgh?

And after the Revolution and particularly after the 30th of Khordad of 1360, I have written extensive critics of mojAhedin’s move to Iraq, state ownership in their program, the “Islamic” tag of the ideal republic in their program, the cult-like practices of their organization, and all other aspects of the program they have been advocating for future of Iran in the last 20 years.

The PMOI’s original ideology was based on an interpretation of Islam, influenced by Ali Shariati. According to Shariati, Islam promoted and required revolution “against despotic rulers, foreign exploiters, greedy capitalists and false clerics.”[19] According to the U.S. Department of State’ presentation of the PMOI, the philosophy of the PMOI is a combination of Marxism, Nationalism and Islam.[

http://books.google.com/books?id=i4O8xI5oq1AC&pg=PA293&lpg=PA293&dq=shariati+mujahideen&source=web&ots=Diegl1ffDw&sig=pnm-HKbtG0gA0iaDECkbIxNGHig&hl=en#PPA291,M1
Revolutions and Revolutionary Movements By James DeFronzo

P. 291

The religious opposition enjoyed the support of many bazaaris, who not only tended to be strongly religious but also experience considerable damage from certain of the shah’s policies. These included the promotion of modern western-style shopping centers to the detriment of the bazaars, urban development projects that destroyed some bazaar districts, and government price inspection teams that, in carrying out their function of combating inflation by suppressing excessive profiteering by bazaar merchants, precipitated many arrests.

Many bazaaris shifted from their 1953 position of seeing the shah as bulwark against communism to viewing him as an un-Islamic agent of corrupting foreign cultural and economic interests.

p. 292

By the early 1970’s two groups developed the capacity to launch limited armed attacks against the shah’s regime: the Fedayeen-e Khalq (Martyrs of the People), a secular, Marxist-oriented group, and the Mujahideen-e Khalq (Islamic Soldiers of the People), an Islamic leftist movement. The Fedayeen developed out of a union in 1970 of three Marxist groups initially organized by university sutdents and writers in Tehran, Mashad, and Tabriz. Man of the Fedayeen were the children of modern middle-class parents who had been involved in either the Tudeh or the left wing of the National Front. Ideologically, the founders appeared to draw on the Debray-Guevara theory of the guerrilla foco.

The Mujahideen-e Khalq, like the Fedayeen, had its origins in the early 1960’s. But many of its members were the children of parents in the highly religious traditional middle class. The Mujahideen were a manifestation of modernists Shiism and were influenced by a number of prominent Iranian Islamic figures who themselves never directly participated in the group and may not have approved of its voilent actions.

The central themes of modernists Shiism were that Islam, if properly interpreted, could provide Iranians with a progressive ideology capable of modernizing Iran, achieving a more equitable distribution of wealth, and protecting the nation from foreign cultural domination and economic exploitation. Among its major proponents was Mehdi Bazargan, who attempted to demonstrate a compatibility between scientific knowledge and Shiism. He called for a future Islamic government run not by clergy but by highly educated lay administrations and technically trained individuals who were dedicated to Shiism.

p. 293

Another insiprational modernist figure for the Mujahideen was Ali Shariati, a famous Iranian sociologist and political activist who is regarded as one of the “two most important pesons whose writings exercised an all-pervading influence on the Iranian people” in the years leading up to the revolution. Shariati, unlike several past revolutionary theorists who held that religious beliefs generally inhibited social revolution, argued that Islamic doctrine, property interpreted, promoted and required revolution. Sharitati believed that the Prophet Muhammad had intended to create a classless society but that his mission had been subverted. He asserted that “true Muslims had the duty to fight against despotic rulers, foreign exploiters, greedy capitalists, and false clergymen who use Islam as an opiate to lull masses into subservience.”

After the 1963 repression, nine young members of Bazargan’s and Taleqani’s Islamic Liberation movement split off to form the Mujahideen. As one founder put it, “it was the duty of all Muslims to continue the struggle begun by the Shia Imams to create a classless society and destroy all forms of despotism and imperialism”. The Mujahideen launched its first military actions in August 1971.

After 1972 the Mujahideen developed an ideology more closely aligned with Marxist concepts. Many in the Tehran branch abandoned Islam as the basis of revolutionary thought in favor of secular Marxist thinking, but most Mujahideen outside of the capital continued to adhere to Islam. This division led to a split and two separate organizations after May 1975, with the secular Marxist offshoot eventually adopting the name “paykar.”

http://www.iran-democracy.com/Maryam-Rajavi/
Democracy for Iran

http://www.maryam-rajavi.com/

http://www.iran-e-azad.org/english/ncri.html
National Council of Resistance of Iran

United States, European Union, Canada, Iraq and Iran have designated the PMOI a terrorist organization.

http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/oj/2005/l_314/l_31420051130en00410045.pdf
COUNCIL COMMON POSITION 2005/847/CFSP
of 29 November 2005
updating Common Position 2001/931/CFSP on the application of specific measures to combat terrorism and repealing Common Position 2005/725/CFSP

25. Mujahedin-e Khalq Organisation (MEK or MKO) (minus the ‘National Council of Resistance of Iran’ (NCRI)) (a.k.a. The National Liberation Army of Iran (NLA, the militant wing of the MEK), the People’s Mujahidin of Iran (PMOI), MuslimIranian Student’s Society)

http://www.state.gov/s/ct/rls/crt/2006/82738.htm
Country Reports on Terrorism
Released by the Office of the Coordinator for Counterterrorism
April 30, 2007

Chapter 6 — Terrorist Organizations

Mujahedin-e Khalq Organization (MEK)
a.k.a. MKO; Mujahedin-e Khalq; Muslim Iranian Students’ Society; National Council of Resistance; National Council of Resistance (NCR); Organization of the People’s Holy Warriors of Iran; The National Liberation Army of Iran (NLA); The People’s Mujahedin Organization of Iran (PMOI); National Council of Resistance of Iran (NCRI); Sazeman-e Mujahedin-e Khalq-e Iran

Foreign Terrorist Organization (FTO) aliases cited are consistent with and drawn from the Specially Designated Nationals list maintained by the Department of Treasury.

http://www.ncr-iran.org
National Council of Resistance of Iran – Foreign Affairs Committee

http://www.globalsecurity.org/military/world/iraq/camp-ashraf.htm
The Mujahedin el-Khalq (MKO or MEK) main base is at Camp Ashraf, Iraq, about 100 kilometers west of the Iranian border and 60 kilometers north of Baghdad. The People’s Mujahadeen, also known by its Persian name Mujahedeen-e Khalq (MEK), has been classified by Washington as a terrorist organization. Washington announced on 22 April 2003 that it had reached a ceasefire with the MEK. The next day MEK officials said the agreement allowed the MEK to keep its weapons and carry on its activities in Iran from Camp Ashraf. But June 2003 the US Military Police took control of Camp Ashraf and the MEK was consolidated and all weapons secured by MPs. As of September 2003 the 4,000 MEK members in the former Mujahedeen base were consolidated, detained, disarmed and were being screened for any past terrorist acts.

http://en.wikipedia.org/wiki/Camp_Ashraf
http://maps.google.com/maps?f=q&hl=en&geocode=&q=Ashraf,+Iraq&sll=37.0625,-95.677068&sspn=51.04407,81.738281&ie=UTF8&ll=34.056997,44.602175&spn=0.052621,0.079823&t=h&z=14

Camp Ashraf or Ashraf City is situated northeast of the Iraqi town of Khalis, about 20 kilometers west of the Iranian border and 60 kilometers north of Baghdad. The city of Ashraf was named in commemoration of Ashraf Rajavi, a famous political prisoner at the time of the Shah. Camp Ashraf is currently an Iranian refugee camp in Iraq guarded by they United States military

http://www.ashrafcity.com/sightseeings.htm
Pearl Memorial is a small cemetery built in 1991 inside Ashraf City. Pearl only houses the graves of a small number of combatants of liberty who lost their lives in their struggle against the regime.

http://www.youtube.com/watch?v=XyKBjDLvGI4
Camp Ashraf – Iraq

June 2004
Under Saddam Hussein, Iranian rebels received help and funding to wage war on the mullahs. But the new government has pledged to repatriate them, where they face execution.

Camp Ashraf, Iraq, is home to 4,000 Iranian exiles. With Saddam’s support, they formed a militia, the People’s Mujaheddin, to overthrow the mullahs in Iran. But with Saddam now gone, they face an uncertain future. The new Iraqi government has pledged to repatriate them as soon as they gain sovereignty. But that’s a prospect that’s worrying many. “If they return to Iran, they’re going to be executed straight away,” fears Iranian exile Mohammed Sadeghpour. Lawyer Bruce Henry is adamant that deporting the camp’s residents would violate international law. But even he knows their safety is not guaranteed admits he “would be very nervous if I was sitting in Camp Ashraf today.”

http://www.youtube.com/watch?v=0UUm1XbBeHo&NR=1
Parents of MKO members in Camp Ashraf – Baghdad 2003

Parents and siblings of members of Mojahedin organization trying to visit their children/brothers/sisters in Camp Ashraf in late 2003. Most of people have travelled a long way and they have not spoken or seen their children/brothers/sisters for years. All they hope to do is to be allowed to see their loved ones, for even a few minutes. The reaction from the Mojahedin is harsh and hostile. They allow some family members to go inside Camp Ashraf, but with constent supervision and no time alone with their loved one.

http://www.ft.com/cms/s/0/cc7ca058-db70-11d9-913a-00000e2511c8.html?nclick_check=1
Bombs threaten to sway Iranian agenda
By Gareth Smyth in Tehran

Published: June 12 2005 19:47 | Last updated: June 12 2005 19:47

At least eight people were killed and more than 70 injured by explosions at the Ahvaz governor’s office, the city’s housing department and the residence of the head of provincial broadcasting.

There was no immediate evidence of links between the bombings in Tehran and Ahvaz, but such attacks have been rare in Iran since the end of the 1980-88 war with Iraq.

It is three years since the Mujahedin-e Khalq (MEK), an armed Iranian opposition group, fired mortars at regime targets in Tehran, although earlier MEK attacks coincided with parliamentary elections in 2000.

http://www.latimes.com/news/nationworld/world/la-fg-iraniraq3mar03,0,4974258.story
Iranian president arrives in Iraq – By Tina Susman and Borzou Daragahi, Los Angeles Times Staff Writers

March 3, 2008

Ahmadinejad and his Iraqi counterpart condemn an Iranian opposition group under U.S. guard northeast of Baghdad.

he presidents of Iran and Iraq today harshly condemned an Iranian opposition group here which has ties to U.S. neoconservatives and remains under the shelter of American forces.

The armed opposition group, which sometimes goes by the abbreviations MKO, MEK or PMOI, fought the Iranian government during the 1980s, when it received shelter from Saddam Hussein. Both Europe and the U.S. State Dept. list the group as a terrorist organization.

But as tensions between the U.S. and Iran have mounted, some in Washington have cultivated ties with the group and advocated using them to destabilize the Tehran government. Numbering up to 3,000, they remain under U.S. guard at their former base northeast of Baghdad.

http://www.iran-interlink.org/files/info/Iran-InterlinkBook2003.htm
Saddam’s Private Army
How Rajavi changed Iran’s Mojahedin from armed revolutionaries
to an armed cult
Anne Singleton, Iran-Interlink, 2003

The in-fighting between the Islamic Mojahedin and the Marxist Mojahedin, continued until after the revolution, when the Marxist Mojahedin changed their name to Paykar and operated from Kurdistan where they still exist as a small group.

http://www.think-israel.org/lipkin.iran2.html
SHI’ITE IRAN: THE KEY TO THE MIDDLE EAST

PART II. From World War I To The Present

by Lewis Lipkin
LEFT REVOLTS AND THE IRAQI WAR

The socialist and radical forces continued to cooperate with the clerics for only a short time. As early as mid 1979, many on the left perceived that their dream of a “true” revolution was rapidly receding in the face of the growing consolidation of power of the IRP. Not only had the new constitution conferred almost limitless power on the government that confronted the would-be left revolutionaries, but Khomeini had already established the system of his personnal representative in each of the 60-odd administrative districts, representatives who reported directly to him and to him only. Also at the government’s disposal, in fact a part of it, was the Pasdaran, the para-military force, that was rapidly being furnished heavy equipment including armor.

The spearhead of any counter-government revolt would have to be the Mojahedin. Some of the leadership had gone underground in 1979, but by 1981 the party could count on more than 100,000 supporters. Of the other pre-revolutionary parties, fragments of the Fadayan and the Paykar could be counted on, but the Soviet sponsored Tudeh and a minor part of the Fadayan declared support for the clerical government.
“… executions were facilitated by a September 1981, Supreme Judicial Council circular to the revolutionary courts permitting death sentences for “active members” of guerrilla groups. Fifty executions a day became routine; there were days when more than 100 persons were executed. Amnesty International documented 2,946 executions in the 12 months following Bani Sadr’s impeachment, a conservative figure because the authorities did not report all executions. The pace of executions slackened considerably at the end of 1982, partly as a result of a deliberate government decision but primarily because, by then, the back of the armed resistance movement had largely been broken. The radical opposition had, however, eliminated several key clerical leaders, exposed vulnerabilities in the state’s security apparatus, and posed the threat, never realized, of sparking a wider opposition movement.”[LOC]

The leftist threat was not the only one faced by the government. The Kurds in the westen provinces begun a revolt in 1979 and stubornly persisted during the leftist revolt and the Iran-Iraq war. The left, partially because of Marxist theory, could not bring itself to cooperate with the Kurdish nationalist movement. The Kurds finally were forced out of Iran into northern Iraq by Army and Pasdaran forces.

President Bani Sadr’s long power struggle with the IRP ended in his dismissal in June 1981. He was impeached, went into hiding and later escaped to France. At this point the Mojahedin rebellion flared, marked by a series of terrorist attacks. Assassination of key officials was topped by the bombing of IRP headquarters. At least 70 were killed, including the secretary-general of the party, Ayatollah Behesti, and the head of the Supreme Court. Other bombings killed the new president, Rajai, and former Khomeini student, Ayatollah Bahonar. The government’s response was direct, merciless and effective.
“The government responded to the Mojahedin challenge by carrying out mass arrests and executions. At the height of the confrontation, an average of 50 persons per day were executed; on several days during September 1981, the total number executed throughout the country exceeded 100. Although the government dramatized its resolve to crush the uprising by conducting many of these mass executions in public, officials showed little interest in recording the names and numbers of the condemned. Thus, no statistics exist for the total number executed. Nevertheless, by the end of 1982 an estimated 7,500 persons had been executed or killed in street battles with the Pasdaran. Approximately 90 percent of the deaths had been associated with the Mojahedin, and the rest with smaller political groups that had joined the Mojahedin in the attempt to overthrow the government by armed force. The efforts to root out the Mojahedin were accompanied by a general assault on procedural rights. The Pasdaran and specially recruited gangs of hezbollahis [coveys of street-fighters controlled by a single cleric] patrolled urban neighborhoods, ostensibly looking for the safe houses in which supporters of the Mojahedin and other opposition groups were suspected of hiding. They invaded such homes and arrested occupants without warrants. Persons suspected of insufficient loyalty to the regime were harassed and often subjected to arbitrary arrest and expropriation of their property. Extensive purges were initiated within all government ministries, and thousands of employees who failed loyalty tests were dismissed. Complaints were voiced that government agents eavesdropped on telephone conversations and opened private mail to collect information to use against citizens. The courts generally failed to protect individuals against violations of due process during this period.” [LOC]

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http://www.ijchronicle.com/article.php?article=190
Carter’s Comments Rekindle Long Standing Hatred Among Iranians
by Karmel Melamed
Contributing editor
August 2007

Frank Nikbakht, an Iranian Jewish activist and director for the L.A. based Committee for Minority Rights in Iran, said Iranian Americans are particularly angered at Carter and his National Security Advisor Zbigniew Brzezinski who encouraged the revolution in Iran and its former leaders including the Ayatollah Khomeini, Mehdi Bazargan, and Ibrahim Yazdi. Nikbakht said both Carter and Brzezinski believed at the time that an Islamic government in Iran would help encircle the former Soviet Union and would totally decimate Iran’s leftists.

“In a frontline country like Iran just south of the Soviet Union at the height of the Cold War, with a sea of oil beneath it and sitting on the northern shores of the Persian Gulf– who O.K.ed the soft handover of an entire regime to a new revolutionary power even before the radical left sparked the violent uprising in February 1979, which was opposed by the Islamic leadership?” said Nikbakht. “During and following a regime such as the Shah’s which was so dependent on the U.S. and Britain nothing like this– the participation of the army and the Iranian secret police (SAVAK) in the handover- could have happened without their approval”.

Further proof of Carter’s activities in ousting the Shah was revealed in a 2004 interview with Ibrahim Yazdi, a close confidant and former representative of Khomeini to Western nations, in the now defunct “Nameh” Persian language magazine based in Iran. In the interview, Yazdi discussed the many correspondences he received directly from Carter and then personally relayed to Khomeini in 1978 prior to the revolution.

“These correspondences were going on long before the Shah left Iran and Khomeini had promised Carter in a letter that he would not disturb the follow of oil from Iran if he came to power,” said Yazdi in his interview. “Then Carter in his last correspondence to Khomeini said the Shah will be leaving soon and asked Khomeini to return to Iran and accept Shapour Bakhitar as the new prime minister in order to avoid a conflict between the mullahs and the military in Iran”.

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http://www.time.com/time/magazine/article/0,9171,920313,00.html
The Odyssey of Ibrahim Yazdi
Monday, May. 07, 1979

An aide to Khomeini during the Ayatullah’s exile in France, Yazdi returned to Tehran on the 747 that brought Khomeini home in triumph, and became Deputy Prime Minister for Revolutionary Affairs in the provisional government of Mehdi Bazargan.

State Department officials recall that during the attack on the American embassy last February Yazdi’s timely arrival on the scene settled the situation and possibly saved American lives. On the other hand, some American reporters in Iran worry about the stridency of Yazdi’s public statements. In an address last week to the police academy he denounced “Zionist newspapers like the New York Times and TIME” for denigrating Khomeini, adding that Zionism was “one of the greatest enemies of our revolutionary movement.”

http://www.answers.com/topic/ibrahim-yazdi
Mideast & N. Africa Encyclopedia: Ibrahim Yazdi

In 1978 he frequented Ayatollah Ruhollah Khomeini’s headquarters in France. When he returned to Iran in 1979, he was appointed deputy prime minister, and in 1980 he became foreign minister in the cabinet of Mehdi Bazargan’s provisional government. He was among the group of Bazargan’s friends who constituted the nonclerical, moderate figures in the Islamic movement and who cooperated closely with the Revolutionary Guards. He also headed the nationalized Kayhan Publishing Group, which produced a daily newspaper whose circulation rate exceeded that of all the other Tehran dailies. He was elected to the Islamic parliament as a deputy from Tehran (1980 – 1984). In the falling-out between the moderates and the more radical Islamic Republican Party affiliates (1979 – 1981), the latter won. After falling from political favor, Yazdi devoted his energies to revitalizing the Liberation Movement of Iran, which now functioned as the only tolerated – albeit eventually officially banned – opposition party in the political landscape of Iran.

http://www.bbc.co.uk/worldservice/people/features/mycentury/transcript/wk51d5.shtml
My Century
Broadcast on Friday 24th December 1999

* Chartered French airplan with loads of reporters as a human shield

the civil airline in Iran arranged independently a flight from Tehran to Paris to bring Khomeini back. They called it the Revolutionary Flight. But we didn’t trust them, because we knew that there was a possibility that the army might attack, or the army might force the aeroplane to land in some remote area So we didn’t accept that. Instead, we chartered an Air France plane. In addition to that, we took with us more a hundred and twenty journalists – reporters from all over the world. I have to confess that we took them as a human shield, so to speak. We knew that nobody would dare to shoot at such a plane, with so many reporters, from so many nationalities.

* Bullet proof jackets

Before we left Paris, a friend of mine sent three bullet-proof jackets for us, from America, one for me, one for Mr Ahmad, Khomeini’s son, and one for Khomeini himself.

http://www.atimes.com/atimes/Middle_East/GI14Ak01.html
Why Iran Can’t Become the New China

September 14, 2005
Asia Times Online
Pepe Escobar

Yazdi deconstructs the idea exposed by many “rightists” of Iran rising to become the new, Muslim China. “There are three components – economic development, social freedom and political expression. The Iranian authorities are only equipped for suppression. Social freedoms in China – like freedom for boys and girls to get together – are no problem in China, as long as they don’t involve anything political. The dress code was never an issue. The Iranian government, on the other hand, keeps hammering an Islamization of social behavior. Even novels are censored – there is no kissing in novels published in this country.”

Yazdi appreciates how “the Chinese divorced themselves from the Cultural Revolution. They put Mao’s [Zedong’s] widow and her cohorts in prison. They released liberals, and invited them to government. The Communist Party decided to remove any ideology. Only nationalism remained. Can Iranian authorities divorce themselves from Islam? No. They do have a problem.” He adds, “The Chinese understand the world superbly, how to explore all international opportunities in favor of implementing their goals. They have extended their economic relationship with the US.” He compares it with Iran’s Kish Island, a free zone in the Persian Gulf shores that is “a separate entity, and was not supported enough to set an example”.

* Montazeri and how he got shafted by Khamenei

It all comes back to the holy of holies, the problem of Khamenei’s legitimacy. Yazdi is extremely attentive when he learns about the official list of eight marja’as – sources of imitation – according to the clerical establishment in Qom. “So Montazeri is not on the list? But he’s the most influential of them all.” Yazdi remembers how, five years ago, Grand Ayatollah Montazeri literally opposed the Supreme Leader, saying, “You are not qualified to issue a religious verdict.” On top of it, Montazeri always insisted that the Supreme Leader must be a spiritual guide, and that control of the police, state security, armed forces and state media is certainly not part of his attributes.

Montazeri – who was Khomeini’s most prized colleague and political confidante – remains a giant thorn in the side of the regime. He was to be Khomeini’s successor – as designated by the imam himself, and confirmed in 1984 by the Council of Experts. But three years later he was already enmeshed in a web of revolutionary intrigue branding him a “liberal”, ie, counter-revolutionary, just like Bazargan and Yazdi.

Montazeri happens to be one of the world’s leading authorities on velayat-e-faqih – a doctrine that is the Shi’ite theological version of Plato’s philosopher-king. He was the president of the assembly of experts that drafted the constitution of the Islamic republic. And the constitution was explicit: the faqih must be a marja’a.

http://www.youtube.com/watch?v=WpLGZy75Ars
Tribunal of General Mehdi Rahimi – who shortly after this kangaroo trial was executed by the savage Islamic Republic.

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http://www.csmonitor.com/2003/0822/p08s01-wome.html
50 years later, Iranians remember US-UK coup By Dan De Luce
from the August 22, 2003 edition

Organized by the CIA and the British SIS to secure Iran’s oil resources from a possible Soviet takeover and secure Iran’s oil resources, the coup marked America’s first intervention in the Middle East. Its aftershocks are still being felt.

After considering military action, Britain opted for a coup d’état. President Harry Truman rejected the idea, but when Dwight Eisenhower took over the White House, he ordered the CIA to embark on one of its first covert operations against a foreign government.

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http://www.azargoshnasp.net/languages/Old_Persian/oldpersianelamitemonths.pdf
The Names and the Order of the Old Persian and Elamite Months During the Achaemenian Period
By Arno Poebel

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http://www.ghadeer.org/english/default.html
THE NARRATIVE OF AWAKENING

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http://president.ir/en/president/email/
Iranian President, His Excellency Dr. Mahmood Ahmadinejad: dr-ahmadinejad@president.ir

http://www.ahmadinejad.ir/en/

http://www.ahmadinejad.ir/en/a-guideline-for-islamic-governance/
A Guideline for Islamic Governance 2007/12/01
In the Name of Almighty God, the All-Knowing, the Most Lovingly Compassionate

One’s perspective regarding government and governance determines the way one ?should cooperate with the people. If one recognizes government as a privilege and prey ?of the governors, then the period of governance can be counted as an opportunity to fulfill ?the expectations of certain individuals and groups or the ostentation and hedonism of the ?governors.?

But if in our view, “government” would be a responsibility before God for ?establishing justice and a duty to ensure the rights of common people, serving the ?servants of God and helping the oppressed- then the most important issue will be the ?people’s concerns. If this is the case, governors would not view themselves as better than ?other people and they wouldn’t put themselves in any other position except serving the ?people. ?

Based upon this view point, the ultimate goal is to achieve God’s approval and ?satisfaction in the way of serving His servants, implementing justice and expanding ?spirituality. This goal cannot be achieved unless fully devoting yourself to Almighty God, ?and thus even sacrificing your life and reputation for its achievement becomes sweet. ?With this type of reasoning, the happiness of an orphan who has achieved his right is ?preferable to the satisfaction of oppressive and voracious politicians. And the ?appreciation of an oppressed woman- who is emancipated from the oppression- is much ?more valuable than hundreds of official and international medals and awards. ?

The political system of the Islamic Republic of Iran is based on this viewpoint. ?The governmental framework and the job description of the rulers is derived from the ?Islamic holy sources and texts, which are which are the best guidelines for good ?governance and honest service. ?

http://www.ahmadinejad.ir/en/taking-fingerprints-of-passengers/
Fingerprinting the passengers, an image of power or an insult to human dignity 2006/11/28
? In the Name of Almighty God, the Most Merciful, the Most Compassionate

The behavior of U.S. government concerning the people of other nations is very ?supercilious and slighting. Part of the increasing hatred toward the U.S. government ?that we witness across the world, is due to the U.S. statesmen disdainful and ?oppressive position and behavior. The Iranian people as other nations of the world, ?believe that U.S. statesmen –although they do not truly represent the votes of the ?American people – but their performance as the representatives of the Americans, is ?ruining the cultural and humane image of the big nation of America. ?

Actions such as – fingerprinting the foreign nationals – deterring the other nations ?cultural, political and scientific elites and sport figures from going to U.S.- destruction ?of the environment – evasion, prolongation, renege and infringement of different ?treaties and accords – aggression of other countries territory and depredation of their ?wealth and recourses – initiation and creation of secret and medieval prisons and death ?camps with Dark Ages type of tortures – invasion of other countries and slaughtering ?women and children – not only illustrates the bad records of the U.S. rulers, but also ?have defaced and ruined the cultural and humane image of the big nation of America ?more than ever.?

Creating a destructive defaced image of the Americans reputation and respectability ?in the world public mind, and also being insulted and suppressed by U.S. ?administration concerning different matters such as wiretapping, crack down on the ?critics and opponents of the U.S. government, racial and ethnic discrimination and ?strict censorship, has now turned the American people into one of the most suppressed ?nations of the world. So the American people are today among the main victims of the ?tyrannical behavior of their own rulers.?

I personally view the decision of the U.S. government concerning fingerprinting the ?passengers as an insult to human dignity and benevolence which is very similar to ?medieval practices that belongs to a bygone era.?

Even though the Iranian people’s honest feelings – as most of the other nations of ?the world – have been hurt from these insults, but their expectation from us – as the ?authorities of the country – is that, we behave and act based upon the dignified culture ?of this land. Albeit, retaliation is our proper right, but the Iranian people are not agree ?that the human dignity of the legitimate American passengers – who indeed are ?counted as the guest of the Iranian nation- be insulted. My request from the respected ?Islamic parliament – regarding the American passengers fingerprinting act- is based ?on the aforementioned reason.?

Basically, the intelligent system of the government that controls our territories and ?borders would not let the spies or the wicked individuals get into the country. And ?they have a different view regarding them. They separate them from ordinary citizens ?of the other countries. But, in regard to reception of other passengers and regular ?people, they have an absolute friendly and humane behavior.?

All of those who travel to Iran admit the greatness of the Iranians impressive and ?highly regarded culture and outstanding hospitality. The culture that would even ?dissolves unethical groups into itself and leaves a good ethical and educational ?impression on them.?

?Our nation would welcome the cultural exchange with all other countries, and ?would like to expose their ancient culture in a scientific conduct. Accordingly, they ?would like to remove all the present obstacles which are blocking the way of a sincere ?and easy relation – between those who are interested in Iranian culture and ?civilization. For instance, in that regard, we decided to have a straight and direct ?flight from Iran to U.S. But, U.S. officials – since they were petrified and did not want ?their fabricated lies be exposed to the American nation – rejected that proposal. ?Because the American citizens – who have lived there for years, are aware of its status ?quo – are the best choice to judge the difference between the true Iranian culture and ?also the present culture which is propagated by U.S. government. They can compare ?and measure the difference and identify the lies and baseless propagation regarding ?freedom, democracy and human rights issues that certain American statesmen claim.?

?U.S. government – itself – knows the terrorists that they have raised, trained ?and nourished, very well and is aware of their status and where about. At anytime that ?U.S. government makes a decision to confront those terrorist groups and ?organizations, it can. But the white house officials – with an excuse of confrontation ?with terrorism- literally, not only they have humiliated their own people, but they ?have also contempted the people of other countries as well. By way of security barrier ?which they have created around their own people- they control their relation with ?outside world and intercept the exchange of cultural and humane enlightenment.?

I am certain that before long, all the barricades would facture and shatter and ?the doors would be opened on the suppressed people of the U.S. and these gentry ?would touch the events of the world directly – without any interference and mediator.

http://www.ahmadinejad.ir/en/freedom/
Freedom & Liberty 2006/12/13

In the Name of Almighty God, the Most Merciful, the Most Compassionate

In Amir Kabir University gathering – when a small number of individuals in the presence of the absolute majority of the university students and associates and the president of the country – with an absolute total freedom – without being worried – insulted the elected president of the people, I had a feeling of joy. Unintentionally, it reminded me the circumstances of those days and years that I was a university student; the days before revolution such as Dec 7, 1953 *. The black years of 1977 and 1978 that one could not breathe politically and criticize the secular government which was supported and protected by the west. The cost of criticizing the government was a death penalty or prison and torture. And now – in contrast – the situation is somehow that a small limited minority would disturb the peace of a meeting of a majority by insulting and even burning. But the majority – the university students and revolutionary professors – would tolerate it with dignity and benevolence – without engaging in a reprisal.

As a 1975 university student that I repeatedly experienced clashing and escaping from shah’s hostile police forces and also remembered that the cost of a small critic in regard to the ruling government was so heavy – in contrast – yesterday, when I witnessed such an impressive effect of the freedom and liberty – not only as Mahmood Ahmadi Nejad – I did not have a bad feeling in my heart concerning any one, but as a person who serves the nation, a president and a political chief executive of the country, I proudly admired our great liberator revolution and praised Almighty God.

This pride is plenty good enough for us that in a contrast with almost all other governments of the world that would implement dictatorship against their adversaries, in our country, a small limited individuals with a full confident and comfort, would apply authoritarianism against the government – which has come to the office by the overwhelming votes of the people – and also against the majority of the people in that gathering – altogether simultaneously. Instead of talking and listening with a calm manner and a logical reasoning in peaceful atmosphere – the estate and stature of the university students and associates – they try to disturb the peace of the meeting.

This freedom and liberty is the outgrowth of the blood of our martyr brothers and sisters. Our Reputation and all of our entities be immolated for this freedom and liberty

http://www.ahmadinejad.ir/en/a-reply-to-an-american-mother-q-s-message/
A Reply to an American Mother`s Message 2007/03/16
Mr. President

I am writing you this letter as a mother who her son was sent to Iraq forcibly and has been taken away from her for ever.

You may know it or not that most of the Americans do not like Bush. He is (….). We do not recognize him as our president. He entered the white house by cheating. He is not a legitimate president. Even a great number of American mothers who their sons were not sent to Iraq, are agree with me. They know Bush as (….).

Mr. President! As much as we hate war, we hate Bush and his gangs! I want you know that if you intend to attack U.S., most of the people are like me here. We can’t stop his stupid acts for now, but I am writing this letter, because I know you as a pious and logical man.

I am not scared of Bush and his gangs or his security forces, but since I do not want them to interrupt my battle and my fellow Americans’ struggle against this administration, please keep my name and identification anonymous.

With best wishes

In the Name of Almighty God, the All-knowing, the Most Lovingly Compassionate

Venerable mother

Greetings

First of all, I apologize for the delay of answering your question. This is due to my heavy schedules. So far, I have received many letters – with the same type of messages – such as yours.

If your son opposed to go to Iraq and impose pressure on the people of that region, and then was forcibly taken there, certainly Almighty God would help him. And those who have forced your beloved son to go to the war are responsible for his blood and the bloodshed that they have caused. They should answer Almighty God in the Day of Judgment.

In regard to statement you have made, since I did not want my reply lead to any problem for you, did not send it through e-mail, because if some agents are getting into private life of the American citizens and eligitimatley control them, may create problem for you. Instead, I decided to post the reply on the web log that those who may have the same views such as yours, get the answer.

U.S. Nicolas tra…@yahoo.com
Youre one of the most stupid president ever ! Im sure about half of the comments posted of this blog are just totally fake and used as propaganda.

Karil Loubas kar…@hotmail.com
I see that you choose only what you like; this is very curios to see how much you love yourself and how much you think that people are stupid to believe that you never receive any critics.

manrix bianchi juz…@yahoo.it
Dear and honorable president my lasts comments not was pubblied and i admire you why this? Are messages too much for show all? Long life to you and Iran and all country that no like death but life.

Jack Meyhoffer kin…@yahoo.com
I hope someone puts a bullet in your head very soon.

Dani California
People like you take the world back to darkness instead of bringing it forward to PEACE

Kevin
You are the type of man that would start WW3. You say some pretty stupid things sometimes.

ken mcfly die…@bex.net
die slow …

D DuBois dal…@yahoo.ca
Cool… are these all real comments from real people? Or planted? Anyway, your blogs are somewhat formal sounding. Why not loosen up the language a little for the American readers? And could you tell us a little about your home life and your family and what your daily routine is like. Also what kind of music do you like? What is your favorite color and what is your favorite sport?

istiftaa@wilayah.org and info@leader.ir and info@khamenei.ir

The Honorable Chief Justice, His Eminence Ayatollah Seyed Mahmoud Hashemi Shahrudi: Shahroudi@Dadgostary-tehran.ir and ijpr@iranjudiciary.org

Speaker of the Islamic Consultative Council (Parliament), His Excellency Dr. Gholam-Ali Haddad Adel: hadadadel@majlis.ir

Minister of Foreign Affairs, His Excellency Mr. Manuchehr Motaki: matbuat@mfa.gov.ir

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http://www.ghandchi.com/iranscope/Anthology/KavehFarrokh/300/index.htm
Dr. Kaveh Farrokh-The 300 Movie: Separating Fact from Fiction

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http://www.avn.com/internet/articles/29684.html
By: Sherri L. Shaulis

Posted: 04/16/2008
Neda Ghazanfarpour has been hired as the operations manager for Channel 1 Releasing.

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http://www.youtube.com/watch?v=bzoV7PhX4ns
March 2006
Ayatollah Montezeri was Khomeini’s heir apparent until he turned his back on the revolution he helped found. Despite the threats, he’s continued to rail against Iran’s government.

“Until the government rethinks what it is doing to this country the situation is really dangerous”, Ayatollah Montezeri states. He was stripped of his political inheritance, branded a traitor and heretic and placed under house arrest after he questioned his old friend Ayatollah Ruhollah Khomeini. Montezeri believes all violence is Unislamic. “There were no political prisoners during the reign of our prophet”. He calls for diplomatic relations with America and has spoken out fearlessly against the government’s crushing of dissidents. “It makes me laugh when I hear the press say we respect human rights in Iran. It’s a joke”.

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http://mehr.org/Massacre_List.htm
A Partial List of 4525 Political Prisoners Who Were Massacred by the Islamic Regime of Iran in the Summer of 1988

pejman- mohamad ali(ali kakoo) shiraz Sharivar 67 peykar

http://asre-nou.net/1383/khordad/29/ko/list%20-%20k6.htm
The list of 4483 political prisoners who were executed during the massacre of 1988 by the regime of Islamic republic in IRAN

http://symourgh.com/images/n00006001-r-b-001.jpg

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http://books.google.com/books?id=ouuRaF5Ug1IC&pg=PA121&lpg=PA121&source=web&ots=5AZMPW7vpB&sig=8-x5YwxRdtlcd54qpSJ4x-EPYlU&hl=en
Rebels with a Cause: The Failure of the Left in Iran By Maziar Behrooz

P. 121

The Marxist Mojahedin was in a rather odd position as revolution overturned the old regime. It had shifted from Islam to Marxism in 1975, had voilently purged its Moslem members, and lost some of its most important members in setbacks in 1976. Furthermore, it had purged Taqi Shahram, the mastermind of the ideological shift, rejected arm struggle a year prior to the revolution, and shifted its attention to agitation among the working class. Therefore it was in a weak position, both theoretically and organisationally, as the revolution shook the old regime. Now, it was faced with a popular Islamic movement, an emerging Moslem Mojahedin and Marxist movement whose major popular groups were at odds with it. In Februrary 1979, it officially changed its name to the Organisation of Paykar (Combat) for the Liberation of Working CLass (sazman-e-paykar dar rah azadi-ye tabaqeh-ye kargar). The Paykar was relatively small, and unprepared for the revolution, and its activities during the final days of the imperial regime were limited to some political agitation. However, after the revolution it began to reorganise.

The actual membership of the Paykar was small, and it did not attempt to bring in new members. Members who played a role in directing policies probably numbered between 30 and 50, although there were thousands of supporters who were mostly former Moslem Mojahedin members who had turned Marxist either in prison or outside. The Paykar had a five-man central committee dominated by Hosein Ruhani and Ali Reza Sepaso-ashtiani. The names of the other three central committee members never became public, but other well-known members were Torrab Haq-shenas, Puran Bazragan, Mohsen Fazel, Qasem Abedini, Ebrahim Nazari, Morteza Aladpush and Afkham Ahmadi.

From 1979 until its disintegraiton in early 1982, the Paykar was the main standard-bearer of Maoism and Stalinism in Iran. Having rejected post-Mao reforms in China, it was extermely hostile to both the Soviet Union and China. Although it considered the United States the main enemy of the revolutionary movement in Iran, it called the Soviet Union a socialist-imperialist power, the Tudeh a Soviet fifth column, and considered the Soviet threat imminent. Having rejected both the Soviet and the Chinese models, the Paykar looked at the Albania for inspiration and as a role model. Indeed its view of Soviet Union as socialist-imperialist was based solely on translations from Albanian sources, indicating a lack of doctrinal weight.

P. 122

The Paykar showed some sympathy for the Islamic liberal faction of the IRI during the early days, but soon changed its policy to one of the opposition to the state as a whole. It boycotted the referendum legitimising the IRI, but did participate in elections for the council of experts which drafted the Islamic constitution. One of the main confrontations between it and the IRI during the first two years of the revolution was over the arrest, in July 1979, and execution, in July 1980, of Taqi Shahram. The Paykar had expelled Shahram a year before the revolution, but his arrest and trail for the murder of Sharif-Vaqefi inevitably placed the organisation centre stage. The Paykar’s position, which differed from that of other Marxist organisations, must be seen in the context of the period, and was that he must be tired by a court composed of his former comrades. This meant that the IRI had to reliquish judicial authority to Marxist organisations. In the end, the case was used by the IRI to put the Paykar and Marxism on trial, and the Paykar and other groups were unable to prevent his execution.

As the standard-bearer of Maoism in Iran, the Paykar and a number of other Maoist organisations and cells arranged for a conference of unity in Tehran in My 1979. The goal was to unite Maoist groups in a united front against both the IRI and other Marxist groups. Among the participants were the Kurdish organisation, the Kumoleh, and the newly-reorganised Communist League, which was made up mostly activists from abroad. The Paykar’s position on unity was based on a belief that the communist movement was weak, and did not have a firm base among the working class, its main natural base. Its policy was that unity between Maoist groups should take place under Paykar leadership. Because of this, union was not achieved, although the Paykar managed to co-opt two small cells without offering its members full membership.

The Paykar’s relations with other non-Maoist organisations was tense for the most part. In Kurdestan, the organisation maintained a tactical alliance with the Kumoleh, the region’s Maoist organisation and second-largest rebel group. The Paykar, itself ideologically weak, acted as the Kumoleh’s ideological mentor until 1981. As the war intensified, the Paykar, like other non-Kuridish Marxist organisations opposed to the IRI, directly supported the Kurds. The Kurdish movement, however, although fighting the IRI, was divided between two main groups, the Kumoleh and the Kurdestan Democratic Party (KDP), fiercely, sometime voilently, competitive. This meant that the Paykar clashed both with IRI armed forces

http://books.google.com/books?id=jqTzo8N-dyEC&pg=PA146&lpg=PA146&source=web&ots=g-i9CAjOLf&sig=Xa4E5ERjKjXnmihqBHmdWkIadSU&hl=en
The Iranian Mojahedin By Ervand Abrahamian

P. 145-148

The Manifesto (1975)

By mid-1975 the Mojahedin had won a nation-wide reputation for organizational efficiency, revolutionary fervour, and religious martyrdom. Together with the Feda’iyan, it had become the idol of the opposition and the scourge of the regime. It was in the midst of this apparent success that the Mojahedin, suddenly and without visible warning, shook the whole opposition, secular as well as religious, by publishing a vehemently anti-Islamic tract entitled Bayanieh-e e’lam-e mavaze’-e idelozhik-e Sazeman-e Mojahedin-e Khalq-e Iran (Manifestor explaining the ideological position of the People’s Mojahedin Organization of Iran). Without mincing words, the Manifesto declared that the organization was henceforce discarding Islam in favour of Marxism-Leninism because Islam was a ‘mass opiate’ and at best a ‘petit bourgeois, utopian ideology’, whereas Marxism-Leninism was the real ‘scientific philosophy’ of the working class and the tru road for the liberation of mankind.

From then on there were two rival Mojahedin organizations. One was the Muslim Mojahedin which refused to relinquish the original name and accused its opponents of gaining control through a bloody coup d’etat; after the Islamic Revolution it managed to regain fully the original title. The other was the Marxist Mojahedin which initially took the full name of the People’s Mojahedin Organization of Iran; then in 1978 assumed the label Bakhsh-e Marksisti-Leninisti-ya Sazeman-e Mojahedin-e Khalq-e Iran (The Marxist-Leninist Branch of the People’s Mojahedin Organization of Iran); and finally during the revolution merged with some Maoist groups to form the Sazeman-e Paykar dar Rah-e Azadi-ye Tabaqeh-ye Kargar (The Combat Organization on the Road for the Emancipation of the Working Class). This became known as the Paykar Organization. Another group of former mojaheds who had converted to marxism while in prison but were less favourable to Maoism and had never contested the Mojahedin title, on their release from goal during the revolution formed the Sazeman-e Kargaran-e Enqelabi-ye Iran (The Organization of the Revolutionary Workers of Iran). They later became better known as Rah-e Kargar (Workers’ Road), which was the title of the their newspaper.

The Marxist and the Muslim Mojahedin have produced their explanations for the 1975 schism. According to the Marxist Mojahedin, their ‘political consciousness’ had been raised once they began to study systematically ‘dialectical materialism’, especially the works of the Marx, Lenin and Mao Tse-tung. Hence, they claimed, Marxism had revealed to them the fallacies of Islam. The Muslim Mojahedin argued that ‘pseudo-left oppotunists’ masquerading as Muslims had carefully infiltrated the organization; had gradually taken over the top positions (this had been facilitated by the 1971 mass arrests); and then, having led astray ‘young, ideologically unsophisticated recruits’, had murdered their opponents and thus is true machiavellian fashion engineered an internal coup d’etat. In this way, they had ‘stolen the organization’s heoric name’.

The real explanation of the schism, however, is far more complicated. Moreover, the conversion was not as sudden and unexpected as it at first appeared to the outside world. As early as mid-1974, one of the three branches – led by Taqi Shahram – drafted what later became the core of the Manifesto. The branch ceased holding group prayers; replaced the term baradar (brother) with the more radical appellation rafiq (comrade); and sent organizers into some of the large industrial plants in Tehran. In later 1974, the second branch – led by Aram – followed suit after an intense internal debate on the pros and cons of Islam. And in early 1975, the third branch – led by Sharif-Vaqefi – split with a significant minority voting against its own leader and with the Marxists in the rest of the organization.

The Marxist Mojahedin were neither raw recruits nor ideological simpletons. On the contrary, they contained many of the surviving intellectuals of the early Mojahedin. For example Ruhani and Haqshenas, both of whom were to play crucial roles in Paykar, had served on the origial Ideological Team. In fact Haqshenas, who was one of the few Mojahedin with a seminary education, had helped write some of the early pamphlets and also assisted the famou Ayatollah Motahhari, his theology teacher, to publish a well-known anti-Marxist tract. Taqi Shahram, who escaped from prison, had been deemed important enough in 1971 to receive one of the stiffer sentences meted out at the mass trials. Aram, who avoided arrest in 1971, had joined the Mojahedin in 1968 and had been Ahmad Rezai’s right-hand man since 1970. He had been active in religious groups since the mid-1960’s.

Jalil Ahmadian, who later became important in Paykar, had an even longer history of involvement in religious organizations. He was born into a highly religious and pro-Mosaddeq bazaari family in Tabriz. A childhood friend of Hanifnezhad, Ahmadian and Hanifnezhad attended the same high school, and went together to Tehran University where they both joined the Islamic Student Association and the Liberation Movement. Because of his important role in the Mojahedin and his arrest in Dubai in 1970, Ahmadian received a life sentence at the 1972 trials. Becoming a Marxist in goal, he led the Marxist Mojahedin Commune in Shiraz prison and joined Paykar as soon as he was released in January 1979. Two years later he met his death at the hands of the Islamic Republic.

Ali-Reza (Sepasi) Ashtiyani, another Paykar leader, had been imprisoned as early as 1964 for belonging to a religious group named the Muslim Nation’s Party (Hezb-e Mellal-e Islami). He joined the Mojahedin in 1971 while studying architecture at Tehran University, and had managed to go underground just before the mass arrest of 1971-2. His father was a small shopkeeper in Ashtiyan.

Puran Bazargan, yet another Paykar activist, was Hanifnezhad’s widow. From a devout middle-class family in Mashhad, she was the first woman member of the Mojahedin, and the principal of the Refah Girls School. Although she became a Marxist, her brother Mansur Bazargan, who had been in prison since the 1972 trials, remained a staunch Muslim. Her sister-in-law Fatemeh Amini-Bazargan, died under police torture refusing to betray her colleagues from the Muslim Mojahedin, Puran’s own sister, however, died fighting for the Marxist Mojahedin.

Mohammad Shafiiha, another Paykar leader, had been close to the Mojahedin since his years at the Alavi school. One brother had been sentenced to life imprisonment in the 1972 mass trials; another brother had died in 1972 when the bomb he was making had blown up. Sadiqeh Rezi, who became one of the first women martyrs of the Marxist Mojahedin, was the younger sister of the famous Rezai brothers. Imprisoned in 1972 for her Mojahedin activites, she escaped from gaol in 1974 with the help of the Feda’iyan and joined the Marxist Mojahedin. In later years, the Rezai family was to gloss over her Marxist attachments.

Lila Zomorradian, another woman martyr from the Marxist Mojahedin, was the younger sister of one of the activits sentenced in 1972 to fifteen years imprisonment. From a wealthy and highly religious family in the Tehran bazaar, she studied at the Refah School, at the Hosaynieh-e Ershad, and at the Social Work College in Tehran University where she joined the Mojahedin. She was married to Sharif-Vaqefi — the same Sharif-Vaqefi who led the Muslim opposition to the Marxists within the Mojahedin.

Morteza Aladpush, who survived to became a founding member of Paykar, had been one of the Mojahedin tried in 1972. From a wealthy and highly religious family in Tehran, Aladpush joined the strongly anti-Baha’i group named the Jojjatieh Society while at the Lavi School, and was introduced to the Mojahedin while studying architecture at Tehran University. Becoming a Marxist while serving his sentence, he led the Marxist Mojahedin Commune in Qasr prison.

P. 149

The real explanation for why so many of the Mojahedin went over to Marxism can be traced to the following three developments:

1. Their disillusionment with the anti-regime clergy, notably with Ayatollah Khomeini.

2. Their inability to make further headway among the modern educated intelligentsia — a class in Iran that had traditionally been anti-religious as well as militantly secular.

3. Their ongoing dialogue with left-wing intellectuals; with the Feda’iyan and other radical fellow prisoners; with student organizations in exile and revolutionary groups in the Arab world; and, finally, with veterans from the early Mojahedin who had already discarded Islam in favour of Marxism.

Each of these three developments warrants detailed explanation, especially at a time when Islam is constantly proclaiming its total victory over Marxism.

P. 186-187

The Mojahedin could not risk drifting too close to either side. Aligning with the ‘liberal bourgeoisie’ of the Provisional Government would have tarnished its left-wing credentials, especially at a time when other revolutionary organizations, notabley the Feda’iyan and Paykar, were threatening to outflank the Mojahedin. Most members of the Mojahedin, as well as of other leftist organizations, saw close parallels between the Russian Revolution and the Islamic Revolution, and jumped to the conclusion that Iran now faced a historical crossroad — either the ‘liberal democratic’ path towards bourgeois rule; or the ‘revolutionary democratic’ path towards working-class liberation. Few realized that th ereal choice was not between bourgeois and socialist societies, but between liberal democracy as epitomized by Bazargan, and populist imagery was costly; for by the time the Left realized its mistake the country had already been swept headlong towards Khomeini’s theocracy.

P. 190

The first skirmish between the Mojahedin and the clerical shadow government came on 13 April 1979. On that day, one of the neighbourhood komitehs in Tehran seized two of Ayatollah Taleqani’s sons on the grounds they were carrying arms; one was a Mojahedin sympathizer; and the other, Mojtaba Taleqani, belonged to the Paykar Organization. Ayatollah Taleqani, who had been complaining about the arbitrary behavior of the komitehs ever since the revolution, reacted by closing down his office and accusing the pasdars of trampling over people’s basic rights. The following day, the Mojahedin, joined by the Fade’iyan and other secular groups, poured into the streets to show their full solidarity with Taleqani. Their main slogan was, ‘Victory for Taleqani; defeat for the reactionaries’. The Mojahedin proclaimation announceing the demonstration criticized the secrecy surrounding the Revolutionary Council, and declared that ‘irresponsible elements’ had taken the law into their own hands; that ‘sinister forces’ were plotting to ‘monpolize power’, and that ‘reactionary invididuals’ were scheming to set up a ‘new dictatorship’. The Mojehding offered to place their entire organization under the personal command of Ayatollah Taleqani. In the following days, clubwielders attacked Mojahedin offices in a number of provincial cities, notably Yazd, Kashan and Abadan. This was the first time Khomeini had faced a serious challenge from the Left. It would not be the last time.

http://bp0.blogger.com/_NmEVEzqvhCg/R68w8StG3pI/AAAAAAAABAk/ymN8WL3o2KA/s1600-h/khomeini_Ali_eshraghi.jpg
Khomeini’s grandson, Ali Eshraghi

http://bp2.blogger.com/_NmEVEzqvhCg/R68wBytG3oI/AAAAAAAABAc/7LSMkIAQzyc/s1600-h/Khomeini_Zahra_Eshraghi.jpg
Khomeini’s granddaughter, Zahra Eshraghi

http://www.sfgate.com/cgi-bin/object/article?f=/c/a/2005/08/24/DDG6SE9BAQ24.DTL&o=0
SEAN PENN IN IRAN
After a series of mysterious telephone calls, a group of Armani-suited “Siths” escorted Sean Penn and his friends into the foothills near Tehran to meet with Hassan Khomeini, the grandson of the late Ayatollah. Their conversation, conducted through an interpreter, centered on religion, human rights and the strained relations between the U.S. and Iran.

http://bp2.blogger.com/_NmEVEzqvhCg/R68x3ytG3qI/AAAAAAAABAs/lhB9FHDtOrA/s1600-h/Hassan_khomeini.jpg
Khomeini’s grandson, Kassan Khomeini

http://www.iranian.com/Features/2002/January/Interogation/index.html
Admit it
Interrogation of former agents of Iran’s Ministry of Intelligence on video

National Union of Journalists, UK
January 22, 2002
The Iranian
Introduction

The National Union of Journalists in the UK has released details of videotapes that throw light on a desperate conspiracy to conceal the truth about the serial killings of journalists and writers in Iran. Five were killed between November 1998 and February 1999.

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http://www.motherjones.com/washington_dispatch/2008/06/three-days-in-rome-plan-for-iran-coup.html

Three Days in Rome Redux: The Cocktail Napkin Plan for an Iran Coup
June 7, 2008

More on the covert meetings between Pentagon officials and shady Iranian expats, plus other intel details from a new Senate report

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http://www.youtube.com/watch?v=gr3C_cW6NO8&NR
Tehran the hottest city

http://www.youtube.com/watch?v=aoPc66Cl7HI
Picture of Tehran

http://www.youtube.com/watch?v=Ao1f-cbyMfY
Pictures from Tehran

http://www.youtube.com/watch?v=dkiw3Jp6nbw
A compilation of pictures of Tehran, mega capital of Iran

http://www.youtube.com/watch?v=RmVvKRm9JdU
Government Mayor – Mohammad Bagher Ghalibaf

Area
– City 1,500 km² (579 sq mi)
– Urban 686 km² (265 sq mi)
– Metro 18,814 km² (7,264 sq mi)
Elevation 1,200 m (3,900 ft)

Population (2006)
– City 7,797,520
– Density 10,000/km² (25,899/sq mi)
– Metro 14,000,000

More than half of Iran’s industry is based in Tehran. Industries include the manufacturing of automobiles, electronics and electrical equipment, military weaponry, textiles, sugar, cement, and chemical products. It is also a leading center for the sale of carpets and furniture. There is an oil refinery south of the city.

The city has numerous large museums, art centers, palace complexes and cultural centers.

In the 20th century, Tehran faced a large migration of people from all around Iran. Today, the city contains a mix of various ethnic and religious minorities, and is filled with many historic mosques, churches, synagogues and Zoroastrian fire temples.

Tehran is the biggest and most important educational center of Iran. Today There are nearly 50 major colleges and universities in total in Greater Tehran.

Since the establishment of Darolfonoon in the mid 1800s, Tehran has amassed a large number of institutions of higher education.

http://www.youtube.com/watch?v=HpUMW2vo29s
tehran my love2

http://www.youtube.com/watch?v=4AITypanK8A
iran tehran my love

Images from Tehran
http://youtube.com/watch?v=qy4difUazd0

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http://akbarganji.net/tabarzadi/index.htm

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http://www.youtube.com/watch?v=gU5aS1Nd63A
Censored interview with a girl in Tehran, capital of Iran. She defends open relations with opposite sex And looking for American style of life.
Typical Misguided Iranian Girl and their aimless strive to pursue superficial aspects of life without clear assessment of what life is

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http://www.youtube.com/watch?v=pACNT_c4nfo
How U.S shot down Iran Air Flight 655?

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http://www.washingtonpost.com/wp-dyn/articles/A58298-2005Feb2.html
Halliburton Doing Business With the ‘Axis of Evil’

By Jefferson Morley
washingtonpost.com staff writer
Thursday, February 3, 2005; 8:00 AM

http://money.cnn.com/magazines/fortune/fortune_archive/2007/02/19/8400167/?postversion=2007020606
Iran’s cola war
Sanctions? Coke and Pepsi found a way around them and are battling for market share in Tehran with local Zamzam Cola. Fortune’s Eric Ellis reports.
By Eric Ellis, Fortune
February 6 2007: 6:06 AM EST

Coca-Cola? Isn’t corporate America prohibited by Washington’s sanctions from doing business in Iran? Yes, for the most part, says U.S. Treasury spokeswoman Molly Millerwise. But Treasury has bent the rules for foodstuffs, a loophole through which American drinks giants Coca-Cola (Charts) and PepsiCo (Charts) have been able to pour thousands of gallons of concentrate into Iran via Irish subsidiaries.

And that has allowed these brands, so much a symbol of America – and so much an affront to Iran’s conservative clerics – to open another front in their global cola war. After just a few years back in Iran, Coke and Pepsi have grabbed about half the national soft drink sales in what is one of the Middle East’s biggest drinks market.

That may be good news in Atlanta and Purchase, N.Y., respectively, where the companies are based, but it’s a hard fact for some of Iran’s theocrats to swallow. They want Iranians to shun “Great Satan” brands like Coke and Pepsi, which they claim send profits from Iranian sales to Israel. Hardliners like Mehdi Minai, a senior official of the Public Demands Council, frequently appear on state TV to denounce Coke and Pepsi, which he says stands for “Pay each penny to save Israel.”

Zamzam’s 17 plants bottled Pepsi before the 1979 Islamist revolution. Now the company is controlled by the Foundation of the Dispossessed, a powerful bonyad, one of many religious charities Ayatollah Ruhollah Khomeini used to quasi-nationalize Iran’s economy.

Conceived as a way of helping Iran’s needy, the bonyads have become gold mines for the powerful. In the case of Zamzam, it answers to Iran’s Supreme Leader, Ayatollah Ali Khamenei, and Minai is lobbying him hard for a ban on the U.S. brands.

Coke and Pepsi shrug off the hardliner rhetoric and insist they are aren’t breaking any laws – American or Iranian – by licensing products in Iran through their concentrate subsidiaries in Ireland.

Coke spokesman Charles Sutlive echoes Pepsi’s line, adding that Coke, which also licenses Fanta, Sprite and Dasani water through Khoshgovar, has “no tangible assets in Iran.”

http://www.globalresearch.ca/index.php?context=va&aid=5227
War Profiteering: How do Economic Sanctions affect Halliburton Energy Services, Inc.?

by Anthony Newkirk

Global Research, March 29, 2007

Economic sanctions have been applied on Iran pursuant to a US sponsored United Nations Security Council resolution. Recent reports in the New York Times and the Washington Post focus on U.S. pressures on foreign companies and governments which are known to either support or have business ties with Iran. Curiously, these reports do not mention Halliburton Energy Services Inc, a company with direct links to the Vice President’s Office, which has, despite the US sponsored sanctions, important investments in Iran’s energy sector.1

Late last month, Halliburton’s public relations department announced that the oilfield services firm will sell its KBR unit that is mired in the Nigerian bribery scandal. Then on March 11 came truly bizarre news: Halliburton’s corporate headquarters will move from Houston to Dubai in the United Arab Emirates. Even with last year’s furor over Dubai Ports World, the public response so far has been crashing silence. But I suppose that only makes sense as U.S.-UAE relations aren’t newsworthy either (Lockheed Martin’s sale of 80 F-16 fighters, on-going free trade talks, and the Navy’s contract with Dubai-owned Inchcape Shipping Services).2

Reducing corporate tax liability seems to be a motive for Halliburton management who want to relocate company headquarters to Dubai. Nor do the United States and the UAE have an extradition treaty, which Halliburton executives may find useful someday.3 But this is nothing next to the fact that Halliburton already has an institutional presence in Dubai and is violating U.S. embargoes against “rogue states” if not directly, then at least in spirit.

Incorporated in the Cayman Islands, Halliburton Products and Services Limited (HPSL) works out of an office in Dubai. Halliburton claims that HPSL is an “independent” foreign subsidiary that is not directly managed by U.S. citizens. Halliburton argues that it therefore does not have to pay taxes on HPSL’s revenues. The argument continues that, not being managed by U.S. citizens, Halliburton’s foreign subsidiaries are not subject to U.S. legal restrictions. But the Treasury Department’s Office of Foreign Assets Control maintains that “U.S. persons may not approve, finance, facilitate or guarantee any transaction by a foreign person where that transaction by a foreign person would be prohibited if performed by a U.S. person or from the United States.”4 No matter. Besides, perhaps I miss the point but how can HPSL be both a “subsidiary” and “independent” at the same time?

Ever since the start of the Bush administration, anyone who cared to know could learn that Halliburton was under Federal investigation for violating sanctions against Iran. It is also common knowledge – that is, among those who care to know – that some of the deeds in question may have begun when Vice-President Dick Cheney was Halliburton’s CEO in the 1990s nor has there been a criminal prosecution in relation to any of them.5

http://www.nytimes.com/2007/03/21/business/worldbusiness/21sanctions.html?ex=1332129600&en=405caebd1bbfffdb&ei=5088&partner=rssnyt&emc=rss

U.S. Cautions Foreign Companies on Iran Deals
By STEVEN R. WEISMAN
Published: March 21, 2007

That may be about to change. The Bush administration has quietly been warning energy companies, including Shell, Repsol and SKS, the Malaysian oil company, as well as the governments of China, India, Pakistan and Malaysia, that penalties are possible if they pursue energy deals with Iran.

As a result, several huge projects planned for Iran could be vulnerable. These include one possible $10 billion project by Royal Dutch Shell and the Spanish oil company, Repsol YPF, to develop a natural gas field offshore in Iran, and a $20 billion venture by SKS Ventures of Malaysia to produce natural gas in Iran’s Golshan and Ferdows fields.

Last month, the United States ambassador to Spain, Eduardo Aguirre Jr., met with Repsol executives in Madrid to advise them against going forward with a deal to develop Iran’s South Pars field, which contains one of the world’s biggest natural gas deposits. The ambassador was told that the deal was not yet final, according to American and Repsol officials.

At the time, President Bill Clinton, acting to avoid a confrontation with Europe and in part to send a conciliatory message to Iran when moderates seemed to be vying for power, waived the sanctions on several European companies, including Total, the leading French oil concern.

Germany had $6.2 billion in outstanding export credits to Iran as of 2005, according to figures circulating at the United Nations. But Germany reported recently that after cutting back credits by 60 percent in the last two years, it planned further cutbacks this year.

Japan, which had $1.9 billion in credits as of 2005, has also informed the United States that it has granted no medium- or long-term credit insurance since last June and has cut short-term credits. American officials say they have received similar pledges from Italy and France to cut back their export credits.

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/31/AR2007013102166.html
U.S. Cautions Europeans to Avoid Oil, Gas Deals With Iran

By Steven Mufson
Washington Post Staff Writer
Thursday, February 1, 2007;

The Bush administration is warning European oil and gas companies against investing in Iran, trying to head off a push by Tehran to attract new investment by international petroleum giants.

Despite the administration’s pressure, however, many of the world’s biggest oil companies were expected to attend a meeting in Vienna today and tomorrow held by National Iranian Oil Co. to drum up interest in 12 onshore and five offshore blocks. Executives from Royal Dutch Shell PLC, Russia’s Lukoil, China’s Sinopec International Petroleum Exploration and Production Corp. and Austria’s OMV will give presentations.

“Obviously Iran is very interesting oil territory for everybody,” said Patricia Marie, spokeswoman for the French oil company Total S.A., which invested about $4 billion in Iran between 1995 and 2002 and is sending a representative to the meeting. As for U.S. admonitions, Marie said, “We are listening. . . . But we respect the French law, the European laws; we are not obliged to respect American law.”

Last week, Royal Dutch Shell and the Spanish company Repsol YPF S.A. signed a preliminary agreement with Iran to explore the possible development of another multibillion-dollar LNG project.

Oil company executives and consultants said any reluctance to invest in Iran ultimately has more to do with the stingy terms Iran offers than with arm-twisting by the U.S. government. Generally, Iranian contracts let foreign companies recoup costs and give them enough oil for them to make a small profit before control of the fields is turned over to National Iranian Oil.

“In effect, the Iranians have made our sanctions work better than we have,” said Gary G. Sick, an expert on Iran at Columbia University.

http://www.iht.com/articles/ap/2007/01/09/asia/AS-GEN-China-Iran-Nuclear.php
U.S. cautions China over reported multibillion dollar gas deal with Iran

The Associated Press
Published: January 9, 2007

China’s No. 3 oil company, China National Offshore Oil Corp., was reported last month to be in talks to develop Iran’s Northern Pars gas field. Around the same time, the U.N. Security Council unanimously agreed to impose sanctions on Iran for refusing to suspend a uranium enrichment program that is suspected of being part of a nuclear weapons project.

Stevenson said U.S. Embassy officials broached the issue in late December with the oil company, known as CNOOC, and with Chinese authorities she would not specify.

The U.S. officials were told that “no final agreement between CNOOC and Iran has been reached,” she said.

China has tread a careful line on Iran. Though worried about nuclear proliferation and wary of crossing swords with the U.S. superpower, Beijing is obsessed with securing energy supplies for its resource-scarce economy, and Iran is a willing supplier.

The Iranian Mehr news agency reported last month that CNOOC signed a US$16 billion (€12 billion) agreement to develop the Northern Pars gas field and build a liquefied natural gas facilities. Dow Jones Newswires, however, quoted CNOOC spokesman, Liu Junshan, last month as saying that the company was still in talks with Iran on the project.

The sanctions apply to China National Electronic Import-Export Company (CEIEC), China National Aero-Technology Import and Export Company (CATIC), and Zibo Chemet Equipment Company.

http://money.cnn.com/magazines/fortune/fortune_archive/2005/02/07/8250445/index.htm
HALLIBURTON’S TEHRAN HIDEAWAY
By Vivienne Walt in Tehran
February 7, 2005

“HALLIBURTON!” CHIRPED THE employee who answered the telephone in Tehran. Tehran, the capital of the Islamic Republic of Iran, part of the “axis of evil”? Yes, the company was a tenant, confirmed the guard in the lobby of a building on Bucharest Street when we dropped in one recent afternoon. The staff rarely invited guests up to their tenth-floor offices, said the guard, and the company’s name was not among those displayed on the lobby wall. Halliburton finally dispatched two Iranian staff members to ask this reporter to leave. Said the guard softly: “We’re not too sure what the company is up to.”

Actually it’s no big mystery. In January Halliburton and the local Oriental Kish Oil won a $308 million contract to drill for gas in Iran’s giant South Pars field. “Halliburton and Oriental Kish are the final winners,” Akbar Torkan, managing director of Pars Oil & Gas, said on national TV. The statement sparked fury among Iran’s hardliners. One newspaper warned, “Footsteps of the Yankees heard moving in on Iran’s oil sector.”

o are U.S. companies tiptoeing back into Iran, ten years after Bill Clinton imposed sanctions? Iran’s deputy petroleum minister for international affairs, Hadi Nejad Hosseinian, certainly thinks so: “The U.S. oil companies are in touch with us,” he told FORTUNE in his office in Tehran. “American companies are very interested in investing in Iran,” he said, adding that a top U.S. oil executive, unnamed, visited him in Tehran last summer. “They want to show their objection to the U.S. administration.” In Halliburton’s case, it says Oriental Kish contracted out the work to Halliburton Products & Services Ltd., or HPSL, a Dubai-based subsidiary registered in the Cayman Islands, which works solely in Iran. “These entities and activities are staffed and managed by non-U.S. personnel,” says company spokesman Wendy Hall. “Halliburton’s business is clearly permissible.” A second Houston oil services company, Baker Hughes, is weighing doing part of the work with Oriental Kish, according to sources close to the talks.

Under U.S. law, a foreign subsidiary can legally operate in Iran if it acts independently of its parent and has no American executives. In addition, there’s a $40 million limit on how much a non-U.S. company can invest in Iran. Halliburton spokeswoman Beverly Scippa told FORTUNE that HPSL’s new contract is worth “between $30 million and $35 million over the next three years.”

http://www.populistamerica.com/confessions_of_a_sanction_buster
Confessions of a Sanction-Buster

April 3, 2007
by Anthony Newkirk

Nuclear warheads aimed at the Middle East, war in Afghanistan and Iraq, huge naval demonstrations in the Persian Gulf, reports of terrorist incidents inside Iran – the long-standing claims by President Bush and others that Tehran “exports terror” is not exactly of the same magnitude as these. But you won’t think so if you rely on the domestic mainstream media for information. For instance, recent reports in the New York Times and Washington Post about U.S. government pressure on foreign companies and governments who help Iran’s energy sector curiously do not mention Halliburton Energy Services Inc.

Late February, Halliburton’s public relations department announced that the oilfield services firm will sell its KBR unit that is mired in the Nigerian bribery scandal. Then on March 11 came truly bizarre news: Halliburton’s corporate headquarters will move from Houston to Dubai in the United Arab Emirates. Even with last year’s furor over Dubai Ports World, the public response so far has been crashing silence. But I suppose that only makes sense as U.S.-UAE relations aren’t newsworthy either (Lockheed Martin’s sale of 80 F-16 fighters, on-going free trade talks, and the Navy’s contract with Dubai-owned Inchcape Shipping Services).

Reducing corporate tax liability seems to be a motive for Halliburton management who want to relocate company headquarters to Dubai. Nor do the United States and the UAE have an extradition treaty, which Halliburton executives may find useful someday. But this is nothing next to the fact that Halliburton already has an institutional presence in Dubai and is violating U.S. embargoes against “rogue states” if not directly, then at least in spirit.

Incorporated in the Cayman Islands, Halliburton Products and Services Limited (HPSL) works out of an office in Dubai. Halliburton claims that HPSL is an “independent” foreign subsidiary that is not directly managed by U.S. citizens. Halliburton argues that it therefore does not have to pay taxes on HPSL’s revenues. The argument continues that, not being managed by U.S. citizens, Halliburton’s foreign subsidiaries are not subject to U.S. legal restrictions. But the Treasury Department’s Office of Foreign Assets Control maintains that “U.S. persons may not approve, finance, facilitate or guarantee any transaction by a foreign person where that transaction by a foreign person would be prohibited if performed by a U.S. person or from the United States.” No matter. Besides, perhaps I miss the point but how can HPSL be both a “subsidiary” and “independent” at the same time?

http://www.atimes.com/atimes/South_Asia/GA11Df07.html
India finds a $40bn friend in Iran
By M K Bhadrakumar
Jan 11, 2005

India’s oil diplomacy took a giant leap forward on Friday when New Delhi unveiled a multibillion-dollar deal with Iran and Russia that will be crucial to India’s long-term energy security, and took the initiative the same week to host the first-ever conference on regional cooperation among Asian oil-producing and consuming countries.

In its US$40 billion deal with the National Iranian Oil Co (NIOC), India committed to import natural gas from Iran over a 25-year period and to develop two Iranian oil fields and a gas field. Iran will sell the liquefied natural gas (LNG) to India at a price linked to Brent crude oil. According to the agreement, India will pay $1.2 plus 0.065 of Brent crude average, with an upper ceiling of $31 per barrel. Iran will ship 5 million tonnes of LNG to India annually, with a provision to increase the quantity to 7.5 million tonnes.

As part of the deal, India’s ONGC Videsh Ltd (OVL) gets a 20% share in the development of Iran’s biggest onshore oilfield, Yadavaran. The Indian company will also get 100% rights in the 300,000-barrel-per-day Jufeir oilfield. The stake in Yadavaran translates into 60,000 barrels per day of oil for India. Significantly, Chinese state oil company Sinopec (China National Petroleum and Chemical Corp) operates the Yadavaran field. With the deal signed in Delhi, India will now hold a 20% stake in Yadavaran, Iran 30%, while China retains its existing 50% share.

In March, Beijing and Tehran signed a deal worth $100 billion. Billed as the “deal of century”, this agreement is likely to increase by another $50 billion to $100 billion, bringing the total close to $200 billion, when a similar oil agreement, currently being negotiated, is inked. The gas deal entails the annual export of some 10 million tonnes of Iranian LNG for a 25-year period, as well as the participation, by China’s state oil company, in such projects as exploration and drilling, petrochemical and gas industries, pipelines, services and the like.

India also confirmed that it is talking to Russia for investing in crumbling oil major Yukos. Officials in New Delhi said ONGC was considering investing $2 billion for a stake in Yuganskneftegaz, the main production unit of Yukos, which was auctioned last month in Moscow in a cloak of mystery. Incidentally, Russia recently offered a 20% stake in Yuganskneftegaz to Sinopec. In the event of both India and China taking shares in Yuganskneftegaz, it would become a triangular Russian-Chinese-Indian collaboration – alongside the envisaged Chinese-Indian-Iranian cooperation in Yadavran.

http://www.treas.gov/offices/enforcement/ofac/programs/iran/iran.pdf
What You Need To Know About U.S. Economic Sanctions
An overview of O.F.A.C. Regulations involving Sanctions against Iran

As a result of Iran’s support for international terrorism and its aggressive actions against non-belligerent shipping in the Persian Gulf, President
Reagan, on October 29, 1987, issued Executive Order 12613 imposing a new import embargo on Iranian-origin goods and services. Section 505 of the International Security and Development Cooperation Act of 1985 (“ISDCA”) was utilized as the statutory authority for the embargo which gave rise to the Iranian Transactions Regulations, Title 31 Part 560 of the U.S. Code of Federal Regulations (the “ITR”).

Effective March 16, 1995, as a result of Iranian sponsorship of international terrorism and Iran’s active pursuit of weapons of mass destruction,
President Clinton issued Executive Order 12957 prohibiting U.S. involvement with petroleum development in Iran. On May 6, 1995, he signed Executive Order 12959, pursuant to the International Emergency Economic Powers Act (“IEEPA”) as well as the ISDCA, substantially tightening sanctions against Iran.

On August 19, 1997, the President signed Executive Order 13059 clarifying Executive Orders 12957 and 12959 and confirming that virtually all trade and investment activities with Iran by U.S. persons, wherever located, are prohibited. On March 17, 2000, the Secretary of State announced that sanctions
against Iran would be eased to allow U.S. persons to purchase and import carpets and food products such as dried fruits, nuts, and caviar from Iran. This change was implemented through amendments to the ITR at the end of April 2000.

Corporate criminal penalties for violations of the Iranian Transactions Regulations can range up to $500,000, with individual penalties of up to $250,000 and 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively.

IMPORTS FROM IRAN – Goods or services of Iranian origin may not be imported into the United States, either directly or through third countries, with the following exceptions:

(a) Gifts valued at $100 or less;
(b) Information or informational materials;
(c) Foodstuffs intended for human consumption that are classified under chapters 2-23 of the Harmonized Tariff Schedule of the United States; and
(d) Carpets and other textile floor coverings and carpets used as wall hangings that are classified under chapter 57 or heading 9706.00.0060 of the Harmonized Tariff Schedule of the United States.

EXPORTS TO IRAN – In general, unless licensed by OFAC, goods, technology (including technical data or other information subject to Export Administration Regulations), or services may not be exported, reexported, sold or supplied, directly or indirectly, from the United States or by a U.S. person, wherever located, to Iran or the Government of Iran. The ban on providing services includes any brokering function from the United States or by U.S. persons, wherever located. For example, a U.S. person, wherever located, or any person acting within the United States, may not broker offshore transactions that benefit Iran or the Government of Iran, including sales of foreign goods or arranging for thirdcountry financing or guarantees.

In general, a person may not export from the U.S. any goods, technology or services, if that person knows or has reason to know such items are intended specifically for supply, transshipment or reexportation to Iran. Further, such exportation is prohibited if the exporter knows or has reason to know the U.S. items are intended specifically for use in the production of, for commingling with, or for incorporation into goods, technology or services to be directly or indirectly supplied, transshipped or reexported exclusively or predominately to Iran or the Government of Iran. A narrow exception is created for the exportation from the United States or by U.S. persons wherever located of low-level goods or technology to third countries for incorporation or substantial transformation into foreign-made end products, provided the U.S. content is insubstantial, as defined in the regulations, and certain other conditions are met.

Donations of articles intended to relieve human suffering (such as food, clothing, and medicine), gifts valued at $100 or less, licensed exports of agricultural commodities, medicine, and medical devices, and trade in “informational materials” are permitted. “Informational materials” are defined to include publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds, although certain Commerce Department restrictions still apply to some of those materials.

FINANCIAL DEALINGS WITH IRAN – New investments by U.S. persons, including commitments of funds or other assets, loans or any other extensions of credit, in Iran or in property (including entities) owned or controlled by the Government of Iran are prohibited.

AGRICULTURAL COOPERATIVE BANK OF IRAN (a.k.a. BANK TAAVON KESHAVARZI IRAN), No. 129 Patrice Lumumba Street, Jalal-Al-Ahmad Expressway, P.O. Box 14155/6395, Tehran, Iran

AGRICULTURAL DEVELOPMENT BANK OF IRAN (a.k.a. BANK JOSIAIYI KESHAHVARZI), Farahzad Expressway, Tehran, Iran

BANK JOSIAIYI KESHAHVARZI (a.k.a. AGRICULTURAL DEVELOPMENT BANK OF IRAN), Farahzad Expressway, Tehran, Iran

BANK MARKAZI JOMHOURI ISLAMI IRAN (a.k.a. THE CENTRAL BANK OF IRAN), Ferdowsi Avenue, P.O. Box 11365-8551, Tehran, Iran

BANK MASKAN (a.k.a. HOUSING BANK (of Iran)), Ferdowsi St., Tehran, Iran

BANK MELLAT, Park Shahr, Varzesh Avenue, P.O. Box 11365/5964, Tehran, Iran, and all offices worldwide, including, but not limited to:
BANK MELLAT (Branch), Ziya Gokalp Bulvari No. 12, Kizilay, Ankara, Turkey
BANK MELLAT (Branch), Binbir Cicek Sokak, Buyukdere Caddesi, P.O. Box 67, Levant, Istanbul, Turkey
BANK MELLAT (Branch), 48 Gresham Street, London EC2V 7AX, England

BANK MELLI, P.O. Box 11365-171, Ferdowsi Avenue, Tehran, Iran, and all offices worldwide, including, but not limited to:

BANK MELLI (Branch), 4 Moorgate, London EC2R 6AL, England
BANK MELLI (Branch), Schadowplatz 12, 4000 Dusseldorf 1, Germany
BANK MELLI (Branch), Friedenstrasse 4, P.O. Box 160 154, 6000 Frankfurt am Main, Germany
BANK MELLI (Branch), P.O. Box 112129, Holzbruecke 2, 2000 Hamburg 11, Germany
BANK MELLI (Branch), Odeonsplatz 18, 8000 Munich 22, Germany
BANK MELLI (Branch), 43 Avenue Montaigne, 75008 Paris, France
BANK MELLI (Branch), 601 Gloucester Tower, The Landmark, 11 Pedder Street, P.O. Box 720, Hong Kong
BANK MELLI (Representative Office), 333 New Tokyo Building, 3-1 Marunouchi, 3-chome, Chiyoda-ku, Tokyo, Japan
BANK MELLI (Representative Office), 818 Wilshire Boulevard, Los Angeles, California 90017, U.S.A
BANK MELLI (Representative Office), 767 Fifth Avenue, 44th Floor, New York, New York 10153, U.S.A
BANK MELLI (Representative Office), Smolensky Boulevard 22/14, Kv. S., Moscow, Russia
BANK MELLI (Branch), Flat No. 1, First Floor, 8 Al Sad El-Aaly, Dokki, P.O. Box 2654, Cairo, Egypt
BANK MELLI (Branch), Ben Yas Street, P.O. Box No. 1894, Riga Deira, Dubai, U.A.E
BANK MELLI (Branch), P.O. Box 2656, Shaikha Maryam Building, Liwa Street, Abu Dhabi, U.A.E
BANK MELLI (Branch), B.P.O. Box 1888, Clock Tower, Industrial Road, Al-Ain Club Building in from Emertel Al Ain, Al Ain, Abu Dhabi, U.A.E
BANK MELLI (Branch), P.O. Box 1894, Riqa, Ban Yas Street, Deira, Dubai, U.A.E
BANK MELLI (Branch), Mohd-Habib Building, Al-Fahidi Street, P.O. Box 3093, Bur Dubai, Dubai, U.A.E.
BANK MELLI (Branch), P.O. Box 248, Fujairah, U.A.E
BANK MELLI (Branch), Sami Sagar Building Oman Street Al-Nakheel, P.O. Box 5270, Ras-Al Khaimah, U.A.E
BANK MELLI (Branch), P.O. Box 459, Al Bory Street, Sharjah, U.A.E.
BANK MELLI (Branch), P.O. Box 785, Government Road, Shaikh Mubarak Building, Manama, Bahrain
BANK MELLI (Branch), P.O. Box 23309, Shaikh Salman Street, Road No. 1129, Muharraq 211, Bahrain
BANK MELLI (Branch), P.O. Box 5643, Mossa Abdul Rehman Hassan Building, 238 Al Burj St., Ruwi, Muscat, Oman

BANK OF INDUSTRY AND MINE (of Iran) (a.k.a. BANK SANAT VA MADAN), Hafez Avenue, P.O. Box 11365/ 4978, Tehran, Iran

BANK REFAH KARGARAN (a.k.a. WORKERS WELFARE BANK (of Iran)), Moffettah No. 125, P.O. Box 15815 1866, Tehran, Iran

BANK SADERAT IRAN, Bank Saderat Tower, P.O. Box 15745-631, Somayeh Street, Tehran, Iran, and all offices worldwide, including, but not limited to:

BANK SADERAT IRAN (Branch), Hamdam Street, Airport Road Intersection, P.O. Box 700, Abu Dhabi, U.A.E
BANK SADERAT IRAN (Branch), Al-Am Road, P.O. Box 1140, Al Ein, Abu Dhabi, U.A.E
BANK SADERAT IRAN (Branch), Liwara Street, P.O. Box 16, Ajman, U.A.E
BANK SADERAT IRAN (Branch), 3rd Floor Dom Dasaf Building, Mejloka Street 7A, Ashkhabad, Turkmenistan
BANK SADERAT IRAN (Branch), 25-29 Panepistimiou Street, P.O. Box 4308, GR-10210, Athens 10672, Greece
BANK SADERAT IRAN (Branch), Imam Ali Street, Sahat Yaghi, Ras Elain-Alektisad Building 2nd Floor, Baalbeck, Lebanon
BANK SADERAT IRAN (Branch and Offshore Banking Unit), 106 Government Road, P.O. Box 825, Manama Town 316, Bahrain
BANK SADERAT IRAN (Branch), Hamra Pavillion Street, Savvagh and Daaboul Building 1st Floor, P.O. Box 113-6717, Beirut, Lebanon
BANK SADERAT IRAN (Branch), Alghobairi Boulevard, Beirut, Lebanon
BANK SADERAT IRAN (Branch), 28 Sherif Street, P.O. Box 462, Cairo, Egypt
BANK SADERAT IRAN (Branch), Old Ben-Ghanem Street (next to God Market), P.O. Box 2256, Doha, Qatar
BANK SADERAT IRAN (Branch), Almaktoum Road, P.O. Box 4182, Deira, Dubai, U.A.E
BANK SADERAT IRAN (Branch), Bazar Murshid, P.O. Box 4182, Deira, Dubai, U.A.E
BANK SADERAT IRAN (Branch), Alfahid Road, P.O. Box 4182, Bur Dubai, Dubai, U.A.E
BANK SADERAT IRAN (Branch), Sherea Shekikh Zayad Street, P.O. Box 55, Fujairah, U.A.E
BANK SADERAT IRAN (Branch), Wilhelm Leuschner Strasse 41, P.O. Box 160151, W-6000 Frankfurt am Main, Germany
BANK SADERAT IRAN (Branch), P.O. Box 112227, Hopfenhof Passage, Kleiner Bustah 6-10, W- 2000 Hamburg 11, Germany
BANK SADERAT IRAN (Branch), Lothbury, London EC2R 7HD, England
BANK SADERAT IRAN (Representative Office), 707 Wilshire Boulevard, Suite 4880, Los Angeles, California 90017, U.S.A
BANK SADERAT IRAN (Representative Office), 55 East 59th Street, 16th Floor, New York, New York 10022, U.S.A
BANK SADERAT IRAN (Branch), P.O. Box 4269, Mutrah, Muscat, Oman
BANK SADERAT IRAN (Branch), 16 rue de la Paix, Paris 2eme, 75002 Paris, France
BANK SADERAT IRAN (Branch), Alaroba Road, P.O. Box 316, Sharjah, U.A.E
BANK SANAT VA MADAN (a.k.a. BANK OF INDUSTRY AND MINE (of Iran)), Hafez Avenue, P.O. Box 11365/ 4978, Tehran, Iran

BANK SEPAH, Emam Khomeini Square, P.O. Box 11364, Tehran, Iran, and all offices worldwide, including, but not limited to:

BANK SEPAH (Branch), Muenchener Strasse 49, P.O. Box 10 03 47, W-6000 Frankfurt am Main 1, Germany
BANK SEPAH (Branch), 5/7 Eastcheap, EC3M 1JT London, England
BANK SEPAH (Representative Office), 650 Fifth Avenue, New York, New York 10019, U.S.A
BANK SEPAH (Branch), 17 Place Vendome, 75001 Paris, France.
BANK SEPAH (Branch), Via Barberini 50, 00187 Rome, Italy
BANK SEPAH (Representative Office), Ufficio di Rappresentan Za, Via Ugo Foscolo 1, 20121 Milan, Italy

BANK TAAVON KESHAVARZI IRAN (a.k.a. AGRICULTURAL COOPERATIVE BANK OF IRAN) No. 129 Patrice Lumumba Street, Jalal-Al-Ahmad Expressway, P.O. Box 14155/6395, Tehran, Iran

BANK TEJARAT, 130 Taleghani Avenue, Nejatoullahie, P.O. Box 11365-5416, Tehran, Iran, and all offices worldwide, including, but not limited to:

BANK TEJARAT (Branch), 6/8 Clements Lane, London EC4N 7AP, England
BANK TEJARAT (Branch), 44 Avenue des Champs Elysees, 75008 Paris, France DEUTSCH-IRANISCHE HANDELSBANK AG (n.k.a. EUROPAEISCH-IRANISCHE HANDELSBANK AG)

Depenau 2, W-2000 Hamburg 1, Germany, and all offices worldwide, including, but not limited to:

DEUTSCH-IRANISCHE HANDELSBANK AG (n.k.a. EUROPAEISCH-IRANISCHE HANDELSBANK AG) (Representative Office), 23 Argentine Square, Beihaghi Bulvard, P.O. Box
15815/1787, Tehran 15148, Iran

EUROPAEISCH-IRANISCHE HANDELSBANK AG (f.k.a. DEUTSCH-IRANISCHE HANDELSBANK AG) Depenau 2, W-2000 Hamburg 1, Germany, and all offices worldwide, including, but not limited to:
EUROPAEISCH-IRANISCHE HANDELSBANK AG (f.k.a. DEUTSCH-IRANISCHE HANDELSBANK AG) (Representative Office), 23 Argentine Square, Beihaghi Bulvard, P.O. Box
15815/1787, Tehran 15148, Iran

HOUSING BANK (of Iran) (a.k.a. BANK MASKAN), Ferdowsi St., Tehran, Iran

IRAN OVERSEAS INVESTMENT BANK LIMITED (f.k.a. IRAN OVERSEAS INVESTMENT CORPORATION LIMITED), 120 Moorgate, London EC2M 6TS, England, and all offices worldwide, including, but not limited to:

IRAN OVERSEAS INVESTMENT BANK LIMITED (Representative Office), 1137 Avenue Vali Asr off Park-e-SAll, P.O. Box 15115/531, Tehran, Iran
IRAN OVERSEAS INVESTMENT BANK LIMITED (Agency), Suite 3c Olympia House, 61/63 Dame Street, Dublin 2, Ireland
IRAN OVERSEAS INVESTMENT BANK LIMITED (Agency), Improgetti, Via Germanico 24, 00192 Rome, Italy
IRAN OVERSEAS TRADING COMPANY LIMITED (Subsidiary), 120 Moorgate, London EC2M 6TS, England
IRAN OVERSEAS INVESTMENT CORPORATION LIMITED (n.k.a. IRAN OVERSEAS INVESTMENT BANK LIMITED), 120 Moorgate, London EC2M 6TS, England

THE CENTRAL BANK OF IRAN (a.k.a. BANK MARKAZI JOMHOURI ISLAMI IRAN), Ferdowsi Avenue, P.O. Box 11365-8551, Tehran, Iran

WORKERS WELFARE BANK (of Iran) (a.k.a. BANK REFAH KARGARAN), Moffettah No. 125, P.O. Box 15815 1866, Tehran, Iran

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# American Hostages #
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http://www.youtube.com/watch?v=ruf5CynbPJo

Former Iranian President Abolhassan Bani-Sadr and Former Reagan-Bush Campaign and White House Staffer Barbara Honegger, attest to the October Surprise. Gary Sick wrote both an editorial for The New York Times in April of 1990 and a book on the subject. Sick a retired Naval Captain, served on Ford’s, Carter’s, and Reagan’s National Security Council, held high positions with many prominent organizations, and wrote a recent book on US-Iran relations (All Fall Down). Sick wrote that in October 1980 officials in Ronald Reagan’s presidential campaign made a secret deal with Iran to delay the release of the American hostages until after the election and in return for this, the United States purportedly arranged for Israel to ship weapons to Iran. Sick had interviewed a witness who saw members of the Reagan election team in Paris in negotiations with the Iranian government. According to Sick, Oliver North was the administration’s scapegoat, taking responsibility to conceal the “treason” of Reagan and Bush.

http://fas.org/irp/congress/1991_hr/s911122-sick.htm

1991 Congressional Hearings
Intelligence and Security

Statement of Gary G. Sick, November 22, 1991

Mr. Chairman, I am pleased to be invited to testify before the committee on the question of possible unauthorized contacts by private Americans with Iran during the presidential elections of 1980. I realize that this is an extremely contentious issue, with implications that go to the heart of the U.S. political system. I hope that my testimony can be helpful to you in deciding whether or not to proceed with a full investigation of this matter.

It may be useful at the start to give you a few words of background about myself and how I became involved with this issue. I spent a full career of 24 years as an officer in Naval Intelligence, retiring in 1981 as a Captain. During the last ten years of my naval service, I completed a PhD in Political Science at Columbia University and then came to Washington where I was the desk officer for the Persian Gulf and Indian Ocean in the Office of the Secretary of Defense.

In 1976, I was seconded to the National Security Council staff, to work on Persian Gulf and Middle East affairs in the administration of President Gerald Ford. The National Security Adviser at that time was General Brent Scowcroft. After the 1976 elections, I was asked to remain in the same position under the administration of President Carter, where I worked for Zbigniew Brzezinski. After the 1980 elections, I was retained in the same position for several months by the administration of President Reagan and his National Security Adviser Richard V. Allen. After my retirement from the Navy in April 1981, I was retained as an unpaid consultant with the National Security Council until I went to New York in August of that year.

I was the principal White House aide for Iranian affairs during the Iranian revolution and the hostage crisis. After I left government service, I spent a year at Columbia University researching and writing a book about those events [`All Fall Down: America’s Tragic Encounter With Iran’]. The book was published in 1985, when I was deputy director of the International Affairs Program and the Ford Foundation. I retired from the Ford Foundation at the end of 1987. Since that time, I have been an independent author and analyst, specializing in the politics of Iran and the Persian Gulf. I also teach a graduate seminar in U.S. foreign policy at Columbia University, where I am an adjunct professor.

My decision to write about the events of the 1980 election was taken slowly and reluctantly. I had, of course, heard suspicions about a secret deal between the Reagan-Bush campaign and Iran almost from the moment when the hostages were released only a few minutes after President Reagan’s inaugural. I did not believe them. I simply refused to believe that a party out of power would intervene with a hostile foreign power to undercut the negotiating efforts of their own government and affect the lives and welfare of 52 American prisoners. Four years later, I wrote a book about the hostage crisis which was not flattering to the Carter administration. I made no reference to a possible secret deal. In the election of 1988, when accusations of a secret deal first received widespread attention in the national media, I acknowledged the new information that had come to light, but I refused to endorse the allegations despite repeated queries from journalists and the Democratic campaign. After the 1988 election, I submitted a proposal to The Twentieth Century Fund to write a book about the Reagan administration’s relations with Iran. The proposal made no reference to the so-called October Surprise, and as I began work on that project in early 1989 I had no intention whatsoever to deal with that subject.

As I began collecting research material for the book, however, I began to discover anomalies in the historical record. For example, I found that some Iranian officials in 1980 had referred openly to efforts by the Reagan-Bush campaign to delay the release of the hostages for political reasons. These contemporaneous statements, and the timing of certain Iranian decisions during the hostage crisis, seemed to be consistent with allegations of a secret deal that had emerged in 1987 and 1988, leading me to dig deeper. During this same time, I began to talk regularly to a small group of journalists who were continuing to pursue this story even after it had been abandoned by the mainstream media. Their investigative findings often matched the timing of the new material I was finding in the historical record. By the end of 1989, I began to conduct a few interviews with prospective sources.

It was not until mid 1990 that I felt I had accumulated enough evidence to consider writing on this subject. At that point I faced an unpleasant decision. I had never considered myself a political partisan. I had always been a registered Democrat, but I had never participated in political campaigns and I attempted to maintain a balanced, non-partisan perspective in my work. I realized that if I decided to write on an issue of such great political volatility, which cut so close to the bone of political sensitivities, I would subject myself to accusations of partisanship and, potentially, to smear tactics as part of a campaign to discredit my work. I consulted with my family, warning them of the possibly unpleasant consequences. They encouraged me to proceed.

I also realized that I might lose the grant on which I relied to carry out the research. In mid-1990 I met with the president of The Twentieth Century Fund to inform him that the book I intended to write was quite different–and far more controversial–than the proposal I had submitted 18 months earlier. I said that I could still write the book I had promised
to the Fund, but it would have to be delayed until I completed my research on the 1980 elections. In the meantime, I would understand if the Fund wished to suspend the grant. After careful consideration, the Twentieth Century Fund agreed to continue its support, a decision that I regarded–and continue to regard–as both generous and courageous.

I provide this brief background to set the record straight. My decision to write about this subject was taken because I had uncovered a body of evidence that I believed was important and deserved to be brought to public attention. I came to the subject late, and I realized that it was potentially hazardous–personally and professionally. My present position, in which I am identified as the advocate for a politically controversial point of view, is both unfamiliar and uncomfortable to me. I firmly believe, however, that the research I have done, with the invaluable assistance of many other researchers and journalists, is too important to be ignored. It is also far from complete. I fully intend to persevere in exploring the circumstances of the 1980 election, though I recognize the limitations of any private citizen in attempting to get to the bottom of such a complex and sensitive matter. For that reason, I respectfully urge the Congress to undertake a quiet, balanced, thorough, and politically fair investigation of these matters.

I would like to raise two substantive points with the members of the subcommittee. Both involve sources.

Within the past several weeks, two magazine articles have appeared that were sharply critical of allegations that the Reagan-Bush campaign of 1980 met secretly with Iranians to affect the timing of the release of the American hostages in Iran. 1

These two articles, which were quite similar in form, tone and substance, were published simultaneously on November 4 (although the publication dates of the magazines are given as November 11 in one case and November 18 in the other). I was contacted by reporters for both articles shortly in advance of publication. In both cases, I informed them that many of the points they intended to raise in their articles would be covered in great detail in my book, which was scheduled to appear one week later on November 11. In both cases, the authors of these articles showed little interest in what I might have to say, and both rushed into print without waiting to see the book.

1 Steven Emerson and Jesse Furman, The New Republic, November 18, 1991; John Barry et al., Newsweek, November 11, 1991.

As a result, there has been a great deal of misinformation and misunderstanding that could easily have been avoided. Because of the proximity of the dates, many observers perhaps understandably assumed that these articles were a critique of my research, when in fact they deliberately chose to ignore it. What they did was to set up a series of straw men, crude caricatures of both the evidence and those who have treated that evidence seriously, and then proceed to knock them down. I do not recognize myself in these gross generalizations, although I am clearly intended to be included as one of their generic conspiracy theorists. I also do not recognize the sources they describe, although I have in many cases spent many hours with these men while the authors of these articles have for the most part contented themselves with a search for press clips. Most of all, I do not find in these articles any reflection of the care and attention that has been devoted to authenticating the evidence that I and others have presented. In their selective use of evidence, their unwillingness to consider alternative explanations, their quickness to demean anyone who has done serious research work on this subject, and their cavalier and wholesale dismissal of the testimony of numerous sources, they did nothing to further the cause of truth. They did, however, whether intentionally or inadvertently, poison the atmosphere in such a way that a reasoned discussion of these issues has become infinitely more difficult.

That is regrettable, for a dispassionate discussion of these issues is precisely what is needed at this time.

Last week, Random House/Times Books published `October Surprise: America’s Hostages in Iran and the Election of Ronald Reagan.’ In that book, I attempt to provide the first truly comprehensive analysis of all the available evidence on this subject. The book contains a great deal of new information, not of the `smoking gun’ variety but rather the crucial details that link the major events together in a whole that is greater than the sum of the parts. The array of evidence presented in the book is the same evidence that persuaded me to change from disbelief to a growing conviction that a secret deal took place in 1980. That evidence may not persuade everyone, but it does provide a baseline for reasoned discussion. In the past, this story has consisted mostly of isolated bits of evidence presented in a wide array of news sources. This book at least assembles those diverse bits and pieces and places them in a larger political and historical context.

What this evidence shows is a consistent pattern of secret contacts between the Reagan-Bush campaign and Iran. The contacts began early in 1980, from about the moment that William Casey became the campaign manager for Mr. Reagan. They continued through the summer of that year in Madrid, where the first outline of a deal was reportedly proposed and accepted and where Israeli participation was first introduced. The terms of the bargain were reportedly made final in the second half of October in Paris. The hostages were released minutes after President Reagan had taken the oath of office, and arms began to flow to Iran from Israel, with U.S. government acquiescence, almost immediately thereafter.

The historical spine of this account is simply a reconstruction of the chronological record, based on a wide
variety of news accounts, letters, and other data from the period. Some of this information has only recently come to light, such as the report of the Iranian foreign minister to the parliament on August 16, 1980, in which he said: `We have information that the American Republican Party, in order to win in the upcoming election, is trying very hard to delay the resolution of the hostage question until after the American election.’ [p. 89] That statement was made only a few days after Casey was reported to have met with an Iranian representative in Madrid for the very purpose described in the statement.

Some of the new information is based on a review of information that was available to the Carter administration in 1980. For example, it is now known that the Hashemi brothers, who were working both with the Carter administration and, covertly, with the Reagan campaign, did seek out two senior Iranians who were prepared to come out of Iran to meet with Americans on the hostage question. One of those was a relative of Khomeini, who in fact had such a meeting in Madrid with a private U.S. representative on July 2. The other was Mehdi Karrubi, who is later said to have met with William Casey at the same site and under almost identical circumstances just three weeks later.

In reconstruction this sequence of events, I conducted hundreds of interviews over a period of several years. I also shared information with a number of fine journalists and scholars, and I benefited immensely from their work. In the book, I cite more than fifty sources, most of whom were former government officials in Iran, the United States, Israel, as well as officials of the Republican campaign, former hostages, and academics. There is no `super source’ who claims to know the whole story. Quite the contrary, I was told repeatedly that this was a professionally managed covert operation which respected the rules of compartmentalization and `need to know.’

The sources are named. Unlike the Watergate investigation that was launched on the basis of a unidentified Deep Throat, this research relies primarily on the testimony of individuals who have been prepared, often at some personal risk, to speak on the record. That means that these individuals have exposed themselves to attack and ridicule, but it also means that in the best academic tradition, the facts can be checked by other investigators. Anonymous sources are used very sparingly in this book, primarily to corroborate information from other sources.

Key elements of the story, particularly the accounts of covert meetings, rely on individuals who have operated on the shadowy side of international politics. Convert arms deals and political operations, regrettably, do not employ boy scout leaders and church deacons. There are two good reasons for that. First `respectable’ people do not have the special skills that are required for such operations. Second, it is convenient to be able to discredit a disgruntled operative who may decide to start talking about what he knows. That does, however, create a serious problem for the researcher.

There are two possible choices. One can dismiss any source who does not have an impeccable record of integrity and honesty. Some have even gone so far as to suggest that anyone who has been investigated or indicted by a federal agency should automatically be rejected as a source, and everything he says should be regarded as false. In Washington, and elsewhere, that sharply reduces the available supply of interlocutors.

A second possibility is to listen carefully to what such individuals say, especially if there is reason to believe that they have access to important information, and then to check those statements as carefully as possible. That is the path I chose. To paraphrase President Reagan’s maxim, the rule is `Listen but verify.’ To those who would repudiate any specific source, I would ask only that you take the effort to find out what information is based on his testimony and whether there is any corroborating evidence. What you will soon discover is that many of the sources who have become popular targets for attack either do not appear at all in this study or else have been used only when the information they provided was independently corroborated.

Mr. Chairman, based on my research, I believe there is substantial evidence that a secret deal was carried out during the election of 1980. Most of that evidence has never been examined by a duly constituted body of the U.S. government. It is certainly incomplete, and reasonable people may differ on the interpretation of the data, but in my view there is ample evidence to justify a low-key and responsible examination by a panel equipped with subpoena power.

In closing, let me suggest to you several areas of inquiry that have been closed to me and to other private researchers but which might be fruitful avenues of investigation for a congressional committee.

First, and most obvious, where was William Casey during this period? Over the past summer, President Reagan directed the archivists of his new library to search the 1980 campaign records to see if there was any evidence that William Casey was involved with Iran during the campaign. According to their report, they found no information whatsoever about his schedule. Mr. Casey simply seemed to be absent from the campaign he directed. His secretary has been similarly uninformed. When reporters contacted her about Mr. Casey’s movements during the period of the alleged meetings in Madrid, she had no information about his movements. Later research discovered that he had attended an international conference in London during part of that time. Can it be that Mr. Casey went off to a long-scheduled conference without telling his secretary or leaving behind some instructions about how he could be reached? This was, after all, only the
second week after the Republican National Convention, and he was the national campaign manager. Mr. Casey was a very busy man. It seems impossible that he would keep no day books, phone logs, calendars, or appointment books, that he accumulated no bills or receipts or even memos that would locate him on key dates. Is there no one who saw him or spoke to him on those dates? We have here the case of the phantom campaign manager. I think a duly empowered investigative team could resolve this mystery. It may find that he was merely attending to campaign business on those dates. If so, then perhaps these questions can be laid to rest. But all attempts to do so have thus far failed.

Second, we know from court documents that the New York office of Cyrus Hashemi was under intensive surveillance by the FBI and Customs from at least October 14, 1980, until the surveillance was abruptly terminated shortly after the Reagan administration took office. Cyrus Hashemi, according to his brother, was acting as a double agent, cooperating with both the Carter administration and Mr. Casey on the hostage issue. His telephone calls, conversations and movements during this crucial period should provide a wealth of information that would either confirm or deny his brother’s accounts. Those records are presently sealed and unavailable to private investigators, as are his files in other government agencies that had contact with him. They should be available to an investigative committee of the Congress.

Third, there is a considerable body of evidence that military equipment began to flow in substantial quantities from Israel to Iran almost immediately after the Reagan inauguration and that these shipments were known to, and approved, by the new administration. There are also repeated charges that some of that equipment came from U.S. stockpiles in Europe and possibly in the United States. That can be checked. A proper investigation should be able to determine whether or not these shipments occurred, and if they did, who authorized them.

Finally, a congressional committee should be able to take depositions from many of the sources who have provided information on this subject, as well as those who have steadfastly refused to talk to me or others who have attempted to investigate this story.

In short, it is my view that the evidence developed to date is sufficient to justify an investigation, and there is reason to believe that such an investigation could resolve the issue.

The charges that have been raised are not about refighting an election that is long past. They are about the proper functioning of a democratic system. If this did not happen, we owe it to Mr. Casey and others to clear any suspicion from their names. If it did happen, it was a perversion of the democratic process and those responsible should be held

To the bigoted goon, Zahra Namdar:

Zahra: “Most Iranians, holding American passport, also hold the Fascist Republic of Iran’s passport . […] A huge number of these Iranians go back and forth at least twice a year to Iran.The only way to enter the soil of Iran today ,one must enter with the Islamic Iranian passport. They make a stop in the middle of their journey to Dubai, England, and France,and exchange passport from their safety box.”

The majority of foreign born Americans have dual citizenship as a means to travel to their country of origin more facilely. This especially holds true for countries in which an entry requires a lengthly and sometimes unattainable acquisition of visa from the country of destination due to intercountry foreign relations.

First of all, there is no copious influx of Iranians visiting their home country; this statement is not only egregiously untrue but is based on mere and gratuitous assumptions. The majority might travel once every five years as it is, not only costly but predicamental. Traveling to a destination country such as Iran through visa is practically impossible for those who holds US citizenship; moreover, the majority of Iranian people here in the US or abroad, still have relatives in Iran and one should not and must not expect a common individual to severe these family ties over political quibbles existed among two countries.

Having a desire to visit the country in which you were born does not make you a “fascist” as you perniciously put it. I have a sick grandmother and an aunt who my father visits once every few years. You cannot expect him to act nonchalantly and ignore his ill mother. People should not suffer just because two governments are at odds. Cutting off a simple visitation of loved ones is inhumane. I had to revoke my Iranian passport due to work as a defense contractor on projects which require secret clearance. However, for other Iranians who still wish to travel abroad, you cannot expect them to be a prisoner of your revisionist mentality — you are nothing but a complete reactionary nation-crusher.

Zahra: “That is why , at the American airport immigration there is no trace of their visits to Iran.This must be stopped!!”

That statement is patently false. Every time a family member, including my father, cousins, aunts, uncles, acquaintances or friends, travels to Iran, he/she is most certainly asked to divulge his/her itinerary and reasons for his/her itinerant. There is no reason what so ever for anyone to abstain from sharing such information with authorities and as a matter of fact almost every individual that has traveled to Iran and back has disclosed such information. Perhaps, if Miss Zahra would have actually done a quick research on this matter, she wouldn’t have made a folly of herself.

Zahra: “USA today is invaded by rich Iranian’s specially in LA,CA [Beverly Hills] and a big number of these Iranians are Savama Agents [secret sevice of the crazy Ahmadinejad] .”

“Invaded!!!” Is Zahra expressing her contempt for likes of “royal” family and their posse, such as herself, who ran away from Iran with people’s money and refuged to affluent neighborhoods of Hollywood? The latest consensus report estimates the Iranian descendants comprises no more than 0.1% of entire US population while Zahra insidiously labels such tiny minority as “invaders.” I can clearly see a calculated pattern of bigotry from Zahra which pars with the same tactics employed by antisemites.

“Savama!!!” Zahra is still being delusional and uninformed with regard to the history of intelligence services in Iran. Savama is a succession organization to Savak — Shah’s brutal secret service, and although it was pampered by CIA and MI6 “after” the Iranian revolution, nonetheless, it was mainly transmogrified to a resolute agency more aligned with the current regime’s agenda. As a matter of fact, there is NO Savama but rather VEVAK (Vezarat-e Ettela’at va Amniat-e Keshvar OR Ministry of Intelligence and Security) which you miserably failed to distinguish. Although the agency has number of proxy and diversionary surrogates and procurers, the nature of their operation is almost non-existence in the US and a very few who operates, are tightly monitored. And for you to come here throwing baseless accusations and lynch mobbing Iranians in the US is deviously malicious. It seems to me that the only agent of “hate,” flagrantly operating in the US is you.

Zahra: “with huge wealth they come to Usa and settle powerful buisnesses [sic] and hold powerful jobs specially in the Banks.This must be stopped!!.”

A paragon of antisemitic lure employed by miss Zahra. The majority of Iranian who come to the US are people who either run away from the oppression of the regime or to seize more economical opportunities. And from my observance of Iranian communities, the big portion of them have created wealth on their own — either through achieving higher eduction (1/4 hold masters and doctorate degrees) or entrepreneurship.

Just like antisemite attack dogs who content the social and monetary statue of Jews for their “hold [on] powerful jobs,” it is abundantly clear that your anti-Iranian mantra pars with anti-capitalism and anti-democracy. Zahra, ungracefully, copies her tactics from the same crowd who reprimand a few Jews for their talent and determination to succeed in this country and merely replace the ethnicity of Jews with Iranians. The irony is that she considers herself a “Zionist” — what a hypocrite.

Zahra: “Iranian devout Muslems are continuesly [sic] invading the USA and in every little corner of the universe!!!”

Preposterous, Iranians are the least religious “Muslim” ethnicity and as a matter of fact, their depreciation of “Arab invaders” are well known. Besides, being intolerance of Muslims clearly goes against the very belief system of a supposed “artist” such as yourself. Again, miss Zahra cunningly chose to juggle provocative words such as “invading” to insinuate an alarmist tone in her fallacious equivocation. “Devout Muslims invading the world…” whack whack whack… As a “non-believer” like myself, I can see the divisiveness and formulated hatred to promote a culture of antagonism in her every misguided and emotionally charged slate.

Zahra: “[…] look arround you , do you see any poor Iranians? they already own half of Los Angeles and San Diego! the Savama Agents buy peoeple accross [2x sic] the globe to do their dirty terrorist job, and unlike the Arabs they look highly western and to the max fashionable,and cruze arround [2x sic] in their BENZ or BMW and sitt in beyound immagination manssions in Beverly Hills. [Get a dictionary]”

“Poor Iranians!!!” If Zari, once in a while, would have come out of her mansion in La Jolla, she would surely find a number of middle-class or even struggling Iranians all around the US — I’ve met many. Instead of latently sitting around your studio and conjuring snide comments about other Iranians, do us a favor and have your mouth shut sealed with venearal warts. Once again, Zahra is actuating the same measures employed by antisemites who point out the economical status of Jewish community to convene a “demonic” picture of such group, she too is guilty of hasty generalization and reproaching Iranian people solely base on their ethnicity.

Zari is another example of self-hating Iranian who associates every persecuted and oppressed countryman by the government of Iran and place a placard of “treason” around their neck. According to her, anyone who has worked hard to upgrade his/her economical status is to be suspicion of cooperation with the Iranian regime. Just unbelievable.

Zahra: “Just take a good look, how many Persian restaurants do you see in LA?”

Yes, it’s because there is a condensed Iranian population in LA, duh!!! It’s as if someone goes to “Chinatown” and not expect to find ample number of Chinese restaurants. Apparently, multi-culturalism is an affront to miss Zari and her sense of “artistic” racism. Her theater of cruelty is fully operational and ready to service a gullible and impressionable mind of people around the world.

Zahra: “How many Iranian Vice Presidents do you see in LA Banks?How many Iranian tellers do you see in your bank?how many Iranian Doctors do you see? How many Iranian or Muslim cab drivers do you see accross [sic] the globe?”

Indeed, how many “vice” presidents of banks are Iranian? So what if there are a few who hold such positions? Are the aforementioned banks are the ones operating under the Iranian regime? Then why are you berating other Iranian immigrants for regime’s installment of banks around the world?

Is it a crime, for instance, a Jew to be active and successful in certain industries? Is this somehow a crime to accelerate in life; in land of opportunities; in land of free? So why are Iranians being singled out here? Iranian tellers, cab drivers!!! Where are you going with that? Doctors? My god [sic], so being a doctor somehow brands you a “terrorist” these days, huh pumpkin? Do you realize, it takes decades of arduous study and practice to become one? Your racist rant clearly brands you an ethno-centrist who is undeserved any rational response.

Zahra: “The iranian yellow pages is thicker than American yellow pages!! You can pickup the Iranian yellow pages at any Persian stores.”

No kidding sherlock!!! If I walk to an Indian or Brazilian store, I do expect to find resources advertising native-oriented products or services.

Zahra: “Our country is full of Mosques! Dont you think they already have invaded the USA and England?”

What country, the US? I see a church for every 5 houses where I live. So what if there are some Mosques erected here in the US? Are you anti-Muslim? Then I must say your juvenile attempt to demonized Muslims is noted. If you can’t tolerate freedom of religion, I suggest pack and move to North Korea.

You are a shame to Iranian community. If you want act as a sole agent of bigotry and intolerance, do it in the seclusion of your studio. Don’t come here spread false rumors just to get your jollies off. Your accusations are merely a loose collection of intellectual conceits, stemming from sheer ignorance. Lumping all Iranians under flag of regime cohorts is nothing short of a psychologically disturbed middle-aged woman who can’t hack her way in real life.

Zahra: “Get It through your proud Iranian head,I am An American!”

Good for you. I too was born in Iran and currently hold an American passport. If you’re juggling parochial factoids, at least try to make them relevant, bubble-head. I consider myself a global citizen and do not have an affinity for Iranian culture — that’s just a matter of preference. From a legal stand point, a passport merely signifies your nationality, not the whole cultural idiosyncrasies that goes with it.

That being said, being raised in a particular culture would congenitally and psychologically bind you to its core attributes. You can accept other cultures base on manifestation of preferential acquiescence but can never divorce yourself from your roots (i.e. Your ethnicity will always remain Iranian). An Indian guy, a Chinese woman, or a French teenager, they all will retain those cultural subtleties of their country of origin even though if they spend the rest of their lives somewhere else.

Zahra: “I do not Have Any desire to see any mosques around my neiyborhood [sp].”

If you have an issue with a construction of monument of certain spiritual importance around your neighborhood, then the matter should be resolved at the municipal level. Nevertheless, if your issue stems from the racist stand point, aiming to discriminate, then, as I have said before, you only brand yourself as a bigot. Your intolerance is a contumely to the most quintessential characteristic of being American: freedom of expression and religion. So I guess you have a long way to go to call yourself an American as you have shown no redeemable quality so far. If any of these fundamental dictum are too much for you to handle, please do everyone a favor and leave America.

Zahra: “My own former Iranian cousine [sp] and friends ,go to Iran just to have fun!.They hold the US passport in their left pocket and […] Iran’s passport… in their right pocket!”

Ya, and your point is? Many people have dual citizenship and as you have mentioned, it’s for “fun” or family related accounts, and the reason is to bypass the the hardship of visa acquisition. If you wish to never visit Iran or some other country, that’s your prerogative but don’t ever reprehend others who hope to visit their family and friends. I have reiterated this point many times but it appears that you are just another overweeningly flatulent piece of braggadocio who does not have a rudimentary understanding of the contemporary circumstances.

Zahra: “Not only that ,Most Are born and raised in the USA,……So, your estimate on % of Iranians are wrong!”

Estimation for what? Are you suggesting those who hold dual citizenship were “most[ly]” born outside of Iran? Haha, are you delusional or just decided to divorce yourself from reality? You can’t just call up a foreign embassy and request a passport, that’s preposterous. Your congenital idiocy is impeding you from making a coherent averment.

Zahra: “Where are The good Iranian Americans?”

You are talking to one. “Good” is a subjective term and with all honestly, do we have to sit here listen to your Finger-Wagging aunt Sally’s gratuitous assumptions? Are you implying that having a particular ethnicity automatically renders you (as you have maliciously inferred) a “bad” person? Your moral steam engine is fizzling out for being overly judgmental.

Zahra: “Where are the good moslims? My foot!!!”

Everywhere, only if you open your heart and eyes. There are decent and shoddy person of almost every background, ethnicity, faith, and nationality but prejudicing base on those attributes alone is frown upon in the civil world, if you haven’t noticed. Your very name, “Zahra,” is a Muslim name, haha. Perhaps you may want to retract your racist rant.

“My foot!!!” What does even mean? Are you trying to mix a bit of “Iranian” idiom into the dialogs? Haha, may I remind you how hypocritical you sound when you dis your own ethnicity, yet pepper the verbality of your statements with Iranian colloquy? Unless you are suggesting you are blessed with giant feet or perhaps own “Haines Shoe House”. I suggest utilizing plausible deniability more often in your discourse…

Zahra: “They are scared? … Islamic people are not scared of anything.”

That’s called a non-sequitur butter troll. Your mantel has gone from thoughtless reductionism to childish desperation.

Zahra: “Do you know how many Iranians I met ,with 3 different names+how many international passports they hold.”

*yawn* I thought you hate Iranians; how come, now, you are admitting to “meeting” with them? Many Indian and Chinese immigrants embrace a more Western surname as it would facilitate their assimilation in to the society. So once again, what is your point? Technically there is no “international” passport, where did you come up with that scheme?

Zahra: “I have A strong hint ,Most Iranians are phony political refugees!”

You have a “hint?” What are you a psychic now? As you have confessed, your premise revolves around concocted postulation which has no place in the realm of honest discourse. “Political refugee…” such as yourself, right? Or perhaps you are referring to Mehdi Kazemi, an Iranin gay young man who is being deported back to Iran so the authorities can have him hang — that kind of “phony” refugee? Oh, my bad, your very religion — Christianity — considers homosexuality a “sin” so I suppose his death means nothing to you.

I asked you not once, but twice to present a concrete and “verifiable” research that points evidence to your premise. Thus far, you have failed miserably to provide any so we can securely contend your remark is merely a speculation, period. Indeed, myths were soon punctured…

Zahra: “It is against the International law to go back to your native country, once you were granted a refuge!”

Not necessarily. There are many Iraqi “refugees” all around the world at this point but that does not mean they can’t move back to their country of origin. Perhaps you meant to say “political asylum” in which case that statement holds true. However, once again, you implied that “Iranian” political refugees are impostors but you failed to provide any evidence for that matter.

Zahra: “Most phony pollitical prisonners [2x sp] In Europe are either in jail or beeing [sp] deported!”

You said it yourself, “phony political prisoners” which means their status of fraud has been determined by the governing authority or else you wouldn’t be calling them “phony.” In that respect, the assumption that “Iranian” political refugees are impostors would be patently false. If one does not have an evidence to prove his refugee status, then he/she must be deported to the country of origin — nobody is disputing that matter. However, the gist of your sputum of garbage condemns “ALL” foreigners who seek political asylum as fake. Disseminating deceptive and misleading evidence are all you got at your disposal and it shows.

Zahra: “Switzerland is recognizing how these poeple [sp] are taking a global advantage of their system.”

Again, where is your proof? Just because your daddy was an ambassador to Austria 30 years ago, it doesn’t make you an arbitrator of bogus claims.

Zahra: “Do you know how many Iranians are Globally In jail for fraud?”

No, what don’t you indulge us with your infinitely “peculiar” wisdom. You ask me a question to sensationalize your quack, yet you conveniently dodge the answer, bravo cup cake.

Zahra: “What is your real name? Are you scared too? ”

Why? So you can pass my name to Iranian regime? I’ve already made some effort to spread the plight and struggle of Iranian students to achieve more social and political freedom so perhaps Mullahs are not too fond of me by now. What are your credentials? What have you done to combat the regime? Ya, that’s what I thought, only a coward hiding in her mansion somewhere in California writes such drivel with a smug sense of righteousness.

Zahra: “my respect for Tibet and It’s nation under pressure is strong… globe witnessed their small but powerfull [sp] voice wich [sp]…”

Bahahaha! Where did Tibet come into play? What does Tibet have to do with any of this? You lame brain red herring would only serve as robotic motions of delusional praise.

Zahra: “Now tell me Iranians are more cyvilized and have more guts,or the nation of Tibet?”

“cyvilized!” You can’t even spell worth snot after all the blow hard ballyhooing that “I am an American.” Please come back when you got your license first and finish grade school. You can’t even locate Tibet on the map let alone champion their cause.

Zahra: “Yes ,under the Great Statue Of liberty ,I can freely say I am Anti-Islam.”

Oh ya, the good old freedom of speech pap… when convenient, you smear the First Amendment as a broad shield to hide behind your racism. Perhaps for someone who never been properly educated, you cannot possibly comprehend the distinction between right to free speech and hate mongering.

Zahra: “We must take millitary [sp] action as soon as possible against Iran…”

We? Who are we? You would strap yourself with a machine gun and fight the mullahs? Or would it be a son of a widow who sends him overseas to fight another poor man’s son at the expense of your self-aggrandizement? War, war, war… That’s all you can muster when you have nothing better than fiddling with your intellectual bankruptcy. You are a lost cause Zahra and I petty you.

Zahra: “John Mc Cain [sp] is the answer, Bibi is the solution and Sarkozy has guts!”

You neither have a mind for psychoanalysis nor political punditry. Stick to your strong suits. Your entire failed Muppet appearance is a testimony to your political virgin mind.

Your entire premise derived from spewing more of immaterial palaver and your pronounced hatred. You are not even capable of putting together a coherent set of thoughts let alone waltz in here to your own echo chamber of prevarication. Engaging in racially hyperbolic inflammatory rhetorics by someone your age is just baffling. You are officially a certifiable nutjob who does not deserve another response from me. Go ahead and conjure up some self-congratulatory comments so you feel good about yourself. Have a nice life.

accountable for their actions, if only to insure that it never happen again.

That’s a phont of Khatami taken in the “wax museum” established to depict various torture chambers of “SHAH’S political prisons.” You credulous morons passively accept any garbage they feed you:

http://www.peiknet.com/1382/page/01bahman/414eteleaat.htm

http://pic.kamangir.net/index.php?cat=25

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http://thinkprogress.org/2009/03/17/conservatives-aig-death/
By Ben Armbruster on Mar 17th, 2009 at 9:45 am
http://www.youtube.com/watch?v=GkRv5iip_lU

Conservatives Suggest Torture Tactics For AIG Execs: ‘Exemplary Hanging,’ Guillotine Party, ‘Boiling In Oil’

Politicians and pundits from both sides of the aisle have expressed outrage at the recent news that bailed-out insurance giant AIG will be paying $165 million in bonuses to the same executives who “brought the company to the brink of collapse.” President Obama and members of Congress are trying to figure out a way to revoke the bonuses while others have called for top executives to be fired.

While conservatives have joined in the mass discontent with AIG, some are taking their anger a bit too far. Yesterday on a local Iowa radio show, Sen. Charles Grassley (R-IA) suggested that AIG executives consider committing suicide. And last night on Fox News, far right pundit Charles Krauthammer and his milder counterpart Mort Kondracke argued that some should be put to death:

KRAUTHAMMER: I’m all in favor of keeping this heaping opprobrium. I would deny them the bonuses if possible. I would be for an exemplary hanging or two. Have it in Times Square, invite Madame DuFarge. You borrow a guillotine from the French and we could have a party. If that’s what it takes to maintain popular support, let’s do it. But it’s not going to change anything economically. […]

KONDRACKE: I was going to recommend boiling in oil in Times Square, but look, because these are the people who invented these crazy credit default swaps that are leading to the whole disaster.

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http://www.ifex.org/iran/2006/01/26/jailed_blogger_taken_to_sit_university/
26 January 2006
Alert
Jailed blogger taken to sit university exams in handcuffs
Mojtaba Saminejad

(RSF/IFEX) – Blogger Mojtaba Saminejad, who has been in prison since February 2005, was taken in handcuffs to sit his exams at Tehran’s Azad University on 21 January 2006. Reporters Without Borders welcomed the fact that the Iranian courts have allowed him to continue his university course but repeated its call for his release.

“We have never stopped our condemnation of the unfair conviction of this young student who has been imprisoned for nearly a year for posting a few messages on the Internet. We urge the authorities to show leniency. Bloggers like Mojtaba represent no threat to Iranian society. On the contrary, they support the emergence of a citizen’s debate,” said the organisation.

The weblogger was photographed inside the Tehran university as he was going to take his exam and the photo was then posted on his former blog: http://man-namanam.blogspot.com.
He was first arrested in November 2004 for speaking out against the arrest of three colleagues. While he was in prison, his website was hacked into by people linked to the Iranian Islamist Hezbollah movement. On leaving jail, he relaunched his blog at a new address http://8mdr8.blogspot.com),which led to his re-imprisonment, on 12 February 2005.

Mojtaba was sentenced in June 2005 to two years in prison for “insulting the Supreme Guide”. One month later he was given an extra ten months in prison for incitement of “immorality”.

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http://forum.newshounds.us/viewtopic.php?t=23282&start=30

Posted by: GizUSN on Fri 8.22 5:34am
“ABMs in Cuba wouldn’t bother me.”

I am sure the State Department would be enthralled to hear your poorly constructed opinion.

“They would be useless.”

The same argument can be made against the Poland’s. It does not serve any tenable peril because Iran has no intention to wage an IBM hurling competition, hence the vanity of the proposed treaty. And I am sure your shortsightedness betrays you by retorting, “prove they are not.” Remember, the burden of proof rests on you side of the fence, not mine.

“Did I miss a question in your first post? It seemed like statements to me, or do you like to ask a question…”

Yes, you conveniently did.

Posted by: elion on Thu 8.21 9:20pm
“Can any of you scholars on the subject matter indulge me as to why on God’s green earth Iran has any intention to ‘hit’ Europe?”

Iran has numerous channels of commerce between several European countries; Mullahs have no intention to thwart these relations by showering half the Europe with inadequately designed rockets. Why would they go down that path when the country is sandwiched between two American states, namely, Iraq and Afghanistan? It’s tantamount to a vitiated 90lb white man, sitting between two 350lb offensive linebackers, suggesting out loud to go lynch some N***a. They probably cannot believe their luck as to how the US is extending their reign of terror for another decade by providing an incentive to fuel the enmity as a means to energize disenchanted population and rally them behind their ever faltering subjugation.

Posted by: GizUSN on Fri 8.22 5:12pm
“Prove that a missile attack from Iran is impossible.”

Proof of impossibility is a rudimental logical fallacy. You already assumed the proposition is true in the absence of evidence. You are attempting to nit pick the pedantic when the intendment of the original poster is patently overt. Perhaps a use of “improbability” would have been more appropriate in this case. However, marinating your premise around unsubstantiated assumption pars with me stating: You have a penis, therefore, it is impossible for you to be a pedophile. You could, as well, be that guy but I don’t have any evidence to charge you with that crime — hence, my assertion is nothing short of a loaded question aimed to stir up a hyped up contention for self-sought objection.

“Missiles deployed by them last year had the range to reach Europe, and they have more programs still in work. You contend that they have no interest in striking Europe, so please offer an alternative target.”

The question does not rest on the target offensively but rather defensively. The same reason conjured up for creation of long-range missiles by the US can also be applied to any other nation seeking to build a military system to protect itself against a foreign intrusion. It’s a sure way of keeping everyone in check. It’s disheartening watching you people buy into this whole schmaltz of irrationality. Obviously, a factual contemporary construct has fallen once again on a broad brush of “paranoia.”

“Israel was within reach of their missiles a couple models back. Yet they are still working to increase range. Some might wonder why, since such effort isn’t cheap.”

Building F-22, F-35, or Aurora [?] isn’t cheap either. Following your logic, the entire planet should dive into a convulsion of hysteria every time someone rolls out a new military equipment. Your concocted frenzy is unwarranted, period.

Posted by: GizUSN on Fri 8.22 5:54pm
“FYI, 1500km provides a capability to reach Southern Europe. 2500km reaches into Poland. They are investing in getting more range. Effort and money aren’t spent without a goal.”

Again, not every rocket manufactured is an indication of imminent “offensive” obtrusion. It reminds me of a saying that goes: You are like a “blind man in a pitch black room, looking for a black cat that is not even there.” Perhaps your next line of defense would be something in an effect of arguing to hypothetical and appealing to emotions: “I hope you could sleep soundly at night knowing Iran will eventually slug out ‘nuclear’ warheads across the ocean into Americans’ living room.”

I asked you a simple question yet you failed miserably to provide a cogent reasoning for your gratuitous presumption and all you do ever since is to dance around your false premise. Maybe espousing plausible deniability is how you wrangle with issues but I wasn’t keeping my hopes high for a trigger-happy military man.

Posted by: Robrob on Fri 8.22 10:18pm
“Is there a reason you are turning this rude?”

Yes, I don’t deal so well with pronounced stupidity. First off, calling someone a trigger-happy does not constitute impudence, perhaps a discourtesy but not the former. If such disquisition offended anyone, I apologize to the forum however not to whom it was directed at. Second, I found it hard to sit back and witness the tenet of Neo-Con mentality being readily promoted like a Mocha Chip Frappuccino at the local Starbucks store — sorry, I am not too forgiving when it comes to that. And some people just simply choose to insulate their sense of complacency by goading at the insignificant poignancies and imaginative follies.

Posted by: elion on Sat 8.23 4:35pm
Posted by: GizUSN on Fri 8.22 10:53pm
“Why is that? Because you chose to say so?”

No, pumpkin, it’s because you haven’t provided any evidence to your assertion. You are simply abandoning the evocation by hiding behind the broad shield of willful perverseness.

GizUSN: “We need interceptors in Poland because Iran is a threat [oddly to Europe].”
Me: “And why is that?”
GizUSN: “Because they make long-range missiles.”

Wow! How did I miss that? Slippery slope anyone? You forgot to mention that they hate our freedom ™ — in your face realm of rationality. Once again, having a schlong doesn’t necessarily make you a pedophile, does it? Where is the clarion of causation? Your polemic suffers from a causal inference of Biblical proportion.

Me: “You need to back up your claim with more concrete evidence.”
GizUSN: “NO, I ONLY ADVERTISE FACTS AND FACTS ONLY.”
Me: “Yes, I am sure you do. But how about a more thorough explanation as to how you reached that conclusion?”
GizUSN: “They have a really really really long-range missile.”
Me: “You’ve already said that. Give us a set of verifiable ratiocentive that proves Iran is on the verge of deploying a shower flash of ICBM’s over Europe.”
GizUSN: “I restrain myself from answering your question because I’ve already rejected your challenge.”

You are so adorable. All the fallacies you invoke stem from the same source: Fallacy of diversion. I asked you about the intent not the probability of an “assumed” offensive position by the Iranian regime. Once again, contending that possession of long-range missile automatically constitutes a military threat is no poetry of serious nature.

Posted by: GizUSN on Fri 8.22 10:55pm
“Waldorf chose the word. I didn’t. Proof exists that he is wrong.”

We already covered that ground but did you read the rest of my response? Oh, I forgot, you “choose” to “quit reading after the first sentence.”

“At least that’s my view through Rambo’s eyes.”

Which one? A B-rated, nauseating action-hero you’re desperately trying to emulate or the one who gorges on a pound of highly concentrated anabolic steroid for breakfast every morning?

Posted by: GizUSN on Fri 8.22 11:00pm
“Yeah, I did miss the question.”
And you still managed to flap your wings like a wounded duck and dodge the question. Keep it up… You’re gonna go far in life.

There is a rule in a game of debating which stipulates you must forgo of absurdity, irrelevance, and persistent ignorance — I am simply going to apply that rule.

Have a nice day.

Posted by: elion on Sat 8.23 4:42pm

Nooruz

http://www.irandokht.com/editorial/index4.php?area=org&sectionID=26&editorialID=2061

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Davood N. Rahni

The Norooz Festival is immortalized in the Decree of Cyrus the Great, founder of the Persian Achaemenid Empire, granting national, cultural and religious freedoms to the peoples of Babylon and beyond in 542 B.C.E.:

“When I entered Babylon (on Norooz) and other lands I conquered, I did not allow anyone to terrorize the land or its people… I kept in view the needs of Babylon and all its sanctuaries to promote their well-being. The citizens of Babylon… I lifted their unbecoming yoke (slavery). Their dilapidated dwellings I restored. I put an end to their misfortunes.” …Thus said the Lord to his anointed, to Cyrus, whose right hand I have holden (Isaiah, XLV-1-3).

Norooz, the new day or the New Year in Persian is the cyclical celebration of the Spring Equinox. Instituted by the Zoroastrians, it is the most cherished and celebrated of all Iranian festivals; it has been observed by all peoples of the broad Iranian plateau for millennia. Commemorating the periodic rebirth and rejuvenation of nature, Norooz has been observed, in one form or another, since 3,000 BCE by all the major cultures of ancient Mesopotamia, and southwest and south central Asia, namely, the Akaddians, the Assyrians, the Babylonians, the Chaldeans, the Elamites, the Medes, the Sumerians, and the Persians.

Today, Norooz is still celebrated annually in a wide arc of territory extending from the Aral Lake and Indus River to the east, the Caspian Sea to the north, the Black and Mediterranean Seas to the west, and the Persian Gulf to the south. Iranian peoples (Persians, Azeris, Kurds, Lurs, Tajiks, Baluchis, Bakhtiaris and Gilanis) as well as other peoples in the proximity (e.g., Armenians, Assyrians, Afghanis, Kazakhs and Kashmiris) all participate in the Norooz celebration. It is interesting that the first day of spring was also observed by Europeans throughout the Middle Ages, and also the American pilgrims during the early 18th century as the “common” New Year.

The roots of Norooz can be traced to Zoroastrianism, which is believed to be the world’s first monotheistic religion. Zoroastrianism considers Nowooz as the last day of the seven day creation epoch; thus the ritual of the Haft Sin, or the seven life-related, mostly plant based, symbolic heralds, all beginning with the letter “S” in the Persian language. During the Norooz holidays, families and friends visit each other, pay their respect to the elderly, reach out and reconcile with adversaries, visit the resting places of the deceased, and make donations to the impoverished and the sick. They give and receive presents during the thirteen day period that ends on April 1st (April fool’s day) when everyone spends the whole day in the country dancing, singing and playing. The commemoration of Norooz recalls the seventh day of creation, when homage is paid to the Creator or Mother Nature, with rest, play and party activities.

Norooz celebrates the Lord of Wisdom and the holy “halo” fire in anticipation of the Spring Equinox. The oldest archaeological record for Norooz celebrations comes from the recordings of over 2500 years ago. An inscription on Persepolis Palace, the Achaemenid dynasty summer capital depicts the Persian Monarch, Darius, accepting gifts from diverse peoples who lived in a federation of territories, stretching from Asia to Europe and North Africa. His father Cyrus the Great is cited as the world’s first true supreme emperor who ruled his vast realm with compassion and justice, a legacy acknowledged by the Greek historian Herodotus. His declaration of Human Rights on a clay tablet is kept at the UN.

Historically speaking, back in 1821 a young Englishman, following his passion for unearthing the lost world of the ancient east, came upon a peculiar monument in the heart of the Iranian plateau. He wrote in his diary:
The very venerable appearance of this historical ruin instantly awed me. I found I had no right conception of it. I sat for near an hour on the steps contemplating it until the moon rose on it, and I began to think that this, in reality, must be the tomb of the best, the most illustrious, and the most interesting of Oriental sovereigns.

The resting place of Cyrus the Great, the founder of the Achaemenid Empire in 550 BC had been identified. This was followed by the identification of ancient Passargädae, the capital of the Empire, in the nearby plain. The few sources on Cyrus portrayed him not just as an empire builder, but a man possessing rare qualities, deeply rooted in his ancestral sportsmanship of horseback riding, with an appreciation of earth’s bounties, the cultural diversity of humanity and the celestial objects in the sky. In the Bible (Old Testament) for instance, the Book of Ezra tells of Cyrus’s liberating the scattered Jews of Babylon, restoring their temple which had been destroyed by Assyrian king Nabopolassar. Cyrus invited the scattered Jews back to Jerusalem to freely practice their cultural and religious rituals without fear of persecution.

Iranian (from the Satem branch of the Indo-European), Medean and Persian tribes had settled in the Iranian plateau as late as the eleventh century BCE. This plateau has always been regarded as a crossroad between East and West for cultural, scientific, and technological discourse. The name Iran is derived from the ancient Iranian genitive plural aryanam, meaning [land] of the Aryans. It is interesting to note the appearance of the same terminology in Europe such as Ireland, again meaning the land of the Aryans.

Cyrus’s ultimate dream of unifying nations from south Asia to Asia Minor and North Africa was finally realized during the reign of his successor, Darius. In Choga Zanbil, a “ziggurat” or sacred city multi-level high rise urban structure, built by the Elamite king Untash-Gal around 1250 BC, substantiates the vast contributions of these inhabitants. Going further back, one can discern the existence of organized tribes of hunters/gatherers in northwestern Iran dating as back as 12,000 years ago. There have been a plethora of discoveries of early successive settlements built atop one another. These have been excavated in northwestern Iran’s Godin Tepe, a region dating back to at least 8,000 years ago. Iran has been a unified cultural and historical entity for at least 2500 years.

In recent times, although there have been sporadic numbers of Iranians who have immigrated to Europe and North America starting in the 19th century, a mass exodus has occurred since the 70’s due to political changes in Iran. There are an estimated three million Iranians living abroad today. According to the US census and other independent think tanks, the Americans of Iranian ancestry are among the most educated and the most affluent communities in the US, and have substantially contributed to the US economy in the hundreds of billions of dollars, and thus immeasurably to the US quality of life. For instance, one can hardly find an American university or college, medical, business or civil sector, and artistic area where Iranian- Americans are not well represented. The Iranian-American Community of one million strong is found in every corner of the US and Canada. There are large communities in the New York metropolitan area, Boston, Washington D.C., Los Angles, San Francisco, San Diego, San Jose, Dallas, Houston, Atlanta, and in Toronto, Vancouver and Montreal. The total number of peoples of Iranian ancestry worldwide, including 70 million in today’s Iran, is estimated at 150 million.

According to a research in Tehran, 5.23 % of people who use intoxicating substances, 53% of alcohol users, and 5.43% of those who smoke have tension within their families.

The Head of the Identification Registration Department in the Foreign Ministry says: “97% of Iranians residing abroad choose Iranian and Islamic names for their children. He adds that choosing foreign names for Iranian children residing abroad, which promotes foreign cultures, is not allowed.”

Azarakhsh Mokri, Head of the Center for Addiction Studies of Iran says that: “close to 20% of the adult population of Iran use drugs in some way.” According to her assessments about half a million people deal drugs, and each sell to about 3- 4 people. The annual cost of these drugs is somewhere between 3 to 5 billion dollars. Close to 200 thousand youths are addicted to heroin in Iran since it’s a popular drug amongst youth. A young boy who used to do body building says that the cost of buying heroin is cheaper that buying a sandwich.

Exclusive Reader’s Digest/Zogby International Poll: “Despite tensions between the United States and Iran, most Iranians – nearly two thirds – said they don’t believe that the two countries will go to war in the next decade. Younger and older Iranians would favor a more conservative, religious society, while those aged 30–49 said they would favor a more liberal, secular culture. What is striking is that just 15% said Iranian culture should stay just the way it is right now.”

The United Nations announced; in terms of the relationship between direct foreign investment and gross domestic production, amongst 177 countries Iran has a standing of 10 which is the worst possible standing.

According to the latest estimates, the assets of Government Corporations in Iran are about 500 thousand billion Tomans ($ 500 billion) of which the share of Corporations handed to the private sector is less than 3 thousand billion Tomans ($ 3 billion).

Exclusive Reader’s Digest/Zogby International Poll revealed that Iran divided on many issues, although united on the role that Iran should play in the region. Iranians said they believe their country should lead the region “diplomatically and militarily” – 56% supported this view, and only 12% said their country should not be the dominant regional power. Nearly equal percentages of respondents want Iran to become more secular and liberal (31%) as want the country to become more religious and conservative (36%).

In no historical occasion were we unanimous. Instead of confronting the aggressor right behind the gates of our land, we sacrificed the time of rescue for unworthy and pointless discussions. We never came to terms with each other and as a result were always conquered. We never come to terms with each other which leads to missing any chance and possibility. At the end of the day we always pick the worst choice. The time passes by and maybe there will be a better era for us.

Iranian men feel less prosperous due to the changes within their society. As a result they may get depressed. According to psychological definitions we can conclude that 54% of Iranian men and 46% of women are either depressed or on the verge of becoming depressed. This is why the happy men of yesterday are less satisfied with their lives than women today. Dr. Abdollahian believes that the change in social values to women’s benefit is the main reason.

http://www.frontpagemag.com/readArticle.aspx?ARTID=9413
The Tears of Iran By: Jamie Glazov
FrontPageMagazine.com | Tuesday, March 01, 2005

Frontpage Interview’s guests today are Banafsheh Zand-Bonazzi and her husband Elio Bonazzi. Both are writers, activists and Middle East pundits.

Preview Image

FP: Banafsheh Zand-Bonazzi and Elio Bonazzi, welcome to Frontpage Interview.

[Editor’s Note: This interview was conducted by email and in some answers, both husband and wife answer a question in unison].

Banafsheh Zand-Bonazzi (BZB) and Elio Bonazzi (EB): Thank you Jamie for providing us and other Iranians whose work you post the forum to enlighten your readers to the nature and purpose of radical Islamism that has ravaged Iran and Iranians over the last 26 years.

FP: Tell us a bit about your background and your family’s background.

BZB: My father is a celebrated journalist and writer whose two main passions in life were Cinema and geo-politics. He was one of the pre-eminent champions of world cinema in Iran and Iranian cinema abroad; as a young Iranian man he advanced (without any help from anyone) in the ’60’s Hollywood, Cinecittà and French New Wave cinema as a film historian, critic and eye for talent… he is an almost larger-than-life kind of a character. When the revolution began, though he had plenty of job opportunities outside Iran and could have fled, he chose to stay behind along with quite a few friends and relatives in order to protect the integrity of social evolution that was occurring in light of the revolution. Now, in retrospect we all see that sadly, that was the wrong choice!

My mother who was a journalist in her youth (and met my father through the journalist circles in Tehran in the ’50’s) got her bachelors degree in Economics from U.S.C. in the ’60’s and then her MBA from NYU; She was one of the managing directors of the Iranian National Handicraft Center in the ‘70’s. This was a wonderful organization that through sales in various specifically designed cooperative stores set up by the ministry of commerce, around Iran, artisans and crafts people were able to sell their and did not have to go through the bazaars where they may have been cheated. It was a win/win situation for all. This organization did so well, that my mother was asked to open the N.Y. based headquarters in ’72. My mom turned it into a successful enterprise there too and returned to Iran in ’74 where after a serious of promotions she was advanced to managing directorship of the Iranian Customs administration. Since the revolution when she left Iran and came back to the U.S., she has been an activist. In fact we occasionally collaborate and strategize on some projects.

I’m 43, born in Tehran in May of ’61…raised between Iran, the U.S. and Europe with Farsi, English and French as my mother tongues. Growing up around and in the world of cinema, I myself studied film/theater/art history and linguistics at the American University in Paris as well as L’IDHEC (the institute of advanced cinematic studies in Paris, now knows as FEMIS) as well as University of Maryland, Baltimore.

I never studied political science and whatever I know is purely auto-didactic. Having been raised by a family of politicos, I myself have been a politico all my life but the active side of me was evoked when I met Elio in Tehran in 1978. He was my junior prom’s blind date! He was living in Iran with his mother who was working for the Italian Embassy in Tehran and attending the Italian school there (Elio’s father is the renowned Italian Sociologist, Giuseppe Bonazzi).

Back in those days Elio was one of the youngest and most active member of the Italian Communist group Lotta Continua. He hated Americans and spoke only French and refused to learn English (because it was the language of Imperialism!) Anyhow, being the hardcore Communist that he was and being that right around then, the whole Bader Meinhoff stuff was going on, the Red Brigade had just kidnapped Aldo Moro, etc. I took him to task at our prom date. After that, we were in love! Though he’d been in Iran for 4 years at that point and it turned out that we had many mutual friends, we only got to meet toward the end of his sojourn in Iran; he was just graduating high school and had to go back to Turin (which is where he’s originally from) to start University, so we only got to spend 3 months together with the proviso that he come back to Tehran on his holidays (his mom was staying in Tehran as her mission wasn’t over). So the Christmas holidays of ’78-’79 when Elio was meant to come back to Tehran, the revolution broke out and the Tehran airport was closed and all non-Iranians were evacuated. We continued writing and phoning each other from Turin to Tehran, with the raging revolution going on all around me and when in the June of ’79 I finally left Iran, I called him from Greece. No matter how hard we tried, we weren’t able to get together that summer and then gradually, due to life’s fickle ways, we lost touch. In July of 2001, just as I was about to marry someone else, in Amsterdam, Elio after years of searching for me, found me again through my high school’s website…after 22 years! The rest as they say is history.

FP: In what ways do you think that the West fails to understand Iran?

BZB & EB: We usually refer to the concept of “cultural imperialism” to explain the failure of most Westerners to understand not only Iran, but also the East in general. Cultural imperialism is the approach for which there is only one way of doing things; that is the Western way, which considers it to be the most advanced, the most civilized, and the most efficient. In the mind of Westerners there is only one way to engage other nations and this way usually implies some sort of economic benefit, in the best case for both participants, in the worst case only for the Western entity, be it a nation, a company or even a cultural institution. The western mentality is fundamentally based on rationality and economic utility, summarized in the notion of “homo economicus”. That notion prevented the nuclear holocaust during the Cold War, because the Russians belong to the same culture, and as the pop singer Sting so eloquently expressed it, “They also love their children.” So even when it became evident that the USSR had lost the cold war, the Russians resisted the biblical temptation of having Samson die with all the Philistines, and decided not to engage in the final conflict, which would have meant the destruction of the planet.

In many occasions, Westerners assume that everybody in the world shares their standard behavior; basically they project their mentality onto all counterparts. And here is where, in the case of Iran, they dramatically fail. The Islamist establishment that unfortunately today governs that country is not interested in making the best possible deal with the West. Its only interest is the destruction of the infidels and their corrupt world.

While in the West the act of engagement is absolutely neutral, and doesn’t imply giving in, but simply to sit down and negotiate, in the mentality of the mullahs to engage basically means that the counterpart proposing engagement feels weak, and tries to beg for a deal from an inferior position.

That was evident during a function organized in July 2004 by the Council of Foreign Relations, where Mr. Brzezinski was proposing engagement with the Islamic Republic. Ayatollah Haa’eri (not the Ha’eri that is part and parcel of the coterie of the Mullahs and is sitting in Qom, but the one who has been defrocked and lives between the U.S. and Germany), a Shia scholar forced to exile because favors a secularized version of Shi’itism, and miraculously still alive after several attempts on his life in Germany, was among the public, and was given the opportunity to speak. Ayatollah Haa’eri strongly instructed Brzezinski and his fellow panelists that engaging the mullahs would simply embolden their aspirations to destroy the West, because in their mind they would smell a weak adversary prepared to make concessions. Among the people present to the CFR function, the Iranians understood perfectly what Haa’eri was saying, while most Westerners were smiling with an air of superiority, not believing a word of what they were hearing, convinced that Haa’eri was a bitter character, unable to extricate himself from his grudges as a defrocked Mullah. This is the origin of the deep sense of frustration that we feel when confronting cultural imperialism: no matter how loud we scream, no matter how eloquent and based on facts is our arguing that the mullahs must be confronted, not courted, Islam absolutely secularized, separating religion from state, the same way westerners aspire to live, our plea falls on deaf ears. Westerners deem to know better, even if the subject matter is our land, our culture and, ultimately, us.

Another sad example is the recent book by Ken Pollack titled “The Persian Puzzle.” Mr. Pollack shows an encyclopedic knowledge of Iran and its history, definitely he knows more than even many of the well-educated Iranians. Yet, in spite of all his knowledge, he fails to grasp the basic concept that the only way to deal with the Islamist threat is to actively pursue regime change in Tehran; anything short of that is simply postponing the inevitable showdown, which will occur sooner or later. The sooner the better for the West, which would confront a regime that doesn’t have yet a nuclear arsenal at his disposal.

Mr. Pollack, (like the journalist, Arnaud de Borchgrave) naively and unfortunately propose instead dialogue and a diplomatic solution, once again projecting their western mentality onto interlocutors that behave according to different systems of belief and standards.

FP: It is interesting that many leftists have supported Islamist terror and tyranny. The French philosopher, Michel Foucault, came out and championed Khomeini’s Revolution in 1979 – with all of its horror. What do you think attracted Foucault to such despotism and its genocide? Why do you think leftists become so intoxicated with violent revolutions that engage in mass murder and terror?

EB: As a former left wing militant, I think I can respond to this question exhaustively. I lived in Iran from 1975 until the beginning of the revolution, and having learned farsi, once I was back in my country of origin (fall of 1978), I participated actively with my Iranian friends living in Italy to the frantic revolutionary activity of support to the movement in Iran.

While Foucault was probably the most renowned intellectual to be involved in the support of Khomeini, major sectors of the European left were enthusiastic about the historical changes taking place in Iran. To understand why, a little historical background is necessary. The left had reached its apogee between 1974 and 1975, between the “Revolution of the Carnations” occurred in Portugal in April 1974 and the fall of Saigon in April 1975. The US was in that phase weak, leaking its Watergate scandal wounds, and unable to lead the Western world through a sufficiently strong leadership. The Soviet block was gaining a considerable advantage over the free world. But the first symptoms of decline for the left were appearing, first the Soviet gerontocracy that was fossilizing the once vibrant and progressive ideas of the October revolution, and then the recurring problems with the satellite states of the Warsaw pact, like Poland, where consensus towards the communist ruling was constantly diminishing.

The Iranian uprising was perceived by the left first and foremost as a defeat for American imperialism, which had brought the Shah to power through a coup in 1953, and considered Iran as the a puppet regime in the Middle East. That sentiment was coupled with a generic love for the idea of a revolution, no matter what the outcome, typical of the left-wing rhetoric. This romanticized revolutionary myth was entrenched in the DNA of the left, and embodied by the character of Che Guevara, whose glorified image was present in every rally and every function held worldwide, immortalized in banners and t-shirts. A commonly used metaphor of that period was the one that compared the revolution to giving birth. One should not focus on the loss of blood and the excruciating physical pain experienced by the mother to dismiss the value of the new creature coming to this world. The left was generally very forgiving of the excesses committed by revolutionary forces, as the supposed good coming from new the world brought about by the abrupt change would have justified the sacrifice of the elements of the old guard, indiscriminately killed and executed during the overthrowing of the old regime. Mao Zedong summarized this concept in the famous sentence “The Revolution is not a gala dinner!” The uprising led by Khomeini occurred concurrently with the revolution in Nicaragua. In those frantic months at the beginning of 1979, the most politically savvy left-wing intellectuals tried to conceal the deep crisis that started affecting the left by driving the attention of the left-wing public on the two revolutions, hoping that the galvanizing forces unleashed in Managua and Tehran would have postponed and possibly avoided altogether the painful realization of the several failures of the Soviet Union, which became even more evident a few months later, when the USSR invaded Afghanistan.

In addition, the initial phase of the Iranian revolution saw the participation of all leftist political forces, from the Feddayns to the Communist Party (Tudeh), from the more centrist followers of Mossadeq to even strata of society that were previously supportive of the monarchy. After Khomeini managed to centralize all power firmly in his hands, and started executing left-wing militants, the left was still prepared to defend the more anti-American aspect of the revolution, symbolized by the humiliation the US suffered in the occasion of the hostage crisis. The common analysis at that time was that, yes, there was a clerical involution occurring in Iran, but in the grand scheme of worldwide geo-politics the fact remained that Iran was no more in the sphere of influence of American imperialism. The left was always completely oblivious to the “collateral damage” provoked by the Revolutionary Guards (Pasdaran). European governments even turned a blind eye on the killers sent by Tehran to execute activist expatriates living in Europe, sometimes even escorting the killers to the airport where a plane was ready to bring them back to Iran in first class seats.

FP: It was Iran that inspired the great wave of Islamist terror with which the world now has to deal. If Iran helped fuel the fire of Islamic fanaticism, do you think there is hope that it can also help dampen those flames?

BZB & EB: There is nothing but disenchantment and acrimony toward the Islamic Republic’s version of Islam today in Iran (however difficult it is for Westerners to hear and accept that), especially among 70% of Iranians who are in fact under the age 30. First of all the popular rage is directed against the “Velayateh Faqeeh”, the theocratic framework imposed by Khomeini after the revolution, which interrupted the long-time tradition of separation between church and State that was typical of Shi’itism. The age range of the worshippers at the Friday prayers shows how uninterested Iranian youth is in religion, at least the official religion of the mullahs. It is furthermore important to consider that Persians are not Arabs, and that in spite of having being conquered by the Arabs and having accepted Islam, Persians still have a strong sense of identity and fiercely resist being “Arabized”, which is exactly what happened after the advent of the Islamic Republic. As a form of civil disobedience against the theocrats, Iranians today choose to name their newborns after Persian heroes of the resistance against the Arab invaders, rather than after Islamic prophets. So names like Hussein and Mohammad are not fashionable any more, while name like Kourosh (Cyrus), Darioush (Darius), Arash, et al, which are pure male Persian names, are very popular today.

Before the revolution of 1979 Iran was a nation characterized by religious plurality. The shi’ites were a relative majority, but there were also Bahais, Christians, Sunnis, Jews and Zoroastrians (Zoroastrianism was one of the first monotheistic religions of the world and the official religion of Persia before Arabs attacked, massacred and forced Persians to accept Islam). A recent phenomenon in Iran is the rediscovery of Zoroastrianism, as a way, once again, to reaffirm the Persian heritage and specificity, and to defy the Islamist zealots. Such interest is manifested in reading books about Zoroastrianism, practicing its rituals, and ultimately converting to it. When books are not readily available, in a way that is reminiscent of the Samizdat phenomenon in the Soviet Union, photocopies are circulated among Iranians interested in their historical heritage.

The net result of having been forced to accept a State-imposed religion for more than 25 years is a complete backlash against it, which will become even more evident after the mullahs are overthrown. This is one of the reasons why it is so important to achieve regime change in Iran. The message to other nations tempted to follow in Khomeini’s footsteps will be clear; after 26 years of Islamic theocracy Islam has been weakened and left with considerably less followers, while secularism and alternative religions are on the rise.

FP: André Glucksmann, one of France’s most renowned philosophers, has stated that the terror war today is one between the forces of civilization and nihilism and that, in many respects, this conflict manifests itself most clearly in Iran. Could you talk about this?

BZB & EB: Mr. Glucksman has summarized it very perceptively. The direction taken by the Islamist ruling of Iran is clearly towards nihilism. After the Islamic Revolution the country experienced a demographic expansion that almost doubled the population, from 37 million to 70 million people in 26 years. Iran is therefore a young country with an ancient culture and millennia of history; this is something in which people take pride! The consensus towards the Mullahocracy among the youth is effectively nil. The unemployment ratio is also extremely high, especially youth unemployment, which favors phenomena like drug addiction. And that is exactly what the government has done to control the alienated youth; it has induced massive drug abuse, especially opium and heroin, which have a debilitating effect on the mental health of the young addicts, who lose any will to rebel and be active against the establishment. Drug addiction now affects millions of young Iranians, and is a well-known problem between UN and DEA officials. The ability to control hostile masses through drug addiction is reminiscent of the policies devised by the British Empire in the 19th century, which kept subjugated Indians and Chinese nationals inducing opium addiction and even going to war twice against China to force the Chinese emperor to allow the import of opium.

A by-product of massive drug addiction is the increased number of HIV/AIDS cases, mainly due to needle sharing, which occurs regularly in Iranian prisons.

Public executions and stoning, which are on the rise, complete the nihilist picture internal to Iran, which is also very active in exporting nihilism overseas. The Islamist theocracy is the main sponsor of suicide bombers, who are financed through Hizbollah and Hamas, and take place in Israel and, more recently, in Iraq. And of course, they vehemently spin their viciousness through shameless media outlets like the laughable Al Manar TV, which is there to brainwash and recruit impressionable people to do their dirty work for them.

Stoning, public executions, massive drug addiction, a growing number of HIV/AIDS cases, together with suicide bombers and terrorist activity have all in common self-destruction and death, the essence of nihilism. Also holding sex slave auctions of Iranian children (between ages 4 and 24 to Arab and even European buyers, believe it or not) has become another form of demoralization and devastation of our people. Islamism is a culture of death, which clashes with civilization, as we know it. That is why André Glucksmann is absolutely right in pointing his finger to Iran as the main engine of nihilism; the Islamic Republic is the main threat to the values of civilization today.

FP: You have discussed how one of the weaknesses of the movement for liberty in Iran is that the fragmentation within the intelligentsia. Could you illuminate this phenomenon for us?

BZB: Well, I wouldn’t exactly call it fragmentation because every group in exile has its differences if you will; however, the fact is that we are making headway in bringing people from various ideological groups together for discussions and conflict resolution. There has to be a national reconciliation across the board and that is in fact happening, however slowly.

The thing that concerns me is that some American scholars and policy makers are falling for the spin that the MEK (Mojahedeen Khalq) who are also known as MKO or National Council of Resistance of Iran should be taken off the State Department’s terrorist list (and we all fear) as possibly the replacement the Mullahs. The MEK/MKO/NCR is a group driven by an ideology that merges Islam with Leninism. The Mojahedeen supported Khomeini, and just before the revolution they organized guerrilla warfare aimed at fighting American presence in Iran, killing four Americans. They participated in the summary executions perpetrated in the first 2 years after the revolution and enthusiastically supported the hostage taking at the US embassy; furthermore, let’s not forget that until the fall of Saddam they were backed by the Baathist regime. Khomeini as a tool to achieve absolute power used the Mojahedeen, but they were later marginalized, which is why they turned on Khomeini and his version of an Islamic Republic. In the summer of 1981 they were banned and started a fierce fight against the regime. Part of their leadership went into exile in France from where, capitalizing on the support of the leftist intelligentsia, organized a coalition and a war against Khomeini’s regime. Their tactic was to have as many victims as possible among their followers in order to claim popular legitimacy. This use of their own people as sacrificial arsenal illustrates their contempt for human life and rights.

I don’t deny that they too have paid a very heavy price in the fight against the Mullahs (thousands were massacred at Khomeini’s command in 1988), but they’re Islamic Socialists and Iranians, as we’ve reiterated time and time again, want nothing to do with Islam as a rule of law anymore. This group is indeed well organized and has been known to often (not always) provide accurate information about the nuclear development in Iran. The fact is that many westerners think that because this group is “organized” that somehow they are the answer to 26 years of havoc wreaked by the Islamic Republic. They’ve learned to talk the western talk and walk the western walk and they have been known to take advantage of western “credulousness” to blur the fact that other major opposition exists! But it’s not the answer to our 26 year long misery and we expect that anyone who wants to see democracy in Iran would not go to bat for this or any other group per se by prescribing a replacement regime for us. That is up to the Iranian people. Up until now the State Department has resisted the pressure to remove the Mojahedeen Khalq from the list of terrorist organizations. Iranian seculars expect that the State Department put conditions on them should they consider releasing them from that list. The MEK must come up with an open self-criticism of their advocating the killing of foreign advisers during the Shah, their support of summary executions and violation of due process during the first years of the Islamic Republic, as well as the U.S. embassy hostage taking. They also must clarify their plans for the future of Iran and submit to the democratic mode of transition. They must renounce the titles of President (Maryam Rajavi, their leader) or any other political title and consider themselves as a political party. They must accept that in Iran there are constitutional monarchists, republicans and many other different political choices, all legitimate and of which they are only one and finally they must clearly profess their belief in International human rights instruments, with no reservation or exceptions.

You see a part of how the Mullahs operate is waiting for the U.S. to make one false move and then the psywar with the people of Iran begins. They will do anything to make the U.S. look incompetent and dictatorial and as a result, they’ll tell the Iranian people that the U.S. has once again turned on them by backing the one force that in fact will not be bringing the democracy Iranians are hoping for.

Also, any movement that has been started by our opposition both inside and outside Iran has been violently squelched by either the Revolutionary Guards (inside Iran) or their assassins (outside). So, if you look at the people who have been killed in Iran (like the murders of Iranian students, intellectuals, free-thinkers and artists inside the country), you’ll see that nothing in that sense has been allowed to succeed because the Revolutionary Guards simply find the activists and either assassinate them or take them to their dreadful prisons (like my father) where dissidents are regularly tortured, in some cases to death.

Then the opposition outside the country…Since 1980 the Mullahs have had their agents assassinate almost 150 of our finest activists; people like the great Dr. Shahpour Bakhtiar, Mr. Abdorahman Boroumand, Mr. Fereydoun Farrokhzad, Reza Mazlouman and the list goes on (to know more please refer to http://iricrimes.org/lr_int.asp). Though only one Iranian ex-pat was assassinated in the U.S., dozens more have been killed in Europe and though in almost every case the European secret services (French DST, Italian SISMI, MI6, Swiss police and Turkish secret service) caught the assassins, they turned around and put them on first class flights back to Iran in order to keep their relationship on the up and up with their Mullah oil baron buddies! By the way, Iranian activists living in Europe still fear for their lives because it is a known fact that the Europeans will safeguard none of us, fighting the Mullahs as long as the Mullahs’ assassins roam the continent freely.

I’d just like to expound on the story the only Iranian assassinated in the U.S. in the early years of the revolution. Mr. Akbar Tabatabai (Iranian Press attaché to the embassy in DC during the Shah) was murdered in his home in Bethesda, Maryland in 1980 by the American David Bellfield, who posed as a mailman and shot him point blank at his door. Bellfield who had become an eager “Moslem” was naïve enough to have allowed himself to be “recruited” by an Iranian fellow, agent of the Mullahs, who incidentally still lives in the DC area and runs an Islamic school. After the assassination, Bellfield, a native of Long Island, New York (who now calls himself Dawud Salahuddin) got in his car and drove directly to Canada. By the time the news hit the airwaves, he was in Canada and then immediately on a flight to Switzerland, where he would be prepped for travel to Iran to sit at Khomeini’s feet. Now Bellfield, who is stuck in Iran for the last 25 years and has an Iranian wife and kids, (because here he still has a warrant out for his arrest) condemns the Mullahocracy in Iran as saying that there are two forms of justice in Iran; one for the Mullahs and their hierarchy and the rest for the rest of Iran (read Ira Silverman’s article about him in the New Yorker Magazine. Issue of Aug. 5th , 2002)

FP: Banafsheh Zand-Bonazzi and Elio Bonazzi it was an honor to have you here. All of us here at Frontpage have tremendous respect for you. You are truly noble and courageous people and you are fighting a priceless and heroic battle. Thank you.

BZB & EB: We’re glad to have allies like you and are grateful for every opportunity you give us to impart the facts to you and your readers. The Iranian issue and it’s cancer-like spread is paralyzing the Middle-East and people here must realize that there are viable and lasting solutions that will not be prescribed by so-called pundits who have the pulpit given to them by traditional media. Those media outlets erected ideological barriers which prevented us to convey the voice of the people of Iran. The two of us have tried to link the “voice” of the people inside Iran and the “ears” of the truly unbiased and humanitarian westerners; Frontpage Magazine has provided us with a forum to finally get the facts out into the open.

The absolute ruler in fake democratic wrapping.
Power structure of the Islamic Republic of Iran. The supreme leader has absolute power. This is how:

The institutions of power in order of supremacy:

1 – Supreme Leader
2 – Guardian Council
3 – Assembly of Experts
4 – Expediency Council
5 – President
6 – Parliament

1- Supreme Leader

Not elected but appointed by the Council of Experts.

The duties of Supreme Leader according to Article 109 of the Constitution of the Islamic Republic as amended on 28 July 1989:

1) Setting out and outlining of all the policies of the Islamic Republic.
2) Overlooking the proper execution of the policies.
3) Ordering Referendum.
4) Head of all armed forces.
5) Deceleration of war, peace and deployment of forces.
6) Appointments, dismissals and acceptance of resignations of:
a) Guardian Council. [He already appoints directly 6 of them and the other six are recommended by the head of the Judiciary – who is appointed by the Supreme leader – to the Parliament who will approve them. However according to this Article he can dismiss any of them and reappoint them. When you read the duties of the Guardian Council, you will discover the absolute power of the Supreme Leader.]
b) the head of the judiciary.
c) the head of the Radio and Television of the Islamic Republic of Iran.
d) The head of the Intelligence.
e) the head of the revolutionary Guards.
f) the heads of the Armed Forces and Police.
7 – Resolutions of any dispute between Judiciary, Parliament and Executive.
8 – Resolutions of any disputes that is not possible in ordinary way via the Expediency Council.
9 – Signing of the President after the election, the presidential candidates must be approved by the Guardian Council according to this constitution and must be approved by the Supreme Leader before the elections in the first round.
10 – Dismissal of the President in the interests of the country after the supreme court’s ruling on the breach of his legal duties or the vote of the Parliament in accordance to Article 89 of the Constitution.
11 – Pardoning or reduction of sentences within the Islamic laws and after the recommendations of the head of the judiciary.

The Supreme Leader can transfer some of his duties and authorities to another person.

And…

The Selection and appointment of the entire Expediency Council, under Art 112.

So Far you can see that the Expediency Council and the Guardian Council are all directly and indirectly appointees of the Supreme Leader.

How is the Supreme Leader Appointed? He is appointed by the Council of Experts.
How is the Council of Experts appointed/elected? This council is elected by the people. But the council is vetted by the Guardian Council [appointees of the Supreme Leader]. The regime does not make too much noise about the elections of this Council and keeps it low key.

Now let’s look at the rest of the Institutions.

2 – Guardian Council
The 12 members of this Council are not elected by the people but are appointed directly and indirectly by the Supreme Leader.

Duties: the duties of the Guardian Council are not defined in one but many Articles. According to Art 91, to guard against any legislation that are in breach of the Islamic laws and the constitution by the legislative bodies. According to Art 99, to overlook the elections of the President, Parliament and referendums. According to Art 96, the acknowledgment of whether a law passed by the legislative is against the Islamic laws is done by the majority of the Council and whether against the constitution by all of the members of the council. According to Art 97, to expedite parliamentary dispute over any proposals they can participate and listen. But if in emergencies they can express their opinions. According to Art 99, the Guardian Council overlooks the elections of the Council of Experts, Presidet, Parliamnet and Referendum.

The overlooking duties of the Guardian Council includes the vetting of the candidates.

As you can see three of the most powerful institutions of the Islamic Republic of Iran are appointed by the Supreme Leader.

There is no need to continue with the rest of the institutions as they are all vetted and selected for elections by THE GUARDIAN COUNCIL and put in for elections by the people. The people only vote for a president that is loyal to the Supreme Leader as vetted by the Guardian Council. The people can only vote for a selected number of candidates for the Parliament that are selected and vetted by the Guardian Council. The people can only vote for a seleceted and hand picked number of candidates for the Council of Experts who are vetted by the Guardian Council.

http://essenceofwisdom.blogspot.com/2006/09/what-is-just-reaction-to-unjust-action.html
Sunday, September 10, 2006
What is a Just Reaction to an Unjust Action?

In the supposed linear world presented by politicians — for every unjust action there must be a reaction. Not only to stop future similar actions, but for revenge purposes as well. Most likely a frame of thinking taken from the Old Testament: An eye for an eye.

However what such thinking doesn’t take into consideration is that in most cases the relationship between action & reaction in the world of politics tends to operate on a parabolic cycle rather than a linear path with a certain ending. Which then begs the question at what point does the reaction(s) of a nation against unjust and inhumane action of others justifiable? Justifiable not only from the usual moral & ethical perspectives but also from points pertaining to economic, political and even societal.To better explain let me go over two events, first the 9/11 attacks and then the 1979 Iranian Revolution.

As a result of the attacks on 9/11/01 by those men who were influenced by Al Qaeda ideologies approximately 2,973 people which by the way not all were Americans lost their lives. This event led citizens of the countries that were effected by this attack mainly U.S. and NATO countries to allow their governments to first invade Afghanistan, and then Iraq in a war that was meant to fight terrorism, but one that I presume meant to avenge the loss of those who lost their life on 9/11.

However the irony is that as this seemingly never ending war against terrorism is continuing more people (both innocent civilians & military service men & women) are dying in an effort to avenge the lives of those killed by those 19 men who already had died. In the first war in Afghanistan so far 330 US soldiers have died while 560 injured, and in the second war in Iraq another 2,662 US soldiers have given their life, while another 9,062 injured (Source: US Dept. of Defense). To these we need to add another ~70 death for the troops from NATO serving in Afghanistan, and another ~227 death by coalition forces in Iraq.

Now here I haven’t even touched on the other victims of the war which are the Afghan and Iraqi civilians! Some studies put Iraqi civilian death toll to be around 100,000 to (655,000 updated)while others that only use reported deaths in the media put the estimate at ~40,000. President Bush himself conceded on the ~30,000 figure. As far as Afghan’s well the casualty on their side is estimated to be ~15,000. So all in all as a whole somewhere around 48,000 to maybe 118,000 (I know pretty wide range) have died in the past 5 years as a result of 9/11. Moreover these figures don’t even include the sudden spike in terrorism and casualties post 9/11 — e.g. attacks in Bali, Madrid, London that caused the death of even more people.

Of course this is just looking at it from purely the perspective of those who lost their lives and not from all of the other consequences of such actions such as economic cost and economic trade-offs ($ on weapons vs. $ on education) of waging such a war, America’s reputation in the world, social impacts of those that somehow have been touched by this war and etc …

In the other example of challenges and dilemmas in reacting against inhumane actions I can’t help but to think of the 1979 revolution in Iran. Recently I had an exchange of thoughts with a friend after I shared a 2003 revelation by an Iranian political activist Emad Baghi. In his book “A Survey Of Iran’s Revolution” he devoted a brief section to a review of actual death toll pre 1979 revolution. His findings which were as a result of having access to Martyrs Foundation (Bonyad Shahid) data showed that during the year of 1963-1977 where opposition groups were accusing the Shah’s regime of horrible atrocities a total of 383 people were killed by the regime. After the revolution started in 1977 and ended in 1979 an additional 2,781 people were killed for a total sum of 3,164. This is while many opposition leaders including Khomeini frequently throw around figures of ~60,000 for the same time period! In fact while in exile in an interview in 1972 Khomeini cleverly suggested that it had been told that in the 1963 uprising 15,000 were killed by the regime, whereas the actual figure was 32! Such exaggerations continued on and in fact were elevated during the period of 1977-79 after each account of friction between the regime and revolutionaries. For example in one of the supposed bloodiest days of revolution (17th Shahrivar) in 1977 actual data showed 64 people were killed, whereas many in the opposition, and foreign media sources put the numbers to be around 4,000 and some even 10,000!

In both the 9/11 attacks and 1979 Iranian Revolution the citizens in these countries had to make a choice in how to address such atrocities. Although the situations have hugely different circumstances and history behind them, but in as far as the over reaction of the citizens they do share some commonality. At what “end” does both the mean and the outcome justify the cause? Does killing 15,000 Afghan and another 40,000 Iraqi justify having 3000 killed by mainly Saudi men? Does killing 1000 Lebanese for having 2 soldiers taken prisoner, and 3 killed justify both the mean and outcome? Does having a revolution that was mainly inspired on the death of supposed 60,000 people (actually 383), and then having another 2,781 die during the revolution and an additional ~4,000 more executed afterward — all justify the cause of having democracy? In fact in Iran’s case one can also take it one hyothetical step further by wondering had it not been for the revolution and Iran’s relation with U.S., Iraq probably would not have had attacked Iran, or at least the war would not have been as long as it was. Thus raising the possibility that had it not been for Iranians over reaction to the horrible atrocities done by the Shah’s regime to the 383 people , just maybe — maybe another approximate 450,000 – 1,000,000 Iranians wouldn’t have died during the war with Iraq!

Now here I must explain that my comments are not meant to suggest that no fights are worth fighting for — no that is not my position. I’m all for holding guilty people accountable, and punished, and I can see the rational for some nations to wage wars or even have revolutions. At what levels and what reactions it makes them justifiable — well that has to be answered on an individual bases, as I don’t have a formula for say the threshold of death on both the side of aggressor and victim in making it a just or an unjust reaction. Having said that I do think that if the reaction will cause the death of multiple more people, then maybe as much as killing one innocent person idealistically is equivalent to killing all innocent people, but since realistically it doesn’t then it may be best to just accept what happened — however tough it may be, and find an alternative approach.

Lastly my main point is that I think all responsible citizens must make sure that their political leaders have exhausted all peaceful means in trying to stop future unjust actions before allowing them to resort to war or say revolution — which could lead to killing of many others. This of course requires accepting the responsibility of making sure we are informed enough so we are not manipulated into allowing those with their own agendas, and not so well thought out plans to change the course of our destiny.

http://www.sadlyno.com/archives/7259.html

That’s a reprinted press release from David Horowitz’s FrontPageMag. The text reads, “The photo accompanying this article, which shows a teenage girl buried before being stoned to death for alleged sexual offenses, will serve as the poster for the protest Week. The stoning took place in Iran.”

This photo turns up all over the right-wing media, but the ’stoning’ actually takes place in a 1994 Dutch indie film called De Steen, directed by Mahnaz Tamizi. The ‘teenage girl’ is actress Smadar Monsinos.

http://tehranbureau.com/man-shadow-mojtaba-khamenei/
The Man in the Shadow: Mojtaba Khamenei

There is much talk about Mojtaba in Iran. Is the young Khamanei being groomed to take over his father’s position?

By MUHAMMAD SAHIMI in Los Angeles | 16 July 2009

[TEHRAN BUREAU] Despite the transparency of your positions [regarding various issues], there have been reports that your respected son — Mr. Sayyed Mojtaba — has supported one of the candidates [in the presidential elections]. Then, I heard that a high official has told you that, “Your son has supported one of the candidates” [implying that he had carried out his father’s order], to which you have reportedly responded, “He is his own man, not just my son,” which made it clear that [his] support was his own personal view [and preference, and not yours].

At the same time there were reports about his [Mojtaba’s] support for another candidate — whose star suddenly dimmed three days before the elections and [the] kindness and support moved toward the other candidate — and that he [Mojtaba] had even had an active role in the campaign of that candidate [before switching to the other candidate]. You are well aware that the unwise intervention of the relatives and aids of some religious and political officials in the past [elections] has had very negative consequences for the political establishment and the nation. Therefore, due to my respect for you and my concern [for the country], I ask you with utmost sincerity not to allow another bitter experience to be added to those of the past. You are the successor to the Imam [Ayatollah Ruhollah Khomeini] who, when some people claimed that [his oldest son] the late Ayatollah Mostafa Khomeini [who passed away in 1977] had prevented them from contacting him, ordered, despite his [Mostafa’s] intellectual and religious significance, that, “he [Mostafa] must not intervene in my affairs.”

This is an excerpt from a letter that Mahdi Karroubi wrote to Iran’s Supreme Leader, Ayatollah Ali Khamenei, in reference to the first round of the Iranian presidential election on June 17, 2005. Karroubi, who is a former Speaker of the Majles (parliament) and ran as a reformist candidate in June’s presidential election, also ran back in 2005.

For several hours after the polls had closed, Karroubi had been trailing only one other candidate, Ali Akbar Hashemi Rafsanjani, a former president and an all-around powerful politician. So, in the early hours of Saturday June 18, Karroubi lay himself down to take a nap and continue to follow the vote count once he was a bit freshened up. But when he woke up a few hours later, everything had changed. Suddenly, a relatively unknown candidate, who had not been supported by any major group, had moved into second place. That candidate was Mahmoud Ahmadinejad, Tehran’s mayor at the time. Neither Ahmadinejad nor Rafsanjani got more than 50 percent of the vote, so the presidential election had gone to a second round between Rafsanjani and Ahmadinejad — and the latter won.

In that letter, Karroubi was protesting the intervention of Ayatollah Khamenei’s second son, Mojtaba, a mid-rank cleric, who had supported Ahmadinejad in the elections. The “other candidate” that Karroubi was referring to was Mohammad Bagher Qalibaf (Ghalibaf), a Major General, a pilot, and a former commander of the air force division of the IRGC, or the Islamic Revolutionary Guard Corps. Qalibaf, who is currently mayor of Tehran, was also a candidate in the 2005 presidential elections. It was widely believed at the time that Qalibaf was the preferred candidate of the IRGC’s top command and also Ayatollah Khamenei. But, as Karroubi alludes to in his letter, as a result of behind-the-scene maneuvers, the IRGC’s top commanders and Ayatollah Khamenei switched their support from Qalibaf to Ahmadinejad. It is believed that Mojtaba Khamenei played a leading role in convincing his father that Ahmadinejad was a more reliable candidate than Qalibaf, especially since Qalibaf had sometimes demonstrated his independence from senior figures in the leadership.

Ayatollah Khamenei responded with a terse letter, rejecting the accusations and even implicitly threatening Karroubi. In that letter, the Supreme Leader said that Karroubi’s actions may trigger a national crisis and that, “Feeling the full wrath of God and his power, I for one will not allow any individual to create a crisis in this country.”

Karroubi responded by sending a second letter, calling the elections “the blackest page in the history of ideological struggle in Iran.” He resigned from his post as a senior adviser to the Supreme Leader, and from membership in the Expediency Council, a constitutional body that arbitrates over differences between the Guardian Council and the Majles. He was even put under house arrest for several days. Soon afterward, he also resigned from the leftist Association of Combatant Clerics, known in Iran as the Rouhanioon, an organization in whose formation he had played a leading role in 1988. Karroubi then founded his own National Trust Party.

Karroubi was certainly not the first senior figure to protest Mojtaba Khamenei’s intervention on behalf of the extreme right. Before him, Ali Akbar Nategh Nouri, another former Speaker of the Majles and a close aid to Ayatollah Khamenei, had quietly protested the younger Khamenei’s meddling in the political process. (Nategh Nouri, a mid-rank cleric, heads the Supreme Leader’s Office of Inspection)

But, it was Karroubi’s letter that caused a sensation in the country. For the first time, a son of the Supreme Leader was being accused of intervening in the affairs of the state, not even as a neutral figure, but as a supporter of a candidate. Such accusations never came up when Ayatollah Khomeini was the Supreme Leader. Ayatollah Khamenei had carefully cultivated an image of himself and his family that presented them as pious and uninterested in personal power or wealth. The accusations, particularly by Karroubi, a man who had always been among the top leadership in the political establishment, shattered that carefully cultivated image.

In the June 12, 2009 presidential election, Mojtaba Khamenei was again accused of intervening — of leading the election coup that declared Ahmadinejad the winner for a second term. Mojtaba has also been accused of ordering the Basij militia, a paramilitary group controlled by the IRGC, to crackdown hard on the massive demonstrations that broke out after the election. The crackdown has resulted in hundreds of injuries, thousands of arrests and several dozen deaths (all those killed have reportedly been under 32 years of age).

Who is Mojtaba Khamenei? Why does he command such loyalty among the right-wing reactionaries? And how is it that he can use the power of the state to advance what appears to be his own political agenda, and continue to do so with such impunity?

His full name is Sayyed Mojtaba Hosseini Khamenei. One of six children of Ayatollah Khamenei, Mojtaba was born in 1969 in the holy city of Mashhad, in northeastern Iran. His father is a cleric and so was his paternal grandfather, Sayyed Javad Hosseini Khamenei. His father, the current Supreme Leader, was active in politics and in the opposition against the Shah, both in Tehran and Mashhad, and had spent years in jail, as well as in internal exile, ordered by the Shah’s government. In the last year before the 1979 Revolution, Ayatollah Khamenei and two other clerics, Abbas Vaez Tabasi and Sayyed Abdolkarim Hasheminejad, formed a sort of leadership ring that led most of the demonstrations and political activities against the Shah in Mashhad and the Khorasan province, which was Iran’s largest province at that time.

Vaez Tabasi is now a powerful cleric who runs the shrine of Imam Reza (the Shiites’ 8th Imam), in Mashhad. He is believed to be a Rafsanjani ally.

Hasheminejad was assassinated in Mashhad on September 29, 1981, by the Mojahedin-e Khalgh Organization, an armed group in exile and listed by the U.S. State Department as terrorists. A nephew of Hasheminejad is Mohammad Ali Abtahi, a progressive cleric who served as a vice president to former president Mohammad Khatami. Abtahi was among the reformists arrested and jailed after the rigged election of June 12, 2009.

After the 1979 Revolution, Mojtaba and his family lived in Tehran, as his father was part of the new revolutionary elite. His father Ali Khamenei’s first job in the revolutionary government was deputy defense minister. His son, Mojtaba, attended Alavi High School, a private religious school with a rigorous course load. (The school is located on Iran Street in central Tehran, where the author grew up.) Many of Iran’s present leaders are graduates of this high school. Mojtaba graduated in 1987. During the last year or two of the war with Iraq, Mojtaba and his oldest brother, Sayyed Mostafa, also served in the armed forces.

The end of the Iran-Iraq war and the death of Ayatollah Khomeini in 1989 were also the beginning of the transformation of Ayatollah Khamenei, who went from being a relatively progressive cleric to a right-wing one. After he was appointed by the Assembly of Experts as the Supreme Leader in June 1989, he began distancing himself from his past positions [including his initial opposition to the doctrine of Velaayat-e Faghih (the guardianship of the jurist), which is the backbone of Iran’s political system]. At first he moved toward the center, and eventually to the extreme right of the political spectrum.

The same Ayatollah Khamenei who used to defend the thinking of Dr. Ali Shariati (1933-1977), the distinguished sociologist and Islamic scholar who was opposed to a special role for clerics in society, began promoting Ayatollah Mohammad Taghi Mesbah Yazdi, the hard-line reactionary cleric. Mesbah Yazdi was vehemently opposed to Dr. Shariati and had even called him an infidel a few years before the 1979 Revolution. The accusations leveled by Mesbah Yazdi at Dr. Shariati even prompted Mahdi Bazargan, the first prime minister after the Revolution, and Ayatollah Morteza Motahhari, an important Islamic scholar and a disciple of Ayatollah Khomeini, to sign a letter stating that while Dr. Shariati may have made some mistakes in his writings on Islam, he was not an infidel. (Motahhari was assassinated in 1979 shortly after the Revolution.) But Ayatollah Khamenei, Shariati’s defender and supporter, has declared that Mesbah Yazdi is “the Motahhari of our era,” a great compliment from the Supreme Leader, given how much Motahhari is revered in Iran.

It was in such an environment that the young Mojtaba began his theological studies after finishing high school. His first teachers were his own father and Ayatollah Sayyed Mahmoud Hashemi Shahroudi, the current judiciary chief. Mojtaba was not a cleric yet. In 1999, he moved to Qom to study to join the ranks of clerics. He was taught there by conservative and ultraconservative clerics such as Mesbah Yazdi; Ayatollah Lotfollah Safi Golpayegani, the first Secretary-General of the Guardian Council in the 1980s; and Ayatollah Sayyed Mohsen Kharrazi, the father of former foreign minister Kamal Kharrazi. (Kharrazi’s real name is Sayyed Mohsen Agha Mir Mohammad Ali and his daughter is married to Mojtaba’s younger brother, Mohsen, a junior cleric.)

Mojtaba Khamenei is also very close to Ayatollah Abolghasem Khazali, an ultra-conservative cleric and former member of the Guardian Council. Both Khazali and Mesbah Yazdi belong to the Hojjatiyeh Society, a right-wing religious organization that was founded in the 1950s, an organization that was banned by Ayatollah Khomeini in 1983 after it fiercely opposed Mir Hossein Mousavi, then the prime minister and the main reformist candidate in the recent presidential election.

Mesbah Yazdi and his followers do not believe in anything resembling democracy. They have no compunction about using coercion if people refuse to embrace their point of view. Mesbah Yazdi once said, “The prophets of God did not believe in pluralism. They believed that only one idea was right.” Mesbah Yazdi apparently believes that he espouses Prophet Muhammad’s ideas and is therefore on the right side of history. He has also said that common people “are like sheep.”

Much has been said about the control that Mojtaba Khamanei exerts on the Basij militia and other paramilitary groups that are used to crackdown on street protests. What are the links between Mojtaba Khamenei and such forces?

One link is a mysterious figure not known to most Iranians. His name is Ayatollah Aziz Khoshvaght, who is a great supporter of Mojtaba Khamenei. Ayatollah Khamenei’s third child, Mostafa (Mojtaba’s older brother), is married to Khoshvaght’s daughter. He is a member of the Assembly of Experts, a constitutional body that appoints the Supreme Leader. Khoshvaght ran for the presidency of the Assembly in July 2007. He had been put up as a candidate by the extreme right faction in the Assembly, led by Mesbah Yazdi, in order to oppose Rafsanjani. But Rafsanjani defeated him.

Khoshvaght is the prayer leader of a large mosque in northern Tehran, and a radical hardliner. Saeed Emami, the notorious figure who was responsible for the infamous Chain Murders in the fall of 1998, which resulted in the murder of six Iranian dissidents (and the murder of close to 70 other dissidents from 1988-1998), was a follower of Khoshvaght. Mojtaba Khamenei was apparently a friend of Emami. He traveled with him to Britain in 1988. Khoshvaght is also close to and influential in the affairs of Ansar-e Hezbollah, a radical right-wing group often used to quell demonstrations. But this is a group that remains shrouded in secrecy as well.

Another link between Mojtaba Khamenei and the paramilitary groups is Brigadier General Sayyed Mohammad Hejazi, a former commander of the Basij militia, and widely considered to be an ultra-hardliner. He now works in the office of the Supreme Leader, and is believed to be the mastermind behind many violent crackdowns on university students and protesters. Hejazi has been a close aid and supporter of Mojtaba Khamanei.

The third link between Mojtaba Khamenei and the paramilitary groups is Hassan Taeb, the current commander of the Basij. A hardliner and cleric, he is also linked with Mesbah Yazdi and his followers.

So through these three links — Ayatollah Aziz Khoshvaght, Brigadier General Mohammad Hejazi and Hassan Taeb — Mojtaba Khamenei is connected with the forces that crack down on protesters and demonstrators. Though little is officially known about the political views of Mojtaba Khamenei, it would not be a stretch to put him in the radical right-wing camp hellbent on advancing the agenda of extremists such as Mesbah Yazdi and Khazali to establish the so-called Islamic government, as opposed to an Islamic Republic, where the views and votes of the people matter.

Mojtaba has always been around the ultraconservatives. He has been educated by them, and has been close to radical right-wing groups. He has had close friendships with notorious figures such as Saeed Emami, and reactionaries such as Mesbah Yazdi, Khazali and Kharrazi. He is known to be fiercely opposed to the reform movement and its leaders. In particular, he has expressed his disgust at Dr. Saeed Hajjarian, a top strategist for the reformists who was left paralyzed after an assassination attempt in 2000.

Though it is widely believed that Ayatollah Khamenei is grooming Mojtaba to succeed him, it is mere speculation at this point. What, however, are the reasons to believe there is some truth behind it?

Attempts by Ayatollah Khamenei’s allies among the radical right, led by Mesbah Yazdi, to fill the ranks of the Assembly of Experts by younger clerics who are loyal to him and Ayatollah Khamenei, is one indication. These young hardliners are Mesbah Yazdi’s former students in the Haghani Seminary, which is still run by him, and also those who work in the Imam Khomeini Educational Institute in Qom, also controlled by Mesbah Yazdi.

One of these young clerics is Ayatollah Ahmad Khatami (no relation to former president Mohammad Khatami), who sometimes acts as the Friday prayer leader of Tehran, and is a member of the Assembly of Experts. It was Ahmad Khatami who threatened the reformist leaders and their supporters with execution during the Friday prayer sermon of June 26, 2009. According to him,

The Supreme Leader is the deputy of the hidden Imam [Mahdi, the Shiites’ 12th Imam who is believed by them to be hiding and will reappear some day] and, therefore, disobeying his [Ayatollah Khamenei’s] orders [that the demonstrations and protests against the rigged election must end] is disobeying the hidden Imam, and that would be tantamount to waging war against God, which is punishable by death. Anybody who fights against the Islamic system or the leader of Islamic society, fight him until complete destruction.

Other relatively young radicals and disciples of Mesbah Yazdi include Mohsen Gharavian and Ghassem Ravanbakhsh. The former always attempts to present a moderate and reasonable image of Mesbah Yazdi and his thinking, whereas the latter who is the editor-in-chief of Partow Sokhan, the weekly published by Mesbah Yazdi, is virulently opposed to the reformist-democratic movement.

Mesbah Yazdi is 75 years old. Therefore, there is not much prospect of him becoming the next Supreme Leader. However, he and his followers hope that by filling the ranks of the Assembly of Experts, eliminating Rafsanjani from the political scene, and promoting Mojtaba Khamenei, they can exert great influence on the selection of the next Supreme Leader, when the opportunity presents itself.

It is probably due to such considerations that Mesbah Yazdi has certified that Mojtaba Khamenei is a mojtahed (a learned Islamic scholar), which is the necessary credential for being eventually recognized as an ayatollah and marja’ taghlid (source of emulation). However, many clerics in Qom dispute Mojataba Khamenei’s religious credentials.

There are also other obstacles to Mojtaba Khamenei’s rise to the position of Supreme Leader. The democratic movement in Iran appears to be gaining strength by the day and has not shown signs of dissipating; this itself a major obstacle to the continuation of the political structure in its present form. Aside from that, the following elements present other important obstacles:

One is that many important clerics in Qom have never accepted Ayatollah Khamenei as a true ayatollah, a marja’ taghlid, and an Islamic scholar of note. He was not even the first choice for Supreme Leader after Ayatollah Khomeini passed away. The first choice was the late Grand Ayatollah Sayyed Mohammad Reza Golpayegani (1895-1993), but he did not receive the required two-thirds of the vote. The most, and perhpas the only, important reason that Ayatollah Khamenei was appointed as the Supreme Leader by the Assembly of Experts was a quote attributed to Ayatollah Khomeini raised by Rafsanjani in a meeting of the Assembly of Experts: “Ishaan liyaaghat-e rahbari daarand [He (Ayatollah Khamenei) is competent enough to be the (Supreme) Leader].” So, it would be very difficult, if not impossible, for Ayatollah Khamenei to impose his son as his successor because, like his father, he lacks stellar religious credentials.

Another obstacle is renewed debate among many senior clerics that there should not be just one Faghih (Supreme Leader), but a council of Foghahaa (many Faghihs). This idea has always been supported by some important clerics. The most important proponents of this idea have been Rafsanjani and Ayatollah Abdollah Javadi Amoli, a conservative but respected cleric (and a maternal uncle of Ali Larijani, the Speaker of the Majles). When Ayatollah Khomeini passed away in June 1989, the idea of forming the Council was brought up by Rafsanjani, but shot down during internal debates of the Assembly of Experts.

The third obstacle is that while important lay conservatives are seemingly loyal to Ayatollah Khamenei, they are strongly opposed to Mojtaba Khamenei, particularly the idea of him ascending to the position of Supreme Leader.

It has been widely reported that Mojtaba Khamenei is close to the top commanders of the IRGC. Not much evidence has emerged yet to support this. But even if is true, it is not clear at all whether they would actually want the younger Khamenei to be their commander-in-chief. (According to Iran’s Constitution, the Supreme Leader is also the commander-in-chief of the armed forces). There have been persistent rumors that Brigadier General Ali Fazli, who lost his left eye in the Iran-Iraq war, the commander of the IRGC forces in the Tehran province, has been opposed to the harsh crackdown on the protesters and demonstrators (reportedly ordered by Mojtaba Khamenei). Both he and Major General Mohammad Ali (Aziz) Jafari, the top commender of the IRGC, are said to be opposed to Mojtaba Khamenei’s meddling and power plays.

Although Ayatollah Khamenei has tried to create the impression that he and his family are not interested in enriching themselves, it appears that at least Mojtaba Khamenei has been using the resources of the state for his political agenda. Immediately after the June 12 election, the British government, at the behest of the European Union, froze a bank account in a British bank worth approximately $1.6 billion. The account was said to belong to the Iranian government, but it was widely reported to be under the control of Mojtaba Khamenei. The account has apparently been used for purchasing equipment for the Basij militia. (That Mojtaba Khamenei was the true controller of the account has not been confirmed with 100 percent certainty, though.)

Another way that Ayatollah Khamenei and most clerics try to spread their influence and assure loyalty is by marrying members of their families to other influential people. The practice is very widespread among the clerics and the senior leadership in Iran. In the case of the Khamenei family, Mojtaba Khamenei is married to a daughter of Gholam-Ali Haddad Adel, a university professor and former conservative Speaker of the Majles. After he was elected the Speaker of the 8th Majles in 2004, Haddad Adel once said, “We were told [by Ayatollah Khamenei] to be here [in the Majles to control it for the Ayatollah],” for which he was widely mocked by the reformists. But this statement indicated how the Ayatollah was putting his loyalists everywhere. Ayatollah Khamenei’s oldest daughter is married to Hojatoleslam Mohammad Mohammadi Golpayegani, his chief of staff.

So while is it clear that Mojtaba Khamenei is playing a leading role in driving the agenda of the extreme right in Iran, whether he will eventually rise to hold a powerful official position is a matter of debate. The jury is still out on that issue.

Grand Ayatollah Youssef Saanei
who normally comments little on political affairs – warned on Friday that “due to the lack of public support, the government may face legal and civil problems and a lack of competency.”

Ayatollah Hossein Mousavi Tabrizi
“The least we can say is that this government’s legitimacy is in doubt. A majority of the people don’t believe that Ahmadinejad was their vote,” said Ayatollah Hossein Mousavi Tabrizi, a leader of the Association of Teachers and Researchers, an influential clerical group at Qom Seminary that issued a statement last week against the election crackdown.
“People were peacefully protesting election results and the response to that should not be the bullet,” Tabrizi told The Associated Press this week. “The harsh crackdown was illogical. They could have handled it without any blood being shed.”

Ayatollah Morteza Moqtadaei
a conservative Ahmadinejad supporter, has called on the opposition to “choose silence to preserve the system.”

Ayatollah Mohammad Yazdi
issued a message directed implicitly at the opposition, reminding them that the supreme leader alone has the right to govern.
“The administration of power has been transferred from the imams to the supreme jurisconsult,” he told students in Qom in a speech carried by the semiofficial Fars news agency. “The jurisconsult has guardianship to administer the Islamic system according to Islamic rulings and not on the basis of his personal opinions.”

is a hard-line Iranian cleric who served as the head of Judiciary System of Iran between 1989 and 1999, following Ayatollah Abdolkarim Mousavi Ardebili and succeeded by Ayatollah Mahmoud Hashemi Shahroudi.

Yazdi is now a member of Guardian Council. He has served as the interim Friday prayer leader of Tehran. During Iranian elections December 15, 2006 Ayatollah Mohammad Yazdi was a candidate from Jame Modarresin and Jame Rohaniyat (the conservative list, rival to Ayatollah Mohammad Taqi Mesbah-Yazdi)

Ayatollah Mohammad Taqi Mesbah Yazdi
believed to be Ahmadinejad’s spiritual mentor – addressed a gathering of Guards commanders on June 22, only days after security forces broke up one of the biggest protests.
“Do not be worried about the events and earthquakes that have occurred. Know that God created this world as a test,” he told them. “The supreme leader holds a great many of the blessings God has given us and at a time of such uncertainties our eyes must turn to him.”

mentor of Iranian President Mahmoud Ahmadinejad and of large portions of the Revolutionary Guards, the intelligence apparatuses, and the conservative fundamentalist faction

Ayatollah Ahmad Jannati Massah
is an Iranian ayatollah and political figure. He is the conservative chairman of the Guardian Council[1],the body in charge of checking legislation approved by Majlis with the Constitution and sharia, and approving the candidates in various elections. He is also a temporary Friday prayer imam of Tehran.

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Abbas-Ali Amid Zanjani
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Ayatollah Abbasali Amid Zanjani

Former President of University of Tehran
Born 1937
Zanjan, Iran
Political party Combatant Clergy Association
Religious beliefs Shia Islam

Ayatollah Abbasali Amid Zanjani (born 1937) in Zanjan is a hardline Iranian politician and cleric.

Zanjani, an ethnic Iranian Azeri, is known for being the only cleric president of University of Tehran. Zanjani holds no secular academic degree[1] and was appointed by Mohammad Mehdi Zahedi, the minister of Science, Research, and Technology in Mahmoud Ahmadinejad’s cabinet in 27 December 2005. Before his selection, the president of the University of Tehran was elected by the faculty members. After his establishment as the president of University of Tehran, many students protested in front of the Central Library, where the establishment ceremony was held.

At the time of his appointment as the chancellor of Tehran University, Zanjani was a lecturer with a ranking equivalent to “associate professor”.[2] However after his appointment, He and his allies tried to make a fake academic degree and university ranking for him. As an example Tehran University launched a webpage about his background education, claiming that “he holds a PhD degree from University Elites, Iran”. [3][4]

Zanjani is a member of the Board of Directors of Imam Khomeini International University. He has published more than 40 books and 70 articles in local newspapers and journals. He is also the founder of the Research Center for Studies and Researches on Islamic Sciences.

During his post as the president of the university, Zanjani was repeatedly criticized for his mismanagements by students and academics. On 5 February 2008, Zanjani was replaced by economist academic Farhad Rahbar after three-days demonstration organized by Tehran University students. [1]
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[edit] Political life

Zanjani has strong political ties with Iranian conservatives and a member of Combatant Clergy Association. Amid Zanjani has had an active presence in reconsideration of the Constitution in 1989 as the delegate of the Parliament in the Revising Council. He has served as a member of Islamic Parliament from Tehran for two terms.

[edit] Expulsion of university scientists

In 2006, the Ahmadinejad government systematicly forced numerous Iranian scientists and University professors to resign or to retire. It has been referred to as “second cultural revolution”.[5] The policy has been said to replace current professors with younger ones.[6][7] Many University professors received letters indicating their early retirement unexpectedly.[8]

Zanjani expelled more than 40 of staff scientists of Tehran University. He reasoned that whoever is older than 65 years must get retired. However he himself was 68 years old at that time.

Another factor may have been the cultural revolution, a part of the Islamic revolution. On 12 June 1980 the Cultural Revolution shut down Iran’s Higher Education system for over a year to completely overhaul and Islamicize it, purging many students and faculty. Nonetheless, the flight abroad of educated Iranians was commented on as early as Oct 31 of 1979, when its importance was disparaging by the founder of the Islamic Republic in Iran, Ayatollah Khomeini:

“They say there is a brain drain. Let these decayed brains flee. Do not mourn them, let them pursue their own definitions of being. Is every brain with – what you call – science in it honorable? Shall we sit and mourn the brains that escaped? Shall we worry about these brains fleeing to the US and the UK? Let these brains flee and be replaced by more appropriate brains. Now that they (the Islamic Republic) are filtering, you are sitting worried why they are executing [people]? Why are you discussing these rotten brains of [these] lost people? Why are you questioning Islam? Are they fleeing? To hell with them. Let them flee. They were not scientific brains. All the better. Don’t be concerned. They should escape. [Iran] is not a place for them to live any more. These fleeing brains are of no use to us. Let them flee. If you know that this is no place for you, you should flee too.”

http://www.youtube.com/watch?v=C_86mF-VVGE
O Fatemeh Zahra!

http://www.youtube.com/watch?v=jeXNUeE2RQE
Iran President Ahmadinejad and some Iranian polititians in Islamic Hard Rock Club. For those who don’t know anything about such ceremonies, I have to say this is a mourning ceremony for some Islamic leaders(Imam Hossein) who have been killed almost 1400 years ago. In Iran such ceremonies will run every day for more than a month. In Iran there is no dancing club but there is something like this. Sounds like Hard Rock Music!

Why are the grand ayatollahs silent?

The grand ayatollahs have not remained silent. You see, in Qom, there are approximately 13 people who are considered marja taqlid [literally translates to: source to imitate or follow, grand ayatollahs with the authority to make decisions for their followers.] Of these 13, seven are the highest ranking, meaning that they have the greatest influence. Of these seven, not a single one has congratulated Ahmadinejad. None have congratulated the leader.

Of that 13, 2 have sent their congratulations but they are are not part of the top 7. Of these seven who have the greatest number of students and funding, who have greater influence within the public, who have more followers, none have been willing to lend their support. This silence was so painful that Ayatollah Khamenei, in his speech on the day of Mabas, stated: “why are the elites silent?” By “elites” he meant these grand ayatollahs. Because they are the ones who give legitimacy to the system. And they have remained silent. Not only are they silent, they have raised their voice in protest. [the leader did say that, and also said that with regards to the “elites”, silence makes them as complicit in crime as those who speak out in support of it.]

Of these seven, three have been outspoken in defending the rights of the people. Of the remaining four, one has taken the middle ground, meaning that he’s addressed both sides. Of the remaining three, one has been completely silent, and the other two have spoken of their strong disapproval with recent events.

Meaning that of these seven, five have supported the green movement in some way. Grand Ayatollah Montazeri, Grand Ayatollah Sanei, Grand Ayatollah Mousavi Ardebili, Safi Golpayghani and Bayat Zanjani. The last two have supported the movement, the first three have written official statements and letters.

On the 10th of July, Ayatollah Montazeri has issued a fatwa calling for the illegitimacy of this government. In the past one hundred years, this fatwa has only been given three times:

* once during the constitutional revolution by Akhond Khorasani against Mohammad Ali Shah Qajar
* once at the beginning of the Islamic revolution by Ayatollah Khomeini against Mohammad Reza Pahlavi
* And now by Ayatollah Montazeri against the head of the Iranian ruling system

http://tehranbureau.com/irans-minister-intelligence/

ran’s Next Minister of Intelligence?

Hoseinian001 Iran’s Next Minister of Intelligence?

Photo: There is talk of Ruhollah Hosseinian taking over at the Intelligence Ministry.

By MUHAMMAD SAHIMI in Los Angeles

[TEHRAN BUREAU] As first reported by the author, Mahmoud Ahmadinejad fired his Minister of Intelligence, Gholamhossein Mohseni Ejehei, after he and his deputies had prepared a report for Iran’s Supreme Leader, Ayatollah Ali Khamenei, in which they had stated that contrary to what Ahmadinejad and his supporters in the Islamic Revolution Guards Corps (IRGC) high command have been claiming, there was no link between foreign powers and the protests and demonstrations that erupted after the rigged presidential election of June 12.

Ejehei had also been angry at the fact that Ahmadinejad had not immediately carried out Ayatollah Khamenei’s order to sack Esfandiar Rahim Mashaei as his First Vice President, and he is said to have been opposed to the broadcasting of the “confessions” of the jailed reformist leaders.

Ahmadinejad also fired several other key figures in the Ministry, including Haaj Abdollah, deputy in charge of internal security, and Khazaei, the deputy for counter-intelligence, both of whom had been working with the Ministry from its inception in 1984. Also fired was the deputy for parliamentary affairs, as was as another high-ranking official in charge of technology; all four had reportedly been involved in the preparation of the report.

Several credible reports from Tehran indicate that at least a dozen other senior officials in the Ministry have either resigned to protest the purge, were fired, or forced into retirement. Some had protested the fact that many members of the intelligence unit of the IRGC (referred in Iran by the reformists as the “parallel intelligence organization”) had been brought by Ahmadinejad into the Ministry, and had taken effective control of it, in an effort to purge from the Ministry those who are deemed disloyal to Ahmadinejad. There was so much discussion about the Ministry that it was forced to issue a statement, asking the press not to report on its internal developments.

After firing Ejehei, Ahmadinejad asked one of Ejehei’s remaining deputies to be the caretaker Minister until a permanent Minister was selected; Ahmadinejad was turned down. Ahmadinejad then announced that he himself would be the caretaker Minister, and appointed an ally, Majid Alavi, as his deputy.

The question is now who is going to be the next Minister of Intelligence? According to the law passed in 1983 when the Ministry was being set up, the Minister must be a Mojtahed, or a learned Islamic person. This has meant that all of Iran’s Ministers of Intelligence have come from the ranks of the clerics. So, by appointing himself as the caretaker Minister, Ahmadinejad is already violating the law regarding the Ministry.

A leading candidate for the post is Ruhollah Hosseinian, a hard-line clerical ally of Ahmadinejad. Born in 1955 in Shiraz, he began his theological studies at Valiasr School, but then joined the Haghani School in Qom, which is run by the reactionary cleric Ayatollah Mohammad Taghi Mesbah Yazdi, who also serves as Ahmadinejad’s spiritual leader. [All five of Iran’s Intelligence Ministers have been graduates of the Haghani School.] Hosseinian has held various positions, including a prosecutor in the revolutionary court of Mashhad, a city in northeast Iran, and in the province of Sistan and Baluchestan, in southeastern Iran on the border with Pakistan; and deputy prosecutor in the same court in Tehran. He was also a prosecutor for the special court for the clerics, an extra-judicial organization meant to control dissident clerics.

Hosseinian was also a deputy to Ali Fallahian, the notorious former Minister of Intelligence who has been implicated in many crimes. While there, he became a close friend of Saeed Emami, the notorious ring leader of a group of intelligence agents who murdered six intellectuals and dissidents in the fall of 1998 (they were involved in many lesser known murders from 1988-1998), referred to in Iran as “the Chain Murders.” When Emami was arrested, Hosseinian strongly defended him and accused the Khatami administration, in a nationally broadcast TV program, of being behind the murders. He once said, “We have been a murderer ourselves. This [murder of the dissident] is not the way things were done.” But, he also contradicted himself when he said,

I do not deny that Saeed Emami might have been involved in the murders. He actually believed that the enemies of the Islamic Republic must be wiped off the face of the earth. He had a lot of experience in this matter.

When the government announced in the spring of 1999 that Emami had committed suicide in jail (a claim that most did not believe), Hosseinian openly mourned his death. He said that, “Hajj Saeed [Emami] sacrificied himself for Iran’s Islamic path. Emami was killed in order to prevent identification of higher authorities who had ordered the murders.”

For a short time, Hosseinian was an advisor to Ahmadinejad for security matters. He is now a deputy in the 8th Majles (parliament), and heads the Center for Islamic Revolution Documents. He is an ardent supporter of Ahmadinejad, and is said to have been involved in a fist fight with Ejehei after Ahmadinejad became aware of the report about the link between the reformists and foreign powers.

Another leading candidate is Heidar Moslehi, a mid-rank cleric. He is currently the head of the Organization for Islamic Endowments (vaghf) and Charities, which runs a vast network of mosques and other Islamic centers. When Ahmadinejad was elected in 2005, Moslehi, who at that time was the representative of Ayatollah Khamenei in the Basij militia, was appointed by Ahmadinejad as his advisor for clerical affairs. But, the appointment was protested by many, and he resigned after three months and was appointed to his present post. If appointed to the post, given his history with the Basij, Moslehi will enhance the influence of the military in the security and intelligence apparatus.

Other candidates include Ahmad Salek, a cleric and representative of Ayatollah Khamenei to the Qod force, an elite and secretive unit within the IRGC. He is also a hardliner who has been accused of many crimes and wrongdoings.

The fourth possible candidate is Hossein Taeb, a cleric who is the commander of the Basij and has a reputation for advocating use of violence against the protestors. In a recent open letter about the aftermath of the presidential election and the violent crackdown, Ali Motahhari, a Majles deputy (son of the late Ayatollah Morteza Motahhari, a leading figure in the 1979 Revolution who was assassinated in April 1979, and a brother-in-law of Ali Larijani, the Speaker of the Majles), criticized Taeb and his use of violence, saying, “He is friendlier to batons and sticks than to wisdom and thinking.” Taeb has also been implicated in the crimes that have occurred in the Kahrizak detention center on the southern edge of Tehran, where at least three protestors jailed there were murdered. Many more tortured and held under the most inhumane conditions there.

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ARUSI, the secular wedding celebration which follows the wedding contract ceremony (?aqd, q.v.). The two ceremonies may occur on the same day or be separated by larger amounts of time-days, months, or even years. Only after the ?arusi do the new husband and wife begin married life. Most ?arusi observances are the responsibility of the groom’s family and constitute the culmination of involved processes of proposal and negotiation between the bride’s and groom’s families. This article is chiefly concerned with wedding ceremonies in traditional Persia and where the traditions are preserved.

Proposal (??ast(a)gari). When a young man reaches marriageable age, his family undertakes the task of finding a suitable wife for him. Sir John Chardin reported that in the late seventeenth century marriages were contracted before children were twenty years of age (Chardin, p. 238). Among the Kalhor tribe in Kurdistan, girls marry between ten and twenty years; the men are somewhat older—fifteen to twenty-five years (Ma??umi, p. 58).

If an appropriate young lady is known or related to the family, the procedure is straightforward. If not, the process is more complicated and a young woman may be found through matchmaking (dallalagi). The women of the would-be groom’s family often take it upon themselves to locate a young woman and pay a visit to her family. If the young man’s relatives are served only tea, it is understood that the girl’s family is opposed to the match. The girl’s relatives express interest by serving sweets and perhaps a cooling drink (šarbat) along with the tea (Faqiri, p. 76; Francklin, p. 110).

The girl being considered is scrutinized carefully by her prospective in-laws. Her speech and sweetness of breath are examined, and in Shiraz a young woman was customarily asked to clean a trayful of vegetables. Correct completion of the task indicated that a girl was patient and ready for marriage (Faqiri, p. 76). A young man’s reputation and standing in the community are carefully investigated by the girl’s family before an agreement can be reached. Family background, wealth, temperament, religiosity, health, looks, and education are all taken into account in reaching a decision.

If all appears well, women of the man’s family escort him on a visit to the girl’s home so that he can see his proposed bride. To accomplish this end, the girl’s relatives may urge her to serve tea to him. Al-e A?mad describes one such awkward visit in his story, “The Unwanted Woman” (pp. 72-74). Alternatively, a more surreptitious glance at the intended bride may be arranged (Savage-Landor, p. 194; Sykes, p. 69).

Betrothal (namzadi). When all parties are satisfied, a party to mark the agreement and arrange details of the match can be held. Friends and relatives are invited to the bride’s home for an official celebration of the betrothal and gifts are sent to the girl’s home by her fiancée’s family. The guests enjoy tea, sherbet drinks, and sweets, and the betrothal is announced publicly. If the parents of the bride can afford it, professional musicians and dancers may entertain the guests (Savage-Landor, pp. 194-95).

The party is known variously as širini-??oran “sweeteating” (Colliver Rice, p. 140), bala-boran “yes-completing” (Faqiri, p.77), or by a name which reflects the gifts given to the bride, such as kafš pa koni “putting shoes on” in Khorasan (Šokurzada, p. 144). Gifts are sent to the girl’s home by the man’s family and may include large trays of candied sugar, expensive shawls, a ring, and perhaps other jewelry. The elaboration of gifts depends upon the groom’s family’s status and means. In 1307/1889 the betrothal of Na?er-al-din Shah’s eight-year-old daughter A?tar-al-dawla, to his favorite page ?olam-?Ali Khan ?Aziz-al-sol?an (Malijak) was observed by the sending of 400 trays of sugar (qand) and bowls of rock candy (nabat), four shawls, and seven pieces of jewelry (E?temad-al-sal?ana, Ruz-nama, pp. 672-73, 676).

In simpler versions of the širini-??oran, the mother of the groom may bring a gold ring, some sweets, and sugar-coated almond slivers (noql) to the gathering. At a Kalhor tribe betrothal party in Kurdistan, the mother of the groom gives a gold ring to the bride; women celebrate and congratulate the girl, tossing noql over her (Ma??umi, p. 61 ).

The betrothal ceremony traditionally involves a meeting of elder representatives of both families: the exact provisions of the marriage contract, including the amount of the mahriya (marriage portion settled on the bride), clothes, and other gifts for the bride are determined. In the late eighteenth century Francklin found the gifts to be as follows: “These, if the person be in middling circumstances, generally consist of two complete suits of apparel of the best sort, a ring, a looking-glass, and a small sum in ready money of about ten or twelve tomans, which sum is denominated Mehr u Kawéén [kabin], or the marriage-portion, it being given for the express purpose of providing for the wife in case of divorce. There is also a quantity of household stuff of all sorts, such as carpets, mats, bedding, utensils for dressing victuals, &c” (Francklin, pp. 110-11).

Among tribal groups the amount of šir-baha “milk price“—a sum of money, cattle, horses, or sheep that the groom or his father pays to the bride’s mother for having nursed her—is also agreed upon at this meeting (Ma??umi, p. 61). The šir-baha remains important in some rural areas and is a measure of the groom’s esteem for the bride’s family (Sa?edi, p. 144).

At the betrothal meeting a day might also be set for a trip to the bazaar so that cloth and other items promised to the bride could be purchased (Faqiri, p. 77; Ma??umi, p. 61 ).

In Shiraz the visit to the bazaar was traditionally followed by a cloth cutting party (ra?t-boran). Women of the bride and groom’s families gathered to take the bride’s measurements and cut cloth for her wedding garments. Women thoroughly enjoyed themselves at these gatherings, played tambourines, danced, and sang special wedding songs (vasunak) (Faqiri, p. 77).

Observances prior to the wedding party (?arusi). Once the marriage contract ceremony has been held and the contract (?aqd-nama, q.v.) signed, the couple are legally united. The actual union of the bride and groom is left to the ?arusi celebration, which includes consummation of the marriage. Faqiri comments that if a bride is married at an ?aqd ceremony, but does not complete the marriage with an ?arusi celebration within a reasonable period of time (a year at the most), it is thought in Shiraz that one of the bride or groom’s relatives will die, and a death in the family during that period is often referred to by the phrase šekar karda ast (she has hunted) (Faqiri, p. 80). Some time may pass between the contract ceremony and the ?arusi, either to allow a young bride to mature—perhaps a matter of years—or to leave time to make preparations for the wedding—a week to a month after the ?aqd. An auspicious time is chosen for the wedding party.

The time which elapses between the ?aqd and the ?arusi is dealt with in various ways. Savage-Landor noted visits between the bride and groom, with the groom bringing fine gifts for his fiancée on each occasion (p. 198). Family members too have a chance to get acquainted during the interval. Often the groom is obliged to give a gift to the bride’s family on each important holiday—especially ?Id-e Fe?r and the new Year, Nowruz. The bride’s family may provide him with a sumptuous holiday dinner in return (Faqiri, p. 80; Ria?i, p. 48). In Shiraz the favor is returned by the groom’s mother-in-law after the wedding, especially at ?Id-e Fe?r. She must also provide her son-in-law with an elaborate meal (ef?ari) to break the fast during Ramazan (Faqiri, p. 80). In contrast, the Kurdish Kalhor do not allow the bride and groom to see one another between the two ceremonies (Ma??umi, p. 61 ).

The day and evening before the wedding are spent in preparation for the celebration. Faqiri reports that in Shiraz the bridal chamber (?ajla) is readied and rice cleaned for the wedding dinner by women who celebrate and sing wedding songs as they work (p. 78). The bride and groom each visit the public bath (?ammam); once bathed, henna is applied to their hands and feet or hair and fingernails. Francklin describes the ceremony of the evening on which henna is applied—šab-e (?ana)-bandi. The groom sent henna to the bride’s house. After her hands and feet were stained, the remainder of the henna was returned to the groom and he was decorated as well (pp. 113-14).
On the day of the wedding the bride is elaborately made up and dressed in her finery; the groom also wears new clothes bought for the occasion.

Each locale has its own ways in which the participants are prepared. Al-e A?mad mentions that in the village Owrazan the groom visits the ?ammam on the night before his wedding, puts on his wedding clothes and pays a visit to the local shrine (emamzada). The groom then spends the evening on the roof of his house (in summer time) with other men, and his guests pledge wedding gifts, with promises to deliver the presents before the bride arrives at the groom’s house. Older men leave the groom and his friends to a bachelor party which lasts throughout the night. In the morning the tired groom is taken on a round of visits in the neighborhood and returns home at noon (Al-e A?mad, Owrazan, pp. 35-36).

The bride’s dowry (jahaz, jahiz, jahiziya) is packed in trunks, often covered with brightly colored velvet and sent to the groom’s house before the wedding celebration. Ma??umi lists the Kalhor girl’s dowry as her hope chest, several jajims (flat-woven, woollen blankets), a mattress, a quilt, a few skins filled with water and one with a yogurt drink (du?), and a skin filled with cooking oil (ibid., p. 63). In poorer areas, the dowry is less elaborate. Owrazan girls seldom have more than one trunk of belongings as their dowry, which includes clothes for the bride and groom, a long tobacco pouch (kisa-ye tutun), a pant’s drawstring (band-e tonban) and a luncheon cloth belt (sofra-ye kamari) (ibid., p. 36).

By contrast, dowries of wealthy urban brides might include fine household furniture, an ample supply of cooking utensils, numerous carpets and boxes of clothes all mounted on gaily decorated mules. Transfer of the dowry to the groom’s house is a festive event and may attract a large and interested audience (Sykes, pp. 77-78). Items included in Shiraz dowries are put on display, along with the wedding presents (Faqiri, p. 79).

A well-to-do groom’s family may sponsor several days of wedding celebrations before the bride is brought to the house. Shirazi families of means customarily chose to include theatrical performance (te?atr-e ta?t-e ?awzi) in the wedding entertainment (Faqiri, p. 79). Savage-Landor remarks that, “Usually for ten days or less before the wedding procession takes place a festival is held in the bridegroom’s house, when the mullahs, the friends, acquaintances, relations and neighbours are invited—fresh guests being entertained each night. Music, dancing, and lavish refreshments are again provided for the guests” (p. 198). By holding these parties on separate evenings, guests of different sorts, classes, and inclinations may be regaled with entertainment and refreshments suited to their tastes and station. The number of nights on which celebrations are held corresponds to the family’s wealth and social obligations. When Chardin was in Isfahan, two weeks were devoted to the wedding of the eldest son of the “Nazir” to the daughter of Divanbigi. “The Wedding lasted Fourteen Days. The Three first, the Parents only, were treated; Several Lords of the Court were treated on the Fourth; the King’s Favourites on the Fifth; and the Generals of the Army on the Sixth: The Pontiffs, and the most considerable of the Clergy on the Seventh. The first Minister was treated on the Eighth, and the King, the next Day after. The Tenth, was for the Chancellor, and the Secretaries of State. The Eleventh for the principal Men of Letters. And on the three last Days, other Persons of Note were invited; so that there was not any Person of Consideration, either at Court or in the City, who was not at the Wedding. It is said to have cost the Nazir Four hundred thousand Livres, the greatest part in Presents to the Guests” (op. cit., I, p. 73).

The wedding procession. Persian weddings have long been noted for the grand processions in which the bride is escorted to her new husband’s home (A?ani, cited in Heffening, p. 1038). On the day of the wedding, the bride is outfitted for her trip to the grooms house. A young boy may tie a bit of bread and cheese wrapped in a cloth to the bride’s waist (Hedayat, p. 23) or hand it to her (Sykes, p. 79), or an older woman may tie a bit of bread wrapped in a scarf around the bride’s waist (Ma??umi, p. 63). The bread later figures in the bride’s meeting with her husband in the bridal chamber (?ajla). A pink or red veil traditionally is placed over the bride’s head and face (Ma??umi, p. 63). At the time Francklin was in Iran in the late eighteenth century the bride was “covered from head to foot in a veil of red silk or painted muslin” (op. cit., p. 115). Women accompanying the bride also wore red silk veils and the presents from the bridegroom to the bride were placed on trays covered with red silk (pp. 114-16).

Relatives and friends of the groom go on foot or on horseback to fetch the bride. If the distance is long, they may entertain themselves with races along the way. Nowadays the trip is often made by car, with beeping of horns and singing by the passengers.

The groom’s representatives may be served some refreshment at the bride’s house before they return to the groom. In Shiraz they steal something from the bride’s house—perhaps a spoon or a glass—in the belief that the theft assures the groom’s success on the wedding night. The father of the bride allows the group to take his daughter only after he has received the official written marriage contract (qabala-ye ?arusi) from them (Faqiri, p. 78). In most places, the parents of the bride remain at home and do not attend the ?arusi celebration at the groom’s house. Attendance at the celebration during the consummation is said to be particularly upsetting to the bride’s mother.

At various stages of the bride’s departure, procession and arrival at the groom’s house, those escorting the bride may refuse to allow her to proceed until a gift is presented to them by a representative of the groom’s family (Ma??umi, p. 64; Ria?i, p. 50; Sykes, p. 80).

The veiled bride is seated astride a gaily caparisoned mule or horse, or—for aristocratic urban families in the past—in a coach, and is conducted through the streets. Traditionally, a large mirror is held in front of the bride as she traverses the way to her husband’s home. She gazes into the mirror, told, says Francklin, “that it is the last time she will look into the glass a virgin” (op. cit., p. 115). Great care must be taken with the mirror; if it breaks, the bride is sure to have bad luck (Faqiri, p. 79).

An elaborate wedding procession would be arranged in the following order: “first, the musicians and dancing girls; after which the presents in trays borne on men’s shoulders; next come the relations and friends of the bridegroom, all shouting and making a great noise; who are followed by the bride herself, surrounded by all her female friends and relations, one of whom leads the horse by the bridle; and several others on horseback close the procession” (Francklin, pp. 115-16). In some places the horse is led by one of the bride’s male relatives (Ma??umi, p. 64). If the groom had an official position, soldiers, bands, and servants would complete the bride’s retinue (Savage-Landor, p. 199). Wild rue (esfand) is burned as the procession goes forward and when the bride arrives at the groom’s house. The pungent smoke of the burning herb protects the bride from the evil eye.

As the bride and her entourage proceed through the streets people along the route may sprinkle her with rose water and perhaps noql candy or raisins. The bride’s approach may be announced by gunshots and, for the wealthy, fireworks (Savage-Landor, p. 199; Sykes, p. 80).

In some areas the groom awaits the bride s arrival on the roof of his house and three times throws sugar (qand), a pomegranate, or an apple at her as she draws near. If he hits her or the object passes over her head, it portends his success on the wedding night (Al-e A?mad, Owrazan, p. 50). Hedayat writes that the groom tosses a sour orange (naranj) at his bride. Should she catch it, she will be the stronger partner in the marriage (op. cit., p. 23).

When the bride approaches the house, the procession stops and one or more sheep are sacrificed as thanks to God and to assure a good future for the marriage. The meat is distributed to those who accompany the procession—musicians, soldiers, etc.—and to the poor (Savage-Landor, p. 199; Sykes, p. 80).

Numerous customs reflect the desire that the groom dominate his wife, or may show that she will rule over him. For example, the groom may remain on the roof over the door of the house as the bride enters, so that she must pass under his feet (Hedayat, p. 23).

The groom’s father or his guardian greets the bride at the door. All men leave at this point and the bride is escorted to a chamber, where she stands on a couch holding a candle while others dance around her for an hour or so with rhythmic clapping of their hands (Al-e A?mad, op. cit., p. 50; Colliver Rice, pp. 145-46; Savage-Landor, p. 201 ).

The bridal chamber (?ajla). A room at the groom’s house is set aside and decorated as the bridal chamber. The walls may be hung with colored cloth and the bed spread with a satin coverlet. In simpler circumstances, bedding may be spread with a white cloth (Ma??umi, p. 64). The bedclothes should be arranged by a woman who has been yekba?t, i.e., she has not shared her husband with a co-wife (havu) (Hedayat, op. cit., p. 24).

At length the groom joins his bride and they seated next to one another. Some advise that the husband perform two units of prayer (do rak?at namaz) in the ?ajla. A family elder gives the bride’s and groom’s hands to one another. The groom’s hand should stay on top of the bride’s so he will always prevail over her. In Shiraz the little fingers of the bride’s and groom’s hands are rinsed with rose water over a basin, into which the couple throw coins. The rose water is later poured at the foot of a green tree (Faqiri, p. 79). Elsewhere, the bride and groom may wash each other’s feet with rose water. First the bride’s right big toe is placed under the groom’s right big toe and rinsed, then her left big toe is placed under his and they are washed. The couple then toss gold coins into the basin at their feet. Hedayat comments that the rose water caught in the basin is sprinkled on the wall to bring blessing (barakat) to the house. This done, the husband may remove his wife’s veil, but only after he has given her a gift of jewelry. The gift is called rugoša or runama, literally “displaying the face.”

The bride and groom now eat some of the sweet bread or bread and cheese which the bride has brought in a handkerchief from her home. The couple is then left alone for the consummation (zefaf) of the marriage. A woman of the bride’s family or, in rarer instances, a female relative of the groom (Ma??umi, p. 66) remains outside the door of the bridal chamber.

Successful consummation of the marriage is announced to the guests by gunshots (Ma??umi, p. 66), drumming (Al-e A?mad, op. cit., p. 50), or ululation (kel zadan) by the female guests (Faqiri, p. 79).

Traditionally, the woman who remained outside the ?ajla displays the bloodied cloth demonstrating the bride’s virginity on her wedding night to the female guests. Among the Kurdish Kalhor, the cloth is given to the mother of the bride, who keeps it for a year (Ma??umi, p. 66).

Observances following the ?arusi. The time immediately following the wedding is punctuated by special observances which mark the bride’s new womanhood and introduce the new husband and wife to the community as a married couple. For three days following the consummation of the marriage, an Owrazan bride neither speaks nor touches anything. A more lenient attitude is mentioned by Aqa Jamal ??ansari in his treatise on the customs prevalent among Persian women. According to the work, the young wife may give up praying for forty days and, if married in Ramazan, need not fast (?Aqa?ed al-nesa?, tr. Atkinson, p. 46).

After the consummation, the bride and groom must both perform ritual ablutions (?osl-e jenabat). When the groom goes to the public bath, an unmarried male relative accompanies him; it is thought that the single man will marry soon thereafter. A like custom prevails with the bride and her unmarried companion will be fortunate (safidba?t) in the same way (Hedayat, p. 24).

On the morning following the wedding night, in Shiraz, the groom visits his mother-in-law, kisses her hand, and escorts her to his house (Faqiri, p. 79).

The husband and wife often make their first public appearances at dinners sponsored by relatives. The custom of sponsoring such formal introductions to society for the newly married couple is known as pagoša, a sort of “stepping out.” A Shirazi father of the bride, traditionally invites his new son-in-law and his friends for dinner or lunch a week after the ?arusi. From that time on, others may extend invitations to them (Faqiri, p. 80). In Kurdistan some three days to a week after the wedding night, the father of the bride sends meat and other foodstuffs for a celebration at the groom’s house. Only women attend this version of pagoša. The women enjoy the meal sponsored by the father of the bride, sing and dance. Afterwards the mother of the bride takes her daughter home for a weeklong visit, at the end of which the groom arrives and takes his wife back to his house (Ma??umi, p. 66). In urban areas, family dinner parties held for a newly married couple suffice as a contemporary form of pagoša.

Baluchi practice stands out as an exception. The wedding night is celebrated at the bride’s home and the consummation takes place there. The couple then spends a month with the bride’s family, after which they begin their life together at the groom’s house (Ria?i, p. 50).

Despite differences in wealth and details of ?arusi observances all wedding traditions express certain relationships and hopes. The union of two families through marriage, and the transfer of the bride to her husband’s group are celebrated in the wedding ceremonies. Each group attempts to fulfill its wedding obligations in a manner which reflects well on the family’s social position. Every effort—practical and ritual—is made to get the couple off to a good start, assuring smooth relations with in-laws, fertility of the bride, and a felicitous relationship between the husband and wife.

For legal aspects of marriage and wedding ceremonies in Afghanistan, Tajikistan, and among the Iranian minorities, see Marriage.

Bibliography : M. R. Afaridun, “Marasem-e ?arusi dar dehat-e Ardabil,” Talas 13, 1347 Š./1968, p. 32. J. Al-e A?mad, Owrazan, 4th ed., Tehran, 1333 Š./1954, pp. 51-55. Idem, The Unwanted Woman in Iranian Society: An Anthology of Writings by Jalal Al-e A?mad, ed. M. C. Hillman, Lexington, Kentucky, 1982, pp. 70-79. M. H. K. E?temad-al-sal?ana, Ruz-nama-ye ?a?erat, ed. I. Afšar, Tehran, 2536 = 1356 Š./1977. Sir J. Chardin, Sir John Chardin’s Travels in Persia, introd. by Sir Percy Sykes, ed. N. M. Penzer, London, 1927. C. Colliver Rice, Persian Women and their Ways, Philadelphia, 1923, pp. 145-48. A. Faqiri, “Marasem-e ?arusi dar Širaz,” Honar o Mardom 162, 2535 = 1355 Š./1976, pp. 76-80 (this article contains the text of Shirazi wedding song [vasunak] verses). Wm. Francklin, Observations Made on a Tour From Bengal to Persia in the Years 1786-7, repr. Tehran, 1976, pp. 109-20. M. ?afuri, “Marasem-e ?arusi dar qaria-ye “Gah”,” Talaš 7, 1346 Š./1967, p. 43. S. Hedayat, Neyrangestan, Tehran, n.d., pp. 23-24. Heffening, “?Urs,” in EI IV, pp. 1038-47 (with a useful bibliography of sources on Persian weddings). H. Karimi, “Marasem-e ?arusi dar Abravan,” Talaš 5, 1346 Š./1967, p. 15. M. Katira?i, Az ?ešt ta ?ešt, Tehran, 1348 Š./1969, pp. 89-131, 163-215. Aqa Jamal K?ansari, ?Aqa?ed al-nesa?, ed. M. Katira?i, Tehran, 1349 Š./1970; tr. J. Atkinson, Ketab-e Kol?um-Nana, Customs and Manners of the Women of Persia, repr. New York, 1971, pp. 42-46, 70-73. Y. Majidzada, “Zanašu?i dar il-e Zarza,” Honar o Mardom 11, 1351 Š./1972, pp. 11-15. H. Masse, Croyances et coutumes persanes I, Paris, 1938, pp. 61-94 (the chapter on marriage includes references to numerous travelers’ accounts in European languages). ?. R. Ma??umi, “?Arusi dar il-e Kalhor,” Honar o Mardon 159-60, 1354 Š./1975, pp. 58-67. ?A. Ria?i, Zar wa bad wa Baluc, Tehran, 1356 Š./1977, pp. 45-50. D. ?. S., “Marasem-e ?arusi dar Astarabad,” Nowbahar, 5th series, 1301 Š./1922-23, pp. 473-75. ?. Sa?edi, ?iav wa Meškinšahr, Tehran, 1354 Š./ 1975, p. 144. A. H. Savage-Landor, Across Coveted Lands I, New York, 1903, pp. 193-203. M. Sotuda, “Nemayeš-e ?arusi dar jangal (Mazanderan),” Yad(e)gar 1/8, 1323 Š./1944, pp. 41-43. Major P. M. Sykes with Khan Bahadur Ahmad din Khan, The Glory of the Shi?a World: The Tale of a Pilgrimage, London, 1910, pp. 65-82 (a fictional account which nonetheless supplies detailed descriptions of marriage customs). M. Šahipasand, “Marasem-e namzadi dar qaria-ye Deh-e Now-e Tal?i-e Torbat-e ?aydariya,” Talaš 11, 1347 Š./1968, p. 41. ?A. Šawqi, “Rosum wa ?adat-e mardom-e Gorgan (marasem-e ?arusi),” Jahan-e Now 1, 1325 Š./1946, p. 298. E. Šokurzada, ?Aqayed wa rosum-e ?amma-ye mardom-e ?orasan, Tehran, 1346 Š./1967, pp. 142-76. C. J. Wills, Persia As It Is, London, 1886, pp. 57ff. S. G. Wilson, Persian Life and Customs, New York, 1895, pp. 237-39 (see pp. 172-73 for a description of the opulent celebrations of the wedding of ?Ezzat-al-sal?ana, oldest son of the Wali-?ahd to Maleka-ye Jahan, daughter of Nayeb-al-sal?ana, Minister of War and son of Na?er al-din Shah; an ?Ali-Allahi wedding is described on pp. 237-39).

The traditional knife dance done in weddings before the cutting of the cake.
http://www.youtube.com/watch?v=brqvnx0hdjQ

Persian Knife Dance
http://www.youtube.com/watch?v=khxYNBhRDNg

Raghseh Chagoo In Order to Get the Knife
http://www.persianmirror.com/Article_det.cfm?id=1480&getArticleCategory=56&getArticleSubCategory=26

Like other traditions in Persian weddings, such as Sofreh Aghd, the bride saying ‘No’ three times and the relatives showering the couple with money, this tradition has to do with showing off, money and ‘eshveh’.

The purpose of the Persian Knife dance (Raghseh Chagoo) is for the couple to retrieve a knife from the dancers so they can cut the wedding cake. The dance starts with one person dancing a typical Persian dance, with the knife and basically asking the couple for money. Once the dancer gets the money, the knife is passed on to the next dancer. The bride and groom continue to offer money to try and get the cake knife. A little back and forth, and a few dance moves later, the couple finally are given the knife and are able to cut the cake.

It would be advisable to get dancers who are skilled with the knife (ouch!) and know how to keep the crowds interested. Suffice it to say that you need to be careful while performing this little number but in all it is meant in good fun and should be enjoyed!

Persian Wedding – Index
http://www.persianmirror.com/celebrations/persianweddings/persianwedding.cfm

Introduction to a Persian Wedding
http://www.persianmirror.com/celebrations/persianweddings/intro/intro.cfm

The Basics of a Persian Wedding

Persian Weddings are usually beautiful and elaborate functions that consists of many different traditions and parts. Before the Wedding ceremonies and parties begin, the couple needs to get engaged. In modern times, couples decide to get married and usually the groom-to-be will ask the father of the bride-to-be for her hand in marriage. This is a tradition that many culture keep in showing respect for the elderly.

The typical Iranian Wedding these days consists of two parts:

1. The Aghd. The Aghd is the legal ceremony that takes place where the officiant declares the couple husband and wife and a legal contract is signed.

2. The Aroosi. The second part of a Persian wedding is the Aroosi, which is the wedding party that follows the Aghd, either immediately or some time later. Here families and friends gather to celebrate the couple’s union.

History of PErsian WEddings

The history of Persian weddings goes back to times of Zoroaster and traditions that have been celebrated for centuries. The union of man and woman is considered sacred and exemplifies the ultimate joy and the greatest form of partnership. Man and woman are told to respect, love, and protect each other as described in this exerpt from an ancient Zoroastrian text:

“I say (these) words to you, marrying brides and bridegrooms! Impress them upon your mind: May you two enjoy the life of good mind by following the laws of religion. Let each one of you clothe the other with righteousness. Then assuredly there will be a happy life for you”.

[Yasna 53.5, ancient Zoroastrian textbook”]

Persian weddings have also been duely influenced by the legal protection that is provided in Islam to the woman in the form of a “Mehr” which is the financial protection provided. Iranian weddings are celebrated with glory, distinction, and a large assembly of family and friends. Iranians consider this to be one of the most important of all occasions. In the past marriages were mostly arranged by the parents and older members of the family. This tradition is very dated and has not been practiced for over 2 generations, although family consent, as in any culture, is still valued. In ancient times, musicians announced the wedding to the town by playing the drums. The group that gathered for the marriage was called the assembly for the queenly bride. Traditionally, both the bride and the bridegroom dressed in white with garlands of flower on their necks. The color white is a symbol of purity, innocence and faithfulness. There are variations and differences in smaller villages and older towns, where some tribes hold on to older traditions and rituals, which may vary from the modern wedding.

Sofreh Aghd
http://www.persianmirror.com/celebrations/persianweddings/sofreh/sofreh.cfm
SOFREh aghd – The Wedding Spread

The Persian Aghd, which is the legal ceremony of the Iranian wedding, is a beautiful and joyful event celebrated with lots of music, laughter, food and love. For Moslem weddings, the Aghd is a legal contract between the man and the woman and extends many rights to the woman that are not common in other legal marriage contracts. Because of the diverse background of the people of Iran, not all Persian weddings are Moslem, and therefore depend on the chosen faith of the couple. Regardless of the faith, the Sofreh Aghd is usually present during a Persian wedding ceremony. These days, with lots of bicultural weddings, this cultural ritual is a beautiful and elegant way to celebrate a union. During this ceremony, a spread or sofreh is prepared for the bride and groom.

Like other ancient Persian traditions such as the Haft Sin sofreh during Noruz, this event has roots in the Zoroastrian faith and does not relate to the Moslem religion. The Zoroastrian faith is based on the four elements of nature: earth, fire, water, and wind, and still has a strong influence on Persian celebrations. Traditionally the sofreh preparation is taken very seriously because what it contains is believed and hoped to be in the couple’s life and marriage. The word sofreh means “spread” like a table or food spread and appears in many Persian celebrations. The spread is typically set on the floor facing the east so that the couple facing the sofreh will face the light. It is best to use a traditional cloth for the sofreh, although in modern days sofrehs tend to be made of silk or white material often times decorated with lace. This of course depends on your taste and can vary from very elaborate to as modern and sleek as desired. It is recommended to have adequate padding or carpet under the sofreh so that the spread is supported properly. Sofrehs are designed on the floor in the room where the couple chooses to get married. These days, weddings are held any where from the family home to hotels, beaches, museums, national parks or the picturesque outdoors.

The Music & The Entrance

Perhaps one of the most important things during the ceremony is the music you choose to play. There are many Persian songs that are beautiful and there are also many classical songs that will suit the occasion, especially if the marriage is a mixed one. Traditional music played when the couple walks to the sofreh is called Mobarak Bad (“Bada Bada Mobarak”). This song is a familiar, happy, upbeat tune that is recognized by most Iranians. It congratulates the couple on this joyful event and is played as the couple walks into the room and takes their seats. Some brides choose to walk out with their fathers following the more Western tradition. In this way you can have a full processional with the wedding party and have your father bring you to the groom at the head of the sofreh.

In addition to this, it is also common to burn some “Esfand” while the couple is making an entrance. Esfand is made from wild rue and is burned in many Zoroastrian ceremonies, rituals and purification rites in Iranian homes. When burned, the Esfand bits give off a pleasant odor and smoke similar to incense. The person carrying the Esfand may walk around the couple and carry the smoke near them to make sure all evil is kept away. To burn Esfand, you can place it on hot coals in a metal container called Manghal or brazier. This will burn and set off the desired effect.

The Wedding Guests

It used to be that a very small select group of people would be allowed to witness the Aghd ceremony, since it was believed that younger, unmarried women should hear the wedding readings for the first time at their own wedding. In today’s weddings, your guests will find this cultural ceremony very interesting, especially those who may not have seen it before or may not know what the signifiance of the Sofreh Aghd is. Typically seats are not provided for the ceremony as in Western weddings. In most ceremony, guests are free to walk around and mingle quietly in the party while the ceremony is taking place. You may want to provide seating and a description of the Persian events so that your guests understand the meaning behind the traditions.

The Couple & the Officiant

After the couple or the wedding party walks in, the couple is seated on a bench or wide chair at the head of the sofreh. They should face the sofreh and be able to see themselves in the mirror. At this point, the officiant arrives and typically sits on the right side of the sofreh, facing the couple. He proceeds to read the agreed upon vows and begins the ceremony. In this section, in a typical Moslem Iranian wedding, the officiant may be a Mullah or Moslem male priest, authorized to perform the legal part of the ceremony. If you are having a bi-cultural wedding, you may choose to have who you wish to perform this section. Some couples choose poetry readings, wedding vow exchanges or a simplified Persian reading in multiple languages to suit the occasion.

The Ceremony & the Language

Both bride and groom provide a witness, typically an older married male such as the fathers, older brother or similar. In traditional Persian weddings, the ceremony consists of preliminary blessings and questions to the witnesses, guardians and the couple. After the preliminary blessings and a few words about the importance of the institution of marriage, the officiant typically confirms with both parents that he can proceed with no objections. Then he asks the mutual consent of the couple. First the groom is asked if he wishes to enter into the marriage contract. Then the bride is asked the same question. Here, the bride traditionally plays shy and makes the groom wait for her hand in marriage by not answering the question right away. The guests scream in the background, “she is not here” or “the bride has gone to pick some flowers” or “the bride is thinking”. She has to wait and not answer the question until it is asked a third time. She then says yes on the third try and they are pronounced husband and wife.

During the service and the readings, married female relatives of the couple hold over the couple’s head a white silky Ghand cloth. Two pieces of crystallized sugar called Kalleh Ghand shaped like cones are rubbed together, showering the couple with white powder. This symbolic act is meant to sweeten the couple’s life. In addition, a small part of the the Ghand cloth, maybe on the left side of the couple is sewn together with needle and thread to symbolize sewing the mother-in-law’s lips together. In today’s weddings, you may choose to skip this part. Others prefer to say that is symblizes sewing the lips of “nay-sayers”, which may be a better explanation for the tradition. You may also have your bridesmaids hold the ends of the cloth but be sure to have married friends or relatives rubbing the sugar on the Ghand cloth. Also, you may modify the traditional readings from the Koran to shorten them, or replace them with beautiful poems to your liking.

Husband & Wife

Once the couple is pronounced husband and wife, the officiant asks for God’s blessing to be with the couple in their lives together. The bride and groom exchange rings and kiss. At this point, the honey is also presented to the happy couple. Here, the groom dips his finger into the honey and gives some to the bride. She does the same in turn and they are ensured a sweet and happy life together. The legal documents are signed by the couple and the witnesses and the wedding party hands out sweets, and pastries from the sofreh to the guests. Items from the sofreh are always thought to be blessed and bring good luck and great fortune. Bride and groom give each other more sweets such as sweet almonds and nuts. They may then proceed to light the candles on either side of the mirror, one for the bride and one for the groom to symbolize light in their new life.

The Items on the Sofreh

Perhaps the best part of the Persian wedding is the sofreh and its significance. The spread contains many items, all to symbolize different qualities that the couple would hope to bring into their new life together. The illustation above is just a simple sample sofreh that you can use to determine where to place your items. You can make the design as elaborate or as clean as you desire. There are many other items you can place on the sofreh and they include:
Item Persian Name Description & Symbolism Position

One Large Mirror Ayne-Ye Bakht To bring light & brightness into the future Head of the Sofreh

Two Candelabras Sha’am Symbolized fire & energy. On either side of the mirror

Spice Tray Sini-Ye Aatel-O-Baatel Tray of seven herbs and spices to guard against
the evil eye. These include: Poppy Seeds In the middle of the spread, usually decorated
“Khash-Khaash”, Wild Rice “Berenj”, Angelica in an elaborate or designed manner.
“Sabzi Khoshk”, Salt “Namak” (to blind the
evil eye), Nigella Seeds “Raziyaneh”, Black
Tea “Chaay”, Frankincense “Kondor”

Flatbread Naan-e Sangak
(Noon-e Sangak) Prosperity for the feasts and couple’s life. It
can be decorated and sometimes has the word “Mobarak On the Sofreh. It can be accompanied by Naan-o Panir,
Baad” to congratulate the couple. which is Iranian feta cheese and fresh herbs to be eaten at the feast.

Decorated Eggs,
Walnuts, Almonds,
and hazelnuts

Tokhm-e Morgh (egg) Ajil (assorted nuts)
Symbolizes fertility On the Sofreh. Can be as elaborate as desired.
Pomegranates and Apples Anar-o-Sib For a joyous future, pomegranates are fruits of the heaven and apples symbolize the divine creation of mankind On the Sofreh.
Rose Water Gol-Ab Usually extracted from specific Persian roses called Gol-e Mohammadi to perfume the air. On the Sofreh
Crystallized sugar Kaas-e Nabaat or Shaakh-e Nabaat To sweeten life for the newly wed. On the Sofreh
Gold Coins Sekeh Wealth and Prosperity On the Sofreh
Honey Asal Consumed right after the ceremony to ensure sweetness in life On the Sofreh
Koran or other Holy Scriptures depending on the faith Ghoraan-e Majid Symbolizes God’s blessing for the couple. Traditionally “Avesta” the ancient Zoroastrian holy book was present during the ceremony and readings were made from it. Opened in the middle and placed on the spread.
Sweets & Pastries Shirini To be shared with the guests after the ceremony. Usually includes: Sugar coated almond strips “Noghl”, Baklava (a sweet flaky Persian pastry “Baaghlavaa”), Mulberry-almond paste “Toot”, Rice-flour cookies “Noon-Berenji”, Chickpea-flour cookies “Noon-Nokhodchi”, Almond-flour cookies “Noon-Baadoomi”, and Honey roasted almonds “Sohan Asali”. On the Sofreh
Termeh Termeh Traditional Perisan silk or gold embroidered cloth, handed down from generations to symbolize family and tradition In the middle of the Sofreh
2 Large Sugar Cones Kalleh Ghand To shower the couple with sugar symbolizing sweetness and happiness Performed during the ceremony over the couple’s head.
The Spread Sofreh The cloth used under the spread should be a fine cloth made of silk or other fine material to your liking
Wild Rue Esfand or Esphand A brazier “Manghal” holding burning coals sprinkled with “Esphand” a popular incense. Wild rue is used in many Zoroastrian ceremonies, rituals and purification rites. It keeps the evil eye away and brings on health. When the couple enters.
Ghand Cloth A scarf or shawl made out of silk or any other fine fabric to be held over the bride and groom’s head throughout the ceremony by various happily married female relatives.

Optional Items:

A needle and seven strands of colored thread to figuratively sew up the mother-in-law’s lips from speaking unpleasant words or meddling in the marriage. For those who wish to keep this portion and make it less offensive, the tradition could means sewing the lips of “nay-sayers”. The Ghand cloth that is held above the couple’s head throughout the ceremony is sewed in one corner by the needle and threads.
A prayer carpet/kit “Jaa-Namaaz” spread open in the center of Sofreh-ye Aghd to remind the couple of their faith. This prayer kit includes a small rug “Sajjaadeh” to be spread on the floor at the time of prayer, a small cube of molded clay with prayers written on it “Mohr” and a strand of prayer beads “Tasbih”.

Aroosi – The Persian Reception
http://www.persianmirror.com/celebrations/persianweddings/aroosi/aroosi.cfm

The aroosi is the big celebration following the Aghd ceremony, which is the official and contractual marriage ceremony. The aroosi, similar to a reception, can be celebrated right after the aghd or up to a year after it. In modern times, couples opt to have minimal to lavish receptions with buffets, dinners and lots of dancing. This is very similar to a western style wedding party. Entertainment, and DJ’s can provide a festive mood and atmosphere for the big celebration. Iranians are great lovers of dance so be sure to include lots of Persian music, even if your event is mixed or bicultural. The location is also very important and can be a home, a hotel reception hall, a museum or the great outdoors. Traditionally, the wedding party is paid for by the groom’s family but this no longer applies to modern couples. A wedding cake is very traditional and sweetens the union at the end of the night. Pick a cake that is personal and significant to your unique taste. Iranians tend to party into the wee hours of the night, so be sure you have a good DJ, lots of food and drink and your dancing shoes on.

The wedding Dinner & reception

Traditional dinner in Persian weddings is served buffet style and is not as formal as its Western counterpart. A very traditional and delicious dish to serve is Javaher Polo, which is considered to be the King of Persian dishes. Javaher means jewelry and Polo is rice. The dish is made of orange peel, almonds, sugar, barberries, and pistachios. Not only is this dish tasty, but it is also aesthetically beautiful with different colors representing jewels such as diamonds, rubies and emeralds for the marriage. For more recipes and dinner ideas be sure to consult the cuisine section of our guide.

the First Dance

More and more weddings have a first dance where the couple officially opens the dance floor. We highly recommend dance classes that will prepare you for this event so that you can dazzle your friends and family on this special occasion. Our guide features exclusive information on where you can get dance lessons. Be sure to make the dance personal and memorable based on your own uniqueness and favorite songs. We also features a cultural section on Persian dance in case you are interested in performing a traditional Persian dance.

wedding Entertainment

Perhaps one of the most important elements of Persian life and culture, which can be celebrated during the wedding, is Persian music. Not only should you make sure that you play the right tunes during the Aghd, but you can also infuse the party with Iranian elements if you use great songs from Iran’s great dance repertoire. Iranians love to dance and you better be sure that your band or DJ knows this. These days there are many local DJ’s who have great Iranian dance tunes. Some of the classic tunes we recommend looking into include:

1. Baba Karam
2. Mobarak Baad (this is to be played right before the ceremony)
3. Aroosi Bandari
4. Aroos O Damad
5. Khastergari
6. Aroose Naaz
7. Shaadoomad
8. Ghaasem Abaadi

Be sure to bring a few cousins who know the songs or some people who love to dance and have fun. In addition, you may consider hiring a live band. There are many that will perform or play a variety of Persian and Pop songs. Use our guide to find your ideal entertainment. Consider tunes that are great to dance to, no matter the origin or time. We prefer DJ’s to bands because that way you can also include other songs from other culture if your wedding is bicultural or if you want to feature dance tunes from all over the world.

wedding Photography & Video

It’s true when they say that the day goes by very fast and the next thing you know you are looking at the pictures or the video of your wedding. If this is going to be your memory of it, then do your research in finding the perfect photographer. Look for someone who can take charge and lead groups of people. Weddings are incredibly hectic and the last thing you want is a soft-spoken photographer. Also, make sure that you look at plenty of his/her sample work and have the same artistic vision and dream of your big day. The same applies for your Video crew. We have provided a comprehensive list of resources for your to choose from. Be sure to explain any important cultural aspects of the wedding such as the Aghd so that their crew is ready and can take shots from the right angles. Explain your day and your ceremony in plenty of detail before hand and be sure they know to capture the details of your day.

The wedding Cake

The cake is a great addition to a wedding, sweetening the life of the couple even more than honey and shirini. For this reason, you may want to pick a cake that suits your taste and has some meaning to your partner. These days, bakers create the most beautiful and modern cakes that defy convention. For a full list of bakers, including Iranian cake makers, go to our resource guide.

Pa Takhty – the day after the wedding

This phrase has a literal translation of “by the bed”. It is the ceremony that takes place the day after the wedding when friends and relatives of the couple are invited to pay a visit to the newly weds to offer blessings and more gifts. At the Pa Takhty, the couple is officially considered married.

some Wedding Favor ideas

Traditional wedding favors in Iran are sweets such as Jordan Almonds or Noghl & Ajil from the sofreh wrapped in pink or white tulle. Occasionally they throw small gold coins in the wraps to represent happy fortunes. These favors are very old fashioned and are recommended only if you are trying to evoke that old-Iran feeling. There are so many beautiful modern, customized favors to choose from these days, that it becomes quite a challenge. We like to mix the old with the new, and suggest having the Jordan Almonds or better yet, real Persian pistachios in a modern package. You can use color paper bags decorated with customized ribbons, elegant tin cans, or even an updated tulle wrap.
If you are still not convinced that the old way is the good way, you can see if any of these favor ideas sound fabulous for you

1. Deck of Cards with personal pictures
2. Elegant Bookmarks are a cost-effective alternative and useful. Use a Rumi poem and a nice picture of the two of you to personalize it.
3. Gourmet Tea Packs – Buy some good old Iranian Tea and place it in a special favor bag complete with personal message and ribbon
4. Other ideas: Fortune Cookies, Coffee packs, Spa sets, Tree Seedlings

http://www.pbs.org/independentlens/arusipersianwedding/

http://books.google.com/books?id=FfHs7u95s_oC&lpg=PA12&ots=eruG20t4XM&dq=persian%20wedding&pg=PA2#v=onepage&q=&f=false
The Persian Wedding
Bijan Moridani

http://www.fordham.edu/halsall/Islam/1885persianwedding.html
Islamic History Sourcebook:
Charles James Wills:
A Persian Wedding, 1885

LOVE at first sight is unusual in a country where the women are habitually veiled, and a glimpse even of a lady’s face is seldom to be got, save by stratagem or by what is considered immodest—the raising of the corner of her veil by the lady herself. Shrouded as she is from head to foot in an immense sheet of blue, two yards square, a yet further precaution must be taken. Over all this is placed a ruh-band or veil—no transparent or flimsy device, as in our own lace “fall,” or the thin and gauzy yashmak of the Turkish belle, serviceable alike to triumphant and to fading beauty. The ruh-band is a piece of white calico or cambric, a yard long, which hangs down like a long mask in front of the Persian woman’s face, when clad in her hideous and purposely unbecoming outdoor costume: which costume, sad to say, is also an impenetrable disguise. In it all women are alike. An aperture four inches long, running transversely across the eyes, enables the Persian lady to see her way, and little more; for even this aperture is covered by elaborate and curious embroidery, between the threads of which she can only peep. But the Persian belle will yet find a way of rewarding an admirer with a glance, and thus the marriages so carefully brought about by parents and relatives are not infrequently the result of predilections slyly manifested. The outdoor dress, being a disguise, cuts both ways; and the intrigante amuses herself with impunity.

Certain marriages take place because in the eyes of the Orientals they are natural ones, such as the union of first cousins. The children have been like brother and sister from the cradle, and they are married as a matter of course; it is their fate, and they submit to it. But outside these marriages of custom, and far more numerous than the marriages of predilection to which we have referred are the marriages usually arranged by “brokers.” These brokers are old women, who always keep themselves in a position to quote the state of the marriage-market, which fluctuates. In hard times, even girls of good appearance are comparatively a drug. In time of plenty, they ” rule firm.” The marriage-broker is ever a welcome guest where there are daughters to marry, and also in houses where the sons wish to find a suitable bride. The young people are not consulted by the broker. She deals with the parents, and generally with the mothers. Crafty as a horse-dealer, she runs glibly over the various advantages, mental, physical, and pecuniary, of her clientele of both sexes. So-and-so is a steady, quiet man. Such-an-one has brilliant prospects—has (important consideration!) no other wife. As for Yusuf, how good-looking he is! And Hassan, no man was ever so good-tempered. Of the other sex she sings the praises no less. The skill of Bebe as a housekeeper, the wealth of the ugly daughter of the banker, the dangerous charms of the portionless Zuleika, she can never say too much about. Her main business is to bargain for the sum to be paid to the father for his daughters hand; a sum which is usually expended by that father in pots and pans (all of copper) and other utensils, which he presents to his child as her separate property. The details being settled after much haggling, the young people are engaged, and the marriage-broker gets her commission from both the parents of the bride-groom and those of the bride-elect. Among the poor and laboring classes the bargain is arranged on other grounds. The peasant takes a wife for her thews and sinews, or her skill at weaving carpets or making cheese; while the bridegroom is or is not eligible according as he may be capable of hard work, or may hold some small office, or have a bit of land or a shop. Here the marriage-broker is generally an amateur, who conducts the negotiations purely from that love of match-making which is such a blessing to the world.

The akd, or marriage contract, is simply a legal form; but it is marriage and not betrothal. A few friends are invited; the bride—perhaps a child of ten—is seated in a room with her parents and relations; over the door hangs the usual curtain. Or, if the ceremony takes place in one room or in the open air, the women are all veiled. At the other side of the curtain, in an outer room or in the open air, are the male guests; and here squats the mullah or priest of the quarter, who now drones out in a monotonous voice the marriage contract, which has been previously drawn up by him. “It is agreed between Hassan the draper, who is vakeel [agent] for Houssein the son of the baker, that he, Houssein, hereby acknowledges the receipt of the portion of Nissa the daughter of Ahkmet the grocer.” Here follows a list of the property of the bride in lands, money, houses, cattle, dresses, furniture, carpets, pots, pans, and so on. Always a copy of the Qur’an and a certain weight of sewing-silk are mentioned. This detailed account of her property, constituting the woman’s separate estate, her husband merely holds in trust during their life together. At death or divorce it goes back again to herself or her heirs. And it is this mehr, or separate estate, that renders secure the otherwise precarious position of the Eastern wife in a polygamous country; for the various things enumerated, though acknowledged by the husband as received, may only exist on paper. Still, he has acknowledged them; and if he wish to put away his wife, or if they separate by consent, he is bound to refund the mehr of which he has legally acknowledged the receipt, or to obtain her legal discharge for the same. “And,” continues the mullah, “he acknowledges the receipt of the aforesaid mehr.” Then follows a hum of delight at the extent of the lady’s property. “You, Hassan, how do you say as vakeel for Houssein—is this so?” — “Yes, yes, I agree,” mumbles Hassan. “And you, Ahkmet, do you give your daughter, Lady Nissa, to be the wife of Lord Houssein?” ” Yes, yes, I agree,” replies Akhmet the grocer. “And you, Lady Nissa, are you there?” “Yes, yes, she is here, mullah,” replies a chorus of women from behind the curtain. “And you agree, Lady Nissa?” Here there is a giggle from the child-bride. “Yes, yes, she agrees,” comes in a triumphant chorus from the women. ” Then,” says the mullah solemnly, “in the name of God the compassionate, the merciful, and of Mohammed the prophet of God, I declare you, Lord Houssein, and you, Lady Nissa, to be man and wife.” Here the mullah puts his stamp of seal to the document: the various parties seal it too, it is carefully witnessed, and formally completed. The mullah receives his fee of a few shillings; and then, and not till then, he hands over the document—her settlement and “marriage-lines” in one—to the agent of the bride or to her father.

The legal ceremony is over; the young people are married fast, fast as the Mohammedan law can bind. And, theoretically, as yet they have never seen each other’s face. But really Houssein has had many a glimpse of the fair Nissa: her mother has often allowed him to see her child from behind a curtain or a cupboard door. All this is understood. And the young people are now legally married. The wedding, as distinct from the espousals, may take place the same evening, in a week, a month, or not for years, according to the age, rank, or circumstances of the bride and bridegroom. Men and women feast separately; and after many water-pipes have been smoked, many pounds of sweetmeats consumed, and a plentiful banquet has been disposed of, the guests separate. All promise to be present at the actual wedding. No music, no rejoicings—nothing but what we have described is seen at the ceremony we have detailed.

From an early hour in the morning of an arusee or wedding—I speak of a wedding in the middle ranks of life—there has been considerable bustle in the house of the bride’s father. The house has been literally swept and garnished. Carpets have been borrowed, and rooms that at other times are unused and empty are now furnished and decorated with flowers. The poor are standing in a crowd at the outer door, sure of being plentifully regaled. The outer court has been got ready for the men. Vases of flowers are placed in rows at all the open windows, and in every recess thirty or forty pounds of tobacco have been prepared by pounding and moistening for smoking; the courtyard is freshly watered. If it be a calm day—and spring and summer days in Persia are always free from wind—rose-leaves are sprinkled on the surface of the water of the raised tank in the center of the courtyard, so as to form the word “Bismillah” [in the name of God], the pious welcome of the Mussulman. Similar preparations, but on a larger scale, have been made in the anderun, that hand somer and larger courtyard which contains the women’s quarters. In this courtyard the Negresses may be seen busily engaged in the kitchen preparing the breakfast for perhaps a hundred guests; and the visitors will stop all day, only leaving to escort the bride to the home of her new husband, whither she will go after dark. Large samovars, or Russian urns, which are in use in every Persian house, are hissing like small steam-engines, ready to furnish tea for the guests on their arrival: not our idea of tea, but a pale infusion sweetened to the consistency of syrup, from the center of each cup of which will project a little island of superfluous sugar. The sherbet-dar, too, is preparing in his own especial den immense quantities of ices and sherbets; and these ices will be served from china bowls, and each ice will be the size and shape of a fair-sized sugar-loaf. As for the sherbets (delicately scented and sweetened fruit-syrups dissolved in water, and with lumps of ice floating in the clear and various colored fluids), they will be supplied in gallons. Orange sherbet, lemon, pomegranate, rosewater, cherry, quince, and an endless further variety of these refreshing drinks will be offered to the thirsty guests. And now come the musicians in two bands, the Mussulmans’, and the Jews’; the latter a ragged and motley crew, but more skillful than their better-clad rivals. They carry with them their strange Old-World instruments, and soon establish themselves in a corner of either courtyard. They, too, partake of tea, and then they prepare to strike up. Noticeable among the Mussulman musicians is the dohol player and his instrument. It is a species of big drum, only used at weddings; and, once heard, the awful resonant roar it makes can never be forgotten.

All is ready; the master of the house, dressed in his best, gives a last anxious glance at the preparations, and has an excited discussion with his wife or wives. He waves his hand to the musicians, and hurries to a seat near the door, to be ready to welcome his guests; the music strikes up a merry tune (it is really an air—barbaric, but inspiriting); the tremendous din of the dohol is heard at intervals. Then in a loud scream rises the voice of the principal solo singer, who commences one of the sad love-songs of Persia in a high falsetto voice. His face reddens with his exertions, which last through a dozen verses. His eyes nearly start from his head, the muscles of his neck stand out like ropes; but he keeps correct time on the big tambourine, which he plays with consummate skill. The rest of the musicians watch his every movement, and all join in the chorus of “Ah! Leila, Leila, you have made roast meat of my heart!” The music is the signal to the invited guests; they now commence to arrive in crowds. The music and singing proceed, and go on unceasingly till the bride leaves for her husband’s home some ten hours after the artists begin. As the guests pour in, the host receives them with transports of pleasure—all the extravagant compliments of Eastern politeness pass between them. “May your wedding be fortunate!” “You are, indeed, welcome; this is a never-to-be-forgotten honor to me, your slave!” In they pour, the men in their best; the women, closely veiled, pass on unnoticed by the men into the anderun, where they unveil and appear to their delighted hostesses in their finest clothes and all their jewelry; and, we are sorry to add, in most cases with their faces carefully painted. As the dresses worn among Persian ladies for indoor use only reach to the knee and are very much bouffé, their wearers look like opera dancers. The ladies’ feet and legs are bare, as a rule; a gauze shirt of gay color and a tiny zouave jacket daintily embroidered with gold lace on velvet or on satin are worn, while the head is decorated with a large kerchief of silk or gauze, elaborately embroidered with gold thread. From beneath this kerchief the hair falls in innumerable plaits behind, sometimes reaching almost to the ground. The colors of their clothes are of the brightest—pinks, greens, yellows, starlets, crimsons, blues. The quantity of solid jewelry worn in honor of the bride is prodigious.

Every one takes tea, every one crunches the sweets of various kinds which are piled on china dishes in huge trays in the center of the rooms. Several hundredweight of confectionery—not food, but “sweets”—-are thus consumed. Conversation goes on, pipes are smoked by both men and women. Messages pass between the two courtyards. But the men remain in their quarters, and the women in theirs. The musicians and buffoons are allowed, however, in the women’s court on these occasions: they are supposed to be mere professional persons, and on this account are tolerated. At noon a heavy breakfast is served. If there be two hundred guests, there is meat for them and for, say, four hundred servants and.hangers-on, while what remains, a still larger portion, is given to the poor.

Lutis or buffoons now bring their performing monkeys or bears—often a miserable and half-starved lion cowed by much beating. They dance, they sing songs, indecent enough in themselves, but tolerated in the East on such occasions. More tea, more ices, more sherbet, more sweets. Pipes without number pass from hand to hand, but no strong drink; that is never seen or tasted, save by the musicians and buffoons, who as the day wanes are freely supplied. The bride meanwhile goes to the bath, whither she is accompanied by many of the ladies, the friends and near relatives of the family.

Dinner is served on the same lavish scale as the breakfast. Fowls by the hundred, boiled to rags, under piles of various-colored rice; lambs roasted whole, or boiled in fragments; mutton in savory stews; game and venison hot on the spit; kababs and pilaws of endless variety; soups, sweets, fruit in profusion: all this is served with the lavishness of true Oriental hospitality.

And now there is a hum of suspense. It is night; and the whole place is lighted up by lamps, candles in shades, and lanterns. A noise of a distant crowd is heard; alms in money are freely distributed among the crowd of beggars and poor at the door; horses are brought for the bride and her friends. The procession of the bride groom is approaching: and it must be understood that another grand party has been going on at his father’s house. The musicians play and sing their loudest: the roofs (the flat roofs of the East) are thronged by all the women and children of the quarter. The bridegroom and his friends arrive, and are welcomed by the women with a peculiar echoing cry of “Kel lel lel,” produced by tapping the cheeks. Then the bride appears, carefully veiled in a huge sheet of pink and spangled muslin. She goes to the door and mounts a gayly-caparisoned horse. All the male guests join the procession. Lighted cressets full of blazing embers are carried on high poles to lead and light the way. The lanterns of all the guests are lighted and borne in this procession, which joyfully wends its way through a cheering crowd. At the moment the bride leaves her father’s house a shout of “Kel lel lel” announces the fact. Fireworks blaze, the music is deafening, above all is heard the monotonous banging of the wedding drum. And so, the buffoons and musicians leading the way, the procession slowly moves on. As it approaches the house of the bridegroom several sheep are sacrificed in honor of the bride; they are slain at her feet as she steps over her husband’s threshold for the first time, accompanied by a female friend or two. Then, invoking blessings on the pair, all wend their way home, and the festival is over.

Source

From: Eva March Tappan, ed., The World’s Story: A History of the World in Story, Song and Art, (Boston: Houghton Mifflin, 1914), Vol. II: India, Persia, Mesopotamia, and Palestine, pp. 411-420.

Scanned by Jerome S. Arkenberg, Cal. State Fullerton. The text has been modernized by Prof. Arkenberg

Note: Many Western sources about Islamic countries exhibit what has come to be known as orientalism. The terms used (“Mohammedan” for instance rather than “Muslim”), and the attitudes exhibited by the writers need to be questioned by modern readers.

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http://www.iranchamber.com/culture/articles/iranian_marriage_ceremony.php
Iranian Marriage Ceremony, Its History & Symbolism
By: Massoume Price, December 2001

“I say (these) words to you, marrying brides and bridegrooms! Impress then upon your mind: May you two enjoy the life of good mind by following the laws of religion. Let each one of you clothe the other with righteousness. Then assuredly there will be a happy life for you”.
[Yasna 53.5, ancient Zoroastrian textbook”]

the Iranian wedding ceremony despite its local and regional variations, like many other rituals in the country goes back to the ancient Zoroastrian tradition. Though the concepts and theory of the marriage have changed drastically by Quran and Islamic traditions, the actual ceremonies have remained more or less the same.

For Iranians marriage is an event, which must be celebrated not quietly but with glory and distinction. It is the most conspicuous of all the occasions and is celebrated in the presence of a fairly large assembly. In the past the parents and older members of the family arranged almost all marriages. This is still the case in rural areas and with traditional families. Modern couples however, choose their own mate but their parents’ consent is still very important and is considered by both sides. Even with modern Iranians, after the couple have decided themselves, it is normally the grooms’ parents or other relatives who take the initiative and formally ask for the bride and her family’s consent. Once this is done then the marriage will be announced. In the ancient times, the musicians playing at marriage gatherings used drums to announce the marriage to the people of the town or village. The group that gathered for the marriage was called the assembly for the queenly bride. Traditionally, both the bride and the bridegroom dressed in white with garlands of flower on their necks. The color white is a symbol of purity, innocence and faithfulness. Today most modern Iranians follow the European dress code and style.

Once the groom and his family express their desire for the union, they go to the brides’ home with flowers, sweets and sometimes-gold coins or jewelry and ask for her hand. If accepted more presents will follow. The couple becomes engaged in a reasonably lavish party. Rings are exchanged; the engagement rings are simple, mainly gold with no stones. While the wedding ring presented to the bride will be lavish expensive with precious stones. The engagement ring is sent to the bride’s house with female relatives of the groom. A few days before the actual ceremony again more presents are taken to the bride’s house. Men dressed up in festive costumes would carry the presents in elaborately decorated large flat containers on their heads. The container is called tabagh and the whole thing with the presents is called khoncheh. Many of these customs are still followed by the more traditional families and in the provinces. The modern Iranians normally by pass some stages like sending the ring through relatives and outside Iran tabagh and khoncheh are hardly used. However ceremonial objects are still present.

Mirror and candelabras are amongst the most important ceremonial objects that are taken to the brides’ home and they are reminiscence of the Zoroastrian religious believes. Grooms’ family is expected to pay for all expenses and if they can not, they will be looked down at. The higher the status and social standing of the bride, the more lavish will be the banquets and the presents, especially the jewelry. An elaborate wedding in Iran presently costs around a hundred thousand dollars. There are efforts by the government to encourage people to simplify the weddings and lower the cost. Mass communal weddings sponsored and paid by the government have become increasingly popular. In February 2001, fourteen thousand couples married all across Iran in this manner.

All financial details are sorted out before marriage and the couple’s parents, mainly fathers, will carry out negotiations. With prosperous families the issue is settled rather quickly. However families with not enough means may drag the negotiations for a while bargaining about how much should be paid and what should be included in the marriage contract. Bride in Persian is called arous, which means white. The word was used in Sassanian period and exists in Avestan literature as well. The oldest historical record describing marriage ceremonies is by the Greek historians following Alexander’s invasion of Persia. Alexander and his men married a number of Iranian women, mainly from the royalty and aristocracy. In one account it is mentioned that the marriage ceremonies were in Persian fashion; chairs were set for the bridegrooms in order of precedence. Wine was served and they all drank to health. Then the brides entered and sat by their grooms, including Alexander. The men took their brides hands and kissed them. The king was the first to perform the ceremony. After the ceremony both the bride and groom ate from a loaf of bread, halved by sword and drank more wine. Then they took their wives into their private quarters and retired. It is also mentioned that dowries were paid for the brides. Alexander provided the money from his treasury.

In 19th century Iran pre marriage arrangements were very extensive. The couples were not allowed to see each other at all before the wedding night. Therefore a number of unofficial arrangements were made for the groom to see the future bride accidentally or watching from behind doors or curtains. Pre-nuptial agreements could take a long time. During negotiations the family of groom was served with tea, sekanjebin (sweet/soar drink made from vinegar and sugar) and they smoked water pipes. Once an agreement was reached then the guests would be served with sweets but not beforehand. This was called ‘sheerne khoran’ (eating sweets) and is still practiced and varies according to the locality. In a few days the bride would receive an engagement ring and a shawl. These were placed in a relatively expensive carrying bag (boghcheh) with nabat (concentrated sugar extract), sugar cones and sweets and other presents. Then the female relatives on both sides would visit the bride, and one of groom’s relatives other than his mother placed the ring in bride’s hand and the shawl on her back. There would be dancing, merrymaking and with the rich female musicians. Segregation of sexes due to religious codes of behavior was observed.

“Sofreh Aghd”
Guests were invited by sending written invitations to the men or simply by calling on them and letting them know. For the women a female servant or relative would personally visit the households and present the ladies with noghl (small sugary sweets), nabat, and cardamom seeds in a silk or satin handkerchief with lace placed on a small glass plate. She would offer them the sweets, would tell them the time and place. The ladies would eat a couple of sweets and would express their joy. If a servant had come they would receive tips and sweets.

Modern Iranians place sweets and candies like noghl and nabat in small satin kerchiefs or lace for the guests to take home. The tradition of giving gifts to guests is very old and existed before and after Islam. One such account is mentioned at the marriage of the daughter of the famous Barmakid Minister Jafar at the court of Abasid Caliphs. In this account special little wax balls were filled with coins or names of slaves or even title to properties. The couple was showered with these and people who got the balls would claim their presents later on.

Three days before the actual wedding the bride would be taken to female beauticians or was visited by them at home for the ritual of removing body hair. A significant rite of passage this marked the passage from girlhood to womanhood. Unmarried women would not remove their body hair or pluck their eyebrows, the most visible sign that a woman was married.

This was done three days before to make sure any allergic reaction and redness of face and body parts would be healed by wedding day. Facial hair, all hair from under arms, legs even stomach and back hair were removed by using special threads that once moved in certain fashion would remove the hair right from the root. This is called band andazi and is still practiced by traditional families and in the rural areas. In recent times with the more restrict and traditional parents moving to the western countries shaving legs and plucking eyebrows has become a source of conflict with their teenage girls. For the teenagers these are part of beautifying process common in modern societies, while for their parents this is an obvious indication of becoming a woman without being married.

Mirrors and candelabra with Espand (a popular incense), large decorated sugar cones, cardamom seeds, rosewater, henna, dress fabrics, prayer mat (janamaz) and candles were sent at this time to the brides house. Included was specially decorated bread called khoncheh still placed on the wedding spread. These were carried on tabagh with singing and clapping and accompanied by male musicians if they could be afforded. All the males stopped by the entrance to the bride’s house and women took over from this point on. The day before the wedding was the bathing day. The bride and other female relatives went to the bathhouses. She would be thoroughly cleaned, massaged and all dead skin on her body would be removed by scrubbing (kisseh keshi). The hair was washed and her entire body would be rubbed with oils and perfumes. On the morning of the wedding the beauticians arrived again to apply the makeup. The groom to be also had his pre-marital bath, however his was a lot simpler. What mattered was the bride being accepted by the groom not the other way around.

Today still many of these traditions are kept and carried out even though they might be ceremonial. The wedding is almost identical to the past and all brides will have the mirror and candelabra if not the other items. The mirrors were always full size and a pair of candelabra was placed on either side of the mirror with lit candles one for each, the bride and the groom. However the cost of living has forced many to settle with smaller mirrors and candelabras.

A very important part of the pre wedding activities is dowry preparation by the bride’s family. Till very recently the girls were expected to prepare many of the items themselves. They were required to weave fabrics, prepare cloths and many in the poor families would weave carpets and rugs long before there was any talk of marriage. The tradition is very ancient. Herodotus mentions that Achaemenian Queen, Amestris, Xerxes’s future wife made a magnificent outfit for the king with fabrics that she had woven and prepared before her marriage. Today dowry preparation is still practiced by almost all families. The bride’s family will buy household items for the dowry. The higher the social status the more elaborate will be the dowry and it could include properties as well. The very modern professional couples with means do not follow this tradition. On the whole this is still very important and is practiced by the majority and at times it becomes a source of major conflict between the two families.

There were and are two stages to a marriage. Most often both take place on the same day, but occasionally there could be some time between the two. In the past when marriage age was very low, there might have been a few years between the two to allow the girl to grow up. The first is called ‘Aghed’ meaning knot. This is when the legal process takes place, both the parties and their guardian’s sign a marriage contract and a bride price or ‘mahr’ is set to guarantee the financial well being of the bride. The mahr is agreed on beforehand and at this time previously prepared documents will be signed. The second stage is the actual feasts and the celebrations, which traditionally lasts from 3 to 7 days.

“Aghd Ceremony at present times”
The ceremony takes place in a specially decorated room with flowers and a beautiful and elaborately decorated spread on the floor i.e. ‘Sofreh Aghed’ and traditionally it faced the direction of sunrise. By custom the aghed would normally take place at the bride’s home or her close relatives and always during the day. This is from the Zoroastrian period when darkness was associated with the hostile spirits. The bridegroom is the first to take his seat in the room and the bride comes afterwards. The groom always sits on the right hand side of the bride. With Zoroastrians, the right side designates a place of respect.

The bride and the bridegroom have each at least one marriage witness. Usually older and married males are chosen amongst close relations to stand as witnesses. The priest (Mula) or other males with recognized authority i.e. a notary public perform the legal part of the ceremony. With very religious families where segregation of sexes is practiced these males will stay in the adjacent room and will only talk to the bride without actually seeing her, or the bride’s face will be totally covered when these procedures take place.

This part of the ceremony consists of preliminary blessings, questions to the witnesses, guardians, the marrying couple and finally the ceremony is solemnized by reciting verses from Quran or other holy books and signing of a legal marriage contract. The contract can contain clauses to protect the bride against polygamy, unconditional divorce rights by the husband, property rights etc. Normally all these details are worked out beforehand.

After the blessings and a few words about the importance of the institution of marriage the priest confirms with both the parents or guardians that they indeed wish to proceed with the ceremony and there are no objections. Then the priest asks the mutual consent of the couple.

First the bridegroom is asked if he wishes to enter into the marriage contract, then the bride is asked the same question. Once the bride is asked if she agrees to the marriage, she pauses and remains silent. The question is repeated three times and it is only at the last time that she will say yes. To make the bridegroom wait for the bride’s answer is to signify that it is the husband who seeks the wife and is anxious to have her and not the other way around. With the very rich each time the bride is asked the question the groom’s mother or sister would place a gold coin or a piece of Jewelry in her hand symbolically encouraging her to say yes. During the service female relatives of the couple (mainly the bride) hold over the couple’s head a fine scarf or other delicate fabrics like silk. Till 19th century this was green, Zoroastrians favorite color, now other colors particularly white are used as well.

Two different actions take place at the same time. Two pieces of crystallized sugar (shaped like cones) are rubbed together, a symbolic act to sweeten the couple’s life together. In the second act two parts of the same fabric are symbolically sewn together with needle and thread. The ceremony is suggestive of the ancient traditions when the bride and groom’s ceremonial belts (koshti) were tied and sewn together. Zoroastrians today hold over the grooms head a tray on which two pieces of cloth are united together, with needle, thread, scissors, a raw egg, a pomegranate or apple, dried marjoram, and white sweetmeats, all covered by a green kerchief. Koshti are ceremonial belts that are given to all Zoroastrians to mark the passage from childhood to adulthood. This is a rite of passage and is a very significant ritual in their lives. The symbolic act of sewing the bride and groom’s koshti together is uniting the couple for the rest of their lives, a knot is tied that should not be broken or separated.

Once the bride has said yes to the proposal, verses from holy books are read. Documents are signed, the amount of mahr (bride price) is entered in the legal document, which is signed by the couple and the witnesses, and the two are announced man and wife. The practice of setting up a bride price is becoming a ceremonial one for most modern couples. Most will settle for a holy book, a gold coin and some flowers mainly roses. However mahr should be included in the marriage document be it symbolic or not. Etymologically meaning “price” or “ransom”, mahr is the money or other valuables, paid or promised to be paid to the bride by the groom or his family for the financial protection of the bride in case of a divorce and it is must in Islamic marriage. Once this is over, the couple hold their right hands together, drink a sweet liquid or taste some honey for a better and sweeter life.

At this time the bride and groom exchange wedding rings. Then the bride is showered by gifts, usually expensive jewelry and all she receives is hers and the husband has no right over the presents. The groom also receives gifts from the bride’s family, normally an expensive watch and other male items like gold chain etc. Songs, jokes and merry-making gestures and clapping of the hands, accompany the whole ceremony. When the two leave the room, they are showered with coins, flowers, rice and the sweet candy noghl. This item is present in all Iranian festivities and it is believed to bring sweetness into life and is regarded as blessed (barakat). Showering the couple with the above items is called shabash and varies from one place to the other. The guests would eat the noghl and take the coins home for good luck. With rich families real gold coins will be used but most will use specially minted fake coins with the word shabash or mobarak bad (congratulation) engraved on the coins.

The elaborately decorated spread in front of the bride and groom contains several items each symbolizing a different aspect of the ancient religion. Mirror and candelabras represent light and fire, two very important elements in the Zoroastrian religion. The large flat bread is specially baked and decorated to bring prosperous feasts (specially baked bread was and is still used by Zoroastrians as holy bread in many of their rituals and ceremonies). Gold represents prosperity. Honey and crystallized sugar is to sweeten life. Espand a popular incense is burnt. This item is used in many Zoroastrian religious ceremonies, rituals and purification rites. It is believed to keep the evil eye away and purify. In the past grain seeds were sacttered on the spread symbolizing abundance and fertility. A glass bowl with gold fish and a green leaf from a local variety of orange called Narenj was also placed in the bowl. Such traditions are disappearing quickly. The spread or the cloth used is called ‘Sofreh’ and is normally very elaborate itself and with the rich ‘Termeh’ a very expensive hand made material from India is used. Sometimes very small pearls are embroidered on termeh to depict beautiful designs. Termeh are still prized and are always included in the dowry if people can afford them and the old ones are becoming collectors’ items.

A large porcelain bowl containing a number of sweet drinks (sherbets) depending on the location was and is still part of the spread in most places. A bunch of herbs called sabzi (green herbs are called sabzi) like parsley and mint with bread and cheese was also placed on the spread and it still is in many places.

After the ceremony, there are lavish feasts, dancing, music and entertainers. There will be more parties given by close relatives and friends for the next few weeks. These parties are called paghosah, meaning clearing the path. They are to introduce the two newly related families to each other. With very traditional families and the poor the groom is supposed to provide fabrics or new cloths as part of the bride price for these occasions. Traditionally at the end of the wedding ceremony the bride would be taken to her new residence, either their own home if they can afford it, or her parent in laws. In the past horsemen and carriages were used with songs, clapping and other merry making gestures. Today several cars will follow the couples’ decorated vehicle while honking.

Honeymoon is a new concept and still most couples in rural areas and smaller cities are not familiar with this occasion. The newly wed would simply spend a night or two together and till recently a stained handkerchief was used as evidence to ascertain bride’s virginity in remoter areas and villages. Where segregation of sexes is observed males and females gather at different rooms or outdoor gardens totally separated from each other. Alcohol is not served with restrict Muslims while with the more modern Iranians whisky beer and vodka are a must amongst other beverages. Guests would be served tea, fruits, non-alcoholic drinks, nuts, raisins and other dried fruits with all kinds of pastry and baked goods. In the past it was considered good luck to take back some of these but most modern Iranians do not practice this any more.

The marriage ceremony marks the most significant ritual for all Iranians specially the women. The wedding feast is the most elaborate in the couples’ life. A few dishes are always present and the rest varies with the locality and the budget. Sheereen Polo or sweet rice is always prepared. All modern Iranians use wedding cakes this tradition is borrowed from the Europeans. The rest of the evening will be spent dancing, feasting and having a good time.

Paghosha parties will be happening for the next few weeks. There are no special foods for these parties at the present. In the 19th century a number of foods including special soup called ash was prepared by the groom’s mother and with the rich they put a few gold coins in the ash and it was sent to the bride the day after the wedding. Afterwards the dishes would be send back cleaned and filled with flowers, sweets, nuts and cardamom seeds for its’ perfume.

It is customary for the newly wed to be the first to visit their parents on No Ruz and to be visited by other relatives because it is their first New Year as a couple. The couple would normally receive special gifts such as flowers, sweets, fruits and expensive fabrics. Iranian Muslims do not marry at certain Islamic months like Muharram and Safar. The first one is a month of mourning for Imam Husayn and his Cheleh or fortieth day of death happens in Safar. No celebrations normally take place in Muharram. Till recently if the wedding happened to be on the same day or close to the festival of sacrifice the groom’s family would send a live sheep decorated with gold silver and expensive shawls for the newly wed. The sheep would be slaughtered and the presents remained with the couple.

http://www.youtube.com/watch?v=FVfaqrjQzu4
December 31, 2009
Regime brought people from Oustide of Terhan for protesting against Iranian nation – listen to their idiocy

http://homylafayette.blogspot.com/2009/12/makhmalbaf-secrets-khameneis-life.html
Makhmalbaf: Secrets of Khamenei’s life – part 1 – His interests
Mohsen Makhmalbaf
Mohsen Makhmalbaf, internationally renowned filmmaker and the Iranian opposition’s main spokesman abroad since the disputed presidential election, posted an article, entitled ‘The secrets of Khamenei’s life,’ on his web site on Monday, December 28, 2009. Makhmalbaf has been living in exile in Paris. The original article in Farsi can be read here.

The following is a translation of the first part of the article. My notes are in italics. The rest of the piece will be posted on this blog on Wednesday, December 30.

Note: The term ‘beyteh rahbari’ has been translated as the Leader’s Household in the broadest sense, which includes Ali Khamenei’s personal office and inner circle.

The Secrets of Khamenei’s Life

Mohsen Makhmalbaf

I compiled this text which is based on information relayed to me by former staff members of the Leader’s Household and the Intelligence Ministry who have escaped abroad.

Introduction
After the Shah and Khomeini, Khamenei is the individual who has most affected the public and private lives of Iranians in the past several decades. He is the person who more than any other knows about the lives of this or that individual through his intelligence apparatus. But very few people know the details about his home, family, connections, interests, or work habits. This excessive secretiveness has been a deliberate choice made by him and his system. By being shrouded in secrecy, he has derived a religious charisma among his followers and a sinister quality among the people.

This article aims to reveal the truth about Khamenei through first-hand sources. This disclosure is free of the constant expressions of hatred of these past days or the infatuation of his fanatical supporters.

His daily schedule
4:00 AM rises from sleep and engages in prayer
6:00 to 6:30 AM meeting with Hejazi (his chief of staff) (NB Asghar Hejazi)
6:30 to 7:00 AM meeting with Vahid (executive deputy of the Leader’s Household)
Vahid
7:00 to 8:00 AM meeting with Mojtaba (his second son), three times a week. (Mojtaba teaches at the Ghom seminaries about 150 days a year, but on all other days meets with his father every morning.)
8:00 to 10:30 AM reviews intelligence, political, and economic reports.
10:30 to 12:00 PM midday nap and rest
12:00 to 1:00 PM communal prayer and lunch
1:00 to 3:00 PM indispensable meetings (which vary and mostly concern the resolution of unexpected crises)
3:00 to 5:00 PM personal matters
5:00 to 8:00 PM special meetings (these encounters are described in the weekly and monthly schedules)
8:00 to 8:30 PM dinner
8:30 to 9:00 PM listens to the latest recordings
9:00 PM prepares for bed

Khamenei’s weekly schedule
(NB The Iranian workweek is Saturday to Wednesday, and the weekend is Thursday to Friday)
1. Sunday afternoons, meetings with military commanders (NB This could be a typo and may refer to Saturday afternoons)
2. Sunday afternoons, meetings with Sepah (NB Islamic Revolutionary Guards Corps) commanders
3. Monday dinners, meetings with the president
4. Tuesday morning, meetings with officials about his own financial matters (Hassan Khamenei (his brother), Mir Mohammadi, Mojtaba Khamenei, and Commerce Minister Shariatmadar (NB Possibly referring to Mohammad Shariatmadar, former commerce minister of reformist President Mohammad Khatami. Shariatmadar was a member of Khamenei’s representative office for Hajj pilgrimage affairs from 1991.)
5. Tuesday dinners, meetings with [Assembly of Experts and Expediency Council chief] Hashemi Rafsanjani.
6. Wednesday afternoons, meetings with members of the Guardian Council.
7. Wednesday nights, dinner with Jannati (NB Head of the Guardian Council Ahmad Jannati)

Monthly schedule
1. Meeting with the head of the Majlis (NB Ali Larijani)
2. Meeting with the head of the judiciary (NB Sadegh Larijani)
3. Meetings with religious advisers (individuals who come from Ghom, like Moghtadeie and Yazdi (NB Possibly referring to Ayatollah Morteza Moghtadeie, head of the conservative Teachers’ Association of Ghom Seminaries, and Ayatollah Mohammad Taghi Mesbah Yazdi, ultra-conservative head of the Imam Khomeini Research Center in Ghom and a spiritual mentor of Mahmoud Ahmadinejad))
4. Meetings with other advisers

Khamenei’s personal interests

Food
Doctors advised him to eat caviar and trout from the Lar river. In time, these two foods became personal favorites. Caviar is sent from Rasht by the city’s Friday Prayer leader (NB Ayatollah Zeinolabedine Ghorbani, also Khamenei’s representative in Gilan province). Pheasant meat is sent from Shiraz by Mr. Haeri (NB Possibly referring to Shiraz Friday Prayer leader Ayatollah Haeri Shirazi). He also consumes quail and ostrich meat (to avoid cholesterol).

A $500,000 device has been bought from the United States to check Khamenei’s food and make sure it is not poisoned. The food is tested after a certain substance is added to it. The cook must taste the food before anyone else, in the presence of bodyguards.

Sports
Hiking in the mountains and horse riding. In 1999, Khamenei fell from a horse because he rides with only one hand and broke his hand. (NB Khamenei’s right hand has been disabled since an assassination attempt in 1981. A bomb hidden inside a tape recorder blew up as he gave a Friday Prayer sermon.) On long trips within Iran, for example to Mashhad, Khamenei and Mojtaba’s personal horses are taken to the destination inside an A330 airplane. Three specially-equipped trucks are used for transporting horses on shorter hauls.

Horses
There are about 100 horses, whose estimated total value is $40 million. The most expensive horse is worth $7 million and is called Zuljanah (NB The white stallion of Imam Hossein. Imam Hossein’s martyrdom in 680 AD is commemorated on Ashura.) Mojtaba’s horse is called Sahand. The horses are kept in two stables, one in the Malek Abad estate in Mashhad which measures 10,000 square meters and houses 70 horses, and another in Lavasanat (NB North of Tehran), measuring 3,000 square meters and housing 30 horses.

View Malek Abad – Mashhad in a larger map

Rashed Yazdi
Gadeh (NB A corresponding English word does not exist. Gadehs are rowdy gatherings of clerics where everything but religion is discussed.)
Karim Shireyi, left, circa 1890
He sometimes engages in gadeh with Rashed Yazdi (A mullah who tells vulgar jokes) (NB Possibly Hojjatoleslam Rashed Yazdi, affiliated with the Imam Reza Shrine in Mashhad). Khamenei gets a good laugh out of these gatherings. (something that Karim Shireyi did for Nassereddine Shah (NB Karim Shireyi was the favorite court jester of Nassereddine Shah, a 19th-century king of the Ghajar dynasty. He was allowed to say anything about anyone, including the shah, in a particularly closed climate.)). Also by listening to the vulgar jokes which are a form of mental release, he takes the pulse of the country. Mohammadi Golpayegani and Vahid Haghanian also take part in these gadehs. (NB Mohammad Mohammadi Golpayegani, head of the Leader’s office). Sometimes [Guardian Council chief] Jannati is also invited and on those occasions he is usually mocked by Rashed. Mojtaba hates Khamenei’s gadehs because he has no influence there and, in his absence, Rashed Yazdi can give economic and political advice and gain favors for this or that person.

Reading
Beyond reports and the press, Khamenei has very little time to read books. From the time he was president (NB 1981 – 1989), he has told people on numerous occasions that the disadvantage of the presidency is that it takes away the possibility to read. However, he does study some books on presidents and world leaders. More than anything, he is interested in the Ghajar period, especially during Nassereddine Shah’s reign. He has read all books written about himself as well as those on the Shah (NB Mohammad Reza Pahlavi who was deposed in the Islamic Revolution) and his family.

Pipe collection
Mashhad 1978, courtesy Abbas
Khamenei was initially a cigarette smoker. He quit cigarettes at the beginning of his presidency because it did not conform to the office’s prestige. He did not want any photos of him with a cigarette to be published. During that time when he was still close to Prime Minister Mousavi (NB the current opposition leader, Mir Hossein Mousavi), they both decided to quit smoking cigarettes at the same time and have not touched cigarettes since. But he still smokes a pipe. A photo of him with a pipe in his mouth was once published. A special pipe tobacco is prepared for him. He has about 200 pipes in his collection. All rumors about him smoking opium are lies. But he has ordered that poets close to him, such as Ali Moallem (NB Mohammad Ali Moallem Damghani, who was recently designated as Mir Hossein Mousavi’s successor at the head of the Academy of Arts), Shahriar, and Sabzevari, to be allowed to indulge in their opium habits. He even ordered that opium be delivered to Shahriar’s home as a gift from the Agha (NB Term which means sir and refers to Ali Khamenei). His pipes are estimated to be worth $2 million. Most of the pipes were given to him as presents. The most expensive pipe is worth $300,000 and is 300 years old. The stem of this pipe is gold-plated and encrusted with jewels. Some of the pipes were given to him as gifts by presidents and world leaders. The pipe-holders bear the names of the people who offered them.

Ring collection
There are about 300 rings in Khamenei’s collection. Three were given to him by the Imam Reza Shrine authorities. The most expensive ring is worth $500,000 and boasts the oldest agate in the world. The collection is kept in the Leader’s Household.

Cane collection
A few years ago, there were 170 antique canes in Khamenei’s collection which was estimated at $1.2 million. The most expensive cane is worth $200,000. It is 170 years old and jewel-encrusted. On special occasions, he will give a cane, ring, or clerical cloak to someone as a present. Before the last presidential election in which Mir Hossein Mousavi was a candidate, he visited Mousavi’s father and gave him a cane. Some people thought this was a sign that he agreed with [Mousavi’s] candidacy. After [Islamic Republic founder Ruhollah] Khomeini’s death, and at the beginning of his leadership, he sent a clerical cloak to Mr. Taheri, then Friday Prayer leader of Isfahan, because Taheri had been quoted as saying that when Khomeini had seen Khamenei on television during Khamenei’s visit to India, he had said that Khamenei would make a good Leader. This same quote convinced the [Assembly of] Experts to vote for Khamenei. The footage of the Experts and the recital of this quote are available on YouTube.

He ususally gives gold coins as gifts to artists and poets who support him. He sometimes sends a check from the Leader’s office. On occasion, some literary figures who flatter the regime are invited to the Household and are given prizes after reading their poems. (This tradition was common in the Ghajar courts, particularly that of Nassereddine Shah.)

Clerical cloak collection
There are about 120 cloaks worth about $400,000 in Khamenei’s collection. The most expensive is worth $30,000. His favorite is a white cloak that he wears from time to time. The cloaks are made of camel hair.

Other interests
Rumors that he played the tar or sitar in his youth are false. But he was interested in music as a young man and listened to classical Iranian music. He used to like Shajarian’s voice, but he dislikes him now because of Shajarian’s political positions (NB Master Mohammad Reza Shajarian is one of the most acclaimed traditional Iranian singers. He has clearly sided with the opposition and openly demanded that the state media stop playing his songs). After becoming leader, and in particular in recent years, he has become increasingly opposed to music. He has spoken against music numerous times on television. This year, he ordered state radio-television to decrease its musical content in order to please his more religious followers.

In his youth, and perhaps simply because of his young age, he bought a red Volkswagen. He probably could not believe that years later during his own rule, some people would be held accountable simply because of the color of their automobiles.

In the report on Khamenei’s past that Reyshahri prepared for Khomeini, references are made to two women who were temporarily wed to Khamenei (NB The term sigheh or temporary marriage refers to a form of prostitution allowed by Islam). These two women live in Mashhad.

Poetry
Khamenei’s interest in poetry began at a young age and has been maintained till today. He spent long hours at the poetry association of Mashhad. He has written some poems. He is delighted when poets write poetry about him and expresses his satisfaction through gifts to the poets. Sabzevari and Ali Moallem, who are among the fawning Muslim poets, are constantly corresponding with him. It is through them that he is informed of the problems of artists affiliated with the regime. At the start of his Leadership, he received the poet Mir Shakak, who was a manic depressive, several times. Khamenei became very proud of himself when Mir Shakak upon saying goodbye would say, ‘Seyed zat ziad’ (Meaning ‘the honor is great’, which is a colloquial prayer). Khamenei invites poets to his Household several times a year so that they may recite poems in his presence.

At the beginning of his presidency, he asked Akhavan Saless, whom he knew very well, to write a flattering poem for the revolution. Akhavan Saless (NB Mehdi Akhavan Saless, also known as M. Omid) responded, ‘We artists are above the government, not with it.’ Khamenei was so incensed by this answer that he ordered that he stop being paid. (NB Akhavan Saless worked at the Academy of Artists and Writers). Akhavan Saless became unemployed after that. Gheysar Aminpour has referred to this event in his article on Akhavan.

Khamenei intensely disliked Shamlou (NB Ahmad Shamlou, one of the most prominent Iranian poets of the last century) and referred to him with hatred. But he never dared arrest and punish him, because he feared tainting his own name in history. He has read much about kings who mistreated poets. In his speeches, he has often cited Lenin’s phrase that if an ideology is not supported by art it will die. He loves poetry so much that if he had not become active in religion and politics, he would probably have turned to poetry and literature. However, because of his busy schedule, he sometimes makes glaring mistakes [in this regard]. Despite claiming to be knowledgeable about verse, when a young poet recited a poem in his presence, he asked him, ‘Is this poem by you?’ To which the poet responded, ‘No, it is by Sohrab Sepehri.’ (Any schoolchild knows Sepehri’s work).

http://homylafayette.blogspot.com/2009/12/makhmalbaf-secrets-of-khameneis-life.html
Makhmalbaf: Secrets of Khamenei’s life – part 2 – His entourage and Household operations
This is part 2 of a series. For part 1, please click here.

Mohsen Makhmalbaf
Mohsen Makhmalbaf, internationally renowned filmmaker and the Iranian opposition’s main spokesman abroad since the disputed presidential election, posted an article, entitled ‘The secrets of Khamenei’s life,’ on his web site on Monday, December 28, 2009. Makhmalbaf has been living in exile in Paris. The original article in Farsi can be read here.

The following is a translation of the second part of the article. My notes are in italics.

Note: The term ‘beyteh rahbari’ has been translated as the Leader’s Household in the broadest sense, which includes Ali Khamenei’s personal office and inner circle.

The Secrets of Khamenei’s Life – Part 2

Mohsen Makhmalbaf

I compiled this text which is based on information relayed to me by former staff members of the Leader’s Household and the Intelligence Ministry who have escaped abroad.

Khamenei’s relationship with his wife and children
L to R, Mojtaba, Meysam, Khamenei, Massoud, Mostafa
Khamenei’s wife is called Khojasteh. She is very much under Khamenei’s thumb, but she is also dominated by her brothers. The oil company’s hospital was once closed off so Khojasteh could have liposuction performed on her stomach. She was twice operated in London for an inflammation of the large intestine. Mojtaba, Khamenei’s second son, has great influence on his father, but he can count on his mother’s support if there are any shortcomings in that regard.

L to R, Massoud, Mojtaba, unknown, Mostafa, Meysam
Khojasta is about 67 years old. One of her brothers was linked to the Mojahedin Khalgh (NB Also known as the MKO, an armed resistance group which is broadly disliked by Iranians because of its collaboration with the Saddam government during the Iran-Iraq War) and has escaped to Sweden. Apart from the exiled brother, she has three other brothers who are involved in very large business operations. Khojasteh’s brother Hassan has the run of the Islamic Republic’s television broadcaster. He has a monopoly on commissions from the sale of Sony cameras and monitors. Iranian television’s total purchases of Sony equipmenet, from cameras to editing systems, do not represent a large figure: about $50 to $60 million per year. But the people buy about $500 to $600 million of Sony equipment a year, of which 7% goes to Hassan, Khojasteh’s brother. An Iranian in Dubai initially had the exclusive license to sell Sony equipment in Iran, but he was threatened and he gave up his license out of fear. Despite a prosperous lifestyle, Khojasteh is constantly worried that their life may appear too simple to outside observers. She has three ladies-in-waiting. She never goes to beauty salons outside of the house and has hairdressers brought to their home. She likes massages and a Korean woman is her masseuse.

Batool, [Islamic Republic founder Ruhollah] Khomeini’s wife, really disliked [Khojasteh] and believed that she was arrogant like her husband and that [Khojasteh] considered herself to be Leader of Iranian women ever since Khamenei had become Leader.

Khojasteh used to cook, but it has been seven or eight years since she has been able to carry out that task. An old man called Seyed is in charge of cooking now.

Khojasteh is in charge of choosing husbands and wives in Khamenei’s home. She first selects families close to the Leader’s Household or top clerics and gets to know them by socializing. Her investigations are completed by the Intelligence Ministry, special division. Then the Khamenei daughters and sons make their choice among the candidates selected by their mother and approved by the Leader. These marriages sometimes encounter serious problems. The fact that Mojtaba’s wife (Haddad Adel’s daughter (NB Gholam Ali Haddad Adel, a regime apologist in academic circles and a former Speaker of the Majlis)) had difficulty getting pregnant almost led to divorce. In Massoud’s case (married to Ayatollah Kharrazi’s daughter), political differences have split the couple and Soussan Kharrazi has returned to her father’s home in order to obtain a divorce.

Appearances within the family are strictly maintained in the presence of outsiders. For example, the children refer to their father as Agha (NB Sir, mister, or gentleman), Leader, or His Excellency the Ayatollah. Khamenei also employs honorifics when calling his children. He usually says, Agha Mostafa, Agha Mojtaba, Agha Massoud, or Agha Meysam. His daughters’ names rarely come up in such encounters, except in family reunions. On such occasions, he refers to them as Boshra Khanoum or Boshra Sadat, Hoda Khanoum or Hoda Sadat.

If the topic of conversation turns to Mr. Khamanei’s election [as Leader] by the [Assembly of] Experts, the children, especially Mojtaba say, ‘The Experts did not elect Mr. Khamanei, but rather discovered him. He is the surrogate of the Imam Zaman (NB The Messiah figure in Shiism, the Hidden Imam who will return at an undisclosed time) and God endowed the Muslim scholars and Experts with the ability to discover him.’

This form of respect is maintained by the executives and employees of the Leader’s Household. Whenever an individual comes out of an audience with Mr. Khamenei, these executives and employees tell the person, ‘May your pilgrimage be accepted [by God]’ (NB Ziarat ghaboul, in Farsi. Pilgrimage is used in the sense of visiting a sacred place). No one in Mr. Khamenei’s office is allowed to say he is going to meet Mr. Khamenei or has a meeting with him. Rather, he must say, ‘I am going to be honored’ or ‘I am going on a pilgrimage.’ More than anyone, Hejazi (his chief of staff (NB Asghar Hejazi)) insists on this form of respect.

Communal prayer at the Leader’s Household
(NB Communal prayer or namazeh jamaat takes place when an imam stands in front of a group of worshippers and leads them in any one of the five daily prayers.)
Communal prayers are performed at the Household three to four times a week. About 15 people have the honor of being led in these prayers. Ten of them, executives in the Leader’s Household, are regulars and five to four people are guests. The guest slots have a price. The bazaar merchants who have problems to resolve participate in the Agha’s (NB Khamenei’s) prayers and seek his advice, and their business picks up. They are willing to pay the ‘lease’ on the guest slots, about 500 million toumans (NB About $500,000), to Hejazi or Mohammadi Golpayegani (NB Mohammad Mohammadi Golpayegani). These prayer followers make back their payment of 500 million toumans severalfold through the Agha’s advice. Therefore customers of the Agha’s communal prayer are usually bazaar merchants. Those within the security apparatus who seek promotion are also frequent worshippers at the communal prayer.

Khamanei’s relation with his devotees
When Mr. Khamanei visits Mashhad and takes a sugar cube out of a sugar bowl, that bowl becomes sacred for his devotees. When he walks past a place on his way to a pilgrimage, his followers kiss the ground he has walked on. Videos of devotees kissing Khamanei’s footprints are available on YouTube. It is unclear how shocked these dovotees would be if they found out about Khamenei’s gadehs (NB Explained in part 1 of this article) and how Mullah Rashed’s vulgar jokes have him in stitches. Would they consider the leftover sugar cubes from his tea to be as sacred?

Khamenei’s catchphrase for the past twenty years has been, ‘Do this, but don’t let the people find out’ or ‘Do that, but make sure no one finds out.’ And those who hear this phrase know that all the power of the Leader’s Household depends on keeping the people ignorant of the secrets of Mr. Khamenei’s life and the behind-the-curtains activities of the Leader’s office.

Until the Friday Prayer that took place a week after the election (NB June 19, when Khamenei led Tehran’s Friday Prayer and cast his lot with Ahmadinejad in a fiery speech against the opposition), Khamenei never took responsibility for anything and people believed that he played the role of an arbiter who maintained a balance of power between the various factions. But that Friday Prayer suddenly revealed everything and showed Khamenei’s biased role in politics and his guilt in the oppression.

Those in charge of Khamenei’s protection
[Islamic Republic founder Ruhollah] Khomeini’s protection team consisted of 200 people, but 10,000 individuals guard Khamenei (reminiscent of the Shah’s Javidan Guard (NB The Immortals) whose numbers never diminished). The two key players are Din Shoari and Hossein Jabari, who stand guard outside his door at night and are the only individuals allowed to be armed around Khamenei. They have been Khamenei’s main bodyguards for thirty years. But the individuals in charge of Khamenei’s protection team over the years have been the following:
1. Khosro Vafa (head of the Janbazan unit)
2. Asgharzadeh (Majlis representative)
3. Motevalian (Sepah (NB Islamic Revolutionary Guards Corps))
4. Ramezani (Sepah intelligence)
5. Nejat (Security Council (NB Supreme National Security Council))
6. Cheyzari (He is the current head of the protection team)

The close guards, who consist of 200 individuals and who witness the trips and the life in the palaces, each possess a home which is worth at least one billion toumans (NB about $1 million). Those who consider Khamenei to be pious and who lead austere lives themselves are not permitted to enter the first ring of guards, lest they become conflicted. These selfless guards are not allowed to marry the daughters of senior bodyguards, even if they fall in love. Marriages are organized within the senior political families or clergy. But those who kiss the ground Khamenei has walked on, steal sugar cubes from sugar bowls rendered sacred by Khamenei, and are prepared to sacrifice themselves for him have never been considered worthy enough to marry the daughter of a senior figure.

500 individuals guard the family members. (The extended family of 40 is guarded: The daughters-in-law, sons-in-law, daughters, sons, brothers, brothers-in-law, and even some of the children of the brothers and brothers-in-law.)

Entering the bodyguard team requires passing three security clearances and takes a very long time. The monthly salary of bodyguards is at least $1,000 and at most $12,000. When someone enters the bodyguard team, he is helped to purchase a residence. The individuals also have access to an official residence in the place where they are stationed.

About 1,000 of the 10,000 bodyguards are women and usually no one knows that they are bodyguards.

Khamenei’s medical care
Alireza Marandi
Former health minister Dr. Marandi is Khamenei’s medical coordinator (NB Professor Alireza Marandi. Alireza Marandi’s son is Seyed Mohammad Marandi, professor of North American Studies at Tehran University, a vocal supporter of the regime and one of the few people in Tehran who has no problem obtaining a satellite feed to be interviewed by foreign news outlets. In July, CNN’s Fareed Zakaria asked Seyed Mohammad Marandi if he had any problem appearing like ‘a mouthpiece for a dying repressive regime:’)

Marandi chooses the team of doctors and brings them to him when necessary. The Leader’s Household has an underground hospital with four doctors on duty 24 hours a day. A mobile hospital follows Khamenei during his land trips. A bus-hospital with an operating room also follows Khamanei on his land journeys. An airplane hospital with two operating rooms is available for long-haul trips. Khamenei has been operated three times in the past thirty years: on his hand after the explosion in the early days of the revolution (NB A failed assassination attempt in 1981 paralyzed his right hand), on his small intestine, and on his prostate.

Whenever Khamenei is ill, differences boil to the surface at the Leader’s Household. People who have committed crimes and fear that the people will take revenge on them when Khamenei dies become worried about their future. But as soon as Khamenei’s health improves, everything is quickly forgotten.

A lady who is the sister of Deputy Defense Minister Ahmad Vahid Dastjerdi and is a gynecologist is the personal physician of Khamenei’s wife, daughters, and daughters-in-law. (NB This sentence appears to indicate that Makhmalbaf prepared at least this section of the report in the summer. The ‘lady’ in question is Marzieh Vahid Dastjerdi who was confirmed by the Majlis as the new Health Minister on September 3, 2009.)

Depression
Khamenei has suffered from depression for years. Some doctors believe it is caused by his habit of listening to recordings before bed. Given that only recordings of people speaking against Khamanei are considered noteworthy, Khamenei is constantly listening to recordings of remarks against himself. In order to preserve his system, Khamenei usually listens to 20 minutes of recorded conversations against himself, between opponents or even officials, every night before sleeping. This contributes to his depression. Every night before sleeping, he reaches the conclusion that no one loves him and the next morning he opens his eyes onto people who plead their loyalty in order to attain power and wealth or in order to avoid his rage.

[His wife] Khojasteh, who has sometimes listened to these recordings, has little patience for the daily groveling of many people. More than anyone, she says that the Iranian people are fawning liars and traitors.

Khamenei sometimes gets a massage from an Iranian physiotherapist. The massages initially focused on the hand that was disabled in the explosion, but later and on the recommendation of physicians, it became a part of the weekly schedule.

The system of recordings
Once Khamenei became Leader, Ahmad Ghadirian was responsible for the recordings for a period of two years. But Taeb has been in charge of this task for 15 years now (NB Possibly referring to Hojjatoleslam Hossein Taeb, former head of the Basij and currently in charge of the intelligence unit of the Revolutionary Guards). The recordings are divided into three parts: recordings of senior officials, recordings of security officials, and recordings of the people. Even the bedrooms of security officials are tapped in order to keep an eye on any possible treachery. The conversations of ordinary people are recorded to understand the climate in the country and allow Khamenei to confront it. This third type of recording is a form of poll.

Two main centers are tasked with the recordings, one in Tochal and the other at the telecommunications center. A team which is based behind Khamenei’s residence on Pasteur Street compiles the recordings related to Khamenei into a 20-minute segment and prepares a two-page report. Five minutes of the recordings concern the society’s morality. All of Khamenei’s meetings are openly recorded and he even tells the attendees that they are being recorded. For example, he records all of his meetings with [Assembly of Experts and Expediency Council chief] Hashemi Rafsanjani, [former President Mohammad] Khatami, [Mahmoud] Ahmadinejad, and other officials. The main people in chargeof the recordings are Taeb and Engineer Hamid, Vahid Haghanian’s brother.

Reyshahri
In this way, Khamenei possesses secret files on all officials and knows their strengths and weaknesses. But very few people know about Khamenei, except Reyshahri (who in Khomeini’s time was responsible for investigating all officials, including Khamenei), and in recent years Hejazi (NB Asghar Hejazi, chief of staff) and Mohammadi Golpayegani, who know all the secrets. (NB Ayatollah Mohammadi Reyshahri, aka Mohammad Mohammadi Nik, former Intelligence Minister).

Reyshahri wanted to become the trustee of the town of Rey (NB His birthplace and the reason he has the alias Reyshahri, which means from the town of Rey), and even though he opposed this, Khamenei gave him the town as a bribe. In Khomeini’s time, Reyshahri would investigate the sexual, financial, and political background of all officials, including Khamenei.

In the political field: When [current opposition leader Mir Hossein] Mousavi was the prime minister (NB 1981 to 1989) and Khomeini supported his economic policies, Khamenei was president but did not legally have the same power as Mousavi within the goverment. Khamenei would criticize Khomeini’s support for Mousavi in private.

In the financial field: Khamenei’s interference in commisions from oil sales was under question.

In the sexual field: Khamenei’s two temporary wives in Mashhad had been discovered (NB Sigheh. Explained in greater detail in part 1).

Of course, none of these issues dispelled Khomeini’s trust in Khamenei. But if the story of his two sigheh women in Mashhad, which took place when he was young, had been divulged, his reputation may have suffered. There have been no reported cases of his womanizing after the revolution.

Khamenei’s travels
Khamenei travels about 100 days out of the year. He resides in the palace he has built in Mashhad (NB His birthplace) for one month in the summer, one week for the Nowrouz holiday (NB Iranian new year’s day, first day of spring), and one week in the winter. Also around Nowrouz, he spends a week in the Dezfoul air force base in Khuzestan province, which enjoys a good climate in that time of the year. He also spends a month along the Caspian Sea, usually in Ziba Kenar, Sari, Ramsar, or Bisheh Kenar. He spends every Thursday and Friday (NB The Iranian weekend) in Niavaran Palace, Jamshidiyeh Palace, or Lavasanat Palace. When Khamenei is traveling, a plane carries officials back and forth once a day. Three protective rings are set up around his place of residence. All of his close guard and the second circle of bodyguards, 1,200 individuals in all, must travel with him. Consequently, every day of his travels costs a minimum of 50 million toumans (NB About $50,000).

When he is in Mashhad, an A330 airplane usually transports his and Mojtaba’s favorite horses and various articles of furniture.

Khamenei sometimes wants to travel like ordinary people. To this end, a special bullet-proof bus was built at a cost of 500 million toumans ($500,000). The bus is equipped with two bedrooms, a lavatory, and a bathroom. It also has a small kitchen, in which Seyed, the Agha’s trusted cook, prepares meals. The Agha’s escort secretly precedes and follows the bus.

http://www.iranianuk.com/article.php?id=45205
Rental Women used in spying and by Information Ministry

Walter R. Mebane, Jr.
University of Michigan
June 29, 2009

http://www-personal.umich.edu/~wmebane/note18jun2009.pdf

Evidently, Mr. Mebane’s updated statistical study illustrates that according to the examined body of models, the surge in Ahmadinejad’s numbers cannot be clearly explained. Apparently, this very fact escaped the regime cohorts who flood their propaganda media machine to spew nonsense.

http://www.tebyan.net/index.aspx?pid=94056
Daily poll and fluctuation of numbers

The Project for the New American Century (PNAC) is a Washington-based neo-conservative think-tank founded in 1997 to “rally support for American global leadership.” PNAC’s agenda runs far deeper than regime change in Iraq. Its statement of principles begins with the assertion that “American foreign and defense policy is adrift” and calls for “a Reaganite policy of military strength and moral clarity.”

While their tone is high-minded, their proposal is unilateral military intervention to protect against threats to America’s status as the lone global superpower.

The validity of the unreleased Iranian surveys cannot be assessed in detail, but a closer look at the one sponsored by Terror Free Tomorrow and the New America Foundation reveals ample reason to be skeptical of the conclusions drawn from it.

http://ayandenews.com/fa/pages/?cid=9368
More evidence for fraud has been presented in this new report that identifies 38 districts in which Ahmadi supposedly won 100% of the votes. If you are arithmetically challenged, that would mean not a single vote went for another candidate.

* the validity of the phone interview in Iran

Using a telephone poll in a country that jails dissenters: If you lived in Iran, to what extent would you trust an anonymous person who called you on the phone to ask who you plan for vote for, for president?

But the poll was conducted from May 11 to 20, well before the spike in support for Mousavi his supporters claim.

That leaves 52 percent unaccounted for. In all, 27 percent expressed no opinion in the election, and another 15 percent refused to answer the question at all.

http://www.terrorfreetomorrow.org/upimagestft/TFT%20Iran%20Survey%20Report%200609.pdf

* funding

Funding for the survey was provided by the Rockefeller Brothers Fund and umberalla funding for almost every major neo-conservative think tank institution.

A close examination of our survey results reveals that the race may actually be
closer than a first look at the numbers would indicate. More than 60 percent of
those who state they don’t know who they will vote for in the Presidential
elections reflect individuals who favor political reform and change in the current
system.

.6 * .5 = 30% for Mosavi + 14% = 44%
.4 * .5 = 20% for Ahmadinejad + 34% = 54%

.6 * .3 = 18% + 14% = 32%
.4 * .3 = 12% + 34% = 46%

* Skepticism expressed by even the survey itself

The current mood indicates that none of the candidates will likely pass the 50
percent threshold needed to automatically win; meaning that a second round
runoff between the two highest finishers, as things stand, Mr. Ahmadinejad and
Mr. Moussavi, is likely.

* Azeri vote goes to Ahmadinejad 2 to 1

The results of our survey indicate that only 16 percent of Azeri Iranians indicate
they will vote for Mr. Moussavi. By contrast, 31 percent of the Azeris claim they
will vote for Mr. Ahmadinejad.

* Ahmadinejad is not not a culprit for economy decline!!!

Yet, in potentially good news for President Ahmadinejad, Iranians do not
seem to hold him responsible for the weakening economy. While a plurality sees
the Iranian economy as declining, Iranian are evenly split on whether President
Ahmadinejad’s policies have succeeded in reducing unemployment and inflation.

* What the voters demand

The number one priority Iranians have for their government is improving the
Iranian economy, very closely followed by ensuring free elections, a free press
and better trade and relations with the West. By contrast, developing nuclear
weapons was not seen as an important long-term priority by most.

* Almost 80% yearn for more freedom, democracy and better relation with the US

In another indication of the Iranian public’s strong support for a more open and
fully democratic system of government, 77 percent said that they support a
political system for governing Iran where the Supreme Leader, along with all
leaders, can be chosen and replaced by a free and direct vote of the people.

In another consistent trend over the past two years, 77 percent of Iranians back
normal relations and trade with the United States. 68 percent also favor Iran
working with the United States to help resolve the Iraq war, while 60 percent
back unconditional negotiations with the U.S.

Significantly, among the possible ways that the US can improve Iranians’ opinion
of America, the most important for Iranians is a free trade treaty between Iran
and the United States, chosen by 69 percent.

Overall, however, the poll revealed that Iranians gave Ahmadinejad tepid reviews on the performance of the economy, and favored a much less bellicose foreign policy than he has pursued. One would think that under those circumstances, the incumbent would be in a fight for his political future.

p. 3

“By contrast, our poll—the third in a series over the past two years—was conducted by telephone inside Iran over May 11th to 20th, 2009, with 1,001 interviews”

p. 25

Interviews were conducted by phone from a CATI facility in the region but outside Iran, in Farsi. They were conducted among a random national sample of 1,001 Iranians aged 18 and older from May 11th to 20th, 2009. The exact location of the CATI facility is not identified in order to maintain confidentiality for the
interviewing team. The questionnaire consisted of 31 substantive questions, 17 demographic questions, and 24 quality control questions.

* ambiguity of the fieldword

Of the 1,731 successful contacts, there were 730 refusals giving the
study a 57.8% response rate. The last poll conducted by KA/TFT had 54.5%
response rate. This poll has a +/- 3.1% margin of error at the 95% confidence
interval.

Urban interviewers comprised 70% of the responses while only 30% of callers reside in rural regions

Let”s say I”m an average Iranian sitting down for breakfast with a bowl of the Persian equivalent of Cheerios and the phone rings “Honey, there is someone on the phone from some group calling themselves the Terror Free Tomorrow and New America Foundation and they want to ask you a few questions”. I”m either going to have milk shooting through my nose from laughing too hard or I am going to get beat red angry. I”d get angry because I was sick of Americans/Westerners branding my people as terrorists. It may have well been said “Honey there is an American on the phone and he wants to know if you”ll be terror free tomorrow.”

You guys also forgot to notice that in Iran everything has happened in the last month ending in the election. Before that, nobody knew the final candidates.

this poll was not screened for likelihood of voting, as most American-based polls are.

* How mousavi’s campaign progressed

Throughout the presidential campaign, Moussavi labored hard to portray his proposals on social policy and foreign affairs as an extension of the Islamic system in order to disarm conservative critics, even denying that he is a mainstream reformist candidate in the hope of winning the support of reformers and moderate conservatives.

Indeed, as the presidential campaign progressed, Moussavi won the backing not only of an important conservative segment of the electorate but also the formidable youth constituency. His charismatic wife, Zahra Rahnavard, electrified the female vote and won the hearts and minds of women voters who flooded their campaign rallies.

In the past two weeks, Moussavi’s campaign gained momentum. There was increasing evidence that the tide was turning and that women and young voters would tip the balance of power his way, if they turned out to vote in large numbers.

For the Iranian government to experienced unexpected voting and yet announce results ahead of their normal schedule, places the burden on them to prove the legitimacy of their vote tally.

http://www.rayemelat.com/Show_Archive.aspx?date=1388/03/13
Mousavi 44% to 50%
Ahmadinejad 39% to 32%

Mousavi’s support steadily went up from 1388/02/30 to 1388/03/13 (in a span of two weeks)

Internet result for Mousavi pretty much trumps Ahmadinejad’s — 1215 as opposed to 299 by 1388/03/17

http://security.nationaljournal.com/contributors/Leverett.php
“Nationa Journal ‘Expert’ Blogs”

in the last three elections, sixty-five per cent of voters have come from traditional, rural villages, which house just thirty-five per cent of the populace. If the current figures are to be believed, urban Iranians who voted for the reformist ex-president Mohammad Khatami in 1997 and 2001 have defected to Ahmadinejad in droves.

You gotta admit, the Islamic Republic sure knows how to formulate a strategy to get people to vote. Inflict on people the worst possible person – i.e. AN – as the country’s president so that even the most fervent anti-IR/anti-vote Iranians will persuade themselves to vote just to get rid of this nightmare, thereby giving the IRI the excuse to claim popular mandate for its tyrannical and repressive rule.

I refrain from calling Hillary an ex-State Department thug as there have been some sense of pragmatism and realism to her approach and ideology when it comes to dealing with Iran which dismisses the oft-amplified misconception that Iran is a suicidal nation.

The style of prose in this article is terse and circles around the purielish name calling of certain sources that have labeled the recent Iran’s election as fraud and resorting to use of pejoratives such as “Iran experts” to undermine the legimicy of the argument against the one-time unsubsantiated foreign poll taken literally at the beginning of the campaign election.

http://www.youtube.com/watch?v=YvR1rHiqEwI
http://www.youtube.com/watch?v=rFJ0sUWRp7A
Ahmadinejad: Condensention of populis and government’s advances throughout history has been prominent. Self-deprecation of people and insult to me personally have been unforgivable especially when it comes to people’s right. I have tell people the deception that is going on in the country. Mousavi has been backing and supporting Rafsanjani et al and vis versa and mutual attack on me in the last 4 years. They have been striving to depict the government as weak and unsustanable. People have been improving through technological and scientific advances which are being ignored and insulted. I inherited the problems you and your friend have been mentioning. Do you think I turned this heaven to hell? It’s 3 against 1 (me). [complain and moaning]

http://www.youtube.com/watch?v=rFJ0sUWRp7A
http://www.youtube.com/watch?v=z5OmDJjNLgo
Mousavi: I am proud of Iran. [too cultural and elitist]. [Direct to the point]. “case by case”? The British sailors must have been prosecuted. Pride of our country was undermined. Gave them suit and let them go like a foreign dignatiry. Ahmadinejad went to Iraq, took pictures with American soldiers. Saudi Arabia travels were futile and didn’t resulted in anything [very terse style of prose]. [no direct mention of AN but rather a reference to “us” and “we”]. In foreign policies we have been disgraced. The Holocaust issue: insult to our country [too much accent, unintelligible at some points and sometimes mumbling].

http://www.youtube.com/watch?v=z5OmDJjNLgo
http://www.youtube.com/watch?v=rg20UtLyvi4
Ahmadinejad: Blair sent us a letter and apologized to us. They looked at us as hostage takers, some period that Mousavi was in the government, and what we did was separating “people” of UK from the British government. Saudi Arabia and OPEC [idiotic attack basically]. In the case of Palestinians, Mousavi has said it himself that we have to send troops to Palestinie to liberate them and wipe off Israel. If we wanted to stay on the same course of Mr. Hashemi and Khatami, we wouldn’t have had the revolution — Imam wouldn’t approve. In the case of nuclear technology, on their terms two protocols were installed on us. and the purpose was to do spy work and inform the foreign regime and because of their agreement, the process was shut down. The protocols are unfair and counter productive for our country. UN resolutions are political but IEAE agency is not and they even have said that we are good. After all the help we provided to Bush in Afghanestan, they backstabbed us. Under your reformist and centerist governments, the US and the West walked all over us and constantly strived to take the revolution out. And on the issue of Holocaust, I only proposed two questions and all of sudden you are implying that the Iran’s dignity is undermined [in the eyes of the West]? We are supposed to wait for the enemy to come to our door and deal with it. Because of our couragous and leadership, see what’ll happen if you go outside of the country and how well they’ll be treated with good will wishes. If Mousavi’s idea is to satisfy a number of foreign forces. Many countries have supported us. In the time of Hashemi, the inflation went up to 40% and sanctions imposed on Iran by Clinton, you didn’t get upset and worried? [Bunch of other incidents to undermine his tenure in the government]? Now you are talking about the Holocaust? The world is behind Iran. Somebody said that Imam’s time and era is done and you supported that article. The insults that hurled at Iran must be responded.

http://www.youtube.com/watch?v=rg20UtLyvi4
Mousavi:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqFkjAOCEdw4
Ahmadinejad Has Harmed Iran’s Dignity, Mousavi Says

June 4 (Bloomberg) — Iran’s President Mahmoud Ahmadinejad has hurt the nation by creating tensions with other countries, his main challenger in the June 12 presidential election said in a televised debate.

“In your foreign policy, you have damaged the nation’s dignity,” former Prime Minister Mir Hossein Mousavi said during yesterday’s evening debate in Tehran broadcast live by state television. “Shame has been brought on Iran. You have created tension with other countries. Heavy costs have been brought on the nation in these four years.”

Ahmadinejad’s management style has been “based on adventurism, instability, unlawfulness and radicalism,” Mousavi said, adding that he entered the race because he is “worried about the country’s future.” The president defended his record, saying past U.S. administrations had wanted to “topple” Iran.

“Now the U.S. has officially announced that it doesn’t seek to do so,” said Ahmadinejad, 52. “Which foreign policy has reinforced the country’s independence? Should we seek to satisfy world powers? Is it possible to be soft in the face of oppression?”

The debate, the second of six between the candidates, comes as Mousavi, 67, emerges as the main rival to Ahmadinejad. Mousavi has the backing of many young people, the more educated middle classes and the cultural elite, while Ahmadinejad attracts the vote of the more traditional parts of Iranian society and rural areas.

Dictatorship

Mousavi, who was prime minister from 1981 to 1989, accused Ahmadinejad of driving the country toward a “dictatorship.” The president criticized his opponent for siding with former president Mohammad Khatami and ex-president Ali-Akbar Hashemi Rafsanjani to attack him.

“From the day this government was formed everyone has been attacking and the most serious condemnations have been made,” Ahmadinejad said. “I’m not standing against one candidate. I’m standing against an alliance led by Rafsanjani and with the cooperation of Mousavi and Khatami.”

The clash on foreign policy and domestic issues degenerated into personal criticism. The president made accusations about Rafsanjani’s family as well as about Mousavi’s wife, Zahra Rahnavard.

Rafsanjani, chairman of Iran’s Assembly of Experts, in a letter addressed to state television’s head, asked for airtime to be provided so he can reply to Ahmadinejad’s “lies.”

Call for Disqualification

Nemat Ahmadi, a prominent Iranian lawyer and civil rights activist, said Ahmadinejad’s accusations against former presidents in the debate were “criminal.” He added that the president is in charge of protecting the constitution, but now that he breached it, the Guardian Council should disqualify him, the Iranian Labor News Agency said. Candidates can’t run without the council’s approval.

The debate “reinforced supporters’ determination in backing their preferred candidate,” said Karim Arghandehpour, 40, editor-in-chief of the Yase-No daily newspaper, in a phone interview after the debate.

“I don’t believe either of the candidates managed to peel votes away from the other,” said Arghandehpour, a member of the Association of Iranian Journalists’ board of directors, referring to the “wide gap” between Mousavi and Ahmadinejad’s supporters.

The first debate between two other hopefuls — Mehdi Karrubi, ex-parliamentary speaker, and Mohsen Rezai, former commander-in-chief of the Revolutionary Guards — was broadcast two days ago.

First for Republic

This year’s presidential campaign is the first in the Islamic Republic’s 30-year history in which a series of live televised debates has been organized.

Ahmadinejad, the first to speak in yesterday’s debate, was both confrontational and defensive and sought twice to interrupt his opponent outside the allotted time. Mousavi was taken off- guard though he remained calm. At one point, he held his hand in a firm gesture, telling the president: “I did not interrupt you. You have no right to speak during my time.”

The format of the debate, which took place from 10:30 p.m. to midnight local time, appealed to many viewers who welcomed the chance to see the two main candidates engage in public.

Reza Haeri, a documentary filmmaker in Tehran, said the president had the “upper hand” in the heated exchange.

“Mousavi is a good man, but when you are faced with an opponent who claims hens are one-legged you cannot argue. You have to attack,” said Haeri, 35. “Mousavi seemed unable to parry Ahmadinejad’s blows.”

Television Criticized

Iran’s state television has been criticized by challengers in recent weeks for favoring the president in its election coverage. Private broadcasters aren’t allowed in Iran.

Last night’s debate was “a step forward” in democracy and will warm up the election’s atmosphere, Arghandehpour said.

Some 58.6 percent of voters say they will cast their ballots in favor of Ahmadinejad while 21.9 percent will back Mousavi, according to a poll conducted for the government on May 3 and 4, state media reported. In a separate poll conducted mid May by Iran’s state-owned broadcaster, Mousavi led in Tehran, with 47 percent of the capital’s vote, while Ahmadinejad had 43 percent.

The polling methods and margin of error in each poll weren’t given.

To contact the reporter on this story: Ladane Nasseri in Tehran at lnasseri@bloomberg.net.
Last Updated: June 4, 2009 10:38 EDT

http://www.progressiverealist.org/blogpost/ahmadinejad-mousavi-debate

Ahmadinejad-Mousavi Debate
From: American Footprints By: Brian Ulrich

Last night, Iran started a series of six televised debates, each featuring two of the candidates in the country’s presidential election. The first, featuring Mehdi Karrubi and Mohsen Rezai, was apparently dull, with theories circulating that the two candidates agreed not to go after each other and instead simply present their positions.

Tonight, however, featured what analysts believe to be the top two candidates, incumbent President Mahmoud Ahmadinejad and former prime minister Mir Hussein Mousavi. Ahmadinejad took the chance to highlight how he is different from his predecessors:

“Ahmadinejad said he had rescued Iran from the denigrations caused by the corruption and foolhardy policies of his predecessors. He asked about the wealth of two-term president Ali Akbar Hashemi Rafsanjani and his sons, and the numbers of billionaires created during that time – and noted that his ministers were humble and pious.

“He charged that reformist Mohamad Khatami’s two terms had been ones of capitulation to the West on the nuclear file, during which Iran had agreed to suspend uranium enrichment activities and permit intrusive inspections.

“Mr. Khatami had helped Washington during the war and making peace in Afghanistan in 2001, but was nevertheless branded by Mr. Bush part of the ‘axis of evil.’ By contrast, Ahmadinejad claimed, his own uncompromising stance meant that even Bush eventually gave up thoughts of regime change – and that now Mr. Obama was willing to talk.”

Khatami serves as a target because of the nationalist foreign policy base Ahmadinejad is targetting, while Rafsanjani, whom Ahmadinejad defeated in the 2005 election, epitomizes for many the corruption of Iran’s elite. By linking Mousavi to a revolutionary old guard now seen as largely corrupt, Ahmadinejad hopes to dampen his populist credentials.

However, even though Ahmadinejad had promised to include criticism of the government Mousavi led as prime minister, so far I haven’t seen that he actually did so, limiting himself to accusations that Mousavi’s wife may have entered graduate school without taking the entrance exam. Why? The most likely reason is that Mousavi’s premiership, from 1981-1989, coincided with the presidency of current Leader Ayatollah Ali Khamene’i. Because of this, Ahmadinejad apparently thinks it best to work by linkage to his two immediate predecessors.

Mousavi, however, feels free to deliver his punches:

“Former prime minister Mir Hossein Mousavi accused President Mahmoud Ahmadinejad of causing instability in Iran with ‘adventurism, heroics, and extremism.’ The hard-line president had ‘undermined the dignity of our nation’ with his caustic anti-West, anti-Israel and Holocaust-denying remarks, he added…

“In Wednesday’s nationally televised debate – the second of six, but the first one featuring Ahmadinejad – the president belittled the credentials of Mousavi’s wife, who is dean of a university. Mousavi charged that hundreds of books could no longer be republished; Ahmadinejad countered that he censored less than his predecessors. Mousavi said Ahmadinejad’s ‘method is leading to dictatorship.’

Mousavi also said:

“For the past four years you kept saying that the United States is collapsing. You have said Israel is collapsing. France is collapsing. Your foreign policies have been based on such illusional perceptions.”

Even with key parts of the government supporting him, Ahmadinejad has a tough road to re-election. He has to hope that the reformists stay cynical, or since that doesn’t seem to be working out, divided, and that his populist message from 2005 will resonate against someone other than the widely scorned Rafsanjani. All of that said, however, Iranian politics are notoriously difficult to predict.

“I left my home in Tajrish along with my family at 3 p.m. We went down Valiast Street which is the main northern-southern avenue in Tehran and entered the Evin Exp’way which leads to Enghelab Street. We knew that people are supposed to gather in Enghelab Sq. (Revolution Sq.) at 4 and march toward Azadi Sq. (Freedom Sq.). From Gisha Bridge onwards, we saw people walking down. Cars were blowing their horns and people were showing victory sign. We went to Navvab Street and parked our car at the end of the street. Then we took a taxi to bring us back to the Enghelab Street. On our way, near Jomhouri Sq. (Republic Sq.), I saw a group of about 20 militia with long beards and batons on motorbikes. My hand was out of the car window with a little green ribbon (the sign of reformists) around my finger. One of the militia told me to throw that ribbon away. I showed him a finger. All of a sudden, about 15 people attacked me inside the car. They beat me with their batons and wanted to pull me out. My wife and my daughter who were sitting in the back seat cried and hold me tight. I also hold myself tight on the chair. They wanted to shatter the car windows. The driver went out and explained that he is a taxi and we are his passengers and he has no fault. After about 5 minutes,they left. My elbow hurts severely. Then, a young man from their group came and kissed my elbow! I told him: You know, I don’t hate you. I am like you with the only difference that I know more and you are ignorant. He apologized and left. We joined the crowd in Enghelab Street.

“Read carefully: What I saw today was the most elegant scene I had ever witnessed in my life. The huge number of people were marching hand in hand in full peace. Silence. Silence was everywhere. There was no slogan. No violence. Hands were up in victory sign with green ribbons. People carried placards which read: Silence. Old and young, man and woman of all social groups were marching cheerfully. This was a magnificent show of solidarity. Enghelab Street which is the widest avenue in Tehran was full of people. I was told that the march has begun in Ferdowsi Sq. and the end of the march was now in Imam Hossein Sq. to the further east of Tehran while on the other end people had already gathered in Azadi Sq. The length of this street is about 6 kilometers. The estimate is about 2 million people. On the way, we passed a police department and a militia (Baseej) base. In both places, the doors were closed and we could see fully-armed riot police and militia watching the people from behind the fences. Near Sharif University of Technology where the students had chased away Ahmadinejad a few days ago, Mirhossein Mousavi (the reformist elect president) and Karrubi (the other reformist candidate spoke to people for a few minutes which was received by cries of praise and applause. I felt proud to find myself among such a huge number of passionate people who were showing the most reasonable act of protest. Frankly, I didn’t expect such a political maturity from emotional Iranians who easily get excited. My family and I had put stickers on our mouths to represent the suppression. Placards that people carried were different; from poems by the national poet Ahmad Shamlu to light-hearted slogans against Ahmadinejad. Examples include: ‘To slaughter us/ why did you need to invite us / to such an elegant party” (Poem by Shamlu).’ ‘Hello! Hello! 999? / Our votes were stolen’ or ‘The Miracle of the Third Millenium: 2 x 2 = 24 millions’ (alluding to the claim by Government that Ahmadinejad obtained 24 million votes) , ‘Where is my vote?’, ‘Give me back my vote’ and many other. We arrived in Azadi Square where the entire square was full of population. It is said that around 500,000 people can be accommodated in this huge square and it was full. Suddenly we saw smoke from Jenah Freeway and heard the gunshot. People were scared at first but then went forward. I just heard the gunshots but my sister who had been on the scene at that part told me later that she saw 4 militia came out from a house and shot a girl. Then they shot a young boy in his eye and the bullet came out of his ear. She said that 4 people were shot. At least one person dead has been confirmed. People arrested one of the Baseeji militia but the three others ran away when they ran out of bullet. At around 8 we went back on foot. On the way back people were still in the street and were chanting Allah Akbar (God is Great). I was coming home at around 2 a.m. In parkway, I saw about ten buses full of armed riot police parked on the side of the street. Then I saw scattered militia in civil clothes with clubs in hand patroling the empty streets. In Tajrish Square, I saw a very young boy (around 16) with a club who was looking at the cars to see if he can find something to attack. I don’t know how and under what teachings can young boys change into militia. I came home. Tomorrow, people will gather again in Valiasr Square for another peaceful march toward the IRIB building which controls all the media and which spreads filthy lies. The day before Yesterday, Ahmadinejad had hold his victory ceremony. Government buses had transported all his supporters from nearby cities. There was full coverage of that ceremony where fruit juice and cake was plenty. A maximum of 100,000 had gathered to hear his speech. These included all the militia and the soldiers and all supporters he could gather by the use of free TV publicity. Today, at least 2 million came only relying on word of mouth while reformists have no newspaper, no radio, no TV. All their internet sites are filtered as well as social networks such as facebook. Text messaging and mobile communication was also cut off during the demonstration. Since yesterday, the Iranian TV was announcing that there is no license for any gathering and riot police will severely punish anybody who may demonstrates. Ahmadinejad called the opposition as a bunch of insignificant dirt who try to make the taste of victory bitter to the nation. He also called the western leaders as a bunch of ‘filthy homosexuals’. All these disgusting remarks was today answered by that largest demonstration ever. Older people compared the demonstration of today with the Ashura Demonstration of 1979 which marks the downfall of the Shah regime and even said that it outnumbered that event. The militia burnt a house themselves to find the excuse to commit violence. People neutralized their tactic to a large degree by their solidarity, their wisdom and their denial to enage in any violent act. I feel sad for the loss of those young girls and boys. It is said that they also killed 3 students last night in their attack at Tehran University residence halls. I heard that a number of professors of Sharif University and AmirKabir University (Tehran Polytechnic) have resigned. Democracy is a long way ahead. I may not be alive to see that day. With eyes full of tear in these early hours of Tuesday 16th June 2009, I glorify the courage and bravery of those martyrs and I hope that their blood will make every one of us more committed to freedom, to democracy and to human rights. Viva Freedom, Viva Democracy, Viva Iran.”

http://www.progressiverealist.org/blogpost/ahmadinejad-mousavi-debate
Ahmadinejad-Mousavi Debate
From: American Footprints By: Brian Ulrich

Last night, Iran started a series of six televised debates, each featuring two of the candidates in the country’s presidential election. The first, featuring Mehdi Karrubi and Mohsen Rezai, was apparently dull, with theories circulating that the two candidates agreed not to go after each other and instead simply present their positions.

Tonight, however, featured what analysts believe to be the top two candidates, incumbent President Mahmoud Ahmadinejad and former prime minister Mir Hussein Mousavi. Ahmadinejad took the chance to highlight how he is different from his predecessors:

“Ahmadinejad said he had rescued Iran from the denigrations caused by the corruption and foolhardy policies of his predecessors. He asked about the wealth of two-term president Ali Akbar Hashemi Rafsanjani and his sons, and the numbers of billionaires created during that time – and noted that his ministers were humble and pious.

“He charged that reformist Mohamad Khatami’s two terms had been ones of capitulation to the West on the nuclear file, during which Iran had agreed to suspend uranium enrichment activities and permit intrusive inspections.

“Mr. Khatami had helped Washington during the war and making peace in Afghanistan in 2001, but was nevertheless branded by Mr. Bush part of the ‘axis of evil.’ By contrast, Ahmadinejad claimed, his own uncompromising stance meant that even Bush eventually gave up thoughts of regime change – and that now Mr. Obama was willing to talk.”

Khatami serves as a target because of the nationalist foreign policy base Ahmadinejad is targetting, while Rafsanjani, whom Ahmadinejad defeated in the 2005 election, epitomizes for many the corruption of Iran’s elite. By linking Mousavi to a revolutionary old guard now seen as largely corrupt, Ahmadinejad hopes to dampen his populist credentials.

However, even though Ahmadinejad had promised to include criticism of the government Mousavi led as prime minister, so far I haven’t seen that he actually did so, limiting himself to accusations that Mousavi’s wife may have entered graduate school without taking the entrance exam. Why? The most likely reason is that Mousavi’s premiership, from 1981-1989, coincided with the presidency of current Leader Ayatollah Ali Khamene’i. Because of this, Ahmadinejad apparently thinks it best to work by linkage to his two immediate predecessors.

Mousavi, however, feels free to deliver his punches:

“Former prime minister Mir Hossein Mousavi accused President Mahmoud Ahmadinejad of causing instability in Iran with ‘adventurism, heroics, and extremism.’ The hard-line president had ‘undermined the dignity of our nation’ with his caustic anti-West, anti-Israel and Holocaust-denying remarks, he added…

“In Wednesday’s nationally televised debate – the second of six, but the first one featuring Ahmadinejad – the president belittled the credentials of Mousavi’s wife, who is dean of a university. Mousavi charged that hundreds of books could no longer be republished; Ahmadinejad countered that he censored less than his predecessors. Mousavi said Ahmadinejad’s ‘method is leading to dictatorship.’

Mousavi also said:

“For the past four years you kept saying that the United States is collapsing. You have said Israel is collapsing. France is collapsing. Your foreign policies have been based on such illusional perceptions.”

Even with key parts of the government supporting him, Ahmadinejad has a tough road to re-election. He has to hope that the reformists stay cynical, or since that doesn’t seem to be working out, divided, and that his populist message from 2005 will resonate against someone other than the widely scorned Rafsanjani. All of that said, however, Iranian politics are notoriously difficult to predict.

For 26 years election has been hold in a different way. Votes have been counted at each voting center separately, and total number of votes along with the actual papers would have been sent to the center (My grandfather has been the head of one the centers in the last 30 years, and I was involved in counting in some of the elections too). Ahmadinejad changed that rule, VOTES ARE NOT COUNTED IN CENTERS ANYMORE, THEY ARE BEING SENT TO “STATE DEPARTMENT CENTER” AND BEING COUNTED BY AHMADINEJAD PEOPLE, AND NO ONE CAN SUPERVISE THAT. This is just simple fact and if you want evidence just ask anyone who has a very preliminary knowledge of vote counting in Iran. I was in Iran in almost every election in the last 30 years and you could predict the winner by 10-20% error margin. The votes of each center was available (at least to the people who know someone there) and the total trend would have made sense.
Now there are tons and tons of evidences that the numbers they reported only 1 hour after election (remember they to count 40 million vote in one center!) are totally fake, but Mr Kallen is going to give the benefit of the doubt to one of the worst dictator we’ve seen and make us believe the numbers are right and we should not ask any question! If the numbers are right why they do not report the exact detail or why they do not accept moosavis people supervise the counting?

http://www.moi.ir/Portal/Home/ShowPage.aspx?Object=News&ID=e3dffc8f-9d5a-4a54-bbcd-74ce90361c62&LayoutID=b05ef124-0db1-4d33-b0b6-90f50139044b&CategoryID=832a711b-95fe-4505-8aa3-38f5e17309c9

Providence result

http://www.moi.ir/Portal/Home/ShowPage.aspx?Object=News&CategoryID=832a711b-95fe-4505-8aa3-38f5e17309c9&LayoutID=dd8faff4-f71b-4c65-9aef-a1b6d0160be3&ID=0601dd51-69cd-454c-be03-4ce4cc437bca

Who is the observer in the election

http://www.jomhoriyat.net/uploads/20090520141251(1).jpg
Rafsanjani & Ahmadinejad

http://www.guardian.co.uk/global/2009/jun/17/iran-election-rigging

Iran election turnouts exceeded 100% in 30 towns, website reports

At least 200 polling stations across Iran had participation rates of 95% or above, say sources of centrist Auyandeh site

Turnouts of more than 100% were recorded in at least 30 Iranian towns in last week’s disputed presidential election, opposition sources have claimed.

In the most specific allegations of rigging yet to emerge, the centrist Ayandeh website – which stayed neutral during the campaign – reported that 26 provinces across the country showed participation figures so high they were either hitherto unheard of in democratic elections or in excess of the number of registered electors.

Taft, a town in the central province of Yazd, had a turnout of 141%, the site said, quoting an unnamed “political expert”. Kouhrang, in Chahar Mahaal Bakhtiari province, recorded a 132% turnout while Chadegan, in Isfahan province, had 120%.

Ayandeh’s source said at least 200 polling stations across Iran recorded participation rates of 95% or above. “This is generally considered scientifically impossible because out of every given cohort of 20 voters, there will be at least one who is either ill, out of the country, has recently died or is unable to participate for some other reasons,” the source said. “It is also unprecedented in the history of Iran and all other democratic countries.”

The claims are impossible to verify, but they are consistent with comments made by a former Iranian interior minister, Ali Akbar Mohtashamipour, who said on Tuesday that 70 polling stations returned more completed ballot papers than the number of locally eligible voters.

Supporters of the defeated reformist candidates, Mir Hossein Mousavi and Mehdi Karoubi, have complained that their campaigns’ inspectors were refused access to or ejected from polling centres on election day.

Abbas Abdi, a Karoubi supporter who was among the radical students who took over the US embassy in Tehran in 1979, said some polling stations had run out of ballot papers as early as 10.30am – even though it is standard procedure to issue each voting centre with more ballots than the number of voters.

After polling times were extended beyond the original 6pm closing time, other stations refused to provide ballot papers for fear that participation would exceed the number of voters on the register, Abdi told Radio Zamaaneh, a Farsi-language station based in the Netherlands.

http://news.yahoo.com/s/afp/20090608/wl_mideast_afp/iranvote_20090608103953

Iran expects ‘record’ turnout for presidential vote

Iran expects ‘record’ turnout for presidential vote AFP – Supporters of Iranian presidential candidate Mir Hossein Mousavi attend a campaign rally in Karaj on …

by Farhad Pouladi Farhad Pouladi – Mon Jun 8, 6:39 am ET

TEHRAN (AFP) – Iran expects a record number of voters to cast their ballots in this week’s presidential election, the head of the country’s electoral committee said on Monday.

“Definitely, the election… will witness a record-breaking turnout,” Kamran Daneshjoo told reporters ahead of Friday’s vote.

Daneshjoo said the interior ministry, which is in charge of organising the election, is putting in place a strategy to ensure “maximum participation” from the 46.2 million eligible voters.

“Iranian people have shown their support of the revolution in different rallies, but on election day we will see the actual number of people who back their revolution,” he said.

He predicted turnout would be high “despite the propaganda of the arrogant nations (Western powers) who are undermining the election.”

Four candidates are in the race for the presidency, including incumbent hardliner Mahmoud Ahmadinejad, who is seeking a second four-year term.

He faces a stiff challenge from moderate ex-premier Mir Hossein Mousavi who has emerged as his main rival.

The other two candidates are reformist former parliament speaker Mehdi Karroubi and the conservative former commander of the elite Revolutionary Guards Corps, Mohsen Rezai.

Daneshjoo gave no figure for the number of polling stations but said a total of 45,713 ballot boxes would be used for the vote, of which 14,258 would be in mobile polling stations to facilitate voting in places like hospitals and remote villages.

Polls will open at 8:00 am (0330 GMT) and close 10 hours later, unless turnout is exceptionally high and provincial governors secure ministry approval for an extension of voting hours.

“But the voting has to end at midnight as it is a one-day election,” Daneshjoo said.

If a clear winner does not emerge on June 12, the election will go to a second-round runoff on June 19.

To win outright in the first round, a candidate must secure 50 percent of the votes cast plus one vote.

In his upset victory in 2005, Ahmadinejad defeated heavyweight former president Akbar Hashemi Rafsanjani in the runoff after trailing him in the first round.

http://www.youtube.com/watch?v=5ZnNaDtmwZ8
Basiji who shot at demostrator exposed

http://www.youtube.com/watch?v=Bkn_tMOkNnI
Exposing Basij

http://www.youtube.com/watch?v=v9RRIU8cuys&feature=related
The Identity of one of the Plain-cloths agents who used gun during Nov 4 protest in Tehran!!
The man at the end of this clip is his father, one of the highest ranked Revolutionary guard members… (Iranian regimes SS )

http://www.presstv.ir/detail.aspx?id=97442&sectionid=351020101
Iran electoral process facts
Mon, 08 Jun 2009 14:29:11 GMT

Head of Iran’s Electoral Office Kamran Daneshjou says that the results of the presidential vote will be announced within 24 hours of the election.

“I think that the final results will be announced within 24 hours, and we will announce the results while votes are being counted,” said Daneshjou.

He added that 45,713 ballot boxes had been prepared nationwide to receive the votes of the 46,200,000 eligible voters on Friday and that ballot boxes had been made available for Iranian expatriates in some 130 countries.

Daneshjou said that 32 polling stations would be ready to receive the votes of Iranians residing in the US and that the largest number of polling stations abroad will be in Iraq, where the mostly pilgrim Iranians will be catered for by 304 stations.

“The polls will open at 8 am on Friday, for ten hours,” Daneshjou said, but this could be extended at the request of local governors and with the approval of the Interior Minister.

According to Daneshjou, if one of the candidates receives 50 percent of the votes plus one vote in the first round and achieves absolute majority, then the election will be completed otherwise the two contenders with the most votes will face off in a second round the following Friday, June 19.

He described the campaign atmosphere as “passionate” and called on candidates to not exceed the bounds of probity.

Daneshjou said that participation in all previous presidential elections in Iran had been over 50 percent, which he described as “remarkable” compared with European and American countries. “This shows that the people like the system.”

“According to the existing forecasts, the turnout in this election will be very high,” he concluded.

The police officers in this frame appear to be doing nothing to stop the militia members.
http://img.timeinc.net/time/photoessays/2009//tehran_brigades/tehran_brigades_05.jpg

Men hurl rocks at Mousavi supporters at Tehran University on June 14.
http://img.timeinc.net/time/photoessays/2009//tehran_brigades/tehran_brigades_08.jpg

Two students hold a shirt that they say belonged to a student beaten by the militias.
http://img.timeinc.net/time/photoessays/2009//tehran_brigades/tehran_brigades_10.jpg

Gun wailing Plaincloth Basij Tehran,friday pray 17 july
http://web3.twitpic.com/img/18237786-2cd80fb997b522eb9053cb9bb6755d1e.4a686290-full.jpg

Basij in front of the Tehran University, July 17
http://twitpic.com/apt41
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http://twitpic.com/apsel
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http://twitpic.com/apsfx
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“‘Republican leadership calls for Obama to condemn Iran’s election results and speak out for the demonstrators shows no knowledge of Iran whatsoever. If he did so, America would become the issue in Iran, not Ahmadinejad, and we would become the excuse and justification for spilling Iranian blood. These sniping remarks by Republican leaders also shows? they put pandering to their right wing above American national security. – Les Gelb.”

Ahmadinejad Heckled outside a Mosque
http://www.youtube.com/watch?v=W1GBecx0kr8
http://www.youtube.com/watch?v=L2JI7dwSyaA
http://www.youtube.com/watch?v=IjpN3CSNjOY

Basiji exposed
http://i40.tinypic.com/2lkvdyh.jpg

http://i41.tinypic.com/m8da3r.jpg
http://img4.imageshack.us/img4/8540/ahmadimoghadamhdofscrty.jpg

Basij on motocycle wearing mask
http://www.flickr.com/photos/fhashemi/3725395397/sizes/o/
http://www.flickr.com/photos/fhashemi/3725395285/sizes/o/

Basij on motocycle mixed with police
http://www.flickr.com/photos/fhashemi/3726201808/sizes/o/

Basij attacks
http://www.flickr.com/photos/fhashemi/3652046211/sizes/o/

Bajis hooded thug with baton
http://news.gooya.com/didaniha/photos/dargiri-monday-1/11.jpg
http://news.gooya.com/didaniha/photos/dargiri-monday-1/12.jpg
http://news.gooya.com/didaniha/photos/dargiri-monday-1/13.jpg

People in Fight with Plaing-cloths agents – August 24, 2009
http://www.youtube.com/watch?v=_hOtBay82jo

http://www.youtube.com/watch?v=_ArjfCDzxnM
http://www.youtube.com/watch?v=5qme37SfBoo
27 Dec, 2009
Brave people of Tehran, fight back against the brutal anti-riot forces… 27 Dec 2009
The cowards on red bikes are basiji milits… who are scaping from the “Sea” of protesters

******* acts of vandilism
http://www.youtube.com/watch?v=WOZ_T_ulvbk
http://www.youtube.com/watch?v=pFPxPO3NBnc
December 09, 2009
Attack of Isalmic Regime at protesters of Yazd, Iran. A truck full of Basijis on the back rams a motorcycle clipping it between the vehicle and the curb, sending the riders off the road. They both get away.

A Basij thug jumps on top of the car (0:51 – 1:02)
http://www.youtube.com/watch?v=Bm3kmrqB4og

Eyewitnesses report this building close to Mir Hossein Moussavi’s Tehran headquarters was attacked by militia forces.
http://www.youtube.com/watch?v=6TtwxUvbPxU

Riot police breakig car window at random
http://twitpic.com/86vw5

http://www.youtube.com/watch?v=60zOpfV9DgM
iranian police attacking houses

Breaking car windows
http://www.daneshjooyan.org/farsi/news/8804/auto_sab_guards_001.jpg
http://www.daneshjooyan.org/farsi/news/8803/mamor_shekastan_shisheh_11_1.jpg

Basij throws a stone at the university student who is capturing their thugary – Polytechnic dept Tehran Univ
http://www.youtube.com/watch?v=kV05uuTDeZo

Paramilitary and plainclothes agent brutally attacked Isfahan University dormitory – June 2009
http://www.daneshjooyan.org/images/8803272123/

Iran-Destruction of public property by police
http://www.youtube.com/watch?v=eSb9NLOV4Qw

Invasion of private homes by Basij militia, throwing stones and congregating in the alley
http://www.youtube.com/watch?v=73LKaif47K4

Iranian Anti riot guards are intruding a private house and beating a person to death in tehran
http://www.youtube.com/watch?v=5YngJTnhrD4

Tehran THUG POLICE kicking doors
http://www.youtube.com/watch?v=z76n0mgRihA

Eyewitnesses report this building close to Mir Hossein Moussavi’s Tehran headquarters was attacked by militia forces.
http://www.youtube.com/watch?v=6TtwxUvbPxU

Government’s special soldiers attacked people’s houses in Saadat
http://www.youtube.com/watch?v=K8DDkVRPsg0

Riot police breaking a car window
http://photos-f.ak.fbcdn.net/hphotos-ak-snc1/hs098.snc1/5185_95506954453_45061919453_1812213_4023413_n.jpg

Iran after riot police attack in Tehran, the guy says they had an Arabic accent, when they got to the rooftop, they dismantled airconditioning units and threw them down. The guy shows a foot print of a the Basij’s boot on the door and the hing and locks that they damanged in order to get into the buildings. He gives a tour of broken residential doors despite being guarded by the metal cage. The guy is asked why they came on the rooftop in which he replies, since people shout anti-government slogans at night on their rooftops, perhaps that was an incentive for them to scare people not to do the same thing again. They had damanged and demolished all the AC units (summer time in Iran) and threw the satellite dishes to the backyard.
The man in the video explains that a group of “Arabic accented” riot police entered the building the night before, breaking glasses and doors and destroying the air-conditioning units on the roof top. They were probably after the people who chant slogans on the roof tops at night or wanted to destroy the satellite dishes (which are illegal). At his last sentence, he says that “we might need to get armed if this problem goes on like this…”

And this He says that the doors were locked in the building, as it is a purely residential buidling, and were kicked in. He then states that they would have tried to break in the doors, and you see the baton marks on one of the doors later, but people stood infront of them. He says that one of the women was pregnant and very scared, and lastly, he states that they threw one of the AC units from the roof and it crashed on top of a car. He states that there was a woman and a child inside the car and they got out and started running.
http://www.youtube.com/watch?v=GmjAkGywfY0

A young man who was shot dead when shouting Alaho Akbar, someone shouts they are using the live ammunation
http://www.blogger.com/img/videoplayer.swf?videoUrl=http%3A%2F%2Fvp.video.google.com%2Fvideodownload%3Fversion%3D0%26secureurl%3DqAAAAJRKzAPfu3a7ks9WIkYJqTFD-szA-ZXR0pggzr84G-E_CcGr1vJTKdYOcrdVOxXAwQ5W9Ix13rww7WSeDOOlHtLJSTRn0mm10k5nD7C2WcQ9TXg3qTsSQ7nfKZX7iOGcU47dgSvyMRwKO2j6lQj5ajslDW4PF0BuvKJwp91bdjOS_a_Y11r5YtmQVFf7ljNbMQOmruEnRQKrHosIGzy1aqpydxzQYBA0ptjrwIVjjtZB%26sigh%3DjEXs-0BwzSgIpHmX-YjNJlM43xc%26begin%3D0%26len%3D86400000%26docid%3D0&nogvlm=1&thumbnailUrl=http%3A%2F%2Fvideo.google.com%2FThumbnailServer2%3Fapp%3Dblogger%26contentid%3D18d526f6d8d44eed%26offsetms%3D5000%26itag%3Dw320%26sigh%3DRENcPv-LyLMjVx7kyfkNkfdfSik&messagesUrl=video.google.com%2FFlashUiStrings.xlb%3Fframe%3Dflashstrings%26hl%3Den

http://www.lidovky.cz/milice-se-nestiti-bit-deti-a-stare-lidi-tvrdi-iranska-studentka-p7b-/ln_zahranici.asp?c=A090624_223107_ln_zahranici_tai

Some news:

Dr Hejazi said he first thought the gunshot had come from a rooftop.

But later he saw protesters grab an armed man on a motorcycle.

“People shouted ‘we got him, we got him’. They disarmed him and took out his identity card which showed he was a Basij member. People were furious and he was shouting, ‘I didn’t want to kill her’.

“People didn’t know what do to do with him so they let him go. But they took his identity card. There are people there who know who he is. Some people were also taking photos of him.”

7.47pm:
There is gruesome account of police beatings from Behnaz, a student in Isfahan, on Lidovky, the website of the Czech daily Lidove noviny. Reader Andrew Gardner has sent through this translation of an email exchange between her and news editor Jan Nevyhosteny.

LN: How are the Basij trying to suppress the unrest?

Behnaz: They are beating demonstrators in a brutal fashion. They’re hitting people with heavy staves, to the head and to the stomach. Some people have been beaten to death. They have no reservations about attacking children and old people. There’s talk of a pregnant woman having been shot; she then gave birth on the street. Here in Isfahan, one person was first beaten and then thrown from a roof. I was at his funeral today [24 June]. His family can’t talk about the circumstances of his death with anyone; they’ve been threatened. I’m convinced that many more such cases will surface over
time.

LN: Is the regime applying pressure on the families of protesters?

Behnaz: The regime is putting a lot of pressure on the families of demonstrators who’ve been detained and killed. When you see how they treat people on the streets, in front of everyone, what must they be doing to those who are in detention?

LN: Were the elections manipulated, or were there only isolated instances of manipulation?

Behnaz: If the elections had been perfectly in order, why would the government be so resistant to holding them again? They should, after all, produce the same result. Why, instead of that, do they prefer to kill so many innocent people on the streets?

http://threatswatch.org/rapidrecon/images/posted/axe-wound.jpg
http://threatswatch.org/rapidrecon/2009/06/unimaginable-horror-in-tehran/

Basij thugs swarm a moving car for some reason and break every window and hammer the body of the vehicle while the passengers inside
http://shooresh1917.blogspot.com/2009/07/basij-militia-allegedly-use-axes.html

http://www.salon.com/news/primary_sources/2009/06/24/iran_photos/
The torture of a 17-year-old in Iran

Shiraz, government thugs attacking people, women and children, bruise on a boy’s arm left by a baton, broken car window — in front of Hafez hospital
http://www.youtube.com/watch?v=f7TLJEAQ5nQ

Riot police breaking car window
http://www.flickr.com/photos/afaryneh/3650170418/sizes/o/

Beating up motorcycles. More video emerges of the brave government security officials who roam around attacking inanimate objects:
http://www.radiofarda.com/video/2267.html

Riot police breaking car windows and plaincloth Basij throwing rocks and debris at random locations to cause property damaged. There is actually one guy standing in his yard as the forces demolish cars and throw rocks right behind his wall/door.
http://www.blogger.com/img/videoplayer.swf?videoUrl=http%3A%2F%2Fvp.video.google.com%2Fvideodownload%3Fversion%3D0%26secureurl%3DpgAAAPCZD0ddCGBZjZs6HcCGJYfrtIHljI00Re1Ta0wYEoPx8veE1x6OuMEhdHj_r_C36Y9NqAMCdOJEqTaTLDa94h8IZg_jH2_WYZlUiYoYTO7CnRAV7aE3V7P9dZQfi3FwRVDBs4YB1CGezkdFXKG9vC5–msveaJ6uNWUhCZV9nH3RMBGsrcUr42WZrFa2bQIxgiNhr3yLD-yvEu4SLqwCTAW3-sT9auvbDTdgWWB7Izl%26sigh%3DtJFyk8bpa1mrYcKRl4YwlaK9goo%26begin%3D0%26len%3D86400000%26docid%3D0&nogvlm=1&thumbnailUrl=http%3A%2F%2Fvideo.google.com%2FThumbnailServer2%3Fapp%3Dblogger%26contentid%3D486b4d06bf2b126%26offsetms%3D5000%26itag%3Dw320%26sigh%3DtZXJiVsboE0dDycRC0xRFhxuanc&messagesUrl=video.google.com%2FFlashUiStrings.xlb%3Fframe%3Dflashstrings%26hl%3Den
http://www.youtube.com/watch?v=9RERgKXUXFA

http://2.bp.blogspot.com/_W_mv9muKB2o/SkA-fWHy8lI/AAAAAAAAABk/RUjjKMywb_w/s1600-h/basiji.jpg

Basij with bat
http://news.gooya.com/didaniha/archives/2009/06/088934.php

http://www.irna.ir/View/FullStory/Photo/?NewsId=556256

Basij destroying a car with people inside – Iran 18 Tir July 9.2009 – Tehran
http://www.youtube.com/watch?v=E-hiqWVJcc0

Basij and Guards destroying private property 13 June 2009 Part 1
http://www.youtube.com/watch?v=SzkHJNC-Kss

Basij and Guards destroying private property 13 June 2009 Part 2
http://www.youtube.com/watch?v=zhoSYvd9WsE

Basij militia destroy private property in Tehran Sobhan 16 June 2009
http://www.youtube.com/watch?v=CxFjeMKXgR0

18 June 2009 – Basij militia attacks homes
http://www.youtube.com/watch?v=Z9m2MqXlRL8

2009 Iranian Revolution – Basij vandalise private propertiy leaving evidence behind 17 june
http://www.youtube.com/watch?v=7ub54E0SSKU

Plaincloth and Basij destroying properties
http://tehran-london.com/uk87/pic20/6145126.jpg

I can’t make sense of this graph
http://i.friendfeed.com/b517280545dd27adf6441266881384d01e884504

Basij plaincloth thugs riding on the main street in the opposite direction of traffic
http://www.facebook.com/video/video.php?v=1024089182936&ref=nf

This video shows glimpses of and the aftermath of the attack by the basij, anti riot police and iranian state sponsered “civilian clothes” on Tehrans university dorm. This attack happened on the night of 24 of June 2009 (two days after the elections in Iran) and went almost unnoticed by the media. Many of the students were kidnapped that night and we still do not know what has happened to some of them since than. At least 7 students were murdered that night.
http://mediadb.ath.cx/wordpress/2009/07/2009-06-14_the-basij-attack-on-tehrans-university-dorm_part-1_%da%a9%d9%88%db%8c-%d8%af%d8%a7%d9%86%d8%b4%da%af%d8%a7%d9%87/

http://www.youtube.com/watch?v=P89Hx1rnhr4
December 30, 2009
People rushing the riot forces and overtake the street

http://www.youtube.com/watch?v=08rjceE2IqE
A group of people chase after a truck full of Basij and riot police while hurling stones and the car veers off

http://www.youtube.com/watch?v=opbTFm0uRcw
http://www.youtube.com/watch?v=wgQ_XtJGCUY
Guards being cornered and attacked by people
http://www.youtube.com/watch?v=DkMGHJ1qJJ0
Different angle
http://www.youtube.com/watch?v=E_yBgd88f50
People are trying to protect the guards then interrogate them in the choas
http://www.youtube.com/watch?v=3GN9GbW97rc
People defending a guard from being ravaged
http://www.youtube.com/watch?v=bR8E39Kew5Y
This happened right after they, the guards, had shot an elderly in the head and people witness blood gushing out of him and they still defending them? from being ravaged.
http://www.youtube.com/watch?v=51dVgsF0yoY
Serveral of the riot guards are beat up – people are chanting “for the sake of Neda ‘let him go'”

Names of the Sepah’s commanders
http://shirzan.wordpress.com/2009/07/06/%D8%A7%D9%81%D8%B4%D8%A7%DB%8C-%D9%86%D8%A7%D9%85-%D8%AA%D8%B9%D8%AF%D8%A7%D8%AF%DB%8C-%D8%A7%D8%B2-%D9%81%D8%B1%D9%85%D8%A7%D9%86%D8%AF%D9%87%D8%A7%D9%86-%D8%B3%D9%BE%D8%A7%D9%87-%D9%88-%D9%88%D8%B2/

Basij pictures
http://lebasshakhsi.blogspot.com/

It’s the same guy
http://tehran-london.com/uk87/pic20/5079055.jpg

http://www.youtube.com/watch?v=8pJa7QRsrTI
December 27, 2009
People engaging face-to-face with the riot police

http://www.youtube.com/watch?v=4N444gpGQF8
People chasing the riot police after a momentarily set back

http://2.bp.blogspot.com/_SbiVoGqVHZk/Sx0E2yxzqJI/AAAAAAAACaA/jCG7mlIfJm0/s1600-h/091207121044_student4.jpg
http://4.bp.blogspot.com/_SbiVoGqVHZk/Sx0E25shWhI/AAAAAAAACaI/MmE4MLrITL4/s1600-h/091207121048_student5.jpg
http://3.bp.blogspot.com/_SbiVoGqVHZk/Sxz7USg_xBI/AAAAAAAACY4/_hL1b8oKTjs/s1600-h/47916378-1bc174c9f10a65224ac4b2a086b80e43.4b1cfafe-full.jpg
Basiji, plaincloth thugs throwing stone

http://www.youtube.com/watch?v=fkVbUOebot8
December 31, 2009
Message of a Mulla in Seda Sima (Iranian Tv Station) to the demonstrators:
“Kill the enemy of islam, have no mercy, Murder them”
“Don’t look at the Supreme Leader with a soft turbine on his head…and don’t think that you can hit it with your head. Right behind him is the 12th Imam! made of steel! you will only be breaking your own heads! When there is people backing you up, rest assured that the judiciary will arrest their leaders and nothing will happen. I give you an … See Moreexample: Mousa Khiabani was arrested. (Mujaheddin leader who was arrested and killed 30 years ago). All of our streets were filled with the slogan: Free Mousa Khiabani! They were so strong that we could not do anything to them. He was arrested with documents showing he was related to the Russians. The Mujahedeen killed people in a demonstration. Mr. Mousavi-Tabrizi was the prosecutor. He arrested the leaders in the afternoon. The same night he announced on the radio that he had executed all 30 of them. And nothing happened! Why? because they killed them!
The more the security forces kills, the better. Yes you can arrest, etc. but don’t give him sympathy. This is backed up by the fact that our Supreme Leader has reached this position because of God and his Prophet Mohammad. He doesn’t need force to stay in power.
But in other places where the Supreme Religious Leaders get to power by force, even if their title of Supreme comes from the Quran, they need to stay in power by security forces.
In this country we do not need to keep the Supreme Leader in power by security forces. His power comes from the people. People are with him!

http://www.youtube.com/watch?v=m9adO3UWNLE
Confrontation between students & Basij thugs at Tehran University — peaceful though

******* beatings
http://www.youtube.com/watch?v=Or79W1_eDi4
Karoubi’s place of stay was serrounded by regime thugs and bullets were fired into his car

http://www.iranian.com/main/files/images/3days008.preview.jpg
Beating women on the street by the riot police

http://www.youtube.com/watch?v=E5lprYNU6Us
IRAN Alleged Car that shot Mousavi’s Nephew Shooting at the people

http://www.youtube.com/watch?v=xwZQoRFMW0k
Basig goon shoots at people while holding the gun like a true gangster before retreating on to the bridge

http://files.posterous.com/onlymehdi/aNHEEb0fFUAAPo8GYpOzO1k7aXcQvSb0d5EhBORNnutcGP1LIOyo5eCgtUsd/Bridge-College-02.jpg?AWSAccessKeyId=1C9REJR1EMRZ83Q7QRG2&Expires=1262370777&Signature=N%2BI4b6l%2FBtPqujS%2FsgJsIA%2FG8dY%3D
http://files.posterous.com/onlymehdi/pkEsgHwLtFQ5ZMgDUAaQCVUzb4ZngqyDunKGPU1vMnyOJxPAsSiOYYZRjEqZ/Bridge-College-03.jpg?AWSAccessKeyId=1C9REJR1EMRZ83Q7QRG2&Expires=1262370812&Signature=acJo6PieFXpR9BkKwouQBQfOB38%3D
http://files.posterous.com/onlymehdi/c9kuROO2qCUjng99pxJr0EEBqM0OPHfJ1kWyOeBj5Ucx4y30HKeTjn0BSTUB/Bridge-College-04.jpg?AWSAccessKeyId=1C9REJR1EMRZ83Q7QRG2&Expires=1262370840&Signature=HdZKAIIpY1BvUzvQzOgFNoa1qyo%3D
http://files.posterous.com/onlymehdi/iNvYdhEH0dmcit7YwG8kYnFOVG9mhcH0WMEMx5vhTriq7gVPdCWhdcQWh4iN/Bridge-College-01.jpg?AWSAccessKeyId=1C9REJR1EMRZ83Q7QRG2&Expires=1262370703&Signature=GcKoLRBAwgHJnIeN1Ii%2BW5F6pKQ%3D
A Basij thug shooting straight into the crowd from the distance

http://persian2english.files.wordpress.com/2009/12/34.jpg
http://persian2english.files.wordpress.com/2009/12/35.jpg
Images of a Tehran citizen after a protest at Kalej bridge, Tehran on the day of Ashoura, Sunday December 27, 2009. The man was shot by an anti-riot police’s pellet gun.

http://www.youtube.com/watch?v=_pG7wEQAuUU
A Basij van literally hits someone, and the other one runs it over
http://www.youtube.com/watch?v=fhWceh5-q1E
http://www.youtube.com/watch?v=GVJKdR3dlIM
Taken from another angle
http://www.youtube.com/watch?v=EUVHpSAhYuU
http://www.youtube.com/watch?v=GVJKdR3dlIM
http://www.youtube.com/watch?v=WmxfLVhMPYk
Another old man has a broken leg induced by the crushing force of the truck
http://www.youtube.com/watch?v=x8wF_Q_ZwfU
Another view 3:15, 4:13 graphic
http://www.youtube.com/watch?v=Jw4ei5IlCHE
A startled witness

http://www.youtube.com/watch?v=-GZUhwuSCjg
GRAPHIC – Iran Tehran 27 Dec 09 Tehran another protestor Dies

http://www.youtube.com/watch?v=D7dQpS5pDCw
GRAPHIC – Iran 27 Dec 09 Tehran protestor dies after being hit by police car

http://www.youtube.com/watch?v=IlfQQ8IAr78
GRAPHIC – Iran Tehran 27 Dec 09 Tehran another protestor Dies

http://www.youtube.com/watch?v=Bt45DwhJO90
Graphic,Shooting in Sirjan – a dead guy shot in the heart

http://www.youtube.com/watch?v=mYqwdFAKwoE
Another young man down

http://www.youtube.com/watch?v=bxynBxvv2gY
December 29, 2009 Basij shooting into air to disperse the protesters

http://www.youtube.com/watch?v=tr7IaluOC9M
Dec 27, 2009 Another dead protestor

http://news.gooya.com/didaniha/archives/2009/12/098353.php
Another video of the same scene

http://news.gooya.com/didaniha/archives/2009/12/098372.php
Ashura turned into hell

http://www.youtube.com/watch?v=VytORI4VY9k
http://www.youtube.com/watch?v=evYX9FRkzoY
Another dead protestor

http://www.youtube.com/watch?v=cvR0U13FRT4
Dec 08 2009
Basijis pushing the students at the University of Tehran

http://www.youtube.com/watch?v=JcRZc1S4CRE
Nov 4 2009
An officer beats a girl in the leg and when a guy tries to help her, he goes Mui Thia on him.

http://www.youtube.com/watch?v=CZyl9PhaiYc
A basiji beats a girl against the wall

http://www.youtube.com/watch?v=MkKgA3iScWo
Animal Basijis beating people

http://tagheer.net/fa/archives/1388,08,16/934
Basij forces with their “weapons”

http://www.youtube.com/watch?v=N1rdpvvPRJA
Graphic video of injured young woman in 13 Aban protests with bloody gash on her head

http://www.facebook.com/photo.php?pid=3430619&id=109834371370
Tortured on his back

0:49 The police is shooting at close range — not sure whether he is using a live ammu or dud
http://www.youtube.com/watch?v=r3YxVuD101s
http://www.youtube.com/watch?v=83PHiVzNgUI
Prior to the shooting
http://www.youtube.com/watch?v=YPOFnsggHNM

http://www.youtube.com/watch?v=knveuLc6KPE
A protester shot by a sniper rifle. Disturbing images from iran protests.
June 24, 2009

http://www.youtube.com/watch?v=-UX5Ktgeeag
Basij fires flare shots or tear gas into the crowd – Karim khan st. Tehran, July 31 2009 — 8 mordad-vahshi baziye basij-meidane vali asr-ebtedaye karim khan-khiabane beh afarin

http://www.youtube.com/watch?v=Lg8a-OvYa-0
Tehran Basiji’s Violence 30 July

Plaincloth Basij shooting with handguns and injuring one guy while others shoots with machine gun
http://www.youtube.com/watch?v=j1WrL9G5J9E

Straight shooting at the demonstrators by the plaincloth Basij
http://2.bp.blogspot.com/_zOZeGXzZT8Y/Sk97KGcgbHI/AAAAAAAAACk/kI15E7JpT2w/s1600-h/21.jpg

A 19-year-old Iranian female iReporter talks about the role of women during the protests in Iran and what she personally endured!!!
http://www.youtube.com/watch?v=LdTpk__f_eE

Severly beaten protester presumably
http://www.flickr.com/photos/29148855@N07/3678819586/

Two Iranian students are shot, one leaves this world to a better place
http://www.youtube.com/watch?v=BnDnOYdBLqs

Basiji Attack Camera Man Iran Protests 09 July 2009
http://www.youtube.com/watch?v=Q03lMQBM9co

Bloody hand
http://cache.daylife.com/imageserve/02atbiA1324zG/610x.jpg
http://cache.daylife.com/imageserve/0ddccsLaVMfuV/610x.jpg

Bloody woman
http://cache.daylife.com/imageserve/0fWx4M41r9bbZ/610x.jpg

A man beaten on the head, bleeding
http://3.bp.blogspot.com/_SbiVoGqVHZk/SjbFrRlxfPI/AAAAAAAAAuU/3I026VloXKo/s1600-h/re.jpg

http://www.washingtonpost.com/wp-dyn/content/gallery/2009/06/10/GA2009061002480.html
1. June 27

Egyptian anti-riot police prevent demonstrators from gathering at a downtown Cairo street during a protest to honor slain Iranian protester Neda Agha Soltan, who was killed by a shot to the chest during a protest following Iran’s June 12 elections.

Hit with baton, slightly bleeding
http://4.bp.blogspot.com/_SbiVoGqVHZk/SjQxOwVqE-I/AAAAAAAAAcc/YJJdmAHmzQw/s1600-h/3622325088_d967efd9ea.jpg

Riot police and Basij beat up a protester – June 26, 2009
http://www.youtube.com/watch?v=Gyq4CUmqk2k

Man lying on bed, bleeding
http://4.bp.blogspot.com/_SbiVoGqVHZk/SjWCG78RsAI/AAAAAAAAAlU/tqn4FDdQED4/s1600-h/14062009048660.jpg

Shot individual is being attended at some corner
http://api.ning.com/files/z2rd8zF7kQyGBHKg-JEpH–yr7em4eVvfWXyQsCr2Oe2iJ-UEzKKUZwgcokHsVW6j5gHfyIlG47nTaAK*WpP6kPl0jqxLwFA/r2887862427.jpg

An injured supporter of Iran’s moderate presidential candidate Mir Hossein Mousavi has blood wiped off his face during a protest against the election results in Tehran June 13, 2009. Hundreds of supporters of President Mahmoud Ahmadinejad and moderate challenger Mousavi clashed in Tehran on Saturday after a landslide victory for Ahmadinejad in a presidential election, a Reuters witness said.
http://macleans.files.wordpress.com/2009/06/rtr24ma3.jpg?w=635

A beat up riot police is saved by the protesters — Micheal Jackson They don’t care about us
http://www.youtube.com/watch?v=lm-FUQUKoXM

Iranian supporters of defeated Iranian presidential candidate Mir Hossein Mousavi are followed by Iranian riot-police in front of Tehran university during riots in Tehran, Iran, Sunday, June 14, 2009. Iranian youth opposed to President Mahmoud Ahmadinejad took to the streets Sunday, setting trash dumpsters and tires on fire, in a second day of clashes triggered by voter fraud claims.
http://macleans.files.wordpress.com/2009/06/6875605.jpg?w=635
http://macleans.files.wordpress.com/2009/06/6874808.jpg?w=635

Shiraz, government thugs attacking people, women and children, bruise on a boy’s arm left by a baton, broken car window — in front of Hafez hospital – June 10, 2009
http://www.youtube.com/watch?v=f7TLJEAQ5nQ

Iran: Ariel View of Tehran Chaos – June 20 2009, Basij forces taking a direct aim at the demonstrators with a live bullet on the rooftop
http://www.youtube.com/watch?v=pryRMOTGMkI
http://www.youtube.com/watch?v=SOyc3On8CiE

Laceration on several protesters
http://i.friendfeed.com/e927c57e7bb7d344a8f6391b6d7f94c6cd962e77
http://i.friendfeed.com/63d46e54c7de191577461013cc6dd772de31ca48

The faces of rehabilitators after (coerced) confession in front of the camera
http://www.facebook.com/photo.php?pid=30373572&op=1&view=all&subj=94189963070&aid=-1&oid=94189963070&id=1243757199

A young man shot dead and dragged on the street, shots fired
http://www.youtube.com/watch?v=1RKOR15JDfk

University Dorms 24 Khordad 1388, injuries sustained from the beatings
http://www.youtube.com/watch?v=tutYRWvO9Zc

Basij beaten then rescued by some people
http://www.youtube.com/watch?v=KyNOnXZOdDQ

Splattered blood of a shot man
http://www.youtube.com/watch?v=d9DY0d8sHm0

3 tir 1388 = 24 June 2009 Baharestan sq In Tehran, Iran
http://www.youtube.com/watch?v=-2W5GPmPR8o

Iran Tazahorat va tirandazie Basij
http://www.youtube.com/watch?v=SI-gHKd5B38

Girl shot in Teheran
http://www.youtube.com/watch?v=SDzei8meXQE

Police beating people in their home yard 14 June 2009 Tehran Iran
http://www.youtube.com/watch?v=HOMyzu6vCB8

Basij entering private homes
http://www.guardian.co.uk/world/video/2009/jun/24/iran-election-unrest

Iranian Regime Thugs Are Beating Foreign Reporters In the Streets
http://www.youtube.com/watch?v=vkc99qOZHBw

Police brutality Iranians protest against election results Tehran 15 June 2009
http://www.youtube.com/watch?v=VJxhPa3eD-I

Gun Shooting in tehran streets
http://www.youtube.com/watch?v=d-uTZBDcgNw

Iranian riot police beating people
http://www.youtube.com/watch?v=T6EUdaGqxQA

iran riot police beatings caught on tape june 15 2009
http://www.youtube.com/watch?v=_adPglFZD90

shot by the iranian police during the protest
http://www.youtube.com/watch?v=rXZuiFsHtlQ

GUN SHOT 15 JUNE 2009 – Protest and strikes in
http://www.youtube.com/watch?v=wQbuD5HDJxo

Beging of gun shot 25khorda88- 15 june2009- Tehran -Iran
http://www.youtube.com/watch?v=-h8Ig2h5bUk

Basij home being surrounded and shooting to the people
http://www.youtube.com/watch?v=EsHE_uUJJdw

Shooting at the demonstrators in the allys
http://www.youtube.com/watch?v=O8aKsXaMPNg

Attack a Basij building and subsequence shooting of the armed forces at people
ttp://www.youtube.com/watch?v=cNStzr9n5Ww

Azarbayejan, Tabriz (!) video of burning car and regime shooting at people
http://www.youtube.com/watch?v=rGcSU7FcgQw

Protesters and shooting
http://www.youtube.com/watch?v=OHS1y3taOtE

People beating Basijies and clearing their way
http://www.youtube.com/watch?v=_kTgSXy4fCk

A young university students is shot
http://www.youtube.com/watch?v=BKX3D_tEPPk

Murdered young man
http://www.youtube.com/watch?v=imrNZmnKgPM

Iran Tehran Tazahorat va koshte shodane javanane Irani
http://www.youtube.com/watch?v=v2MCARhjqIU

Protestors overcome the riot police and have them on the run
http://www.bbc.co.uk/persian/iran/2009/06/090621_ag_street_clashes.shtml

Police senseless vandilism
http://www.huffingtonpost.com/video/video_1225.html?1245623678

Stabbed Student
http://2.bp.blogspot.com/_c3WtQv44wGc/Sjn0JDFy-pI/AAAAAAAABX0/kK8ox_k9KFM/s1600-h/stabbed+student.bmp

Neda #Neda girl protester shot killed in Tehran by Basij AmirAbad massacre “The Voice”
http://www.youtube.com/watch?v=np4xJ3vFOBE
http://www.youtube.com/watch?v=ivdKvsW2kmM

http://www.salon.com/news/primary_sources/2009/06/24/iran_photos/
The torture of a 17-year-old in Iran

A teenager’s story, with graphic photos, of abuse at the hands of Iran’s religious paramilitaries, the Basij

Injuries mount amid Iran protests
http://www.guardian.co.uk/world/video/2009/jun/22/iran-protest-injuries

Protesters on the streets of Tehran
http://www.guardian.co.uk/world/video/2009/jun/22/iran-protests-tehran

http://www.youtube.com/watch?v=NUqmICa5_d0
tehran massacare by basij 1

http://www.youtube.com/watch?v=6xEiZQxSms4
tehran massacre by basij

http://www.youtube.com/watch?v=hFxELSYIbNc
Tehran Riots beating 22 June Tazahorat

Bleeding at the back of the car
http://www.flickr.com/photos/fhashemi/3652044371/sizes/o/

Bleeding beaten on the sidewalk
http://www.flickr.com/photos/fhashemi/3646366651/sizes/o/
http://www.flickr.com/photos/fhashemi/3636327528/sizes/o/

“In Baharestan we saw militia with axe choping ppl like meat – blood everywhere – like butcher . . . Fighting in Vanak Sq, Tajrish sq, Azadi Sq – now . .”
http://www.huffingtonpost.com/video/video_1242.html?1245860957

Kerman demonstration
http://www.youtube.com/watch?v=k5zLcD3Dp5g

Beat up by the riot police
http://www.flickr.com/photos/fhashemi/3647173192/sizes/o/

Beat up to the side of the head
http://www.flickr.com/photos/fhashemi/3644588398/sizes/o/

Lone protester in front of Ahmadinejad’s convoy
http://www.flickr.com/photos/fhashemi/3639493316/sizes/o/

Cut forearm by the Basij
http://www.flickr.com/photos/fhashemi/3632714408/sizes/o/

Plummeted in the eye
http://www.flickr.com/photos/fhashemi/3631900935/sizes/o/

Hit in the face
http://www.flickr.com/photos/fhashemi/3631332924/sizes/o/

Riot police beat down
http://www.flickr.com/photos/fhashemi/3631332730/sizes/o/

Hit in the eye socket
http://www.flickr.com/photos/fhashemi/3629097479/sizes/o/

Smuged in the head
http://www.flickr.com/photos/fhashemi/3629911968/sizes/o/

http://www.flickr.com/photos/fhashemi/3629096417/sizes/o/
Batoned on the heap

Batoned on the back
http://www.flickr.com/photos/fhashemi/3629817610/sizes/o/

Basij cowards shooting at people while being chased
http://www.youtube.com/watch?v=XcHnBOsEMGE

Basij being chased gradually out of the neighborhood
http://www.youtube.com/watch?v=wn9wcgwXP3g

Anti-riot guards are intruding a private house and beating a person to death in Tehran
http://www.youtube.com/watch?v=pSj4i6pSgSA

Shot in the belly area
http://www.youtube.com/watch?v=02aYIDHHeiw

Not a good challenging of the Basij bikers
http://www.youtube.com/watch?v=ucoa7B3Xz7c

Injuries mount amid Iran protests

Amateur footage shows an injured man receiving help during protests over the presidential election results

http://www.guardian.co.uk/world/video/2009/jun/22/iran-protest-injuries

http://www.guardian.co.uk/world/2009/jun/24/neda-soltan-iran-family-forced-out

Neda Soltan’s family ‘forced out of home’ by Iranian authorities

Parents of young woman shot dead near protests are banned from mourning and funeral is cancelled, neighbours say

guardian.co.uk, Wednesday 24 June 2009 18.00 BST

http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i14_19370659.jpg
Hard-line supporters armed with batons try to break into a house where protesters found shelter in central Tehran June 14, 2009

Iranians armed with sticks and batons ride on motorcycles during protests in central Tehran June 14, 2009
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i24_19370655.jpg

Armed with handguns, members of the Iranian security force, in civlian clothes, fire warning shots to disperse supporters of Mir Hossein Mousavi in central Tehran on June 14, 2009.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i32_19369363.jpg

A man lies on the back of a taxi, after being seriously injured by gunfire in an area where pro-government militia were firing shots near a rally supporting leading opposition presidential candidate Mir Hossein Mousavi in Tehran, Iran, Monday, June 15, 2009.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i39_19381431.jpg

A man lies the back of a truck after being seriously injured by gunfire in an area where militia were firing shots at a rally supporting Iranian President Mahmoud Ahmadinejad’s top opponent on Monday, June 15, 2009.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i40_19381629.jpg

Onlookers observe the body of a man allegedly shot by pro-government militia near a rally supporting leading opposition presidential candidate Mir Hossein Mousavi in Tehran, Iran, Monday, June 15, 2009.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i41_19382207.jpg

In this series of four photographs, supporters of Mir Hossein Mousavi confront riot police and Basij militia members in Tehran, Iran on June 20, 2009. In the top photograph, the man at far right brandishes a handgun that he apparently just fired into the air. In the second photo, protesters approach in spite of the brandished gun – the man in the gray shirt apparently comes too close, and in photo three, he is attacked by a member of the militia. Photo four shows an apparent retreat of militia members as stone-throwing protesters advance on them.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_22/i30_19430395.jpg

In this photograph posted on the internet, a wounded man is treated on the street by others in Tehran, Iran on Saturday June 20, 2009.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_22/i31_19435829.jpg

Basij gang up on a handcuffed boy and beat him senseless
http://www.youtube.com/watch?v=GWyUFQ3bUuM

A man dies of gun shot by the Basij
http://www.youtube.com/watch?v=z4o2fRxRlRM

Iran after election 2009 (Police are staying in between the people)
http://www.youtube.com/watch?v=zPeDOhHOIQ4

iranian police attacking the protesters at night
http://www.youtube.com/watch?v=EMQ3qb44MGs

Basij thug carrying a dagger
http://www.daneshjooyan.org/farsi/news/8803/lebas-shakhsi-chaghoo.jpg

Iran-LiveLeak com IRAN NOW; Police Attacks university students; UNBELIEVABLE FOOTAGE
http://www.youtube.com/watch?v=cwCAtxJkB5c

Police beating up people with baton Iran
http://www.youtube.com/watch?v=Sy6p6648nZ0

Basij Militias Hitting a Defenseless Girl In Rasht a City in Northern Iran
http://www.youtube.com/watch?v=fCDqnrQ31Yc

Protesters in Esfahan, Iran receive first aid in a garage after having been shot by Khamenei police. Some have died from gunshot wounds and can be seen lying dead on the ground.
June 21, 2009
http://www.youtube.com/watch?v=HupHG8Co0y8

http://3.bp.blogspot.com/_L6pDyjqqsvY/Sj7BmeFtmBI/AAAAAAAAcTM/smR_VUv-iJk/s1600-h/basij3.jpg
http://4.bp.blogspot.com/_L6pDyjqqsvY/Sj7BOtmVTDI/AAAAAAAAcTE/lzJMupYMd8U/s1600-h/basij2.jpg
http://4.bp.blogspot.com/_L6pDyjqqsvY/Sj7BEXrGDAI/AAAAAAAAcS8/8uKd9wBcJPQ/s1600-h/basij.jpg

A doctor that was on the scene when Neda got shot and died says he saw people grabed a person who was Basiji and shouting “I didn’t mean to kill her.”
http://news.bbc.co.uk/1/hi/world/middle_east/8119658.stm

This thug’s name is, Hassan MirKazemi. Head of Basig force in AlHadi mosque. CEO of Metal World, Inc. in Karaj, Iran
http://edmonton.persianblog.ir/post/13/
http://twitpic.com/83shm
Information on Universal of Metal
http://www.peykerooz.com/Job/13322_data.aspx

Two women who witnessed the protests and violence in post-election Iran are in the U.S. CNN’s Ted Rowlands reports.

Security forces wielding clubs and firing weapons beat back demonstrators who flocked to a Tehran square Wednesday to continue protests, with one witness saying security forces beat people like “animals.”
http://www.youtube.com/watch?v=SS059IZiXyg

Tehran – yek javoone tir khorde dar yadegare emam
http://www.youtube.com/watch?v=9V0LOA9wkm8

Tehran – begir begir too Khiaboon
http://www.youtube.com/watch?v=43XhxvpGkP0

New Violence: Iranian Police Use CS Gas On Protesters
http://www.youtube.com/watch?v=T3cehHBsZXM

Tehran – 23 June hamleh be mardom
http://www.youtube.com/watch?v=AcfWjFIWHDY

Shooting 13 June 2009 Tehran near Metro station Iran Tehran
http://www.youtube.com/watch?v=-6PSIO9FgmY

Shiraz University – Shiraz- Iran People are demonstrating in many cities in Iran
http://www.youtube.com/watch?v=GI35sqVcRSQ

iran; iranian snipers is taking out protesters june 24 2009
http://www.youtube.com/watch?v=dD5Wrh9rt34

Basij recurit says he gets paid 200k Toman per day and there are Arabs among the force but they stay in different hotel
http://www.roozonline.com/persian/news/newsitem/article/2009/june/24//200-3.html

Tehran Baharestan real footage 24 June Tazahorat, first they advance and take one basiji but the forces come back and take a few and run
http://www.youtube.com/watch?v=MD13WNKNGQk
http://www.youtube.com/watch?v=h2IZ_yi_3sA

Eyewitness Account of the Massacre at Baharestan Square, Iran.
http://liberal4lifeblog.blogspot.com/2009/06/eyewitness-account-of-massacre-at.html

Scores of injured protesters being brought to some building – Date is unknown
http://www.youtube.com/watch?v=fACeoTc3DnE

Babol, Iran, Basij plaincloth forces with baton and some motorcyle helmat make their presence in the square known – June 15, 2009
http://www.youtube.com/watch?v=LtFfmJyQQK4

Injured at the back of the car seat being carried to hospital
http://twitpic.com/7i8bz

crime in university of Shiraz/Iran
http://twitpic.com/7f6kj

Firing tear gas at the demonstrators
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97711.jpg

The beat down by the riot police
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97712.jpg

Protest in Tehran, June 208, 2009 — a demonstrator bleeding from his head
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97598.jpg
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97597.jpg

Saturday battles in Tehran between Reformists and Basij – injured man being carried away
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97659.jpg
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97655.jpg

Some stores were being marked by the Basij
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97688.jpg
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97686.jpg
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97684.jpg

A proteter seems to be shot June 16, 2009
http://www.youtube.com/watch?v=cwKa-p7gcI8

Riot police and Basij beat up people at the bus station with baton
http://www.youtube.com/watch?v=0tnwaquaOZE

http://shooresh1917.blogspot.com/2009/07/what-goes-on-behind-bars-in-iran.html
The following document consists of, statements of those who who were recently freed from the IRI’s different prisons. This information is being published to show the kind of torture they people have been through, and is to show the depth of the problem we are facing. It has minor formatting and is mainly just listed. Due to security reasons the identities have been kept private.

A witness states: some have been released by 50 thousand toman bails, and some others have paid, were as high as 50 million toman on bail. The file’s have been submitted to the Enghelab court for further investigations. There are still many in prison, who’s family and loved ones have not heard from and do not know if they are still alive or have been killed.

In continuation:

* 1. As expected not everyone was arrested during the rallies. Many were arrested as they were going about their daily business like, getting off of a taxi, leaving the metro station, or just taking a walk around town and were even away from the crowd. Some state their homes were attacked in the middle of the night, and they were taken in to custody. A 16 year old prisoner’s family states, even though he was bailed less than a week ago, last night their home was attacked in the middle of the night and he was arrested and taken from his own bed.
* 2. Many different class of people are observed amongst the prisoners, from teenagers and regular people to university professors and the noblemen of the society, who were mainly arrested in groups. One states he left his home to get ice cram, and was arrested on his way back home while he was still holding his ice cream. Mahtab Nasir Poor is amongst the celebrities who were recently arrested.

Some foreign citizens were also spotted in Evin prison, such as an African American and a turkish prisoner, who did not even understand Farsi. One was arrested while driving his in labor wife to the hospital, and as of now does not know the condition of either his wife nor his child. A dentist was arrested in his own dental office. Also there has been news of a basij crowd member who was arrested because apparently he did not look like other basij members and was beaten severely, he states he even had possession of his active basij card at the time of his arrest. A witness has stated the number of arrests are so high that often older prisoners are used as Guards! Due to lack of space the prisoners are forced to make use of the space they have and there is very high chance of spread of disease in between them.

* 3. Even those who were arrested out side of the rallies were violently beaten with batons, bats, and electric batons. The word has it one of the plain clothes has shot a prisoner in his thigh form close range. Prisoners were tortured in many places such as specified prisons, basij stations, police station and ect… the worst tortures were noticed to be done at basij and police station of Vahdat Eslami street. More information on the kinds of torture used can be found below.
* 4. The ones who were brought in injured are denied medical attention, and their families are not even allowed to give them medicine or anything of that sort. One injured states he was hit in the face after requesting medical treatment for his broken nose, which was done during the riot with baton.
* 5. The investigation are done in long sessions (7-12 hours or even more), with no break in between. In these investigations they will try anything to get a confession, also they are known to have kept the email address and cell phones of the prisoners, and kept controlling their communications.
* 6. After being released, their belongings are not given back. Word has it, one was released from prison with only his underwear on his back and nothing els.
* 7. Apparently sexual harassment is one of their ways, it worries us that it is seen more towards women and political prisoners. specially since and it goes completely against the Iranian cloture and their beliefs. Of course there is no way of proofing that since there are not autopsies preformed on the corpses that come from a neutral coroner’s office.
* 8. The prisoners, nor those who have ben released, are in a good mental condition. Some have not been able to get a decent night sleep, due to the traumatic scenes they have seen over the past couple of weeks, and have decided they are better off not even going to bed.

The kinds of tortures used on prisoners:

ones who have been arrested by lain clothes and basij, were severely beaten, and were transferred to detention facilities and basij stations, and at the end before being taken to Evin prison, transferred to investigation department of Shapoor ( Vahdat Eslami). They were tortured severely in each and every one of these facilities, and have heard complains from the police force about them being limited on beating the prisoners, due to the severity of the prior tortures they had gone through, but still they were not hesitant about it.

The interesting point is they were actually enjoying putting people through this, and all of the beating was accompanied by their laughter and mockery.

* Word has it, they broke the left side of someones scull, and to make it even they broke the right side as well.
* During a group beating of prisoners, they were told by someone, that captives should not be tortured, then he has pushed everyone aside, and started the beating himself, after he was tired, he has ordered them to resume their beatings.
* One states after requesting for his hand cuffs to be loosened a little bit, they have actually made it tighter to the point that it had pinched the skin, and he was taken from one place to another by his cuffs.
* Some prisoners state, they were forced to kneel in front of a wall for 4 days straight, and were only given two small portions to eat, and during the 4 days, they were beaten in the head if they had happened to fall sleep.
* One states the first shock he had gotten from taser, has thrown him almost 2 meters away, but now after being tortured, he has no reaction to the taser gun.
* The ones who were a little more buffed were more in target, with the excuse of demolishing public properties and hitting the security forces.
* Group beating of prisoners, hitting with baton, cable, bats, taser as well as kicking the prisoners in the face even the injured, has been seen a lot.
* A witness states, some injuries were due to hitting and kicking, and also hitting with bloody cables, chains and etc…
* wrist fractures were seen in most cases.

IRAN: Clashes with plainclothes – July 03, 2009
http://www.youtube.com/watch?v=AD_Rd_MxcFg

NOTICIAS BASIJ ON THE STREETS OF TEHRAN 9jul09
http://www.youtube.com/watch?v=Zw1xOWNcw34

********** Chase

Attacking people in Iran by police and Besij forces
http://www.youtube.com/watch?v=deZvZCCd6fo

9 July 2009 Tehran – Protesters chased by anti-riot police help a brave woman
http://www.youtube.com/watch?v=GyeDq_rVS_Y

********** Dorms

Dormatory break down

http://www.flickr.com/photos/fhashemi/3629817388/sizes/o/
http://www.flickr.com/photos/fhashemi/3629001957/sizes/o/

Dormatory break down — door
http://www.flickr.com/photos/fhashemi/3636327250/sizes/o/

A poster of defeated candidate Mir Hossein Mousavi is seen on the broken-down door of a room in Tehran University dormitory after it was attacked by militia forces during riots in Tehran, Iran in the early hours of Monday, June 15, 2009. Overnight, police and militia stormed the campus at the city’s biggest university, ransacking dormitories and arresting dozens of students angry over what they claim was election fraud
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i33_19376901.jpg

An image of Mir Hossein Mousavi is seen (lower left), fixed to a desk with a smashed computer monitor in a room in a Tehran University dormitory after it was attacked by militia forces during riots in Tehran, Iran in the early hours of Monday, June 15, 2009.
http://inapcache.boston.com/universal/site_graphics/blogs/bigpicture/iranelect_06_15/i34_19376873.jpg

Protesters in London show support of the people’s uprising – June 2009
http://www.daneshjooyan.org/images/8803281101/

Basij (paramilitaries) & Riot Police Attack Tehran University at night – This is the Aftermath
http://www.youtube.com/watch?v=FzUhJXTspcw

Elevator destoyed in Tehran University dormitory
http://twitpic.com/7kz6e

Labs destroyed
http://2.bp.blogspot.com/_SbiVoGqVHZk/SjYWHjHfTTI/AAAAAAAAAms/46Mis-5s3JE/s1600-h/img_3941.jpg

Basij’s confrontation in the University of Azad with students, kicking and shoving
http://www.youtube.com/watch?v=xlAmLtyjpwM
http://www.youtube.com/watch?v=d1h9v4ChWuY

******** Protests abroad
Iranian people protest against Fraud in Iran presidential election in Vancouver (1388)
http://www.youtube.com/watch?v=MdFX7rV4JqM

Vancouver Iranians Protest in support of movement in Iran – June 14 – Convention Center
http://www.youtube.com/watch?v=xnlcBwuoTNU

Iran Election Protest in Vancouver – 14 June 2009
http://www.youtube.com/watch?v=2S5SDJ0lnuI

Iran Election Protest – Vancouver – 14 June 2009
http://www.youtube.com/watch?v=IO0nid8AGHE

http://www.flickr.com/photos/12710985@N02/1329464869/
iranian police arrested woman who has not cover her hair or wear a dress that show her body and make male horny heehee

UC-Berkley Protest in Support of the People’s Uprisings – June 2009
http://www.daneshjooyan.org/images/8803251439/

protest for iran perth australia
http://www.youtube.com/watch?v=Y4oR6MIhoLM

Demonstration at 14th June 2009 in Brussels against unjustice in Iran
http://www.youtube.com/watch?v=vnlfhATGFPU

Protest in Boston Harvard Square Cambridge 06 14 09
http://www.youtube.com/watch?v=xC2mLYhCrPk

Tazahorat Demonstration Iran Deutschland Alman Hamburg 16-06-09 Part(1)
http://www.youtube.com/watch?v=8OCYuMoHbXA
http://www.youtube.com/watch?v=6Dri0TdPKUM
http://www.youtube.com/watch?v=Lt6oIkOCOB0
http://www.youtube.com/watch?v=TZa5-IzDMU0
http://www.youtube.com/watch?v=Wy_qUnvMMIw
http://www.youtube.com/watch?v=OupSpfhSUTI
http://www.youtube.com/watch?v=6Vapj6UqgyY

azahorat Frankfurt #1
http://www.youtube.com/watch?v=vgpv7NtMOnw
http://www.youtube.com/watch?v=j_yOZpeQi40
http://www.youtube.com/watch?v=rknDcTQVZPQ
http://www.youtube.com/watch?v=DO4qFcrGH3c
http://www.youtube.com/watch?v=8gagYyJfLmE
http://www.youtube.com/watch?v=sVmYo2OWprQ

tazahorat dar wien 2009 part 1
http://www.youtube.com/watch?v=pF-g2NMSD4o
http://www.youtube.com/watch?v=DYnkMte-uMY
http://www.youtube.com/watch?v=xy6GzCPwrp0
http://www.youtube.com/watch?v=N7QgvcQtn-c
http://www.youtube.com/watch?v=vRkx9ICny-I
http://www.youtube.com/watch?v=OFNh9RtaTIg

London
http://www.youtube.com/watch?v=CNukYUc2szM
http://www.youtube.com/watch?v=n-zD0x3kDrY
http://www.youtube.com/watch?v=d047aWrfqrI
http://www.youtube.com/watch?v=qzhRc3dB2SE

Dubai
http://www.youtube.com/watch?v=4UdfSM1KZVM
http://www.youtube.com/watch?v=QL4Wo9yQ7kE
http://www.youtube.com/watch?v=leEgeczciXg
http://www.youtube.com/watch?v=R556L0IRzHc
http://www.youtube.com/watch?v=DzHRcXH3jvg
http://www.youtube.com/watch?v=n_jYjRPqw3g
http://www.youtube.com/watch?v=52hrOwsvmaU
http://www.youtube.com/watch?v=iwodJnOeICY

Washington
http://www.youtube.com/watch?v=pkMdXjesWP4
http://www.youtube.com/watch?v=bo_nL-0Dixk
http://www.youtube.com/watch?v=6ctgCj00iGg
http://www.youtube.com/watch?v=sH25WjHKfBA
http://www.youtube.com/watch?v=HI9xet3TvXo
http://www.youtube.com/watch?v=gdH_wbEOdF0
http://www.youtube.com/watch?v=QdPk-ybtO6M
http://www.youtube.com/watch?v=Snh6Ymu0O-Y

Rome
http://www.youtube.com/watch?v=-ko91WrYgzQ
http://www.youtube.com/watch?v=TM0VgtutOTM

Berkeley San Francisco
http://www.youtube.com/watch?v=ZA4JG1El6Xo
http://www.youtube.com/watch?v=IkzR8q2iC-Q
http://www.youtube.com/watch?v=ZA4JG1El6Xo
http://www.youtube.com/watch?v=SoveYVMjfm4
http://www.youtube.com/watch?v=BfRf4GE62cg
http://www.youtube.com/watch?v=UAb4GyfK0qE
http://www.youtube.com/watch?v=it9pZaAlyxc

Los Angeles
http://www.youtube.com/watch?v=Vu4nxM-4gh4
http://www.youtube.com/watch?v=kiMEoqu-yGM
http://www.youtube.com/watch?v=sZoCUWJzxfE
http://www.youtube.com/watch?v=OGwf_u2aG7o
http://www.youtube.com/watch?v=Bb9aRgdN2kU
http://www.youtube.com/watch?v=XIqCX-SX0xE
http://www.youtube.com/watch?v=U7b6ikNp9HY

Solidarity with Iran, Sunday, June 21st, 2009, Toronto ( II )
Solidarity with Iran, Protesting brutality against Iranian people Location:Queens Park Time:2:00PM to 4:00 PM
http://www.youtube.com/watch?v=RobPYpDAAQQ
http://www.youtube.com/watch?v=ajZkQhnNDTY
http://www.youtube.com/watch?v=B2JW8U1cHbs
http://www.youtube.com/watch?v=B2JW8U1cHbs
http://www.youtube.com/watch?v=b8XB-TXEQmw
http://www.youtube.com/watch?v=OLQ1eSRPYSk
Iranian Rally in Toronto – CBC Radio’s Jian Ghomeshi at Toronto’s Queen’s Park (21.06.2009)
http://www.youtube.com/watch?v=2LDYDCkYsSM
http://www.youtube.com/watch?v=uATzpShETdo
http://www.youtube.com/watch?v=gfHtk7jC1GA
http://www.youtube.com/watch?v=fEPJ23EmF9o

Iranian embassy protest in Bern 26.06.2009
http://www.flickr.com/photos/raphael_moser/sets/72157620604675646/

Anti Ahmadinejad rally in Cali
http://www.facebook.com/photo.php?pid=447984&id=1071637282&ref=nf#/album.php?aid=23833&id=1071637282

Iranian Elections Protested in Dallas, Texas – June 25, 2009
http://www.youtube.com/watch?v=wyQiXDBwfZc

Malasy, Demonstrators shout “Death to Dictator” in front of the Islamic Republic cousole
http://www.youtube.com/watch?v=gw1izMq7KMI

Iranian Expats Protesting in Greece, June 24, 2009
http://www.youtube.com/watch?v=zZdHTSubR7I

San Francisco, US, Iran walk on Golden Gate Bridge – June 26, 2009
http://www.flickr.com/photos/ari/sets/72157620623276290/

NYC, Paramount picture of the demonstration
http://www.twitpic.com/8j4nb/full
NYC Rally for Human Rights in Iran, 6/26
http://www.flickr.com/photos/39880630@N04/sets/72157620475713823/

Amersderdam, Holland
http://zamaaneh.com/morenews/2009/06/post_1057.html

NYC Iran Rally at the United Nations, 6/20
http://www.flickr.com/photos/39745562@N02/sets/72157620418632052/

http://www.youtube.com/watch?v=Cd4NeRHZ89E
http://www.youtube.com/watch?v=NZoW_RIiImc
http://www.youtube.com/watch?v=u-rErR1Zwfc
http://www.youtube.com/watch?v=sYF7Ftm-TtE

Spain, Madrid
http://www.demotix.com/news/viva-iran-viva-libertad-madrid

Iranians gather in Budapest
http://www.demotix.com/news/iranians-gather-budapest

Iranian ex-pats in Madrid protest in front of the Iranian Embassy
http://www.demotix.com/news/iranian-ex-pats-madrid-protest-front-iranian-embassy

Iranian Pro Democracy Demonstration – London
http://www.demotix.com/news/iranian-pro-democracy-demonstration-london

Paris Demonstration — Communist party?
http://photos-g.ak.fbcdn.net/hphotos-ak-snc1/hs113.snc1/5130_1117861421780_1084325032_30267934_2901484_n.jpg
http://photos-f.ak.fbcdn.net/hphotos-ak-snc1/hs093.snc1/5130_1117861381779_1084325032_30267933_4983283_n.jpg

About 100 demonstrators gathered in Cincinnati, Ohio on Fountain Square on June 27, 2009 to hold a rally in support of and to demonstrate solidarity with the people of Iran who have been protesting the results of their most recent election. These are the opening remarks. Audio and Images are both from the rally.
http://www.youtube.com/watch?v=raULz9e3ROE
http://www.youtube.com/watch?v=v_g0ec4T1nQ&feature=player_embedded

Paris rally – june 28, 2009
http://www.flickr.com/photos/sachaqs/sets/72157620539995973/
http://www.youtube.com/watch?v=knw0X-wA_Qc
http://www.youtube.com/watch?v=SUQtfo1mTF4
http://www.youtube.com/watch?v=x0M6rd_qqD0

June 25 solidarity event at the Irvine City Hall, CA where many, among them the Mayor of Irvine and the Chief of Police, attended. Some of the speakers:

— Mayor of Irvine, Sukhee Kang
— Mayor pro tem of Irvine, Larry Agran
— City council of Anaheim, Lorri Galloway
— City council of Costa Mesa, Katrina Foley
— Pastor Gary Chomiak, Congregational church of Fullerton
— President of UCI student association
— Dr. Cheryl Williams, VP of international & cultural Relations, Concordia University
— Dennis Short from Interfaith Peace Ministry
— Anila Ali from COPAA( pakistani-American Community)
— Harish Murthy from Indian American community
— Teresa Camacho from Mexican community
— Rrepresentatives from Iranian American organizations
http://iranian.com/main/albums/all-together

Protest organized by Amnesty international in Columbus Circle, New York City, June 26, 2009.
http://iranian.com/main/albums/big-green-apple

Photo essay: Demonstration supporting the struggle of Iranian people- 29-Jun-2009
http://iranian.com/main/albums/people-power-paris
http://www.youtube.com/watch?v=0mIU_J47vyA
http://www.youtube.com/watch?v=gejE_5_OPcU
http://www.youtube.com/watch?v=LM85SozR7mA
http://www.youtube.com/watch?v=3zrxg84Bh3Q
http://www.youtube.com/watch?v=T5O0-XS4DRY

Rally and vigil in Orange County, California
28-Jun-2009
At the corner of Jamboree and Barranca in Irvine.
http://iranian.com/main/albums/light-dark

Iranians in San Francisco mourn those killed in Iran protests 22-Jun-2009
http://iranian.com/main/albums/honoring-martyrs
Brussel 27 Jun 2009
http://www.flickr.com/photos/39901492@N03/sets/72157620741067502/

There was a demonstration outside the Iranian embassy in London on the 9th of July. About a thousand people gathered with banners, posters and flags in front of the embassy. It marks the 10th anniversary of the student uprising in Iran.
http://www.demotix.com/news/demostration-outside-iranian-embassy

Cyprus 9 July 2009 SHAME ON CYPRUS for breaking up an Iranian peaceful protest
http://www.youtube.com/watch?v=oFpAOMU7AC0

*********** Arabs
Arabs among Pasdaran
http://www.goftaniha.org/2009/06/blog-post_4044.html

protesters giving flowers to the police
http://www.ireport.com/docs/DOC-272472

*********** Demonstrations

Shiraz mollasadr, (1) 24.03.88

http://www.youtube.com/watch?v=fRNNsHjUPgY&eurl=http%3A%2F%2F74%2E125%2E47%2E132%2Fsearch%3Fq%3Dcache%3ApQL2LknvNJEJ%3Aforums%2Eiransportspress%2Ecom%2Fshowthread%2Ephp%253Ft%253D58926%2526page%253D3%2B%252Byoutube%2B%25D8&feature=player_embedded

Babol Ardebil – 25 khordad
http://www.youtube.com/watch?v=U4_DkO4Xt80

noshirvani babool1
http://www.youtube.com/watch?v=Oh46dkasAqg

Esfehan June 16, 2009
http://www.youtube.com/watch?v=hkTLaAa4tBE

A truck rams through the demonstrators in Tehran
http://www.youtube.com/watch?v=qiq4JgFEFhY

Assorted protesters in various locations
http://www.youtube.com/watch?v=x-wAqphAngI

Protesters in Haft-e Tir Square (Tehran) Protest – June 22, 2009
http://www.youtube.com/watch?v=HVAS2IRDky0

Tehran – Azadi Square, June 15, 2009
http://www.youtube.com/watch?v=ziWuZnHj5FQ

Demonstration in Tehran, June 15, 2009
http://www.youtube.com/watch?v=GZ-_EwYldlw

Rallying through Tehran, June 15, 2009
http://www.youtube.com/watch?v=O5E7jwib30U

Esfehan, people thanking the “Police” forces for their civil treatment of protesters – June 16, 2009
http://www.youtube.com/watch?v=H_ik7JBFPVo

Esfahan, people singing Doost’eh Dabistani, June 16, 2009
http://www.youtube.com/watch?v=kVhniGg6Kgc

Esfahan, Demonstrators congregating on some street, June 16, 2009
http://www.youtube.com/watch?v=9qqoQGqCvTQ

Azadi, Tehran, Demonstrators circle in the square and chanting, June 15, 2009
http://www.youtube.com/watch?v=Ul1dtbknR7s

Tehran, demonstrators shout “Mir Hussain” – June 16, 2009
http://www.youtube.com/watch?v=wZUJ0fQ7Pmo

Unknown location, demonstrators shut down the traffic by setting up fire in the middle of road- June 16, 2009
http://www.youtube.com/watch?v=b2Tu80hPMBg

Imam Khomeini Square, June 18, 2009
http://iran.whyweprotest.net/pictures/816-exclusive-people-gathering-emam-khomeini-square-18-6-2009-a.html

Esfahan Demonstration – Naghshe Jahan Sq
http://twitpic.com/7kim4
http://twitpic.com/7kiki
http://twitpic.com/7kiic
http://twitpic.com/7ki6e
http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=esfahan,+iran&sll=37.0625,-95.677068&sspn=54.884801,135.263672&ie=UTF8&ll=32.657072,51.677166&spn=0.0071,0.016512&t=h&z=17

South Mofatteh Street, Tehran, June 22, 2009 – Basij and Police occupy and station in Shahid Shiroudi Sports compound as the dispatch location. The protesters martch toward the compound but are scattered once the rows of motocycle Basij approach them. Then truck loads of forces are too sent to the direction of demonstrators.
http://www.youtube.com/watch?v=ie5izEsJK1U

Demonstrators run away from the Basij and police forces.
http://www.youtube.com/watch?v=j10WJTaNqwg

Tehran, demonstration on Sunday 28, 2009 — A mullah marching along side a secular woman
http://www.demotix.com/sites/default/files/imagecache/large_652x488_scaled/photos/97715.jpg

Treatment of an accused by the Iranian authority – beat up with the stick and baton then shoved into the trunk
http://www.youtube.com/watch?v=YISlFsIcZ34

Women’s demonstrations against Iran’s clerical rulers in Tehran!
http://www.flickr.com/photos/hamishak/1161604075/sizes/o/

Pre-election, Sharif University students express their lack of interest in having Ahmadinejad during his rally
http://xeegeex.blogspot.com/2009/06/blog-post.html

28 June 2009 Tehran – Iranians protest against election results
http://www.youtube.com/watch?v=HcKEeEIcDdA

Iran Riot in tehran streets
http://www.youtube.com/watch?v=MKREu7zjbC8

Riot in tehran streets Mix 15.06.2009 Iran Persian
http://www.youtube.com/watch?v=l1VtLTESzqk

Cleaners join the protests
http://www.youtube.com/watch?v=pmMU-JC8odE

Kermanshah — June 15, 2009
http://www.youtube.com/watch?v=_vVx2A3bgM8

Protests in Kashan University @ july 2009!
http://www.facebook.com/video/video.php?v=1021528238914&ref=nf

Intersection of Taleghani and Valiasr 18 tir 9th July
http://www.youtube.com/watch?v=Uq2usr3HAkA

Iran riots: 18 Tir 88 , demonstration in Tehran
http://www.youtube.com/watch?v=eoUgvrXprsA

Iran Tehran July 9 18 Tir Part 15
http://www.youtube.com/watch?v=JL219jB6o4I

TEHRAN, IRAN – JULY 9: Iranian Basij ride motorcyles while policing demonstrations on July 9, 2009 in Tehran, Iran. Following recent unrest in the wake of the disputed presidental elections, demonstrators were met by force and tear gas rounds fired by Iranian police and Basij as they defied government warnings to stage a march in commeration of the anniversary of bloody student unrest at Tehran University in 1999.
http://cache.daylife.com/imageserve/0fIc7GC4KSbLU/610x.jpg
http://cache.daylife.com/imageserve/0abgcfZ3Ikaop/610x.jpg

http://www.understandingiran.com/2009/06/elitists-versus-masses-in-iran.html
The Elitists versus the Masses in Iran
Posted by Farshad
Tuesday, June 23, 2009

http://my-vote.blogspot.com/2009/06/blog-post_7679.html
http://tehranbroadcast.com/Kian-Amani-Injured-by-the-Militia.html
Kian Amani Injured by the Militia on 18th June
translated by amiru
tags: Tehran

Kian Amani, a photo-journalist working for the “Cultural Heritage News Agency” (CHN) and some foreign journals was beaten and injured by plainclothesmen and security forces on Tuesday 18th June.

According to the HRAI (Human Rights Activists in Iran) news agency, While Kian Amani was doing some photography on the streets of Tehran, plainclothesmen and militia forces, equipped with batons, metal chains, knives and so on, attacked and beat him and broke his two cameras and professional lenses. Eventually Kian was saved by people and sent to the hospital. These assaults on Iranian journalists happen while dozens of foreign journalists and photographers were forced to leave the country as their visas were not extended. Furthermore, the remaining international news agencies were banned from covering the protests in Iran.

By imposing severe censorship on newspapers, slowing down the Internet and shutting down the text messaging services, the Iranian government tries to curb the circulation of information about the current protests.

http://online.wsj.com/article/SB124726981104525893.html
Inside the Iranian Crackdown
When the Unrest Flared, the Ayatollah’s Enforcers Took to the Streets of Tehran With Batons and Zeal
By FARNAZ FASSIHI

TEHRAN — When the protests broke out here last month, Mehdi Moradani answered the call to crush them.

On the first day of the unrest, the 24-year-old volunteer member of Iran’s paramilitary Basij force mounted his motorcycle and chased reformist protesters through the streets, shouting out the names of Shiite saints as he revved his engine.

On the fourth day, he picked up a thick wooden stick issued by his Basij neighborhood task force and beat demonstrators who refused to disperse.

By the eighth day, demonstrators alleging that President Mahmoud Ahmadinejad had rigged his re-election were out by the hundreds of thousands. Mr. Moradani says he mobilized in a 12-man motorcycle crew, scouting out restive neighborhoods across Tehran. He battled protesters with a baton and tear gas. The demonstrators fought back with rocks, bricks and bottles. Mr. Moradani says he handcuffed scores of demonstrators and dragged them away as they kicked and screamed.

“It wasn’t about elections anymore,” says Mr. Moradani, a short, skinny man with pitch-black hair and a beard. “I was defending my country and our revolution and Islam. Everything was at risk.”

The mass uprising against the results of the June 12 election by supporters of Mr. Ahmadinejad’s challengers has largely died down. Demonstrations this Thursday, though heated, drew thousands rather than hundreds of thousands. Iranian officials have said between 17 and 20 people have died in the monthlong protests. Independent organizations tracking human-rights violations in Iran put the death toll closer to several dozen.

If Supreme Leader Ayatollah Ali Khamenei succeeds in stamping out the unrest, it will be in large part because of Mr. Moradani and his colleagues in the Basij militia, the Islamic Republic’s most loyal foot soldiers.

The story of Mr. Moradani, a midranking Basij member, offers a rare glimpse into one of the most mysterious and feared arms of Iran’s regime — and into the group’s most significant mobilization since the Iran-Iraq War of the 1980s. This portrait of Mr. Moradani is based on interviews with him conducted in person and by phone, both before the uprising and after the crackdown began.

The Basij fanned out across Tehran, beating protesters with sticks, lining streets and squares, and roaring through neighborhoods on their motorcycles in a show of force. Regime officials praised the shock troops.

“Our efforts to unveil the faces of our enemy saved Iran from a grave danger,” Yadollah Javani, the political chief of the Revolutionary Guard Corps, which commands the Basij, said last week.

But the Basij also became the most visible target of the opposition’s fury. In some neighborhoods, protesters covered streets with oil to thwart Basij motorbikes, surrounding and beating fallen Basij riders.

The Basij was created in 1979 by the founder of the Islamic Republic, Ayatollah Ruhollah Khomeini. It was devised as a volunteer force, to back up the Iranian army in the Iran-Iraq war. Many of its young members were deployed to the battlefield to walk ahead of soldiers and detonate Iraqi mines.

After the war ended in 1988, the Basij evolved into a type of neighborhood task force. Members serve as law enforcers, morality police, social-service providers and organizers of religious ceremonies. In times of crisis, the Basij are tasked with restoring order and ferreting out dissidents.

Iran’s government says the Basij count some five million members. Independent analysts put the number closer to one million, out of an Iranian population of about 75 million.

Those numbers make the group the regime’s largest and most wide-reaching network of security volunteers. Members, both men and women, slip easily between roles, from social worker to community spy.

The Basij don’t wear uniforms. Men typically sport beards, and often wear loose-fitting shirts that fall untucked over their pants. Women members are usually covered in head-to-toe black chadors.

Rank-and-file members don’t draw salaries, though there are perks to the job. They enjoy special consideration when competing for university admission or government jobs.

A Basij chapter operates out of every officially sanctioned institution, private or government owned. Ministries, universities, factories, schools, mosques and hospitals all house Basij units. Joining the Basij can be as easy as signing up. But members are carefully vetted. Indoctrination includes theology and ideology seminars, then military training.

During the administration of reformist President Mohamad Khatami, from 1997 to 2005, the Basij were only called out during times of street protests. After Mr. Ahmadinejad won the presidency in 2005, the Basij enjoyed something of a revival.

Under Mr. Ahmadinejad, authorities reinstituted street checkpoints, manned by Basij and separate morality police, who monitored everything from men’s haircuts to how women wear their mandatory headscarves.

In 2005, Basij forces were placed under the command of the Revolutionary Guard Corps, Iran’s most elite security force. The Guard, with responsibility for internal security, runs a sort of parallel military, with its own air force and naval branches, its own ministry and extensive business activities.

Mr. Moradani is the son of a former commander of the Guard, who fought against Israel in Lebanon in the 1980s and helped train the armed militia of Hezbollah, the Lebanese Shiite group.

The eldest of three children, Mr. Moradani was enrolled by his parents in the Basij’s youth club when he was nine years old. The youth club is a mix between the Boy Scouts and Bible school. The clubs organize soccer games, swimming lessons and picnics in the woods.

Children are taught how to pray, and they recite Quranic verses. Religious teachings at the clubs emphasize the call to defend Islam, even at the expense of death, or martyrdom. Future Basij members to told to strive to create a pure society in line with conservative Islamic values.

Mr. Moradani remembers field trips to war monuments, Shiite shrines and so-called martyrs’ cemeteries, where those who died in the Iran-Iraq war are buried. He received his first military training before he turned 14, learning how to handle a gun and fight from trenches, he says.

When he was 14, the Basij forces piled Mr. Moradani and 100 other youths into buses and took them around the dormitories of Tehran University. At the time — 10 years ago this week — students had been orchestrating large, antigovernment protests. The demonstrations were among the most significant since the 1979 founding of the Islamic Republic.

Basij commanders ordered the teenagers to beat up student organizers, Mr. Moradani says. They did. In 2003, when student uprisings erupted again, he rushed to help quash them.

“The revolution and Islam need me. I will give my life in a heartbeat if the regime asks me,” Mr. Moradani said in an interview earlier this year at a shop in central Tehran, where he sells Islamic and revolutionary paraphernalia, including key chains, T-shirts and CDs. “Our society is now at the verge of sin and filled with antirevolutionary people.”

In his small store, Mr. Moradani works with his shoes off, because he also prays there. The shop’s walls are adorned with framed posters of Iran’s Supreme Leader Ayatollah Khamenei, Hezbollah leader Hassan Nasrallah and Mr. Ahmadinejad.

“My heroes,” he says.

Mr. Moradani, who lives in Shahr-eh Rey, a city adjacent to southern Tehran, didn’t attend university. He focused instead on his religious studies. He says he hopes one day to follow in his father’s footsteps and join the Revolutionary Guard.

He has taken the Guard’s rigorous entrance exam twice, passing the ideology and the written portions both times. But he failed the final hurdle: an intense interview that lasts six to eight hours. Applicants must discuss why they are loyal to the regime and the Supreme Leader. He intends to try again.

Mr. Moradani takes religious-singing lessons and aspires to master “madahi,” the art of chanting Shiite religious odes at holy ceremonies. His cellphone is programmed to ring with a famous religious song about Imam Hussein, a Shiite saint.

Before the election, Mr. Moradani campaigned for Mr. Ahmadinejad. He printed campaign posters and pasted them on walls. The day after the vote, with his candidate declared the winner, Mr. Moradani bought a box of chocolate cupcakes and drove his motorcycle to one of Mr. Ahmadinejad’s campaign offices to celebrate.

A few hours later, he recalls, he was shocked to see demonstrators filling the streets. They set plastic trash bins afire along Tehran’s long Vali Asr Avenue. Men and women, gathered in clusters across town, shouted “Death to the Dictator.”

Riot police chased them away. The demonstrators regrouped and began chanting again — a cat-and-mouse game that played out for days.

“I never expected the protests to be so intense and last so long,” said Mr. Moradani in a phone interview from Tehran this week. “I thought it would be over in a few days.”

Basij members organized to support riot police and other security officials across Tehran. Some Basij members infiltrated the opposition demonstrations, according to eyewitnesses.

Protesters, most of them young, fought back. “You saw young people on both sides mobilizing with vengeance and willing to kill,” said Issa Saharkheez, a political analyst in Tehran, in an interview shortly after the election. Mr. Saharkheez was subsequently arrested in detentions that followed the unrest.

At the height of the street battles, in Sadaat Abad, a middle-class neighborhood in east Tehran, young men and women organized themselves into an unofficial militia to fight the Basij, with a “commander” taking responsibility for each street. Every afternoon, they would meet to prepare for the evening’s expected battle, according to a 25-year-old student who was involved with the group.

They collected rocks, tiles and bricks from construction sites and spilled oil on the roads, an attempt to sideline the Basij’s motorcycles. When a Basij rider would go down, the young men would beat him, according to the student. Women stood back, screaming “Death to the Dictator” and stoking bonfires in the street. Older supporters remained indoors, throwing ashtrays, vases and other household items from their balconies and windows onto the Basij motorcycle riders below.

“There was a war going on here every night,” the student says. “We are not going to stand and let them beat us.”

At the end of the first week of protests, Mr. Khamenei, the Supreme Leader, led Friday prayers and endorsed Mr. Ahmadinejad’s victory. He ordered all demonstrators off the streets.

A few hours after Mr. Khamenei’s sermon, Mr. Moradani got a call at home. The local Basij headquarters was holding an emergency meeting. About four hundred members showed up.

A top Basij commander briefed them on the riots and their responsibilities going forward. He called protesters “havoc makers” and accused them of having ties to Western countries aiming to sow chaos in Iran. The commander said the protests were no longer a matter of election unrest, but had become a serious, national-security threat.

“It is now everyone’s Islamic and revolutionary duty to crush these antirevolutionary forces,” Hossam Gholami, the 27-year-old chief of Shahr Rey Basij, told members, he recalled in a telephone interview this week. “You are not dealing with ordinary people. They are our enemy,” he said he told them.

Mr. Moradani lined up with his comrades to receive an official letter of deployment, signed and bearing the seal of the Revolutionary Guard. He was given new equipment: a camouflage vest to wear over his clothes, a plastic baton, handcuffs and a hand-held radio.

Depending on rank, some members received shields and hard hats, and others were given chains and tear gas, according to Messrs. Gholami and Moradani. Mr. Moradani says no one in his division carried knives or guns.

On the streets the next day, a Saturday, the Basij and other security services cracked down, resulting in some of the bloodiest clashes with protesters. Mr. Moradani says he and his brigade roamed the streets, attacking what he says were violent protesters. Alerted about a burnt-out mosque, he rushed to the scene to secure the area.

One day, Mr. Moradani says, a mob chased him. He fell off his motorcycle and the crowd beat him with sticks and rocks, he says.

His leg was bandaged for a few days, and he still walks with a limp, he says. Dozens of Basij militia have been killed and injured, he says. Protesters have attacked his friends by throwing acid on their faces, he says.

A surgeon at Pars Hospital in central Tehran, where many of the fallen were taken, confirmed casualties on both sides. He said the hospital had operated on three young people from the opposition who were shot in the head and abdomen by security forces. He also treated scores who were badly beaten or stabbed, he said.

Among them were Basij and government supporters, he said — including Basij members who had acid thrown on their faces.

Mr. Moradani says a young man in his group was killed when a protester in a black sports car ran over him, he says. The driver, he says, was arrested and confessed to driving over 11 Basij members. Mr. Moradani’s account was impossible to independently verify.

For Mr. Moradani, the biggest shock during the election turmoil came in his personal life. He had recently gotten engaged to a young woman from a devout, conservative family. A week into the protests, he says, his fiancée called him with an ultimatum. If he didn’t leave the Basij and stop supporting Mr. Ahmadinejad, he recalls her saying, she wouldn’t marry him.

He told her that was impossible. “I suffered a real emotional blow,” he says. “She said to me, ‘Go beat other people’s children then,’ and ‘I don’t want to have anything to do with you,’ and hung up on me.”

She returned the ring he gave her, and hasn’t returned his phone calls. “The opposition has even fooled my fiancée,” he says.

Write to Farnaz Fassihi at farnaz.fassihi@wsj.com

************ Funeral of dead

Sohrab A’rabi
http://www.youtube.com/watch?v=c2ytSNYY-Js

Alikhani’s Speech in Majlis in Support of Mousavi
http://www.youtube.com/watch?v=B7l1MruLmgE

A reference to your career was a call to one’s educational background in despite of your intellectual and moral bankruptcy.
http://www.ajc.com/metro/content/metro/stories/2009/06/21/atlanta_protest_iran.html

Here’re the pictures of the protest which was held in Atlanta, GA in front of the CNN Center on Saturday June 20, 2009: http://bit.ly/hCJuF
http://www.ledger-enquirer.com/251/story/755016.html?mi_pluck_action=comment_submitted&qwxq=6889217
http://www.11alive.com/news/local/story.aspx?storyid=131649&catid=3
http://www.examiner.com/x-6571-Atlanta-Political-Buzz-Examiner~y2009m6d20-Americans-Iranians-protest-violence-in-Iran-in-front-of-CNN-headquarters-in-Atlanta
http://blogs.creativeloafing.com/freshloaf/2009/06/19/protest-over-iranian-elections-crackdown-in-atlanta-on-saturday/
http://onlineathens.com/stories/062109/new_452940396.shtml
http://savannahnow.com/node/741646
http://blog.amnestyusa.org/middle-east/history-in-the-making-in-iran
http://blog.amnestyusa.org/middle-east/act-now-for-iran
http://www.sfgate.com/cgi-bin/blogs/lieberman/detail?entry_id=42098
? http://www.earthtimes.org/articles/show/amnesty-international-iranian-student-activists,867160.shtml
http://atlanta.creativeloafing.com/gyrobase/protest_in_support_of_iranian_demonstrators_at_cnn_center/Content?oid=879770
http://www.topix.com/world/iran/2009/06/iranians-in-atlanta-protest-violence
http://www.inform.com/articles/110567655/?puburl=http%3a%2f%2fwww.thefirstpost.co.uk%2f49357%2cnews%2cdeath-dying-video-makes-neda-soltani-the-face-of-the-iranian-protests-tehran
http://www.mercurynews.com/ci_12614396
http://digg.com/politics/Americans_Iranians_protest_violence_in_Iran_in_front_of_CNN
http://www.wrbl.com/rbl/news/local/article/iranians_in_atlanta_protest_violence_outside_cnn/78698/
http://www.13wmaz.com/news/local/story.aspx?storyid=65608&catid=52
http://buzz.yahoo.com/article/1:33d7a2d1d410a72649ce42d834979c36:61036f57c9503b01d5036ef4449939fc/Americans-Iranians-protest-violence-in-Iran-in-front-of-CNN-headquarters-in-Atlanta
http://niacblog.wordpress.com/2009/06/22/iran-updates-june-22
http://www.forbes.com/feeds/prnewswire/2009/06/19/prnewswire200906191032PR_NEWS_USPR_____DC35299.html
http://www.topix.com/atlanta/2009/06/amnesty-international-iranian-student-activists-to-hold-peace-vigil
http://nycforiran.wordpress.com/2009/06/26/nyc-rally-for-human-rights-in-iran-62609
http://www.joshdweiss.com/photoblog/2009/06/29/iran-protest-at-cnn/
http://www.memoirevive.tv/blog/iran-bernard-henry-levy/

Basij motocyclists congregating for the next move
http://www.youtube.com/watch?v=uJX_QNAxKIM

http://www.youtube.com/watch?v=FDF8ozLegO8
Song about Ahmadinejad – Eng Sub

Hey, whoever’s managing the comments, why are you sacking my posts? I am just sharing a translation of a poem. What’s wrong with you?

For those of you who are interested in lyrics to “Yaur’e Dabestani”, here is a rough translation:

– My old school chum (my fellow schoolmate), you are with me and along side of me
– When a cane [of “Alef” — the first alphabet letter in Farsi language equivalent of “A” in English] is wielded over our head, You clamor [“Bogz” translates to “having a lump in one’s throat”] and groan with me
– Engraved are the names of you and I on this blackboard
– Lashes [a reference to “legacy” and “patrimony”] of oppression and tyranny have still remained on our flesh

– Our uncultured prairie [implying to ignorance prevailing in social milieu] has entirely extirpated [“weeded out”] its grass
– Good, if it’s good, bad, if it’s bad [whether it’s good or bad], dead are the spirit of its people
– Your hands and mine are to to tear down this curtain [of injustice]
– Who other than you and I can find cures to our ills

(repeat of verses)

P.S. Although “dabestan” literally translates to “elementary” and not “school,” they are semantically interchangeable. Speaking of elementary school, in the last few weeks, as rallies and marches were occurring in Tehran, I’ve come across a few photos taken near my old school. Here’s a picture taken from the demonstrators facing toward St. Sarkis church steeples (south) [ http://tinyurl.com/m98ueb ] [google map: http://tinyurl.com/l2xdag ] where my old elementary school is located just across the street [google map: http://tinyurl.com/ljxknb ]. This is another picture taken on the same day from the farther back [ http://tinyurl.com/ll4sb9 ] where you can still see the church’s steeple on the left hand side, located near the western end of Karimkhan-e Zand bridge [ http://tinyurl.com/ndtbvj ]. You can also view the demonstrators marching at the eastern end of the bridge here [ http://tinyurl.com/lc4kx5 ] [google map: http://tinyurl.com/mftams ]. The whole area is about half a mile from a major artery and Vali-ye Asr Square [google map: http://tinyurl.com/lzv4lv ].

A building right adjacent to St. Sarkis church is painted with a ubiquitous image of American flag [ http://www.travel-images.com/iran68.jpg ] depicted as red and white strips dropping bombs that the media usually plasters to convey regime’s general contempt toward America. It’s clearly visible as you drive down the Karimkhan-e Zand bridge toward Vali-e Asr Square — now you know where the picture came from. Frankly, nobody ever cares about these public display of rhetorical idiocies.

Facing to St. Sarkis Church Steeple
http://tinyurl.com/m98ueb
http://tehrandaily.files.wordpress.com/2009/06/4th_day_of_demonstrations_9.jpg
http://tinyurl.com/l2xdag
http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=tehran+iran&sll=37.0625,-95.677068&sspn=54.884801,135.263672&ie=UTF8&ll=35.714902,51.415104&spn=0.003423,0.008256&t=h&z=18

US flag strip dropping bombs
http://www.travel-images.com/iran68.jpg
http://www.mehrnews.com/mehr_media/image/2009/06/454309_orig.jpg
http://photos-b.ak.fbcdn.net/hphotos-ak-snc1/hs117.snc1/4853_98869452121_697882121_1913985_5930598_n.jpg

Picture taken from the Western end of Karimkhan-e Zand bridge
http://tinyurl.com/ndtbvj
http://media.nowpublic.net/images//12/3/123500a215a3f4275164082c66d8d4ae.jpg

Eastern end of the Karimkhan-e Zand bridge
http://tinyurl.com/lc4kx5
http://2.bp.blogspot.com/_SbiVoGqVHZk/Sjl8pPmuIbI/AAAAAAAAA2A/G3j-8tkaz0s/s1600-h/5026_505538725572_139100553_30189439_2938891_n.jpg
http://tinyurl.com/mftams
http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=tehran+iran&sll=37.0625,-95.677068&sspn=54.884801,135.263672&ie=UTF8&ll=35.715346,51.421831&spn=0.003423,0.008256&t=h&z=18

Vali-ye Asr Square
http://tinyurl.com/lzv4lv
http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=tehran+iran&sll=37.0625,-95.677068&sspn=54.884801,135.263672&ie=UTF8&ll=35.711665,51.406966&spn=0.003424,0.008256&t=h&z=18

Beheshti Elementary School on Karimkhan-e Zand
http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=tehran+iran&sll=37.0625,-95.677068&sspn=54.884801,135.263672&ie=UTF8&ll=35.715633,51.413757&spn=0.003423,0.008256&t=h&z=18
http://tinyurl.com/ljxknb

Marching toward Vali-e Asr Square
http://tinyurl.com/ll4sb9
http://i25.photobucket.com/albums/c57/omglord/NearBeheshtiElementarySchool.jpg

Ruling old mullahs
http://1.bp.blogspot.com/_SbiVoGqVHZk/SkJpyaRjD1I/AAAAAAAABJc/HxxQYqw4z0M/s1600-h/ggcb9qsh1s9pz8ogtv0w.jpg

Farshad Hemmati
compucated technologies

State:CA 92037
City: la jolla

University of California, Berkeley

If you have any questions regarding what Shi’as are doing at UC Berkeley, please contact Farshad Hemmati.

Kaveh L. Afrasiabi is a political scientist and author of Iranian origin who has lived for many years in the United States.

U2 – Sunday Bloody Sunday (live 02JUL09 @ Camp Nou, Barcelona)
http://www.youtube.com/watch?v=PR8d1qM-GqE

Ahmadinejad’s supporters interrupt Mousavi’s wife while shouting profanity
http://www.youtube.com/watch?v=q9ULd-aaSKQ

My school friend, you are with me all along
Stick of Alf strikes us on the head, our

Mousavi: “In regard to America, we must wait.”
http://vahid-online.net/wp-content/uploads/2009/04/sabr.jpg
The whole picture now
http://vahid-online.net/wp-content/uploads/2009/04/marg.jpg

Ahmadinejad kissing a baby while it bursts into tears
http://i.friendfeed.com/913c197b734a108870b14712166cd9154ca186b9

http://moi.ir/Portal/File/ShowFile.aspx?ID=003a5a4c-0a0d-414f-b962-eb92972fa06c
Detail of each ballet box vote

Ahmadinejad taking a nap
http://i.friendfeed.com/34485e9e8bdabc435f9d4e4c82e532eb930477e3

The bodies are returned, cemented in concrete to cover the traces of torture
http://www.peykeiran.com/Content.aspx?ID=3662

http://www.rferl.org/content/What_Will_Happen_To_Those_Arrested_In_Iran_I_Can_Tell_You/1762681.html

‘What Will Happen To Those Arrested In Iran? I Can Tell You’

June 25, 2009

By official count, some 450 people have been arrested in opposition protests against Iran’s presidential election results. Many sources inside Iran put the count in the thousands. To those arrested 10 years ago, in Iran’s last great wave of student demonstrations, what the new detainees face next is already clear. Ali Fathi (a pseudonym) was one of those students arrested in 1999. This is his story.
What will happen to the people who have been arrested in the protest rallies in Iran? I can tell you.

I was arrested during the 1999 student demonstrations in Tehran, exactly 10 years ago.

What I did was as trivial in terms of real crime as what the protesters in Iran have done now by expressing rage over the presidential election results.

But the punishment I received was so out of proportion to my actions – and so truly criminal – that I had to flee my homeland and seek political asylum in Europe.

In 1999, Mohammad Khatami was president and reformist hopes were high that the Islamic republic’s oppressive ideological atmosphere was lifting slightly.

I was a university student and we were enjoying an unprecedented amount of freedom to speak our minds in class. That included the compulsory class all students have to take in the roots of the Islamic Revolution.

‘Change Was In The Air’

At that time, even the presence of the Basij among the students – 50 percent of all university places are reserved for the members of the militia – did not have its usual chilling effect. Change was in the air.

Then came the sparks that ignited the demonstrations that swept campuses across Tehran and spread to other cities in the summer of 1999.

Students, their mouths taped shut, hold up portraits of reformist newspaper editor Abdollah Nuri after Nuri was sentenced to five years in prison for “anti-Islamic propaganda” in December 1999.
Some students at Tehran University protested the closure of one of the most popular reformist newspapers. Their small demonstration was attacked by vigilantes armed with clubs who beat at least one student to death as police did nothing.

Our rage boiled over. Tens of thousands of students took to the streets demanding the dismissal of police officials. We also called on Khatami to speed up reforms and give us a more open society.

I was with a group of about 50 students on my campus which tore down a poster of the Supreme Leader Ayatollah Ali Khamenei that hung in one of the buildings. Someone set fire to the picture. The riot police took the simplest course. They locked the campus gates and arrested everyone found inside.

But they did not take us to a police station. Instead, we were blindfolded and taken outside of the legal system to a place where our parents could never find us.

‘Stripped Us Naked’

The place was one of the semi-abandoned military camps outside Tehran that date back to the Iran-Iraq war of the 1980s. There we were shoved into metal freight containers – the kind used for shipping. They stripped us naked and gave us two blankets each.

Inside there was nothing to sleep on and no electric light. There was no way to tell the time except by the daylight when it shone through the watchman’s peephole at one end and a ventilation vent at the other.

I was in the container with four other boys. We were all barely 20. And we were inside for two weeks — naked, powerless, and face-to-face with the fear of being totally at the mercy of our captors.
I was in the container with four other boys. We were all barely 20. And we were inside for two weeks — naked, powerless, and face-to-face with the fear of being totally at the mercy of our captors.

Food was thrown in once a day. From time to time, we were taken out for questioning. And both those processes helped to destroy whatever shreds of our dignity remained.

The first interrogation sessions were simply beatings. Men who were clearly convinced that we had violated all laws of God and man kicked us until we fell down. Then they kicked our faces. As they did, they shouted “Allahu Akbar,” calling on God to be pleased with them. They were skinheads, but with hair and beards.

Then the real questioning began, and it, too, was to show there was no way out.

‘No Correct Answers’

The interrogators wanted to know who pulled down the picture of the Supreme Leader, to what organizations I belonged, and to what organizations my friends and classmates belonged.

It did not matter what I said. There were no correct answers.

“Do you know Masud Rajavi (the spiritual leader of the armed resistance group, the People’s Mujahedin of Iran)?”

“No.”

“You are lying. Everyone knows that bastard. You are lying about everything.”

Sometimes they seemed to want to understand my problem.

“You were one of those who shouted,” the interrogator said.

“No, I wasn’t.”

“You were! Go ahead and shout now. Shout as much as you want.”

And they offered treatment.

“You have extreme tendencies. You just need some balancing.”

And then, turning to one of the strongmen, “Brother X, take him for balancing.” The balancing was more beating.

Nothing To Confess

The interrogations were conducted with a hood over my head. Looking down, I could see only the floor. Once I saw the hands of one of the interrogators after he cuffed my head. His hands were twice the size of mine.

Students try to shake hands with then-President Mohammad Khatami (second from right) after his speech at Tehran’s Elm-o-Sanat University in December 1999.
After two weeks, I was transferred to a succession of other prison cells, with no idea where I was. Sometimes, the cells were pitch dark. Sometimes, they had four brilliant light bulbs shining 24 hours a day.

I was lucky I had nothing to confess. And I was lucky that made me of no real interest to my captors. After eight months, as inexplicably as the way they had treated me, they let me go.

But now I was a criminal with a history of imprisonment. And that meant all of Iran would be my lifetime prison.

With a prison record, I could not return to university. I could not get a job. My only course was to leave Tehran and return to my small provincial city. And there, where everyone knows everyone, I was an outcast.

My parents had all but given me up for dead. For months they had gone around every prison in Tehran trying to locate me. At every place, they were told there was no record of me being detained. But one official said it was likely I had been made to “disappear.”

The police sent my prison file to an old man in my home town who had lost three sons in the Iran-Iraq war. He owned a men’s shoe store next to the local bank that no one shopped in because the fashions were 10 years old. But he was powerful because he was strongly linked to the Revolutionary Guards.

This man was my parole officer. I had to appear before him each week to show I was still in town. If I wanted to visit friends in another city, I needed his permission.

His only demand of me was to pray. Not just in the mosque but in private prayer meetings as well. And eventually, I complied.

That was how I began my journey out of Iran. As he gained trust in me, I could more easily get permission for longer absences. And on one of these absences, I slipped out of the country.

Dehumanizing

The escape route that people take — across the Iranian border, across Turkey, by ship to Greece, and overland to France — is well known. Some of those who are now in jail for protesting the presidential election results – if they are released — will undoubtedly take it, too. It is horrible, full of dangers, and as dehumanizing as being in prison.

I was tricked by traffickers as one group handed me off to another that claimed it had not been paid. So, I soon ran out of money.

I rode in freight containers. And I rode hanging onto the bottom of a speeding truck. That means sitting on a small metal bar a half-meter above the asphalt and hanging on with arms that become so paralyzed the muscles no longer contract. I was numb with fear.

Was it worth this to escape my home country and to leave my parents and dearest friends? Of course not.

But for me it was a question I never had to ask. The government of my country took my country away from me. And my crime was nothing more than taking part in a political demonstration.

http://www.npr.org/templates/story/story.php?storyId=106535773
Foreign Policy: Iran’s Terrifying Facebook Police

by Evgeny Morozov

Facebook website

Facebook website. AP

NPR.org, July 13, 2009 · A scary anecdote from Iran. A trusted colleague – who is married to an Iranian-American and would thus prefer to stay anonymous – has told me of a very disturbing episode that happened to her friend, another Iranian-American, as she was flying to Iran last week. On passing through the immigration control at the airport in Tehran, she was asked by the officers if she has a Facebook account. When she said “no”, the officers pulled up a laptop and searched for her name on Facebook. They found her account and noted down the names of her Facebook friends.

This is very disturbing. For once, it means that the Iranian authorities are paying very close attention to what’s going on Facebook and Twitter (which, in my opinion, also explains why they decided not to take those web-sites down entirely – they are useful tools of intelligence gathering).

Second, it means, as far as authorities are concerned, our online and offline identities are closely tied and we have to be fully prepared to be quizzed about any online trace that we have left (I can easily see us being asked our Facebook and Twitter handles in immigration forms; one of the forms I regularly fill flying back to the US has recently added a field for email address).

Third, this reveals that some of the spontaneous online activism we witnessed in the last few weeks – with Americans re-tweeting the posts published by those in Tehran – may eventually have very dire consequences, as Iranians would need to explain how exactly they are connected to foreigners that follow them on Twitter (believe me, I’ve observed enough bureaucratic stupidity in Eastern Europe to know that even some of the officials who follow Twitter activity on a daily basis may not know how it works).

http://www.guardian.co.uk/world/interactive/2009/jun/29/iran-election-dead-detained
Iran election: faces of the dead and detained
We want to put a face to each of those hundreds – possibly thousands – killed or arrested since the Iranian election.

Ahmadinejad’s Millions of Photoshopped Supporters
http://www.hurryupharry.org/2009/06/17/ahmadinejads-millions-of-photoshopped-supporters/

Efshaye akhoondha
http://golestanimovie.blogspot.com/2008/10/blog-post_25.html

Iranian President Mahmoud Ahmadinejad, right, wears a 3-D glasses to see an aerial map with Iran’s Chief of General Staff of the Armed Forces Major Gen. Hassan Firouzabadi, left, during his visit to the space center in Tehran, Iran, Monday, Feb. 4, 2008. Iran launched a research rocket Monday and unveiled its first major space center that will be used to launch research satellites, state-run television reported.

http://shooresh1917.blogspot.com/2009/06/more-than-500-civil-and-human-rights.html
After the Results of the presidential election and the people’s protests in Tehran and other cities in the country, more than 500 civil and human rights activists, women and several hundred journalists and political activists were arrested. Many students from different universities across the country were followed with the same trend.

Although after announcing the election results were not agreeable but the widespread protests by the students of multiple universities countrywide began peacefully. However, these protests were faced by most violent, cruel, savage and brutally used weapons by the Hezbollah, Civil Forces, Robo cops who are strongly protected by the IRI’s security and safety forces.

On the 15th of June 2009, only after the results of the elections were announced, the violent attacks of the Hezbollah forces hand in hand with the Basijis and other anti- protest forces to the different universities and their dorms around the country with massive brutality, agonizing and severe acute actions against the students were carried out. They assaulted and battered students at the University of Shiraz, Esfehan, the dorms at the Kermanshah University, Babol University, Semnan, Ghazvin and few others around the country. In the past 2 weeks of multiple attacks to the universities by these forces, hundreds of students were either detained either unbearably mutilated, taken away savagely or killed.
As per the news recieved, Nasser Amirzarad, from school of Space and Astronomy of University of Tehran is among the deceased, while these forces were attacking the universities, his body was found in yassuj (Near Khoram Abad, state of Fars). Also per Amirkabir news reportage, Kiyanoush Assa born in Kermansha, from school of Chemistry of University of Sciences and Technology of Tehran, was killed on June 16, 2009. Mustafa Ghanian, another student who was away from the university and was shot and killed by the Civil Forces. Another student in the University of Esfahan’s dorm was shot to death. Neda Agha Soltan, a student of school of Philosophy is another one who was shot and shook the world.

Due to these savage and inhuman attacks, many of the students are injured in multiple hospitals reported non stable condition. Many of the University of Tehran’s students are at the Shariati Hospital who have been shot to the neck and head area which has left them severe injuries may be beyond repair. Few others have lost their eye site due to the basijis shootings to the affected areas.
Ashkan Zahabian, a student of Babol University, is in a coma due to the ferocious and savage attacks of the Ansar Hezbollah forces.

Also in this regard, the complaints of the faculty was significantly noted. University professors of different universities in Tehran, after the tragedy occurred in the dormitory, with a sit-in demonstration in front of the University’s Mosque protested the brutality rendered upon students. Furthermore, these faculties showed there disgust and repugnance by signing numerous petitions against the regimes violence and announced the results of the elections invalid.

On the other hand, the security forces acting upon these faculty protests while severely intimidated, arrested a considerable number of them. Among them are the faculties of the Int’l University of Ghazvin and Hamedan. Also, in the past few days, 70 of the faculties who went to visit with Mir Hossein Mousavi were detained, however few of them wee released after several hours.
Although per the reportage of the past 2 week, at least 400 students were taken into custody, however, due to their unknown whereabouts and no contact or communications, the specific information about these students is still unknown.

The night of the attack on the dormitories of the University of Tehran, Shiraz, Isfahan, hundreds of students who were arrested were released after one night. With the head count of the detainees in these events, the number of the students in custody in the past two weeks surpasses a thousand.
The list below are the names of the students within the respective universities who were taken into custody and posted:

University of Tehran
Ahmad Ahmadian, Eskandari, Amin Afzali, Vahid Anari, Mohamad Belourdi, Hossien Hamedi, Mohsen Habibi Mazaheri, Navid Haghdaadi, Mohamad Reza Hakami, Kazem Rahimi, Morteza Rezakhaani, Meissam Zeraai, Amin Sami’i, Bahram Shabani, Alireza Sheikhi, Ebrahim Azizi, Siavash Fiaz, Seyed Hossein Mirzadeh, Hossein Nobakht, Javad Yazdanfar, Habib khadangi, Sohrab Ahdian Reza Arkavazi, Karim Emami, Mohamad Hossein Emami, Elaheh Imanian, Roohollah bagheri, Farhad Binazadeh, Iman Pourtahmasseb, Ezat Tarbati, Simeh Tohidlou, Yasser Jaffari, Milad Chegini, Mohamad Reza Had abadi, Seyed Javad Hosseini, Farshid heidari Zamin, Behnam Khodabandehloo, Mohamad Khansari, Mohamad Davoudian, Mahmoud Delbari, Ali Ra’i, Omid Rezayi, Ali Refahi, Seifollah Ramezani, Ebrahim Zahedian, Nasser Zamani, Majid Sepahvand, Hanif Salimi, Mohamad Bagher Shabanpour, Hamed Sheikh Alishahi, Iman sheidai, Farhad Shiahmad, Saman Saheb Jalali, Farhan Sadeghpour, Farshad Taheri, Ghamdideh, Hamzeh Faratirad, Esmail ghorbani, Mohamad Karimi, Erfan Mohamadi, Mohsen Azmoodeh, Payam Pourang, Morteza Janbazi, Haji pour, Adrian Jalali, Sohrab Ahmadi, Reza Zinali, Samad Mehrali tabar.

University of Polytechnic
Pedram Rafati, Hadi Polavar, Mojtaba Alijani, Bita Samimizad, Amirhossein Astiri, Adrian jalali, Mitra a’ali, Ahmad Jaberi

Students in detention- Deprived of education
Zia Nabavi (Councilperson to defend education), Alireza Khoshbakht (Student deprived of education), Zahra Tohidi (deprived of education), Peyman Aref (deprived of education), Shiva Nazar Ahari

Azad University
Amir Kolhar (Uni of Karaj), Hessam Nassiri (Unif of central tehran), Ali Beix (PHD student, school of history), Mojtaba Mohamadian (uni of babol), Amir hossein mohamadi (Uni of Maybod)

University of Mazandaran and Babol University of Technology Noshiravani of Babol
Siavash Saliminejad, Mohsen Barzegar, Iman Sadighi, Hessamoldin Bagheri, Alireza Kiani, Milad Hosseini Koshtan, Ali Nazari, Ashkan Zahabian, Ali Dinari, Rahman Yaghoobi, Maziyar yazdani, Ali Abbassi, Shovaneh Merikhi, Mohsen Barzegar, Mohamad Alami, Nima Nahavi, Hamidreza Jahan Tigh, Marjan Fiazi, Sogand Alikhah

University of Krmanshah
Siamand Qiasi,Mohammad Jafari and some other students

Int’l University of Imam Khomeini – Ghazvin
Payam Heidar Ghazvini, Nassim Riyahi, Mojtaba Rahimi, Ata Rashidi, Esatid Daneshgah, Hossein Rayissian, Fazly, Darvish, Imani, Alborzi

University of BuAli – Hamedan

Siavash Hatam, Jojat Bakhtiari, Mehdi Mossafer, Pouria Sharifian, Reza Jafarian, Mostafa MehdiZadeh, and Amin Nazari (Council members), Mohamad Seiyadi

University of Teaching Credentials
Sajad Bazvand, Nasseh Faridi (Graduate School)

University of Semnan

25 detainees after assembly objections

University of Fedossi – Mashhad

Reza Lotfi

University of Hormozgan

Ali Shojaii

University of Shiraz

Esmail Jalilvand, Hamdollah Namjoo

University of Alameh Tabatabayi

Majid Dari

University of petroleum- Ahvaz

Hossein Rahimi and Amin Nikzadeh

University of Tabriz

Amir Mardani and Amin Jahani

Riot police in people’s house
http://cache.daylife.com/imageserve/0bjB5OF84Z84I/610x.jpg

Techniques Of Torture
April 5, 2009 6:44 PM
Ahmad Batebi endured mental as well as physical torture.
http://www.cbsnews.com/video/watch/?id=4920611n&tag=related;photovideo

Shahin Najafi – Tarafe Ma
http://www.youtube.com/watch?v=_ckQPLV6csQ

Identifying a Basij member – Muhammad Majeed Basirat, commandar of Larzadeh mosque
http://www.goftaniha.org/2009/07/blog-post_10.html

A Basij funearl was allowed to be carried
http://www.irna.ir/View/FullStory/Photo/?NewsId=552690

Attack at the Basij headquarter new Azadi Square
http://www.irna.ir/View/FullStory/Photo/?NewsId=549468

Damn Che
http://4.bp.blogspot.com/_SbiVoGqVHZk/Sj5dBx1gQAI/AAAAAAAABG0/9QYWwdSfGFA/s1600-h/5107_1158935366398_1018197149_30480710_4247353_n.jpg
http://cache.daylife.com/imageserve/03w30iudzncJg/610x.jpg

Pro-Ahmadinejad professors
http://www.mehrnews.com/fa/newsdetail.aspx?NewsID=893890
Notice the empty seats
http://www.mehrnews.com/mehr_media/image/2009/06/452616_orig.jpg

Point by point rebuke of Ahmadinejad’s attack on character of Mousaiv and his 80’s government by Khomeini’s own words
http://www.facebook.com/video/video.php?v=98003242881&ref=nf

Basij on motorcycle and sitting around waiting for orders.
http://cache.daylife.com/imageserve/04o8gJ72grcKd/610x.jpg
http://cache.daylife.com/imageserve/0fMpfVvgun2hL/610x.jpg
http://cache.daylife.com/imageserve/03Q6esy9WUcqr/610x.jpg

Rooftop project
http://www.mightierthan.com/2009/07/rooftop/

Repression has a familiar face

Mojtaba Khamenei, left, son of Iran’s supreme leader, Ayatollah Ali Khamenei, with Amir Farshad Ebrahimi.
http://seattletimes.nwsource.com/ABPub/zoom/html/2009442937.html
Ebrahimi, now living in exile in Berlin, uses his blog to out hard-line Iranian militia members.
http://seattletimes.nwsource.com/ABPub/zoom/html/2009442938.html

Caspian Makan, 37, who identified himself as Neda Agha-Soltan’s boyfriend says this picture is the cemetary where Neda was buried. It appears to show plenty more prepared graves.

http://www.facebook.com/photo.php?pid=1947909&id=510261623

A student hammers social and political issues to the representative
http://www.facebook.com/video/video.php?v=1209056186974&ref=nf

Arabic speaking Basij?
http://www.facebook.com/video/video.php?v=1024065622347&ref=nf

Yar Dabestani man played by a street artist with his little girl
http://www.youtube.com/watch?v=pkIpr1Nq8o0

If you consider yourself Iranian then why you say “When YOU Iranians realize that in…”???? If you something know about organizing resources maybe you can start doing it yourself.

Laleh,

First off, I “am” an Iranian, culturally and racially — there is no way around it therefore I don’t need to “consider” myself as such. I am also an American in a more cultural sense. Whether my preference compels me to adhere to the ethnological or cultural idiosyncrasies of my birth place, that’s another story. “You” was simply a reference to the segment of the Iranian population who do not possess a conviction nor a recognition that there are rooms for improvement in mechanism of derliverance, refinement of the intended message, and above all, providing a comprehensive verity to the context. Remember, I’m not the one ignorning these facts, hence the self exclusion. Now, if you want to get hung up on nugatory and editorial constructurism, then it’s your loss. But I’m sure you’d prefer to glorify this flimflam in your next response to obfuscate the tenor of my point. My advise to you is to forgo of this unfounded conniption.

Allow me to give you an example. Assume that I’m a “media” guy; the ultimate goal is to maintain a constant media vigilant on people’s struggle by keeping the media outlets to shine the lights on the ongoing state of affairs because once the lights are out, the butcher knives would be blazing. So, as someone who is reporting on these current matters if I stumble upon this video, what am I supposed to report on? Do I have the necessary tools and informative credential to oblige to my journalistic code of ethics? I would be asking myself, where this video was taken, why are these men chasing after this particular vehicle among a sea of cars, were the passengers or the driver posing a security risk to the authorities (i.e. guns, explosives, etc.) prior to the swarm by the forces, on and on… You are not giving me, the “media” guy, enough ammo to pursue the story. Wouldn’t you consider this a missed opportunity to expose the regime to a broader audience? Remember, others are not you and I; they don’t know what these animals are capable of; they don’t know the extend of their conduct that permits them to act in such barbaric fashion on a daylight while hundreds overlook in horror their countrymen being ravaged like a spring lamp among hungry wolves. I’m not claiming in any shape or form that the people who provide us with these images are directly responsible for an abatement of the significance to their work, however, it does not excuse the rest of us not to strive for something more panoptic. Isn’t this a worthy message to advertise? I believe it is and even binding. So rather focusing on “me” critisicing the arresting deficiencies, concentrate on the merit of my observation, shall we? I guess not.

Your reference to the tenet of the left was a dead give away to your penchant and equally misguided notion that marrying yourself into the venues that espouse on the tenet of radical right is some how the only option available to convey your message. It’s a sad predecemant.

Your taking-no-hostage philosophy is equally disturbing

you are doing a disservice to all Iranians by getting in bed with these folks
and I am compel to call your so-called “activism” a disgrace
while you being a darling of the fringe on right and pampering your every failed muppet “feel good” strategized methodology
Just a venue for you to be as loud as your runaway emotions desire
go back there spew and be carried as a hero on their shoulder of gullibilities
you guys are planning to go Kamakazi on the regime which surely will backfire and executively ineffectual

Very well Ilnaz, I can give it a try but don’t hold your breath as it’s been a while since I’ve written in Farsi.

Yes, gooftand, tajamo’ateh 18 tir (last Thursday) baraye dahomin salgharde nehzateh doneshjo-ee bood. Etefaghan, sale peesh, vaghti as khaharam dar D.C. molaghat meekardam, A|h|m|a|d B|a|t|e|b|i ro deedam (man esmaro joda-joda minevisam ke filterha vareshoon nadereh) — Jed’dan eshoon mardeh gondehee hast ya eenja khaylee rosht kardan 🙂

Eenjaham migoftan, choon rooz-haye akheer ma’moran tajamo’at-e bozorg ra monhal mikardan, garar shod ta rahpayma-ee-hara to grouhay-e koochiktar anjam bedan. Rausti, “Aryasharh” koojay-e Tehran bood? Man kheilee as mantagheharo faramoosh kardam. Sadeghiyeh hammon Aryasharh-re (North of Azadi square), akhar-e Sattar Khan? Hamechizo ghati kardam.

I know where Keshavarz and Fatemi are; our second home was near Vali-e Asr square. Keshavarz ta Engelab ke rah-e zee-adi nist, if my recollection doesn’t sabotage me. Mindazee to Karegar ya Felestin to bokhori be Engelab, right? Vaghti migeen “setade ma ro,” kodoom setad-o sohbatesho mikoneen? Setad ma’molan maleh B|a|s|i|j ya P|a|s|t|a|r|a|n-e, nist? Ya kalamey-e “setad” be onvan-e gorooh estafadeh meesheh?

Dastaneh tirandazi B|a|s|i|j|is be mardom dar rahpayma-eehay-e “sokoot” be bagi-ya-heh dastanha motabeghat mikoneh. Bebinam, hich kasi be een neghabdarha nazdeek nashoot va ba “charb zabooni” azashoon chanta so’al bekone? Masalan beporseen, “baradar, khaste nabasheed, een ashoobgaran koja hastan ke ma rahemono nandazeem be raheshoon? Rausti, bacheha maleh koja hastan?” Chand hafteh peesh, ya khabarnegari haminjoree as yekee as een arazel ke omade bood yek noshidanee bekhareh chand ta so’al kard dar mored-e eenk-e as koja omadand, cheghard migeran (mali), va hat’ta as ghoshoon-e “Arab”-ha ke to hotel-ha-ye khoob azashoon negahdari mikonan.

“tazegia akhbar khili sakht rado badal mishe.”

Chetor? Internet-o mahdood kardan?

“amma maha eine ztishe zire khakestar shodim.”

What does ztishe mean? Like a fire under ash, amadey-e atashgiree, right?

“az tarafi chand rooze pish ahmadi nejad yehoo to tv zende barname gozasht.avalesh k b halate asaby ye parvanaro gereft!”

Parvan-e bood ya shaparak? Didn’t he “miss” it? Enja ham yekami een sahnaro neshoon dadan baray-e maghsood as maskhar-e kardanesh, vali as gharar-e ma’loom, heech et’tela-ee az eenk-e mardik-e cheegoft nemidan. Chant haft-e peesh ham Obama ye magasoo vaghti mosaheb-e mikard kosht, baray-e hamin, sahney-e A|h|m|a|d|i|n|e|j|a|d ro ba Obama baray-e tanz moghayese mikardan. Az tebghe ma’mol, hezb-e Conservative, Obama ro ba magas-kosh (fly swatter) maskhar-e mikonan.

Yek so’al ke dafhey-e peesh porsidam een bood ke mardom che enteghadati ya tavaghodati az dolatha va mardom-e US va Europe daran? Meekhahan ke dolatah tamam-e mod’dat enteghad va hamleh be r|e|g|i|m|e bekonan ya mardom eenja faghat poshtibani az jonbesh-e akhir bekonan? Yek seri mahdoodi az Iranihay-e inja fagat mikhahand tamam-e dolatha hey berizand va bezanan tosar-e dolat-e Iran. In grooh, tavagho daran ke hame tamame rabeteh haro ba Iran ga’t konan — tejari va siasee ta hokomat belarze va betarse.

Ba’ziha mikhahand ke mardom-e inja az jonbeshe mardomi ra hemayat konan va zeiad be pal-o peech-e r|e|g|i|m|e napelekan choon agar hey be dolat pa-peech beshan, metarsan ke r|e|g|i|m|e bahaneh baray-e zarbo shast-e shadidtar bar alaih-e mardom dar be-avarad. Nazar mardom to Iran chee hast?

Ok, az bast Farsi neveshtam, fekr mikonam bayad beram cheshmamo ghosl begiram.

Sincerely,

http://gatewaypundit.blogspot.com/2009/06/iranian-hero-leading-activist-ahmad.html

This is an utter outrage that Mr. Batebi’s trust, who only recently managed to slip out of Iran and come to the U.S., was so clearly violated by this witch, Banafsheh, who so blatantly mistranslated his statements. I met Mr. Batebi earlier this year and from a quick conversation we had, he did not come off as someone who would adhere to the views of the radical right, certainly not to the pundits who merely look for red meat to slobber over. My sister also met him a few weeks ago in the Washington D.C. for one of their rallies which took place in front of the Russian embassy. He is new to the political atmosphere here in the U.S. and does not entirely understand how certain elements will take advantage of him for their personal agenda and self-aggrandizement — including Banafsheh who has married herself for years into the tenet of the neo-Conservatives.

I totally understanding for someone who is not professionally trained, live translation could be a daunting task and I, to some extent, am forgivable when she (Banafsheh) missteps in many places. However, when I read the title of the video “Iranian Hero Ahmad Batebi On Obama: ‘His Lack of Response Will Not Be Regarded Kindly'”, I immediately became suspicious because that’s not Mr. Batebi’s philosophical stance on the subject matter and anyone with an ensemble of integrity knows it. So I listened to this segment prudently and long behold, Banafsheh, once again, has done her country a disservice by unctuously contriving a sophistry to advance her, and the right’s, agenda. I am translating Mr Batebi’s question and answer ( http://www.youtube.com/watch?v=M3qEPF1jfuE ) starting at 3:21 just to cover the context of his portion of the Interview. I am presenting the Farsi version, then Banafsheh’s translation, following mine. I encourage everyone to seek an independent source that can speak Farsi fluently and examine the veracity of her and my translation. This woman is unbelievable — a disgrace to all of us Iranians living in the U.S..

3:21 Batebi (Farsi): “Va to in zamine, zamani baz mish-e ke mardome Iran bebinan ke dolat-e Amrica az ona hemayat mekone.”
3:30 Banafsheh’s Translation: “And the only… the only time that those bad memories [reference to 1953 coup] would be wiped away for the Iranian people is when they see that the government of the United States actually supports the people of Iran.”

My Translation: “And in this regard, an opportunity presents itself [for the U.S.] so the Iranian people would be able to perceive that the American government is [indeed] supporting them.”
There was no reference to the coup in this juncture by Mr. Batebi. Do the translators who lean right have an affinity with the word “wiping away/out/off,” i.e. “Wipe Israel off the map” when in neither cases such word was ever uttered?

3:43 Batebi (Farsi): “I think, azmon-e bozoorgi inja baray-e Obama hast.”
3:48 Banafsheh’s Translation: “This is big test… is very much umm… what Obama is facing right now.”

My Translation: “I think there is a big test [which he’ll be evaluated on] here for Obama.”
Although azmon-e bozoorg in a literal term translates to “big test,” in certain context it could also carry a connotation of being a “big opportunity” rather than a mere assessment.

3:55 Batebi (Farsi): “oon chahar-choobi ke… oon chahar-choobi ke shoma megin ke Obama emrooz baray-e barkhord ba masa’el-e Iran daure entekhab mikoneh…”
4:06 Banafsheh’s Translation: “The… the framing and structure of… ummm… the… ummm… sort of… approach that he adopts toward Iran right this very minute …”

My Translation: “A [diplomatic] framework that… a framework that you mentioned Obama is about to select to deal with Iran’s issue today…”

**** THIS IS THE PART THAT SHE LITERALLY CONCOCTS THE ENTIRE DIALOGUE THAT SIMPLY DIDN’T HAPPEN ****

4:15 Batebi (Farsi): “Bozoorgtarin et’tefaghi ke mitone zehneeyat-e Irano avaz bokone, mardome Iran ro avaz bokone , va ravabet ro ba… mard[om-e]… ba vezarat-e Amrica be halat-e, darvaghe, mardom-e Iran na hokomat mardom-e Iran ba dolat-e Amrica be shekle kheili normal va molayem berim. [Interuption by Banafsheh “umm..”] [Batebi continues] na ba tanesh va bee e’temadi.”
4:34 Banafsheh’s Translation: “So… so basically the… the… that… that’s what basically the Iranian people are going to be looking to as a kind of uh… eh, eh, kind of uh… umm… eh, eh… you know, let’s… let’s say, form of reconciliation if you were, for the lack of a better word, and, and that would be the test where umm… the… you know… the Iranian people will respond. Umm… the… his… his lack of response, however, will not be regarded… uh… kindly. [SON OF A!!! That’s NOT WHAT HE SAID]”

My Translation: “The biggest development [or milestone] that can happen in order to change the Iran’s mindset [‘people’s’ in reality and he supplements his statement with ‘people’ in the following phrase], change the mindset of Iranian people, and to [improve the] relationship with… peop[le] [semantically he was going for the ‘government’ where he corrects himself]… with the American government and, in reality, [with] the Iranian people [rather than] the [Iranian] government to form a normalized and temperate [relationship]. ‘Not’ with acrimony and animosity.”

So, what he is basically asking is for the U.S. government to show a good will toward the Iranian “people” in order to bury the hatchet of the past misconducts. He, at NO POINT, even remotely hinted that Obama’s “lack of response” is somehow going to be viewed “unkindly” by the Iranian people — as a matter of fact, HE NEVER SAID ANYTHING in that line. He specifically stated that he wishes the American government to approach the situation with caution rather than with haste, acrimony and animosity which has been a prevailing attitude during the past administration.

You know, madar-bozorg-e man to Ekbatan zendegi mikard (1980’s) gablaz inkeh beyad kharej. Doran-e bombardeman-e Tehran dar jange-e Aragh va Iran, ma mirafteem peesheshoon memondeem. Chand vaght-e peesh, yeki az doostan ke safar be Iran karde bood, video-e Ekbatan-e emroozy ro zapt karde bood. Kheili cheeza avaz shoodeh — man beeshtar-e atrauf-e Ekbatan-o nemi-shenakhtam.

Az masafati ke gofty, benazar miyad ke gaz az to hava pakhsh kardan vagarn-e dastee inkar az dasteshoon bar nemiyayad. Dalil baray-e sor’at-e kam-e Internet ine ke mikhahand mardoom hanooz az Web estefadeh konand ta moch-e mokhalefan ro begirand. Che roozname ha-ee basteh shodand?

Bezar yek so’al-e kol’li beporsam. Too in modat ke tazahorat bood, cheghard az gheshr-hay-e digar-e mardomi be jam’ amadand? Be ghay-raz shomaha, dig-e mardom-e shahrestaniha kar-e ziadee nakardand. Hame ya betafavot neshoon dadan khodeshoon-o ya ba dolat ham-bastari kardan. Mas’aley-e Iran inek-e, adamhay-e too jam’-e maha fekr mikonan ke hame ba hamin tarz-e ravesh-e fekry daran miran jolo. Vali dar vagh-e, te’daud-e mardoomi ke be masa’l-e jame’-e tavaj’joh nadaran ya tarz-e tafak’koreshoon dar khat-e dolat-e emroozi hast, kheili bishtar-e az mahast. Baray-e hamin, agar gharar hast ke jonbeshy bashat, ba-yad mardoom az nazar-e agah-gari-e fekry jolo beran. Choon “faghat” ba mokhalefat kardan, oon kasik-e hazer-e dam-e dolat-o dashtebash-e tagheer-e aghid-e nemidahad.

Bebinam, in khanom-e Ebadi ke kheili harf dar mored-e dolat mizan-e, nemiyan sareshono zir-e ab bekonan? Ajeeb hast ke Ebadi ham-cheen harfee mizan-e choon ba’d az bordan-e Noble Prize, vaghti be Iran bargashtand, harfha-yeshan ra avaz kardan and goftand ke ma nabayad Iran ro tahreem bekoneem choon tagheer bayad az too ijad beshavad. Kheili az Iranani ha ke taraf-e raust hastand, az Ebadi badeshoon miyad bekhater-e inke eshoon ba ghat-e rabet-e va tahreem-e shadeed movafegh nadashtan. Age 2 sal naft kesee az Iran nakharad, Iran varshekast mishavad vali mardomesham bahash miran to chaleh. Onvaght, mamlekat bedast-e yek seri adam bayn-e Kim Jon-il va Saddam mioft-e.

Vaghe-an harf-e enteghal-e ghodrat az pedar be pesar-e ya in vaghat yek shaye’-e hast? Pesra-e ke hat’ta akhond-e angosht-e sab’babey-e yek haji-e besar-o-pa ham ke nemisheh! R\a\s\a\n\j\a\n\i dar-e jolo-ye oon seri adamha-ee ke pashoon to kafsh-e p/a/s/d/a/r/a/n hast meghir-e choon kheili az project-ha az zir-e dastesh mir-e be taraf taran-e mokhalef.

P.S. Farsi neveshtan baray-e kasi ke salha-ye-sal faghat yek zaban-e dig-e shaboo-o-rooz khondeh va neveshe kheili moshkel-e, makhsoosan ke alef-ba-ye oon zabono baray-e neveshtanesh estefad-e kon-e. Dar mah-e akhir ke majbor shodam Farsi as tooy-e B|l|o|g va rooznamey-e Irani bekhonam, ba ink-e yek kam adam ravontar mish-e, vali har jomlaro bayad 20 daf’-e aghab jolo konan ta ah-eh-oh hasho dorost begiram. To madres-e hamish-e az adabiyat nefrat dashtam. Hala, agar betonam a khat-e she’r-o bekhonam, zogh-zade-h misham. Oly-hay-e mohtaram, dandonashon-o beham mit’tarashonan ke bach’chashoon zaboon-e madari nemiton-e bekhon-e. Inam, akhar-e aghebat-e ma. Rausti, chera harvaght yek film-e Irani mibinim, tarz-e mokalemeha kheili avaz shod-e — akh-e kee injoree harf mizan-e! Hey, kalamey-e gholomb-e solomb-e mindazan in vasat va ham-e mikhandan bejoz Bagher (a.k.a. me). La’nat be in zabon-e Arabi ke az har panja kalemey-e, sheeshtash Farsi neest.

“een adam engahdr ahmaghe k nemidoneste dolate esraeel moteshakel az mardome yahodie k ghasam khordan baraye dineshoon bejangan…”

Nemidonam chetori in gofteh ra tajze-eh va tahleel konam (loogatar-o dorost bekar bordam?). Nemikhaham, at the same time, ghezavat bekonam bekhater-e eenk-e nemidonam nazarat-e shoma dar mored-e I/s/r/a/e/l chee hast. Dorest-e ke sohbat-e M\a\s\h\a\e baray-e kasani ke I/s/r/a/e/l ro doshman mibinand shayad ghayr-e manteghi benazar beyat vali dar in mored-e makhsoos, harfesh maram-e dorosti darad.

Mardom-e I/s/r/a/e/l mesl-e mardom-e Iran mikhan zendegi bekonand. Hala beyayand and mardom-o be jon-e ham bendazan. Albate Yahodi hay-e A/m/r/i/c/a ba Yahodi hay-e I/s/r/a/e/l fargh daran. To A\m\r\i\c\a, Yahodi ha av’valan ke daray-e pool va basat-e ziyadi hastan bekhater-e inke adamhay-e bahoosh va poshtekari hastan — besiar khoob midonand chetor pooleshon-o tarfi’ bedan. Shooma aslan Yahodi a faghir ya badbakht nemibinid.

In yeki as khososiati ke hamey-e donya bayad az farhangeshoon taghleed bekonand che az nazar-e sarmay-e dari and che az nazar-e farhangi-ejtema-ee. Az bachegi beheshoon yad medan ke chejori az fekreshoon estafad-e konan, che ekhtera konan, to che sarmay-e gozari konan, va ghayr-e. Beeshtareshoon ham tahsill karde az behtareen daneshgaha hastan to HAMEY-E zamineha na faghat to nokhod kishmish ba ink-e jami-ateshoon 2% az A/m/r/i/c/a hast (0.025% to donya). Shooma to har ghestami az jame’e berin, gereft-e az siasat, elm, eghtesadi, banki, ostadi, kheili Yahodi dar kar-e. Inha az neshastan ro korsi va ghalion keshidan anjam nemishe balk-e ba zahmat va talash be dast miyad. Too shoon ham adam-e sharlatan, dozdo, va pool parast ham hast, mesl-e hamay-e aghshar-e jame’e. To khodeshoon ham kheili hastan.

Az nazar-e dini ham, a big majority of them, bishtar to farhang-e Yahodi hastan, na to din-e Yahodi. Mesl-e inke be shooma began, choon ghaza va rasm-o-rosom-e Irani ro mikhorid va anjam mideen, in khosoos shooma ya molamoonet mikon-e ya zartoshti. Dorost-e ke farhang-e va din-e Yahodi kheili baham zamine-hay-e shariki daran, vali heech elzami nist ke shakhs mazhabi bashad (kalame-hay-e Farsi dar-e yadam miyad). That’s why we call these type of J/e/ws, an “observing” J/e/w rather than “practicing.” Az nazar-e farhangi, in joor Yahodi-ha vaghe-an adamhay-e bafekr va motebah’her hastan. Farhangeshoon beheshoon “zendi” yad midahad bejay-e mozakhrafat.

Yek te’dadi az Yahodi ha, adamhay-e raz-o-kasif-e mazhabi hastan ke asasan estefraugh avaran. Ba’zihashoon boland mishan, miran I/s/r/a/e/l va zamin az mardom-e dig-e midozdan. Yek noktey-e dig-e a ghabele zekr hast in-e ke, Yahodi hay-e A/m/r/i/c/a beeshtareshoon chapi hastan ta rausti. They always vote with Liberals (Democrats) as opposed to Conservative (Republicans) party. Rausti-ha osoleshon in-e ke ghalati I|s|r|a|e|l khast bokoneh, bayad azashoon poshtibani kard. Chapiha, ba in ke ba I/s/r/a/e/l kheili ra miyand, vali na be had’d-e vahshiane-ye rausti ha. Dalilesh in-e ke, Yahodi ha yek rabete-ye ghalbi ba I/s/r/a/e/l daran — mesle in ke shoma bekhahid az bachatoon hemayat nakonid vaghti hamey-e donya azash enteghad bokanad ba in ke shayad oon farzand yek seri amalkard-e khoshee nadashte bashad. Mesl-e inja ke az I/r/a/n enteghad mikonand vali bishtar-e vaght-ha, integhad ro jouri elham mikonand ke nafaghat dolat-o mot’taham mikonand, balk-e mardome I/r/a/no ba yek tarz-e fajihaneh-ee neshoon medan ke adam fekr mikon-e ajab hayvonati in “mardoom-e” I/r/a/n hastand. To in chant vaght-e akheer, yeki-do-ta film-e mostanad az “mardoom-e” I/r/a/n neshoon dadand ke kheili ha bargh az sareshoon parideh bood, ke in ha (I/r/o/ni ha) hayvan-e darandeh nistand. Hami migoftand, “ma mikhasteem ro sar-e in ha boomb bendazim? In ha ke mesl-e adamizatand.” Ablah too A/m/r/i/c/a kheili ziyad hast.

Siasat-e to khod-e I/s/r/a/e/l kheili boghranjtar az inhast bekhater-e in ke, I/s/r/a/e/l mesl-e A/m/r/i/c/a do’ta hezb ke nadar-e balki 6 or 7 ta. Baray-e hamin, aghar yek hezbi bekhahad be yek maghsadi beresad, bayad ba kheili ha kenar beyayad, hat’ta ba oon seri hezbi ke az gereftan-e zarmin-e oon becharey-e filistini nemigozarad. Hala, oon Yahodi ke yek kami ham az in mavared narazist, vojdanan nemiton-e az I/s/r/a/e/l badi bege choon mitarsan ke yek daf’e I/s/r/a/e/l ba inkar az ham bepache. Az yek taraf-e digar, A/m/e/r/i/c/an foreign policy, be tor-e kol’li mikhahad ta yek hododi shologhi to khavar-e miyan-e bashad to betonand mohre-ha-ro be naf’e khodeshoon harekat bedan (dar vaghe khodeshoon ra to mantag-e mostaghar konand). Rausti ha (Conservatives) yeki az osoleshoon hamine ke hey az I/s/r/a/e/l hemayat bokonand. Ma ba kheili hashoondar salian-e sal hast ke dargiriy-e lafzi dareem. Be alavey-e in ke, I/s/r/a/e/l va Yahodi ha pool, ghodrateshoon, va nofozeshoon ro W/a/sh/in/g/to/n ziyad hast. Aghar yek nafar jighesh dar beyad, in ha yek ghoshoon-e vakil va PR people mindazan roosh. Agh-e in kafi nabood, mazhabihay-e masihi ke kheili ro siasat-e A/m/r/i/c/a nofoz daran ham, baray-e dari-vari hay-e mazhabishoon, az I/s/r/a/e/l tarafdari mikonand.

Hala ke in aghay-e Mashaee yek harf zad-e and ham-e ro saresh rikhtan, in ha baziy-e siasist. Bebinam, kodom Y/a/z/d/i ro migy? M/e/s/b/a/hi ya M/uh/a/mm/a/d? Az jofteshoon khefrat daram vali M/e/s/b/a/hi az oon yeki hat’ta razl-tar — mardikey-e fashist a kasif va man har kasi ro fashist seda nemizanam. M/e/s/b/a/hi aslan be democracy e’teghadi nadar-e. Khoda khodast-o va man ham payghambaresh. Az man eta-at nashe, be seekh mikeshoonametoon.

Hey gofti az siasat harf nazanim, bebin in mokatem-e ro be che gandi keshoondam. Sorry.

http://www.zandiq.com/pandiq/0000000003.shtml
Ministry of Information meeting about 18 tir of 78 when they attacked the Kosar university dormatory

http://www.youtube.com/view_play_list?p=5B2142AEA79B17B2
Basij secret service meeting in Tehran (Iran) 1998
The individual who recorded it took a massive risk. It exposes the highest ranked Basiji’s with their names, the tactics they are using, and where they work. The commanders you will hear are among those who are responsible of horrific violations against human rights in Iran. The names of some of these will appear in a random order during the audio.

http://odeo.com/episodes/24812400-persian-hamayeshe-kousar-sader3-21_22-mp3-audio-mpeg-Object
The audio of above clips
Please keep in mind ‘they’ means Basidj / police / guards They WANT to develop strategy to defeat the protests based on size, composition, locations, the leader of the protests!

THEY ARE USING HEZBOLLAH WOMEN to get inside riots without people know!

THEY WANT to use FAKE PHOTOGRAPHER for Fake PHOTOS

1) They don’t have good communication between them. To report where protests are and to whom it should be reported!

2) Person who reports the protests 2 them, should know how to say it so they don’t panic if it is not a huge protest! DUMB

3) They want to identify the kind [small, big, students, random people] protest & assigned priority to each of the riots .

4) They think they can easily control the most protests because of lack of leadership & organization!

5) They want Within themselves people who can control/lead/ make decisions to disperse the protests in any ways .

6) They, themselves don’t have a common strategy ahead of time to handle riots before happening. They need to be able to tell the difference between the protesters & the observers of riots

7) They see 2 kinds of riots 1) All people are protesters 2) some are protesters & others are observers .

8) They want to play with people’s emotions & take away their confidence. Which is half of the work to stop the riots. They use Mental &emotional [psychological] ways to stop rioters,through media/whatever,would do 1/2 work to stop riots .

9) They want to know kinds of rioters 2 help to stop them sooner. ex: if students coming to Tehran, stop their bus on the way!

10) They need to be able to know what kind of weapons protesters are using! [Stones,]

11) They want to have a common tactics for Decision making & leading the guards/basidj/police in & outside of the protest .

12) They need better leadership in their [basidj/guards/police] system .

13) They want to have secret locations to regroup in case protesters take over the police/basidj depts .

14) They want to use the Traffic Cameras in the intersections to control & know the locations of riots .

15) They want to use psychological & mental tricks on people to CALM & CONTROL the protesters .

16) They don’t want to corner the protesters. Keep riots out in open, so when arresting rioters, the rest will run away! Because When they corner protesters & arresting some, the rest of protesters will respond back & create violence.

17) They don’t want to Bring dangerous Weapons that make the rioters more aggressive & defensive [Psychological game] EX:Students/ Young protesters will get more defensive seeing basidj with deadly weapons, They want to ACT stronger like a hero!

18) PSYCHOLOGICAL GAME: play with protesters mind, be calm & friendly with protesters .

19) They say Some protesters are very religious. Use religion to make those protesters side with basijs .

20) They used “Hezbollah” women in university /hospitals as spies to “help” injured rioters & got info on rioters .

21) The Don’t want to KEEP detainees in known locations: lots of families & others gathering outside, hard to control them! Prevent people & family of detainees gatherings out side of prisons by not letting them know where detainees are kept.

22) THEY want to PAY lots of money to SOME BASIJ to become “PHOTOGRAPHER”, get into universities/hospitals & spy on rioters .

23) They want to PAY SOME BASIJ to be “PHOTOGRAPHER”, also to control the media & controlling the photos being published .

24) Kerman, Khorasan, Seistan, & Baluchistan Cities/Borders needs to strength their guards & security!

Basiji’s secret meeting on 17 July 2009
http://www.youtube.com/watch?v=VBM8fE9JSfA
http://www.youtube.com/watch?v=aNKlWaZjF7s
http://www.youtube.com/watch?v=V4PvV8vWOcQ
http://www.youtube.com/watch?v=j3ZPz02hoCk
http://www.youtube.com/watch?v=03W86Uo-7UM
http://www.youtube.com/watch?v=ObUXcT5Iz8o
http://www.youtube.com/watch?v=MONgP0H4dKo

http://www.understandingiran.com/2009/07/ahmadinejads-speech-in-mashhad-lies-and.html
Running really low on the content for site lately? I wonder if regime’s funding is also running out.

First off, if you believe that an undated video should be taken on its face value, you are a lost cause. That goes to both the old and the new clip. Second, I concur with the last statement made here that Iran still consists of large number of people who don’t mind a genuflection to their fascistic clerical handlers. This very fact is vital to combating the regime and, indeed, must be made to the responsibility of others to inform and educate this segment of the society to the fundamental errors in the governing constitutions. Loops holes that entirely leave the governing body to deny freedom of speech, expression, true democracy and press while maintaining an absolute power over every aspect of the people’s lives.

This, however, does not invalidate the claim that the regime goad the impressionable minds into bus loads of cohorts and use them for propaganda props. Yes, if you wish to believe IRIB’s poorly constructed prevarications, half-truths, and absolute censorship, then why are you upset about the other side’s distortions? Let’s see if you denounce the “state-run” propaganda machine. Let us enjoy an ensemble of honesty here while you elaborate on how the regime has a total control over the news media, given the one and only TV station and incessant shutting down the opposing newspapers while imprisoning and torturing journalists and writers. Oh, I’m sorry, I must have been influenced by the clever Western media and not the fact that I personally experienced such brutalities first hand.

Occupy yourself with trivial piffle while ignoring the bigger picture. You’re gonna go far in life…

http://zeerzamin.blogspot.com/2009/07/blog-post_16.html
http://irankampian.blogfa.com/post-42.aspx
Taraneh-e Mousavi raped and burnt

http://zeerzamin.blogspot.com/2009/07/blog-post_3749.html

What really happened in University Dorms of Tehran University Iran
http://www.youtube.com/watch?v=bJMrwqVLGqA

Mojtaba Khamenie
http://tehran-london.com/uk87/pic20/9767171.jpg

http://margbarbasiji.blogspot.com/
http://idthebasiji.blogspot.com/
http://outthebasij.wordpress.com/

http://www.gerdab.ir/fa/pages/?cid=422
http://www.gerdab.ir/fa/pages/?cid=407

*********** supporters of regime outside of the country

Elaheh Rostami-Povey

Haleh Afshar

Mehri Honarbin (anti-imprelialist)

Akbar Ganji:
Ganji “served in the Islamic Revolutionary Guards Corps during… and joined the Ministry of Intelligence of the Islamic Republic.”
http://en.wikipedia.org/wiki/Akbar_Ganji

http://www.gerdab.ir/fa/pages/index.php

Ya, another prevarication by the regime tools. I checked the majority of the sites mentioned at the bottom of the entry and none has been censored. Of course, we all know you are not going to publish this comment because you know your days are numbered. How about create a “hyperlink” for each of the sites “named” at the bottom of the article so people can easily verify your lies? Don’t be a coward.

Kahrizak prison ordeal of torture, beating, and deaths
http://kahrizak.wordpress.com/2009/07/27/%D9%81%D8%AC%D8%A7%DB%8C%D8%B9-%D9%88-%DA%A9%D8%B4%D8%AA%D8%A7%D8%B1-%D8%A7%D9%86%D8%B3%D8%A7%D9%86%DB%8C-%D8%AF%D8%B1-%D8%A7%D8%B1%D8%AF%D9%88%DA%AF%D8%A7%D9%87-%DA%A9%D9%87%D8%B1%DB%8C%D8%B2%DA%A9/

http://peykeiran.com/Content.aspx?ID=4373

http://loln.wordpress.com/2009/07/28/first-hand-testimonials-of-a-21-year-old-iranian-protester-who-was-arrested-on-18-tir-protests-in-tehran-and-taken-to-kahrizak-camp/

I don’t know where to start. I hope you forgive my grammatical mistakes in this report that I am going to write about Irans’ Gunatanamo, Kahrizak camp. I am in a rush and I have to go soon. Now that I am writing this it is 8 minutes in the morning of Mordad 6th [July 28]. This morning me and a couple of others miraculously were rescued from death.

Now I have arrived home from the hospital and immediately I created this blog [1]

I was arrested on Tir 18th [July 8th]. I am 21 years old. Now that I am writing this I can not believe that I am free. In the 18th Tir protests, me and a friend of mine were on a motor bike and my friend was filming [the events] using his mobile phone, [suddenly ] plainclothes attacked and started beating us. A woman came to our rescue but they beat the poor woman too.
They dropped us in a minibus that was full of beaten and injured people and the minibus took us to the police station. I was so badly beaten that I did not know where I am. After that they put all of us back to the wall, me and my friend were standing together. A heavily build plainclothe [guard] came and pulled some of us out and put us in a minibus. From that moment onward I don’t have any news about my friend. They took us with tens of others to Kahrizak camp.
You can not believe this, at least in that room that we were held there were another 200 people. they were all injured and beaten by batons. You could hear people crying everywhere. I told to myself what are they going to do with us? May be tomorrow they will take us to a jail or a court or something. At least that would be better than being here.
There was no place to sit down, and there was blood everywhere on the walls.
I was thinking of my friend, he was not someone who could bear to be in such a place.
[Suddenly] some of the people [in the room] started crying and saying that one person is dead. Their voices was coming from the back of the room, but may be you can not believe this that we were all standing so close to each other that no one could move. The plainclothes guards came into the room and broke all the bulbs in the room and in the pitch dark started beating us, whomever they could. They did that for half an hour. Some went into a coma after that and may be they were dead.
After that they put a flash light into our faces and said if you make a noise we will put these batons into your a… . I could not believe that. I was thinking that this is just a nightmare.
“Sadegh”, who was apparently their superior, picked up the body of the dead person leaned it on the wall, put the flash light into the dead persons face and said:”We have the order to kill you all. you’ll be lucky if you don’t die like this mother f..r [pointing at the dead person]. Do not make any noise (he said) if you’ll be alive till tomorrow so be it, if not then …

He [Sadegh] said: “You are all “Mohareb”s [2] Do you know what “Moharabeh” means?” In front there was 16-17 years old boy. He grabbed his neck and asked: “Tell these people what “Moharebeh” means.” “I don’t know”, the boy said. The guard started beating the boy while shouting “tell them” (what it means) . He beat the boy so much that he fainted. He [Sadegh the guard] said ” it mean Satan, it means criminal. He kept beating the boy, some people in the room protested; They also got beaten to death.

In our room at least 4 people died by the morning.

Sadegh shouted, “here there is no tooth brush and no toilet, you do your job right here!! understood?”

There was no healthy person among us [all injured], everyone had blood on their faces, or they had a black eye like me. Many with broken legs and arms. Because of the darkness in the room I could not see many of the people there. When they would open the door the light would hurt us badly.
In the morning after and other days we spent the time in the worst possible condition that I need more time to explain it all.
To prevent us dying of hunger everyday (I don’t know in the night or the morning) they would give a bag of leftover food which we would eat eagerly. You could find pieces of old bread, herbs and rice in the bag.
There was one person among us called Dr.Zareh and he was responsible to ration the food among us. I just knew him and many others by their voices. Till one day Sadegh came with some bulbs and after that he took us outside in the camp.
Wow! that was a sense of freedom for us! the blue sky and the sunlight was a new thing for all of us (oh by the way, they took us out because they wanted us to take out our dirt and feces) I am sorry that I am writing this like that, I hope when others come out of the camp they can explain better and I am sure that this camp is way worse than Guantanomo and Abu-Garib.
Anyway, based on Sadegh’s tyros, we were among the first whom they kicked out of the camp without being tried! due to the lack of space in the camp. And they threatened us if we say anything to anyone they will immediately kill us.
Immediately after my release I contacted my family using a passerby’s cell phone, and they came and picked me up. Freedom is sweet!
But remember that there are thousands of people still in Kahrizak camp in the worst possible condition.
Also I want to give the names of some who died in the camp that I have memorized their names. By the way, if those animals would take these people to a hospital they would have not been dead.
Hasan Shapuri (Student)
Reza Fatahi (Student)
Milad (no last name, he is the 16-17 years boys whom Sadegh beated him to death the first night and went to a coma after, and they took him with them but the doctor who was with us, somehow our senior, said that the boy was bleeding from his ears and mouth and unfortunately is dead)
Morteza Salahshoor
Morad Aghasi
Mohsen Entezami

Also I have the names of many of people who are still in custody in our camp and I will put their names on the same blog in the following days

God frees us from them
I can not believe where I have been 24 hours ago.
God, free all Iranians and freedom lovers as soon as possible!

P.S. I think with regards to the changes that were being made in Kahrizak, the detention center that their corrupt leader [Khameneh’ie] is supposed to close down is the same Kahrozak camp. Because many died in there.

Reza Yavari (my nickname)
Mordad 6th 1:10 AM [July 28]
Hope for the release of those who are still in Kahrizak

****List of 52 Iranians Murdered by The Iranian Government Forces or tortutred to death in Prison****

Saeed Abbasi
Abolfazl Abdollahi
Neda AghaSoltan
Vahed Akbari
Hossein Akhtarzand
Kaveh Alipour
Naser Amirnejad
Sohrab Arabi
Mohammed Asgari
Kianoosh Assa
Fatemeh Barati
Yagoub Barvayeh
Sarvar Boroumand
Meysam Ebadi
Aliewza Efekhari
Mobina Ehterami
Mostafa Ghanian
Ramin Gharemani
Mohsen Hadadi
Iman Hashemi
Masoud Hashem-Zadeh
Farzad Hashti
Mohammad Hossein Barzegar
Mohsen Imani
Seyed-Farzad Jashni
Amir Javadifar
Bahman Jenabi
Mohammad Kamrani
Mehdi Karami
Shalar Khazri
Masoud khosravi
Parisa Koli
Hamid Maddah Shorcheh
Taraneh Mousavi
Ahmed Naeim Abadi
Iman Namazi
Nader Nasseri
Mohammad Nikzadi
Fatemeh Rajabpour
Sadjad Qayed Rahmati
Mohsen Roh Alamini
Davood Sadri
fahimeh Salahshoor
Ali Shadehi
Kasra Sharafi
kambiz Shojaii
Ashkan Sohrabi
Seyed-Reza Tabatbaii
Vahid-Reza Tabatabaii
Salar Tahmasabi
Hossein Tahmassebi
Amir Hossein Tofanipour

A defector of Al Ansar Hezbullah Basij speaks about his ex-fellow friends
http://edition.cnn.com/video/data/2.0/video/world/2009/08/04/pleitgen.iran.defector.cnn.html

http://www.youtube.com/watch?v=4u3Efd_LhL8
An iranian youth grown up in Canada travels to Iran to follow President Ahmadinejad in one of his trips and covers with his view and interviews with people with and against the president.
Milad Dokhanchi
Ahmadinejad

1:21:43
MD: What has been your greatest achievement? I’m not asking for a certain example like the nuclear energy, etc.. What’s that achievement that’s specific to Mr. Ahmadinejad that if it wasn’t for Ahmadinejad, that new discourse would have not come through?

Ahmadinejad: Let’s not reduce the achievements to one individual. Revolution is a huge current. A river and I’m just a drop in that river. According to some version, 60 years and according to another version 200 years, there has been only one language ruling the world. The dominant discourses were Communism and Liberalism. The discourse of individualism, the hedonist human being after his/her maximum interests, maximum pleasure, that the freedom of others would not be violated. Now, in that individualist, hedonist, interest oriented, and so called free where would dignity, sacrifice, and blessing have a place? It would be as if as doors are closed.

MD: I’m still looking for that achievement?

1:23:29
Ahmadinejad: Very well, when the fundamental of our definition for human being is hedonistic… interest oriented and individualist, the society created out of that is the one in which there is merely struggle for survival. Everyone is after authority and take over; everyone is after maximizing their interests, this then becomes the roots of hostilities, wars, discrimination, and gaps, and then there is a world created that a minority is well of and a majority is poor and a minority assume rights for themselves even above the law, and some are deprived of any rights, some are respected and some are not respected at all. Then the discourse becomes force, coercion and power. Well, that must change. What is the dominant discourse in the world right now? Even those who were after oppressing no longer dare to speak with the language of force. They say: oh, yeah! Justice, respect, dignity, humanity. This is the change that happened. That means the discourse that was after control and was disrespectful towards other nations. And that some assume the authority to do whatever they want, this tread was reversed. Even those whose intentions haven’t changed, and are still pursuing the same goals, but to remain in power and enforce those intentions, now are showing new attitude; they are even saying new words.

MD: And you’re saying Mr. Ahmadinejad achieved this?

Ahmadinejad: No, this is the achievement of the Iranian naiton.

MD: A tough question. Your greatest criticism towards Ahmadinejad?

Ahmadinejad: Ahmadinejad himself is only a “borrowed amount.” He is not even ‘cash’.

MD: Is there something though?

Ahmadinejad: Of course, there is. But I have to pay attention to it myself.

MD: Mr. Ahmadinejad, when you usually make any reference to west, you speak of it in terms of this dominating and controlling system. I was raised in the West. And West is not as bad as you say it is. Is there something about the West that you admire?

Ahmadinejad: Look, when I say West, I’m making reference to that dominating side of it. Not the people. We differentiate between the people and the dominating system. People are good everywhere. They are good everywhere. People are not after dominating attitudes. They are not after wrong behaviors. They accept the truth when confronted by it. If of course confronted by a sense of truth. People resent genocide, war, imposing and exploitation. The majority of people. I’m refering to that majority whose [ilegible] are resented even among the people of the West. But we are not denying the achievements in industry, technology, and certain social relations. That mentality that has affected the world, and has deviated the world issues from their right path, it’s that mentality that we have disagreements with. But we appreciate for example, citizens rights, social rights, certain defined social relations, there are good relations, very well defined and set. The fact that only part, and I stress only part even in the west only part, not everyone, live in a relative well being. We are happy about that, and don’t find it negative. These are in fact very positive. But we believe that this, first of all, should be universal. And it should not cost the misery and deprivation of a huge part of the world. We also say the purpose of life is something higher than this.

MD: If your son was to leave Iran to pursue education abroad, would you let him?

Ahmadinejad: If he had really reached the conclusion that for this prognesis and prefection, he wants to travel around the world, I don’t see anything wrong with that.

MD: Among personalities in the world, is there any personality that you’ve been influnced by?

Ahmadinejad: Well, they are many…

MD: No, I’m looking for that one or two pesonalities who have been…

Ahmadinejad: Well, in Iran, Imam [Khomeini] has been the most influential (above everyone else). Ayatollah Motahari, I used to read his books. There have been other personalities, in the Iraq-Iran war, in the political sphere.

MD: Any foreign personality?

Ahmadinejad: Of course there have been others, but I don’t want to mention names. But I have read the biographies of all revolutionary characters in all over the world, whether in America or Africa or Europe. Although in Europe, there have been less revolutionary characters after the Renaissance. But there have been those who have considered morality, I have read their biographies as well.

MD: Is there any memory from your childhood that has influenced you so much?

Ahmadinejad: There are a lot of memories from childhood. I remember my primary school, my first grade teacher. Memories which have been overall very influential in…

MD: Any particular example?

Ahmadinejad: I remember that affection and perseverance in my teacher. At the same that the teacher genuinely loved everyone. Presented discipline, and a sense of authority. Then we went on to the second and third grade. I remember in third grade our teacher changed. And this change of teacher, changed our entire world. I remember we were crying for almost a week. Asking why our teacher has been replaced.

MD: Can we see the influence of that kind yet strict teacher in Mr. Ahmadinejad?

Ahmadinejad: Never thought about it that way. Well, it’s obvious that a character is shaped throughout time. And my parents were ver influential in the way I was shaped. Very much. From the very childhood and the way they took care of me. We were seven brothers and sisters. Of course we were not low in number. And my father’s job was a dificult one. His profession would make him very tired. But without us realizing he ha a very careful supervision over us. But we wouldn’t sense that at all. I remember once he came and said: “Those kids you go play with, are not good kids. it’d be really good if you can change your friends.” Or he would supervise our studies. He would come to our school to ask our teachers how we are doing. Sometimes he wouldn’t even tell us. He would supervise carefully, he would look at our homework. Sometimes if we had played a little too much, he would remind us that this may be enough, and there are other things to do. He would make sure we would be introduced to religious and divine teachings. But he would never force us. So we would feel there is just an obligation that we have to fulfill. No, the environment was open that we found it appropriate. But beyond these things. I was very fascinated by my dad’s firmness. I do not remember one scene from my father during the life time of almost 48 years, other than the first two years, during life time of almost 48 years, I do not remember one scene from my father that he would feel weak or belittled. I don’t remember even one scene. But he would always be a resort, a relying point. My mother also, she was the center of love, affection, and in-house organizaitons.

MD: Regarding Iran-U.S. relations, you’ve always stated that you’re waiting for the U.S.’ move, and this is U.S.’ turn. And that you’re waiting for that ‘first step.’ What first step should president Obama take to be considered the first step to reconcile the Iran-US relation?

Ahmadinejad: Well, this is a secret. A secret that cannot be easily revealed.

MD: Alright, if this film criticizes you at some points, what would be your psoition on it?

Ahmadinejad: We have to see, if it’s a legitimate criticism that would add something to me, I would be thankful. If not, like the rest.

MD: Who are criticising exactly?

Ahmadinejad: It doesn’t really matter what they say. Look, what really matters is that you’re certain that the path you have picked is the correct one. Everyone makes mistakes. Now, in this right path one may speed up a little, fall into bumps, make wrong brakes, for instance. But you’re in the right path and if that’s the case you will eventually reach your destination.

MD: I spoke to a lot of people in Iran, and asked them about their criticism towards president Ahmadinejad. Among supporters as well as critics. There seemed to be consensus that Mr. Ahmadinejad does not consider expert analysis and goes by decisions he thinks are correct. They have a lot of examples from change of ministers and so on. Are you saying all these criticisms are baseless? What is your response to these critics?

Ahmadinejad: There was a certain style of decision making at a government level prevalent in all areas in the country, that I have in fact come to change that and I’m not saying I’ve been totally successful in changing that. But I have come to change that style of thinking. The mentality that is criticizing follows that same old style of decision making, certain approach in expert analysis that I do not agree with. That explains why my style sounds strange to them. And the vibe created does not correspond with their mentality. Thus, it’s a wrong style of decision making. But from their perspective they are right. But, I have come to change that. Both methods and fundamentals of decision-making. Provincial trips for example, according to that conventional style, information and statistics must study the issues and pass on decisions. There is no need to travel all the way to a far province. They would say we gather all the information and make decisions here. But the expert analysis of my colleagues leads us to a different rationality. This rationality says between us and the problem, there is an obstacle. That obstacle is called bureaucracy. Bureaucracy has it’s own faults while it has certain benefits. The faults of bureaucracy causes the difference between the decisions made here, and the reality on the ground. That maeans the decisions undergo many changes. And there are many countries in the world that are stuck with this bureaucracy. In the west, in the east, pretty much everywhere. This bureaucracy that has become fashionable in the past 200 years has its own problems. Let me give you an example from the U.S.. There was a hurricane in 2005, in one of the South East states. And people were severely damaged. Some were killed, some homeless and some are still homeless. Why are they still homeless? Part of the reason may go back to the political and social systems and their value system. But part of it goes back to the administrative system. The bureaucracy that is unable to reflect the problem for the rules of the country to help them understand. Look, people are severaly damaged, go help them. In the provincial trips, we have bypassed this obstacle. Now, the bureaucratic system is not something to change over-night. It’s not like you can reverse the entire trend. After an in-depth brain storming among experts, we found a way to bypass this obstacle. We pump the decision on this end, and then go to the other end and supervise the final result. Well this is a very scientific approach. But the fundamentals are not compatible with the dominant style of decision making. That mentality is used to pumping ideas one sided irrespective of what the outcome is. Well, we find that outdated and inefficient. I have introduced an alternative approach in decision-making and it will son become prevalent although there is a lot of resistance at the moment. But it will eventually find its own place (we have to resist). The question now becomes what is the best approach? It’s obvious that we must erase the class divisions. We must erase economic oppression, we must progress. The same discussion exists in foreign policy. Some would say that my style is wrong and is inefficient simply because they wanted to work within the framework that had been experimented for many years. Now let’s look at it this way, let’s say in a game you play against a player who has written the rules of the game. Well then of course you’re subject to loose. Your loss is obvious even before the game. Why would you even enter a game that your competitor has written the rules of the game? You must either define new rules or denounce those rules, so you can create an opportunity for your victory. And that’s what we did in foreign policy. We said, you’ve written all those one sided rules. We don’t accept these rules. We should either write the rules together or we write them, who are to write the rules? And when I say West, it’s not like I have divided world’s geography and then say this part is entirely problematic. I’m talking about those who want to impose their discourse on other societies. Those who have defined a system fo r nations in the past 100 or 60 years. Whoever has used this system to reclaim their rights has ultimately failed. And that minority who at least claimed part of their rights did not go that conventional path. They chose another path. Now, I, as someone who is to make decisions for our country, as someone who has read history and knows the international systems, behaviors and approaches, and wants to reclaim our nation’s rights. The worst decisions is to play by the rules they have set for us. When your enemy states explicitly that to claim your rights, follow my rules. Well it’s obvious that this approach is subject to failure. I don’t think it needs a lot of rationalizing. It’s very obvious. Same thing goes in the United States. American people are after change. They are not happy with the situation in the world and in the U.S.. How is it that 80 million people live under poverty line? [What!!!] That means 26% of the entire population live under poverty line. And 40 million people live without insurance coverage. And this is on the rise, as unemployment is on the rise. And every job loss means 2-3 people or one family is affected. Now if American people were to pursue their demands ina two party system, that would never effectively come through. It’s impossible, those two parties follow their own agenda. Couple of days ago I saw someone stating: Mr. Obama must realize that campaign promises are very different from the governing realities on the ground. This means these two parties have created such a system, that nothing can be achieved unless it serves their interests. Now let’s say American people demanded something beyond the interests of those two parties. How can they go about achieving their demands? Shall they pursue them through these parties? Of course these parties are not going to do that. This of course must change. So people’s demands would come through. Now if one says I don’t approve of the two party system, this goes against civil liberties. This goes against people’s rights of self-determination. Of course these two parties would shout: “Oh this is irrational.”

MD: Thank you. What are your plans after your presidential term? Whether it is 1 month or 4 years and 1 month. Do you want to launch your own charity foundation?

Ahmadinejad: Why charity foundation?

MD: Usually that’s what former presidents do in the world.

Ahmadinejad: Well, before I came here, I used to work at university while I did my own works related to these fundamental changes. Whether in the national level or international level. But no one knows about future. Be careful. I don’t know what will happen in future.

MD: And message for Canadians?

Ahmadinejad: I love them. I love them, Canadians are great people. There has never been a problem between Iranian and Canadian people. Be careful there. Same thing goes for American people. There has never been a problem between Iranian and American people. Pass my regards to all of them.

MD: I’m planning to make another documentary about you in 40 years. I don’t think I’m going to be around in 40 years.

[certainly you would]

MD: Thank you very much.

[I was delighted]

Ahmadinejad: Good lock.

http://www.opendemocracy.net/globalization-institutions_government/colour_revolutions_3196.jsp
Democratisation, NGOs and “colour revolutions”
Sreeram Chaulia, 19 – 01 – 2006
From Georgia to Kyrgyzstan via Ukraine, new forms of youthful, tech-savvy mass mobilisation are impelling regime change from below. But is the phenomenon as benign as it appears? Are the movements who inspire the “colour revolutions” catalysts or saboteurs? Sreeram Chaulia analyses a modern face of global democratic politics.
19 – 01 – 2006

“…power does its work by stealth, and the powerful can subsequently deny that their strength was ever used at all.”

Salman Rushdie, Shalimar the Clown (2005)

Samuel Huntington, summarising the mix of primary causes for the “third wave” of democratisation that began in 1974, listed a new but not decisive factor that had been absent in the preceding two waves: “Changes in the policies of external actors…a major shift in US policies toward the promotion of human rights and democracy in other countries…”. American international NGOs (“Ingos”) were prominent mechanisms through which this causal link between superpower foreign policy interests and regime change worked out in many transitions from authoritarian rule in the twenty-one-year-long “third wave”.

This essay attempts to extend the analysis on Ingo instrumentality and democratisation to the geopolitical storms popularised as “colour” or “flower” revolutions that have been sweeping the post-communist world since 1999. It sets out to assess the strength of the impact of transnational actors on recent international political events of great consequence, and explore the parasitic relationship between Ingos and a hegemonic state.

The intention is to bring the state back into a field dominated by flawed renderings of transnational activism. The principal argument is that the main and direct causes of the colour revolutions were United States foreign-policy interests (strategic expansion, energy security and the war on terrorism) as they were serviced by Ingos. Without the intervention of these US-sponsored Ingos, the political landscapes in countries like Georgia, Ukraine and Kyrgyzstan would not have been repainted in new colours.

These three revolutions – the “rose revolution” in Georgia (November 2003-January 2004), the “orange revolution” in Ukraine (January 2005) and the “tulip revolution” in Kyrgyzstan (April 2005) – each followed a near-identical trajectory; all were spearheaded by the American democratisation Ingos working at the behest of the US foreign policy establishment.

It will be argued that the comparable political convulsions of Uzbekistan (May 2005) and Azerbaijan (November 2005) did not experience “colour revolutions” due to a variation in the independent variable, US foreign-policy priorities.

The contexts of democratisation

Most studies of democratisation recognise the international context in which regime change occurs, but such studies never go to the extent of giving external causes prime place. The consensus is that exogenous factors “are difficult to apply in a sustained manner over the long term.” In the case of the former communist bloc, some scholars regard international organisations, western economic aid and the Catholic church as “catalysts of democratisation”; others claim that international human-rights norms triggered fundamental political changes leading to the demise of communism.

Transnational actors, comprising Ingos at the hub of advocacy networks, are viewed as capitalising on opportunity structures offered by “internationalism”, acting as “ideational vectors of influence”, and maintaining constant criticism of vulnerable “target states” that are repressive in nature. Portrayals of advocacy networks as autonomous entities that skilfully manoeuvre states and international organisations for achieving their own principled ends suggest that democratisation was “both a contributing cause and an effect of the expanding role of transnational civil society.”

On the question of how transnational actors “penetrate” target states, which is of seminal interest for our colour-revolutions quest, constructivist theory harps on norm institutionalisation in issue-areas like human rights that enable coalitions with powerful state actors who favour such norms. The manner in which American democratisation Ingos penetrated Ukraine and Kyrgyzstan, however, did not follow this route.

Another pathway for penetration is presented by the “boomerang pattern”, wherein international contacts “amplify the demands of domestic groups, pry open space for new issues and then echo back these demands into the domestic arena. ” Though campaign strategies and pressurising tactics of Ingos do approximate to what happened before the colour revolutions in Ukraine and Kyrgyzstan, the origin of American INGO involvement in these states was not as straightforward as an invitation from local civil society to global civil society.

Former communist countries are characterised by weak local civil societies and embryonic homebred intermediate organisations. Nor were the dynamics of INGO intervention in these states as simple as domestic grievances being resolved by coalitions with principled external networks “motivated by values rather than by material or professional norms. ” For the most apposite theoretical framework that fits the story of Ingos and colour revolutions, we must leave constructivism and turn to the revolving applications of realism in world politics.

Ingos as vehicles of strategic penetration

Realism asserts that transnational actors can punch above their weight and have disproportionate impact on world affairs only if they lobby and change the preferences, practices and policies of powerful states. The Helsinki network in Europe followed this game plan to great effect by winning over the US government to its side in the struggle against communism.

Norm-driven theorists fail to concede that superpowers have minds and agency of their own and only give in to transnational “pressures” when the issue area serves larger geo-strategic purposes. Rarely has the US promoted human rights and democracy in a region when they did not suit its grander foreign-policy objectives.

Thomas Carothers, a leading authority on US democracy promotion, has decried the instrumentalisation of democratisation by recent American administrations: “The United States has close, even intimate relations with many undemocratic regimes for the sake of American security and economic interests… and struggles very imperfectly to balance its ideals with the realist imperatives it faces.”

The flip side of this reality is the fact that when undemocratic regimes prove to be thorns in the flesh, the US sees great merit in their overthrow by a range of diverse methods. In the cold-war era, selectivity in democracy promotion was best reflected by Jeane Kirkpatrick’s distinction between “totalitarian” and “authoritarian” regimes, the latter being states which can be supported in the scheme of bigger US interests.

As we delve into the case studies of colour revolutions, the same “good despot-bad despot” patchiness of superpower attitudes to democratisation in the post-communist world will resurface in the new context of the “war on terrorism”.

Geoffrey Pridham divides geo-strategic impact over regime changes into the two dimensions of space and time. The Mediterranean had turned into an area of intense superpower rivalry in the mid-1970s due to the enhanced Soviet naval presence and instability in the middle east. Regime transitions in that hotspot, therefore, sharpened US and western interests in the outcomes.

As a corollary, at sensitive world historical moments, American inclinations to intervene in regime politics of countries tend to be greater. Early cold-war economic instability in Italy and Greece in the 1970s was one juncture where the outcome stakes were felt to be so high in Washington that it took an active interventionist role. Thirty years on, the spatial and temporal importance of Ukraine and Kyrgyzstan in the geo-strategic sweepstakes was ripe for colour revolutions orchestrated from outside.

Laurence Whitehead has deepened understanding of democratisation as a geopolitical strategy that redistributes global power and control with the metaphor of a vaccine, not of a contagion or virus. US military and other modes of destabilising interventions in Central America were meant to inoculate polities from contamination by Castroism and this treatment was labelled “democracy”. “Two-thirds of the democracies existing in 1990 owed their origins to deliberate acts of imposition or intervention from without…It is not contiguity but the policy of a third power that explains the spread of democracy from one country to the next.” The colour revolutions under our bioscope were integral to this power-politics tradition motoring dominant states in international relations.

Realist views on transnational actors as instruments of powerful states date back to debates about multinational corporations (MNCs) and their entanglement with American hegemony. Robert Gilpin was the first to explain the rise of MNCs as a function of hegemonic stability, i.e. that the leadership of a powerful political state actor is essential for the creation and maintenance of a liberal world economy in which MNCs thrive.

Robert Keohane and Joseph Nye also warned in the 1970s that “transnational relations may redistribute control from one state to another and benefit those governments at the centre of transnational networks to the disadvantage of those in the periphery.” Ingos had not burst onto the global notice board during these early reviews on transnationalism. However, the usage of Ingos as foreign-policy instruments was not unknown right from the start of the cold war.

Humanitarian Ingos like the International Rescue Committee (founded in 1933 to assist anti-Nazi opponents of Hitler) and democratisation Ingos like Freedom House (founded in 1941; an important component of the Marshall Plan to prevent communist takeover of western Europe) are two high-profile cases that represented US governmental interests while maintaining INGO legal status.

Inducing defectors and refugees from behind the “iron curtain” to cross over, public diplomacy, propaganda and funding of electoral candidates in foreign countries by charities and Ingos existed long before the voluntary sector attained an overtly pivotal position in the annals of US foreign policy. More recently, humanitarian (not human-rights) Ingos heavily dependent on US finances have been found to be consciously or subconsciously extending US governmental interests. As Julie Mertus writes: “It’s not the NGOs driving the government’s agenda; it’s the US government driving the NGO agenda.”

Doctrinal developments in foreign policy kept pace with the growing potential of Ingos as valuable assets for promoting US national interests. Andrew Scott’s (1965) “informal penetration” theory tied US foreign aid, technical assistance and international organisations together as a toolkit that can be used to increase the porosity and penetrability of rival states.

Permeability of national borders was both a precondition for the emergence of transnational entities like MNCs, Ingos and international organisations, as well as the end result of increasing transnationalism with the US as metropole. Richard Cottam theorised that the Zeitgeist of world politics had changed from the ultimate recourse of “shooting warfare” to political, economic and psychological warfare. The arenas at which critical international battles took place were increasingly the domestic politics of weaker target states that are vulnerable to foreign influence and interference.

Cottam was disappointed with the “ad hoc” nature of US foreign policy and its neglect of a long-term strategic plan based on “tactical interference”. The contemporary blueprint for co-opting transnational actors as active wings of foreign policy was laid by Joseph Nye’s liberal “soft power” idea that called for harnessing the US’s tremendous reserve of intangible resources such as culture, ideology and institutions for preserving world dominance.

“Soft power” at the end of the cold war would be less costly and more effective to Nye because of its subtlety and seductive quality. The prohibitive costs of direct military action in modern times ensure that “other instruments such as communications, organisational and institutional skills, and manipulation of interdependence have become important instruments of power. ” To manage the challenges of “transnational interdependence”, Nye urges greater US investment in international institutions and regimes on issue-areas that can perpetuate the American lead in global power.

His emphasis on private actors operating across international borders as a key category that has to be managed by the hegemonic state aims at the heart of our discussion on democratisation Ingos as pawns. Among practitioners of US diplomacy too, soft power’s utility in furthering strategic ends has been toasted after the end of the cold war. Warren Christopher, President Clinton’s first secretary of state, proposed a strategic approach based on “new realism” to promoting democracy: “By enlisting international and regional institutions in the work, the US can leverage our own limited resources and avoid the appearance of trying to dominate others.”

The democratisation Gongos

The watershed that brought Ingos to the forefront of global democracy-promotion was the Reagan administration’s decision to create the National Endowment for Democracy (NED) in 1983 to roll back Soviet influence. With a stated raison d’etre of “strengthening democratic institutions around the world through nongovernmental efforts”, NED was conceived as a quasi-governmental foundation that funnelled US government funding through Ingos like the National Democratic Institute for International Affairs (NDI), the International Republican Institute (IRI), International Foundation for Electoral Systems (IFES), International Research and Exchanges Board (IREX), and Freedom House.

These Ingos in turn “targeted” authoritarian states through a plethora of programmatic activities. NED’s first president, Allen Weinstein, admitted openly that “a lot of what we do today was done covertly 25 years ago by the CIA. ” The organisation was a deus ex machina in the face of scandalous Congressional investigations into the CIA’s “soft side” operations to destabilise and topple unfriendly regimes that embarrassed the government in the late 1970s.

As William Blum writes: “An NGO helps to maintain a certain credibility abroad that an official US government agency might not have. ” 97% of NED’s funding comes from the US state department (through Usaid and before 1999, the Usia), the rest being allocations made by right-wing donors like the Bradley Foundation, the Whitehead Foundation and the Olin Foundation. Since its conception, and despite the bipartisan structure, “neoconservatives have held tight control over NED’s agenda and institutional structure.”

Senior figures in the George W Bush administration who are signatories to the Project for a New American Century (PNAC), which wears aggressive US foreign interventions on its sleeve, have officiated in NED. Notwithstanding its claims to “independence” and “nongovernmental status”, the US state department and other executive agencies regularly appoint NED’s programme personnel. As one ‘Project Democracy’ (codename for NED in the Iran-Contra scandal) advocate put it, “These ‘private’ agencies are really just fronts for the departments they serve; the agency may prepare a report or a research project that it then gives to the private firm to attach its letterhead to, as if it were really a private activity or initiative.”

A survey of NED’s partner Ingos reveals a similar pattern of public priorities forwarded by private agents. Freedom House, a neocon hub which succoured the colour revolutions, has a history of being headed and staffed by ex-CIA high-level planners and personnel.

NDI is dominated by “liberal hawks” or right-wing Democrats who find their way to prime foreign-policy slots when their party is in power. IRI comprises a herd of far-right Republican politicians and representatives of major financial, oil, and defence corporations. IFES top brass belong to conservative Republican ranks, the CIA or military intelligence. IREX, the training school for colour revolution elite protagonists, is peopled by political warfare, public diplomacy and propaganda specialists from the news media, US foreign service and the US military.

For our purpose, it is interesting to note that compared to humanitarian and development Ingos, which have often promoted US foreign-policy objectives, democratisation and human-rights Ingos boast of a far greater preponderance of US government and intelligence operatives. This owes much to the fact that democratisation is a sensitive political minefield with direct bearings on international relations. It is too important a foreign policy subject for the US government to hand over reins to the voluntary sector.

Armed with the luxury of a sea of democratisation Gongos (governmental NGOs) and quangos (quasi-governmental NGOs), William DeMars says: “The US government has a greater capacity than any other single actor in the world to keep track of them, channel them, thwart them, or ride them in a chosen direction.”

Usaid’s avowal that democracy can be promoted around the world without “being political” is totally fictional, because the onus of NED and its family is on altering the balance of political forces in the target country in the pretext of “civil society assistance.”

Criticising the brazen politicisation of democratisation Ingos, Elizabeth Cohn recommends: “Close consultation between the U.S. government and nongovernmental groups should stop. NGOs should set their own goals and not be servants of U.S. national interests, as NED is by congressional mandate.”

That such relinquishment would appear foolhardy for the realists in US government goes without saying, for it is tantamount to killing the goose that lays golden eggs. To its supporters, the NED family has numerous successes to show off – interventions “to protect the integrity of elections in the Philippines, Pakistan, Taiwan, Chile, Nicaragua, Namibia, Eastern Europe and elsewhere.”

Neutral assessments would rate these as electoral manipulations. Left out of the above count are victorious overthrows of democratically-elected governments in Bulgaria (1990), Albania (1992) and Haiti (late 1990s) and destabilisation in Panama, Cuba and Venezuela. The next section will demonstrate that the latest feathers in NED’s cap are the colour revolutions.

Ukraine’s operation orange

Ukraine epitomises habitual American “instrumentalisation of value-based policies”, thus “wrapping security goals in the language of democracy promotion and then confusing democracy promotion with the search for particular political outcomes that enhance those security goals.”

Identified by the Clinton administration as a priority country for democratisation and the lynchpin of US post-Soviet foreign policy, Ukraine’s importance for Nato’s eastward expansion is second to none. Clinton’s special adviser on the former USSR, Richard Morningstar, confirmed during the 1997 Ukraine-Nato pact that “Ukraine’s security is a key element in the security policy of the United States. ” For Zbigniew Brzezinski, the liberal hawk who influences the Democratic party’s foreign policy:

“Ukraine, a new and important space on the Eurasian chessboard, is a geopolitical pivot because its very existence as an independent country helps to transform Russia. Without Ukraine, Russia ceases to be a Eurasian empire … if Moscow regains control over Ukraine, with its 52 million people and major resources, as well as access to the Black Sea, Russia automatically again regains the wherewithal to become a powerful imperial state.”

With the accession of the Czech Republic, Hungary and Poland to Nato by 1999, Ukraine remained the last frontier, the single largest buffer on the Russia-Nato “border”. The orange revolution has to be viewed in the context of a defensive Russia attempting to hold on to its sphere of influence in the Commonwealth of Independent States (CIS) and an aggressive Euro-Atlantic eastward push by the European Union and Nato.

The line-up of foreign backing for the two presidential candidates on the eve of the revolution unambiguously unravels this background tug of war. Viktor Yanukovych, the candidate of outgoing president, Leonid Kuchma, received strong verbal and financial support from the Kremlin before, during and after the disputed 2004 election. In a personal meeting with Russian president, Vladimir Putin, just before the election, Yanukovych promised “that he would end Ukraine’s policy of seeking membership in NATO.” Viktor Yushchenko, the pro-market challenger who benefited from American diplomatic, intelligence and Ingo assistance for the orange revolution, put his eggs entirely in the EU and Nato basket.

Energy politics also figured in Washington’s regime change calculus for Ukraine. In July 2004, much to the consternation of the Bush administration and Brussels, Kuchma’s government reversed an earlier decision to extend the Odessa-Brody pipeline to Gdansk in Poland. Had the extension occurred, it would have carried enormous Caspian oil flows to the EU, independent of Russia, and weakened Ukraine’s overwhelming dependence on Russia for its energy needs.

Jettisoning a project that would have cemented Kiev’s westward trajectory, Kuchma decided to open an unused pipeline that would transport oil from the Russian Urals to Odessa. The fallout on US interests was not negligible, as W Engdahl reports: “Washington policy is aimed at direct control over the oil and gas flows from the Caspian, including Turkmenistan, and to counter Russian regional influence from Georgia to Ukraine to Azerbaijan and Iran. The background issue is Washington’s unspoken recognition of the looming exhaustion of the world’s major sources of cheap high-quality oil, the problem of global oil depletion.”

The US ambassador to Ukraine, Carlos Pascual, repeatedly beseeched Kuchma to give up the reversal, arguing that the Polish plan would be more attractive for investors and more profitable for Ukraine in the long term, particularly by attenuating Russian monopoly control and diversifying Ukraine’s energy inventory. It was no coincidence that Yushchenko’s government, after the orange revolution, restored status quo ante on Odessa-Brody, announcing “positive talks with Chevron, the former company of US secretary of state Condoleezza Rice, for the project.”

The install-Yushchenko operation in Ukraine had several components. Important power-brokers like the Ukrainian army, the ministry of internal affairs, the security service and senior intelligence officials (silovki) worked against Kuchma’s crackdown orders and passed critical inside information to Yushchenko’s camp.

Though these Praetorians claimed to have disobeyed executive commands altruistically, there was a pro-US tilt in many vital state agencies. Their communication channel with Yushchenko’s aide, Yevyen Marchuk, a Nato favourite and former defence minister who discussed the upcoming elections with US defence secretary, Donald Rumsfeld, in August 2004, suggests a well planned coup d‘etat. Yushchenko’s wife, Kateryna Chumachenko, a former Reagan and George H Bush administration official and émigré Ukrainian heavyweight, is alleged to have played a key backdoor part.

None of the above machinations would have mattered without the disputed election result, the amassing of people power on the streets and the engineering of democracy through civil disobedience. It is here that NED and its family of Ingos were most needed.

Having penetrated Ukraine in 1990 at the behest of the George H Bush administration with the assent of the pro-American Leonid Kravchuk, the effective leader of the republic, these Ingos had the power to finance and create the local NGO sector from scratch, controlling its agenda and direction.

The neo-liberal Pora organisation, for instance, was an offshoot of the groundwork done by the “Freedom of Choice Coalition” that was put together in 1999 by the US embassy, the World Bank, NED and the Soros Foundation. On the eve of the orange revolution, NED Gongos hired American pollsters and professional consultants to mine psephological data and unite the opposition under Yushchenko’s electoral coalition, months before the poll; trained thousands of local and international election monitors partisan to Yushchenko; organised exit polls in collaboration with western embassies that predicted Yushchenko’s victory; and imported “consultants” who had experience in the Serbian overthrow of Milosevic and the Georgian rose revolution.

The mass mobilisation in Kiev was handpicked from Yushchenko’s western Ukraine bastions and did not reflect nationwide sentiments. “A few tens of thousands in central Kiev were proclaimed to be ‘the people’, notwithstanding the fact that many demonstrators nursed violent and anti-democratic viewpoints”, writes John Laughland. The NGO monitors, teamed up with western media outlets, deliberately exaggerated electoral fraud involving Yanukovych’s party, ignoring serious violations by Yushchenko’s.

US government expenditure on the orange revolution has been put at $14 million, while the overall civil-society promotion budget set by Washington for Ukraine (2003-2004) was $57.8-$65 million. The Soros Foundation and Freedom House pumped in a steady flow of funds through Ingos and local NGOs for “elections-related projects.”

Massing of pro-Yushchenko crowds in Kiev’s Independence Square was a meticulous operation of “careful, secret planning by Yushchenko’s inner circle over a period of years” that oversaw distribution of thousands of cameras, backup teams of therapists and psychologists, transportation, heaters, sleeping bags, gas canisters, toilets, soup kitchens, tents, TV and radio coverage, all of which needed “large sums of cash, in this case, much of it American.” (Daniel Wolf.)

Local oligarchs and US-based émigré Ukrainian businesspersons also chipped in with sizeable contributions to the neo-liberal Yuschchenko. The shadowy and fungible ties between the US government and democratisation Gongos leave little doubt that the latter were purveyors of large amounts of money in Ukraine that will not appear in audits or annual reports. Public acknowledgements of spending are understatements akin to official casualty figures given by governments during counterinsurgencies.

According to Congressman Ron Paul, the US allocated $60 million for financing the orange revolution “through a series of cut-out NGOs – both American and Ukrainian – in support of Yushchenko.” The figure happens to be “just the tip of the iceberg”. Claims that “Russia gave Yanukovych far more money than the United States (gave to Yushchenko)” rest on the myth that US government financing through the NED family “is publicly accountable and transparent.”

The NED family’s role in first following the Bush administration’s lead and anointing Yushchenko’s outfit as the only valid manifestation of “civil society” (at the expense of non-neoliberal, anti-authoritarian parties) and then consistently bolstering it with funds and regime-toppling expertise completely blurs lines between impartial democracy promotion and meddling in Ukraine’s political process.

It tinkers with Robert Dahl’s basic dimension of democratisation – contestation, i.e. the playing-field of political competition and the relative strengths of contenders. Much that was done by the Ingos in the name of democratisation in Ukraine was outright biased, including voter education that is supposed to neutrally inform citizens to make free choices rather than to campaign for a particular candidate: “Yushchenko got the western nod, and floods of money poured in to groups which support him, ranging from the youth organisation, Pora, to various opposition websites.” (Jonathan Steele.)

The sinuous route taken by western money can be illustrated with an example. The Poland-America-Ukraine Cooperation Initiative (Pauci), a prominent grantee of Usaid and Freedom House, funded NGOs active in the orange revolution like the International Centre for Policy Studies, which had Yushchenko on its supervisory board. In essence, American Ingos constricted the Ukrainian political space by plumping for the interests of the neo-liberal candidate before the 2004 elections, and partook in a multi-pronged regime-change operation orchestrated in Washington.

Kyrgyzstan’s tulip implantation

Central Asia has long been in the crosshairs of great-power competition games. After the fall of communism, the George H Bush and Clinton administrations defined a set of geo-strategic goals for this heavily meddled region: “To secure an alternative source for energy, help Central Asia gain autonomy from Russia’s hegemony, block Iran’s influence, and promote political and economic freedoms.”

From 1993, goals of diversifying long-term energy reserves (finding alternatives to Persian Gulf sources) and pressures from the oil and gas private sectors “began to take centre stage” in Washington’s policy toward Kazakhstan and Turkmenistan. The Pentagon pressed for increasing US military presence in the region and succeeded in securing membership for four of the five central Asian states, including Kyrgyzstan, in Nato’s Partnership for Peace in 1994.

Frequent joint military exercises and “interoperability” training in the Clinton years were expected to yield American bases in the region from which to counter Russian and Chinese hegemonic ambitions. With limited oil and natural gas reserves, Kyrgyzstan’s weak economy was heavily dependent on Russia, a vulnerability that the Clinton administration sought to counteract by deepening the US defence interests and nudging the International Monetary Fund (IMF) and World Bank to lend voluminous amounts of development aid to Askar Akayev’s relatively democratic government.

IMF technical assistance was critical to Kyrgyzstan becoming the first state in the region to leave the Russian rouble zone. Despite the 1999 extension of the CIS collective security treaty that boosted Russian military leverage in Kyrgyzstan, kidnappings and effortless incursions into Kyrgyz territory by the fundamentalist Islamic Movement of Uzbekistan (IMU) exposed chinks in the security apparatus of Akayev’s “Switzerland of central Asia”. As Kyrgyzstan got dragged into central Asia’s Islamist tangle by geography, the narcotics trade and border conflicts, the subterranean US-Russian race for military bases came into the open, paving the road to the tulip revolution.

After 11 September 2001, the Pentagon ventured on an epic journey: “The greatest shake-up in America’s overseas military deployments since the end of the second World War to position U.S. forces along an ‘arc of instability’ that runs through the Caribbean, Africa, the middle east, the Caucasus, Central Asia and southern Asia.”

The cash-strapped Akayev offered the largest American military base in the region at Manas, outside Bishkek, an installation that was not taken lightly in Moscow. China, which shares a border with Kyrgyzstan was equally alarmed and, together with Russia, steered the Shanghai Cooperation Organisation toward opposing and ending US military bases in central Asia. The expectation that Manas base would “reduce Kyrgyz dependence on Russia”, besides being a logistic hub for the war in Afghanistan, was belied when in 2003 President Putin negotiated with Akayev to open up a Russian airbase at Kant – thirty kilometres from the American “lily pad”.

China was also reported to be engaged in secret parleys for its own base in Kyrgyzstan and for border adjustments; these kicked up a political storm against Akayev in March 2002. Russia’s ministry of internal affairs, “Akayev’s new friends”, helped defuse the demonstrations. Akayev’s moves to align Kyrgyzstan with China through “Silk Road diplomacy” and suppression of the Uighur guerrillas – explained mainly by his desperate need of finances to stem the tail-spinning domestic economy – upset Washington, which saw Beijing as a thorn in its strategic expansion agenda.

The American perspective on this dangerous development went as follows: “Given the 1,100-kilometer border between Kyrgyzstan and China – and Washington’s already considerable foothold in nearby Uzbekistan and Tajikistan – the fall of the China-friendly government of disgraced president Askar Akayev would be no small victory for the ‘containment policy’.”

Prior to the Sino-Russian counteroffensive that found receptive ears in Bishkek, Akayev’s progressively autocratic tendencies had not ruffled many feathers in Washington. His rigged presidential election in 2000 went largely unnoticed by the US government, even though NDI observers termed it unfair and laden with illegal subornment of the state machinery. In fact, Eric McGlinchey’s study of the reasons for Akayev’s slide into anti-democratic politics puts the blame squarely on US-inspired IMF doles that allowed him to “rein in political contestation and rebuild authoritarian rule.”

Having cosseted Akayev for more than a decade, the volte-face done by the Bush administration before the tulip revolution was not an overnight realisation of how despotic he had become but a hard-nosed calculation that its vital interests were no longer being served. The visible consequences of Washington’s displeasure with “the news from Kant” (the opening of the Russian base) were recorded thus: “The IMF office in Bishkek has become tougher towards Kyrgyzstan. And the State Department has opened its own independent printing house – which means opposition newspapers will be back in full force.” (P Escobar.)

Diplomatic sources are on record that as soon as the Kant deal fructified, Akayev was “on the American watch list” and “the U.S. began supporting all conceivable elements arrayed against him.”

Democratisation of Kyrgyzstan, a footnote in American policy, suddenly acquired an aura and urgency. We should add that there was also a generic strategic rationale mooted in the Bush administration for democratisation in central Asia after 11 September. Since anti-US popular feelings in the region are not as high as in other Muslim parts of the world, “the risk of democratisation in the region is relatively small.” Winning the hearts and minds of central Asian Muslims through democratisation “will not only facilitate the process of liberalising the economy, but also, as a by-product, increase support for the United States.”

11 September opened a classic realist “window of opportunity through which an ‘arc of stability’ can be established in the strategically important area between the Caspian Sea and the northwestern border of China.” Wildly inconsistent in application, the notion that democracy promotion can soften the Islamist challenge to pax Americana fitted well with rising discontent in Washington with Akayev’s usefulness. Kyrgyzstan, with a population of barely 5 million (the fourth smallest in the region) received a sum total of $26.5 million for “democratic reform” from the state department in 2003-04, second only to the much more populous Uzbekistan. As with Ukraine, the official figures shroud a fortune.

From 2003, NED-family Ingos got into the act of securing regime change at the next parliamentary elections, turning against Akayev who had initially allowed them access to the country during the heyday of IMF and Usaid conditional lending. Even more than in Ukraine, American dominance of the local NGO sector is complete in Kyrgyzstan. P Escobar describes the monopolisation of local civil society thus: “Practically everything that passes for civil society in Kyrgyzstan is financed by US foundations, or by the US Agency for International Development (USAID). At least 170 non-governmental organizations charged with development or promotion of democracy have been created or sponsored by the Americans.”

The absolute control of Kyrgyz civil society by the NED family of Gongos is compounded by the donor-driven nature of “civil-society building” carried out in the region. Fiona Adamson’s field research of democratisation aid in Kyrgyzstan finds that: “Local NGOs receive almost 100 percent of their funds from international actors and can easily become almost 100 percent donor driven. International donors implicitly or explicitly expect local NGOs to administer programmes that do not necessarily match local needs.”

Among the strategies adopted by the Ingos in the name of democratisation was winning over local elites to western ideas and models, a time-tested cold-war tactic of psychological warfare. Irex organised conferences, seminars, “technical assistance” and exchange programmes with Kyrgyz elites, believing that domestic political change comes from exposure to western ideas.

That this tactic worked was evident by the trend among the Kyrgyz business and political elites to endorse a closer security and economic relationships with the US. Kurmanbek Bakiyev of the National Movement of Kyrgyzstan, the man who replaced Akayev as prime minister after the tulip revolution, was himself sent to the US on an exchange programme. Felix Kulov, the new head of security, and Omurbek Tekebayev, the new speaker of parliament after the tulip revolution, were also beneficiaries of state-department-sponsored visitors programmes.

Tekebayev disclosed what he learnt on the Washington jaunt candidly: “I found that the Americans know how to choose people, know how to make an accurate evaluation of what is happening and prognosticate the future development and political changes.”

Top opposition leaders in the 2005 parliamentary elections like Roza Otunbayeva had reputations as “Washington’s favourite”, though not as across-the-board as in Ukraine. They were quick to see potential in the NED’s arsenal for regime change and utilised Ingo-funded projects for publishing anti-government newspapers, training youth “infected” with the democracy virus through US-financed trips to Kiev for a glimpse of the orange revolution, and mobilising fairly large crowds in Bishkek that stormed Akayev’s presidential palace and in the southern towns of Osh and Jalalabad.

Usaid “invested at least $2 million prior to the elections” for local activists to monitor government-sponsored malpractices but did not do anything to prohibit these “independent observers” from actually working for opposition candidates. The Coalition for Democracy and Civil Society (CDCS) and Civil Society Against Corruption (CSAC), key local NGO partners of the NED, worked in tandem with the anti-Akayev parties without any pretence of impartiality.

The US embassy in Bishkek, continuing the murky tradition of interventionist behaviour in crises, worked closely with Gongos like Freedom House and the Soros Foundation – supplying generators, printing presses and money to keep the protests boiling until Akayev fled. Information about where protesters should gather and what they should bring spread through state-department-funded radio and TV stations, especially in the southern region of Osh.

CDCS head, Edil Baisolov, admitted that the uprising would have been “absolutely impossible” without this coordinated American effort. On the utility of the NED Gongos to the entire exercise of the tulip revolution, Philip Shishkin noted: “To avoid provoking Russia and violating diplomatic norms, the US can’t directly back opposition political parties. But it underwrites a web of influential NGOs.”

It is important to note that the clan structure of Kyrgyz society, ethnic tensions with Uzbeks, and incipient Islamism in the Ferghana valley intervened on the ground to alter the revolutionary script charted in Washington. Russia too had learnt its lessons from Ukraine and cultivated some key opposition figures, making it impossible for the US to monopolise the opposition as was the case in the previous two colour revolutions.

The element of surprise, the slick media packaged proclamation of democracy’s relentless march, the legitimisation by western capitals in lightning speed – all had become predictable by the time the democratisation caravan reached Bishkek. The ambivalent attitude of the new order in Kyrgyzstan – in sharp contrast to the euphoric pro-western policies in Georgia and Ukraine – owes much to this variation between these two case studies.

“Good” vs “bad” authoritarians

Before drawing final lessons from this analysis, it is worth knowing why questionable elections by semi-dictatorial rulers in other post-communist states did not end up in colour revolutions. The main reason why Ilham Aliev, the heir to Heydar Aliev’s autocracy in Azerbaijan, could fix the November 2005 parliamentary elections and not have to run the gauntlet from Washington’s public-relations machinery and NED Gongos was his regime’s loyalty to immense American (and British) energy interests in the Baku-Tiblisi-Ceyhan pipeline.

This was the second time Ilham Aliev grossly manipulated an election and got away without repercussions. His succession façade in the notorious October 2003 presidential election was not only condoned in Washington but met with congratulatory messages from the Pentagon.

Uzbekistan’s Stalinist strongman, Islam Karimov, brutally clamped down on a mass demonstration in Andijan against corruption and arbitrary detentions in May 2005, killing 500 and wounding 2,000, but Washington echoed the Uzbek government’s claim that it was the handiwork of “Islamic terrorists”.

Karimov, at the time of the tulip-revolution-inspired stirrings, had been the US’s staunchest ally in the war on terrorism in central Asia, an insurance policy against democratisation pressures. His pre-emptive moves before the December 2004 parliamentary elections and after the tulip revolution to expel and constrict the activities of NED-family Ingos did not meet with any criticism from the US government. Comparing Uzbekistan to the other colour revolutions, the perceptive P Escobar wrote: “The former strongmen of colour-coded ‘revolutionary’ Georgia, Ukraine and Kyrgyzstan were monsters who had to be removed for ‘freedom and democracy’ to prevail. So is the dictator of Belarus. Not Karimov. He’s ‘our’ dictator.”

The necessary causation of regime change

These case studies have upheld the realist paradigm by showing that American-democratisation Gongos are necessary, but not sufficient, causes for the colour revolutions. Unless US foreign-policymakers decide to field the full panoply of their intelligence, economic and military resources alongside the Gongos, the spectacle of yet another orchestrated colour revolution is unimaginable. Lacking strong US condemnation and proactive directions, the NED Gongos cannot manage to stage regime changes on their own in conjunction with local activists. It is the push factor from Washington that galvanises the Gongos into a war footing for regime toppling.

The orange and tulip revolutions are cases of “regime change”, not “regime-type change”, for they did not democratise Ukraine and Kyrgyzstan. By their very nature, these episodes were replacements of anti-western elites with pro-western ones, not far-reaching changes that remodelled polities. Even a minimalist definition of democracy – free and fair elections – was not unambiguously achieved in the two cases.

So narrow was the base of these regime changes that it is a travesty to call them “revolutions”, a term propagated by the US government and western media. The replacements of Kuchma by Yushchenko and of Akayev by Bakiyev are no more “revolutionary” than the overthrow of Saddam Hussein in Iraq, which has been christened by the Bush administration as a “purple revolution”. The difference in methods – Gongos and backroom intrigue in post-communist states and direct military occupation in Iraq – does not nullify the similarity of the independent variable: US strategic ambitions.

Predictions for future regime changes on the lines of the colour revolutions will need to carefully track how this independent variable evolves vis-à-vis undemocratic states in the post-Soviet space and how it shapes the concatenation of hard and soft power instruments. American strategy would also depend on domestic political peculiarities in individual states, factors that could not be fully covered in this essay due to the methodological problem of degrees of freedom.

American Gongos are highly effective in certain domestic milieus and moments and less so in others. Sabotage can suffice in some countries while full-scale military offensives may be needed in others. As Peter Gourevitch points out, purely international causation for domestic causes is “not totally convincing” except in the case of complete military occupation by a foreign power. A full range of necessary causation for regime change would have to include internal political and socio-economic variables, besides the NED brand of interposing.

http://www.youtube.com/watch?v=zchYqAUdazY&feature=related

Mindless genuflection of brainwashed kids worshiping at Khamenie’s altar of false prophethood

Insults

wipe that smug fucking grin off your face and off of this planet.

Look, you got Fabio as a side kick for your unlitigated bullshit

Butter troll

swallow stuff under the sink

Unless you are a hopeless spinster who rather decorates her dignity with used condomns.

If that still requires more explanation, you might as well ask your husband to purchase a new vibrator for your misplaced rage.

The only thing you’ve ever played with was a doll used in pedophile trials so the kids can show where there were touched by their alleged molester.

sucked one too many diseased cocks and turned you into a ****ing retard

Mind of a 60-year-old fascist cab driver

Your mother left you cookies while you were whacking off

Your cretinous babble is driving your mom to pamper her vagina with a silk diaphragm. Stop being an overweening little bitch who whines about someone’s failed policies.

Did you just come back from the Thinking-Too-Hard festival?

You died of looking shitty

Caugh up your mother’s clitoris and quit it with your meretricious babble.

Your pherological analysis is nothing short of a cretinous moron who seeks enlightenment by licking public restroom toilet sits.

I don’t feel like sitting here while you indulge yourself in your little mastebatory antics

We all have to learn to live within your limitations.

comes off as just another garden variety redneck misogynist. He lacks both the intellect and intestinal fortitude to confront Coulter on the issues, so he resorts to cheap name calling and he-man neanderthalisms to get his point across.

When junior finds a lump on his testicals

What do you got a GPS system implanted in your penis?

every gobbet of stale drollery, every tired urban legend and every goofy web site on the internet.

An admitted male feminist

senile delinquent (a virtue-filled old person who is bad and naughty)

nasuaing diversed grabed back of genetic people you call family

She should sue the fucking sperm that fertilized her in 1972.

I wouldn’t trust this failed Muppet to guard my deodorant, much less …

That’s why your husband and I ejaculated on your flat chest so the first nutritious food your child ever tastes to be a warm cum.

Pus puking hell

I’ll put seed in your belly

Lose your vagina virginity to the mechanical bull and anal virginity to a lamp shade.

A kind of liar that could only exist on the dole in the fantasy land of the PC-infested academia.

whose job as a deceptive GOP verbal gymnast it is to spray perfume on turds

Double D cup, or double degregation and that cup is tipping over

Stick to your MacDoland’s and occasional perverted underage Japanese masturbatory sessions.

sort of like if talcum powder had a wee bit of fart dust in it

Where did you get your GED, JC Penny?

I just want to rub my asshole up and down its face until it starts yodeling for mercy.

insert my giant penis into her salivating hole and thrust it so deep that when I ejaculated I could see my sperm floating around her epiglottis

tiny viagra-fueled woodies

If I ever fuck you, I should be getting a humanitarian award for my infinite kindness

Parking Chinese food in your refrigrator which you occasionally smell and recoil of tangy smell

Have you lost your lollypop?

Why don’t you grab your BB gun, head to the woods and kill something. Ya, you’re DA man.

You are entertaining us like an STD

Your hands is your only lover

Thank you for your interest in our photographs. Unfortunately, we are unable to accommodate your request, not now, not at any time. Currently, most nations prohibit the electronic transfer of images depicting children having sex with adults which you have been vehemtly in pursue of its acquisition. We understand that you are willing to pay “any amount” for these types of pictures, but we neither produce nor condone this type of content.

Regarding your second request of “pictures of arabs being tortured” we also cannot provide you with pictures of this type of content.

you have a face for naked webcam strip tease and not a mind for psychoanalysis nor political punditry. Stick to your strong suits

For someone who has sexual fantasies of a cartoon character, this conversation is way beyond your intellectual capacity.

Reminiscence of your childhood gratification disorder; yes Charlie, good times are just around the corner

Demonstrating cataleptic insanity, courtesy of your cocaine withdrawal

The only thing I am [un]covering is your prevaricating goblin-breathed racist mouth foaming garbage while being probed by an electro-ejaculator.

right-wing country fried rube

grossed out by your period-stained-hazy-hangover-Sunday boxer shorts

Your contribution is as useless as a drunken fluffer standing by the bathroom at a shitty porn party somewhere in San Fernando Valley.

it will turn your penis into a question mark

fat girls are easy because they haven’t had any sex, so their ankles are up by their ears.

Coprophagia is the consumption of feces

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Pile Of steaming estrogen

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You are just an old man yelling at the clouds for not morphing into shape of a breast.

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in an ironic Al Bundy kind of way

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passively accept whatever they shove it up the fart hole.

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turning tricks in sailors hammocks to pay for retirement

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What is it about belly-shirt-wearing little twinks that makes all of us, gay or straight or male or female, want to tie them to a moldy mattress in a cold, locked basement?

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but being a metal groupie has gone from a glamorous past time to something just below cleaning out the foreskins of deformed orphans in Chernobyl.

Here we go with yet another neo-con conspiracy theorist who got nothing other than firing up tiresome, rehearsed liberal-bashing vitriol to get his jollies off. and “sucking osama’s dick?” Come’n big boy, is that the extent of your diatribe? Listen Shirley, I simply gave you a dose of reality now you are rolling on your own shit-stained underwear, sophomorically regurgitating run-around blather, pretending to be something you will never mount to be, pathetic. Have your mouth sealed shut with venearl wartz or better, stick to mindless pro-wrestling and urine-flavored beer for your misplaced rage. you’ve just sucked one too many diseased cocks and turned into a fucking retard with brain capacity of an 80-year-old fascist cab driver.

“President Bush is our greatest President…” Ya, go figure, conginetal idiocy is an impedement to learning and you’ve displayed that fact amply here. your tiny viagra fueled woodies wouldn’t get your far in life, cheese-tits.

I give you a hint: I ain’t liberal but I fist fuck an american traitor, neo-con anywhere, anytime. now go back to your pile of steaming estrogen where turning tricks in sailors hammocks is the only way you’ll pay for your retirement.

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Inbreeding with a girl who has an IQ lower than 60 doesn’t really make you a man and that pains you. Your best bet is to stick to asking a 1-800 operator for dates.

only fans wake up in missourri every morning in a pool of their cousins bodily fluids to the theme tune for deliverance

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You pointless gabber proved to be nothing more than a cow mooing while taking a shit the size of a dinner plate.

Your aimless banter and pointless gabber prove to be nothing more than the equivalent of a cow mooing (camel moaning) while taking shit the size of dinner plates.

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I bet you jerk-off in front of a mirror everynight and then cry yourself to sleep

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you should petition your dad’s penis to return to his ballsac

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Good for you tit droopers

You get a hard-on by just staring at my doody

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I know you are creaming with self-congratulations while reciting a eulogy of your favorite mole porn daddy.

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You have nothing to contribute to humanity, so the stay fuck out.

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Finish high school, get your license and job first, then come here gasconade on being cognizant of verbal parameters.

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You are not a pretentious cocksucker who yearns attention even if it means taking your little daughter to a violent pedophile cell block for a strip tease.

Skull and spiderweb tattoos? Check. Studded bracelet and bullet belt? Check. Karate bandana over greasy hair? Check. All the tough-guy accoutrements of a gang member in a movie from the 1970s? Check, check, check.

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a great exodus from the ballbark of the bullshitters.

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their heads lodged securely in their assholes –cherished nutsack —

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Another moron whose genetic line thankfully came to a crashing end.

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Go piss on an electrical cord outside your shack then practice tight rope walking on it.

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that poor little Robbie got his sphincters sodomized by a big black convict named Mandingo

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You haven’t been able to locate your dick since Reagon administration

Your teeth are so yellow I cant believe it’s not butter.

Your forehead’s so big you could show slides on it.

You are so stank that your shit is glad to escape from your ass.

You’re so short I can see your feet on your driver’s license.

Afros on her nipples.

You are so hairy that your armpits look like you got Don King in a headlock.

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You ever tried Internet dating? I know you did because I read it on a bathroom wall

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cumburn

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It’s as bad as when you try to hide your farts with coughing

The only time you smell food is when I fart

belch like a viking god and release farts that would blind small animals

Ever farted so bad you thought it might actually catapult you across the room?

You get off by farting in the crowded elevator

you want to rip off your pants, wrench open the nearest window, and let rip with a long, pungent anal symphony of highs and lows so mellifluous they create a new musical scale.

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only to get you to say yes on tape so i can beat you senseless and get off the hook by pleading faggot rage

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It pains me to not be able to run over and give you a “Colombian Necktie” and wipe that smug fucking grin off you face and off of this planet.

So jolly, so cheerful, so fucking fake I want to destroy everything you hold sacred.

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You don’t choke on chugging energy drinks and eating gross microwavable pizza and roasted peanuts.

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people with two brain cells who can rob them against each other

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Come back when your testicals just descended.

Slurp your noddle soap and drink your koolaid

Naming your pimples

classroom erection

A closer examination of you shows that you’ve grown a third testicle and your voice dropped an octave.

Wait until the doctor cut the embelical cord then come here coo…

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People with dogs are a bummer because they’re putting their loneliness on a leash for all the world to see.

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when your pierced genitals are dragging on the street and your fucking feedbags are hanging out of your leather jacket it may be time to take it down a notch.

a haggard old spinster whose pussy is sealed shut with venereal warts.

Earth tranny

erase all his testosterone with an elaborate airbrushed mess of make up

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Why don’t go get a Swastika tatooed on your implanted penis and give a Nazi solute as a way of displaying your solidarity to the ideology of hatred which you have surmised by watching countless hours of “news alerts.”

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# in Debate #
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You are bleeding all over this thread, wipe yourself clean.

You are getting one pussy hair from turning into a fart breeze.

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Cupcake warriors

Arm-chair generals

another keyboard sock puppet warrior acting tough, armed with nothing but a keyboard while sitting in his mother’s basement.

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Making fun of your linguistic deficiency is as unfair as English language overmatching George Bush.

Your scrambled English grammar and set of incoherent discourse fail me.

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Drunk on your own ignorance

Deeply misguided that you have become allergic to reality of our lives.

You don’t find such level of naivity outside of 1970’s porno flicks.

Old enough to cut the emblical cord of ignorance

Your reasoning sucks and your silence is blessing

Your half-cocked knowledge on international affairs flounders to even surpass the lassitude on sex-practice of native people.

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I envision torturing each and every one of you petulant fuckers.

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If you consider roasted peanuts a “large” word (as opposed to more appropriate contextual phrase “big”), then all hopes are lost. If there is an assay of disparagement, at least make it so the other 12 monkeys around you squeal; yours pars with monkey shit-fight in a zoo.

Not only your sophomoric psycho analytical fantasies are sooooo 1930’s, but it beats “Yo Mama Jokes” of mid 90’s by minimum of 70 years where it lands 100 miles in the town called “Don’t Let My Kids Near This Guy”. Let me show you how it’s done son.

Remember the time when you were kid, one day daddy comes from work, pulls your pants down, grabs your pee-pee and asks, “Do you know what Bible says about homosexuals?,” “No, daddy,” you reply. He would then take a random page from the Bible and gives a deep paper cut on your genital.

You jerk back in writhing agony but he tugs you back, repetitively inflecting gashes with great celerity, grinding his teeth, and searching for that rare moment of anguish in your screams. Tears roll down and knees sap, you succumb to a sad realization, that you may never be able to play with your piss pump ever again.

As you witness the blood running down your puny legs and getting ready to accept the ground’s invitation, he pierces you suspending in midair, while holding the blood-soaked Bible, whispering, “You go and tell them [sinners], blood of Christ was shed for this Bible. Look at it son! you literally giving your “head” in the name of the lord.”

Fast forwarding a few decades, we now know what has made you a senile delinquent that you are today — a walking disease with cacophony of nightmares plaguing your daily life and bone chilling “Why are you doing this to me daddy?” mutters. I am telling you man, you should never petition your ballsac to return to your mutilated penis. Oh! The pungent aroma of obloquy.

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Your feeble attempt to instigate a physical threat over the Internet is the newest fucking low you’ve achieved since your days as the test subject to rectum-probing electro-ejaculator.

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If that gargantuan pile of human waste could put as much effort into becoming a respectable sight to humanity as she put stuffing her overblown carcass with food, then there might be a chance for her to forgo being the punchline to every “fat momma” joke currently making the email rounds.

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prevaricating the falsehood is the newest fucking low you’ve achieved since your days as the test subject to rectum-probing electro-ejaculator.

Your desperate attempt to link every other person, who seeks to expose your run-around equivocations, to an ethnic group who you and your fellow Zionist cocksuckers have shown a great deal of bigotry and hatred is the newest fucking low you’ve reached since your days as the test subject to rectum-probing electro-ejaculator. Wail on your gratutious failed assumptions… I am a “non-believer” who opposes aggression bestowed upon oppressed people.

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So why don’t you stick to climaxing to wrestling, roasted peanuts, and urine-flavored beer for your misplaced rage.

Small words. If that’s the best you can come up with, you might as well stick to wearing condoms, quaffing urine flavored beer, and gorging on roasted peanuts.

If this needs more explaining you should probably just stick to jerking off.

Why don’t you stick to your wrestling, Dragon Ball Zero alpha-male cretinous fairytale, and religious induced masturbatory sessions for your misguided grievance.

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The only time you smell hot food is when I fart!

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I can personally attest to the fact that this “Sarah” character is a nefarious ne’er-do-well, a cad, a rogue, and dare I say it, a tango pirate in the extreme. I, on the other hand, while somewhat lacking in chest size (especially compared to you, my love!), have the most curious natural gift of a giant phallus on the back of my right knee. Dotty dear, this phallus is available for your around the clock pleasure, and unlike the genitalia of this “Sarah” is free of the diseases spread by common street curs and trollops.

Furthermore, half of the rooms of my house have extraordinarily low ceilings, created in anticipation of your arrival. You now never have to feel inadequate ever again. I will also give you an endless supply of kittens and puppies, to be used however you feel necessary.

I think your choice is clear. I wait with expectant and quivering anticipation for your reply. P.S. By the way, the phallus on the back of my knee is really more of a razorcock. That’s not an issue for you, is it?

Now, now, Sarah. I think I more than make up for your admirable celibacy. I sleep with anyone and everyone, man, woman, amputee, whatever. It is odd that I’m not a happier person, since I seem to get laid all the time. The truth is, though, that by fucking anything with legs (or without, in the case of the amputees) I am trying unsuccessfully to break a sexual obsession I have on my mother. I’m sick, help me. I’m the one who masterbates in my cat’s litterbox.

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At least I didn’t get my clothes from Toys R Us. Who are you trying to seduce? Babies?

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No, not quite like your Spartanesque superlatives. You know you are part of the most fucked up operation since the Rape of Nanking.

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you just let them fist fuck you so deep that you’ll end up licking their fingers clean and thank them for feeding you. Game over.

British & American Foray in the Middle East

http://209.85.207.104/search?q=cache:wS9KGfddUPMJ:groups.yahoo.com/group/hidayahnet/message/5156+a+tissue+of+small+jealous+principalities+%22Lawrence,+T.+E.%22&hl=en&ct=clnk&cd=3&gl=us

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http://findarticles.com/p/articles/mi_qn4156/is_20030223/ai_n12580720
Games With Frontiers; With a red pencil and an empty map of Arabia,
Sunday Herald, The, Feb 23, 2003 by Trevor Royle

” Things wasn’t going as swimmingly as Cox wanted

It was late November 1922 and the map of the Middle East was about to be redrawn by a middle-aged British colonial servant who was determined to put an end to the impasse. Otherwise, he told his aide, Major Harold Dickson, “at the rate they were going, nothing would be settled for a year”.

” The three representatives of Iraq, Kuwait, and Saudi Arabia

Sitting with Cox were the representatives of the territories whose future was being determined. Ibn Saud was the ruler of the Nejd (soon to become Saudi Arabia) and a British client, thanks to his support against the Turks in the first world war.

Sabih Beg was the representative of King Feisal of Iraq, formerly the Ottoman province of Mesopotamia but now a British mandate.

As for Kuwait, a British protectorate, its ruler Sheikh Ahmad Al Sabah, was not allowed to be present but was represented by Major JC More, the British political agent, who did all the talking.

” Shaddy, unprofessional, and hasty partitioning by Cox

Fearing that neither side would give ground, an exasperated Cox produced a red pencil and an empty map of what was known as Arabia. Telling the delegates “gentlemen, there are your borders,” Cox drew the angular lines which are today’s frontiers of Iraq, Kuwait and Saudi Arabia. Nobody got what they wanted: Ibn Saud felt cheated of his desert inheritance, Iraq was denied access to the Gulf, its outlet being almost blocked by two adjoining Kuwaiti islands, Warba and Bubiyan, and Kuwait was sandwiched between two potential enemies.

” Pathatic attempt by Saud to suck up to Cox

“It was astonishing to see the Sultan of Nejd being reprimanded like a naughty schoolboy, and being told sharply that he, Sir Percy Cox, would himself decide on the type and general line of the frontier,” noted Dickson who had done most of the translating. “Ibn Saud almost broke down, and pathetically remarked that Sir Percy was his father and brother, who had made him and raised him from nothing to the position he held, and that he would surrender half his kingdom, nay the whole, if Sir Percy ordered.”

” Kuwait got shafted royaly

As for the nominal ruler of Kuwait, Sheikh Ahmad simply had the verdict handed down to him with the thought that “on this unfortunate occasion, the sword had been mightier than the pen, and that had he not conceded the territory, Ibn Saud would certainly have soon picked a quarrel and taken it, if not more, by force of arms.”

” How the border between Kuwait and Iraq was realized

The signatories went their different ways and it was left to Major More to demarcate the border between Iraq and Kuwait. This he did by marching out an unknown number of paces from the oasis of Safwan and placing a notice in the middle of the desert. His efforts, though admirable, were in vain: passing Bedouin caravans frequently moved the notice north or south depending on their allegiance to Iraq or Kuwait and the exact location of More’s noticeboard remains a matter for debate.

http://www.adduonline.com/articles/fahd.htm
FAHD OF SAUDI ARABIA

Thursday August 28, 2003

In On 8 January 1926 Abdul-Aziz Bin Abdul-Rahman ( Known as Ibn-Saud) was self-proclaimed king of Arabia. King Abdul-Aziz was embroiled in discussions with the British representative, Percy Cox, for the determination of the borders of the new entity. The British Public Records described king Abdul-Aziz’s demeaning stature at these meetings “like a naughty schoolboy” in front of Cox. When Cox insisted it was his decision as to the frontiers between Kuwait, “Ibn-Saud almost broke down and pathetically remarked that Sir Percy was like his father and mother who made him and raised him from nothing… and he would surrender half his Kingdom, nay the whole, if Sir Percy ordered. Cox took out a map and pencil and drew a line of the frontier of Arabia”. Surely no Muslim can ever read such a statement except with abject shame at the way the sacred sites of Makkah and Medinah and the land of Hijaaz were put in the hands of a family with such debased and dishonorable pedigree.

1926-1932, King Abdul Aziz Bin Abdul-Rahman (Ibn-Saud) courted the British unashamedly, showing sublime affection towards Britain’s envoys. He offered to put Arabia under their control. For his loyalty to the British crown, like so many other British agents, Ibn Saud was awarded a knighthood (presented to him by his self-proclaimed “father and mother” Percy Cox) and British documents referred to him as “Sir” Abdul Aziz Bin Saud for many years afterwards.
In On September 23, 1932 the self appointed king, Sir Abdul-Aziz Bin Abdul-Rahman replaced the names of Najd and Hijaaz by the Kingdom of Saudi Arabia and he laid the foundations of the current Pirate state.

http://books.google.com/books?id=OZrnZpS84xoC&pg=PA59&lpg=PA59&source=web&ots=6fIlR9HOmp&sig=T5-uhCEWs1kh4w7fbRmCLEm1I7E&hl=en
Shifting Lines in the Sand: Kuwait’s Elusive Frontier with Iraq By David H. Finnie

P. 52

Progress was slow, according to Dickson, “The talks were a wonderful example of the bargaining methods employed when representatives of two great oriental states get together and try to settle a problem. There was no give and take whatever… both sides making ridiculous demands all the time… The arguments went on for five whole days.” On the sixth day, Cox had had enough. He took Ibn Saud aside for a final chat, the two of them attended only by Dickson as interpreter. “[Cox] lost all patience over what he called the childish attitude of Ibn Saud… It was astonishing to see the Sultan of Jajd being reprimanded like a naughty schoolboy… Ibn Saud almost broke down, and pathetically remarked that Sir Percy was his father and mother… and that he would surrender half his kingdom, nay the whole, if Sir Percy ordered.” Meeting once more in plenary session, the conferees watched in awe as “Sir Percy took a red pencil and very carefully drew in on the map of Arabia a boundary line… This gave Iraq a large area of the territory claimed by Najd. Obviously to placate Ibn Saud, he ruthlessly deprived Kuwait of nearly two-thirds of her territory and gave it to Najd.”

Later than evening, Dickson witnessed what he called “an amazing sequel:”

Ibn Saud asked to see Sir Percy alone. Sir Percy took me with him. Ibn Saud was by himself, standing in the centre of his great reception tent. He seemed terribly upset. “My friend,” he moaned, “you have deprived me of half my kingdom. Better take it all and let me go into retirement.” Still standing, this great strong man, magnificant in his grief, suddenly burst out into sobs. Deeply disturbed, Sir Percy seized his hand and began to weep also. Tears were rolling down his cheeks. No one but the three of us was present, and I relate exactly what I saw.

P. 60
The emotional storm did not last long. Still holding Ibn Saud’s hand Sir Percy said: “My friend, I know exactly how you feel, and for this reason I gave you two-thirds of Kuwait’s territory. I don’t know ho Ibn Sabah will take the blow.”… Sir Percy was a very great man. Abdul Aziz Al Saud was a very great man too — and a very great actor besides.

http://coat.ncf.ca/our_magazine/links/issue49/articles/49-saudi.pdf
Saudi Oil, Nazi Power, the CIA and Bush family profits
By Richard Sanders

coordinator, Coalition to Oppose the Arms Trade Philby “secretly joined forces” with the Wahhabis and helped make Ibn Saud king of the state that still bears his family name. Philby gave Ibn Saud “the intelligence information that ensured military victory for the House of Saud against Arab leaders supported by the British government.” Philby helped create the Arab Legion, an “armed force under British direction, ready for the (eventual) battle against the Zionist interlopers…. Ibn Saud’s forces captured Mecca and Medina by force in 1924 and 1925. [He] became king in 1926, with Philby as his trusted confidential and financial adviser.”

Loftus and Aarons make these key points: In the 1920s, “Jack Philby recruited Allen Dulles, first as his agent to influence U.S. policy against the Jewish homeland and then as his secret partner in the development of Saudi Arabian oil.

With Dulles’s help, Philby ensured the economic and political survival of Ibn Saud by creating a partnership with U.S. oil companies, allied
against British interests and in favor of Nazi Germany. In the 1930s, Dulles established an interlocking financial network among major Nazi corporations, U.S. oil men and Saudi Arabia.

Dulles led a team of U.S. and British investors that funded the early Nazi party and continued to do business with the Third Reich throughout
World War II.” Loftus and Aarons note that: “The Nazis would have remained a minor political party, and Germany would have remained a cash-starved country, weaponless and powerless, but for a massive influx of outside investment capital. The most important event of this period was the alliance between U.S. oil companies and Saudi Arabia. It was the indispensable precondition for war and the Nazi Holocaust…. The history
books do not even mention the secret partnership of Ibn Saud, Jack Philby and Allen Dulles. Together they were the secret source of oil, wealth and international influence that worked behind the scenes to put Hitler onto the world stage….

During the war, Dulles’ used Saudi oil to blackmail both Britain and the U.S. He amassed a huge fortune for himself, and his clients, like Ibn
Saud, Standard Oil and I.G. Farben. Then, at the end of the war and after it, he helped smuggle top Nazi spies out of Germany to work for the CIA, and “directed the smuggling of Nazi money back to his Western clients.”

Both G.H.Walker and Prescott Bush “worked with Allen Dulles to finance the Third Reich and then, when war broke out, cloaked their activities
under the cover of intelligence operations.” They were eventually charged with running Nazi front groups in the U.S. “The U.S. government found that huge sections of Prescott Bush’s empire had been operating on behalf of Nazi Germany and had greatly assisted the German war effort.” G.H.Walker was the President of the Union Banking Corp., an affiliate of Brown Brothers, Harriman, a bank specializing in getting U.S. millionaires to invest in Germany. Loftus and Aarons describe Union Banking as “an out-and-out Nazi money-laundering machine.”

http://books.google.com/books?id=trU7nY-T-4EC&pg=PA30&lpg=PA30&source=web&ots=sCAm57p3sG&sig=uyG3NJ9Oq3u2UyRkgo6SWLB6B1o&hl=en
The Secret War Against the Jews: How Western Espionage Betrayed The Jewish … By John Loftus, Mark Aarons

P. 30

The ambiguous promise of a Jewish homeland in Palestine had little effect in terms of the United States’ commitment to the war effort. It did, however, have a major effect on Jack Philby. From that moment on, he would never turst his own government again. The Balfour Declaration, according to Philby, was “an act of betrayal for whose parallel, the shekels and the kiss and all the rest of it, we hve to go back to the garden of Gethsemane.” To put it bluntly, the declaration made Philby realize that Palestine was an unimportant square on the British chessboard and that the Arabs were merely pawns to be pushed around at will. To Philby, however, Palestine was the site of the third holiest shrine in Islam and the Arabs were noble princes.

While Hussein was fighting the Turks for the British, Ibn Saud, the young chieftain of the ultra-conservative Wahhabi sect, was sending terrorist raids against him. Philby was supposed to pressure Ibn Saud’s dissidents back intoline. Instead, it was the beginning of a long and mutually beneficial relationship, which ultimately set Philby against any policy of his own government that conflicted with Ibn Saud’s best interests.

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Waïl S. Hassan “Lawrence, T. E.” The Oxford Encyclopedia of British Literature. David Scott Kastan. Oxford University Press 2005.

“His (Sherif Hussein) aim is the establishment of a Caliphate (not the only one) for himself, and independence for people speaking Arabic from their present irritating subjection to people speaking Turkish. His aims are thus in definite opposition to the Pan-Islamic party who are his strong obstacle (…) his activity seems beneficial to us, because it marches with our immediate aims, the break up of the Islamic block and the defeat and disruption of the Ottoman Empire, and because the states he would set up to succeed the Turks would be as harmless to ourselves as Turkey was before she became a tool in German hands. The Arabs are even less stable than the Turks. If properly handed they would remain in a state of political mosaic, a tissue of small jealous principalities, incapable of cohesion and yet always ready to combine against an outside force. The alternative to this seems to be the control and colonization by a European power other than ourselves which would inevitably come into conflict with the interests we already possess in the Near East (…) If we can only arrange that his (Sherif Hussein) political change shall be a violent one, we will have abolished the threat of Islam, by dividing it against itself in its very heart. There will be a Khalifa in Turkey and a Khalifa in Arabia, in theological warfare, and Islam will be as little formidable as the Papacy when Popes lived in Avignon.” – T. E. Lawrence, January 1916.”

http://findarticles.com/p/articles/mi_qn4156/is_20030223/ai_n12580720
Games With Frontiers; With a red pencil and an empty map of Arabia,
Sunday Herald, The, Feb 23, 2003 by Trevor Royle

Drawn up by Sir Mark Sykes, a British MP who had travelled extensively in the Middle East, and by Francois Georges Picot, the scion of a French colonial family, the agreement allowed each country to gain spheres of influence and exploitation – Syria and Lebanon would go to France, Iraq and Trans-Jordan to Britain. At the same time the decision was taken to offer Zionist leaders a stake for a Jewish National Home in what would become Palestine, even though the territory concerned was 93% Arab.

Lawrence, T.E., Seven Pillars of Wisdom. London: Penguin Books, 1988.

“The [British] Cabinet raised the Arabs to fight for us by definite promises of self-government afterwards. Arabs believe in persons, not in institutions. They saw in me a free agent of the British Government, and demanded from me an endorsement of its written promises. So, I had to join the conspiracy, and, for what my word was worth, assured the men of their reward…I risked the fraud on my conviction that Arab help was necessary to our cheap and speedy victory in the East, and that better we win and break our word than lose.”

1902 – Sir Campbell Bannerman, Prime Minister of Britain [1905-08]

“There are people (muslims) who control spacious territories teeming with manifest and hidden resources. They dominate the intersections of world routes. Their lands were the cradles of human civilizations and religions. These people have one faith, one language, one history and the same aspirations. No natural barriers can isolate these people from one another … if, per chance, this nation were to be unified into one state, it would then take the fate of the world into its hands and would separate Europe from the rest of the world. Taking these considerations seriously, a foreign body should be planted in the heart of this nation to prevent the convergence of its wings in such a way that it could exhaust its powers in never-ending wars. It could also serve as a springboard for the West to gain its coveted objects.”

Building Modernity on Desert Mirages by JOHN KIFNER.

“And of all the artificial countries created by the victorious European powers who drew arbitrary lines on maps after World War I, none was more artificial than the tiny, poor, lawless leftover patch of desert that would become Jordan. Even the flag was artificial. The green, red, white and black banner that fluttered over Arab raiders led by the Hashemite family against the Ottoman empire — the basis for today’s flags of Jordan and the Palestine Liberation Organization — was designed by a British Foreign Service officer named Sir Mark Sykes and produced by his army’s supply shop in Cairo.”

http://books.google.com/books?id=hdfLNSnUx-AC&pg=PA41&lpg=PA41&source=web&ots=PK9w6qWoAq&sig=DE05Zo32Kw1KPGK0nhPCmBEZqAo&hl=en
Devil’s Game: How the United States Helped Unleash Fundamentalist Islam By Robert Dreyfuss

P. 41

Lawrence said, “If the Sultan of Turkey were to disappear, then the Caliphate by common consent of Islam would fall to the family of the prophet, the present representative of which is Hussein, the Sharif of Mecca. Hussein’s activities seem beneficial to us, because it marches with our immediate aims, the breakup of the Islamic block and the disruption of the Ottoman Empire, and because the states he would set up would be as harmless to ourselves as Turkey was. If properly handled the Arab States would remain in a state of political mosaic, a tissue of jealous principalities incapable of cohesion, and yet always ready to combine against an outside force.

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http://books.google.com/books?id=1b87CVa9xu4C&pg=PA111&lpg=PA111&source=web&ots=AugjFgUiwA&sig=Zp1PqUJ4Oi8w9YCWy5nlzd8qowI&hl=en
Far-flung Lines: Essays on Imperial Defence in Honour of Donald Mackenzie … By Greg Kennedy, Keith Neilson, Donald
Far Flung Lines shows how the British Empire used its maritime supremacy to construct and maintain a worldwide defence system that would protect its vital imperial interests.

P. 111

While all eyes were fixed on the German offensive that was launched on the Western front in late March, the Eastern Committee began its work. On 24 April, the question of the future of mesopotamaia was discussed. Curzon pointed out that the concept of “self determination” and Lloyed Georige’s statement — contained in his speech of 5 January — that the fate of mesopotamia would be decided at a post-war peace conference meant that committee’s deliberations were somewhat constrained. However, Curzon posited that in the case of Allied victory, Britian should “construct a State with an ‘Arab Facade,’ ruled and administered under British guidance”. The region of Basra, given “the political and commerical interests involved,” should be kept “entirely in British hands.” Immediately, the sort of strategic thinking that had motivated he de Bunsen committee earlier began to re-appear. The Director Military Intelligence (DMI), Jaor-General Sir G.M.W. Macdonogh, suggested that the area around Basra be extended northward and towards Persia to create “defensible strategic frontier.”

http://www.rupe-india.org/34/colony.html
Western Imperialism and Iraq:
From Colony to Semi-Colony

As the Ottoman empire fell into decline, Britain and France began extending their influence into its territories, constructing massive projects such as railroads and the Suez canal and keeping the Arab countries deep in debt to British and French banks.

” Speculation of oil rich region in Iraq

When Germany, a relative latecomer to the imperialist dining table, attempted to extend its influence in the region by obtaining a ‘concession’1, to build a railway from Europe to Baghdad, Britain was alarmed.By this time the British government — in particular its navy — had realised the strategic importance of oil, and it was thought that the region might be rich in oil. Britain invested £2.2 million in the Anglo-Persian oil company (a fully British firm operating in Iran) to obtain a 51 per cent stake in the company. Gulbenkian, an adventurous Armenian entrepreneur, argued that there must be oil in Iraq as well. At his initiative the Turkish Petroleum Company (TPC) was formed, 50 per cent British, 25 per cent German and 25 per cent Royal Dutch-Shell (Dutch- and British-owned).

” Securing Iraq during negotiations with Arabs (Hussien)

During the war British carried on two contradictory sets of secret negotiations. The first was with Sharif Husayn of Mecca. In exchange for Arab revolt against Turkey, the British promised support for Arab independence after the war. However, the British insisted that Baghdad and Basra would be special zones of British interest where “special administrative arrangements” would be necessary to “safeguard our mutual economic interests.”

” Carving up the region among French and Britain. Russian exposture of such secret treaty to Arabs

The second set of secret negotiations, in flagrant violation of the above, was between the British and the French. In the Sykes-Picot Agreement of 1916, Iraq was carved up between the two powers, with Mosul vilayet going to France and the other two to Britain. For its assent Tsarist Russia was to be compensated with territory in northeast Turkey. When the Bolshevik revolutionaries seized power in November 1917 and published the Tsarist regime’s secret treaties, including the Sykes-Picot Agreement, the Arabs learnt how they had been betrayed.

” The mandate systems

The ‘mandate’ system, a thin disguise for colonial rule, was created under the League of Nations, the predecessor to today’s United Nations. Mandate territories, earlier the possessions of the Ottomans were to be ‘guided’ by the victorious imperialist powers till they had proved themselves capable of self-rule.

” How Britain intended to keep the Iraqi dissenters at bay

However, anti-imperialist agitation in Iraq troubled the British from the start. In 1920, with the announcement that Britain had been awarded the mandate for Iraq, revolt broke out against the British rulers and became widespread. The British suppressed the rebellion ruthlessly—among other things by bombing Iraqi villages from the air (as they had done a year earlier to suppress the Rowlatt agitation in the Punjab). In 1920, Secretary of State for War and Air, Winston Churchill, proposed that Mesopotamia “could be cheaply policed by aircraft armed with gas bombs, supported by as few as 4,000 British and 10,000 Indian troops”, a policy formally adopted at the 1921 Cairo conference. (“The Hidden History of the Iraq War”, Edward Greer, Monthly Review, May 1991)

” The installment of puppet government which its strings can be pulled by Britain

In the words of Curzon, the foreign secretary, Britain wanted in the Arab territories an “Arab facade ruled and administered under British guidance and controlled by a native Mohammedan and, as far as possible, by an Arab staff…. There should be no actual incorporation of the conquered territory in the dominions of the conqueror, but the absorption may be veiled by such constitutional fictions as a protectorate, a sphere of influence, a buffer state and so on.”

” Rise of nationalistic outrage over a dictatorship of King Fiasal

The British High Commissioner proclaimed emir Faysal I belonging to the Hashemite family of Mecca (who had been expelled from the French mandate Syria) as the King of Iraq. The puppet Faysal promptly signed a treaty of alliance with Britain which largely reproduced the terms of the mandate. This roused such strong nationalist protests that the cabinet was forced to resign, and the British High Commissioner assumed dictatorial powers for several years.

http://www.ukwatch.net/article/the_iraqi_holocaust_90_years_of_imperial_genocide
The Iraqi Holocaust: 90 Years of Imperial Genocide
December 15th, 2007By Nafeez Mosaddeq Ahmed

This policy in Iraq — which included both the colonial phase of direct rule and the transition to effective indirect rule under decolonisation — was candidly described by Lord George Curzon, then British Foreign Secretary, who noted that what the UK and other Western powers desired in the Middle East was an:

“Arab facade ruled and administered under British guidance and controlled by a native Mohammedan and, as far as possible, by an Arab staff…. There should be no actual incorporation of the conquered territory in the dominions of the conqueror, but the absorption may be veiled by such constitutional fictions as a protectorate, a sphere of influence, a buffer state and so on.” [William Stivers, Supremacy and Oil: Iraq, Turkey, and the Anglo-American World Order, 1918-1930, Cornell University Press, Ithaca, 1982, p. 28, 34]

http://www.globalresearch.ca/articles/CHU407A.html
Winston S. Churchill: departmental minute (Churchill papers: 16/16) 12 May 1919 War Office
from Companion Volume 4, Part 1 of the official biography, WINSTON S. CHURCHILL, by Martin Gilbert (London: Heinemann, 1976)

I do not understand this squeamishness about the use of gas. We have definitely adopted the position at the Peace Conference of arguing in favour of the retention of gas as a permanent method of warfare. It is sheer affectation to lacerate a man with the poisonous fragment of a bursting shell and to boggle at making his eyes water by means of lachrymatory gas.

I am strongly in favour of using poisoned gas against uncivilised tribes. The moral effect should be so good that the loss of life should be reduced to a minimum. It is not necessary to use only the most deadly gasses: gasses can be used which cause great inconvenience and would spread a lively terror and yet would leave no serious permanent effects on most of those affected.

http://www.fas.org/spp/starwars/congress/1992/h920324g.htm
MY ADVICE TO THE PRIVILEGED ORDERS
Henry B. Gonzalez, (TX-20)
(House of Representatives – March 24, 1992)
[Page: H1681]

As a matter of fact, I feel that all of those who consider the so-called Persian Gulf war to be over to be very deceptively mistaken. It has just barely started. We have not seen the end of it at all, because rather than stabilizing, we have destabilized this area that is potentially the most explosive in the world.

I said in last week’s statement that in revealing the incredible sort of self-divided policy of an administration or two where we started out since 1983, when President Reagan removed Iraq from the list of terrorist nations to peddle all kinds of goods, commercial as well as military to Iraq, to suddenly find that as late as the spring and early summer of 1990, just 2 years ago, we were still doing that, only to find that the invasion on August 2, led to a precipitous decision to enter into a state of war.

But there again, where is the moral right? The first one to use gas against Arabs was Winston Churchill, the British, in the early 1920’s. They were Iraq Arabs they used them against.

In the words of Winston Churchill, or his military head, it was used in order to subdue the, quote/unquote, recalcitrant Arabs.

So where is the moral right? Who are we to preach?

Excerpt from pages 179-181 of Simons, Geoff. “Iraq: From Sumer to Saddam”.
London: St. Martins Press, 1994.

In 1917, following the defeat of the Ottoman Empire, the British occupied Iraq and established a colonial government. The Arab and Kurdish people of Iraq resisted the British occupation, and by 1920 this had developed into a full scale national revolt, which cost the British dearly. As the Iraqi resistance gained strength, the British resorted to increasingly repressive measures, including the use of posion gas.

This would entail “the provision of some kind of asphyxiating bombs calculated to cause disablement of some kind but not death…for use in preliminary operations against turbulent tribes.”

Churchill remained unimpressed by such considerations, arguing that the use of gas, a “scientific expedient,” should not be prevented “by the prejudices of those who do not think clearly”. In the event, gas was used against the Iraqi rebels with excellent moral effect” though gas shells were not dropped from aircraft because of practical difficulties […..]

Today in 1993 there are still Iraqis and Kurds who remember being bombed and machine-gunned by the RAF in the 1920s. A Kurd from the Korak mountains commented, seventy years after the event: “They were bombing here in the Kaniya Khoran…Sometimes they raided three times a day.” Wing Commander Lewis, then of 30 Squadron (RAF), Iraq, recalls how quite often “one would get a signal that a certain Kurdish village would have to be bombed…”, the RAF pilots being ordered to bomb any Kurd who looked hostile. In the same vein, Squadron-Leader Kendal of 30 Squadron recalls that if the tribespeople were doing something they ought not be doing then you shot them.”

Similarly, Wing-Commander Gale, also of 30 Squadron: *If the Kurds hadn’t learned by our example to behave themselves in a civilised way then we had to spank their bottoms. This was done by bombs and guns.

Wing-Commander Sir Arthur Harris (later Bomber Harris, head of wartime Bomber Command) was happy to emphasise that *The Arab and Kurd now know what real bombing means in casualties and damage. Within forty-five minutes a full-size village can be practically wiped out and a third of its inhabitants killed or injured.* It was an easy matter to bomb and machine-gun the tribespeople, because they had no means of defence or retalitation. Iraq and Kurdistan were also useful laboratories for new weapons; devices specifically developed by the Air Ministry for use against tribal villages. The ministry drew up a list of possible weapons, some of them the forerunners of napalm and air-to-ground missiles:

Phosphorus bombs, war rockets, metal crowsfeet [to maim livestock] man-killing shrapnel, liquid fire, delay-action bombs. Many of these weapons were first used in Kurdistan.

http://www.guardian.co.uk/world/2003/apr/19/iraq.arts
Our last occupationGas, chemicals, bombs: Britain has used them all before in Iraq
Jonathan Glancey The Guardian, Saturday April 19 2003

Iraq is the product of a lying empire. The British carved it duplicitously from ancient history, thwarted Arab hopes, Ottoman loss, the dunes of Mesopotamia and the mountains of Kurdistan at the end of the first world war. Unsurprisingly, anarchy and insurrection were there from the start.

The British responded with gas attacks by the army in the south, bombing by the fledgling RAF in both north and south. When Iraqi tribes stood up for themselves, we unleashed the flying dogs of war to “police” them. Terror bombing, night bombing, heavy bombers, delayed action bombs (particularly lethal against children) were all developed during raids on mud, stone and reed villages during Britain’s League of Nations’ mandate.

An uprising of more than 100,000 armed tribesmen against the British occupation swept through Iraq in the summer of 1920. In went the RAF. It flew missions totalling 4,008 hours, dropped 97 tons of bombs and fired 183,861 rounds for the loss of nine men killed, seven wounded and 11 aircraft destroyed behind rebel lines. The rebellion was thwarted, with nearly 9,000 Iraqis killed. Even so, concern was expressed in Westminster: the operation had cost more than the entire British-funded Arab rising against the Ottoman Empire in 1917-18.

Churchill was particularly keen on chemical weapons, suggesting they be used “against recalcitrant Arabs as an experiment”. He dismissed objections as “unreasonable”. “I am strongly in favour of using poisoned gas against uncivilised tribes _ [to] spread a lively terror _” In today’s terms, “the Arab” needed to be shocked and awed. A good gassing might well do the job.

Conventional raids, however, proved to be an effective deterrent. They brought Sheikh Mahmoud, the most persistent of Kurdish rebels, to heel, at little cost. Writing in 1921, Wing Commander J A Chamier suggested that the best way to demoralise local people was to concentrate bombing on the “most inaccessible village of the most prominent tribe which it is desired to punish. All available aircraft must be collected the attack with bombs and machine guns must be relentless and unremitting and carried on continuously by day and night, on houses, inhabitants, crops and cattle.”

“The Arab and Kurd now know”, reported Squadron Leader Harris after several such raids, “what real bombing means within 45 minutes a full-sized village can be practically wiped out, and a third of its inhabitants killed or injured, by four or five machines which offer them no real target, no opportunity for glory as warriors, no effective means of escape.”

http://www.globalpolicy.org/security/issues/iraq/occupation/2004/1028colonize.htm
Iraq in the DNA of Imperialism
By Luciana Bohne *
Iraq News Net
October 28, 2004

With the ingratitude typical of occupied people, Iraqis rebelled with a resistance 100,000 strong. Winston Churchill placed the control of Iraq in the hands of the Royal Air Force, asking if it would be possible for the RAF to use some kind of asphyxiating bombs. Indeed, Churchill’s enthusiasm for poisoned gas was total: “I do not understand this sqeamishness about the use of gas. I am strongly in favor of using gas against uncivilised tribes.”

Poisoned gas, was used on Arabs and Kurds. There are still Iraqis alive who remember the terror-RAF bombings of their villages in the ’20s, “sometimes they raided three times a day.” RAF Wing Commander, Sir Arthur Harris, Bomber Harris of Dresden in WW II, then said, “The Arab and Kurd now know what real bombing means in casualties and damage. Within forty-five minutes, a full-size village can be practically wiped out and a third of its inhabitants killed or injured.”

When the rebellion was quelled, the British looked around to find an “Arab facade” on their rule of Iraq. They selected the son of a British ally in WW I—Prince Faisal of the Hashemite dynasty, a Sunni from Arabia, and made him King of Iraq in 1927. King Faisal was succeeded in 1933 by his son, Ghazi, an anti-British nationalist, whom the British found uncooperative. He died conveniently in a car accident, strongly suspected to have been arranged by His British Majesty’s government in London.

http://news.bbc.co.uk/2/hi/uk_news/2719939.stm
Britain’s role in shaping Iraq

By Patrick Cockburn
Author and analyst

What to do about Iraq is hardly a new question for the UK. For it was Britain that drew the map of Iraq, and it has never ceased to play a significant role there.

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http://findarticles.com/p/articles/mi_qn4156/is_20030223/ai_n12580720
Games With Frontiers; With a red pencil and an empty map of Arabia,
Sunday Herald, The, Feb 23, 2003 by Trevor Royle

On the other side of the River Jordan was the mandated territory of Palestine, soon to become the battleground for Jews and Arabs as British forces attempted to hold an impossible peace. The emirates in the Persian Gulf were also included in the agreement – they became “protected states” in treaty with Britain, a handy arrangement when oil was discovered in their territory in the following decade.

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http://www.cyberistan.org/islamic/pande.htm
History in the Service of Imperialism by Dr. B. N. Pande

A glimpse into official British records will show how this policy of Divide-et-Impera was taking shape. The Secretary of State Wood in a letter to Lord Elgin [Governor General Canada (1847-54) and India (1862-63)] said: ‘We have maintained our power in India by playing off one part against the other and we must continue to do so. Do all you can, therefore to prevent all having a common feeling.’

George Francis Hamilton, Secretary of State of India wrote to Curzon, ‘I think the real danger to our rule in India not now, but say 50 years hence is the gradual adoption and extension of Western ideas of agitation organisation and if we could break educated Indians into two sections holding widely different views, we should, by such a division, strengthen our position against the subtle and continuous attack which the spread of education must make upon our system of government. We should so plan educational text-books that the differences between community and community are further strengthened (Hamilton to Curzon, 26th March 1886).

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http://www.cooperativeresearch.org/context.jsp?item=a1097chessboard#a1097chessboard

Zbigniew Brzezinski. [Source: USIS, American Embassy]Former National Security Adviser Zbigniew Brzezinski publishes a book, The Grand Chessboard: American Primacy and Its Geostrategic Imperatives, in which he portrays the Eurasian landmass as the key to world power, and Central Asia with its vast oil reserves as the key to domination of Eurasia. He states that for the US to maintain its global primacy, it must prevent any possible adversary from controlling that region. He notes: “The attitude of the American public toward the external projection of American power has been much more ambivalent. The public supported America’s engagement in World War II largely because of the shock effect of the Japanese attack on Pearl Harbor.”

He predicts that because of popular resistance to US military expansionism, his ambitious Central Asian strategy can not be implemented, “except in the circumstance of a truly massive and widely perceived direct external threat.” [Brzezinski, 1997, pp. 24-25, 210-11] The book also theorizes that the US could be attacked by Afghan terrorists, precipitating a US invasion of Afghanistan, and that the US may eventually seek control of Iran as a key strategic element in the US’s attempt to exert its influence in Central Asia and the Middle East. [Brzezinski, 1997]

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http://www.netnative.com/news/06/mar/1090.html
A Century Of War: Anglo-American Oil Politics and the New World Order
by F. William Engdahl

In November 1978, President Carter appointed George Ball head of a special White House Iran task force under Brzezinski. Ball recommends the US should drop support for the Shah of Iran and support the radical Islamist opposition of Ayatollah Khomeini. This idea is based on ideas from British Islamic expert Dr. Bernard Lewis, who advocates the balkanization of the entire Muslim Near East along tribal and religious lines. The chaos would spread in what he also calls an “arc of crisis” and ultimately destabilize the Muslim regions of the Soviet Union. The Shah will later comment in exile, “I did not know it then, perhaps I did not want to know?

But it is clear to me now that the Americans wanted me out. Clearly this is what the human rights advocates in the State Department wanted. What was I to make of the Administration’s sudden decision to call former Under Secretary of State George Ball to the White House as an adviser on Iran? Ball was among those Americans who wanted to abandon me and ultimately my country.”

P. 171-174

* George Ball’s recommendation on sacking monarchy and replacing it with Islamic opposition as an arc of crisis against the wave of communism and diminishing Soviet’s influence on the Islamic beltway.

In November 1978, President Carter named the Bilderberg group’s George Ball, another member of the Trilateral Commission, to head a special White House Iran task force under the National Security Council’s Brzezinski. Ball recommended that Washington drop support for the Shah of Iran and support the fundamentalistic Islamic opposition of Ayatollah Khomeini. Robert Bowie from the CIA was one of the lead ‘case officers’ in the new CIA-led coup against the man their covert actions had placed into power 25 years earlier.

Their scheme was based on a detailed study of the phenomenon of Islamic fundamentalism, as presented by British Islamic expert, Dr. Bernard Lewis, then on assignment at Princeton University in the United States. Lewis’s scheme, which was unveiled at the May 1979 Bilderberg meeting in Austria, endorsed the radical Muslim Brotherhood movement behind Khomeini, in order to promote balkanization of the entire Muslim Near East along tribal and religious lines. Lewis argued that the West should encourage autonomous groups such as the Kurds, Armenians, Lebanese Maronites, Ethiopian Copts, Azerbaijani Turks, and so forth. The chaos would spread in what he termed an ‘Arc of Crisis,’ which would spill over into Muslim regions of the Soviet Union.

* Shah saught to have a more sensible petroleum deal with British. Britain was not taking enough oil according to the contracts and shah wanted to raise the price of oil.

During 1978, negotiations were under way between the Shah’s government and British Petroleum for renewal of the 25-year old extraction agreement. By October 1978, the talks had collapsed over a British ‘offer’ which demanded exclusive rights to Iran’s future oil output, while refusing to guarantee purchase of the oil.

London was blackmailing and putting enormous economic pressure on the Shah’s regime by refusing to buy Iranian oil production, taking only 3 million or so barrels daily of an agreed minimum of 5 million barrels per day. This imposed dramatic revenue pressures on Iran, which provided the context in which religious discontent against the Shah could be fanned by trained agitators deployed by British and U.S. intelligence.

* Broadcasing propaganda using government control BBC to pave the way for fundamentalists

The British Broadcasting Corporation’s Persian-language broadcasts, with dozens of Persian-speaking BBC ‘correspondents’ sent into even the smallest village, drummed up hysteria against the Shah. The BBC gave Ayatollah Khomeini a full propaganda platform inside Iran during this time. The British government-owned broadcasting organization refused to give the Shah’s government an equal chance to reply.

* Carter was largely kept in the dark by the Republican

Indications are that the actual planners of the Iranian Khomeini coup in London and within the senior ranks of the U.S. liberal establishment decided to keep President Carter largely ignorant of the policy and its ultimate objectives. The ensuing energy crisis in the United States was a major factor in bringing about Carter’s defeat a year later.

* Indication of oil companies keeping the supply reserves intentionally low to hike up the prices

There was never a real shortage in the world supply of petroleum. Existing Saudi and Kuwaiti production capacities could at any time have met the 5-6 million barrels per day temporary shortfall, as a U.S. congressional investigation by the General Accounting Office months later confirmed.

Unusually low reserve stocks of oil held by the Seven Sisters oil multinationals contributed to creating a devastating world oil price shock, with prices for crude oil soaring from a level of some $14 per barrel in 1978 towards the astronomical heights of $40 per barrel for some grades of crude on the spot market.

Devil’s Game: How the United States Helped Unleash Fundamentalist Islam
by Robert Dreyfuss

pp. 236-243

* Fundamentalists take over and Brzezinski’s decision to pull back from military coup d’tat

After the Shah Mohammad Reza Pahlavi is deposed in Iran and Ayatollah Khomeini takes over as Iran’s new leader in February 1979, the US is interested in continuing to work with the Iranian government. At first the US is taken aback by the new fundamentalist Islamic government, and National Security Adviser Zbigniew Brzezinski contemplates fomenting a military coup to stop Khomeini. But Khomeini is fiercely anti-communist, and Brzezinski soon decides that Iran’s new government can become part of an effective anti-Soviet alliance he calls the “arc of crisis’ (see November 1978-February 1979). The US embassy in Teheran, Iran, remains open, and more US officials come to Iran and begin tentative talks there.

pp. 264-265

* Collaboration between CIA and perhaps MI6 in feeding Iranian regime after the revolution

The CIA in particular begins secretly collaborating with Iranian intelligence, providing information about the Soviet Union, Afghanistan, and Iraq. The CIA and Iran both covertly work to destabilize the pro-Soviet government in Afghanistan.

pp. 240-243

* Brzezinksi meets Bazargan in Algeria, US takes in Shah for cancer treatment, Khomeini sees the opportunity to knock out Bazargan’s influence by arranging the take over the embassy.

In early November 1979, Brzezinski secretly meets with Iranian Prime Minister Mehdi Bazargan, as well as Iran’s foreign minister and defense minister, in Algiers, Algeria. But shortly before the meeting, the US agrees to allow the Shah, dying with cancer, to come to the US for medical treatment. Khomeini is enraged, and on November 4, just three days after the Algeria meeting begins, Khomeini arranges for students to take over the US embassy in Teheran and seize hostages. This realigns political forces in Iran and allows Khomeini to sideline Bazargan and other others meeting in Algeria, rendering the negotiations there moot. Brzezinski’s attempts to create a de facto alliance with Iran collapse. The US hostages will be held for over a year before finally being freed.

http://books.google.com/books?id=Fm0Q2-K5CVEC&pg=PP1&ots=b04CY2cm9P&sig=h_WfUlKH2VyKEY6z0KHfQ1RuGzI&hl=en&sa=X&oi=print&ct=title&cad=one-book-with-thumbnail#PPA91,M1
George Ball: Behind the Scenes in U.S. Foreign Policy
By James A. Bill

P. 90-91

* George Ball touts for replacement of shah with government that represents people.

Relying heavily on National Security Advisr Brzenzinski and preoccupied with the Camp David Accords, Carter completely misread and misunderstood the explosive situation in Iran. On the advice of Treasury Secretary Michael Blumenthal, Carter called in George Ball for an independent assessment. Ball, who had a long acquaintance with Iran and had visisted the country a half dozen times, set up office in the White House on November 30, 1978. skeptical of the government information on Iran, Ball consulted with outside experts. After nearly two weeks of study, he prepared a paper that included an analysis and policy recommendations. After presenting his report to a cabinet-level group thta included Brzenzinski, Ball met with President Carter to discuss his conclusion.

In an eighteen-page memorandum entitled “issues and Implications of the Iranian Crisis,” Ball argued that the shah was finished as an absolute monarch. He pointed out that military repression was doomed to failure and that it risked turning Iran into another Lebanon. He recommended that the shah transfer full power to a government responsive to the people. He suggested a “council of notables” composed of responsible opposition figures known for their personal and professional integrity.

* Brzenzinski had faulty information given to him by Iran’s ambassador and believed Shah can be salvaged.

Although Ball’s proposal was mild, given the lateness of the date, Brzenzinski opposed it strenuously. The national security adviser, working with a profound ignorance of Iran and relying on distorted information provided him by the shah’s ambassador to the United States, Ardeshir Zahedi, had taken charge of Iran policy. Brzenzinski believed the shah could be salvaged and that a military government could maintain control. Like Zahedi, Brzezinski imagined a restoration similar to the one of the 1953, when covert U.S. action helped the shah return to power after a nationalist insurrection.

When Ball went in to present his report to Carter, to his surprise, “there was Zbing sitting there.” Carter told Ball that he appreciated the report but he would not accept its recommendations since he would not presume to tell another head of state what to do. Ball argued that Carter, in suggesting that the shah step down, would only be responding to friend’s desperate plea for advice. Under the influence of Brzezinski, the president put aside Ball’s report.

According to George, Ball, the only positive result of his consultantship to Carter was his argument that the president not send Brzezinski to Tehran. Apparently, Brzezinski felt that his presence in iran would in some way help the shah. Ball listened to Brzezsinki’s plan and sharply told Carter, “With all due respect, [this] is the worst idea I have ever heard.” Knowing that Ball had dheard many bad ideas over his long career, the president was impressed. He vetoed the idea of a Brzezinski Tehran trek.

* Brzezinski sent ill-prepared general as an advisor to take things under control at no vail.

After Ball left the White House, he watched in disgust as Carter and Brzezinski bumbled and stumbled their way through disastrously conceived policies concerning Iran. Such policy involved sending an ill-prepared miliary general to Iran as political mediator, the ill-advised admission of the shah into the United States, thus precipitating the hostage crisis, and the ill-fated hostage rescue attempt in April 1980. One result was the honorable resignation of Secretary of State Cyrus Vance and his replacement by Edmund Muskie.

http://books.google.com/books?id=w-l6M4pOnUkC&pg=PA61&lpg=PA61&dq=brzezinski+khomeini&source=web&ots=kwa3i7STNs&sig=vkqpnydJer0k8dKPfToEX4CVdG8&hl=en
America and Political Islam: Clash of Cultures Or Clash of Interests?
By Fawaz A. Gerges

P. 60-62

* Carter was getting conflicting and inaccurate intelligence and assessements. Sullivan called for containment of Khomeini but later switched to the idea of infusing military with Khomeini for smooth transition meanwhile maintaining the stability of military.

From the outset of the Iranian crisis, President Carter’s task was complicated by conflicting advice from his aides. On the one hand, administration officials were divided over the most eefective approach to adopt toward the new revolutionaries. On the other hand, “many of Carter’s best intelligence source,” argues James Bill, “provided him with a deeply flawed and inaccurate picture of Iran.” Although initially the U.S. ambassador to Tehran, William Sullivan, called for quarantining Khomeini and working with the Shah, he subsequently changed his mind and advocated a dialogue between the military and Khomeini. Such a dialogue, stated Sullivan, might smooth the transition to a new political pact.

* The majority feared support of Khomeini as his seizure would result in domination by fundamentalists and leftists.

With the exception of Sullivan and a few voices in the State Department, most U.S. officials strongly opposed any overture to Khomeini, fearing the adverse effects of Khomeini’s seizure of power on Western interest: His Iran would become an easy target for radical leftist and religious forces. Brzezinksi argued that Khomeini represented the forces of “Islamic fundamentalism that were now openly challenging the existing order.” Similarly, General Robert Huyser, who was sent to Tehran to “encourage the military to stage a coup,” came to a similar conclusion: Khomeini’s return to Iran would constitute the greatest potential for complete disaster.”

* Brzezinski and Huyser wanted the military coup but Sullivan saw the political scene of Iran falling apart. Carter was getting too many contradictory reports hence adhering to Brzezinski’s advice which was Sovietcentric in nature.

Of all Carter’s advisers, Brzezinski and Genearl Huyser lobbied hardest or a military solution in Iran – a military takeover if necessary. Contradicting Brzezinksi and Huyser, Ambassador Sullivan reported that Iran’s political structures were breaking apart, including the military. Conflicting advice resulted in Carter’s indecision and wavering posture, which in turn often led to the President following the advice of Brzezinski. After the Shah’s departure from Tehran, some U.S. policy makers encourage the Iranian armed forces to execute a coup in the event that Khomeini decided to return home from his exile in Paris. As Carter stated: “The threat of a military coup is the best way to prevent Khomeini from sliding to power.”

* Badly informed Carter admininstration and ill-prepared to deal with the revolution.

Nevertheless, when it came to formulating a consistent policy toward revolutionary Iran, the United States was at a loss. This difficulty arose not only because of conflicting advice wihtin the Carter administration but also due to the fact that the administration, noted Iran desk offcier Henry Precht, was ill-informed about the new religious men who controlled political life in Iran. furthermore, argues Iranian specialist James Bill, powerful Pahlavi supporters in the United States sought to discredit the revolution by portraying the revolutionaries as uncivilized, barbaric, and fanatical and the revolution itself as a fleeting aberration that lacked the support of the Iranian people. To this must be added the strong, anti-American behavior of the new revolutionaries who advocated the “export of revolution” into neighboring countries.

* Carter preferred to deal with the provisional government rather than directly with the revolutionaries.

Far from exploring the opportunities for reconciliation with the powerful clergy in Tehran once the Shah was overthrown, the Carter adminstration backed away from the unknown and untried Islamists, preferring to deal with the Western-edcuated moderates who were nominally in charge of the provisional government. The advocates of change within the Carter administration usually lost on the Iran issue. U.s. officials mistrusted the mullahs as well as underestimated their political strength and the captivating power of their message. President Carter had only contempt for the “street mobs” who whipped up anti-American feelings to a fever pitch and for Khomeini’s “irrational” statements and actions. “We are dealing with crazy people in Iran,” wrote Hamilton Jordan, Carter’s Chief of Staff.”

P. 63

* Gary Sick speculated that Khomieni’s worldview was far away from Carter’s vision.

At the heart of this U.S. misreading of the Iranian scene, notes Gary Sick, NSC staff member for Iran and chief assistant to Brzezinski throughout the Iran crisis, lies a deep cultural bias: It is the contradiction between two value systems and world conceptions — Khomeini’s Islamic-theocratic worldview versus Carter’s essentially Wester-secular one. According to Sick, although both Khomeini and Carter were deeply religious men, their faiths had almost nothing in common: “Khomeini was the archetype of the medieval prophet emerging from the desert with a fiery vision of absolute truth. His god was a harsh and vengeful deity — full of fury, demanding the eye and tooth of retribution for human transgressions of divine law…. He was a man riven with hate — hatred for the shah, hatred for Carter and American, hatred for those who dared oppose his vision.

The tension between the religious and secular, adds Sick, was a major contributing factor to the failure of both Iranians and Westerners to understand and gauge properly each other’s fears and aspirations. In his explanation of the U.S.-Iranian crisis, Sick puts a lot of weight on the unbridgeable chasm between two impossibly different cultures, as reflected in the very different personalities of Carter and Khomeini: “We are all prisoners of our own cultural assumptions.”

http://www.wm.edu/news/?id=3475
U.S. and Iran remain on ‘collision course’ says Bill
News · W&M News · 2004 archive · U.S. and Iran on ‘collision cour
Author: Bill Walker, Source: W&M News
Date: Mar 19, 2004

* James A. Bill has found it frusturating of a lack of understanding of Iranian unrest and society by the American embassy.

Through countless interviews with Iranian officials, political leaders, citizens and dissidents, Bill developed a personal understanding of the growing unrest in the country and the increasing repression of the Shah’s regime. Just as distressing as the repression, the young scholar found, was the lack of understanding and sensitivity he found in the American embassy.

“Less than ten percent of U. S. diplomats spoke Persian fluently. The comparable numbers for the British and Soviet embassies were 45 and 70 percent, respectively,” Bill recalled. “The American community in Tehran clustered around the commissary. With sales of $4 million annually, the commissary imported huge amounts of liquor, cigarettes, pet food and Coke. In 1970, American aircraft lifted 79 tons of processed cat and dog food to Tehran. In the words of one Iranian, ‘the American’s dogs eat better than the average Iranian.’”

http://books.google.com/books?id=FNBpbh-mDcoC&pg=PA252&lpg=PA252&source=web&ots=i0GfIyxY3f&sig=Tzz7Z7hWpqQV6yEh1qbRHqJ4aPY&hl=en#PPA246,M1
The Eagle and the Lion: The Tragedy of American-Iranian Relations
By James A. Bill

P. 246-247

* American ambassador to Iran, William H. Sullivan, a direct guy who thought he can get shah under wrap

William H. Sullivan was a distinguished white-haired, ramrod-straight man who spoke quietly and directly. He exuded personal strength and confidence. Sullivan had just served for four years as ambassador to the Philippines, and before that he had held posts in Washington and in Laos and Vietnam, where it was widely rumored that he directed a wide range of American intelligence operations. He had no experience in the Middle East. Sullivan was not pleased with the Tehran appoitnment, but he had a reputation as a man who knew how to deal with authoritarian leaders. Yet as one foreign service officer confided after Sullivan had been briefed by State Department officials, “the shah likes to deal with tough guys. he’ll have Sullivan eating out of his hand the same way he did Helms and MacArthur. The shah is no Marcos.”

* Sullivan was debreifed by advisor in State Department and wanred the situation was not what it seemed on the suface.

Sullivan did his homework before he left for Iran. The American Pahlavi supporters weighed in with praise for the shah, with special emphasis on the stability of his regime. But Sullivan carefully listened to the other side when he was briefed by academics and the middle-level State Department Iran specialists. These advisers strongly recommended that Sullivan would do well to break out of the old circle of Iranian hangers-on who encircled and encrusted the U.S. Embassy in Tehran. They warned him that all was no as it appeared on the surface in Iran and that the Pahlavi regime had a number of soft spots. Sullivan spent a day listening in apparent boredom to the State Department team. But his questions and comments made it clear that he had indeed listened well.

* Although he made a good contact with the Iranian system, he realized the U.S. was not cognizant of intricacies of Iranian politics.

He was also duly impressed with Asadollah Alam, who had made a career of gaining the favor of American and British ambassadors. Sulivan was professional enough to realize, however, that the United States did not really understand the intricacies of Iraniana politics. Even John Stempel, who had served as political officer in Iran since 1975, admitted that “American did not realize what was happening in Iran.” Sullivan attempted to improve American intelligence in Iran but never really succeeded. By the time he made a serious effort to do so, the most extreme members of the Iranian opposition refused to have anything to do with American officials.

* Sullivan preferred a quitet and indirect approach to quelling the unrest.

Although Ambassador Sullivan may have personally supported a human rights policy, he strongly disagreed with the vigor of the approach pusued by the Bureau of Human Rights in the Department of State. Sullivan and Charles Naas, his deputy chief of mission, preferred an indirect, quiet approach, and as a result significant tension developed between the mission in Tehran and the bureau in Washington. Although Sullivan, like Carter himself, failed to push the shah seriously on this issue, he did cooperate to an extent with the International Commission of Jurists and the Butler missions, whose legalistic approach he preferred to the more frontal political tack of Amnesty International. In a letter of December 1977 to William Butler, Sullivan compare the approaches as follows:

You both come to more or less the same conclusions, but Amnesty’s approach is that of looking at a glass half empty while yours can be described as looking at a glass half full. It would be my judgment that the Amnesty paper will be poorly received here merely because of its tenor, rather than because of its contents. On the other hand, your observations, while they amount to the same thing, would be considered constructive and therefore might be more persuasive.

P. 248

* Sullivan’s main concern was economic but he did realized the social aspect of the Iran was not stable due to lack of democratic participation of various elements in the country which has been giving rise to oppositions that saught to have sayings in the political process or promoting a new social and political foundations for Iran (i.e. Marxism or Islamism). He understood that shah’s departure may become permenant which led to his recommendation for contingency plans.

Sullivan’s major concern was economic in nature, and he focused his most serious analysis on the Iranian industrialization program. In the process, he underestimated the social and political fragility of the Pahlavi regime, and it was not really until November 1978 that he realized that the shah was in serious trouble. As late as May 5, 1978, Sullivan signed off on a memorandum prepared by his deputy Jack Miklos that contained the following assessment: “In a major sense Iran has now reached the position of a stable and moderate middle-level power well-disposed toward the United Statees which has been a goal of our policy since the end of WWII. There are no outstanding issues of such serious magnitude that they need be identified in this memorandum.” Sullivan had been so confident in the shah’s control of the situation that he had taken an extensive home leave during the middle of the revolution, from June to late August 1978. On Novermber 9, 1978, he wrote his now famous cable entired “Thinking the Unthinkable” in which he cautiously but seriously indicated that the United States had best begin preparing contingency plans in case the shah did not survive politically.

* Realizing the dire situation in Iran, he makes an attempt to notify the Washington and asks to establish a direct dialogue with Khomeini which was ignored by Brzezinski and State Department’s Vance.

Sullivan was enough of a professional to admit that he had been much too opimistic and that is was now timeto face facts. Althoughhe had come very late to the realization that the shah was unlikely to mke it, he became increasingly sure of it through Novermber and December 1978. he attempted to get the message to Washington, even recommending that the United States establish direct contact with Ayatollah Khomeini in Paris. But Sullivan found his increasingly desperate mesages ignored in Washington. Not only had Zbigniew Brzezinski and his staff taken charge of Iran policy, but Secretary of State Vance himself refused to believe that the shah was in serious trouble. As David newsom noted, “Vance was among the very last to admit, even to himself, that the shah might collapse.” The fact that Sullivan received no response to his important cable of November 9 was symptomatic of the misunderstanding and lack of communication that henceforth marked Carter foreign policy toward Iran.

P. 249

* Brzezinski thought shah’s military can muscle his way out of the tight situation. He took under this wings Gary Sick and David Aaron who had no deep understanding of the Iranian situation. Moreover, he took shah’s ambassador’s friend, Ardeshir Zahedi, which not coincidentally fed him with pro-shah tenet.

National Security adviser Brzezinski had consistently argued that only a hard-line, no-nonsense policy from the shah could save the day. Although he had been particularly slow to recognize the shah’s difficulties, he always felt that tough action by the shah’s military forces would scatter the opposition, which he believed consisted of communists on the left and a few reactionary religious leaders on the right. Brzezinksi was reinforced by his deputy David Aaron, a humorless, steely-eyed bureaucrat who had become an instant expert on the Middle East. Naval captain Gary Sick represented Brzezinksi’s Iran expertise. Sick was a bright, sensitive individual, but he had very little background in Iranian affairs, and, as a consummate loyalist, he simply reinforced Brzezinski’s distored views. Brzezinski’s major understanding of Iran came from his friend, Iranian ambassador Ardeshir Zahedi, with whom he maintained close contact throughout the crisis. Brzezinski and Zahed spent the last half of 1978 reinforcing one another’s opinions on the situation on Iran.

* George Ball was amazed by how Brzezinski operated through his channels and always under some global sphere, mostly likely to hinder communism.

Policy conflict between the national security adviser and his staff on the one hand and the Department of State on the other hand was inevitable. Old foreign policy hand George Ball was horrified by Brzezinski’s bureaucratic imperialism. Ball stated: “He was operating in a free-wheeling manner, calling in foriegn ambassadors, telephoning or sending telegrams to foreign dignitaries outside State Department channels, and even hiring a press adviser so he could compete with the Secretary of State as the enunciator of United States policy.” In describing Brzezinski’s pompous justifications for policy recommendations, which were always framed in some grand global context, Ball quoted his father, who described his tactic as “a flair for making little fishes talk like whales.”

P. 250

* Sullivan was opposing Brzezinski’s recommendations which made him take contradictory actions. In return, Sullivan became frusturated and his response almost cost him his job until Vance intervened.

By the time Vance belatedly understood what was going on in Iran, he found that Brzezinksi had preempted him and had the ear of the president. Sullivan was another matter. He was at least as tough as Brzezinksi. Furthermore, Sullivan was on the ground in Iran and had received some difficult on-the-job education in Iranian politics. When Brzezinksi failed to respond to Sullivan’s suggestions or merely took contradictory actions to those Sullivan recommended, Sullivan responded with increasingly caustic cables. Brzezinski used these to turn President Carter against Sullivan. Only vance’s intervention kept Carter from firing Sullivan on the spot. This type of confrontation occurred up and down the U.S. policy-making hierarchy.

* It was reported Bazaar was closed when Taliqani was released from prison and protests at university of Tehran was hammered. The atomospher in other cities indicated that a revolution is around the corner.

In early November 1978, for example, State Department officials Carl Clement, George Griffin, and Stephen Cohen (Bureau of Human Rights) traveled to Tehran, arriving there on November 4. That day Clement and Cohen visited the Tehran bazaar, which was partially closed since many bazaaris had gone to meet Ayatollah Taliqani, who had just been released from prison. Major riots that resulted in heavy casulaties also erupted at Tehran University that day — a day that would be commemorated on year later by the taking of American hostages. While in Iran, these three officials split up and traveled widely, visiting such cities as Tabriz, Isfahan, and Khurramshahr. It was the explosive situation in the provinces that convinced them that a genuine revolution was in progress.

* David Aaron Gary Sick listened to the founding of officers but decided to keep the support behind the shah.

On their return to Washington, Clement, Griffin, and Cohen arranged a meeting with Under Secretary David Newsom to explain the seriousness of the situation they had witnessed in Iran. The three officers and Iran desk officer Henry Precht subsequently met with Brzezinski’s deputy David Aaron and NSC Iran-watcher Gary Sick, both of whom listened to the evidence and eyewitness accounts for nearly an hour. Aaron, who was somewhat more liberal version of Brzezinski, was unimpressed by what he heared. At one point, he reportedly asked Henry Precht, “Tell me Henry, who exactly is the opposition?” “The people, David, the people,” Precht acidly responded. In the end, Aaron simply said, “Well you fellows may be right but we have no choice but to support the shah.” When the State Department officials asked Gary Sick what he thought, he tersely responded, “I agree with David.”

* Sullivan and Sick played a blaming game as to which side wasn’t enitrely take a necessary action based on the known reprots.

The sad state of the situation is seen in the fact that Sick has since condemned Sullivan for failing to ask for advice from Washington. Sullivan, on the other hand, has written that he was deeply puzzled and frustrated because he was never provided any instructions from Washington. It seems true that Sullivan’s credibility suffered back in Washington because of his earlier consistent optimism about the shah’s chances. It is also clear, however, that the major foreign policy making forces in Washington had determiend that the shah was to be supported at all costs and that his regime could be protected through the application of enough military force. Nothing was going to change their minds.

* Powerful influences — Nelson Rockefeller (Vice president to Gerald Ford 1974-1977), John J. McCloy (banker who later became a prominent United States presidential advisor, World War II, as Assistant Secretary of War, 1947 to June 1949,

McCloy was president of the World Bank, chairman of the Chase Manhattan Bank from 1953 to 1960, chairman of the Ford Foundation from 1958 to 1965; he was also a trustee of the Rockefeller Foundation from 1946 to 1949, and then again from 1953 to 1958, From 1954 to 1970, he was chairman of the prestigious Council on Foreign Relations in New York, to be succeeded by David Rockefeller, who had worked closely with him at the Chase Bank), and Henry Kissinger — in Washington signaled that they rather keep the shah.

p. 251

Brzezinski was genearlly supported in this stance by Harold Brown and the Department of Defense, James Schlesinger and the Department of Enery, and, to a somewhat lesser extent, Stansfield Turner and the Central Intelligence Agency. Furthermore, several powerful American businessmen and Pahlavi supporters such as John J. McCloy, Nelson Rockefeller, and Henry Kissinger were applying pressure on American policymakers to support the shah with whatever it took and at all costs. At a special meeting of high-level decision makers in the situation room of the White House on November 2, 1978, for example, Brzezinski reported that he had received a telephone call from Nelson Rockefeller, who critized the government for apparently doing little to support the shah.

* shah believed the military action was counterproductive and he could not stand murdering his own people in scores. Brzezinski went on the rampage of accusing everyone as being indecisive.

A seldom-mentioned irony is that th eshah himself indicated that further military mearsures would be counterproductive and would result in such bloodshed that his dynasty would be hated and his family’s very existence would be in mortal danger. he would have nothing to do with such measures. The shah was also incredulous when he heard that Brzezinski had vetoed Sullivan’s proposal that the United States make direct contact with Khomeini in paris. After watching his trooops kill over ten thousand of his own people in the streets of Iran’s cities, the shah determined that violent tactics were doomed to fail. Because of this position, the monarch found himself criticized by Brzezinski as being weak, vacillating, and indecisive. Later, in February 1979, Brzezinski was as disgusted with the Iranian military as he had been earlier with the shah, since “the Iranian military evidently did not have the will to act.” Ultimately, in Brzezinski’s eyes everyone was cavillating: Ambassador Sullivan, the shah, and the Iranian military itself.

* Clear indication of discontent between the State Department and NSC. Precht vs. Vance and Brzezinski

The Department of the State-National Security Council tension carried heavy professional and personal costs. As the crisis developed, the White House increasingly cut Henry Precht and his colleagues at State out of the decision-making process. On December 19, 1978, Precht wrote a revealing letter to Ambassador Sullivan in Tehran. This communication was marked “Official-Informal-Secret-Eyes Only” and captured the frustration of an official who, in retrospect, had as good as grasp of events unfolding in iran as anyone in Washington:

I presume you are aware of the Top Secret list of questions that was sent out over the weekend for the Shah. I have no been shown the list, such is the level of distrust that exists in the White House towards the State Department (and egotistically, I feel, towards myself). I am afraid that we are losing valuable time and that events may sweep us by, depriving the U.S. of the opportunity to recoup its position in Iran.

I have probably confided more than I should to a piece of paper, but I doubt I have much of future anyway. I would ask you to protect me for the sake of the education of the young. Whatever the risks, I believe it important to give you my frank assessment of how things are shaping up on the Iranian front these days.

P. 252

Divided
against itself, preoccupied with other international issues, and somewhat restrained in its capacity to do bureaucratic battle by a code of professional ethics, the Department of State watched Brzezinski and his staff arrogantly shape a policy that placed America on the losing side in a revolution. This policy seriously compromised American national interests and was partionally responsible for the extremism and anti-Americanism that broke forth in Iran after the revolution.

* George Ball was asked to assess the situation. NSC didn’t welcome him.

At the urging of Michael Blumenthal and with the consent of Brzezinski, President Carter called on George Ball to carry out an independent study of the situation and to develop policy recommendations. Ball energetically began his research on November 30, 1978, and sought the advice of a wide network of Iran specialists. On at least one occasion, State Department official George Griffin managed to slip an Iran scholar up the backstairs of the White House and into Ball’s office. The NSC staff did not welcome input recommended by the Department of State.

* Ball recommends to replace shah with a government responsible to people. He also saught to open up the channel of communication to Khomeini.

Ball prepared an eighteen-page memorandum for the president entitled “Issues and Implications of the Iranian crisis.” In this hard-hitting report, Ball sharply criticized the basis of the Nixon Doctrine and stated that the United States bore much of the responsiblity for the shah’s megalomania. He argued that the shah was finished as absolute monarch. Ball pointed out that military repression was doomed to fail and that it risked turning Iran into another Lebanon. Ball recommended that the shah transfer full power to a government responsive to the people. The mechanism that Ball favored for such transfer was a Council of Notables composed of responsible individuals carefully selected by the United States. In ball’s view, “I thought this was the only way we could protect it from becoming a government of the shah’s own designation.” At the same time, Ball urged the president to open a disavowable channel of communication to Ayatollah Khomeini.

* Ball’s heed was not taken into account.

Although Ball’s propsal was mild, given the lateness of the date, only Acting Secretary of State Christopher gave it unqualified support. Ball submitted the memorandum on December 11, 1978. The next morning he met with Brzezinski, who was very “dubious” and who indicated that he thought a restoration similar to the one of the 1953 could be accomplished. Ball went in to see Carter that afternoon, and, to his surprise, “there was Zbing sitting there.” Carter told Ball that he liked the report but that he would not accept its recommendation since he would not tell another head of the state what to do. Ball replied that Carter would only be responding to a friend’s needs, a friend who had sought the president’s advice. Partly under the influence of Brzezinksi, Carter failed to take George Ball’s advice. Brzezinski later admitted that he had makde a mistake in seeking the independent opinion because this violated a basic law of bureaucratic tactics: “One should never obtain the services of ‘impartial’ outside consultant regarding an issue that one feels strongly about without first making certain in advance that one knows the likely contents of his advice.”

* George prevents Brzezinski to travel to Iran for better understanding of the situation.

According to George Ball, about the only positive result of his activites was that he convinced the president not to send Zbigniew Brzezinksi to Tehran. Apparently, Brzezinski felt that his presence in Iran would provide Washington with new insights into the Iranian politics scene while bolstering the courage and position of the shah. Ball incredulously told Carter that this plan, “with all due respect is the worst idea I have ever heard.” Given the fact that Ball had obviously heard many bad ideas over his long diplomatic career, this statement made an impresson on the president, who decided to cancel the Brzezinski trek.

P. 252-254

* State Department sends Robert Huyser as an adviser to Iranian military as a liaison

The futile efforst of George Ball were soon replaced by a recommendation by the Department of Defense and supported by Brzezinski to send a high-ranking U.S. military official to Iran as a liasison to teh Iranian military forces, who seemed to hold the key to Iran’s political future. The man selected was Gen. Robert “Dutch” Juyser, deputy commander-in-chief of the U.S. European Command under Alexander Haig. General Huyser had been traveling to Iran since the late 1960s and had close personal and professional relationship with Iranian military leaders. He has also pointed out that “I had many audiences with the Shah, at which a mutual respect of the trust were established.” That year he had already visited Iran twice — in April and again in August.

* Huyser’s mission was to stabilize the military to support shah and back Bakhtiar and if his government fell, stage a coup d’etat.

Dutch Huyser arrived in Iran on January 4, 1979. His charge was to hold the Iranian military together and to send a sharp signal that the United States stood behind the current regime. He has said, “In general terms I was sent there by the Government of the United States to stabilize the Iranian military and to encourage the Iranian military to support their legal government.” The military was to bak Prime Minister Shapour Bakhtiar; if the Bakhtiar government fell, then Huyser was to encourage the Iranian generals to carry out a coup d’etat. According to Huyser, “if that government collapsed, then at exactly the right moment, I was to see that the military took action.”

* The U.S. had spying electronic monitoring devices in Iran to have an eye on Soviets. The last one standing went under seige when the Iranian employees hold up 22 American technicans for their backpay. Two officers flew and rescued the technicals (CIA hired employees). Huyser was hoping he could hold the military together after revolution so they still can utilize such sites.

The decision to protect the integrity of the military was closely interwined with another matter of considerable concern to American officials. It involved the supersecret, sophisticated electronic listening posts at Bihshahr and Kapkan in northern Iran. From these posts the United States had been closely monitoring Soviet missile and space activities. The Kapkan site, located forty miles east of Mashhad, was especially valuable to the United States and was considered irreplaceable. Although the Bihshahr station had been closed in December 1978, Kapkan continued to operate until the local Iranian employees mutinied, demanded their backpay, and held the twnty-two American technicians there captive. In a harrowing, little-known missiong, two American military leaders still in Tehran, Capt. H. F. Johnson and Col. T. E. Shaefer, along with two resourceful Iranian employees and 30 million rials, flew to Kapkan in an Iranian C-130 piloted by an unfriendly Iranian air force officer. After paying the local employees, they returned with the twenty-two technicians, who were actually employed by the CIA. This quiet rescue mission saved American lives but left the listening posts in Iranian hands. Huyser and other American officials had hoped to hold the military together in order to ride the revolution out so that, among other things, American might continue to operate these valuable intelligence sites.

* Huyser’s responsbilities sort of clashed with Suvillian’s. He was badly informed with regards to Khomeini’s support in Iran and conjectured Communists are behind them or will take control once religious right comes on top.

Huyser’s presence in Iran undercut Ambassador Sullivan’s authority; it seemed evident to all that the White House now had its own representative in Tehran. Huyser’s mission was a dramatic indication of Washington’s two-track, collision-course, contradictory policy toward Iran. Huyser was a direct, competent officer, but he was badly over his head in the Iranian political thicket. Traveling around north Tehran in a bulletproof vest and closeted daily with five or six of the shah’s leading generals, Huyser never understood Iran. He has admitted that th e never heard Khomeini’s name before April 1978 and that he estimated that only 10 or 20 percent of the Iranian population supported Khomeini. Like the myopic military officers he advised, he appeared to believe that the communists were somehow standing behind the religious leaders. While he pointed out that the Iranian generals “saw a Communist behind every mosque,” he also argued “that if Iran became an islamic Republic, it would eventually end up in the Communist camp.”

P. 255

* Huyser and Sullivan were getting mixed signal from different departments

Over dinner in the evening at the ambassador’s residence, Huyser and Sullivan would discuss the day’s events. After dinner they would both call Washington from two secure telephone circuits. In Sullivan’s words: On one line I would speak to Under Secretary of State Newsom or Assistaant Secretary Saunders. On the other, Huyser would speak with the chairman of the Joint Chiefs of Staff, David Jones, or with Secretary of Defense Hardold Brown. We would then compare notes after our conversations to try to sort out what Washington was attempting to convey to us. There were times when we felt we must have been talking to two different cities.

* They were professional but disagreed sharply on assessements — especially on military — and such division and mix signals were meant to be doomed at the time of crisis.

Since they were both thorough professionals, Huyser and Sullivan respected both one another and one another’s opinions, something that was uncommon among American decision makers in Washington. Nonetheless, they disagreed sharply in their assessement of the Iranian military. Sullivan felt it was deeply split, quite demoralized, and would fall apart in the face of the crisis that loomed ahead. Huyser curiously overestimated the strength of teh shah’s armed forces despite their leaders’ personal and professional rivalry, their appalling lack of planning, and their refusal to take responsiblity. Huyser witnessed this firsthand every day of the month he was in Tehran. When he drafted a cable to Washington giving his positive assessement of the military’s solidarity, he asked for Sullivan’s opinion. Sullivan said he did not agree, and Huyser included the dissenting view in the telegram. In a poignant moment after Huyser had left the ambassador’s office, Sullivan turned to his deputy chief of mission and said that he strongly believed his assessment to be correct, but “Goddamn, I wish in this case that I am wrong.” In the end, Sullivan was proven right; even Huyser came to admit that “Yes, the military did collapse, ten days after Khomeini returned to Iran and seven days after I departed.”

P. 256

* Civilians were brought in to determine the future the country. Also, the rivarly among officers.

Despite this, high-ranking American military advisers who remained in Iran after Huyser left were shocked by the February 1979 collapse of the Iranian military. In retrospect, they explained the collapse in the following terms. First, in a major meeting of four hundred flag and middle-grade officers, a decision was made to permit the civilian and constituational forces to determine the future of the country. Second, the hard-lin senior officers lost their credibility because of intense personal rivalries, infighting (especially in the air force), and clumsy political moves. General Manuchehr Khosrowdad, for example, took himself out of the game by intemperate, frontal verbal attacks on prime Minister Shapour Bakhtiar, who simply had him removed as commander of army aviation and relegated to the command of a secondary military support group.

* Some soldiers and middle-level officers due to religious proclivity, had switched sides to opposition along with some high-level officers. Many soldiers began defecting.

In general terms, no one should have been surprised by the collapse of the military. It had been under incredible pressure for months. The rank-and-file soliders were very religious and naturally susceptible to the ideas and proclamations of their cleric leaders. But even the officer class had been successfully penetrated, and a number of the high ranking officers began to work quietly with the opposition. These included such officers as Gens. Hatam, Na’ini, and Bakhshazar. The families of important military men were targeted for special attention and extraordinary pressures by teh religious revolutionaries. Throughout 1978 and early 1979, thousands upon thousands of soldiers had defected. By the time Gen. Abbas Qarabaghi became chief of staff in early December 1978, defections were numbering on thousand a day and rising.

* The opposition asserted that Sullivan had far more knowledge regarding the situation than general Huyers as he had closeted himself, communicating with top ranking generals only as a means of extracting information.

The Iranian revolutionary opposition considered Ambassador Sullivan much more knowledgeable about the situation in Iran than General Huyser. In their words: “While Sullivan situation, his views were ignored in Washington because they were bad news and therefore unacceptable. On the other hand, everyone eargerly awaited Huyser’s report.” In the opinion of the Iranian opposition, Huyser had “very little information” because he closeted himself only with the highest-ranking Iranian generals. In his own accounts, Huyser had admitted no contact whatsoever with the opposition forces and has indicated that he spent 4 1/2 to 7 or 8 hours every day (with one exception) with the Iranian commanders.

* Presence of military advisor rather than civilian fueled the extermists and oppositions.

Besides further dividing the policy-making establishment in Washington, the Huyser mission had profoundly negative effects in the Iranian political context. The opposition forces viewed Huyser’s presence as an obvious U.S. attempt to intervene directly and militarily in a last-ditch effort to save the Pahlavi regime. The fact that the United States had chosen to send a high-ranking military emissary rather than an important civilian diplomat hurt the secular moderate opposition and contribted to the extremist climate. The shah himself saw this as a hostile act designed to hasten his exit. And a small group of high-level Phalavi loyalists in the military viewed Huyser’s mission as an attempt to keep them froma bloody coup in order to install a military government.

P. 258

* After the untimely call to shah to express support of Jalah Square massacre, State Department wanted the president to contact Khomeini as a means to gain Iranian people’s support to squash the anti-Americanism sentiments which both Huyser and Sullivan agreed upon.

But Carter never did this. In fact he vetoed any direct American contacts with Ayatollah Khomeini, contact that was strongly recommended by most knowledgeable American advisers and that was a one issue on which both Ambassador Sullivan and General Huyser agreed. After seriously considering approving a mission that was to be headed by former State Department official Ted Eliot to meet with Khomeini in paris, Carter backed away when Brzezinski, through the means of the clever bureaucratic tactics of stalling and intrigue, smothered the idea.

http://www.spartacus.schoolnet.co.uk/USAmccloyJ.htm
The CHAIRMAN: JOHN J MCCLOY & THE MAKING OF THE AMERICAN ESTABLISHMENT
by Kai Bird

* John McCloy had strong ties with Iranian Shah through venture banking (Chase) and legal counsel, handling $2 billion/year of Iranian Eurodollar transactions.

John McCloy developed a close relationship with Mohammad Reza Pahlavi (Shah of Iran), who gained power in Iran during the Second World War. McCloy’s legal firm, Milbank, Tweed, Hadley & McCloy, provided legal counsel to Pahlavi. The Chase International Investment Corporation, which McCloy established in the 1950s, had several joint ventures in Iran.

Kai Bird (The Chairman: John J. McCloy: The Making of the American Establishment) has argued: “Each year, the bank handled some $2 billion in Iranian Eurodollar transactions, and throughout the 1970s Iran had at least $6 billion on deposit at various branches around the world.” As one financial commentator pointed out: “Iran became the crown jewel of Chase’s international banking portfolio.”

* Iran had half a billion in loans. McCloy tried to persuade Carter to protect shah. After shah fled, he argued that the U.S. has an obligation to protect him here in the States.

McCloy became concerned that Mohammad Reza Pahlavi would be overthrown. This was a major problem as outstanding loans to the regime amounted to over $500 million. McCloy went to see Robert Bowie, deputy director of the CIA. Bowie, who had just returned from Iran, was convinced that the communist Tudeh Party was behind the protests and were guilty of manipulating the Fedayeen and Mujahadeen. Over the next few months, McCloy organized a campaign to persuade President Jimmy Carter to protect the regime. This included David Rockefeller, Nelson Rockefeller and Henry Kissinger making deputations to the administration.

* But Carter feared that shah’s entry to the U.S. would cause an uproar in Tehran and result in endangering lives of American citizens.

McCloy asked President Carter to allow the Shah to live in the United States. Carter refused because he had told by his diplomats in Iran that such a decision might encourage the embassy being stormed by mobs. As a result McCloy made preparations for the Shah to stay in the Bahamas. David Rockefeller arranged for his personal assistant at Chase Manhattan, Joseph V. Reed, to manage the Shah’s finances.

* In return Rockefeller created plan, Project Alpha, to get shah into the U.S.. He used Chase money to buy favoritable views from the academic and also pressuring Carter through meetings and incessant nagging to officials with regard to the situation. They even mounted an attack through conservative magazines.

Rockefeller also established the highly secret, Project Alpha. The main objective was to persuade Carter to provide a safe haven for Mohammad Reza Pahlavi (code-named “Eagle”). McCloy, Rockefeller and Kissinger were referred to as the “Triumvirate”. Rockefeller used money from Chase Manhattan Bank to pay employees of Milbank, Tweed, Hadley & McCloy who worked on the project. Some of this money was used to persuade academics to write articles defending the record of Pahlavi. For example, George Lenczowski, professor emeritus at the University of California, was paid $40,000 to write a book with the “intention to answer the shah’s critics”.

Kissinger telephoned Zbigniew Brzezinski, National Security Advisor to Carter, on 7th April, 1979, and berated the president for his emphasis on human rights, which he considered to be “amateurish” and “naive”. Brzezinski suggested he talked directly to Jimmy Carter. Kissinger called Carter and arranged for him to meet David Rockefeller, two days later. Gerald Ford also contacted Carter and urged him to “stand by our friends”.

McCloy, Rockefeller and Kissinger arranged for conservative journalists to mount an attack on Carter over this issue. On 19th April, George F. Will wrote about Carter and the Shah and said; “It is sad that an Administration that knows so much about morality has so little dignity.”

McCloy had meetings with President Carter in the White House on 16th May and 12th June where he outlined his reasons for providing Mohammad Reza Pahlavi with sanctuary. Carter listened politely to his arguments but refused to change his mind.

During the summer of 1979 McCloy contacted Zbigniew Brzezinski, Cyrus Vance, Walter Mondale and Dean Rusk about the Shah being allowed to live in the United States. McCloy told them that Carter’s refusal to provide sanctuary to an old U.S. ally was “ungentlemanly” and dismissed the idea that lives in Iran might be jeopardized. Vance later recalled that: “John (McCloy) is a very prolific letter writer. The morning mail often contained something from him about the Shah”.

* After a while Brzezinski switched sides and advised Carter to let Shah in. Carter was very concern with the situation in Tehran and American embassy and truely was against shah’s invitation to the country.

In July 1979, Mondale and Brzezinski told Jimmy Carter that they had changed their minds and now supported asylum for the Shah. Carter replied: “F*** the Shah. I’m not going to welcome him here when he has other places to go where he’ll be safe.” He added that despite the fact that “Kissinger, Rockefeller and McCloy had been waging a constant campaign on the subject” he did not want the Shah “here playing tennis while Americans in Tehran were being kidnapped or even killed.”

* Rockefeller made a scene by indicating that if shah doesn’t get treatment, he’ll die and it’ll look aweful on administration. Carter finally reluctently gave permission to shah to come to the U.S.. Two weeks later, the Embassy is overrun.

In October, 1979, David Rockefeller’s assistant, Joseph V. Reed, called the State Department and claimed that the Shah had cancer and needed immediate treatment in a U.S. medical facility. Cyrus Vance now told Carter that the Shah should be allowed in as a matter of “common decency”. Carter’s chief of staff, Hamilton Jordan, argued that if the Shah died outside the United States, Kissinger and his friends would say “that first you caused the Shah’s downfall and now you’ve killed him.” Carter replied: “What are you guys going to advise me to do if they overrun our embassy and take our people hostage?”

Faced with the now unanimous opposition of his closest advisers, the president reluctantly agreed to admit the Shah. He arrived at New York Hospital on 22nd October, 1979. Joseph V. Reed circulated a memo to McCloy and other members of Project Alpha: “Our mission impossible is completed. My applause is like thunder.” Less than two weeks later, Iranian militants stormed the U.S. Embassy in Teheran and took hostage 66 Americans. Thus beginning the Iranian Hostage Crisis.

* McCloy asks for freeze of Iran’s assets, gulloping the loan as the interest payment was in default.

McCloy now persuaded Jimmy Carter to freeze all Iran’s assets in the United States. This was the day before Iran’s $4.05 million interest payment was due on its $500 million loan. As this was not now paid, Chase Manhattan Bank announced that the Iranian government was in default. The bank was now allowed to seize all of Iran’s Chase accounts and used this money to “offset” any outstanding Iranian loans. In fact, by the end of this process, the bank ended up in profit from the deal.

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http://wikileaks.org/wiki/US_Special_Forces_counter-insurgency_manual_FM_31-20-3
US Special Forces counter-insurgency manual FM 31-20-3

http://wikileaks.org/wiki/How_to_train_death_squads_and_quash_revolutions_from_San_Salvador_to_Iraq
How to train death squads and quash revolutions from San Salvador to Iraq

How to covertly train paramilitaries, censor the press, ban unions, employ terrorists, conduct warrantless searches, suspend habeas corpus, conceal breaches of the Geneva Convention and make the population love it

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# Halliburton #
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http://www.ameinfo.com/113274.html
Halliburton opens corporate headquarters in the United Arab Emirates
Halliburton Company (NYSE: HAL) announced at a regional energy conference in the Kingdom of Bahrain the opening of a corporate headquarters office in the United Arab Emirates.

Bahrain: Monday, March 12 – 2007 at 07:59

Based in Dubai, Lesar will work closely with Halliburton Eastern Hemisphere Senior Vice President Ahmed Lotfy to further strengthen the company’s activities in the Middle East, Africa, Asia Pacific and Europe/Eurasia regions.

‘This is already a strong market for Halliburton and we are excited to position the company in this key business area,’ he adds. ‘Halliburton continues to introduce innovative technologies, such as the Geo-Pilot® and EZ-PilotTM rotary steerable tools and GasPerm 1000 fracturing agent, among others, which help to enable our customers to recognize even greater returns on their drilling and production operations.’

Halliburton’s energy services operations have recently celebrated key contract wins, expanded service offerings across the divisions, and experienced increased utilization of integrated services and technologies throughout the Eastern Hemisphere. During 2006, more than 38 percent of Halliburton’s US$13 billion oil field services revenue was generated from the Eastern Hemisphere. The area encompasses four regions with more than 16,000 employees, more than 80 percent of which are localized.

http://www.independent.co.uk/news/world/americas/halliburton-from-bushs-favourite-to-a-national-disgrace-440126.html
Halliburton: From Bush’s favourite to a national disgrace

It is a symbol of American cronyism, the beneficiary of lucrative Iraq contracts thanks to its relationship with Dick Cheney. Now Halliburton is relocating to Dubai – and US politicians are outraged. By Andrew Buncombe

Wednesday, 14 March 2007

Halliburton, which is in the process of spinning off its KBR arm, has long enjoyed a close relationship with the Bush administration, and indeed, with previous US governments. It has most recently been in the public eye for its contracts in Iraq – the Logcap (or Logistics Civilian Augmentation Programme) under which it provides military support services such as meals, laundry and fuel supplies and the Restore Iraqi Oil (RIO) contract. Reports say the estimated value of the contracts stands at more than $25bn. A number of its contracts were awarded on a no-bid basis – which drew criticism not just from watchdogs but from other companies seeking their share of the spoils of the so-called Iraqi “reconstruction” projects.

Industry observers say Halliburton enjoys a near unique position within the US corporate world. “People always look at Dick Cheney and say he is the poster-boy of cronyism but at a bureaucratic level there has also been a lot of revolving doors from the Army Corps of Engineers to Halliburton or else consultants to Halliburton,” said Charlie Gray of HalliburtonWatch.Org, a project of the Centre for Corporate Policy, a non-profit group based in Washington. He added: “Given the multiple ongoing investigations into Halliburton’s alleged wrongdoing, policy-makers should closely scrutinise Halliburton’s latest move, and whether it will allow the company to further elude accountability. Moreover, this underscores the need for Congress to bar companies that have broken the law, or avoided paying taxes, from receiving federal contracts.”

Pratap Chaterjee, director of CorpWatch, another watchdog organisation, agreed that Halliburton’s position was remarkable. But he said the company was not simply close to the Bush administration – to which it has been a sizeable political donor – but that it had enjoyed a relationship with previous US administrations. He pointed out that KBR’s predecessor, Brown and Root, had operated in Vietnam and had faced similar accusations of over-charging and corruption as well as allegations that it was too close to President Lyndon Johnson. Indeed, a young Illinois congressman called Donald Rumsfeld travelled to Vietnam to investigate such allegations. Brown and Root also won contracts from President Bill Clinton for work in the Balkans. Long before that, Erle Halliburton, who died in 1957, had loaned his yacht to the US military during the Second World War.

http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=22571&version=%201&template_id=%2037&parent_id=17
US, UAE move to formalise military tiesPublished: Thursday, 13 January, 2005, 12:02 PM Doha Time

ABU DHABI: The US and the United Arab Emirates have held the first meeting of a Joint Military Commission (JMC) aimed at formalising their growing defence co-operation, a senior Pentagon official said yesterday.

Assistant Secretary of Defence for International Security Affairs Peter Rodman said the UAE would take delivery of the first batch of 80 US-built F-16 Falcon fighters in May and confirmed that an Emirati military air flight training centre involving “outside” countries was now operational.

“I’m here for what we hope will be the first of a regular series of bilateral meetings with our friends in the UAE,” Rodman said after he led a team from the Pentagon, Centcom and State Department in two days of talks with Emirati military officials headed by newly named armed forces chief of staff General Hamad Mohamed Thani al-Rumaithi.

“We have these forums with other friends around the world,” including a number of Arab countries, to “talk about co-operation, the strategic situation in the neighbourhood, sometimes arms sales … It’s a way of formalising interaction.”

http://www.time.com/time/business/article/0,8599,1171773,00.html

The Dubai Deal You Don’t Know About
Thursday, Mar. 09, 2006
By DAREN FONDA

Yet while one Dubai company may be giving up on U.S. ports, another one shows no signs of quitting the U.S.—or of giving up a contract with the Navy to provide shore services for vessels in the Middle East. The firm, Inchcape Shipping Services (ISS), is an old British company that last January was sold to a Dubai government investment vehicle for $285 million. ISS has more than 200 offices around the world and provides services to clients ranging from cruise ship operators to oil tankers to commercial cargo vessels. In the U.S., the company operates out of more than a dozen port cities, including Houston, Miami and New Orleans, arranging pilots, tugs, linesmen and stevedores, among other things. The firm is also a defense contractor which has long worked for Britains Royal Navy. And last June, the U.S. Navy signed on too, awarding ISS a $50 million contract to be the husbanding agent for vessels in most Southwest Asia ports, including those in the Middle East, according to an unclassified Navy logistics manual for the Fifth Fleet and a press release from ISS.

Why is a Dubai shipping services company doing business with the Pentagon when handing over U.S. port operations to the emirate would supposedly compromise national security? Because it makes sense. Call it the reality of living in a globally connected business world. Your IBM laptop is now manufactured by a Chinese company that may outsource customer support to an Indian firm and the logistics to FedEx. Dubai companies aren’t just buying overseas assets like hotels in New York and wax museums in London; they’re providing jobs and business for U.S. companies. Boeing, for one, can only hope it doesn’t receive a frosty reception the next time it wants to sell airplanes to Dubai’s booming airline, Emirates. Rival Airbus would be more than happy to take advantage of Washington’s creeping protectionism.

The Navy, for one, has long understood that it would be virtually impossible to rely solely on Western-owned companies for critical services. It simply couldnt operate without local firms providing logistics support at the 200 ports its ships visit around the world. After the bombing of the USS Cole in 2000, the Navy undertook a wide-scale review of contracting procedures, including those involving ship husbanding. As a result of that review, the Navy took several steps to increase the security of ships in foreign ports, but maintained its system of contracting. We’ve been doing business in the Persian Gulf for 60 years, says a Navy official who was unable to confirm the details of the ISS contract. Moreover, Dubai is considered one of the best-equipped ports for the Navy—its also a crucial logistical base for operations in the region, including those in Iraq and Afghanistan.

http://www.ratical.org/ratville/CAH/linkscopy/HCtOiI.html

Halliburton Connected to Office in Iran

Dow Jones, 1 February 2001

Halliburton Co., the U.S. oil-services giant until recently headed by Vice President Richard Cheney, has opened an office in Tehran and operated in Iran in possible violation of U.S. sanctions, Thursday’s Wall Street Journal reported.

Since 1995, U.S. laws have banned most American commerce with Iran. Halliburton Products and Services Ltd. works behind an unmarked door on the ninth floor of a new north Tehran tower block. A brochure declares that the company was registered in 1975 in the Cayman Islands, is based in the Persian Gulf sheikdom of Dubai and is ‘non-American.’ But, like the sign over the receptionist’s head, the brochure bears the Dallas company’s name and red emblem, and offers services from Halliburton units around the world.

But a U.S. official said a Halliburton (HAL) office in Tehran would violate at least the spirit of American law. The Treasury Department’s Office of Foreign Assets Control declined to comment on a specific company, referring inquiries to a Web site summary of Iran sanctions that bans almost all U.S. trade and investment with Iran, specifically in oil services. The Web site adds: ‘No U.S. person may approve or facilitate the entry into or performance of transactions or contracts with Iran by a foreign subsidiary of a U.S. firm that the U.S. person is precluded from performing directly. Similarly, no U.S. person may facilitate such transactions by unaffiliated foreign persons.’

http://www.guardian.co.uk/world/2004/feb/12/iran.oil
Halliburton faces Iran inquiry
David Teather in New York
The Guardian, Thursday February 12, 2004

Halliburton, the company formerly run by Dick Cheney, the US vice-president, was last night facing another investigation, this time over possible business dealings with Iran.
The oil services company said it had received a letter from the US treasury department, informing it that an inquiry into allegations that Halliburton might have broken trade embargoes had been reopened.

The investigation relates to when Mr Cheney was running the company. He was chief executive between 1995 and 2000 before quitting to run for office with George Bush, taking with him a $36m (£19m) severance package.

Halliburton said the investigation, originally begun in 2001, had been reopened but gave no other detail. Reuters quoted treasury sources saying that new information had come to light which prompted a fresh investigation.

The news agency claimed to have seen documents which detailed business dealings between a Halliburton subsidiary registered in the Cayman Islands and an Iranian oil company called Kala.

http://www.foxnews.com/story/0,2933,134836,00.html
Cheney Pushed for More Trade With Iran

Saturday, October 09, 2004

Vice President Dick Cheney (search), who has called Iran “the world’s leading exporter of terror,” pushed to lift U.S. trade sanctions against Tehran while chairman of Halliburton (search) Co. in the 1990s. And his company’s offshore subsidiaries also expanded business in Iran.

Democratic vice presidential candidate John Edwards (search) criticized Cheney in Tuesday night’s debate for his position on Iran during the 1990s, and Edwards said he supports expanding the sanctions against Iran.

Cheney countered that he now supports sanctions against Iran but sidestepped the issue of Halliburton’s involvement, saying it was being raised by Democrats “to try to confuse the voters.”

Halliburton’s foreign subsidiaries did about $65 million in business with Iran last year, company documents say. A federal grand jury is investigating whether Halliburton or its executives deliberately violated the U.S. ban on trade with Iran.

Foreign subsidiaries of American companies can do business with Iran as long as no Americans participate in or direct that business. Halliburton says it did not break that law.

While he headed the Houston-based oil services and construction company, Cheney strongly criticized sanctions against countries like Iran and Libya. President Clinton cut off all U.S. trade with Iran in 1995 because of Tehran’s support for terrorism.

Cheney argued then that sanctions did not work and punished American companies. The former defense secretary complained in a 1998 speech that U.S. companies were “cut out of the action” in Iran because of the sanctions.

At an energy industry conference in 1996, Cheney said sanctions were the greatest threat to Halliburton and other American oil-related companies trying to expand overseas.

“We seem to be sanction-happy as a government,” Cheney said. “The problem is that the good Lord didn’t see fit to always put oil and gas resources where there are democratic governments.”

Although Cheney maintained his opposition to unilateral U.S. sanctions during his first months as vice president, the Bush administration renewed the trade ban with Iran in March 2001.

“It is neither prudent nor appropriate for our company to establish our own country-by-country foreign policy,” Halliburton said in a January statement amid criticism of its Iran deals.

Much of Halliburton’s business with Iran comes through Halliburton Products & Services Ltd., a subsidiary incorporated in the Cayman Islands and based in the United Arab Emirates. Halliburton Products & Services opened a Tehran office in early 2000, before Cheney left Halliburton to become Bush’s running mate.

Halliburton Products & Services Ltd. does between $30 million and $40 million in business each year with Iran, Halliburton said in response to a challenge by New York City Comptroller William Thompson Jr. Other foreign subsidiaries did about $25 million in business with Iran in 2003, the company said.

Halliburton also has kept alive a U.S.-based subsidiary called Kellogg Iran, Inc. Halliburton spokeswoman Cathy Gist said that company has not done anything since 1977, before Cheney acquired Kellogg Iran’s former parent company for Halliburton.

http://lautenberg.senate.gov/documents/foreign/REPORT_Halliburton_Iran.pdf
DICK CHENEY, IRAN AND HALLIBURTON:
A GRAND JURY INVESTIGATES SANCTIONS VIOLATIONS

At issue is a foreign subsidiary of Halliburton, called “Halliburton Products & Services Limited,” that has only one source of revenue: business with the Iranian government and its national oil company. While U.S. sanctions law prohibits American companies, like Halliburton, from doing business with Iran, a loophole in the law allows the foreign subsidiaries of a U.S. company to conduct business with terror-sponsoring states. However, Halliburton may have
egregiously abused that loophole by conducting decision-making on Iran operations not out of the foreign subsidiary, but out of the U.S. parent company or its U.S.-based subsidiaries – a serious violation of the law.

In order to comply with terrorist sanctions law, neither Halliburton (the U.S. parent company) nor any of its U.S. subsidiaries here or overseas can engage in any decision making with regard to, or become involved in, business transactions between the foreign subsidiary – Halliburton Products and Services – and Iran. The foreign subsidiary must be truly independent in order to legally take advantage of the loophole.

After initially closing an investigation of Halliburton in early 2001, the Treasury Department’s Office of Foreign Assets Control reopened the case in January 2004, after CBS News’ 60 Minutes broadcast an expose of Halliburton Products and Services’ longtime business practices with Iran.

IS HALLIBURTON LIMITED AN INDEPENDENT SUBSIDIARY?
In order to abide by U.S. terrorist sanctions law, Halliburton Limited must maintain a completely separate and independent operation from any U.S. subsidiary of Halliburton. But as this page from Halliburton’s online corporate directory shows, Halliburton Limited shares an office suite, phone and fax lines with KBR, Halliburton’s U.S. subsidiary. It is hard to argue that Halliburton is maintaining such independence when the two subsidiaries are so intertwined: ( http://www.halliburton.com/ofc_loc/location_search.jsp?USA=0&rgn=ME&cnt=United%20Arab%20Emirates )

[W]hen Vice President Cheney was chief executive of Dallas-based Halliburton Co., a major oil equipment supply company, in the mid-1990s, he blasted the
Iran sanctions as “self-defeating.” “There seems to be an assumption that somehow we know what’s best for everybody else, and that we are going to use our economic clout to get everybody else to live the way we would like,” he said in 1996 in Abu Dhabi, in the United Arab Emirates.

– John Ward Anderson, “Iran Throwing Off Its Isolation; U.S. Remains Dubious After Decades of Mutual Distrust,” The Washington Post, March 31, 2001, p. A18

“We’re kept out of there primarily by our own government, which has made a decision that U.S. firms should not be allowed to invest significantly in Iran,
and I think that’s a mistake.”

“While American companies have to sit on the sidelines, oil companies from the rest of the world have invested in Iran’s energy sector, sometimes without
operating the same high standards.”

– Dick Cheney Speech before the World Petroleum Congress Calgary, Canada June 13, 2000 (the month before joining the Bush-Cheney ticket)

Halliburton’s 1997 Year End lobbying report filed with the Senate and the House of Representatives. The lobbying report indicates that Iran and Libya sanctions were one of the few issues Halliburton focused its lobbying efforts on in that year, while Dick Cheney was CEO. Halliburton’s 1998 lobbying reports have similar references to lobbying on Iran and Libya sanctions.

http://www.sec.gov/Archives/edgar/data/45012/000004501204000228/edjune10q2004_final.htm
FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004

OR

[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____

Commission File Number 1-3492

HALLIBURTON COMPANY

(a Delaware Corporation)
75-2677995

5 Houston Center
1401 McKinney, Suite 2400
Houston, Texas 77010
(Address of Principal Executive Offices)

Telephone Number – Area Code (713) 759-2600

P. 27

Operations in Iran. We received and responded to an inquiry in mid-2001 from the Office of Foreign Assets Control (OFAC) of the United States Treasury Department with respect to operations in Iran by a Halliburton subsidiary that is incorporated in the Cayman Islands. The OFAC inquiry requested information with respect to compliance with the Iranian Transaction Regulations. These regulations prohibit United States citizens, including United States corporations and other United States business organizations, from engaging in commercial, financial, or trade transactions with Iran, unless authorized by OFAC or exempted by statute. Our 2001 written response to OFAC stated that we believed that we were in full compliance with applicable sanction regulations. In January 2004, we received a follow-up letter from OFAC requesting additional information. We responded fully to this request on March 19, 2004. We understand this matter has now been referred by OFAC to the Department of Justice. In July 2004, we

P. 65

Office of Foreign Assets Control inquiry
We have a Cayman Islands subsidiary with operations in Iran, and other European subsidiaries that manufacture goods destined for Iran and/or render services in Iran. The United States imposes trade restrictions and economic embargoes that prohibit United States incorporated entities and United States citizens and residents from engaging in commercial, financial, or trade transactions with some foreign countries, including Iran, unless authorized by the Office of Foreign Assets Control (OFAC) of the United States Treasury Department or exempted by statute.

We received and responded to an inquiry in mid-2001 from OFAC with respect to the operations in Iran by a Halliburton subsidiary that is incorporated in the Cayman Islands. The OFAC inquiry requested information with respect to compliance with the Iranian Transaction Regulations. Our 2001 written response to OFAC stated that we believed that we were in full compliance with applicable sanction regulations. In January 2004, we received a follow-up letter from OFAC requesting additional information. We responded fully to this request on March 19, 2004. We understand this matter has now been referred by OFAC to the Department of Justice. In July 2004, we received from an Assistant United States Attorney for the Southern District of Texas a grand jury subpoena requesting the production of documents. We intend to cooperate with the government’s investigation. As of June 30, 2004, we had not accrued any amounts related to this investigation.

Separate from the OFAC inquiry, we completed a study in 2003 of our activities in Iran during 2002 and 2003 and concluded that these activities were in full compliance with applicable sanction regulations. These sanction regulations require isolation of entities that conduct activities in Iran from contact with United States citizens or managers of United States companies.
We have been asked to and could be required to respond to other questions and inquiries about operations in countries with trade restrictions and economic embargoes.

http://www.hirhome.com/iraniraq/savak.htm

http://www.time.com/time/magazine/article/0,9171,952735-1,00.html

Idioms

*********An albatross around one’s neck

Meaning

A burden which some unfortunate person has to carry.

Origin

A reference to the poem The Rime of the Ancient Mariner by Samuel Taylor Coleridge, in which the character who shot an albatross is obliged to carry the bird hung around his neck.

God save thee, ancient Mariner
From the fiends, that plague thee thus
Why look’st thou so ? – With my cross-bow
I shot the ALBATROSS.
…
Ah. well a-day. what evil looks
Had I from old and young
Instead of the cross, the Albatross
About my neck was hung.

**********Pipe dream

Meaning

An unrealistic hope or fantasy.

Origin

pipe dreamThe allusion is to the dreams experienced by smokers of opium pipes. Opiates were widely used by the English literati in the 18th and 19th centuries. Samuel Taylor Coleridge was one of the best known users, and it would be difficult to claim that the imagery in surreal works like Kubla Khan owned nothing to opium. Lewis Carroll, although not known to be an opium user himself, makes clear allusions to drug use in Alice’s Adventures in Wonderland. Sir Arthur Conan Doyle has his hero Sherlock Holmes visit an opium den – although that was for research rather than consumption.

It’s strange then that ‘pipe dream’ comes from none of these sources but has an American origin. The early references to the phrase all originate from in or around Chicago. The earliest I have found is from The Chicago Daily Tribune, December 1890:

“It [aerial navigation] has been regarded as a pipe-dream for a good many years.”

The first that associates the phrase with opium smoking is from The Fort Wayne Gazette, September 1895:

“There are things taking place every day in Chicago which are are devoid of rational explanation as the mysterious coinings of the novelist’s brain. Newspaper men hear of them, but in the rush for cold, hard facts, the ‘pipe stories’, as queer and unexplainable stories are called, are at a discount. Were it not for this the following incident, which can be verified by the word of several reputable men, would have long ago received the space and attention it merits instead of being consigned to the wastebasket as the ‘pipe dream’ of an opium devotee.”

[The piece goes on to describe an incredible story, apparently believed by the reporter, of a mystic incident in which a man foretells in detail the suicide of another man. It rather makes one wonder what the reporter had been smoking]

In his 1896 play, “Artie – A Story of the Streets and Town”, the American columnist and playwright George Ade penned this line:

“But then I was spinnin’ pipe dreams myself, tellin’ about how much I lose on the board and all that.”

It seems clear that that Ade would have expected his audience to have prior knowledge of it. He goes to no effort to explain it in the play and the meaning wouldn’t have been clear otherwise.

*********Flash in the pan

Meaning

Something which disappoints by failing to deliver anything of value, despite a showy beginning.

Origin

There’s reason to believe that this phrase derives from the Californian Gold Rush of the mid 19th century. Prospectors who panned for gold supposedly became excited when they saw something glint in the pan, only to have their hopes dashed when it proved not to be gold but a mere ‘flash in the pan’. This is an attractive and plausible notion, in part because it ties in with another phrase related to disappointment – ‘it didn’t pan out’. ‘Panning out’ can be traced to US prospectors and was used in that context by the early 20th century. For example, Paul Haworth’s Trailmakers of the Northwest, 1921:

“The Colonel had told them that a cubic foot of gravel would pan out twenty dollars in gold.”

flash in the panNevertheless, gold prospecting isn’t the origin of ‘a flash in the pan’. The phrase did have a literal meaning, i.e. it derives from a real flash in a real pan, but not a prospector’s pan. Flintlock muskets used to have small pans to hold charges of gunpowder. An attempt to fire the musket in which the gunpowder flared up without a bullet being fired was a ‘flash in the pan’.

The term has been known since the late 17th century. Elkanah Settle, in Reflections on several of Mr. Dryden’s plays 1687, had this to say:

“If Cannons were so well bred in his Metaphor as only to flash in the Pan, I dare lay an even wager that Mr. Dryden durst venture to Sea.”

************* catch-as-catch-can

1. (idiomatic) intermittent; only when possible or when the opportunity presents itself

My efforts lately have been catch-as-catch-can, not carefully planned.

* a. 1681, John Fryer, Richard Chiswell, Robert Roberts, Robert White, A New Account of East-India and Persia, in Eight Letters, Being Nine Years Travels, Begun 1672 and Finished 1681

Which being done, the Women run in the dark to catch as catch can ; and whatever Lot they light on,

*************** Wet behind the ears

Meaning

Naive.

Origin

The allusion is to the inexperience of a baby, so recently born as to be still wet.

This phrase was in circulation in the USA in the early 20th century – twenty years before it was first recorded elsewhere. The converse of the phrase – ‘dry back of the ears’, was also known in the USA from around the same date. That was recorded in the American Dialect Society’s Dialect Notes IV, 1914:

“Dry back of the ears, mature; – of persons.”

The earliest citation I can find for ‘wet behind the ears’ is from the Portsmouth Daily Times, October 1911:

“There is not much in the matter so far as the organ [the courthouse record] is concerned except it is so new that it is wet behind the ears yet”.

************** sucking hind tit

Not getting a fair share. Many female mammals have multiple rows of breasts, for example dogs. Typically the rear most pair of breasts is smaller and less developed than the rest. Hence a pup nursing from the rear most breast is likely to receive less milk than other nursing pups. Hind means rear most. Tit is slang for breast.
Since the introduction of Windows ’95, Apple Computer has been sucking hind tit.

************* Cadmean victory

A victory won at as great a cost to the victor as to the vanquished.

*************** Prosopagnosiacs’ motto

We don’t take people at face value.

Prosopagnosia is also known as face blindness, usually a result of brain injury. People suffering from it cannot recognize familiar faces, even their own.

*************** Illegitimi non carborundum

is a mock-Latin aphorism meaning “Don’t let the bastards grind you down”.

**************** Ignoratio elenchi

(also known as irrelevant conclusion[1] or irrelevant thesis) is the informal fallacy of presenting an argument that may in itself be valid, but does not address the issue in question. “Ignoratio elenchi” can be roughly translated by ignorance of refutation, that is, ignorance of what a refutation could logically be; “elenchi” (genitive singular of the Latin elenchus) is from the Greek ??e????, meaning an argument of disproof or refutation

***************** Ignotum per ignotius,

a Latin phrase meaning literally “the unknown by the more unknown,” is an explanation more unfamiliar than the concept which it seeks to explain.

For example, “The oven felt hot because of Fourier’s Law.” It is unlikely that a person unfamiliar with the hotness of ovens would be illuminated by a reference to the fundamental laws of physics. Of course, such a person might exist in theory, so ignotum per ignotius is not strictly a logical fallacy; it is just a criticism of an argument which is not useful in a particular context.

***************** Ignotum per æque ignotum,

meaning “the unknown by the equally unknown”, is a related form of fallacy in which one attempts to prove something unknown by deducing it from something else which is also not known to be true

*********** The Greek phrase Molon labe! (????? ?aß?; approximate Classical Greek pronunciation [mol?`?n labé], Modern Greek [mo’lon la’ve]), meaning “Come and take them” is a classical expression of defiance reportedly by King Leonidas in response to the Persian army’s demand that the Spartans surrender their weapons at the Battle of Thermopylae. It corresponds roughly to the modern equivalent English phrase “over my dead body”, “bring it on” or, most closely, “come and get it”. It is an exemplary use of a laconic phrase.

**************** A Tom Swifty (or Tom Swiftie) is a phrase in which a quoted sentence is linked by a pun to the manner in which it is attributed. Tom Swifties may be considered a type of Wellerism.

Origins

The name comes from the Tom Swift series of books (1910–1993), similar in many ways to the better-known Hardy Boys and Nancy Drew series, and, like them, produced by the Stratemeyer Syndicate. In this series, the young scientist hero, Tom Swift, underwent adventures involving rocket ships, ray-guns and other things he had invented. A stylistic idiosyncrasy of at least some books in this series was that the author, “Victor Appleton,” went to great trouble to avoid repetition of the unadorned word “said”; elegant variation used a different quotative verb, or modifying adverbial words or phrases. Since many adverbs end in “ly” this kind of pun was originally called a Tom Swiftly, the prime example being “We must hurry,” said Tom Swiftly. At some point, this kind of humor was called a Tom Swifty, and that name is now more prevalent.

This excerpt (with emphasis added) from the 1910 novel Tom Swift and His Airship illustrates the style:

“Oh, I’m not a professor,” he said quickly. “I’m a professional balloonist, parachute jumper. Give exhibitions at county fairs. Leap for life, and all that sort of thing. I guess you mean my friend. He’s smart enough for a professor. Invented a lot of things. How much is the damage?”

“No professor?” cried Miss Perkman indignantly. “Why I understood from Miss Nestor that she called some one professor.”

“I was referring to my friend, Mr. Swift,” said Mary. “His father’s a professor, anyhow, isn’t he, Tom? I mean Mr. Swift!”

“I believe he has a degree, but he never uses it,” was the lad’s answer.

“Ha! Then I have been deceived! There is no professor present!” and the old maid drew herself up as though desirous of punishing some one. “Young ladies, for the last time, I order you to your rooms,” and, with a dramatic gesture she pointed to the scuttle through which the procession had come.

“Say something, Tom — I mean Mr. Swift,” appealed Mary Nestor, in a whisper, to our hero. “Can’t you give some sort of a lecture? The girls are just crazy to hear about the airship, and this ogress won’t let us. Say something!”

“I — I don’t know what to say,” stammered Tom.

The Tom Swifty, then, is a parody of this style with the incorporation of a pun.
[edit] Examples

* “Who left the toilet seat down?” Tom asked peevishly.
* “Pass me the shellfish,” said Tom crabbily.
* “That’s the last time I’ll stick my arm in a lion’s mouth,” the lion-tamer said off-handedly.
* “Can I go looking for the Grail again?” Tom requested.
* “I unclogged the drain with a vacuum cleaner,” said Tom succinctly.
* “I might as well be dead,” Tom croaked.
* “We just struck oil!” Tom gushed.
* “They had to amputate them both at the ankles,” said Tom defeatedly.
* “Who discovered radium?” asked Marie curiously.
* “The Battle of the Nile? A lot of fun!” said Lord Nelson disarmingly.
* “Hurry up and get to the back of the ship,” Tom said sternly.
* “Would you like to ride in my new ambulance?” asked Tom hospitably.
* “Who put the moss in the bog again?” asked Tom repeatedly.
* “A word that contains all six vowels? And I suppose you want those vowels to appear in alphabetical order?” asked Tom facetiously.
* “Charlatan! Pretender! Mountebank! Quack! Rogue!” said Tom euphoniously.
* “I’m not going to evangelize the rest of the neighborhood,” concluded Tom distractedly.
* “The robber is coming down the stairs,” said Tom condescendingly.
* “Nnnn”, Tom murmured forensically.
* “I think I’m a homosexual,” said Tom half in earnest.
* “I am the bone lord,” Tom proclaimed skulkingly.
* “I know who turned out the lights,” Tom hinted darkly.
* “I dropped my toothpaste,” said Tom crestfallenly.
* “Only one of my speakers works!” said Tom monotonously.
* “I have a split personality,” said Tom being frank.
* “It’s great to be camping,” said Tom with intent.
* “Baa,” said Tom sheepishly.
* “It’s obvious I’ve lost my job,” said Tom redundantly.
* “I can’t wait to get off this boat” said Tom assuredly.
* “Let’s take this song in cut time,” said Tom intuitively.
* “I don’t like nun’s clothing,” said Tom habitually.
* “Don’t you fire that gun at me,” Tom shot back.

As will be seen, the standard syntax is for the quoted sentence to be first, followed by the description of the act of speaking. The hypothetical speaker is usually, by convention, called “Tom” (or “he” or “she”), unless some other name is needed for the pun (as in the Marie Curie and Lord Nelson examples above).

********** Wellerisms, named for Sam Weller in Charles Dickens’s The Pickwick Papers, make fun of established proverbs by showing that they are wrong in certain situations, often when taken literally. In this sense, wellerisms that include proverbs are a type of anti-proverb. Typically a Wellerism consists of three parts: a proverb or saying, a speaker, and an often humorously literal explanation.

Some researchers concentrated on wellerisms found in English and European languages, but Alan Dundes documented them in the Yoruba language of Nigeria (Dundes 1964), with African scholars confirming and adding to his findings (Ojoade 1980, Opata 1988, 1990). They are also found in ancient Sumerian “The fox, having urinated into the sea, said: ‘The depths of the sea are my urine!'”

A special format for Wellerisms called a Tom Swifty incorporates a punning adverb that modifies the manner in which the statement was related.
[edit] Examples

* “Everyone to his own taste,” the old woman said when she kissed her cow.
* “We’ll have to rehearse that,” said the undertaker as the coffin fell out of the car.
* A body can get used to anything, even to being hanged, as the Irishman said. (Lucy Maud Montgomery–Anne of Green Gables)
* “This week is beginning splendidly,” said one who was to be hanged on Monday.
* “Much noise and little wool,” said the Devil when he sheared a pig.
* “So I see,” said the blind man as he picked up his hammer and saw.

Intelligent Design vs. Evolution

By materialism I don’t mean consumerism. I’m not talking about people who are greedy for material things. I’m talking about a philosophical system that explains what is real and what is not. A philosophical materialist believes that everything is, at the bottom, material composition. You start with the fundamental particles that compose matter and energy.

Another word for essentially the same thing is naturalism. It’s stated a little bit differently. Naturalism says nature is all there is, and nature is made of those particles. (Don’t let the distinction between matter and energy confuse you on this, because energy, like matter, is composed of particles according to the naturalistic viewpoint.)

What bothers me with ID’s approach is the undeniable “philosophical” implication that it carries with the message. Not only that, there is a proclivity to beat evolutionists with the club of “immorality” under the umbrella of “materialism” or “naturalism.” They first associate evolution with aforementioned school of philosophies, then hammer their stand-point by asserting how the humanity, as we know it, would dangerously come to extinction if these school of thoughts are promoted through “Darwinism.” Oh for crying out loud! I thought we are talking science not philosophy! Straw man fallacy at its worst.

Another aspect of ID that baffles me is why the proponents, especially the religious people who do not necessary cognizant of its various parameters, are perturbed by the mention of evolution theory as if there is an attempt to snap “God” away from them and throw him down the abyss of evanescence. To my limited knowledge, evolution does not question the existence of deity of any sort — it merely pursuits to assay the existing set of data and to draw the best educated assessment according to the evidence; right or wrong in the sense of scientific conclusion, I am not going to venture in that as I have limited knowledge in such field. It could well be concluded by religious community that “God” has concerted the universe based on a set of fundamental principles (i.e. Anthropic Principle) which would construct itself in such a way that it is perceived today.

Also our inate sense of right and wrong comes from the fact that we live in social environment and would have died out long ago if we spent the entire time annoying our neighbours by killing their kids and stealing their food. The simple fact that you tried to justify your belief in god proves it’s not faith that you have, but reliance on misinformation.

mathematically Creationism requires Super-Evolution

evolution doesn’t necessary reward intelligence

What evolution does say about life on Earth is that: (a) All life on Earth examined so far appears to have developed by ‘descent with modification’; the common ancestry of all life on Earth has been very firmly established by multiple lines of evidence. (b) No biological structures or species have been identified that could not have arisen by a relatively gradual series of individually-advantageous steps. (In many cases, the individual steps have been illustrated by fossils, molecular evidence, etc.)

Bacteria did not up and evolve into humans. They evolved into slime-mold like bacteria colonies, and then everything went up from there.

Biological evolution is not faith. It’s as much a fact as Earth orbiting the Sun. The fossil record no longer leaves room for reasonable doubt that evolution does happen. That “what” aspect of evolution is backed by data. The “how” aspect is less clear, which is why biological evolution is rightfully called a theory.

Not believing in evolution is like not believing in the sun, it doesnt really matter because its still there. A fairy tale is some whispy old man with a snowy white beard breathing some halitosis into a pile of dirt and forming man. A fairy tale is a middle aged jew moving a trillion gallons of water with sign language. Dont insult science by applying your archaic belief system to it, but take your skepticism and want for evidence that you hold for evolution and apply it to creationism.

The Discovery Institute’s mission is to fabricate reasons to deny the 150 years of research that stands behind the theory of evolution because it contradicts a literal interpretation of the book of Genesis. Has Dr. West ever heard of Galileo?

Scientists will admit to mistakes in measurement, lack of sufficient data, failure to properly consider alternate explanations, etc., but bluntly admitting they lack the basic rationality to formulate theories, which they would immediately and honestly abandon when new facts or better explanations appear, strikes directly at their self-image and the cultural prestige they have worked so hard to obtain.

And, implying that our selfish emotional structure would unconsciously or, worse yet, consciously control a scientist’s reasoning when examining data or interpreting measurements invokes considerable angst among its practitioners. In fact, such a reality claim, if it were proven true, veers dangerously close to the religious concept of “original sin”.

Which brings us to another point I would like to establish here, a blatant, affronted political motivation of ID which is strongly backed by religious institutions. Here is why such assumption is strongly devisable; Evolution by itself does not shake the foundation of theism, that is, it does not contrive to take the possibility of existence, not in a natural sense, of supernatural being out of the equation — we leave that to philosophers. But the gist of TE does go up against what religious dogma has been preaching and what it has offered as a fact. This would congenitally ultimately paint a fraudulent picture of religion as we know it. To no surprise, this “upsets” the religious community which in turn would back an opposing movement, ironically Intelligent Design. So it is not discriminatory to state that religious folks have a political gain in their support for ID.

Such credence is mostly highlighted by the fact that, due to religious background of ID members, it is not naive to assume that their belief system is influencing the process of what is considered a norm in scientific methodologies. That is, the assumption has already been established (there is a God), now the premise is contrive by all means. I thought the science works the other way around, you state a hypothesis, then try to establish that point! So once again, it is bewildering to witness all these philosophical raving being thrown around while the actual scientific finding is being discarded — not saying ID or ToE are being disingenuous with regards to presenting the “data” but rather when it comes to battling off the details, the discussion astray to philosophy.

Besides, what would be a tantamount to evolution when it comes to the actual putting down Intelligent Design for school curriculum? If ID is ONLY “negating” the evolution argument, then ID has no discourse for teachers to go on. In other word, if ID is stating “evolution” is wrong, then what is it presenting in its replacement? God created all the life form and…? That’s it? Well, aren’t we getting that from religious institutions already? Unless ID’s finding vouches to take evolution to be taken out of the program in its entirely! Please note that I am not, in any shape or form, suggesting evolution is “the” answer and Intelligent Design Theory is bluntly wrong, but if ID reproaches evolution, then allow this “challenge” to be examined in its scientific domain because augmenting the “designer” into the discussion adds no value in the scientific disquisition.

Moreover, if ID is only disproving evolution, then I think anyone can see its offering would be entirely devolutionary to the science curriculum because in one hand we are telling students this is how we have evolved and the next thing you know, well… “it didn’t really happen that way!!!” What is the student to write on the final paper? So at the end, it’s either evolution or ID — you cannot have both at the same time. Am I missing something here? Again, I hope my point is clear that I am not suggesting one theory is more valid than the other (not yet at least) but rather absurdness of “both” theories being presented in the educational bubble.

There are other possibilities that belie the assertion that “everybody knows” the identity of the designer. It might be a kid named Oorv who exists in the 22nd dimensions of space and the 3rd dimension of time, and our 4th space-time dimension are his science project this semester (all held in a crystal sphere no bigger to him than a baseball).

It might be a master musician with no name who exists in Uber-Brane and all universes are effects of vibrational harmonics arising through his unimaginable instrument.

It’s a fact that the language of science is a developing practice.

Solutions that scientists have devised should be considered qualified and provisional

If one day some scientist discovered an ‘ectoplasmic dimension’ in which ghosts resided, and a method for reliably observing it, then ghosts would cease to be considered supernatural as the borders of what we consider ‘natural’ expanded. Conversely, to someone operating out of an earlier Cartesian or Newtonian framework of physical theory, the behavior contemporary scientists ascribe to quanta would seem blatantly magical.

Theism is the belief that God not only created the universe of mind and nature, but also continually sustains its operation. In contrast to: atheism (no God); pantheism (God equals the universe); panentheism (the universe is a ‘small’ part of God); and deism (God created an independent universe).

The anthropic principle states that humans should take into account the constraints that human existence as observers imposes on the sort of universe that could be observed. Originally proposed as a rule of reasoning, the term has since been extended to cover supposed “superlaws” that in various ways require the universe to support intelligent life, usually assumed to be carbon-based, and occasionally to be specifically human beings.

Anthropic reasoning involves assessing these constraints by analyzing the properties of universes with different fundamental parameters or laws of physics from the current one, and has frequently concluded that essential structures, from atomic nuclei to the whole universe, depend, for stability, on delicate balances between different fundamental forces.

the odds against DNA assembling by chance are 1040,000 to one [according to Fred Hoyle, Evolution from Space,1981]. This is true, but highly misleading. DNA did not assemble purely by chance. It assembled by a combination of chance and the laws of physics. Without the laws of physics as we know them, life on earth as we know it would not have evolved in the short span of six billion years.

The nuclear force was needed to bind protons and neutrons in the nuclei of atoms; electromagnetism was needed to keep atoms and molecules together; and gravity was needed to keep the resulting ingredients for life stuck to the surface of the earth.
–Victor J. Stenger

Science leaves open the question of whether those laws were designed. That is a metaphysical question. Believing the universe or some part of it was designed or not does not help understand how it works.

“Darwinism” is not a scientific term; it is a polemical term—like Maoism—designed to incite opposition to evolution. Scientists who raise objections are denigrated as “dogmatic” preachers of the religion of “scientism.”

“Darwinism” is a pejorative term concocted by religious community (I am talking to you Christians), as a polemic lingo to incite opposition against science. And this short-sighted twit getting materialistic and materialism (school of philosophy) mixed up is nothing short of a cretinous blind follower seeking mental sanitation by licking off sordid human ejaculation off of public restroom toilet seats.

“Evolution is theory not fact” should be regarded by everyone with a decent education as offensive insult to one’s intellect as awful one-liners from days past like “one man, one vote” and “segregation NOW, segregation forever.” It’s pig-ignorance from fundamentalists who don’t understand science, don’t WANT to understand science since they haven’t even made a slight effort, and whose agenda is to demolish science in favor of forcing religion back into society middle-ages style.

This textbook asserts that gravity exists. Gravity is a theory, not a fact, regarding a force that cannot be directly seen. This material should be approached with an open mind, studied carefully, and critically considered.

This book discusses heliocentrism, the theory that the Earth orbits around a centrally located sun. Students should be encouraged to fully consider the evidence for, and the evidence against, this interesting idea.

This textbook states that the Earth is over 4 billion years old. Because this fact conflicts rather directly with a hugely popular fictional account, both sides of the argument should be taught to impressionable children.

This book promotes the theory of plate tectonics, the gradual movement of the major land masses. Because nobody actually witnessed the land masses moving, teachers should refer to the theory as unprovable.

This textbook contains a chapter about general relativity, a theory that promotes relativism. The offending sections should be cut out of the book with a razor blade.

This textbook claims that evolution is not fully accepted by scientists because it is just a theory. The author hopes to confuse you into equating scientific theory with cockamamie theory.

carbon 14 is NOT used to determine the age of the earth. The geologic column does exist and only someone who isn’t a geologist and didn’t spend any time in the feild would say that it doesn’t. Uranium 238 is what’s used to date the earth and it’s easily 4.5 billion years old, if not more. He is using the equilibrium theory on the ASSUMPTION that the earth is less than 7000 years old.

Now that we know that equillibrium was reached over 4 billion years ago we can start. I’ll start with carbon 14 dating. It’s absolutely true that the levels of carbon 14 in the atmosphere indeed do fluctuate from year to year. But this fluctuation can be measured and predicted in reasonably accurate terms. The way scientists do this, is dendrochronology (which he conveiniently omits).

Dendrochronology is the fact that you can tell the age of a tree by counting its rings. The thickness of each ring is indicative of the amount of carbon 14 the tree absorbed in that corresponding year. This can be measured with reasonable accuracy. Also, through dendrochronology, scientists can observe a distinct pattern in the rate of fluctuation of the carbon 14 in our atmosphere in any given year, and accurately calibrate carbon 14 tests accordingly.

Potassium-40 is another radioactive element naturally found in your body and has a half-life of 1.3 billion years. Other useful radioisotopes for radioactive dating include Uranium -235 (half-life = 704 million years), Uranium -238 (half-life = 4.5 billion years), Thorium-232 (half-life = 14 billion years) and Rubidium-87 (half-life = 49 billion years).

carbon-14 stops entering the body when the animal dies. From there the carbon-14 starts to decay.

Empirical explanations can be scientific or non-scientific. Freud’s idea of the Oedipus complex is empirical but it is not scientific. Jung’s notion of the collective unconscious is empirical but it is not scientific. Biblical creationism is empirical but it is not scientific. Poetry can be empirical but not scientific.

On the other hand, if by ’empirical’ one means capable of being confirmed or disproved by observation or experiment then ID is not empirical.

Natural selection acts on variation within populations, resulting in modified organ morphology, physiology, and ultimately the formation of new species.

So far, the arguments I’ve seen advanced for ‘intelligent design’ have been answered; the two key biological concepts, ’specified complexity’ and ‘irreducible complexity’, have not fared well. Dembski’s ‘complex, specified information’ model has not produced new results anywhere outside the intelligent design area (unlike evolution, which has spawned genetic algorithms in computer science, enhanced epidemiology and immunization techniques, and improved breeding practices in animal husbandry and agriculture, etc.) and has itself been widely questioned regarding its fundamental definitions and mathematical rigor. Various biological systems proposed as ‘irreducibly complex’ have been shown to be evolvable, and indeed some of the precursor steps have come to light.

And even evolution does not attempt to dispute whether there is a God behind the universe or otherwise, but rather how the world evolves through progressive incremental steps. Then again, there is no assay in excluding a super natural power but surely, it does reveal a facade of extortion and deception in religion.

Evolution is only a threat to those who insist on biblical literalism (or literalism in whatever they consider holy text). These people are making a false idol out of their scripture (in the case of former Alabama Judge Moore, literally a graven one!).

Judaism does not require literalism. When I was growing up most synagogues were using a version of the Pentateuch (the five books of Moses) published by the Soncino Press. It included commentaries by a former Chief Rabbi of the British Empire (from around the 1930’s). In it (page 194 of the second edition) he points out that the greatest Jewish commentator of all time (Rashi) taught that scripture was not supposed to give a strict chronology of creation, and that Maimonides taught that the account is not meant to be literal.

The Chief Rabbi also makes the following point: imagine if Genesis Chapter 1 had contained a scientifically accurate account of the creation:

Monera begat Amoeba, Amoeba begat Synamoebae, Synamoebae begat Ciliated Larva, . . . Primary Mammals begat Pouched Animals, Pouched Animals begat Semi-Apes, Semi-Apes begat Tailed Apes, Tailed Apes begat Man-like Apes, Man-like Apes begat Ape-like Men, Ape-like Men begat Men.

Would such an account have even been understood, much less inspiring? Galileo said it best, the bible exists to explain how to go to heaven, not how the heavens go (or were made). For that question we must turn to the observable facts, analyzed by reason. In short, for that we need science (knowledge not faith).

The Appendix: Often derided by vile, secular, liberal scientists as unimportant, the appendix is in fact an essential feature in God’s meticulous design for humanity. The Almighty uses this organ, which He non-coincidentally sculpted in the shape of a miniature flaccid penis, to remotely inflict torturous earthly pain on all who displease Him.

Wisdom Teeth: Contrary to the preposterous notion that the human jaw bone has somehow grown incrementally smaller over the course of untold millennia, God took great pride in carefully programming our DNA to cause at least one impacted wisdom tooth in 90% of adults. He did this in order to assure a bright and promising future for another of his intelligent creations: orthodontia.

The “Tail Bone”: Though it has labored under the double indignity of TWO anti-Christian labels: the evolution-implying “tail bone” and egregiously lewd “coccyx”, this ingeniously sensitive spinal tip was installed by God specifically for occasions when your rollerskates fly out from under you while you’re doing the Hokey-Pokey – so you’ll land on something that punishes you for acting like white trash.

Man Nipples: While know-nothing commie scientists might point to the man-teat’s inability to lactate as clear evidence of its nipple’s superfluousness, God felt it wise to include an aesthetic nod to the lesser gender’s mammaries on his otherwise superior male model, if for no other reason than to attract would-be lesbians to their rightful place: squatting spread-eagle atop a hunka hunka burnin’ man.

Hybrid Excretory/Reproductive Organs: The Almighty created humanity in His own perfect, infallible image. Yet inasmuch as He lives forever, and can create people just by snapping His fingers, He doesn’t need to have disgusting sex. And since He doesn’t eat, He doesn’t need to go tinkle or doody either. These minor differences required last-minute, albeit still perfect. modifications to His miraculous design. And while liberal academics suggest that excretory and reproductive functions would be kept separate in any truly “intelligent” design, in God’s mind, boys’ willies and girls’ hoo-hoos have but ONE function: expelling sundry sticky and smelly juices, semi-solids, and screeching little sinners.

The Narrow Birth Canal: When the Lord first designed woman – using His Original Recipe Disembodied Rib, His only intention was for Eve to sit around in the Garden of Eden being inferior and keeping the place clean. Hence, instead of providing her with the same sturdy crotch tool as Adam, He gave her nothing but an empty, dank, teeny-tiny little hole. Soon thereafter, God intelligently designed the “episiotomy” childbirth procedure – in order to punish Eve’s entire gender for all eternity for her being such a cock-teasing slut.

Tender Feet: In leaving human feet free of paw pads or tough, horse-like hooves, the Lord rendered our solitary means of locomotion highly susceptible to injury – thereby programming us to covet leather, calfskin, and/or snakeskin cowboy boots. Subsequently, man slaughters countless beasts for their hides, simultaneously asserting our iron-fisted dominion over all the earth.

Rev El Mundo

What do you expect? It’s Georgia! Where the family trees have no branches, creationism is bound to take hold.

God made man But a monkey supplied the glue

Youngstown Scientists Refute Gravity With New ‘Intelligent Falling’ Theory

Youngstown, OH – As the debate over the teaching of evolution in public schools continues, a new controversy over the science curriculum arose Wednesday in this embattled Midwestern town. Scientists from the Evangelical Center For Faith-Based Reasoning are now asserting that the long-held “theory of gravity” is flawed, and they have responded to it with a new theory of Intelligent Falling. The new theory will be introduced to Youngstown public school students starting at the beginning of the 2009 school year.

“Things fall not because they are acted upon by some gravitational force, but because a higher intelligence is pushing them down,” said the Reverend Dr. Stanton Doran, current president of the ECFR, who holds advanced degrees in education, biology, physics and applied Scripture from Oral Roberts University, Regent University, the Discovery Institute and The Billy Graham School for Advanced Molecular Engineering.

Reverend Dr. Doran: “Gravity – which is falsely taught to our children as a law – is founded on great gaps in understanding. The laws predict the mutual force between all bodies of mass, but they cannot explain that force. Isaac Newton himself said, ‘I suspect that my theories may all depend upon a force for which philosophers have searched all of nature in vain.’ Of course, he was alluding to a higher power. What else could he have been talking about?”

Founded in 1968 at Dr. Stanton’s alma mater, East High School, the ECFR is the world’s leading institute of Christian medicine, a branch of medicine based on the literal interpretation of the Bible. Rev. Doran (famous for his studies demonstrating that stem cells should never be used in fighting disease because they may inadvertently “grow babies in the brain”) was joined in his announcement by other leading experts in the fields of physics, mathematics, biology and medicine including Dr. Charles McGowen, MD and the Rev. Mickey Erdel, all long-time Youngstown residents and graduates of the Youngstown public school system.

~Rev. El Mundo

It’s insane to believe that an all powerful being would create something as massive as our universe so we on this planet could play a game of avoid eternal damnation.

Time should also be spent teaching the controversy over astrology. Is it really inferior to psychology? The unconscious mind is only a theory. Shouldn’t children decide whether the 12 configurations of stars orbiting the earth is the actual determinant of their actions? Surely, we can produce scientists who read their daily horoscopes. Shouldn’t we have a pro vs. con discussion of this in 6th grade science class?

Teach also the controversy over numerology — is it really inferior to physics? Is alchemy not worth study with it’s denial that inanimate elements are in fact inanimate. Shouldn’t the schools present the counter theory that minerals have souls and genders?

Teach the children all the controversies and let the children decide.

Health Care

http://honolulu.injuryboard.com/medical-malpractice/medical-malpractice-expenditures-comprise-less-than-1-percent-of-overall-health-costs.aspx?googleid=250112
Medical Malpractice Expenditures Comprise Less Than 1 Percent Of Overall Health Costs

Posted by Wayne ParsonsOctober 27, 2008 2:42 AM
http://www.citizen.org/documents/MedMalBriefingBook08-09-04.pdf
http://www.amsa.org/business/nhestatesummary2004.pdf
We hear a lot of propaganda from medical professionals, insurance companies and politicians who try to place the blame for America’s skyrocketing health care costs on the so-called medical malpractice “insurance crisis.” They claim that patients who are injured by negligent doctors and their lawyers are responsible for driving up the costs of health care here in Hawaii and across the country. The media repeats the dire warnings from the doctors and the politicians who get lucrative campaign contributions from them. We routinely see news reports that if we don’t place more and more restrictions on the legal rights of patients, doctors will stop practicing medicine.

Are the proponents of new restrictions on patients’ rights telling us the truth? The answer is a definite NO.

Those who claim that medical malpractice insurance costs are driving up the costs of health care are actually misleading the American public. Hawaii has been subjected to these untruths by doctors who want laws passed that will allow them to injure patients through negligence and escape any responsibility.

According to an in depth analysis of this subject by consumer advocate Public Citizen the fact is that medical malpractice insurance costs nationwide in 2002, for instance, had only a minuscule impact on the cost of health care – less than one percent!

Medical malpractice expenditures comprise less than 1 percent of overall health costs. In 2002 health care expenditures rose 9.3 percent to $1.553 trillion. Yet expenditures on all malpractice premiums reported to the National Association of Insurance Commissioners (NAIC) that year were only $9.6 billion – making malpractice costs about .62 percent of national health care expenditures.

In Hawai`i, the total payments for medical malpractice insurance coverage were only 0.69% of our state’s overall health care expenditures. Truth be told, even if medical malpractice litigation were completely eliminated, the resulting cost savings would have only the tiniest effect on health care spending. There is no legitimate basis for restricting the legal rights of people who are injured by negligent doctors. Doing so will not have any effect on controlling rising health care expenses.

The Public Citizen analysis of this subject explodes and exposes the fraud that doctors and their insurance companies are perpetuating on the public. Every politician and member of the public should have this book as a resource to understand health care in America

Most studies employ small numbers I had the benefit of 25 years of data and a sophisticated computer system. The politicians in our state said the same thing what is your scientific proof, guess what they were and still are mostly attorneys. I had 70 law firms reporting to me and we tried over 200 cases per year some years 300. I could argue this topic with you as long as you like. You obfuscate the issue a trait very common among attorneys. I said I agree the cost of med mal payments is small but don’t suggest there is no relationship with the fear of a claim and defensive medicine …when polled 78% of New Jersey docs said they are treating patients with unnecessary tests to avoid a malpractice case.

Protecting your turf I understand just be honest medical malpractice and bad outcomes are decidied by theatrics and obfuscation not standard of care. For every one med mal case you handled I handled hundreds. Not one day went by with out a decision on a million dolaar claim, I have med mal experience you could not fathom. I served on 2 Governor’s task forces and appeared in feature articles in several national magazines. Please don’t question my credentials you have no clue

http://www.hsph.harvard.edu/news/press-releases/2006-releases/press05102006.html

Study Casts Doubt on Claims That the Medical Malpractice System Is Plagued By Frivolous Lawsuits

For immediate release: May 10, 2006

Boston, MA – The debate over medical malpractice litigation, which raged during the last presidential campaign, continues as a hot-button political and health care issue in the U.S. The Senate is expected to vote soon on legislation to impose a federal cap on noneconomic damages in malpractice suits, following on similar bills that passed the House of Representatives but stalled in the Senate last year. One popular justification for tort reform is the claim that “frivolous” medical malpractice lawsuits—those lacking evidence of substandard care, treatment-related injury, or both—enrich plaintiffs’ attorneys and drive up health care costs. A new study by researchers from the Harvard School of Public Health (HSPH) and Brigham and Women’s Hospital challenges the view that frivolous litigation is rampant and expensive.

The researchers analyzed past malpractice claims to judge the volume of meritless lawsuits and determine their outcomes. Their findings suggest that portraits of a malpractice system riddled with frivolous lawsuits are overblown. Although nearly one third of claims lacked clear-cut evidence of medical error, most of these suits did not receive compensation. In fact, the number of meritorious claims that did not get paid was actually larger than the group of meritless claims that were paid. The findings appear in the May 11, 2006 issue of The New England Journal of Medicine.

“Some critics have suggested that the malpractice system is inundated with groundless lawsuits, and that whether a plaintiff recovers money is like a random ‘lottery,’ virtually unrelated to whether the claim has merit,” said lead author David Studdert, associate professor of law and public health at HSPH. “These findings cast doubt on that view by showing that most malpractice claims involve medical error and serious injury, and that claims with merit are far more likely to be paid than claims without merit.”

The authors reviewed 1,452 closed claims from five malpractice insurance companies across the country. They focused on four clinical categories: surgery, obstetrics, medication and missed or delayed diagnosis, areas that collectively account for about 80% of all malpractice claims filed in the U.S. Specialist physicians in each of these clinical areas reviewed the claims and the associated medical records to determine whether the plaintiff had sustained an injury from care. If an injury had occurred, the physicians judged how likely it was to have been due to medical error.

The reviewers found that almost all of the claims involved a treatment-related injury. More than 90% involved a physical injury, which was generally severe (80% resulted in significant or major disability and 26% resulted in death). The reviewers judged that 63% of the injuries were due to error. The remaining 37% lacked evidence of error, although some were close calls.

Most claims (72%) that did not involve error did not receive compensation. When they did, the payments were lower, on average, than payments for claims that did involve error ($313,205 vs. $521,560). Among claims that involved error, 73% received compensation. “Overall, the malpractice system appears to be getting it right about three quarters of the time,” said Studdert. “That’s far from a perfect record, but it’s not bad, especially considering that questions of error and negligence can be complex.” The 27% of cases with outcomes that didn’t match their merit included claims that went unpaid even though the injury was caused by an error (16%); claims that were paid but did not involve error (10%); and claims that were paid but did not appear to involve a treatment-related injury (0.4%).

However, the study did not paint a uniformly positive picture of the current malpractice system. The costs of litigating claims, including defense costs and contingency fees paid to plaintiffs’ lawyers, averaged $52,521 per claim. Overall, these administrative costs amounted to 54% of the compensation paid to plaintiffs. “Deciding negligence is a very expensive process,” said Studdert. The authors also found that it took an average of five years from injury to resolution of the claim—a long time for plaintiffs to wait for compensation and for defendants to endure the uncertainty that litigation entails.

Finally, the authors found that the claims that did not involve errors absorbed a relatively small piece of the costs of compensation. Eliminating those claims would decrease the system’s compensation and administrative costs by no more than 13% to 16%. “Many of the current tort reform initiatives, such as caps on noneconomic damages, are motivated by a perception that ‘jackpot’ awards in frivolous suits are draining the system,” explained Michelle Mello, an associate professor of health policy and law at HSPH and a co-author of the study. “But nearly 80% of the administrative costs of the malpractice system are tied to resolving claims that have merit. Finding ways to streamline the lengthy and costly processing of meritorious claims should be in the bullseye of reform efforts.”

In a separate study released May 10 by the Robert Wood Johnson Foundation’s Synthesis Project, Mello examined the effects of the recent increases in malpractice insurance premiums on the delivery of health care services and the impacts of state tort reforms. Reviewing existing studies, the report concluded that the deteriorating liability environment has had only a modest effect on the supply of physician services. “The best evidence shows, at most, a small overall decrease in the number of physicians practicing in high-liability states compared to lower-risk states, though some rural areas have been more affected,” Mello said. Aside from caps on noneconomic damages, most tort reforms adopted by states in response to malpractice crises have not been effective in boosting physician supply or reducing insurance or litigation costs. Damages caps “help constrain growth in litigation costs and insurance premiums over time, but disproportionately burden the most severely injured patients.” The study is available at http://www.rwjf.org/publications/synthesis/reports_and_briefs/issue10.html

http://hcfan.3cdn.net/a9ce29d3038ef8a1e1_dhm6b9q0l.pdf

Health Insurers
Break Profit Records as
2.7 Million Americans
Lose Coverage
http://www.HealthCareforAmericaNow.org
HEALTH CARE
HEALTH CARE FOR AMERICANOW!
QUALITY, AFFORDABLE HEALTH CARE WE ALL CAN COUNT ON.
FEBRUARY 2010
2 HEALTH CARE FOR aMERICA NOW!
HEALTH CARE FOR aMERICA NOW! 3
The five largest U.S. health insurance companies
sailed through the worst economic downturn since
the Great Depression to set new industry profit
records in 2009, a feat accomplished by leaving
behind 2.7 million Americans who had been in
private health plans. For customers who kept their
benefits, the insurers raised rates and cost-sharing,
and cut the share of premiums spent on medical
care.1 Executives and shareholders of the five
biggest for-profit health insurers, UnitedHealth
Group Inc., WellPoint Inc., Aetna Inc., Humana
Inc., and Cigna Corp., enjoyed combined profit
of $12.2 billion in 2009, up 56 percent from the
previous year. It was the best year ever for Big
Insurance.
The outsize earnings are a vivid reminder that
without comprehensive national health care
reform the gatekeepers of our broken health
insurance system always will put the short-term
interests of Wall Street before the needs of millions
of patients and a national economy plagued by
joblessness.
The 2009 financial reports from the nation’s five
largest insurance companies reveal that:
• The firms made $12.2 billion, an increase of
$4.4 billion, or 56 percent, from 2008.
• Four out of the five companies saw earnings
increases, with CIGNA’s profits jumping
346 percent.
• The companies provided private insurance
coverage to 2.7 million fewer people than the
year before.
• Four out of the five companies insured fewer
people through private coverage. United-
Health alone insured 1.7 million fewer
people through employer-based or individual
coverage.
• All but one of the five companies increased
the number of people they covered through
public insurance programs (Medicaid, CHIP
and Medicare). UnitedHealth added 680,000
people in public plans.
• The proportion of premium dollars spent on
health care expenses went down for three of
the five firms, with higher proportions going to
administrative expenses and profits.
It was clear from the earnings reports that reduced
enrollment in private plans correlates with big
gains in net income. Aetna, the lone company that
substantially increased both membership and the
share of premium revenue it spent on actual
medical care, was the only one of the five companies
to post net income that was less than it reported
the previous year.
The shedding of 2.7 million members from private
health plans is part of the industry’s long-term
shifting of responsibility for the care of millions of
sick, older or lower-income customers to taxpayersupported
government health programs, such as
Medicaid and the state Children’s Health Insurance
Plans. State and federal programs have increasingly
been hiring big insurers to manage their care.
Insurance industry officials see great opportunity
in serving government-run programs because other
markets are not growing. That is because private
buyers of insurance are steadily being priced out of
the market. During 2009, the five insurers boosted
enrollment in government-subsidized programs
administered by private plans, including Medicare
and Medicaid, by 688,000.2 Medicaid growth is the
biggest single driver of increased national health
spending, according to a study released Feb. 4
by the policy journal Health Affairs. The authors
project that by 2012 government health programs
Health Insurers Break Profit Records
As 2.7 Million Americans Lose Coverage
4 HEALTH CARE FOR aMERICA NOW!
will pay for half of the health care purchased in
this country, up from 47 percent in 2008.3
Last year the five health insurers continued
managing their capital resources carefully to benefit
investors and corporate executives. Most of the
companies reported that they wait six to eight
weeks after receiving claims to pay doctors,
hospitals and patients. The cash they hold during
this period builds up company reserves and
improves balance sheets, but the delay is yet
another way that the managers of the existing
system harm patients and health care providers.
Secondly, most of the five insurers participate in
share repurchase programs. Since 2003, the five
companies have bought $55.4 billion of their own
stock on the open market,4 increasing earnings
per share by reducing the number of shares
outstanding, thereby boosting a company’s stock
price. Companies make share repurchases with
excess cash on hand or with borrowed funds.
Buybacks are a way of removing money from
a company’s balance sheet for the benefit of
investors, reflecting management’s decision not to
invest in improving a company’s operations,
in making the health system run more efficiently
or in giving customers rate relief when premiums
are soaring. The companies prefer to hand over
the money to Wall Street investors. Chief executive
officers are primary beneficiaries of share buybacks
because their soaring compensation packages
depend on reaching earnings-per-share goals that
often would be unachievable without repurchasing
programs. Executives also are compensated with
stock options that put enormous numbers of
company shares in their hands, so they benefit
personally and directly from everything that
pushes share prices higher.
Big Insurance in 2009
The top five health insurers reported 2009 fourth
quarter and full-year earnings between Jan. 21
and Feb. 5, 2010. Here are key points about each
company based on new filings with the U.S.
Securities and Exchange Commission and other
sources.
WellPoint
Summary
Profit increased $2.3 billion, or 91 percent, from
the previous year, and set a new record for annual
net income, $4.75 billion.
Total enrollment fell 1.4 million, or 3.9 percent.
• Private enrollment dropped 1 million (3.2 percent).
• Public enrollment declined 348,000 (11 percent).
Medical loss ratio decreased by 1 percentage point,
to 82.6 percent.
WellPoint, the largest health insurer by membership,
posted record profit of $4.75 billion for 2009, an
increase of $2.3 billion, or 91 percent, from a year
earlier. The Indianapolis-based company, which
operates market-dominating Blue Cross franchises
in 14 states, ended the year with 33.67 million
members, a decrease of 1.38 million, or 3.9 percent,
from a year earlier. The decline in membership was
most pronounced in the company’s commercial
products, which are sold directly to individuals and
families or through employers that provide health
benefits to workers and their dependents.
Enrollment in WellPoint private plans declined
by 1.03 million, or 3.2 percent, to 30.72 million,
and membership in government-sponsored
insurance plans declined 348,000. The company’s
medical loss ratio fell 1 percentage point to 82.6
percent. For health care providers and patients, the
average waiting time for payment for covered care
was 42 days. The company devoted $2.64 billion
to repurchasing its shares in 2009, the most of
the five insurers, bringing WellPoint buybacks to
$17.25 billion since 2003. WellPoint spent
HEALTH CARE FOR aMERICA NOW! 5
$4.7 million last year to lobby in Washington
against comprehensive national health reform
proposals.7 Since 2007, the insurer’s political
action committee and its employees have made
$1.1 million in political contributions to advance
the company’s interests.8
UnitedHealth
Summary
Profit increased $845 million, or 28 percent, from
the previous year, and reached $3.8 billion.
Total enrollment dropped 1 million, or 3.4 percent.
• Private enrollment fell 1.7 million (6.5 percent).
• Public enrollment rose 680,000 (17 percent).
Medical loss ratio increased slightly, 0.3 percentage
point, to 82.3 percent.
UnitedHealth Group, based in Minnetonka, Minn.,
maintained its position as the largest health insurer
by sales, with $87.1 billion in revenue in 2009.
Profit rose 28 percent to $3.82 billion, compared
with $2.98 billion in 2008. The strong performance
came as total enrollment declined by 1.04 million,
or 3.4 percent, to 29.32 million members.
Private health plan membership at UnitedHealth
has been eroding in recent years while the
company has used its national marketing muscle
to attract more customers through governmentsubsidized
programs. UnitedHealth’s private
enrollment decline of 1.72 million in 2009 was
offset by a gain of 680,000 members in its Medicare
and Medicaid plans. Across all lines of business,
UnitedHealth’s medical loss ratio (MLR )—the share
of premiums used to pay doctors, hospitals and
other health care providers—rose 0.3 percentage
point to 82.3 percent. Despite the increase, that
still leaves UnitedHealth’s MLR lower than the
unweighted average MLR of the five companies.
For health care providers and patients, the average
waiting time for payment for covered care was 54
days. In 2009 UnitedHealth continued its industryleading
share repurchasing program with another
$1.8 billion in buybacks. Since 2003, UnitedHealth
has spent a remarkable $21 billion on share
repurchases to raise the value of its shares.
UnitedHealth spent $4.5 million last year to lobby
in Washington against comprehensive national
health reform proposals.5 Since 2007, the insurer’s
political action committee and its employees have
made $1.6 million in political contributions to
advance the company’s interests.6
Cigna
Summary
Profit increased $1 billion, or 346 percent, from the
previous year, and set a new a record for annual net
income, $1.3 billion.
Total enrollment dropped 639,000, or 5.5 percent.
• Private enrollment fell 656,000 (5.6 percent).
• Public enrollment climbed 17,000 (49 percent).
Medical loss ratio slipped 0.5 percentage point, to
81.2 percent.
Profits rose 346 percent in 2009 compared with
a year earlier for Philadelphia-based Cigna. Net
income of $1.3 billion surged to an all-time
company record after the insurer booked profit
of only $292 million in 2008. Total enrollment
plunged 5.5 percent to 11.04 million, with the
decline attributable to a drop of 656,000 in private
plan membership, offset by 17,000 more members
in government-sponsored plans. Cigna’s MLR fell
0.5 percentage point to 81.2 percent—the lowest
consolidated MLR of the five companies. Cigna did
not report share repurchases last year, leaving the
total spent on boosting share prices for investors at
$6.62 billion from 2003 through 2009.
Cigna spent $1.6 million last year to lobby in
Washington against comprehensive national
health reform proposals.9 Since 2007, the insurer’s
political action committee and its employees
have made $544,000 in political contributions to
advance the company’s interests.10
6 HEALTH CARE FOR aMERICA NOW!
Full Year 2008 Profit
(in millions)
Full Year 2009 Profit
(in millions)
2008-2009 Year-Over-Year
Change in Profit
WellPoint $2,491 $4,746 91%
UnitedHealth $2,977 $3,822 28%
Humana $647 $1,040 61%
Cigna $292 $1,302 346%
Aetna $1,384 $1,277 -8%
Totals $7,791 $12,186 56%
Big Insurance Broke Records With 2009 Profits
Source: U.S. Securities and Exchange Commission filings.
2008 Enrollment
(in thousands of
members)
2009 Enrollment
(in thousands of
members)
Change in Total
Enrollment (in thousands
of members)
Percentage
Change in Total
Enrollment
WellPoint 35,049 33,670 (1,379) -3.9%
UnitedHealth 30,355 29,315 (1,040) -3.4%
Humana 8,472 8,325 (147) -1.7%
Cigna 11,679 11,040 (639) -5.5%
Aetna 17,701 18,914 1,213 6.9%
Totals 103,256 101,264 (1,992) -1.9%
Total Enrollment Fell in 2009*
2008 Private Health
Plan Enrollment
(in thousands of
members)
2009 Private Health
Plan Enrollment
(in thousands of
members)
Change in Private
Health Plan Enrollment
(in thousands
of members)
Percentage Change
in Private
Enrollment
WellPoint 31,753 30,722 (1,031) -3.2%
UnitedHealth 26,345 24,625 (1,720) -6.5%
Humana 3,601 3,381 (220) -6.1%
Cigna 11,644 10,988 (656) -5.6%
Aetna 16,488 17,435 947 5.7%
Totals 89,831 87,151 (2,680) -3.0%
Employer-Sponsored, Individual Memberships Declined as Profits Rose*
*All enrollment figures include only medical care plans and exclude vision, dental, specialty, Medicare supplemental, and Medicare stand-alone prescription drug plans.
Source: U.S. Securities and Exchange Commission filings.
*All enrollment figures include only medical care plans and exclude vision, dental, specialty, Medicare supplemental, and Medicare stand-alone prescription drug plans.
Source: U.S. Securities and Exchange Commission filings.
HEALTH CARE FOR aMERICA NOW! 7
2008 Public Health
Plan Enrollment
(in thousands of
members)
2009 Public Health
Plan Enrollment
(in thousands of
members)
Change in Public
Health Plan Enrollment
(in thousands
of members)
Percentage Change
in Public
Enrollment
WellPoint 3,296 2,948 (348) -10.6%
UnitedHealth 4,010 4,690 680 17.0%
Humana 4,872 4,945 73 1.5%
Cigna 35 52 17 48.6%
Aetna 1,213 1,479 266 21.9%
Totals 13,426 14,114 688 5.1%
Government-Sponsored Enrollment Grew in 2009*
*All enrollment figures include only medical care plans and exclude vision, dental, specialty, Medicare supplemental, and Medicare stand-alone prescription drug plans.
Source: U.S. Securities and Exchange Commission filings.
Medical Loss Ratios Decreased or Remained Flat at Most Big Insurers
Source: U.S. Securities and Exchange Commission filings.
2008 Consolidated
Medical Loss Ratio
2009 Consolidated
Medical Loss Ratio
Change in Medical Loss
Ratio (in % points)
WellPoint 83.6% 82.6% -1.0%
UnitedHealth 82.0% 82.3% 0.3%
Humana 84.5% 82.8% -1.7%
Cigna 81.6% 81.2% -0.5%
Aetna 81.5% 85.2% 3.7%
Health Insurers Held Money Owed for Claims Payments
For Six to Eight Weeks
Source: U.S. Securities and Exchange Commission filings.
Days in Claims Payable
UnitedHealth 54
WellPoint 42
Humana 55
Cigna N/A
Aetna 44
8 HEALTH CARE FOR aMERICA NOW!
Aetna
Summary
Profit declined $108 million, or 8 percent, from
the previous year, to $1.28 billion.
Total enrollment increased 1.2 million, or 6.9 percent.
• Private enrollment grew by 947,000 (5.7 percent).
• Public enrollment climbed 266,000 (22 percent).
Medical loss ratio rose 3.7 percentage points, to
85.2 percent.
Aetna, based in Hartford, Conn., reported profit of
$1.28 billion in 2009. It was the only one of the
five biggest insurers whose net income fell short
of the previous year’s performance (by 8 percent)
and whose enrollment expanded in 2009. The
company said it had 18.91 million members on
Dec. 31 after private plan enrollment grew by
947,000 and the company’s Medicaid and Medicare
managed care plans added 266,000 members. The
MLR shot up 3.7 percentage points to 85.2 percent,
the highest level among the five insurers.
The average waiting time for doctors, hospitals
and patients to receive payment for covered
services from Aetna was 44 days. Aetna bought
$773 million in shares from the open market,
raising the total stock buybacks since 2003 to
$10.2 billion.
The health insurer spent $2.8 million last year
to lobby in Washington against comprehensive
national health reform proposals.11 Since 2007,
the insurer’s political action committee and
its employees have made $728,000 in political
contributions to advance the company’s interests.12
Humana
Summary
Profit increased $393 million, or 61 percent, from
the previous year, and reached $1 billion.
Total enrollment dropped 147,000, or 1.7 percent.
• Private enrollment dropped 220,000 (6.1 percent).
• Public enrollment rose 73,000 (1.5 percent).
Medical loss ratio fell 1.7 percentage points, to
82.8 percent.
Humana, based in Louisville, Ky., reported that
2009 profit rose to $1.04 billion, a 61 percent
increase from a year earlier. Enrollment fell by
147,000 to 8.33 million. Membership in private
plans declined by 220,000 while governmentsupported
plans added 73,000 members.
The company holds on to claims payments to
doctors, hospitals and members for 55 days, the
longest of the five insurers. Humana has bought
back $296 million of shares since 2003, including
$23 million last year.
Humana spent $3.2 million last year to lobby
in Washington against comprehensive national
health reform proposals.13 Since 2007, the insurer’s
political action committee and its employees
have made $747,000 in political contributions to
advance the company’s interests.14
HEALTH CARE FOR aMERICA NOW! 9
The biggest for-profit health insurers sidestepped
the severe economic recession and broke profit
records in 2009. In the process, they parted ways
with 2.7 million Americans who had been in
their private plans. For customers lucky enough
to renew their benefits, the insurers raised rates
and cost-sharing requirements, and cut the share
of premiums spent on medical care.15 Executives
and shareholders of the five biggest for-profit
insurers, WellPoint Inc., UnitedHealth Group Inc.,
Aetna Inc., Humana Inc., and Cigna Corp., enjoyed
combined net income of $12.2 billion in 2009, a 56
percent increase from 2008. The companies set a
new standard for profitability in the managed care
industry.
The record earnings are a potent reminder that
without comprehensive national health care
reform the gatekeepers of our broken health
insurance system can and will continue to put the
short-term interests of Wall Street before the needs
of millions of patients and a national economy
plagued by joblessness.
Many of the 2.7 million Americans whose health
benefits expired were casualties of an economy
that has lost millions of jobs since 2007. But many
others—the exact tallies are trade secrets—were
victims of an industry practice called purging, in
which sharply higher premiums push individuals
with health problems or employers with sicker or
older workforces away from continuing coverage.
Typically these individuals and employers are
asked at renewal time to pay double-digit premium
increases they can’t afford, forcing them to search
elsewhere for coverage or to go without health
benefits.
That’s what California’s biggest insurer, the Anthem
Blue Cross subsidiary of WellPoint, did last week,
according to the Los Angeles Times. The company
is raising premiums 30 to 39 percent for many
of its 800,000 customers who buy their policies
directly from the company rather than through
employers. Premium hikes on a similar scale were
imposed 12 months ago. The impending 2010
monthly premiums shocked Blue Cross customers,
some of whom say the new prices will exceed
their mortgage payments. After being insured by
Blue Cross for 30 years, one married couple in
Los Angeles received notice that effective March 1
the annual rate will rise to $27,336 from $20,184.
Customers were also outraged to learn that
WellPoint for the first time is reserving the right to
raise premiums at will in the middle of the policy
year rather than following the established industry
practice of doing so only once a year.16
Uninsured Population Keeps Growing
Faced with such onerous costs, many customers are
winding up uninsured. Health insurance premiums
have risen so high that experts forecast 52 million
Americans will be without coverage this year.17
Left alone to purchase a health plan directly from
private insurers, many will have no choice but to
remain uninsured or to buy cheap policies with
inadequate benefits that leave them underinsured
and at financial risk should they have a serious
accident or illness. The states lack the will, skill,
resources and power to address these insurance
company practices.
Insurers also drive up the uninsured population by
excluding applicants from obtaining coverage in
the first place. The count of 2.7 million policyholders
who lost coverage last year does not capture the
full extent of the insurance industry’s efforts
to avoid sick patients. Millions of Americans
apply for family policies and are excluded from
coverage because they are sick or had a pre-existing
Profits Soar Despite Loss of 2.7 Million
Private-Sector Members
10 HEALTH CARE FOR aMERICA NOW!
condition, and no line items about them can
be found in corporate earnings statements. The
Commonwealth Fund last year reported these
disturbing survey data:
“Nearly half (47 percent) of adults who tried to
purchase insurance in the individual market in the last
three years found it very difficult or impossible to find
a plan that fit their needs; 57 percent found it very
difficult or impossible to find a plan they could afford;
and 36 percent said they were turned down or charged
a higher price because of a preexisting condition. Nearly
three-quarters (73 percent) of respondents said they
never bought a plan, with 61 percent of those who did
not buy a plan in the individual market citing expensive
premiums as the main reason.”18
Profits Before Membership Growth
To insurance company CEOs and chief financial
officers, elaborate efforts to avoid costly customers
(an activity known as “underwriting,” “lemon
dropping,” and “risk avoidance”) are routine
techniques that protect the bottom line. Most
of the CEOs of the biggest insurance companies
have publicly proclaimed their determination to
move quickly to reduce enrollment, if necessary,
to increase profits. In 2008, WellPoint CEO
Angela Braly famously said, “We will not sacrifice
profitability for membership.”19 Her comment
echoed a 2003 remark by Humana CEO Michael
McCallister: “If we have to choose between
achieving our membership goals and achieving
profitability goals, profits will win every time.”20
Aetna was a leader in this approach beginning in
2000 after acquisitions had built its enrollment
to 21 million, the largest in the country at the
time. When executives realized they had taken on
too many sick patients, they set about the job of
getting rid of them. Aetna soon had purged
8 million members from its book of business.21
This industry strategy, which continues to go
unchecked by the states, has created a uniquely
American tragedy with a huge human toll. People
without health insurance coverage are more likely
to delay care, to get less care, and to die when they
fall ill. Harvard Medical School researchers last year
concluded that 44,789 Americans each year—123
people every day—die because they lack health
insurance.22 Others are driven to financial ruin.
Medical debt was a key reason that 62 percent of
personal bankruptcy filers sought court protection
in 2007.23 In 2008, there were 1.07 million nonbusiness
bankruptcies filed nationwide.24 No other
developed nation allows insurers to discriminate
against the sick this way.
But the sickness and death inflicted on Americans
is often camouflaged by the financial and medical
complexity of care, the sensitive and private
nature of health care, and the industry’s lack
of public accountability. As medical care grows
more expensive and health insurance benefits
more limited, millions of insured Americans are
exposed to the catastrophic
costs of accidents
and illnesses—even when they think they are
financially protected. More families are finding
themselves without adequate health benefits just
as the cost of coverage on the open market has
climbed to record levels,25 far outstripping growth
in wages.26
Premium Growth Disconnected From
Economic Conditions
Although the unfair system created by Big Insurance
has left behind a huge swath of Americans who
must fend for themselves, health insurers have
relentlessly imposed higher premiums, deductibles
and cost-sharing requirements for everyone else.
The for-profit companies have pioneered these
techniques, and their non-profit competitors have
followed suit. A recent national survey by Buck
Consultants, a human resources firm, forecasts
more of the same premium growth in 2010. Buck
surveyed insurers providing health benefits to 78
million Americans and concluded that premiums
for the most popular medical plans will increase
more than 10 percent this year.27 As usual, this kind
of cost growth is out of sync with broad trends in
the wider economy, which has retrenched. Doubledigit
increases in health insurance premiums come
as experts forecast that in 2010 the U.S. gross
domestic product will rise 2.1 percent; the overall
HEALTH CARE FOR aMERICA NOW! 11
personal consumption expenditures index will
grow 1.4 percent; and the consumer price index
will climb 1.6 percent.28
Most insurers continue to protect their profits by
reducing the share of premium dollars spent on
actual medical care, as opposed to marketing,
underwriting, overhead, administration and
gargantuan CEO salaries.29 In 1993, the leading
insurers used 95 cents of every premium dollar
on medical benefits, according to the consulting
firm PricewaterhouseCoopers.30 Ever since, health
insurance executives have pursued mergers,
acquisitions and initial public offerings that turned
the for-profit health insurance industry into a
Wall Street juggernaut.31 Many non-profits decided
that if they couldn’t beat the for-profits, they
should join them, and conversions were rampant
in the 1990s. Along the way, health insurers’
medical loss ratios plummeted even as medical
costs and premiums grew far more rapidly than
overall inflation. By 2007 investor-owned health
insurers had reduced spending on actual medical
care to less than 85 percent of premiums collected,
according to the analysis by PricewaterhouseCoopers.
The unweighted average medical loss ratio of the
five companies last year was 82.8 percent,32 a figure
some Wall Street analysts and investors consider
too high. The pressure is already on to bring it
down further, and that is achievable in the many
states that permit much lower MLRs.
Private health insurers offer scant evidence that
they have done or are willing to do anything to
restrain the relentless upward march of health costs.
The industry argues that premiums are rising
because underlying health costs—what doctors and
hospitals charge for tests, procedures, treatments,
etc.—are skyrocketing. But the picture is not so
simple. Insurers are willing players at the nexus of
all health care transactions. Like banks, insurers
benefit from handling and investing vast rivers
of premium cash even if they don’t get to keep
all of it. The typical insurer keeps health care
providers and patients waiting an average of
nearly two months before paying off legitimate
claims.33 The money made by holding this money
for so long is substantial. On one hand, insurers
delay payments to hold the money and use it for
corporate purposes that benefit shareholders, while
on the other hand insurers are unwilling or unable
to restrain the continual increases in providers’
rates.34 Exploiting these inefficiencies is a key
pathway to profit.
Insurers Unwilling or Unable to
Restrain Costs
If they chose to, private insurers could use their
market power to drive hard bargains and lower
costs. Instead they have passed along higher
provider costs through higher premiums to enrollees
and employers, generating enormous profits in the
process. John Holahan and Linda Blumberg of the
Urban Institute note that “[d]ominant insurers do
not seem to use their market power to drive hard
bargains with providers.”35 Large insurers in this
environment do not face competitive pressure from
smaller insurers, which cannot negotiate better
rates with providers and so adopt premiums that
“shadow” those of dominant insurers. Consequently,
insurers are able to pass costs on to individuals.36
The inexorable growth in health spending,
which happens with minimal resistance from
the health insurance industry, puts our country
at a tremendous disadvantage in the global
marketplace, where the lowest employment cost
structures determine which nations are more likely
to attract investment and create jobs.
The difference in health care spending between the
U.S. and other advanced nations is breathtaking,
and thanks to the practices of Big Insurance it
has climbed to a level never before seen in the
developed world. For every dollar spent in the U.S.
last year, 17.3 cents was devoted to health care, up
1.1 percentage points from the previous year and
the largest single-year increase on record, according
to actuaries at the U.S. Centers for Medicare and
Medicaid Services (CMS).37 Such rapid growth in
relative spending, especially at a time when the
economy is sputtering, is a hidden tax on families
and businesses. It reduces the U.S. standard of
living, keeps wages down, drains family bank
accounts and weakens our ability to compete with
other countries. Without comprehensive national
12 HEALTH CARE FOR aMERICA NOW!
health insurance reform that will make quality,
affordable care available to all, the portion of our
economic output devoted to health care is projected
to rise to a staggering 19.3 percent in 2019.38
“In the absence of change, the [CMS] report raises
a grim prospect for the country—a health care
system consuming an ever greater and potentially
unsustainable share of the economy even as private
health coverage lags,” wrote health policy reporter
Noam Levey in the Los Angeles Times.39
Defenders of the status quo claim the U.S. has the
best medical care in the world, but government
statistics say we don’t even come close. We rank
far below many nations in life expectancy and
quality of life, according to the World Health
Organization.40,41
Of the estimated $809 billion spent on private
health insurance in 2009,42 the five biggest forprofit
companies—WellPoint, UnitedHealth, Aetna,
Humana and Cigna—captured $232 billion.43 Their
share of the pie has increased steadily through
mergers and acquisitions. Unless comprehensive
national health reform is passed to rein in insurers,
increase their accountability and require them
to offer quality, affordable coverage, the U.S.
faces a bleak economic future. Without national
reform, consolidation will continue unabated,
Big Insurance will gain greater market power
and bigger profits, and a business model built on
blatant discrimination against the sick and the
unlucky will become more entrenched.
Endnotes
1 U.S. Securities and Exchange Commission filings.
2 U.S. Securities and Exchange Commission filings.
3 Christopher J. Truffer, Sean Keehan, Sheila Smith, Jonathan Cylus, Andrea Sisko, John A. Poisal, Joseph Lizonitz and M. Kent Clemens, “Health
Spending Projections Through 2019: The Recession’s Impact Continues,” Health Affairs, Feb. 4, 2010. Accessed at http://content.healthaffairs.
org/cgi/content/full/hlthaff.2009.1074v1.
4 U.S. Securities and Exchange Commission filings; also, Health Care for America Now, “Premiums Soaring in Consolidated Health Insurance
Market: Lack of Competition Hurts Rural States, Small Businesses,” May, 2009. Accessed at http://hcfan.3cdn.net/1b741c44183247e6ac_20m6i6n
zc.pdf.
5 The Hill, “Insurance Interest 2009,” Jan. 22, 2010. Accessed at http://thehill.com/business-a-lobbying/77583-insurance-interest-2009.
6 Public Campaign Action Fund analysis of data from Center for Responsive Politics.
7 The Hill, “Insurance Interest 2009,” Jan. 22, 2010. Accessed at http://thehill.com/business-a-lobbying/77583-insurance-interest-2009.
8 Public Campaign Action Fund analysis of data from Center for Responsive Politics.
9 The Hill, “Insurance Interest 2009,” Jan. 22, 2010. Accessed at http://thehill.com/business-a-lobbying/77583-insurance-interest-2009.
10 Public Campaign Action Fund analysis of data from Center for Responsive Politics.
11 The Hill, “Insurance Interest 2009,” Jan. 22, 2010. Accessed at http://thehill.com/business-a-lobbying/77583-insurance-interest-2009.
12 Public Campaign Action Fund analysis of data from Center for Responsive Politics.
13 Ibid.
14 Public Campaign Action Fund analysis of data from Center for Responsive Politics.
15 U.S. Securities and Exchange Commission filings.
16 Duke Helfand, “Anthem Blue Cross dramatically raising rates for Californians with individual health policies,” Los Angeles Times, Feb. 4, 2010.
Accessed at http://articles.latimes.com/2010/feb/04/business/la-fi-insure-anthem5-2010feb05.
17 Todd P. Gilmer and Richard G. Kronick, “Hard Times and Health Insurance: How Many Americans Will Be Uninsured By 2010?” Health Affairs
28, no. 4 (2009): w573–w577.
18 Michelle M. Doty, Sara R. Collins, Jennifer L. Nicholson, and Sheila D. Rustgi, “Failure to Protect: Why the Individual Insurance Market Is Not
a Viable Option for Most U.S. Families,” Commonwealth Fund Issue Brief, July 2009. Accessed at http://www.commonwealthfund.org/~/media/
Files/Publications/Issue%20Brief/2009/Jul/Failure%20to%20Protect/1300_Doty_failure_to_protect_individual_ins_market_ib_v2.pdf.
19 Transcript, WellPoint Earnings Conference Call, April 23, 2008. Accessed at http://seekingalpha.com/article/73633-wellpoint-inc-q1-2008-
earnings-call-transcript?page=-1.
20 Humana Inc., Fourth Quarter 2002 Earnings Conference Call, Feb. 3, 2003.
21 Wendell Potter, testimony before the U.S. Senate Committee on Commerce, Science and Transportation
June 24, 2009. Accessed at http://commerce.senate.gov/public/?a=Files.Serve&File_id=6bbaf0e4-b8f2-497d-8a54-88f5be8c4cae.
22 Andrew P. Wilper, MD, MPH, Steffie Woolhandler, MD, MPH, Karen E. Lasser, MD, MPH, Danny McCormick, MD, MPH, David H. Bor, MD and
David U. Himmelstein, MD, “Health Insurance and Mortality in US Adults,” Sept. 17, 2009. Accessed at http://ajph.aphapublications.org/cgi/
content/abstract/99/12/2289.
23 David Himmelstein, et al., “Medical Bankruptcy in the United States, 2007: Results of a National Study,” The American Journal of Medicine,
2009. Accessed at http://pnhp.org/new_bankruptcy_study/Bankruptcy-2009.pdf.
24 US Bankruptcy Courts, “Table F2: Business and Nonbusiness Bankruptcy Cases Commenced, by Chapter of the Bankruptcy Code: During the
Twelve Month Period Ending Dec. 31, 2008.” Accessed at http://www.uscourts.gov/bnkrpctystats/statistics.htm.
HEALTH CARE FOR aMERICA NOW! 13
25 Institute of Medicine, “America’s Uninsured Crisis: Consequences for Health and Health Care,” Report Brief, February 2009. Accessed at http://
http://www.iom.edu/Object.File/Master/63/122/America%27s%20Uninsured%206%20pager%20FINAL%20for%20web.pdf.
26 Health Care for America Now, Health Insurance Coverage Keeps Shrinking as Premiums, Family Costs Continue Climbing, June 2009. Accessed
at http://healthcareforamericanow.org/page/-/affordability%20reports/AppendixMA2.pdf.
27 Buck Consultants, Health Care Costs Increase at Double Digit Rates: Buck Consultants Survey, Jan. 28, 2010. Accessed at http://www.
buckconsultants.com/buckconsultants/Portals/0/Documents/PUBLICATIONS/Press_Releases/2010/PR-21st-National-Health-Care-Trend-
Survey012810.pdf.
28 Douglas Elmendorf, Congressional Budget Office, testimony to the Committee on the Budget, U.S. House of Representatives, January 27, 2010.
Accessed at http://budget.house.gov/hearings/2010/01.27.2010_Elmendorf_Testimony.pdf.
29 Health Care for America Now, “Premiums Soaring in Consolidated Health Insurance Market: Lack of Competition Hurts Rural States, Small
Businesses, May, 2009. Accessed at http://hcfan.3cdn.net/1b741c44183247e6ac_20m6i6nzc.pdf.
30 PricewaterhouseCoopers, “Beyond the sound bite: Review of presidential candidates’ proposals for health reform,” 2008. Accessed at http://
http://www.pwc.com/us/en/healthcare/publications/popups/medical-loss-ratio.jhtml.
31 Health Care for America Now, “Net Income of Major U.S. Health Insurers, 2000 – 2008 (in millions),” 2009. Accessed at http://
healthcareforamericanow.org/page/-/documents for download/090728 Net Income of Major Health Insurers 2000-2008 – Final-1.pdf.
32 U.S. Securities and Exchange Commission filings.
33 U.S. Securities and Exchange Commission filings.
34 Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” March 2009. Accessed at http://www.medpac.
gov/documents/Mar09_EntireReport.pdf.
35 John Holahan and Linda Blumberg, “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?,” Urban
Institute Health Policy Center, 2008.
36 Ibid.
37 Christopher J. Truffer, Sean Keehan, Sheila Smith, Jonathan Cylus, Andrea Sisko, John A. Poisal, Joseph Lizonitz and M. Kent Clemens, “Health
Spending Projections Through 2019: The Recession’s Impact Continues,” Health Affairs, Feb. 4, 2010. Accessed at http://content.healthaffairs.
org/cgi/content/full/hlthaff.2009.1074v1.
38 Ibid.
39 Noam N. Levey, “Soaring cost of healthcare sets a record,” Los Angeles Times, Feb. 4, 2010. Accessed at http://www.latimes.com/news/nationand-
world/la-na-healthcare4-2010feb04,0,1362585.story.
40 “Mortality and Burden of Disease,” World Health Organization, 2009. http://www.who.int/whosis/whostat/EN_WHS09_Table1.pdf.
41 Christopher J.L. Murray, M.D., D.Phil., and Julio Frenk, M.D., Ph.D., M.P.H., “Ranking 37th—Measuring the Performance of the U.S. Health
Care System,” New England Journal of Medicine, Jan. 14, 2010. Accessed at http://content.nejm.org/cgi/content/full/362/2/98#R1.
42 Christopher J. Truffer, Sean Keehan, Sheila Smith, Jonathan Cylus, Andrea Sisko, John A. Poisal, Joseph Lizonitz and M. Kent Clemens, “Health
Spending Projections Through 2019: The Recession’s Impact Continues,” Health Affairs, Feb. 4, 2010. Accessed at http://content.healthaffairs.
org/cgi/content/full/hlthaff.2009.1074v1.
43 U.S. Securities and Exchange Commission filings.

http://www.gao.gov/new.items/d09363r.pdf

United States Government Accountability Office
Washington, DC 20548
February 27, 2009
The Honorable Olympia J. Snowe
Ranking Member
Committee on Small Business and Entrepreneurship
United States Senate
The Honorable Christopher S. Bond
United States Senate
The Honorable Richard J. Durbin
United States Senate
The Honorable Blanche L. Lincoln
United States Senate
Subject: Private Health Insurance: 2008 Survey Results on Number and Market Share of
Carriers in the Small Group Health Insurance Market
As a follow-up to our 2005 and 2002 reports on the competitiveness of the small group health
insurance market, you requested updated information on each state and the District of
Columbia.1 Specifically, this report provides information from states and the District of
Columbia (hereafter referred to as a state) on the number of carriers licensed in the small
group market, the largest carriers, and their market share.2
To obtain this information, we sent an electronic survey to the office responsible for
regulating insurance, health plans, or both in all 51 states. After following up with
nonresponding states by e-mail and telephone, all but 1 state completed the survey. Of the 50
states that responded, however, 3 were unable to provide the requested information on small
group carriers and their market share. For the remaining 47 states, not all had the
information needed to answer all of the questions. For example, 44 states reported the largest
carrier and 39 states provided market share data. Also, the 47 states varied in how they
defined the size of a small group. Most—33—defined a small group as 2 to 50 employees; 12
defined a small group as 1 to 50 employees; and 2 had another definition. Finally, states
generally reported information as of December 2007, though 6 states were able to provide
2008 numbers, and 3 states were limited to data from 2006. We did not independently validate
1GAO, Private Health Insurance: Number and Market Share of Carriers in the Small Group Health
Insurance Market in 2004, GAO-06-155R (Washington, D.C.: Oct. 13, 2005); and GAO, Private Health
Insurance: Number and Market Share of Carriers in the Small Group Health Insurance Market,
GAO-02-536R (Washington, D.C.: Mar. 25, 2002).
2A carrier is generally an entity (either an insurer or managed health care plan) that bears the risk for
and administers a range of health benefit offerings.
GAO-09-363R State Small Group Health Insurance Markets

the information provided by the states. However, in the survey, we asked states to describe
the source of the information reported and provide clarifying information about the numbers
reported. As a result of this information, we excluded some states’ responses from certain
market share analysis, e.g., if the state had no way of separating data on small group health
insurance from data on all group health insurance. We performed our work from December
2008 through February 2009 in accordance with all sections of GAO’s Quality Assurance
Framework that are relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence to meet our stated
objectives and to discuss any limitations in our work. We believe that the information and
data obtained, and the analysis conducted, provide a reasonable basis for any findings and
conclusions. Because we did not evaluate the policies or operations of any federal agency to
develop the information presented in this report, we did not seek comments from any agency.
The following summarizes the findings from our 2008 survey:
• The median number of licensed carriers in the small group market per state was 27.
• The median market share of the largest carrier in the small group market was about
47 percent, with a range from about 21 percent in Arizona to about 96 percent in Alabama.
In 31 of the 39 states supplying market share information, the top carrier had a market
share of a third or more.
• The five largest carriers in the small group market, when combined, represented threequarters
or more of the market in 34 of the 39 states supplying this information, and they
represented 90 percent or more in 23 of these states.
• Thirty-six of the 44 states supplying information on the top carrier identified a Blue Cross
and Blue Shield (BCBS) carrier as the largest carrier, and in all but 1 of the remaining 8
states, a BCBS carrier was among the five largest carriers.
• The median market share of all the BCBS carriers in the 38 states supplying this
information was about 51 percent, with a range of less than 5 percent in Vermont and
Wisconsin and more than 90 percent in Alabama and North Dakota.
In comparing what states reported in 2008 to what they previously reported to GAO in 2005
and 2002, we found:
• The median market share of the largest small group carrier has increased to about
47 percent in 2008 from the 43 percent reported in 2005 and the 33 percent reported in
2002. Twenty-four of the 29 states providing information in both 2002 and 2008 saw
increases in the market share of the top carrier that ranged from about 2 to 39 percentage
points. In contrast, the top carriers in 5 states lost market share with decreases ranging
from about 1 to 16 percentage points.
• The number of states with a combined market share of the five largest carriers of
75 percent or more has also increased since our 2002 survey. The combined market share
of the five largest small group carriers represented three-quarters or more of the market in
34 of 39 states, compared to 26 of 34 states reported in 2005 and 19 of 34 states reported in
2002.

Finally, the median market share of all the BCBS carriers in 38 states reporting this
information in 2008 was about 51 percent, compared to the 44 percent reported in 2005
and the 34 percent reported in 2002 for the 34 states supplying information in each of
these years.
The enclosure summarizes by state the number of licensed carriers, the largest carrier and its
market share, and the market share of the five largest carriers in the small group market. In
addition, the enclosure shows the rank of the largest BCBS carrier and the combined market
share of all BCBS carriers.
– – – – –
As arranged with your offices, unless you publicly announce the contents of this report
earlier, we plan no further distribution of it until 30 days after its issue date. Copies will then
be sent to other interested parties. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report. Please call me at
(202) 512-7114 if you have any questions. Major contributors to this report were
John E. Dicken
Kristi Peterson, Assistant Director; Susan Barnidge; Grace Materon; and Nelson Olhero.
Director, Health Care
Enclosure

http://www.nytimes.com/2010/02/24/opinion/24reich.html?pagewanted=print

February 24, 2010
Op-Ed Contributor
Bust the Health Care Trusts
By ROBERT B. REICH

Berkeley, Calif.

MY health insurer here in California is Anthem Blue Cross. So far, my group policy hasn’t been affected by Anthem’s planned rate increase of as much as 39 percent for its customers with individual policies — but the trend worries me, as it should everyone. Rates are soaring all over the country. Insurers have been seeking to raise premiums 24 percent in Connecticut, 23 percent in Maine, 20 percent in Oregon and a wallet-popping 56 percent in Michigan. How can insurers raise prices as much as they want without fear of losing customers?

Astonishingly, the health insurance industry is exempt from federal antitrust laws, which is why a handful of insurers have become so dominant in their markets that their customers simply have nowhere else to go. But that protection could soon end: President Obama on Tuesday announced his support of a House bill that would repeal health insurers’ antitrust exemption, and Speaker Nancy Pelosi signaled that she would put it toward an immediate vote.

This is promising news. Forcing insurers to compete for our business would do at least as much good as the president’s proposal to give the federal government, working with the states, the power to deny or roll back excessive premiums. The fact is that half of the states already have the power to approve rates and they don’t seem to be holding insurers back much.

Health insurers like Anthem claim they have to raise rates (as well as co-payments and deductibles) because of the economic downturn. Employers are reducing coverage and cutting payrolls. As a result, more people are buying individual policies, but they tend to be older and sicker. Younger and healthier Americans are simply going without insurance, and thus not subsidizing their costlier fellow policy-holders.

This can’t be the whole story, because big health insurers are making boatloads of money. America’s five largest health insurers made a total profit of $12.2 billion last year; that was 56 percent higher than in 2008, according to a report from Health Care for America Now.

It’s not as if health insurers have been inventing jazzy software or making jet airplanes. Basically, they just collect money from employers and individuals and give the money to providers. In most markets, consumers wouldn’t pay this much for so little. We’d find a competitor that charged less and delivered more. What’s stopping us? Not enough choice.

More than 90 percent of insurance markets in more than 300 metropolitan areas are “highly concentrated,” as defined by the Federal Trade Commission, according to the American Medical Association. A 2008 survey by the Government Accountability Office found the five largest providers of small group insurance controlled 75 percent or more of the market in 34 states, and 90 percent or more in 23 of those states, a significant increase in concentration since the G.A.O.’s 2002 survey.

Anthem’s parent is WellPoint, one of the largest publicly traded health insurers in America, which runs Blue Cross and Blue Shield plans in 14 states and Unicare plans in several others. WellPoint, through Anthem, is the largest for-profit health insurer here in California, as it is in Maine, where it controls 78 percent of the market. In Missouri, WellPoint owns 68 percent of the market; in its home state, Indiana, 60 percent. With 35 million customers, WellPoint counts one out of every nine Americans as a member of one of its plans.

Antitrust laws are supposed to prevent this kind of market power. So why are giant health insurers like WellPoint exempt? Chalk it up to an anomaly that began seven decades ago in the quaint old world of regional, nonprofit Blues. They were created in part by hospitals to spread the costs of expensive new equipment and facilities over many policy holders. Collaboration was the point, not competition. The 1945 McCarran-Ferguson Act made it official, exempting insurers from antitrust scrutiny and giving states the power to regulate them, although not necessarily any power to regulate rates.

The system worked fairly well until about two decades ago when insurers began morphing into publicly held, for-profit cash machines. A new breed of medical entrepreneur saw opportunities to profit from a rapidly aging population eager to get every new drug and technology that might extend their lives, and a government committed to doling out hundreds of billions of dollars in Medicare and Medicaid.

With size has come not only market power but political clout. Big for-profit insurers deploy enough campaign money and lobbyists to get their way with state legislators and insurance commissioners. A proposal last year to allow California’s Department of Insurance to regulate rates, for example, died in committee. These companies have even been known to press states to limit how many other health insurers they license.

And when they can’t get their way, insurers go to court. In Maine — one state that aggressively regulates rates — WellPoint’s Anthem subsidiary has sued the insurance superintendent for reducing its requested rate increase.

Political clout can be especially advantageous at the federal level, as the big Wall Street banks have so brazenly demonstrated. Over the past two and a half years, WellPoint’s employees and associates have contributed more than $922,000 to federal political campaigns, and the company has spent $7.8 million lobbying Washington policymakers, according to the Center for Responsive Politics. It should not be surprising that WellPoint was one of the leading opponents of the public insurance option, which would have subjected it to competition even where it had sewn up the market.

Antitrust is no substitute for broader health care reform, but it’s an important prerequisite. If a handful of giant health insurers are allowed to dominate the industry, many of the other aspects of reform (establishing insurance exchanges, requiring people to have insurance, even allowing consumers to buy insurance across state lines) won’t bring down the price of insurance.

Regardless of what happens at the White House’s health care meeting on Thursday, we’ve got to make sure health insurers compete for every one of our dollars. First chance I get I’m going to find another health insurer here in California — unless Anthem has such a lock on the market I can’t find a better deal.

Update: On Wednesday, members of the House voted overwhelmingly to eliminate the heath insurance industry’s antitrust exception.

Robert B. Reich, a professor of public policy at the University of California, Berkeley, and a secretary of labor under President Bill Clinton, is the author of “Supercapitalism.”

http://www.politicsdaily.com/2010/02/25/tom-k-working-insurance-nightmare-why-we-need-a-better-system/
Insurance Nightmare: Why We Need a Better System
Posted:
02/25/10

Late last year, I learned two things at about the same time: My cancer was coming back, and I had gotten a new insurance plan. Since then, I’ve learned something else: It’s far easier to deal with my disease than with my new insurers.
I have multiple myeloma, a cancer of the bone marrow that’s incurable but treatable. I’ve kept it at bay by aggressively pursuing the most advanced treatments available. By the time I relapsed in December, I had multiple bone fractures, was in significant pain and trying to figure out what to do next. Insurance was the last thing on my mind. I made an appointment in the new year to see the doctors who know me best, the myeloma experts at the Mayo Clinic.
That was my first mistake. Mayo Clinic, it turns out, is not part of the network of UnitedHealthcare, one of the nation’s largest health insurers. UHC took over my coverage on Jan. 1 because the company I retired from, The New York Times, was looking to save money. UnitedHealthcare, it also turns out, does not have to pay for any treatment it hasn’t approved in advance. But I didn’t know that. So because I rushed off without notice to consult a doctor I’ve seen for the last decade, I can’t calculate what that might cost me.
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Keeping your own doctor is one of the big concerns in the debate on overhauling the nation’s health care system, an effort that appears to be on life support as President Obama convenes a summit Thursday to try to patch together a bill that Republicans can sign on to. Another threat raised repeatedly by opponents of the Democrats’ plan is that it will create a nightmare system where government bureaucrats make all the decisions.
Bureaucrats? There are plenty of those in the private sector, too. But I should be so lucky to get one. All I get when I call UHC is the phone bank. Over the last month, I’ve called at least a dozen times and have never once talked to anyone who is actually reviewing my case or could make a decision about approving it. In fact, when I asked to speak with someone in the Clinical Coverage Department, I was told: “They don’t have a number.” Later, when I asked to speak with the person reviewing my case, the answer was, “She can only speak to the provider.”
What I want is to get into a clinical trial for an experimental drug called pomalidomide, the successor to Revlimid, the drug that put me in remission for the last three years. Doing so would not only save my life but actually save UHC money, as Celgene, the manufacturer, will supply the drug for free. Revlimid had cost my previous insurer $70,000 a year. The first drug Celgene marketed, thalidomide, was my initial treatment, in a clinical trial at the Mayo Clinic in 2000.

Related on Lemondrop: ‘Will Marry for Health Insurance’ — One Woman’s Desperate Quest
The pomalidomide trial would mean spending a month at Mayo headquarters in Rochester, Minn., or its branch in Phoenix. So when I returned from Rochester, I knew it was vital to get my insurance company on board. I called UHC to ask the obvious question: Are either of these hospitals in your network? Three people gave me three different answers. The first said Rochester is but Phoenix isn’t. The second said both are in network. The third said neither is in network. I said, Who am I supposed to believe?
That was only the beginning of the struggle to communicate with my new insurers. At one point, after three weeks of conversations, I was told that information about the trial that I’d given UHC had been deleted from the system. UHC wouldn’t take it because it came from an unauthorized doctor. It was then that I thought I might actually die from toxic insurance company stress syndrome (TICS) before the myeloma killed me!
Every UHC phone call begins with the same ordeal: Before you can talk to a human, you have to be screened by a computer. Are you calling as a health professional? (No.) OK, what’s the member ID you’re calling about? And what’s your date of birth? Now, do you want claims, benefits or something else? Benefits? Sure. What type? Medical, prescription drug, mental health or substance abuse?
It’s enough to drive you to substance abuse.
Once you get past the computer, you get a human, who asks many of the same questions. Each time, I patiently explain my situation. Usually I get transferred to someone else, where I start all over again. I never get to talk to the same person twice. And I can’t call back because no one will ever give me a direct number. “Just call the number on the back of the card” is the standard answer. In my myriad phone calls, I’ve been transferred to people in Customer Service, Cancer Resource Services, Care Coordination, Intake Coordination and Clinical Coverage. The last person I spoke with didn’t even know what a clinical trial was. I freaked out.
That’s when I decided to write about this nightmare situation. I called UHC for comment. Cheryl Randolph, spokesperson for UnitedHealthcare, was extremely apologetic for what she called the “ridiculous runaround” I had been given. She said that whether the Mayo Clinic is in network is an “easy question” that should have an easy answer. “I don’t know why you were given three different answers. I apologize for that. It is unacceptable.” She promised she would look into that and “help me figure out the best way to get you to participate in that trial.”
Within 24 hours, I got a call from a woman at UHC who said she was handling my case. I’m grateful for the quick response.
But the insurance company couldn’t really explain why UnitedHealthcare’s system was so convoluted and inefficient. Or why they would not accept information from the doctors most familiar with my case. Or why I was unable to talk with anyone at UHC who actually had any familiarity with my case. Or why this whole process was taking a month, while my cancer advances day by day.
It made me wonder: What about those people who can’t call up corporate communications and say, “I used to work for The New York Times, who switched me over to your coverage, and now am writing a piece for AOL, and I’d like you comment about the unbelievable trouble I’m having getting approval for a treatment that may help to save my life”?
Through my journalism experience and my health problems alike, I’ve become pretty skillful at navigating insurance companies. One of the first things I did when I tried to communicate with my new insurer was to ask for a case manager. All the major companies have them for high-maintenance people like me. Here, from my notes, is the saga that unfolded:
Jan. 25: After several transfers, I get Alice in Cancer Resource Services. She says she’s never heard of a case manager, I should call Customer Service. That’s when I’m transferred to three people who give me totally different answers as to whether Mayo Clinic is in-network or not. I’ve been on the phone for 45 minutes and feel completely spent.
Jan. 26: I try again and repeat my information for several people. The last one (was it Margaret or Vera?) sounds pretty certain that Mayo is out of network but says it could be considered in-network if the trial I want is not offered anywhere else. She creates a file for me and gives me a reference number to check on the status. I begin to think I’ve actually started this ball rolling.
Jan. 29: After three days, I call to see what’s happening. I finally get Customer Care and give them my reference number. They tell me my case is pending.
Feb. 2: UHC actually calls me! Maybe there’s been some progress. But it’s only Carole, who manages transplant patients. I ask why she is calling me; I’ve already had a transplant and I’m not looking to have another. Oh, she says, they sent me your file.
Feb. 3: Lydia phones. She says she needs the diagnosis codes for my illness, all the codes for procedures I would be having in Phoenix and the name of the doctor who will be treating me there. Since I’ve never been, I have no idea. She can’t take any information from my Mayo doctor in Rochester because he’s not a network provider.
Concluding the call, Lydia says she’s canceling out the earlier information because she will get new data from my local (approved) oncologist. Thank God he is in the network.
Feb. 15: I call to check on my case. They tell me it has been deleted from the system because it didn’t come from a preferred provider. If I didn’t know it before, I think I’m really in trouble now.
Feb. 16: The helpful woman in my doctor’s office calls to say she has supplied the insurance company with all the information they requested, but they told her the next thing I need to do is get a case manager. Oh dear, you mean a case manager like the one Alice told me three weeks ago she had never heard of before?
Feb. 16: I call UHC. You can’t have a case manager, I’m told. Your doctor’s office needs to call us first and talk to an intake coordinator. That starts the “clinical gap” request, they say. After that information is entered in the system, a case manager will be assigned. I call my doctor’s office and leave a message that I can’t get a case manager, they need to do it for me to get the ball rolling.
Feb. 19: I call UHC to see if a case manager has actually been assigned. The person I’ve been transferred to tells me they still need clinical notes from my doctor before they can get a manager on the case.
Feb. 19: My doctor’s office calls again: UHC says the Mayo Clinic in Phoenix has no record of me in their files. Well, duh! I haven’t been there yet. Now let’s see if I’ve got this straight: I can’t go there until UHC approves it. UHC can’t approve it until all the requisite information has been filed and a case manager assigned. But I can’t have a case manager until the intake coordinator has entered the case in the system. And the intake coordinator hasn’t entered the case because the hospital where I’m appealing to go has no record of me. I don’t know whether to scream or cry!
Feb. 19: I call Mayo in Phoenix and talk to the scheduler for my trial. Within minutes – and without talking to any robotic voices – I have gotten myself entered into Mayo’s system. Now I just need to tell UHC that if they call again, they will find me there.
Feb. 19: I call UHC back. After the litany of hurdles, I get Jay, who actually gives me a number for care coordination and tells me he’ll transfer me there. I am transferred, and I get the computer screener all over again. Exasperated, I hang up and call the direct number. I still get a robot, but at least it identifies itself as the care coordination department. And finally, I get Diana. I think of Paul Anka. Oh please, please Diana.
I tell Diana I’m calling about my appeal to get into a clinical trial and try to give her the reference number that was given me in a previous call (the second reference number, because the first says my case has been canceled). Diana just needs to get some information first. Here we go again – name, number, date of birth, etc. After the drill, she asks sweetly, Now what were you calling about? I say my appeal to get into a clinical trial. A clinical what? she asks. I’m not familiar with that. Oh my God, I blurt out, unable to help myself. She becomes defensive as I labor in distress to explain what a clinical trial is. Still sounding confused, she asks me, Are you a patient? Yes, I say. Well, she says, that’s why I’m not familiar with your terminology.
I try again: I just want to give you some information about my appeal. Oh, she replies, then you’ve got the wrong department, because we don’t handle any appeals. I’m about to explode, but I say, as calmly as I can, It’s not an appeal of a decision; I’m making a request for a decision to go to a trial at the Mayo Clinic. Well, she says in a slightly indignant tone, we don’t even contract with the Mayo Clinic. Hyperventilating, I say, please, please, Diana, just take the reference number and read the information so you’ll know what this is about!
I give her the number and she puts me on hold, hold, hold. When she returns, she sounds smugly satisfied, like she’s just discovered the simple answer to a question I’ve made unnecessarily complicated: Well, this is just a request for medication!
Aye-yi-yi! Yes, I say, the medication that’s given in the clinical trial. A request for you to let me go to the Mayo Clinic so I can have this drug that will save my life but has not yet been approved for market. Oohhh, she says, in a voice that belies the light bulb that’s just gone off in her head, what you’re asking for is a gap exception!
EXACTLY, I nearly shout out. Then, somewhat patronizingly, she says, Let me explain to you the process for that. You need to get your doctor to make a referral, your doctor has to call to set up what we call a clinical gap request. I cut her off before she can finish. Yes, I’ve done that, I’ve done all that, I say between gritted teeth. I can hardly keep from shouting. His office and yours have been talking for weeks! I just wanted to give you the name of the person to call at the Mayo Clinic so you can see that I’m in their system, awaiting an answer from you to get into their clinical trial!
She says, Well the reviewer working on it says she’s waiting for a call back from your doctor’s office for clinical information. The reviewer working on it? Someone is actually working on it? Who is that person? Can I get her number and speak directly with her? Unfortunately, she tells me, “she’s not going to speak with no one but the provider.”
I’m in despair. I think back to last year, when I signed up for early Social Security. It took one phone call. Fifteen minutes max. Everything was loaded into their system and I could look it up online. All the information was there. It was all correct. My checks come like clockwork on the same day every month. I’ve never had one problem. Last year my husband signed up for Medicare. Same experience. No problems, no complaints. This is your government at work. Some bureaucrats know how to get it right.

http://www.familiesusa.org/issues/private-insurance/hsas/health-savings-accounts.html

Health Savings Accounts (HSAs) are being promoted by President Bush and conservatives in Congress as a way to bring down spiraling health care costs. Only if consumers have “skin in the game,” they argue, will Americans start to shop around for cheaper health care.

HSAs are tax sheltered savings accounts coupled with high-deductible health insurance policies, and they have serious drawbacks. For many health consumers, HSAs will increase out-of-pocket costs—and complexity.

And here’s what they won’t do: They won’t bring down health care costs and they won’t make a dent in the number of Americans without health insurance. This resource center pulls together a range of materials looking at the limitations of Health Savings Accounts.
Analyses of and Articles about Health Savings Accounts:

An Unequal Burden: The True Cost of High-Deductible Health Plans for Communities of Color discusses the full costs associated with high-deductible health plans and why these expenses are disproportionately unaffordable for racial and ethnic minorities. It also examines several myths about health savings accounts (HSAs), which are often coupled with such health plans. (Families USA, September 2008)

Findings from the 2007 EBRI/Commonwealth Fund Consumerism in Health Survey shows that HSAs have had no impact on the number of uninsured, but they have increased market segmentation by attracting wealthier and healthier people. The study also documents that individuals with HSA-coupled health insurance have lower satisfaction, face high cost-sharing, and are more likely to delay needed care due to cost. More than half of such policyholders have no first-dollar coverage for preventive services. (Employee Benefit Research Institute and The Commonwealth Fund, 2008.)

Consumer Directed Healthcare: Except for the Healthy and Wealthy, It’s Unwise, a new study completed by Harvard Medical School researchers, finds that high deductible health insurance plans are unfair to women. Because of routine medical exams, women pay an average of $1,000 more than men on health care. The study’s author sums up: “High-deductible plans punish women for having breasts and uteruses and having babies.”

Stop Bad Ideas—How HSAs Can Drain Your Wallet and Harm Your Health presents three examples that illustrate what can happen to employees working for a hypothetical company that purchases a high-deductible health plan. (Families USA, December 2006)

New Provision in “Tax Extenders” Bill Would Make Health Savings Accounts More Attractive as Tax Shelters describes a new law that extends HSA tax shelters, primarily benefitting the wealthy. (Center on Budget and Policy Priorities, December 7, 2006)

Stop Bad Ideas—HSAs: Missing the Target examines the effects that HSAs will have on those without health insurance and on the health care system overall. (Families USA, November 2006)

Squeezed: Why Rising Exposure to Health Care Costs Threatens the Health and Financial Well-Being of American Families finds that two of five privately insured adults who had high-deductible health plans had expensive medical bills that were not covered by insurance. (The Commonwealth Fund, September 2006)

Consumer Directed Health Plans: Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans (U. S. Government Accountability Office, GAO-06-798, August 2006)

Informing the Debate about Health Savings Accounts: An Examination of Some Misunderstood Issues (Center on Budget and Policy Priorities, June 13, 2006)

Health Savings Accounts Unlikely to Significantly Reduce Health Care Spending (Center on Budget and Policy Priorities, June 12, 2006)

Health Savings Accounts: Why They Won’t Cure What Ails US Health Care (The Commonwealth Fund, June 2006)

Tutorial: Consumer-Directed Health Plans (kaiserEDU.org, June 2006)

Consumer Directed Health Plans: Small but Growing Enrollment Fueled by Rising Cost of Health Coverage includes data on enrollment and on out-of-pocket health care expenditures for people in HSA- or HRA-qualified high-deductible health plans. (Government Accountability Office, GAO-06-514, April 2006)

High-Deductible Health Plans with Health Savings Accounts: Emerging Evidence and Outstanding Issues (Missouri Foundation for Health, March 2006)

Taking a Closer Look at Health Savings Accounts explains what HSAs are and discusses their shortcomings. (The Georgia Budget and Policy Institute, March 2006)

Opinion: HSAs: “Shopping” for Price, Quality Difficult (Des Moines Register, March 27, 2006)

President Bush’s Fiscal Year 2007 Budget: Analysis of Key Health Care Provisions includes discussion and commentary on Health Savings Accounts (HSAs), Medicaid, and Medicare. (Families USA, February 2006)

President’s Proposal Would Make Health Care Less, Not More, Affordable (Families USA Press Statement, February 2006)

President’s Health Care Message Is Most Notable for What Was NOT Said (Families USA Press Statement, February 2006)

Administration Defense of Health Savings Accounts Rests on Misleading Use of Statistics (Center on Budget and Policy Priorities, February 2006)

Opinion: Consumer-Driven? Bad Idea; Beware Health Care Cost-Cutting Measures Like Tax Deductions, HSAs (Charlotte Observer, February 2006)

A Second Opinion on the President’s Prescription explains how President Bush’s support of HSAs constitutes another gift to the affluent and healthy and a “poison pill” to those living on the margins of society. (The Commonwealth Fund, February 2006)

Dangerous Prescription California Insurance Commissioner John Garamendi’s piece provides a more in-depth explanation of what HSAs are and what changes they will cause if implemented. (California Department of Insurance, January 2006)

President’s Health Care Tax Cut Proposals Are Likely to Weaken Employer-Based Health Insurance, Primarily Benefit High-Income People, and Worsen Deficits (Center on Budget and Policy Priorities, January 2006)

Health Savings Accounts Won’t Work for Workers (AFL-CIO, 2006)

Early Experience with High-Deductible and Consumer-Driven Health Plans lists six key problems with HSAs. (Employee Benefit Research Institute, December 2005)

Do High-Deductible Health Plans Threaten Quality of Care? (New England Journal of Medicine, September 2005)

HSAs: A Great Tax Shelter for Wealthy, Healthy People but Little Help to the Uninsured, Underinsured, and People with Medical Needs (Ethics Journal of the American Medical Association, July 2005)

The Effect of Health Savings Accounts on Health Insurance Coverage argues that HSAs will not help expand health care and may help weaken small-group health care. (The Commonwealth Fund, April 2005)

Health Savings Accounts: The Fundamentals (National Health Policy Forum, April 2005)

How High Is Too High? Implications of High-Deductible Health Plans (The Commonwealth Fund, April 2005)

Hazardous Health Care: The Impact of Health Savings Accounts on Minnesota Health Care (SEIU Local 113, March 2005)

Health Savings Accounts: Issues and Implementation Decisions for States examines the role that states will play in implementing HSAs. (Academy Health, State Coverage Initiatives, September 2004)

Most Households’ Medical Expenses Exceed HSA Deductibles (Urban Institute Tax Policy Center, August 2004)

Proposal for New HSA Tax Deduction Found Likely to Increase the Ranks of the Uninsured (Center on Budget and Policy Priorities, May 2004)

http://www.cbo.gov/ftpdocs/87xx/doc8758/MainText.3.1.shtml

The Long-Term Outlook for Health Care Spending

Introduction and Summary

Spending on health care in the United States has been growing faster than the economy for many years, representing a challenge not only for the government’s two major health insurance programs—Medicare and Medicaid—but also for the private sector. As health care spending consumes a greater and greater share of the nation’s economic output in the future, Americans will be faced with increasingly difficult choices between health care and other priorities. However, a variety of evidence suggests that opportunities exist to constrain health care costs without adverse health consequences.1

In December 2007, the Congressional Budget Office (CBO) will release new long-term budget projections, and spending on health care will play a central role in the fiscal outlook to be described in that report. This study presents CBO’s projections of federal spending on Medicare and Medicaid and health care spending generally over the next 75 years. Despite the substantial uncertainties surrounding projections over that long a period, particularly ones involving the growth of health care costs, such a horizon is useful for illustrating the long-term fiscal challenges that this country faces.

The goal of the projections in this study is to examine the implications of a continuation of current federal law, rather than to make a prediction of the future. Under that assumption, however, federal spending on health care would eventually reach unsustainable levels. In reality, federal law will change in the future, ensuring that the basis for the projections will not turn out to be correct, but the projections nevertheless provide a useful measure of the scope of the problem facing the nation.

A simple extrapolation of historical growth rates in Medicare and Medicaid expenditures can illustrate paths for future spending on those programs.2 That approach, however, implicitly allows the economic impossibility of having health care spending eventually exceed total national income and fails to allow the nonfederal components of the health system to respond to rising costs (as they probably would do even without a change in federal law). Those shortcomings are magnified as the projection period lengthens. This study describes an alternative approach in which the rising share of national income devoted to health care creates pressure on households and employers to take potentially painful steps to reduce the growth in health care spending.

Various plausible paths exist for how spending in the rest of the health care system would evolve over time in the absence of changes in federal law, and one innovation in the methodology presented here is to incorporate a specific metric for determining how that spending will grow. Many such metrics could be applied; the premise that CBO chose was that Americans will ultimately demand changes to the system to prevent their consumption of other goods and services from declining in real (inflation-adjusted) terms. In other words, CBO’s projections assume that to avoid a reduction in real consumption of items besides health care, employers, households, and insurance firms will change their behavior in a variety of ways (potentially including higher cost sharing, increased utilization management, reduced insurance coverage by employers, and greater scrutiny of new technologies based on evidence of their comparative effectiveness) to slow the rate of growth of spending in the nonfederal part of the health system. The projections also assume that, even in the absence of changes in federal law, some of the measures adopted to slow growth in the rest of the health care system will moderate spending growth in Medicare and Medicaid and that regulatory changes at the federal level and policy changes at the state level will help to slow cost growth in those programs.3

The results of CBO’s projections suggest that in the absence of changes in federal law:
¦

Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082.
¦

Federal spending on Medicare (net of beneficiaries’ premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.

Those results show significantly higher federal spending on Medicare and Medicaid under current law than other official projections do, which typically assume that spending on those programs grows much more slowly in the future than it has in the past. For example, although the projections by CBO and by the trustees of the Medicare program (under their intermediate assumptions) track each other relatively closely for the next two or three decades, by the end of 75 years, Medicare spending under CBO’s projections is about 50 percent higher.

To be sure, significant uncertainty surrounds such projections, and the growth of spending on health care could turn out to be substantially higher or lower over the next 75 years than projected here. Like overall budget projections that show an exploding ratio of federal debt to GDP over the long term (which could not in all likelihood actually occur because, at some point, the government would not be able to sell additional debt to investors), the projections here of significant increases in health care spending and a sustained differential in the growth rates of Medicare and Medicaid relative to that of the rest of the health care system will almost certainly not occur, because current law will be changed to help prevent such outcomes. Nonetheless, the projections are useful in illustrating the implications of current law. The main message of this study is that, without changes in federal law, federal spending on Medicare and Medicaid is on a path that cannot be sustained.

In itself, higher spending on health care is not necessarily a “problem.” Indeed, there might be less concern about increasing costs if they yielded commensurate gains in health. But the degree to which the system promotes the population’s health remains unclear. Indeed, substantial evidence exists that more expensive care does not always mean higher-quality care. Consequently, embedded in the country’s fiscal challenge is the opportunity to reduce costs without impairing health outcomes overall (see Box 1).

Box 1.
What Policy Options Can Help Reduce Spending on Medicare and Medicaid?

The analysis underlying the projections in this study, by design, keeps federal law unchanged. A result of that constraint is that Medicare and Medicaid grow more rapidly than the rest of the health system, which is unlikely to occur because federal law will change in the future. In other words, it is certain to change to prevent the scenarios presented here from being realized. So what types of federal policy options would help to reduce future spending on Medicare and Medicaid?

One type of change involves reducing payment rates in the two programs. For example, some analysts have proposed reducing payments to Medicare Advantage plans. Those private insurance plans, according to the Congressional Budget Office’s estimates, are paid roughly 12 percent more than the cost of enrolling their beneficiaries in the traditional fee-for-service component of Medicare. Other proposals have involved reductions in reimbursement rates for specific types of services or providers.

A more fundamental set of federal policy changes may help to reduce not only federal spending but also health care spending overall. Indeed, given the interactions between federal programs and the rest of the health system, many analysts believe that significantly constraining the growth of costs for Medicare and Medicaid over long periods of time, while maintaining broad access to health providers under those programs, can occur only in conjunction with slowing cost growth in the health care sector as a whole.

Two potentially complementary approaches to reducing spending on Medicare, Medicaid, and health care generally—rather than simply reallocating spending among different sectors of the economy—involve generating more information about the relative effectiveness of medical treatments and changing the incentives for providers and consumers in the supply and demand of health care. The current financial incentives facing both providers and patients tend to encourage or at least facilitate the adoption of expensive treatments and procedures, even if the evidence about their effectiveness relative to other therapies is limited. For doctors and hospitals, those incentives stem from fee-for-service reimbursement. Such payments can encourage health care providers to deliver a given service in an efficient manner but also provide an incentive to supply additional services—as long as the payments exceed the costs. For their part, insured individuals generally face only a portion of the costs of their care and thus have only limited financial incentives to seek lower-cost treatments. Private health insurers have incentives to limit the use of ineffective care but are also constrained by a lack of information about what treatments work best for which patients.

Many analysts believe that expanded research on “comparative effectiveness” offers a promising mechanism to address some of those concerns. Analysis of comparative effectiveness is simply a comparison of the impact of different options that are available for treating a given medical condition for a particular set of patients. Such studies may compare similar treatments, such as competing drugs, or they may analyze very different approaches, such as surgery in comparison to drug therapy. The analysis may focus only on the relative medical benefits and risks of each option, or it may go on to weigh both the costs and the benefits of those options. In some cases, a given treatment may be found more effective for all types of patients, but more commonly a key issue is determining which specific types would benefit most from it.

To affect medical treatment and reduce health care spending, the results of comparative effectiveness analyses would ultimately have to change the behavior of doctors and patients—that is, to get them to use fewer services or less intensive and less expensive services than are currently projected, which, for Medicare, would require changes to current law. The program has not taken costs into account in determining what services are covered and has made only limited use of data on comparative effectiveness in its payment policies. But if statutory changes permitted doing so, the program could use information about comparative effectiveness to promote highervalue care. For example, Medicare could tie its payment to providers to the cost of the most effective or most efficient treatment. If that payment was less than the cost of providing a more expensive service, then doctors and hospitals would probably elect not to provide it—so the change in Medicare’s payment policy would have the same practical effect as a coverage decision. Alternatively, enrollees could be required to pay for the additional costs of less effective procedures (although the impact on incentives for patients and their use of care would depend on whether and to what extent they had supplemental insurance coverage that paid some or all of Medicare’s cost-sharing requirements).

More modest steps that Medicare could be authorized to take would include smaller-scale financial inducements to doctors and patients to encourage the use of cost-effective care. Doctors and hospitals could receive modest bonuses for practicing effective care or modest cuts in their payments for using less effective treatments. Likewise, enrollees could be required to pay a portion of the additional costs of less efficient procedures (rather than the full difference in costs). Or Medicare could provide information to doctors and their patients about doctors’ use of various treatments, which would create some pressure for them to use more-efficient approaches. Adopting more modest measures to incorporate the findings of comparative effectiveness research, however, would probably yield smaller savings for the program.

Even in the absence of more information about comparative effectiveness, changes in incentives could help to control health care costs—but such measures would be more likely to maximize the health gains obtained for a given level of spending if they were combined with improved information. On the provider side, greater bundling of payments to cover all of the services associated with a treatment, disease, or patient could reduce or eliminate incentives to provide additional services that might be of low value. Such approaches, however, can raise concerns about the financial risk that providers face and about incentives for them to provide too little care. On the consumer side, a landmark health insurance experiment by RAND showed that higher cost sharing reduced spending—particularly when compared with a plan offering free care—with little or no adverse effects on health.

The broad options of generating more information and of changing incentives do not represent an exhaustive list of proposals intended to reduce costs in Medicare and Medicaid. In addition, some analysts have advocated significant expansions of disease management and care coordination as mechanisms for reducing costs—proposals that reflect the increasing prevalence of many chronic conditions, the large share of health care spending attributable to those conditions, and the lack of systems to coordinate care in many public and private health insurance plans. For example, 25 percent of Medicare beneficiaries accounted for 85 percent of the program’s costs in 2001; more than three-quarters of those expensive beneficiaries had one or more of seven prominent chronic conditions (including coronary artery disease, diabetes, and congestive heart failure). However, the evidence to date—including the findings of several demonstration projects conducted under Medicare— suggests that disease management and care coordination may raise the quality of the health care provided but do not significantly reduce costs among a broad array of patients. As more evidence on the approaches is developed, identifying specific ways to reduce costs, especially for targeted subsets of beneficiaries, may become possible; for now, the possibility and scope of savings remain unclear.

Overview of the U.S. Health Care System

Spending on health care in the United States is financed through a combination of private and public sources. Most Americans under the age of 65 have private health insurance obtained through an employer. According to CBO’s estimates, about 63 percent of that population (161 million people) had employment-based coverage in 2006, while about 4 percent (10 million people) purchased private coverage directly from an insurer.4 The two main sources of public financing for health care are Medicare and Medicaid. Nearly 43 million elderly or disabled individuals were enrolled in Medicare in 2006, and nearly 61 million low-income individuals were enrolled in Medicaid for at least part of the year.5 About 43 million people (constituting 17 percent of the nonelderly population) were uninsured. (For more details on the Medicare and Medicaid programs, see Appendix A.)

In 2005, the most recent year for which data are available, national spending on health care totaled nearly $1.9 trillion, or 14.9 percent of the nation’s GDP.6 Some 55 percent of the total was financed privately, and the rest came from public sources (see Table 1). Payments by private health insurers were the largest component of private spending, accounting for 37 percent of national health expenditures. Consumers’ out-of-pocket expenses, which include payments for deductibles and copayments for services covered by insurance as well as payments for services not covered by insurance, accounted for 13 percent of national health expenditures.7 Other sources of private funds, from philanthropy and on-site clinics that some employers maintain for their workers, accounted for 4 percent of the total.

Table 1.

National Spending on Health Care by Source of Funds, 2005

Billions of Dollars Percent
Private Spending 1,013.5 54.5
Private health insurance 694.4 37.3
Out-of-pocket payments 249.4 13.4
Other private spending 69.8 3.7

Public Spending 847.3 45.5
Medicare 342.0 18.4
Medicaida 311.0 16.7
Other public spending 194.3 10.4

Total 1,860.9 100.0

Source: Congressional Budget Office based on data on spending on health services and supplies, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services.

a. Spending on Medicaid includes amounts spent by the federal government as well as by the states.

Federal spending on Medicare accounted for 18 percent of national health expenditures in 2005, while federal and state spending on Medicaid accounted for 17 percent. A variety of other public programs accounted for 10 percent of national health expenditures, including ones by state and local health departments, the Department of Veterans Affairs, and the Department of Defense; workers’ compensation programs; and the State Children’s Health Insurance Program.

The American health care system also consists of a broad array of health care providers, manufacturers, and suppliers. Although 45 percent of the spending on medical care is financed publicly, most services are furnished by private providers. For example, Medicare and Medicaid beneficiaries receive most of their care from physicians, hospitals, and other providers that deliver services to the general population.

From 1975 to 2005, the share of national health expenditures that was financed privately fell slightly, from 59 percent to 55 percent, while the share that was financed publicly rose correspondingly, from 41 percent to 45 percent (see Figure 1). During that period, out-of-pocket payments fell from 31 percent of national health expenditures to 13 percent, while payments by private insurers rose from 25 percent to 37 percent. Although the share of national health expenditures that is financed by out-of-pocket payments has fallen substantially, such payments are still a significant burden for many families. According to one study, 4.3 percent of the nonelderly population (nearly 11 million people) lived in families that spent more than 20 percent of their after-tax income on out-of-pocket payments for medical care in 2003.8

Figure 1.

National Spending on Health Care by Source of Funds, 1975 to 2005

(Percent)
Figure 1

Source: Congressional Budget Office based on data on spending on health services and supplies, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services.

Historical Growth of Health Care Spending

Total spending on health care in the United States, including both private and public spending, increased from 4.7 percent of GDP in 1960 to 14.9 percent in 2005, the most recent year for which data are available, rising steadily throughout most of that period (see Figure 2). A notable exception was the period from 1993 to 2000, when the share remained relatively stable. Many analysts have attributed that lull to a substantial increase in the number of people who were enrolled in managed care plans as well as to excess capacity among some types of providers, which increased health plans’ negotiating leverage.9

Figure 2.

Spending on Health Care as a Percentage of Gross Domestic Product,
1960 to 2005

(Percent)
Figure 2

Source: Congressional Budget Office based on data on spending on health services and supplies, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services.

Note: Amounts for Medicare are gross federal spending on the program. Amounts for Medicaid include spending by the federal government and the states.

Factors Underlying the Historical Growth in Health Care Spending

Most analysts agree that the most important factor contributing to the growth in health care spending in recent decades has been the emergence, adoption, and widespread diffusion of new medical technologies and services.10 Major advances in medical science allow providers to diagnose and treat illnesses in ways that were previously impossible. Many of those innovations rely on costly new drugs, equipment, and skills. Other innovations are relatively inexpensive but add up quickly as growing numbers of patients make use of them. Although technological innovation can sometimes reduce spending, in medicine such advances and the resulting changes in clinical practice have generally increased it.

Other factors that have contributed to the growth of health care spending include increases in personal income and the growth of insurance coverage. Demand for medical care tends to rise as real family income increases. Moreover, the growth of insurance coverage in recent decades, as evidenced by the substantial reduction in the percentage of health care spending that is paid out of pocket, has also increased the demand for medical care, because coverage reduces consumers’ cost of care. However, according to the best available evidence, increasing income and insurance coverage cannot explain much of the growth in health care spending in recent decades.11

Another source of spending growth has been the aging of the population. Among adults, average medical spending generally increases with age, so as the population becomes older, health care spending per capita rises. However, over the past three decades, the effect of aging on health care spending has been relatively modest. The demographic effect will become more pronounced with the aging of the baby-boom generation, but it will continue to have a modest effect not only on national health care spending but also on federal spending on Medicare and Medicaid.12

Historical Trends

When analyzing historical trends in the growth of health care spending, it is useful to disaggregate the various components. Factors that affect spending on health care include general inflation; growth in the size of the population; and, to a lesser extent, changes in the age distribution of the population. Removing their effects reveals the amount of spending growth that is attributable to factors beyond inflation and demographics. There are at least two ways to measure such additional spending growth: as the increase in real annual health care spending for an average individual (“real per capita cost growth”) or as the increase in health care spending for an average individual relative to the growth of per capita GDP.13 The latter measure is commonly referred to as “excess cost growth,”

signifying that it measures the extent to which growth in per capita spending on health care exceeds the growth in per capita GDP, after adjustments for changes in the age distribution of the population. (The phrase is not intended to imply that growth in per capita spending on health care is necessarily excessive. It simply measures that growth relative to the growth of the economy.) If per capita health care spending grows faster than per capita GDP, the share of the economy devoted to health care will rise.

Although real per capita cost growth is useful for short-term projections, excess cost growth is a more useful concept for long-term projections. From one year to the next, real per capita cost growth is the more reliable measure, because health care spending does not closely track annual economic trends. (Per capita health care spending does not usually fall in a recession or sharply accelerate during years of strong economic growth.) As a result, excess cost growth is often unusually low during periods of strong economic growth and unusually high during periods of slow growth. Over longer periods, though, growth in per capita health care spending is likely to reflect changes in overall economic growth. As the baby-boom generation retires and the growth of the labor force slows, per capita GDP growth will probably slow from the rate experienced over the past 30 years, and growth in per capita spending on health care will probably slow as well. Because the projections contained in this study are long term, they are based on assumptions about future excess cost growth rather than real per capita cost growth.

In part, the projections are based on historical trends since 1975. The purpose of beginning in 1975 is to exclude the start-up period for Medicare and Medicaid; by that year, both programs had been in effect for nearly 10 years, and Medicare benefits had been available to nonelderly disabled people for two years.

The historical rates of cost growth that CBO used for Medicare and Medicaid remove the effect of growth in the number of beneficiaries. The calculation for Medicare also removes the effect of changes in the age composition of the population. For Medicaid, the computation removes the effect of changes in the composition of the caseload: the portion of beneficiaries who are children, disabled people, elderly people, and other adults.14

From 1975 to 2005, real per capita spending on health care grew an average of 4.2 percent annually (see Table 2). During that period, per capita GDP grew at 2.2 percent, and excess cost growth amounted to 2.1 percentage points (see Table 3).15 Those measures capture the growth in total spending on health care, including payments from all private and public sources. Excess cost growth was somewhat higher during that period for Medicare (2.4 percentage points) and Medicaid (2.2 percentage points) and somewhat lower for all other health care spending (2.0 percentage points). Included in other health care spending are payments by private insurers, payments by people who lacked health insurance coverage, all other out-of-pocket payments by consumers, and health care spending by government programs other than Medicare and Medicaid. Consequently, the differences in excess cost growth between Medicare, Medicaid, and other health care spending should not be interpreted as meaning that Medicare or Medicaid is less able to control spending than private insurers.

Table 2.

Real per Capita Cost Growth in Medicare, Medicaid, and All Other Spending on Health Care

(Percent)

Medicare Medicaida All Other Total
1975 to 1990
5.4 5.4 4.8 5.1
1990 to 2005
3.8 3.3 3.1 3.4
1975 to 2005
4.6 4.4 4.1 4.2

Source: Congressional Budget Office.

Note: Figures are annual averages.

a. For Medicaid, data are available through 2004.

Table 3.

Excess Cost Growth in Medicare, Medicaid, and All Other Spending on Health Care

(Percentage points)

Medicare Medicaida All Other Total
1975 to 1990
2.9 2.9 2.4 2.6
1990 to 2005
1.8 1.3 1.4 1.5
1975 to 2005
2.4 2.2 2.0 2.1

Source: Congressional Budget Office.

Note: Excess cost growth refers to the number of percentage points by which the growth of spending on Medicare,
Medicaid, or health care generally (per beneficiary or per capita) exceeded the growth of nominal gross domestic product (per capita). Figures are annual averages.

a. For Medicaid, data are available through 2004.

Excess cost growth was higher during the earlier part of that period and slower during the second half. The slower growth in overall spending during the 1990s, though, may have reflected one-time changes (for instance, the spread of managed care) rather than a change in the underlying trend. In addition, rates of excess cost growth in Medicare and Medicaid are partly driven by changes in law and policy. Changes have included expansions of the programs as well as efforts to limit cost growth. Most notably, in 1983, Medicare introduced a prospective payment system, under which hospitals are paid a predetermined rate for each admission. The system reduced costs. Whether such changes will ultimately constitute one-time shifts or more permanent changes in cost growth rates is uncertain. As with other spending on health care, the rates of real per capita cost growth and excess cost growth for Medicare and Medicaid were lower from 1990 to 2005 than they were in the preceding 15 years. Because it is unclear whether the experience from the 1990s represented a one-time shift in the level of costs or a change in the underlying trend and because the entire 30-year period was marked by substantial year-to-year volatility without any apparent trend (as shown in Figure 3), CBO uses the average from 1975 onward as the starting point for the projections of the future.

Figure 3.

Excess Cost Growth in Medicare, Medicaid, and All OtherSpending on Health Care

(Percentage points)
Figure 3

Source: Congressional Budget Office based on data on spending on health services and supplies, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services.

Note: Excess cost growth refers to the number of percentage points by which the growth of annual spending on Medicare, Medicaid, or all other health care (per beneficiary or per capita) exceeded the growth of nominal gross domestic product (per capita).

a. For Medicaid, data are available through 2004.

Projections of Health Care Spending

In the absence of an unprecedented change in the long-term trends, national spending on health care will grow substantially over the coming decades. The magnitude of that growth is highly uncertain, even over short periods, let alone a period as long as 75 years. CBO’s projections show health care spending assuming no change in federal law affecting Medicare or Medicaid.16 Thus, they provide a measure of the scope of the potential problem posed by the rising costs but are not a forecast of future developments because the magnitude of the problem will ultimately necessitate changes in the government’s programs. They are also subject to the inherent uncertainty surrounding any long-term predictions, especially regarding health care.17 Nevertheless, they provide a useful reference in showing the consequences of current law and assessing the impact of changes in law.

CBO’s Assumptions About Future Spending on Health Care

In CBO’s projections, spending for Medicare and Medicaid over the next 10 years is based on the agency’s March 2007 budget outlook.18 The projections for those programs in 2018 and later, as well as the projections for other health care spending, are based on the growth and aging of the population, growth in per capita GDP, and assumed rates of excess cost growth.

Short-Term Projections. For federal spending on Medicare and Medicaid, this study uses CBO’s baseline budget projections for 2008 to 2017, which assume no change in current federal law.19 CBO’s baseline budget projections do not include projections of total national spending on health care. Therefore, short-term projections of all other (non-Medicare and non-Medicaid) health care spending were made using the same methods as those used for the long-term projections, as described below.

The Structure of Long-Term Projections. In its long-term projections, CBO combines an assumption about excess cost growth in the spending on health care with projections of the growth and aging of the population and of the growth in per capita GDP.

The agency develops separate projections for three categories:
¦

Federal spending on Medicare;

¦

Federal spending on Medicaid; and

¦

All other spending on health care, which includes private, state and local, and other federal health spending. (This category includes Medicare premiums, Medicare beneficiaries’ cost sharing, and the states’ share of Medicaid spending.)

CBO constrained Medicare premiums and cost sharing to grow at the same rate as federal spending on Medicare and constrained state Medicaid spending to grow at the same rate as federal Medicaid spending.20

Assumptions About Initial Rates of Excess Cost Growth. Although all long-term economic and demographic trends are difficult to forecast, future excess cost growth in health spending during the next century may be particularly uncertain. Systems of health care and health care financing have existed in their current forms for only a few decades, and medical technology continues to evolve rapidly.

One simple projection methodology is to base excess cost growth in the future on the average rate in the past. CBO adopts that approach when selecting initial rates of excess cost growth. Specifically, the excess cost growth rate for each of the three categories (Medicare spending, Medicaid spending, and all other spending on health care) in 2018 is assumed to equal the average of the rates from 1975 to 2005 (as presented in Table 3). (As mentioned, for all other spending on health care, the same rate is also used for 2008 through 2017.)

Assumptions About Long-Term Rates of Excess Cost Growth. For later years, one option would be to adopt the historical averages indefinitely. Although that approach is attractive for its simplicity (the results from such an extrapolation are presented in Appendix D), it has significant shortcomings. For example, simply extrapolating prior growth rates would result in total spending on health care eventually exceeding 100 percent of GDP. Furthermore, even in the absence of changes in federal law, spending growth would probably slow eventually as health care expenditures continued to rise and displaced increasing amounts of consumption of goods and services besides health care. In other words, pressure to slow cost growth will mount as health care accounts for a larger share of the American economy.

In response to rising health care costs, various policy changes in the private sector and by state governments would be likely. Employers would probably intensify their efforts to reduce their own costs, by, for example, working with insurers to make health care more efficient or by reducing insurance coverage. They would also probably raise premiums and out-of-pocket charges. Employees would then react to the higher charges either by shifting to plans with lower premiums—and more restrictive coverage—or by limiting their consumption directly in response to the higher out-of-pocket charges.21

It is impossible to predict with certainty precisely how such a process would unfold and how much cost growth could slow. Among various plausible approaches, a simple and transparent one is to assume that within the projection period, households would not be willing to spend so much more on health care that, from one year to the next, the increase in such spending alone was greater than the total increase in productivity. Therefore, under the assumption that the consumption of items besides health care does not decline, at the end point of CBO’s projection period, in 2082, per capita consumption would continue to grow because of increased productivity, but the additional economic resources would be devoted entirely to health care. That assumption, to be sure, is not the only reasonable one, and other assumptions could generate higher or lower amounts of spending on health care in the long term. The approach, though, has the virtue of considering future levels of spending on both health care and other goods and services.22

Under the scenario that CBO presents, the slowdown in excess cost growth would not be painless and would not occur simply through improved efficiencies given the current structure of the health sector. Households would probably face increased cost sharing; new and potentially useful health technologies would be introduced more slowly or utilized at lower levels than would occur without a slowdown in excess cost growth; and more treatments or interventions might simply not be covered by insurance. Nevertheless, Americans would still face steadily increasing health costs. In other words, even though the growth rate might decline, the real level of health care costs would continue to rise—to the point of accounting for all of the increase in productivity. Therefore, real average consumption of goods and services other than health care would stagnate.

Such a slowdown in non-Medicare, non-Medicaid spending on health care may be particularly difficult to achieve in the absence of changes in federal law (as assumed in the projections). But at some point, the pressure on that portion of the system would probably become so severe that measures to slow growth would be taken. State governments and the private sector would almost certainly have more flexibility to respond to that pressure than the federal government would have without a change in federal law. The steps taken to slow growth in the non-Medicare, non-Medicaid sectors of the health system, in turn, would probably exert some downward pressure on growth rates in the public programs because they are integrated to a significant degree with the rest of the health care system. To the extent that actions by individuals and businesses resulted in lower-cost “practice patterns” by physicians, slower development and diffusion of new technologies, and cost-reducing changes to the structure of the health care system, Medicare and Medicaid would experience some reduction in their own growth—but the extent of that spillover is uncertain.

Moreover, CBO assumes that under current law, the federal government would make regulatory changes aimed at slowing spending growth on federal health programs and that Medicare beneficiaries’ demand for health care services would decline as Medicare premiums and cost-sharing amounts consumed a growing share of their income. On the basis of discussions with health and policy experts, CBO assumes that—without changes in law—the combined effects of those factors would be to reduce Medicare’s excess cost growth by one-fourth of the reduction in the growth of non-Medicare, non-Medicaid spending on health care. In other words, in a scenario in which the growth rate of spending on health care outside Medicare and Medicaid declined from 2 percent to 1 percent per year, Medicare spending growth would decline from 2 percent to 1.75 percent per year. (As discussed below, it is perhaps unlikely that Medicare and Medicaid would actually experience a significantly higher growth rate than the rest of the health sector over an extended period of time, but changes in federal law would be necessary to avoid that outcome.)

CBO assumes that excess cost growth will decline more rapidly for Medicaid, which is a joint federal–state program, than for Medicare. In addition to the spillover effects and possible federal regulatory changes noted above, states are likely to take actions to reduce the growth of Medicaid spending even without changes in federal law. State governments would probably respond to growing fiscal pressures by limiting the services they chose to cover or by reducing their number of beneficiaries by tightening eligibility. In its projections, CBO assumes that the rate of decline in Medicaid’s excess cost growth will be 75 percent of the reduction in the growth of non-Medicare, non-Medicaid spending on health care. CBO’s projection methodology for excess cost growth from 2019 through 2082 is thus based on the following set of assumptions:
¦

Excess cost growth in 2018 for Medicare, Medicaid, and all other health care will equal the historical averages;

¦

Total real per capita consumption of goods and services besides health care will not decline during the 75-year projection period; and

¦

The annual reduction in excess cost growth in Medicare and Medicaid will be, respectively, one-fourth and three-fourths of that for all other health care.

Under those assumptions, the excess cost growth rate for non-Medicare, non-Medicaid spending on health care declines by 4.6 percent annually (see Table 4).23 By 2082, that rate drops to 0.1 percentage point. For Medicare, excess cost growth declines to 1.1 percentage points that year, and for Medicaid, to 0.2 percentage points. The average rates for excess cost growth between 2018 and 2082 are 0.6 percentage points for non-Medicare, non-Medicaid spending, 1.7 percentage points for Medicare, and 0.9 percentage points for Medicaid.

Table 4.

Assumptions About Excess Cost Growth Over the Long Term

(Percentage points)

2018 Rate
(Historical Average) Annual Decline in
Rate, 2018–2082
(Percent) Average Rate,
2018–2082 Rate in 2082
Medicare
2.4 1.1 1.7 1.1
Medicaid
2.2 3.4 0.9 0.2
All Other Spending on Health Care
2.0 4.6 0.6 0.1

Source: Congressional Budget Office.

Note: Excess cost growth refers to the number of percentage points by which the growth of spending on Medicare, Medicaid, or health care generally (per beneficiary or per capita) is assumed to exceed the growth of nominal gross domestic product (per capita).

It may be difficult to envision how per capita Medicare and Medicaid spending could continue to grow more rapidly than other health care spending over such a long period, but changes in federal law are probably necessary to avoid that outcome. Furthermore, actions to reduce spending growth in the private sector could attenuate the incentives for the development and diffusion of new medical technologies for nonelderly people while having little effect on new technologies focused on diseases principally affecting the elderly.

That aspect of the projections may appear unrealistic, but it highlights the core problem—the unsustainability of current federal law. (The inherent tension in making long-term projections for a federal health care system that cannot be sustained in its current form must manifest itself in some way.) In reality, it is likely that changes in federal law as well as in practices in the private sector will slow the growth of health care spending such that growth in per capita Medicare and Medicaid spending does not diverge greatly from other spending on health care.

Projections of Health Spending

Over the past 30 years, total national spending on health care has more than doubled as a share of GDP. Under the assumptions described above, according to CBO’s projections, that share will double again by 2035, to 31 percent of GDP. Thereafter, health care costs continue to account for a steadily growing share of GDP, reaching 41 percent by 2060 and 49 percent by the end of the 75-year projection period (see Figure 4).

Figure 4.

Projected Spending on Health Care as a Percentage of Gross Domestic Product

(Percent)
Figure 4

Source: Congressional Budget Office.

Note: Amounts for Medicare are net of beneficiaries’ premiums. Amounts for Medicaid are federal spending only.

Although the rate of cost growth slows over the projection period, the annual increase in the level would remain high. For example, for the five years beginning in 2007, CBO projects health care spending, measured as a share of GDP, to grow by 12 percent—from 15.5 percent of GDP to 17.4 percent. From 2070 to 2075, CBO projects, it will grow by only 4 percent, from 44.4 percent of GDP to 46.2 percent. From one perspective, the growth during the latter period is much slower. But in both periods, health care spending rises by about 2 percent of GDP.

Spending on Medicare and Medicaid is projected to grow as a share of total spending on health care—as
the assumed rates of excess cost growth for those programs under current federal law slow less quickly than does the rate for other spending on health care and as

the population ages. Net federal spending on those programs now accounts for about 4 percent of GDP, or 26 percent of total spending on health care. By 2035, those figures grow to 9 percent of GDP, or 30 percent of total spending on health care, and by 2082, to 19 percent of GDP, or 38 percent of total spending.

Excess cost growth is the main factor responsible for the projected increase in both national spending on health care and federal spending on Medicare and Medicaid. By itself, the projected change in the age composition of the population has a modest effect on the future path of health care spending (see Box 2).

Box 2.
The Effect of the Aging of the Population on Spending on Medicare and Medicaid

In coming decades, the share of the population that is covered by Medicare will expand rapidly as members of the baby-boom generation become eligible for the program, and the share that uses long-term care services financed by Medicaid will also probably increase. Although the aging of the population is frequently cited as a major factor contributing to the large projected increase in federal spending on those two programs, it accounts for a modest fraction of the growth that the Congressional Budget Office (CBO) projects. The main factor is excess cost growth—or the extent to which the increase in health care spending for an average individual exceeds the growth in per capita gross domestic product (GDP).

As shown in the figure, if the age distribution of the population were fixed—so that the average age did not increase over time—and there were no excess cost growth, spending on Medicare and Medicaid as a share of GDP would remain essentially constant. That scenario is represented by the bottom line in the figure. The next line shows projected spending on Medicare and Medicaid if the age distribution of the population changes as expected—so that the average age of the population increases—but excess cost growth remains at zero. The difference between that line and the bottom line captures the effect of the aging of the population on projected federal spending on Medicare and Medicaid. The top line in the figure shows CBO’s projection of spending on those programs, which includes the effects of the aging of the population and of excess cost growth. By itself, aging accounts for about one-quarter of the projected growth in federal Medicare and Medicaid spending through 2030. By 2050, that share has fallen to under 20 percent, and by 2082, to only about 10 percent.

Sources of Growth in Projected Federal Spending on Medicare and Medicaid
(Percentage of gross domestic product)

Source: Congressional Budget Office.

Consumption of Health Care and of Other Goods and Services

Historically, economic growth has been driven primarily by improved productivity. As the average worker is able to produce more, the average citizen can consume more. As the population ages and a smaller portion is employed, per capita GDP is likely to grow more slowly, but, on average, future generations will be substantially richer than Americans are today. In 2007, total per capita consumption averages about $27,000, of which about $6,000 is for health care. Under CBO’s projections, by 2035, per capita consumption would grow by over $15,000 (in 2007 dollars), but more than three-quarters of that extra money would be spent on health care. While the consumption of other goods and services would grow by just 12 percent, the consumption of health care would triple.

In addition, although the consumption of goods and services besides health care would, on average, be stable at the end of the projection period, the effect would vary for different individuals. Lower-income people tend to spend fewer dollars on health care than average, but that spending represents a larger portion of their earnings than it does for others. Also, people generally have less flexibility about their spending on health care than on other things. For example, even in companies that offer multiple options for health insurance, premiums do not vary substantially. As a result, as costs for health care increased, higher-income people would generally still be able to increase their consumption of other goods and services, whereas poorer people would probably see their consumption of those items decline.24

Projections Under Alternative Assumptions

Analysts working 75 years ago, in 1932, would have been extremely unlikely to correctly project the current share of the economy devoted to health care, and the projections in this study will undoubtedly prove to be inaccurate in one direction or another. It will be difficult to judge their accuracy even after the fact, because they assume no changes in federal law, and such changes are virtually certain to occur.

Even without those changes, though, actual spending on health care could be much lower or much higher. Past technological developments have generally resulted in expanded treatment and higher total spending. Future innovations could accelerate that trend. Alternatively, if future research results in the development of inexpensive curative therapies, growth could slow.

Among simple alternative scenarios for excess cost growth, one in which it is held constant at zero, while implausible, is useful because it isolates the effect of the aging of the population (see Figure 5). Aging alone is projected to increase federal spending on Medicare and Medicaid. Under that scenario, projected net federal outlays on the two programs would increase from 4 percent of GDP in 2007 to 6 percent of GDP by 2040 and then rise gradually to 7 percent by 2082.

Figure 5.

Federal Spending for Medicare and Medicaid as a Percentage of Gross Domestic Product Under Different Assumptions About Excess Cost Growth

(Percent)
Fogire 5

Source: Congressional Budget Office.

Note: Excess cost growth refers to the number of percentage points by which the growth of annual health care spending per beneficiary is assumed to exceed the growth of nominal gross domestic product per capita.

Under a scenario in which excess cost growth for Medicare and Medicaid is 2.5 percentage points, which could be roughly interpreted as what would occur with no slowing of growth rates whatsoever, net federal spending on the two programs would grow to 13 percent of GDP in 2040 and 38 percent of GDP by 2082. (Appendix D shows a set of projections in which spending on Medicare, Medicaid, and other health care grows at their historical average excess growth rates from 1975 through 2005.)

The projections presented in this study can also be compared to the Medicare trustees’ projections of spending on the program.25 For that comparison, CBO adjusted its projections to measure Medicare spending gross of the premiums paid by beneficiaries, which is the measure used by the trustees. (All of CBO’s other projections of Medicare spending in this study are net of beneficiaries’ premiums.) Both CBO and the trustees project that gross Medicare outlays will more than double from their current level of 3 percent of GDP to more than 7 percent of GDP in 2035 (see Figure 6). Under their intermediate scenario, the trustees assume that excess cost growth will decline gradually from the 25th to the 75th year of the projection period but constrain total spending over the 75-year period to the result obtained by assuming excess cost growth to be a constant 1 percentage point in the 25th year and later. CBO’s methodology does not impose that type of constraint. Consequently, the two sets of projections track each other relatively closely over the next two to three decades but then diverge significantly; the trustees project gross Medicare outlays to reach 11 percent of GDP by the end of the projection period, compared with CBO’s 17 percent. In both sets of projections, however, the main message is that health care spending is projected to rise significantly and that changes in federal law will be necessary to avoid or mitigate a substantial increase in federal spending on Medicare and Medicaid.

Figure 6.

CBO’s and the Trustees’ Projections of Spending on Medicare as a Percentage of Gross Domestic Product

(Percent)
Figure 6

Source: Congressional Budget Office.

Note: Projections are of gross federal spending.
1

Statement of Peter R. Orszag, Director, Congressional Budget Office, Health Care and the Budget: Issues and Challenges for Reform, before the Senate Committee on the Budget (June 21, 2007).

2

Ibid.

3

Such changes that would also affect federal programs could include less rapid development and adoption of costly new technologies and changes in physicians’ practice patterns.

4

Those estimates are from CBO’s health insurance simulation model. For a description of the model, see Congressional Budget Office, CBO’s Health Insurance Simulation Model: A Technical Description (October 2007).

5

Sixteen percent of Medicare beneficiaries were also enrolled in Medicaid.

6

This study defines national spending on health care as total spending on health services and supplies, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services. The figure cited is equal to total national health expenditures minus spending on research and development and construction.

7

Out-of-pocket payments do not include the premiums that people pay for health insurance. Premiums fund the payments by insurers, which are already included in the measure of private spending.

8

Jessica S. Banthin and Didem M. Bernard, “Changes in Financial Burdens for Health Care: National Estimates for the Population Younger Than 65 Years, 1996 to 2003,” Journal of the American Medical Association, vol. 296, no. 22 (December 13, 2006), pp. 2712–2719.

9

See, for example, Katharine Levit and others, “National Health Expenditures in 1997: More Slow Growth,” Health Affairs, vol. 17, no. 6 (1998), pp. 99–110.

10

See Joseph P. Newhouse, “Medical Care Costs: How Much Welfare Loss?” Journal of Economic Perspectives, vol. 6, no. 2 (Summer 1992), pp. 3–21; David M. Cutler, “Technology, Health Costs, and the NIH” (paper presented at the National Institutes of Health Economics Roundtable on Biomedical Research, Cambridge, Mass., September 1995); and Technical Review Panel on the Medicare Trustees’ Reports, Review of Assumptions and Methods of the Medicare Trustees’ Financial Projections (December 2000).

11

Ibid.

12

For the effect on Medicare, see Micah Hartman and others, “U.S. Health Spending By Age, Selected Years Through 2004,” Health Affairs, Web Exclusive (November 6, 2007), available at http://www.healthaffairs.org.

13

The effect of general inflation is removed from the second measure because growth in spending on health care is measured relative to growth in per capita GDP, both of which are affected by general inflation.

14

That methodology is consistent with CBO’s projections of future spending, which separately account for projected changes in the composition of the caseload.

15

Excess cost growth is not computed simply by subtracting per capita growth in GDP from per capita growth in health care spending but involves a more complex formula (see Appendix B).

16

The projections for Medicare assume that the program will continue to pay for benefits as currently scheduled, notwithstanding the projected insolvency of the Medicare Hospital Insurance trust fund. Moreover, CBO assumes that future Medicare spending will not be affected by the provision of current law that requires the Medicare trustees to issue a “Medicare funding warning” if projected outlays for the program exceed 45 percent of “dedicated financing sources,” because the law does not require the Congress to respond to such a warning by enacting legislation that would reduce Medicare spending.

17

For simplicity, the projections assume that the projected growth in health care spending has no effect on the future growth of GDP.

18

Congressional Budget Office, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2008 (March 2007) and Detailed Projections for Medicare, Medicaid, and State Children’s Health Insurance Program (March 2007).

19

Appendix C presents projections under an alternative scenario that assumes a change in federal law to prevent the reductions that would otherwise occur in the fees that Medicare allows for physicians’ services. That scenario assumes that those fees will be updated to account for inflation in the inputs used for physicians’ services. In both that scenario and the one presented in the main text, projected outlays for Medicare over the next 75 years are similar because the assumption that Medicare’s physician fees will be updated to account for inflation has a minor effect over the long term.

20

To apply those constraints, CBO initially projected total Medicare spending, gross of beneficiaries’ premiums and including cost sharing by beneficiaries, and total Medicaid spending, including both state and federal spending. To separate out federal spending on Medicare and Medicaid, CBO then reclassified the projected Medicare premiums and cost sharing and state spending on Medicaid into the category that includes all other spending on health care.

21

In its projections, CBO assumes that the share of health care spending that will be in the form of premiums in employment-based plans—and thus is tax preferred—will remain at approximately 58 percent of non-Medicare, non-Medicaid spending on health care.

22

For related discussions, see Michael E. Chernew, Richard A. Hirth, and David M. Cutler, “Increased Spending on Health Care: How Much Can the United States Afford?” Health Affairs, vol. 22, no. 4 (2003), pp. 15–25; and Glenn Follette and Louise Sheiner, “The Sustainability of Health Spending Growth,” Finance and Economics Discussion Series No. 2005-60 (Washington, D.C.: Board of Governors of the Federal Reserve System, 2005).

23

Specifically, ECGy = ECGy-1 * 0.954.

24

For example, consider the simplified example of two coworkers with incomes of $20,000 and $80,000 who both get a 10 percent salary increase and devote their extra income to an increase of $5,000 in health insurance premiums. The lower earner’s income would increase by $2,000, but his or her health care costs would be $3,000 higher than that, forcing a real reduction in his or her consumption of other goods and services. The higher earner’s income would increase by $8,000, more than enough to cover the additional $5,000 in health care expenses.

25

See Department of Health and Human Services, Centers for Medicare and Medicaid Services, Office of the Actuary, 2007 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (April 23, 2007), pp. 160–162.

Previous Table of Contents Next

http://www.statehealthfacts.org/compare.jsp
50 State Comparisons

http://v1.theglobeandmail.com/v5/content/pdf/CONCORD.pdf
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 1
Articles
Cancer survival in five continents: a worldwide population-based study (CONCORD)
Michel P Coleman, Manuela Quaresma, Franco Berrino, Jean-Michel Lutz, Roberta De Angelis, Riccardo Capocaccia, Paolo Baili, Bernard Rachet, Gemma Gatta, Timo Hakulinen, Andrea Micheli, Milena Sant, Hannah K Weir, J Mark Elwood, Hideaki Tsukuma, Sergio Koifman, Gulnar Azevedo e Silva, Silvia Francisci, Mariano Santaquilani, Arduino Verdecchia, Hans H Storm, John L Young, and the CONCORD Working Group*
Summary
Background Cancer survival varies widely between countries. The CONCORD study provides survival estimates for 1·9 million adults (aged 15–99 years) diagnosed with a first, primary, invasive cancer of the breast (women), colon, rectum, or prostate during 1990–94 and followed up to 1999, by use of individual tumour records from 101 population-based cancer registries in 31 countries on five continents. This is, to our knowledge, the first worldwide analysis of cancer survival, with standard quality-control procedures and identical analytic methods for all datasets.
Methods To compensate for wide international differences in general population (background) mortality by age, sex, country, region, calendar period, and (in the USA) ethnic origin, we estimated relative survival, the ratio of survival noted in the patients with cancer, and the survival that would have been expected had they been subject only to the background mortality rates. 2800 life tables were constructed. Survival estimates were also adjusted for differences in the age structure of populations of patients with cancer.
Findings Global variation in cancer survival was very wide. 5-year relative survival for breast, colorectal, and prostate cancer was generally higher in North America, Australia, Japan, and northern, western, and southern Europe, and lower in Algeria, Brazil, and eastern Europe. CONCORD has provided the first opportunity to estimate cancer survival in 11 states in USA covered by the National Program of Cancer Registries (NPCR), and the study covers 42% of the US population, four-fold more than previously available. Cancer survival in black men and women was systematically and substantially lower than in white men and women in all 16 states and six metropolitan areas included. Relative survival for all ethnicities combined was 2–4% lower in states covered by NPCR than in areas covered by the Surveillance Epidemiology and End Results (SEER) Program. Age-standardised relative survival by use of the appropriate race-specific and state-specific life tables was up to 2% lower for breast cancer and up to 5% lower for prostate cancer than with the census-derived national life tables used by the SEER Program. These differences in population coverage and analytical method have both contributed to the survival deficit noted between Europe and the USA, from which only SEER data have been available until now.
Interpretation Until now, direct comparisons of cancer survival between high-income and low-income countries have not generally been available. The information provided here might therefore be a useful stimulus for change. The findings should eventually facilitate joint assessment of international trends in incidence, survival, and mortality as indicators of cancer control.
Funding Centers for Disease Control and Prevention (Atlanta, GA, USA), Department of Health (London, UK), Cancer Research UK (London, UK).
Introduction
International comparisons of population-based cancer survival have been rare,1–5 but large and unexplained differ-ences in survival have been reported for many cancers from individual studies and cancer registries in Europe and North America.6 For example, 5-year relative survival for women diagnosed with breast cancer during 1985–89 was 73% in Europe (weighted mean for 17 countries)7 and 84% in the USA.8 The CONCORD study provides a systematic comparison of survival between Europe and North America,9–16 extended to countries in all other continents.
The first international comparison of cancer survival, published in 1964,17 was a study of patients diagnosed with one of 15 common cancers in Denmark, England, Finland, France, Norway, Sweden, and the USA, mainly during 1945–54. It was the first study in which relative survival techniques, first described in the 1950s,18–20 were used to correct the survival estimates for differences in background mortality between participant countries. The findings are mainly of historical interest, but survival in the USA (represented by Connecticut) was generally higher than in the European countries.
Cancer survival is known to vary between the regions of the USA covered by the US National Cancer Institute’s (NCI) Surveillance, Epidemiology and End Results (SEER) Program,21 but the range of survival in Europe is much wider. Furthermore, survival from breast cancer during 1985–94 was higher in each of the nine SEER areas than in any of the 22 countries participating in the European study of cancer survival (EUROCARE).7,22 The differences were
Published Online
July 17, 2008
DOI:10.1016/S1470-2045(08)70179-7
*Members of the CONCORD Working Group are listed in the webappendix
Cancer Research UK Cancer Survival Group, Non-Communicable Disease Epidemiology Unit, London School of Hygiene and Tropical Medicine, London, UK (Prof M P Coleman FFPH, M Quaresma MSc, B Rachet MD); Department of Preventive and Predictive Medicine (F Berrino MD, G Gatta MD, M Sant MD), and Descriptive Epidemiology and Health Planning Unit (P Baili PhD, A Micheli PhD), Fondazione IRCCS Istituto Nazionale Tumori, Milan, Italy; Geneva Cancer Registry, Geneva, Switzerland (J-M Lutz MD); National Centre for Epidemiology, Surveillance and Health Promotion, Department of Cancer Epidemiology, Istituto Superiore di Sanità, Rome, Italy (R De Angelis BSc, R Capocaccia PhD, S Francisci PhD, M Santaquilani PhD, A Verdecchia PhD); Finnish Cancer Registry, Helsinki, Finland (Prof T Hakulinen PhD); Division of Cancer Prevention and Control, Centers for Disease Control and Prevention, Atlanta, GA, USA (H K Weir PhD); British Columbia Cancer Agency, Vancouver, BC, Canada (Prof J M Elwood MD); Osaka Cancer Registry, Department of Cancer Control and Statistics, Osaka Medical Centre for Cancer and Cardiovascular Diseases, Osaka, Japan (H Tsukuma MD); Department of Epidemiology, National School of Public Health, Oswaldo Cruz Foundation, Ministry of Health, Rio de Janeiro, Brazil (S Koifman PhD); Institute of Social Medicine, University of Rio de Janeiro,
Articles
2 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
often more marked in elderly patients:9 for several cancers, 5-year survival for patients diagnosed aged 75 years or older during the 1990s was nearly 20% higher in the USA than in Europe.23
The CONCORD study began in 1999 as an extension of the EUROCARE-3 study, then just starting. EUROCARE has published systematic comparisons of survival for most adult and childhood cancers in Europe since 1995.24 The first EUROCARE study involved patients diagnosed in 1978–84 in 12 countries;25 EUROCARE-2 covered patients diag-nosed during 1985–89 in 17 countries,26 and EUROCARE-3 involved 22 countries, with patients diagnosed in 1990–94 and followed up to 1999.27,28 More recently, EUROCARE-4 has included patients diagnosed in 23 countries during all or part of 1995–2002 and followed up to 2003.29,30
CONCORD was originally designed to assess the survival of adults (aged 15–99 years) diagnosed with cancer of the breast (women), colorectum, or prostate during 1990–94 in Europe and the USA, using population-based data and standardised quality control, and with identical analysis for all datasets, adjusted for differences in general population (background) mortality by country, region, race, and calen-dar period, and also for differences in the age structure of patient populations. CONCORD also enables comparison of cancer survival between five states and four metropolitan areas in the USA covered by the SEER Program (SEER-9) and 11 states covered by the Centers for Disease Control and Prevention’s (CDC) National Program of Cancer Registries (NPCR). It also provides a wider comparison of cancer survival between black and white patients in the USA than has previously been possible.
CONCORD includes data from one or more countries on all five continents. To our knowledge, it is the first attempt at a global comparison of cancer survival.
Methods
Cancer registries
In 1999, we identified at international cancer meetings in Atlanta (USA) and Lisbon (Portugal), and from published studies, population-based cancer registries that had pub-lished survival data and were operational during 1990–99. Registries that had met the quality criteria for inclusion in Cancer Incidence in Five Continents (volume VII, 1988–92)31 were eligible. We obtained data from 19 other registries. Most had met comparable criteria, such as those in the EUROCARE-3 study (patients diagnosed during 1990–94 with follow-up to 1999).28 North American registries were eligible if they had met the standards required for Cancer Incidence in North America, 1991–95,32 and could provide complete follow-up to the end of 1999. In total, we identified 112 registries, but 11 were withdrawn or excluded: no re-sponse (one); withdrawal for legal reasons (one); incom-plete registration before 1995 (four); follow-up activity stopped before 1999 (two); data not supplied by the September, 2005 deadline (three).
A pilot study of 50 registries in 2000 obtained a 100% response. All registries were able to provide data for patients diagnosed during all or part of the period 1990–94, and had access to various data sources to obtain follow-up information for all patients for at least 5 years or to the end of 1999. After further recruitment, a detailed questionnaire was obtained for 100 of the 101 registries finally included in the analyses, covering data definitions and methods of operation, including data collection, coding of tumour site, morphology, behaviour, and stage at diagnosis, tracing of registered patients to ascertain their vital status, and linkage between data on the incident tumour and data on subsequent death or loss to follow-up. The procedures and definitions used, the stated quality and completeness of data on the registration of incident cancers, and of the follow-up of those patients over the next 5 years, were deemed adequate to attempt cancer-survival analysis, subject to central quality control of the data. The pilot study confirmed the feasibility of the CONCORD protocol33 and the active support of cancer registries for wider international comparisons of cancer survival. The questionnaire and detailed findings are available online.34
Data sources
Anonymised individual tumour records were obtained from population-based cancer registries in all five continents, as defined on UN guidelines:35 Africa, America (Central and South, including the Caribbean), America (North), Asia, Europe, and Oceania (table 1 and webfigure 1). We retained Hawaii (USA) with North America rather than Oceania.
Africa was represented by a single cancer registry, for the wilaya (département, or state) of Sétif (Algeria).
Central and South America, including the Caribbean, were represented by the national cancer registry of Cuba and two regional registries in Brazil: the Goiânia (Goiás state) registry is one of 20 registries in state capitals, whereas the Campinas (São Paulo state) registry is the only one in Brazil that is not in a state capital.
Data from North America include five of the seven largest provinces in Canada (British Columbia, Manitoba, Nova Scotia, Ontario, and Saskatchewan). Data for the USA came from 22 registries covering 16 states (California, Colorado, Connecticut, Florida, Hawaii, Idaho, Iowa, Louis-iana, Michigan, Nebraska, New Jersey, New Mexico, New York State, Rhode Island, Utah, and Wyoming) and six metropolitan areas (Atlanta, GA, Los Angeles, CA, San Francisco, CA, Detroit, MI, New York City, NY, and Seattle, WA).
Population-based cancer registries in the USA receive support from either or both of the two federal cancer-surveillance programmes, the NCI’s SEER Program and the CDC’s NPCR.36 As of 1990, the SEER Program included nine population-based cancer registries covering some 10% of the US population (SEER-9): the states of Connecticut, Hawaii, Iowa, New Mexico, and Utah, and the metropolitan areas of Atlanta, GA, Detroit, MI, San Francisco, CA, and Seattle, WA. The Los Angeles cancer registry became a SEER registry in 1992, but we opted to retain it with the NPCR data, so that the SEER grouping
Rio de Janeiro, Brazil (G Azevedo e Silva PhD); Department of Cancer Prevention and Documentation, Danish Cancer Society, Copenhagen, Denmark (H H Storm MD); Metropolitan Atlanta SEER Registr y, Georgia Center for Cancer Statistics, Department of Epidemiology, Rollins School of Public Health at Emory University, Atlanta, GA, USA (Prof J L Young PhD)
Correspondence to:
Prof Michel P Coleman, Cancer Research UK Cancer Survival Group, Non-Communicable Disease Epidemiology Unit, London School of Hygiene and Tropical Medicine, London WC1E 7HT, UK
michel.coleman@lshtm.ac.uk
See Online for webfigure 1
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 3
we used was identical with that for which SEER data had been published in the past (SEER-9). The NPCR at the CDC began more recently, and this is the first cancer-survival analysis for 11 states: California, Colorado, Florida, Idaho, Louisiana, Michigan, Nebraska, New Jersey, New York, Rhode Island, and Wyoming.
Population covered by registry
% of national population
Breast
Colon
Rectum
Colorectum
Prostate
Total
Women
Men
Women
Men
Women
Men
Women
Africa
Algeria (Sétif)
1 104 561
4·2
180
10
14
30
30
40
44
36
300
America (Central and South)
Brazilian registries
1 795 387
1·2
806
130
194
50
69
180
263
474
1723
Campinas
870 380
0·6
175
61
82
..
..
..
..
149
467
Goiânia
925 007
0·6
631
69
112
50
69
119
181
325
1256
Cuba
10 754 868
100·0
6461
1083
1516
674
734
1757
2250
4341
14 809
South American registries
12 550 255
··
7267
1213
1710
724
803
1937
2513
4815
16 532
America (North)
Canadian registries
16 474 543
58·1
44 620
13 989
13 819
6272
4220
20 261
18 039
45 999
128 919
British Columbia
3 131 700
11·0
9141
2223
2178
625
412
2848
2590
11 496
26 075
Manitoba
1 109 998
3·9
2932
954
957
556
343
1510
1300
3761
9503
Nova Scotia
918 000
3·2
2316
771
829
··
··
··
··
2243
6159
Ontario
10 298 801
36·3
27 389
9214
9069
4613
3154
13 827
12 223
25 310
78 749
Saskatchewan
1 016 044
3·6
2842
827
786
478
311
1305
1097
3189
8433
US registries
108 775 729
42·4
324 551
89 673
96 186
40 149
32 774
129 822
128 960
356 881
940 214
Atlanta,† GA
2 315 961
0·9
5747
1215
1473
474
496
1689
1969
6406
15 811
California
30 974 659
12·1
85 143
21 384
22 351
9999
8172
31 383
30 523
95 707
242 756
Los Angeles, CA
9 055 424
··
22 587
5741
6136
2659
2233
8400
8369
25 789
65 145
San Francisco, CA
3 805 588
··
12 321
3165
3375
1463
1194
4628
4569
12 733
34 251
Colorado
3 495 939
1·4
9117
2084
2183
944
751
3028
2934
11 433
26 512
Connecticut
3 300 712
1·3
11 335
3112
3299
1458
1128
4570
4427
11 357
31 689
Florida
13 650 553
5·3
46 065
14 845
15 007
6007
4790
20 852
19 797
64 256
150 970
Hawaii
1 158 613
0·5
2857
986
808
508
279
1494
1087
3482
8920
Idaho
1 071 685
0·4
2689
676
681
331
239
1007
920
3899
8515
Iowa
2 818 401
1·1
9133
2776
3532
1267
989
4043
4521
10 743
28 440
Louisiana
4 293 003
1·7
11 204
3302
3780
1374
1186
4676
4966
13 059
33 905
Michigan
9 479 065
3·7
31 183
8821
9323
3791
3162
12 612
12 485
23 705
79 985
Detroit, MI
3 969 304
··
12 247
3223
3534
1499
1213
4722
4747
17 162
38 878
Nebraska
1 611 687
0·6
5242
1625
1801
776
544
2401
2345
6828
16 816
New Jersey
7 880 508
3·1
27 125
8110
8670
3694
3091
11 804
11 761
29 877
80 567
New Mexico
1 595 442
0·6
3796
901
892
436
323
1337
1215
5393
11 741
New York State
18 246 653
7·1
55 404
15 191
17 426
6936
5889
22 127
23 315
47 096
147 942
New York City
7 322 564
··
21 644
5821
7048
2335
2253
8156
9301
16 770
55 871
Rhode Island
1 012 581
0·4
3466
1113
1280
477
440
1590
1720
3449
10 225
Seattle,† WA
3 567 217
1·4
10 451
2415
2577
1168
893
3583
3470
12 818
30 322
Utah
1 836 799
0·7
3506
866
805
393
293
1259
1098
5779
11 642
Wyoming
466 251
0·2
1088
251
298
116
109
367
407
1594
3456
North American registries
125 250 272
44·0
369 171
103 662
110 005
46 421
36 994
150 083
146 999
402 880
1 069 133
Asia
Japanese registries
10 819 997
8·7
7179
5469
4588
3510
2248
8979
6836
1691
24 685
Fukui
827 000
0·7
840
738
709
477
310
1215
1019
325
3399
Osaka
8 734 516
7·0
5112
3337
2593
2075
1283
5412
3876
920
15 320
Yamagata
1 258 481
1·0
1227
1394
1286
958
655
2352
1941
446
5966
(Continues on next page)
Articles
4 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
Population covered by registry
% of national population
Breast
Colon
Rectum
Colorectum
Prostate
Total
Women
Men
Women
Men
Women
Men
Women
(Continued from previous page)
Europe
Austria (Tirol)
624 939
8·0
1559
416
483
261
237
677
720
1432
4388
Czech Republic ( West Bohemia)
861 000
8·3
1543
672
601
681
416
1353
1017
693
4606
Denmark
5 145 160
100·0
14 686
3954
4822
3308
2495
7262
7317
6503
35 768
Estonia
1 562 468
100·0
2205
598
845
479
553
1077
1398
1143
5823
Finland
5 070 000
100·0
12 214
1907
2639
1687
1561
3594
4200
7544
27 552
French registries
3 098 526
5·6
6359
1675
1544
1164
876
2839
2420
2909
14 527
Bas-Rhin
954 710
1·8
2591
848
730
522
379
1370
1109
1626
6696
Calvados
618 353
1·1
1640
440
448
345
309
785
757
1283
4465
Côte d’Or
507 147
0·9
791
387
366
297
188
684
554
..
2029
Isère
1 018 316
1·8
1337
..
..
..
··
..
..
..
1337
Germany (Saarland)
1 067 027
1·3
2957
1035
1237
712
656
1747
1893
1610
8207
Iceland
254 960
100·0
504
125
128
37
47
162
175
493
1334
Ireland
3 609 000
100·0
1513
587
534
382
224
969
758
1062
4302
Italian registries
8 944 772
15·3
26 403
8713
8672
4743
3887
13 456
12 559
10 671
63 089
Ferrara
355 479
0·6
1321
488
486
200
158
688
644
438
3091
Genoa
695 981
1·3
2571
892
894
442
380
1334
1274
1122
6301
Latina
468 865
0·8
657
199
182
135
84
334
266
197
1454
Macerata
281 537
0·5
629
296
283
168
119
464
402
435
1930
Modena
602 570
0·5
1887
641
654
361
275
1002
929
810
4628
Parma
391 237
0·7
1318
480
410
256
204
736
614
456
3124
Ragusa
140 537
0·5
513
159
171
123
82
282
253
227
1275
Romagna
604 488
0·8
1347
498
549
226
226
724
775
740
3586
Sassari
469 570
0·8
591
143
128
126
62
269
190
198
1248
Turin
996 443
1·8
3009
868
904
500
457
1368
1361
1030
6768
Tuscany
1 167 687
2·1
3807
1420
1446
854
702
2274
2148
1797
10 026
Varese
793 378
1·4
2400
691
710
410
344
1101
1054
803
5358
Veneto
1 977 000
3·5
6 353
1938
1855
942
794
2880
2649
2418
14 300
Malta
365 000
100·0
359
76
73
53
31
129
104
111
703
Netherlands registries
5 158 472
34·3
15 862
2418
2791
1471
1271
3889
4062
5353
29 166
Amsterdam
2 620 000
17·4
7509
1764
2117
1020
946
2784
3063
4171
17 527
Netherlands (North)
1 602 661
10·6
5999
..
..
··
··
..
..
..
5999
Netherlands (South)
935 811
6·3
2354
654
674
451
325
1105
999
1182
5640
Norway
4 245 180
100·0
9193
3590
4136
2536
2048
6126
6184
9841
31 344
Polish registries
2 373 190
6·1
4220
1080
1152
827
773
1907
1925
1159
9211
Cracow
747 985
1·9
1205
240
243
203
168
443
411
253
2312
Warsaw
1 625 205
4·2
3015
840
909
624
605
1464
1514
906
6899
Portugal (South)
1 145 000
11·4
1219
364
355
327
236
691
591
344
2845
Slovakia
5 297 774
100·0
6079
2572
2126
2646
1815
5218
3941
2821
18 059
Slovenia
2 072 000
100·0
3327
914
898
1025
851
1939
1749
160
8175
Spanish registries
5 566 140
14·4
9744
3439
2934
2502
1613
5941
4547
4273
24 505
Basque Country
2 097 000
5·4
3816
1321
1027
1057
589
2378
1616
1721
9531
Granada
787 898
2·0
879
299
255
219
152
518
407
..
1804
Mallorca
582 655
1·5
1143
447
394
296
213
743
607
617
3110
Murcia
1 036 966
2·8
1485
505
512
397
330
902
842
643
3872
Navarra
520 300
1·3
1229
404
304
249
167
653
471
688
3041
Tarragona
541 321
1·4
1192
463
442
284
162
747
604
604
3147
(Continues on next page)
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 5
Survival estimates reported from the SEER Program have until now been the only population-based cancer survival data from the USA.21,37 We wanted to compare survival between the areas covered by registries in the NPCR and the SEER Program during 1990–94. We received separate datasets from Detroit, MI, San Francisco, CA (SEER registries), and Los Angeles, CA (NPCR), and these were included in the respective totals for SEER and NPCR. However, the data from these metropolitan areas could not be separately identified in the state-wide datasets we received from California and Michigan, therefore, the non-metropolitan data for those states could not be included with the other NPCR data. Data from all nine SEER registries were available.38
Survival in the SEER-9 areas was therefore compared with survival in nine states and one metropolitan area covered by
Population covered by registry
% of national population
Breast
Colon
Rectum
Colorectum
Prostate
Total
Women
Men
Women
Men
Women
Men
Women
(Continued from previous page)
Sweden
8 826 939
100·0
24 170
6112
6685
4401
3578
10 513
10 263
24 041
68 987
Swiss registries
1 758 249
25·8
4847
..
..
··
··
..
..
..
4847
Basel
429 104
6·3
1365
..
..
··
··
..
..
..
1365
Geneva
381 492
5·6
1275
..
..
··
··
..
..
..
1275
Graubunden-Glarus
210 485
3·1
544
..
..
··
··
..
..
..
544
St Gallen-Appenzell
483 801
7·1
1 027
..
..
··
··
..
..
..
1027
Valais
253 367
3·7
636
..
..
··
··
..
..
..
636
UK
58 984 046
··
154 867
41 499
45 729
30 600
22 556
72 099
68 285
78 608
373 859
England (national)
49 310 000
100·0
129 703
33 983
37 334
25 618
18 780
59 601
56 114
66 181
311 599
East Anglia
2 089 000
4·2
6330
1820
2060
1245
954
3065
3014
3897
16 306
Mersey
2 412 000
4·9
6561
1932
2080
1425
1069
3357
3149
3242
16 309
Oxford
2 582 000
5·2
7458
1737
1934
1193
929
2930
2863
3612
16 863
South Thames
6 756 000
13·7
17 002
3880
4689
2824
2328
6704
7017
8232
38 955
South West
3 320 000
6·7
19 203
5630
6215
3869
2917
9499
9132
11 766
49 600
Trent
4 745 000
9·6
13 360
3523
3793
3045
2087
6568
5880
6774
32 582
West Midlands
5 278 000
10·7
13 561
4397
4482
3272
2066
7669
6548
7315
35 093
Yorkshire
3 698 000
7·5
9 473
2599
2910
2121
1574
4720
4484
5165
23 842
English registries
30 880 000
62·5
92 948
25 518
28 163
18 994
13 924
44 512
42 087
50 003
229 550
Northern Ireland
1 648 960
100·0
1527
562
576
328
224
890
800
888
4105
Scotland
5 100 086
100·0
14 254
4441
5089
2671
2124
7112
7213
6855
35 434
Wales
2 925 000
100·0
9383
2513
2730
1983
1428
4496
4158
4684
22 721
European registries
126 029 842
··
303 830
81 746
88 384
59 842
45 724
141 588
134 108
161 771
741 297
Oceania
Australia
18 071 422
100·0
41 090
15 200
15 098
9911
6904
25 111
22 002
42 890
131 093
Australian Capital Territory
304 371
1·7
548
180
160
99
78
279
238
414
1479
New South Wales
6 133 913
33·9
14 382
5358
5066
3478
2354
8836
7420
15 507
46 145
Northern Territory
178 062
1·0
165
46
41
41
20
87
61
78
391
Queensland
3 252 245
18·0
7052
2783
2743
1619
998
4402
3741
7468
22 663
Southern Australia
1 473 966
8·2
3688
1323
1335
937
734
2260
2069
4228
12 245
Tasmania
472 971
2·6
1081
474
453
242
171
716
624
1321
3742
Victoria
4 521 392
25·0
10 583
3865
4103
2683
1978
6548
6081
9826
33 038
Western Australia
1 734 502
9·6
3591
1171
1197
812
571
1983
1768
4048
11 390
CONCORD
CONCORD total
293 826 349
··
728 717
207 300
219 799
120 438
92 703
327 738
312 502
614 083
1 983 040
*Some registries provided data for shorter periods, ie, 4 years: Campinas, Macerata, Granada (1991–94); 3 years: Isère (1990–92) , Portugal (1991–93), Sétif , Sassari (1992–94); 2 years: Malta, Northern Ireland (1993–94); 1 year: Ireland (1994). †No state-wide data available for this city. Where a registry did not provide data for a given cancer, cell entries for numbers of patients and survival estimates are left blank. National percentages are derived from the raw data and can differ from the sum of regional percentages because of rounding. Row totals avoid double counting of colon and rectal tumours, also shown in the table as colon and rectum combined.
Table 1: Population coverage and number of adults (aged 15–99 years) diagnosed with cancer of the breast, colon, rectum, or prostate during
1990–94* and included in the analyses: continent, country, and region
Articles
6 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
NPCR: Colorado, Florida, Idaho, Los Angeles, CA, Louis-iana, Nebraska, New Jersey, New York, Rhode Island, and Wyoming. For this comparison, data from the non-metro-politan areas of California and Michigan were excluded to ensure that the two sets of data were mutually exclusive.
In Asia, Japan was represented by three of the prefectural (state) registries: Fukui, Osaka, and Yamagata.
In Europe, the 53 cancer registries that contributed data to EUROCARE-328 on cancers of the breast, colon, rectum, or prostate all participated in the CONCORD study. Six other registries also provided data: two national registries (Northern Ireland and Ireland) and four regional registries from the Netherlands (North) and Switzerland (Grau-bunden-Glarus, St Gallen-Appenzell, Valais). As in the EUROCARE study, the UK is considered as its four con-stituent countries (England, Scotland, Wales, Northern Ireland), each of which has a national registry. In England, both the national cancer registry and eight of the regional cancer registries submitted datasets.
Oceania was represented by the national cancer registry of Australia, with data from each of the eight population-based state or territorial registries.
Quality control
Procedures used in the EUROCARE-3 study were applied to all datasets. Tumour records were supplied with the ana-tomical site coded to the ninth revision of the International Classification of Diseases (ICD-939) for four index tumours: cancers of the breast (women) (ICD-9 174.0–174.9), colon (153.0–153.9), rectum (including the anus, 154.0–154.9), and prostate (185). Tumour morphology and behaviour were coded to the first or second revision of ICD-Oncology (ICD-O,40 ICD-O-241). Only invasive malignant tumours (behaviour code 3) were included. Patients with an index tumour had sometimes been registered with another malignancy, either before or after the index tumour. Data on those other cancers in index patients were also sub-mitted. Only the first, primary, invasive, malignant tumour diagnosed in each patient was retained for analysis. Patients registered with a malignant neoplasm before the index tumour were excluded, although non-melanoma skin cancer was not counted as a previous tumour for this purpose. Bilateral breast cancers and multiple colon cancers were included as a single tumour if synchronous; otherwise, only the earliest tumour was considered. The duration of survival was taken from the date of diagnosis of the index tumour until death from any cause, or until the patient was censored from the analysis as alive, either at loss to follow-up or after Dec 31, 1999, whichever came first; any subsequent tumour occurring in the same patient during that period was ignored.
Standard quality-control routines, based on those devel-oped by the International Agency for Research on Cancer,42 were applied to each tumour record. Records with invalid codes, impossible sequences of dates, or improbable com-binations of tumour site and morphology were returned to the registry for checking. Usually, the registry provided a correction or an explanation. Corrected tumour records were checked again: those which still had missing, invalid or inconsistent values for sex, site, morphology, or dates were flagged as major errors and excluded from analysis. Records for which an unlikely combination of age, site and morphology had nonetheless been confirmed as correct were flagged as minor errors, and included in the analyses. Details of the approach have been published elsewhere.43 Detailed quality-control findings are available online.34
Follow-up
All registries used more than one mechanism of follow-up to ascertain the vital status (alive, dead, emigrated, lost to follow-up) and the date of the last vital status for each registered patient. The mechanisms varied between countries, usually linkage between the registry’s database and a variety of other data sources, especially the national index of deaths. Secure linkage of a tumour record and a record of death, based on a set of identifiers such as name, sex, date of birth, and personal identity number, enabled the registry to update the tumour record accordingly. Direct contact with the patient or their family to establish vital status was unusual, although home visits by registry staff were done in Algeria. Enquiries to the patient’s primary care physician or hospital consultant were frequently used. A wide variety of administrative databases was also used, such as social insurance, health insurance, motor vehicle records, drivers’ licences, hospital discharge records, national primary-care databases, electoral registers (those eligible to vote), and voter registration records (those who voted in the last election). The presence of a person’s record in such administrative databases on a given date is taken as evidence that the person was alive on that date. This is subject to administrative error (failure to remove in timely fashion the record of a person known to be dead) and fraud (by someone seeking to retain access to benefits received by the deceased), but in most instances the risks are small. If coverage of the databases was known to be high, and especially if a person was present in more than one such database, the risk of error decreased further.
In the USA, a match to an administrative database might show that an event occurred during a certain quarter of a year (eg, an insurance claim paid, a licence renewed), but the exact date might not be known; the date of last vital status was then set to the first day of the quarter, ie, Jan 1, April 1, July 1, Sept 1. This approach can give rise to irregular distri-butions of the day of last known vital status, but it is a conservative approach to establishing when patients were last known to be alive, because patients are censored from survival analysis on the latest of any such dates in the record.
The proportion of patients not known to be dead and for whom the registry could not be certain that the date of last vital status was at least 5 years after diagnosis was less than 1% overall. The proportion was often zero (follow-up for at least 5 years was established for every patient not known to be dead), the highest proportion was 4%, and only in a
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 7
Breast
Colon
Rectum
Colorectum
Prostate
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
RS (%) (95% CI)
Africa
Algeria (Sétif)
38·8 (31·4–46·2) R
11·4 (0·7–40·9) R
30·6 (9·5–56·1) R
25·9 (11·4–43·7) R
18·2 (6·6–34·6) R
22·5 (10·6–37·7) R
22·6 (11·2–36·7) R
21·4 (8·7–38·9) R
America (Central and South)
Brazilian registries
58·4 (52·7–64·6)
33·1 (24·2–45·3)
32·7 (26·1–40·8)
49·3 (34·8–69·8)
38·4 (27·3–53·9)
47·3 (37·5–59·6)
43·5 (35·7–53·1)
49·3 (43·6–55·8)
Campinas
36·6 (27·8–48·3)
23·8 (13·1–36·8) R
21·4 (12·6–31·9) R
..
..
..
..
34·4 (25·2–47·0)
Goiânia
65·4 (58·3–73·2)
48·1 (36·7–63·1)
44·8 (35·2–56·9)
49·3 (34·8–69·8)
38·4 (27·3–53·9)
47·3 (37·5–59·6)
43·5 (35·7–53·1)
55·7 (49·0–63·3)
Cuba
84·0 (82·9–85·2)
59·3 (55·8–63·1)
61·4 (58·3–64·5)
59·2 (55·1–63·7)
62·8 (58·6–67·4)
59·5 (56·8–62·5)
62·0 (59·5–64·6)
69·7 (67·1–72·3)
America (North)
North American registries
83·7 (83·5–83·9)
59·5 (59·1–59·9)
59·9 (59·5–60·3)
56·4 (55·8–56·9)
59·7 (59·1–60·3)
58·6 (58·3–58·9)
60·0 (59·7–60·3)
91·1 (90·9–91·3)
Canadian registries
82·5 (81·9–83·0)
56·1 (55·1–57·2)
58·7 (57·7–59·7)
53·1 (51·5–54·6)
58·7 (57·0–60·4)
55·3 (54·4–56·2)
58·9 (58·0–59·8)
85·1 (84·4–85·7)
British Columbia
85·4 (84·2–86·5)
57·0 (54·5–59·6)
59·2 (56·8–61·7)
64·6 (59·9–69·7)
62·8 (57·5–68·6)
58·7 (56·4–61·0)
59·9 (57·7–62·2)
89·3 (88·1–90·5)
Manitoba
82·9 (80·9–85·0)
57·4 (53·4–61·6)
59·8 (56·1–63·8)
54·6 (49·6–60·1)
58·1 (52·3–64·6)
56·4 (53·3–59·7)
59·5 (56·4–62·8)
87·5 (85·5–89·6)
Nova Scotia
79·3 (77·0–81·8)
54·3 (50·0–58·9)
58·2 (54·3–62·4)
..
..
..
..
84·7 (81·8–87·6)
Ontario
81·6 (80·9–82·3)
56·0 (54·8–57·3)
58·5 (57·3–59·7)
51·1 (49·3–52·9)
57·8 (55·8–59·8)
54·5 (53·5–55·6)
58·6 (57·5–59·6)
83·4 (82·5–84·3)
Saskatchewan
82·8 (80·8–84·8)
55·4 (51·3–59·7)
58·0 (53·9–62·4)
54·8 (49·6–60·6)
61·1 (55·1–67·7)
55·2 (52·0–58·6)
59·1 (55·6–62·7)
77·5 (74·4–80·8)
US registries
83·9 (83·7–84·1)
60·1 (59·6–60·5)
60·1 (59·7–60·5)
56·9 (56·3–57·5)
59·8 (59·2–60·4)
59·1 (58·8–59·5)
60·2 (59·8–60·5)
91·9 (91·7–92·1)
Atlanta,† GA
85·7 (84·0–87·4)
63·9 (60·2–67·7)
60·7 (57·8–63·7)
56·5 (50·9–62·7)
64·3 (59·4–69·7)
62·3 (59·3–65·6)
62·0 (59·4–64·7)
93·4 (91·8–94·9)
California
84·6 (84·3–85·0)
60·4 (59·5–61·2)
59·5 (58·7–60·3)
57·2 (56·0–58·5)
60·1 (58·8–61·4)
59·4 (58·7–60·1)
59·9 (59·2–60·5)
90·4 (90·0–90·8)
Los Angeles, CA
83·4 (82·6–84·2)
61·2 (59·6–62·9)
58·4 (56·9–60·0)
55·7 (53·3–58·1)
58·5 (56·1–61·0)
59·5 (58·1–60·8)
58·5 (57·2–59·8)
90·7 (89·9–91·5)
San Francisco, CA
86·2 (85·2–87·2)
59·2 (57·1–61·4)
59·9 (57·9–62·0)
56·5 (53·4–59·8)
60·3 (57·1–63·7)
58·4 (56·6–60·2)
60·2 (58·4–62·0)
89·5 (88·4–90·6)
Colorado
87·0 (85·8–88·2)
61·6 (59·0–64·4)
62·0 (59·5–64·6)
55·6 (51·7–59·8)
59·8 (55·9–64·0)
59·7 (57·5–62·0)
61·7 (59·6–63·8)
92·8 (91·6–93·9)
Connecticut
85·7 (84·7–86·7)
62·3 (60·1–64·7)
63·4 (61·3–65·6)
61·3 (58·1–64·6)
62·4 (59·1–65·8)
62·0 (60·2–63·9)
63·4 (61·6–65·2)
91·7 (90·5–93·0)
Florida
84·0 (83·5–84·5)
60·2 (59·2–61·3)
61·0 (60·0–62·0)
57·1 (55·5–58·7)
61·0 (59·4–62·6)
59·4 (58·5–60·2)
61·2 (60·3–62·1)
89·0 (88·4–89·5)
Hawaii
89·3 (87·3–91·4)
67·9 (64·2–71·8)
66·5 (62·6–70·6)
59·3 (54·2–64·8)
61·0 (54·7–68·0)
65·0 (61·9–68·1)
65·5 (62·2–69·0)
90·9 (88·7–93·2)
Idaho
86·3 (84·2–88·5)
61·4 (56·9–66·3)
63·4 (59·1–68·0)
66·9 (60·8–73·6)
60·0 (53·3–67·6)
63·6 (59·9–67·6)
62·8 (59·2–66·7)
91·7 (89·8–93·7)
Iowa
86·6 (85·5–87·7)
60·8 (58·4–63·3)
64·8 (62·7–67·0)
59·0 (55·6–62·6)
63·8 (60·2–67·6)
60·3 (58·3–62·3)
64·7 (62·9–66·6)
92·6 (91·4–93·8)
Louisiana
81·0 (79·9–82·2)
59·8 (57·5–62·1)
58·8 (56·8–60·7)
57·3 (53·9–60·9)
58·7 (55·5–62·1)
59·1 (57·3–61·1)
58·9 (57·2–60·6)
88·4 (87·2–89·6)
Michigan‡
82·3 (81·7–83·0)
58·7 (57·4–60·1)
59·3 (58·0–60·5)
55·2 (53·2–57·2)
59·2 (57·2–61·3)
57·8 (56·7–58·9)
59·4 (58·4–60·5)
100·0 (99·8–100)
Detroit, MI
83·0 (82·0–84·1)
60·5 (58·3–62·8)
58·0 (56·0–60·1)
55·8 (52·6–59·1)
57·5 (54·2–60·9)
59·1 (57·3–61·0)
57·9 (56·2–59·6)
93·4 (92·4–94·4)
Nebraska
85·4 (84·0–86·9)
60·4 (57·3–63·7)
64·2 (61·4–67·2)
58·3 (54·0–63·0)
60·6 (56·0–65·7)
59·8 (57·3–62·5)
63·6 (61·1–66·1)
92·8 (91·3–94·4)
New Jersey
83·3 (82·6–84·0)
61·3 (59·9–62·7)
61·1 (59·8–62·5)
56·1 (54·0–58·2)
58·4 (56·3–60·5)
59·6 (58·4–60·8)
60·5 (59·4–61·6)
90·8 (90·1–91·6)
New Mexico
84·6 (82·7–86·4)
62·0 (58·1–66·2)
61·6 (57·8–65·7)
52·6 (47·2–58·7)
59·1 (53·0–65·8)
59·0 (55·7–62·4)
61·0 (57·8–64·4)
92·4 (90·7–94·1)
New York State
81·0 (80·5–81·5)
56·6 (55·6–57·7)
56·4 (55·5–57·4)
54·9 (53·4–56·4)
56·7 (55·2–58·2)
56·1 (55·3–57·0)
56·6 (55·8–57·4)
85·6 (85·0–86·2)
New York City
77·4 (76·6–78·2)
54·2 (52·6–55·9)
53·6 (52·1–55·1)
50·6 (48·2–53·2)
52·4 (50·0–54·9)
53·2 (51·8–54·5)
53·3 (52·1–54·6)
81·6 (80·5–82·7)
Rhode Island
84·6 (82·8–86·4)
64·7 (60·9–68·7)
63·5 (60·0–67·2)
60·1 (54·5–66·3)
59·9 (54·5–65·8)
63·3 (60·2–66·7)
62·8 (59·8–65·8)
90·8 (88·4–93·2)
Seattle,† WA
88·6 (87·5–89·7)
63·7 (61·3–66·2)
64·1 (61·9–66·5)
60·7 (57·2–64·4)
65·4 (61·9–69·2)
63·0 (60·9–65·1)
64·8 (62·9–66·8)
95·0 (94·0–96·0)
Utah
85·8 (84·0–87·7)
60·8 (56·8–65·1)
58·6 (54·5–63·0)
59·9 (54·2–66·2)
61·3 (55·0–68·2)
61·1 (57·8–64·6)
59·6 (56·2–63·3)
93·7 (92·2–95·2)
Wyoming
84·3 (80·9–87·8)
59·5 (52·5–67·4)
58·5 (52·2–65·6)
46·5 (37·3–57·9)
52·3 (42·7–64·0)
56·0 (50·1–62·5)
57·8 (52·4–63·7)
92·2 (89·3–95·3)
Asia
Japanese registries
81·6 (79·7–83·5)
63·0 (61·3–64·8)
57·1 (55·5–58·8)
58·2 (55·9–60·5)
57·6 (55·2–60·1)
61·1 (59·7–62·5)
57·3 (55·9–58·6)
50·4 (46·3–54·9)
Fukui
83·1 (78·3–88·2)
68·5 (64·2–73·0)
62·8 (58·8–67·0)
59·6 (54·1–65·7)
61·6 (56·0–67·8)
65·3 (61·8–68·9)
62·4 (59·1–65·9)
54·1 (46·6–61·6) R
Osaka
79·4 (77·1–81·9)
59·6 (57·3–62·0)
52·5 (50·4–54·7)
54·4 (51·3–57·7)
55·2 (51·9–58·7)
57·6 (55·7–59·5)
53·3 (51·5–55·2)
51·1 (46·1–56·6)
Yamagata
87·3 (83·4–91·4)
67·5 (64·3–70·8)
63·7 (60·7–66·8)
63·7 (59·8–67·9)
61·8 (57·6–66·3)
66·0 (63·5–68·5)
63·0 (60·5–65·5)
49·4 (43·2–55·6) R
Europe
European registries
73·1 (72·9–73·4)
46·8 (46·3–47·2)
48·4 (48·0–48·8)
43·2 (42·7–43·7)
47·4 (46·9–48·0)
45·3 (45·0–45·6)
48·1 (47·7–48·4)
57·1 (56·7–57·6)
Austria (Tirol)
74·9 (71·9–78·1)
57·0 (51·5–63·0)
59·3 (54·3–64·7)
45·8 (39·1–53·8)
45·2 (37·6–52·8) R
52·7 (48·2–57·6)
55·1 (50·8–59·7)
86·1 (82·9–89·4)
Czech Republic (West Bohemia)
62·9 (58·9–67·1)
37·7 (33·0–43·0)
37·6 (33·3–42·5)
29·3 (25·2–34·1)
39·1 (33·8–45·2)
33·8 (30·5–37·6)
38·3 (34·9–42·0)
50·7 (44·4–58·0)
Denmark
73·6 (72·5–74·7)
44·7 (42·7–46·7)
48·6 (46·8–50·4)
43·4 (41·2–45·6)
45·9 (43·6–48·3)
44·2 (42·7–45·7)
47·7 (46·3–49·2)
38·4 (36·3–40·6)
Estonia
61·3 (57·9–64·8)
38·5 (33·7–44·1)
39·1 (35·3–43·2)
33·6 (28·4–39·7)
30·2 (26·0–35·1)
36·4 (32·8–40·4)
35·5 (32·6–38·6)
56·5 (52·3–60·9)
(Continues on next page)
Articles
8 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
Breast
Colon
Rectum
Colorectum
Prostate
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
RS (%) (95% CI)
(Continued from previous page)
Finland
80·2 (79·0–81·4)
54·6 (51·6–57·8)
54·7 (52·5–57·1)
49·8 (46·8–53·0)
52·6 (49·7–55·6)
52·5 (50·4–54·7)
54·0 (52·2–55·8)
62·9 (60·6–65·2)
French registries
79·8 (78·2–81·4)
57·4 (54·4–60·7)
60·1 (57·2–63·2)
52·8 (49·3–56·7)
63·9 (60·1–67·8)
55·6 (53·3–58·1)
61·5 (59·2–64·0)
73·7 (70·5–77·1)
Bas-Rhin
82·2 (79·7–84·7)
57·8 (53·5–62·5)
62·7 (58·8–66·9)
57·9 (52·6–63·7)
61·7 (56·0–67·9)
57·8 (54·4–61·4)
63·0 (59·6–66·6)
73·8 (69·4–78·4)
Calvados
75·6 (72·5–78·8)
62·0 (56·0–68·5)
61·3 (56·0–67·1)
52·2 (45·6–59·8)
67·9 (62·0–74·5)
57·6 (53·1–62·5)
64·2 (60·1–68·5)
73·1 (68·4–78·2)
Côte d’Or
78·1 (74·1–82·3)
50·6 (44·6–57·5)
52·6 (46·7–59·4)
45·3 (38·8–53·0)
61·3 (53·3–70·5)
48·7 (44·1–53·7)
55·3 (50·5–60·6)
··
Isère
81·9 (78·6–85·2)
..
..
..
..
..
..
··
Germany
(Saarland)
75·5 (73·3–77·8)
52·0 (48·2–56·0)
56·2 (52·9–59·7)
47·8 (43·0–53·1)
52·5 (48·1–57·3)
50·1 (47·2–53·2)
55·0 (52·3–57·9)
76·4 (72·7–80·4)
Iceland
79·0 (73·5–85·0)
48·1 (39·0–59·3)
54·9 (45·2–66·6)
52·1 (31·9–71·4) R
48·4 (31·7–64·6) R
49·5 (41·0–59·9)
54·0 (45·9–63·6)
69·7 (62·2–78·1)
Ireland
69·6 (66·1–73·3)
49·1 (44·0–54·8)
48·5 (43·7–53·8)
41·1 (35·0–48·2)
52·5 (44·6–60·3) R
46·0 (42·0–50·4)
50·0 (45·9–54·5)
62·8 (58·0–68·0)
Italian registries
79·5 (78·8–80·3)
52·4 (51·1–53·8)
53·8 (52·6–55·0)
47·4 (45·7–49·2)
50·4 (48·6–52·3)
50·7 (49·7–51·8)
52·7 (51·7–53·8)
65·4 (63·7–67·2)
Ferrara
78·8 (75·6–82·2)
48·5 (43·2–54·5)
54·9 (49·8–60·5)
44·6 (37·1–53·6)
48·0 (40·5–57·0)
47·3 (42·8–52·2)
53·6 (49·2–58·4)
69·8 (63·2–76·0) R
Genoa
80·6 (78·3–83·0)
49·9 (45·9–54·2)
51·2 (47·5–55·3)
40·5 (35·2–46·6)
45·4 (40·0–51·5)
46·8 (43·5–50·3)
49·5 (46·3–52·9)
66·2 (61·0–71·9)
Latina
81·8 (76·4–87·5)
52·7 (45·3–61·3)
57·4 (49·9–65·9)
46·3 (36·3–56·2) R
45·1 (34·7–58·5)
51·2 (45·0–58·2)
53·3 (47·1–60·3)
61·0 (53·9–69·1)
Macerata
77·5 (73·0–82·4)
48·9 (42·8–55·9)
57·9 (51·7–65·0)
42·0 (34·1–51·8)
52·1 (41·2–62·6) R
46·7 (41·6–52·3)
56·8 (51·4–62·7)
69·7 (63·1–76·0) R
Modena
83·1 (80·4–85·8)
55·0 (50·5–59·9)
52·0 (47·7–56·5)
48·4 (42·5–55·1)
45·3 (39·0–52·5)
52·8 (49·2–56·7)
49·8 (46·2–53·7)
68·7 (61·7–76·6)
Parma
81·2 (78·1–84·4)
50·7 (45·6–56·4)
53·7 (48·3–59·7)
47·4 (39·9–54·9) R
41·6 (34·7–49·7)
49·8 (45·6–54·5)
49·3 (44·9–54·2)
56·1 (48·0–65·6)
Ragusa
68·9 (63·2–75·1)
39·5 (32·0–48·8)
44·0 (36·8–52·6)
50·3 (40·8–61·9)
37·8 (26·0–50·3) R
44·9 (38·7–52·1)
41·9 (35·9–48·9)
49·9 (41·0–58·9) R
Romagna
87·4 (84·4–90·4)
51·4 (46·2–57·1)
58·7 (54·0–63·8)
51·0 (42·9–59·0) R
57·9 (50·8–65·9)
50·9 (46·6–55·5)
58·4 (54·4–62·7)
73·3 (67·9–79·2)
Sassari
76·4 (71·3–81·9)
39·9 (31·2–51·0)
41·5 (32·0–51·0) R
44·5 (34·2–54·8) R
42·8 (31·5–58·0)
42·3 (35·8–50·1)
43·5 (36·5–51·8)
52·2 (42·8–61·5) R
Turin
79·4 (77·1–81·7)
50·1 (46·1–54·5)
51·4 (47·8–55·4)
43·7 (39·0–49·0)
54·0 (48·8–59·6)
47·8 (44·7–51·2)
52·4 (49·3–55·6)
63·2 (58·1–68·8)
Tuscany
80·8 (78·9–82·7)
55·6 (52·5–58·9)
54·4 (51·4–57·5)
50·8 (46·9–55·0)
48·7 (44·6–53·2)
53·8 (51·4–56·4)
52·5 (50·1–55·1)
66·4 (62·4–70·7)
Varese
77·6 (75·2–80·0)
55·3 (51·0–59·9)
55·1 (51·1–59·5)
52·4 (46·5–59·0)
53·4 (47·8–59·6)
54·5 (51·1–58·2)
54·5 (51·1–58·1)
72·2 (66·7–78·2)
Veneto
77·6 (76·2–79·1)
53·7 (50·9–56·7)
54·6 (52·0–57·3)
48·4 (44·6–52·5)
55·7 (51·7–60·0)
52·0 (49·8–54·4)
55·0 (52·8–57·2)
61·8 (58·5–65·3)
Malta
73·5 (66·7–81·1)
38·0 (25·9–50·7) R
58·0 (46·5–72·4)
34·7 (20·8–49·9) R
52·5 (31·9–71·4) R
35·7 (27·0–47·1)
55·5 (46·1–66·8)
44·3 (32·3–56·9) R
Netherlands registries
77·6 (76·6–78·6)
52·7 (50·1–55·4)
55·4 (53·2–57·7)
55·0 (51·6–58·6)
54·5 (51·3–57·9)
53·6 (51·5–55·7)
55·1 (53·3–57·0)
69·5 (67·2–71·9)
Amsterdam
78·0 (76·5–79·4)
52·1 (49·1–55·2)
54·1 (51·6–56·7)
51·5 (47·6–55·7)
56·4 (52·7–60·3)
51·9 (49·5–54·3)
54·8 (52·7–57·0)
68·1 (65·4–70·8)
Netherlands
(North)
77·8 (76·2–79·4)
..
..
..
··
··
··
··
Netherlands
(South)
75·7 (72·9–78·5)
54·2 (49·2–59·8)
59·4 (54·9–64·2)
62·1 (56·6–68·1)
49·2 (43·1–56·1)
58·0 (54·2–62·2)
56·1 (52·5–60·0)
74·9 (70·3–79·8)
Norway
76·3 (75·1–77·6)
50·8 (48·7–53·0)
54·4 (52·5–56·3)
51·3 (48·9–53·9)
56·9 (54·3–59·6)
51·1 (49·5–52·8)
55·3 (53·8–56·9)
63·0 (60·9–65·1)
Polish registries
62·9 (60·6–65·3)
28·5 (25·3–32·1)
30·9 (28·0–34·2)
28·4 (24·7–32·7)
30·2 (26·7–34·1)
28·6 (26·1–31·3)
30·6 (28·3–33·0)
37·1 (33·0–41·6)
Cracow
54·7 (50·6–59·1)
24·6 (18·8–32·1)
23·4 (17·9–30·7)
25·0 (18·9–33·3)
22·9 (16·8–31·1)
25·7 (21·5–30·8)
22·5 (18·3–27·6)
21·3 (15·2–29·9)
Warsaw
66·1 (63·4–68·9)
29·7 (26·1–33·9)
33·6 (30·3–37·4)
29·2 (24·9–34·2)
32·6 (28·6–37·3)
29·6 (26·8–32·7)
33·0 (30·3–35·8)
41·4 (36·5–46·8)
Portugal (South)
72·2 (68·2–76·5)
48·6 (42·6–55·4)
44·8 (39·1–51·3)
42·3 (35·5–50·4)
44·5 (37·8–52·4)
46·5 (41·8–51·8)
44·7 (40·2–49·7)
47·7 (40·7–54·8) R
Slovakia
57·9 (55·9–59·9)
40·1 (37·7–42·7)
44·1 (41·7–46·7)
27·6 (25·5–29·8)
32·3 (29·9–34·8)
34·0 (32·3–35·8)
38·7 (37·0–40·5)
45·7 (42·7–49·0)
Slovenia
66·3 (63·8–68·9)
37·3 (33·5–41·5)
39·8 (36·3–43·6)
34·0 (30·5–38·0)
35·6 (32·1–39·5)
35·7 (33·1–38·5)
37·7 (35·3–40·4)
43·7 (39·4–48·4)
Spanish registries
77·7 (76·4–79·0)
54·2 (52·2–56·3)
56·3 (54·2–58·4)
50·0 (47·7–52·4)
51·8 (49·1–54·6)
52·5 (51·0–54·1)
54·7 (53·1–56·4)
60·5 (57·6–63·6)
Basque Country
79·5 (77·6–81·5)
59·0 (55·8–62·3)
58·3 (55·0–61·8)
53·3 (49·6–57·3)
52·2 (47·8–56·9)
56·5 (54·1–59·0)
56·2 (53·5–58·9)
63·0 (58·8–67·4)
Granada
71·8 (67·0–77·0)
50·6 (44·3–57·8)
50·9 (44·5–58·2)
45·7 (38·1–54·8)
51·1 (43·0–60·8)
48·2 (43·3–53·7)
51·1 (46·0–56·8)
..
Mallorca
80·1 (77·2–83·2)
51·4 (46·4–57·1)
57·4 (52·2–63·0)
48·9 (42·5–56·2)
51·7 (44·5–59·9)
50·9 (46·9–55·3)
56·1 (51·8–60·7)
68·2 (60·7–76·6)
Murcia
72·8 (69·1–76·8)
49·7 (44·4–55·7)
54·8 (50·2–59·9)
49·2 (43·4–55·8)
47·8 (42·0–54·4)
49·7 (45·5–54·3)
52·3 (48·7–56·3)
52·0 (45·4–59·4)
Navarra
78·3 (74·9–81·8)
50·6 (45·1–56·8)
53·3 (46·8–60·8)
42·7 (36·4–50·1)
58·1 (49·1–66·5) R
47·7 (43·4–52·4)
55·6 (50·4–61·3)
54·6 (47·2–63·0)
Tarragona
76·4 (73·0–80·0)
49·2 (43·9–55·1)
52·8 (47·8–58·3)
50·1 (43·2–58·0)
49·8 (40·9–58·4) R
49·6 (45·4–54·3)
51·7 (47·4–56·4)
54·6 (46·3–64·3)
Sweden
82·0 (81·2–82·7)
52·5 (50·9–54·2)
54·8 (53·3–56·3)
53·0 (51·2–55·0)
58·2 (56·3–60·2)
52·8 (51·6–54·1)
56·2 (55·0–57·4)
66·0 (64·7–67·3)
Swiss registries
76·0 (74·3–77·7)
..
..
..
..
··
··
··
Basel
78·2 (75·1–81·4)
..
..
..
..
··
··
··
Geneva
79·1 (76·0–82·4)
..
..
..
..
··
··
··
(Continues on next page)
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 9
very few registries was it greater than 1% (available on-line34). Such patients are described as censored from the analysis.
Statistical analysis
We estimated relative survival up to 5 years after diagnosis from the individual tumour data, using the Hakulinen approach44 embedded in the US National Cancer Institute’s publicly accessible SEER*Stat software.45 SEER*Stat is the standard tool used for cancer-survival estimation by the SEER Program cancer registries, and we used it to ensure that survival estimates for US registries would be seen as comparable with those already published by the SEER Program. Survival estimates were also derived by race for the USA (black and white).
Relative survival is the ratio of the survival noted in the patients with cancer and the survival that would have been expected had they been subject only to the mortality rates of the general population (background mortality). It is a measure of the excess mortality in patients with cancer over and above the background mortality, and can be inter-preted as survival from the cancer after correction for other causes of death. This approach is crucial for international comparisons of cancer survival, because the background risks of death from all causes in adults often differ very widely. Background mortality was taken from life tables developed specially for the CONCORD study, specific for sex, calendar year, region, and race.46
The probability of survival in successive years after diagnosis was estimated in survivors to the start of each year. We report the cumulative relative survival at 5 years. Survival was not estimated if fewer than five patients with a given cancer were available for analysis in any category defined by age, sex, and race. Relative survival was adjusted
Breast
Colon
Rectum
Colorectum
Prostate
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
RS (%) (95% CI)
(Continued from previous page)
Graubunden-
Glarus
71·7 (66·8–77·0)
..
..
..
··
..
··
··
St Gallen-
Appenzell
71·7 (68·1–75·5)
..
..
..
..
··
··
··
Valais
75·3 (70·4–80·6)
..
..
..
··
.·
··
··
UK
69·7 (69·4–70·1)
43·5 (42·9–44·1)
44·4 (43·8–45·0)
40·6 (39·9–41·3)
45·3 (44·5–46·1)
42·3 (41·8–42·8)
44·7 (44·3–45·2)
51·1 (50·4–51·8)
England (national)
69·8 (69·5–70·2)
43·4 (42·8–44·1)
44·3 (43·7–45·0)
40·4 (39·6–41·2)
45·4 (44·6–46·3)
42·2 (41·7–42·7)
44·7 (44·2–45·3)
50·9 (50·1–51·7)
East Anglia
70·8 (69·2–72·4)
43·6 (40·8–46·7)
42·9 (40·2–45·8)
46·0 (42·4–49·8)
49·8 (46·1–53·9)
44·6 (42·4–47·0)
45·2 (43·0–47·6)
51·9 (48·4–55·7)
Mersey
69·4 (67·8–71·1)
43·8 (41·0–46·9)
43·6 (41·0–46·4)
41·2 (38·1–44·5)
44·5 (41·0–48·2)
43·0 (40·9–45·1 )
44·0 (41·8–46·2)
52·6 (49·3–56·1)
Oxford
71·1 (69·6–72·6)
44·8 (42·1–47·8)
45·0 (42·4–47·8)
43·1 (39·8–46·6)
45·6 (41·8–49·7)
44·3 (42·1–46·6)
45·3 (43·2–47·6)
50·4 (47·4–53·6)
South Thames
73·9 (73·0–74·9)
45·5 (43·6–47·6)
48·3 (46·5–50·2)
45·3 (43·0–47·8)
51·1 (48·6–53·6)
45·5 (44·0–47·1)
49·3 (47·9–50·8)
56·1 (54·0–58·2)
South West
73·4 (72·5–74·2)
51·5 (49·8–53·1)
51·6 (50·1–53·2)
48·6 (46·7–50·6)
52·0 (49·8–54·2)
50·3 (49·0–51·5)
51·8 (50·5–53·1)
55·8 (53·9–57·9)
Trent
68·2 (67·2–69·3)
40·3 (38·3–42·5)
42·2 (40·2–44·2)
39·3 (37·1–41·6)
43·8 (41·3–46·5)
39·8 (38·3–41·4)
42·9 (41·3–44·5)
47·0 (44·8–49·4)
West Midlands
75·4 (74·2–76·5)
48·0 (46·2–49·9)
48·4 (46·6–50·2)
44·4 (42·2–46·7)
46·9 (44·3–49·6)
46·6 (45·2–48·1)
48·0 (46·5–49·5)
55·4 (53·2–57·7)
Yorkshire
71·4 (70·1–72·8)
45·5 (43·1–48·1)
45·4 (43·1–47·8)
43·8 (41·1–46·7)
49·8 (46·8–53·0)
44·7 (42·9–46·6)
47·0 (45·1–48·9)
53·3 (50·5–56·4)
Northern Ireland
72·0 (68·9–75·3)
47·3 (42·1–53·0)
49·0 (44·3–54·3)
48·2 (41·6–55·8)
43·8 (37·0–51·9)
47·8 (43·7–52·3)
47·8 (43·8–52·2)
54·0 (48·7–59·9)
Scotland
70·6 (69·5–71·8)
45·9 (44·0–47·9)
47·8 (46·1–49·6)
42·3 (39·9–44·9)
46·9 (44·4–49·6)
44·6 (43·1–46·2)
47·7 (46·2–49·2)
54·2 (52·0–56·5)
Wales
67·1 (65·8–68·4)
39·9 (37·5–42·6)
38·0 (35·7–40·4)
39·5 (36·8–42·3)
41·9 (38·8–45·2)
39·8 (38·0–41·8)
39·3 (37·5–41·3)
47·9 (44·9–51·1)
Oceania
Australia (national)
80·7 (80·1–81·3)
57·8 (56·8–58·8)
57·7 (56·7–58·6)
54·8 (53·6–56·1)
59·2 (57·8–60·6)
56·7 (55·9–57·5)
58·2 (57·4–58·9)
77·4 (76·6–78·2)
Australian Capital
Territory
80·4 (74·3–87·0)
62·0 (53·8–71·5)
59·1 (51·2–68·2)
57·2 (45·5–68·1) R
61·3 (49·8–75·5)
56·5 (49·1–65·1)
59·8 (53·0–67·5)
78·7 (72·5–85·5)
New South Wales
80·4 (79·4–81·5)
60·8 (59·1–62·6)
58·2 (56·6–59·9)
56·9 (54·7–59·1)
59·6 (57·3–61·9)
59·3 (57·9–60·7)
58·7 (57·4–60·0)
78·3 (77·0–79·6)
Northern Territory
71·9 (58·7–88·0)
53·5 (36·3–69·4) R
51·7 (34·2–67·5) R
46·3 (28·9–63·4) R
66·5 (39·6–86·0) R
52·1 (38·6–70·5)
53·2 (39·9–70·9)
63·7 (49·0–77·0) R
Queensland
80·5 (79·0–82·0)
59·8 (57·5–62·3)
60·6 (58·6–62·8)
53·7 (50·7–56·9)
61·2 (57·7–64·8)
57·7 (55·8–59·6)
60·7 (58·9–62·5)
75·7 (73·9–77·6)
Southern Australia
80·0 (78·0–82·0)
56·3 (53·0–59·8)
58·6 (55·5–61·8)
55·2 (51·3–59·4)
59·2 (55·1–63·6)
55·8 (53·3–58·4)
58·6 (56·1–61·2)
77·1 (74·3–80·1)
Tasmania
77·1 (73·4–81·1)
52·4 (46·8–58·6)
50·0 (44·9–55·6)
44·9 (37·5–53·6)
55·0 (46·8–64·6)
50·2 (45·7–55·1)
51·8 (47·4–56·6)
70·2 (65·8–74·8)
Victoria
81·5 (80·4–82·7)
54·7 (52·7–56·7)
56·1 (54·3–57·9)
54·9 (52·5–57·4)
59·0 (56·5–61·6)
54·8 (53·3–56·4)
57·2 (55·7–58·6)
76·8 (75·2–78·4)
Western Australia
81·4 (79·3–83·5)
53·2 (49·7–56·9)
54·5 (51·4–57·8)
50·9 (46·8–55·3)
54·8 (50·3–59·7)
52·5 (49·8–55·3)
54·8 (52·1–57·5)
80·0 (77·7–82·3)
RS=relative survival. R=raw (not age-standardised) survival estimate: too few cases in one or more age groups. *International Cancer Survival Standard (see text). †No state-wide data available for this city. ‡Survival truncated if greater than 1·0 (100%). 95% CIs were calculated by use of a logarithmic transformation (see text).
Table 2: 5-year relative survival (%), age-standardised to ICSS weights* with 95% CIs for adults (aged 15–99 years) diagnosed with cancer of the breast (women), colon, rectum, or prostate during 1990–94 and followed up to Dec 31, 1999: continent, country, and region
Articles
10 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
for heterogeneity in the withdrawal of patients from follow-up and consequent changes in the age-sex-race distribution of patients with cancer in successive calendar years, by use of the exact method.44
Expected survival was derived from complete life tables that contained the probabilities of death or the central death rates for the general population of the registry’s territory, by single year of age, sex and (where possible) race, and single calendar year between 1990 and 1999. Many registries provided complete life tables. For some registries, complete life tables were constructed from raw data obtained from published sources on the numbers of deaths by age, sex, and race in the relevant year(s) or period, and the corresponding populations. For the remaining registries, abridged (5-year or 10-year age groups) life tables from published sources were smoothed to produce complete life tables. In some registries, life tables were interpolated, as required, to provide life tables by single calendar year throughout the decade 1990–99. Details are provided in an accompanying paper.46
Cancer survival is known to vary with race,47–55 and we assessed racial differences in survival where possible. Individual tumour records were coded by race only in the data from the USA (black, white, other). Race-specific estimates of relative survival were produced with separate life tables for each race, constructed from the raw data on populations and the number of deaths.46
In the USA, race-specific mortality in the general population also varies between states.36 We developed separate sets of complete life tables for each state and metropolitan area and for each sex. This approach was designed to enable the closest possible adjustment of relative survival estimates in the USA for geographic variation in background mortality in both blacks and whites, by age, sex, and calendar period. Race-specific life tables for both blacks and whites were developed for 11 of the 16 states and all six metropolitan areas. Where race-specific life tables were available, they were used in the estimation of relative survival for patients of that race. For other patients, the all-races life table for that population was used. For five less populous states (Hawaii, Idaho, New Mexico, Utah, and Wyoming: 6% of the 109 million population covered by participating registries; webtable), only the life tables for whites were sufficiently robust, and relative survival estimates for blacks are not separately presented.
Relative survival measures the extent to which patients with cancer have a higher death rate than the general population of the country or region in which they live.56 Occasionally, despite use of the most appropriate life table, this excess death rate can be negative in a given time interval since diagnosis, implying that the death rate of cancer survivors during that interval is actually lower than that of the general population. This situation can arise from random variation in the death rate when the number of deaths in the interval is small,57 either because the interval is very short, or because survival is poor and most patients have already died before the start of the interval, or because survival is high and there are very few deaths. In such situations, we present by default the estimate derived by use of the SEER*Stat option to constrain the excess mortality rate to zero, which imposes a plateau in the relative survival curve. The unconstrained estimate was also obtained for comparison.
Even though relative survival is already adjusted for age-specific differences in background mortality, robust international comparison of relative survival requires age-standardisation,23 because the age distribution of patients with cancer varies between countries, and because relative survival also varies widely by age, at least in Europe.27 Conventional age-specific weights used to standardise incidence or mortality rates (eg, the national population or the hypothetical world standard population58) are unsuitable because patients with cancer have a very different age profile from that of the general population.
A cancer-survival comparison of such wide scope has not been done before and the choice of weights for age-standardisation was not straightforward. International standard cancer-patient populations have been proposed, with different sets of weights in 5-year or 10-year age bands for each of 20 common cancers, derived from their world-wide distribution.59 The weights used for the EUROCARE-3 study were derived from the age distribution of all patients included in that study for each cancer, and were thus cancer-specific.43 The disadvantage of these standards is either that a unique set of weights is required for each cancer (cancer-specific), or else that the standards are arbitrary (study-specific), vitiating comparison between studies.
We chose the recently developed International Cancer Survival Standard (ICSS) weights.60 These comprise just three sets of age weights, derived from discriminant analysis to find the smallest number of sets of standard age weights that enable adequate standardisation of survival. Each standard is applicable to a range of different cancers, and provides age-standardised survival estimates that are not too different from the unstandardised estimates. The first ICSS standard applies to cancers for which incidence rises rapidly with age, and we used this in all analyses. For cancers of the breast, colon, and rectum, we used five age groups: 15–44, 45–54, 55–64, 65–74, and 75–99 years. For prostate cancer, which occurs mainly in older men, we used four age groups: 15–54, 55–64, 65–74, and 75–99 years. Where data were too sparse for standardisation, the raw (unstandardised) survival estimate is presented, flagged with “R”.
The same age weights were used for men and women, and for each race, enabling direct comparison of age-standardised relative survival between patient groups defined by sex and race. Because identical weights were used for breast, colon, and rectal cancer, the age-standardised estimates of survival for these cancers can also be directly compared. This would not be possible if cancer-specific weights were used.
See Online for webtable
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 11
Central and SouthData covering less than 100% of countryJapanCuba†USAAustraliaFranceCanadaNetherlandsSwedenAustriaSpainFinlandNorwayItalyGermanyIcelandNorthern IrelandBrazilPortugalIrelandScotlandDenmarkEnglandWalesEstoniaSloveniaMaltaSlovakiaCzech RepublicPolandAlgeriaUSAAustriaCanadaAustraliaGermanyFranceIcelandCuba†NetherlandsSwedenItalyNorwayFinlandIrelandSpainEstoniaScotlandNorthern IrelandEnglandCzech RepublicJapanBrazilWalesPortugalSlovakiaMaltaSloveniaDenmarkPolandAlgeriaCuba†FranceUSACanadaAustraliaJapanSwedenMaltaNorwayNetherlandsAustriaGermanySpainIcelandFinlandItalyIrelandNorthern IrelandDenmarkScotlandEnglandPortugalBrazilWalesSlovakiaCzech RepublicSloveniaEstoniaPolandAlgeriaCuba†USACanadaSwedenJapanAustraliaFinlandFranceItalyIcelandSpainNetherlandsNorwaySwitzerlandGermanyAustriaDenmarkMaltaPortugalNorthen IrelandScotlandEnglandIrelandWalesSloveniaPolandCzech RepublicEstoniaBrazilSlovakiaAlgeria0204060801000204060801001·05·641·750·72·27·143·046·97·026·365·62·77·743·345·7Breast (women)Colorectum (women)Colorectum (men)ProstateAmerica, NorthAsiaEuropeOceania5-year relative survival (%)5-year relative survival (%)
Figure 1: 5-year relative survival (%), age-standardised to the ICSS weights* with 95% CIs for adults (aged 15–99 years) diagnosed with cancer of the breast (women), colorectum, or prostate during 1990–94 and followed up to Dec 31, 1999: country
Vertical bar on the right of each graphic shows the contribution (%) of each
continent to the total number of cases analysed (contributions under 1% are not labelled). Red vertical line represents mean survival for the 22 European countries that participated in EUROCARE-3, age-standardised to ICSS weights. Switzerland only provided data for breast cancer. *Age-standardised to ICSS weights, except for Sétif, Algeria (all cancers), Malta (prostate), and Portugal (prostate), which were unstandardised values (see text). †Problems with data quality might have led
to over-estimation (see text).
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12 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
Figure 2: 5-year relative survival (%), using state-specific and race-specific life tables and age-standardised to the ICSS weights* for adults (aged 15–99 years) diagnosed with cancer of the breast (women), colon, rectum, colon and rectum combined, or prostate during 1990–94 and followed up to Dec 31, 1999: 16 US States and six metropolitan areas
Vertical lines represent mean survival for SEER (red) and NPCR (green) registries, age-standardised to ICSS weights (see text). *Age-standardised to ICSS weights (see text). †Problems with data quality might have led to over-estimation (see text).
bySEER registriesMichigan†SeattleAtlantaDetroitUtahColoradoNebraskaIowaNew MexicoWyomingConnecticutHawaiiLos AngelesIdahoNew JerseyCaliforniaRhode IslandSan FranciscoFloridaLouisianaNew York StateNew York CityHawaiiSeattleColoradoSan FranciscoIowaIdahoUtahConnecticutAtlantaNebraskaCaliforniaNew MexicoRhode IslandWyomingFloridaLos AngelesNew JerseyDetroitMichiganNew York StateLouisianaNew York CityHawaiiIowaNebraskaSeattleConnecticutRhode IslandIdahoColoradoNew MexicoNew JerseyFloridaAtlantaSan FranciscoCaliforniaMichiganLouisianaLos AngelesUtahWyomingDetroitNew York StateNew York CityHawaiiRhode IslandAtlantaSeattleConnecticutNew MexicoLos AngelesColoradoNew JerseyIdahoUtahCaliforniaIowaDetroitNebraskaFloridaLouisianaSan FranciscoWyomingMichiganNew York StateNew York CitySeattleAtlantaIowaConnecticutHawaiiUtahFloridaNebraskaSan FranciscoCaliforniaIdahoRhode IslandColoradoMichiganNew MexicoLos AngelesLouisianaNew JerseyDetroitNew York StateNew York CityWyomingIdahoConnecticutSeattleRhode IslandUtahHawaiiIowaNebraskaCaliforniaLouisianaFloridaSan FranciscoAtlantaLos AngelesNew JerseyDetroitColoradoMichiganNew York StateNew MexicoNew York CityWyomingHawaiiSeattleIowaNebraskaConnecticutIdahoRhode IslandAtlantaColoradoFloridaNew MexicoNew JerseySan FranciscoCaliforniaUtahMichiganLouisianaLos AngelesDetroitWyomingNew York StateNew York CityHawaiiIdahoRhode IslandSeattleAtlantaConnecticutUtahIowaLos AngelesNebraskaCaliforniaColoradoNew JerseyFloridaLouisianaDetroitNew MexicoSan FranciscoMichiganNew York StateWyomingNew York City0Breast (women)ProstateRectum (women)Rectum (men)Colon (women)Colon (men)Colorectum (women)Colorectum (men)20406080100020406080100020406080100020406080100NPCR registries5-year relative survival (%)5-year relative survival (%)5-year relative survival (%)5-year relative survival (%)
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 13
For countries represented by more than one regional cancer registry, we provide a survival estimate derived from the pooled data for all contributing registries, age-standardised in the same way. This is an overall estimate of survival in the combined territories providing data from that country, not a weighted mean of the various regional estimates. The combined estimate should not be considered as necessarily representative of survival in the country as a whole, except where the regional registries cover the entire country.
Breast
Colon
Rectum
Colorectum
Prostate
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
RS (%) (95% CI)
Atlanta, GA (all races), S
85·7 (84·0–87·4)
64·1 (60·5–68·0)
60·9 (58·0–63·9)
56·6 (51·0–62·8)
64·5 (59·5–69·8)
62·5 (59·4–65·8)
62·2 (59·6–64·9)
94·0 (92·4–95·6)
Black
71·1 (67·1–75·4)
59·9 (52·3–68·5)
52·6 (47·2–58·6)
45·5 (35·3–58·6)
52·1 (42·5–63·7)
56·8 (50·3–64·2)
52·9 (48·1–58·2)
86·5 (83·3–89·8)
White
89·6 (87·8–91·5)
65·4 (61·3–69·8)
63·9 (60·5–67·6)
59·4 (52·9–66·7)
67·9 (62·3–74·1)
64·1 (60·6–67·8)
65·4 (62·4–68·4)
96·1 (94·4–97·9)
California (all races), N
84·9 (84·5–85·3)
60·8 (59·9–61·6)
59·8 (59·0–60·6)
57·5 (56·3–58·8)
60·3 (59·0–61·6)
59·8 (59·1–60·5)
60·1 (59·4–60·8)
91·1 (90·6–91·5)
Black
73·4 (71·4–75·6)
54·8 (51·4–58·4)
51·1 (48·3–54·2)
50·3 (44·9–56·4)
50·9 (45·9–56·4)
53·6 (50·7–56·7)
51·2 (48·7–53·8)
84·5 (82·9–86·1)
White
85·3 (84·9–85·7)
60·7 (59·8–61·6)
60·1 (59·2–61·0)
57·4 (56·1–58·7)
60·4 (59·0–61·8)
59·7 (58·9–60·4)
60·3 (59·6–61·0)
90·8 (90·3–91·2)
Los Angeles, CA (all races), N
83·8 (83·0–84·6)
61·9 (60·2–63·6)
58·8 (57·3–60·3)
56·2 (53·8–58·6)
58·8 (56·4–61·3)
60·0 (58·7–61·4)
58·8 (57·6–60·2)
91·7 (90·9–92·6)
Black
72·5 (69·6–75·6)
58·9 (54·5–63·8)
52·1 (48·2–56·3)
49·8 (42·3–58·7)
50·1 (43·4–57·9)
57·0 (53·2–61·2)
51·7 (48·2–55·3)
84·8 (82·5–87·3)
White
84·7 (83·9–85·5)
61·5 (59·7–63·4)
59·4 (57·6–61·2)
55·4 (52·8–58·2)
58·5 (55·7–61·4)
59·6 (58·0–61·1)
59·2 (57·7–60·7)
92·3 (91·4–93·2)
San Francisco, CA (all races), S
86·6 (85·6–87·6)
59·8 (57·6–62·0)
60·3 (58·2–62·5)
57·0 (53·8–60·3)
60·6 (57·4–64·0)
58·9 (57·2–60·8)
60·5 (58·8–62·3)
90·5 (89·4–91·6)
Black
77·2 (73·2–81·4)
47·4 (41·0–54·7)
50·0 (44·4–56·4)
54·7 (43·7–68·5)
52·3 (41·5–66·0)
49·7 (44·2–56·0)
50·6 (45·6–56·2)
83·7 (80·4–87·1)
White
87·5 (86·5–88·6)
60·3 (57·9–62·9)
61·1 (58·7–63·6)
56·8 (53·2–60·5)
61·5 (57·9–65·4)
59·3 (57·3–61·4)
61·4 (59·4–63·5)
90·2 (88·9–91·4)
Colorado (all races), N
87·0 (85·8–88·2)
61·7 (59·1–64·5)
62·0 (59·6–64·6)
55·6 (51·7–59·9)
59·8 (55·9–64·0)
59·8 (57·6–62·1)
61·7 (59·6–63·9)
92·9 (91·8–94·1)
Black
81·6 (74·1–89·9)
45·0 (34·3–58·8)
48·0 (36·9–62·5)
76·8 (44·8–97·7) R
39·6 (16·2–64·9) R
49·7 (39·3–63·0)
46·7 (36·2–60·2)
80·7 (74·6–87·4)
White
87·0 (85·8–88·2)
62·1 (59·4–65·0)
62·3 (59·8–65·0)
54·9 (50·9–59·2)
60·6 (56·6–64·9)
59·8 (57·6–62·2)
62·1 (60·0–64·4)
92·8 (91·6–94·0)
Connecticut (all races), S
85·7 (84·7–86·8)
62·4 (60·2–64·7)
63·5 (61·4–65·7)
61·3 (58·1–64·6)
62·4 (59·1–65·9)
62·1 (60·3–64·0)
63·4 (61·6–65·2)
91·9 (90·7–93·2)
Black
75·2 (69·3–81·6)
51·1 (41·9–62·3)
52·7 (44·8–61·9)
63·5 (47·5–85·0)
73·3 (56·8–86·2) R
54·4 (46·0–64·3)
56·5 (49·4–64·6)
82·3 (77·6–87·2)
White
86·3 (85·3–87·3)
62·9 (60·6–65·3)
64·1 (61·9–66·4)
61·3 (58·1–64·7)
61·9 (58·5–65·5)
62·4 (60·5–64·3)
63·7 (61·9–65·6)
92·3 (91·0–93·6)
Florida (all races), N
84·0 (83·5–84·5)
60·2 (59·2–61·2)
61·0 (60·0–62·1)
57·0 (55·5–58·6)
61·0 (59·4–62·7)
59·4 (58·5–60·2)
61·2 (60·4–62·1)
89·2 (88·7–89·8)
Black
72·7 (70·1–75·3)
54·4 (50·0–59·1)
54·3 (50·9–57·9)
44·8 (37·7–53·1)
54·5 (48·4–61·3)
51·6 (47·8–55·6)
54·8 (51·9–58·0)
84·7 (82·7–86·7)
White
84·7 (84·2–85·2)
60·5 (59·4–61·6)
61·6 (60·5–62·7)
57·8 (56·2–59·5)
61·3 (59·6–63·1)
59·8 (59·0–60·8)
61·7 (60·8–62·6)
89·7 (89·1–90·3)
Hawaii (all races), S
90·2 (88·1–92·3)
68·4 (64·7–72·3)
67·2 (63·3–71·3)
59·6 (54·5–65·2)
61·5 (55·1–68·6)
65·4 (62·4–68·6)
66·2 (62·8–69·7)
91·8 (89·6–94·1)
White
90·2 (86·5–94·1)
67·9 (61·2–75·2)
61·6 (54·1–70·1)
54·0 (44·3–65·8)
66·0 (50·8–79·0) R
64·6 (58·6–71·1)
62·9 (56·2–70·3)
92·4 (89·0–96·0)
Idaho (all races), N
86·3 (84·2–88·5)
61·4 (56·9–66·3)
63·4 (59·1–68·0)
66·9 (60·8–73·6)
60·0 (53·3–67·6)
63·6 (59·9–67·6)
62·8 (59·1–66·7)
91·7 (89·8–93·7)
White
86·3 (84·2–88·5)
61·4 (56·8–66·4)
63·4 (59·1–68·1)
66·7 (60·5–73·4)
59·9 (53·1–67·5)
63·6 (59·8–67·5)
62·8 (59·1–66·8)
91·5 (89·5–93·5)
Iowa (all races), S
86·6 (85·5–87·7)
60·8 (58·4–63·3)
64·8 (62·7–67·0)
59·0 (55·6–62·6)
63·8 (60·2–67·6)
60·3 (58·3–62·3)
64·7 (62·9–66·6)
92·7 (91·5–93·9)
Black
60·1 (46·6–77·5)
66·8 (39·0–89·6) R
75·2 (51·7–94·1) R
56·5 (17·3–91·4) R
40·7 (12·5–71·8) R
66·9 (43·7–86·2) R
65·9 (46·5–82·8) R
85·8 (72·3–97·6) R
White
86·8 (85·7–87·8)
60·8 (58·4–63·3)
64·6 (62·5–66·8)
58·7 (55·3–62·4)
63·8 (60·2–67·7)
60·2 (58·2–62·2)
64·6 (62·7–66·5)
92·6 (91·4–93·8)
Louisiana (all races), N
81·0 (79·8–82·1)
59·9 (57·6–62·2)
58·8 (56·9–60·8)
57·2 (53·8–60·9)
58·7 (55·5–62·1)
59·2 (57·3–61·1)
58·9 (57·2–60·6)
88·6 (87·4–89·9)
Black
69·9 (67·2–72·7)
54·2 (49·6–59·3)
53·1 (49·6–56·9)
48·0 (40·8–56·4)
48·2 (41·9–55·4)
53·1 (49·2–57·2)
52·4 (49·2–55·8)
80·6 (78·1–83·2)
White
84·0 (82·8–85·3)
61·6 (59·1–64·3)
60·6 (58·4–63·0)
58·4 (54·6–62·4)
61·4 (57·8–65·3)
60·7 (58·6–62·9)
61·1 (59·2–63·1)
91·0 (89·6–92·4)
Michigan (all races)‡, N
82·3 (81·6–82·9)
58·8 (57·5–60·2)
59·3 (58·1–60·6)
55·2 (53·2–57·2)
59·2 (57·2–61·3)
57·8 (56·7–59·0)
59·5 (58·4–60·6)
100 (99·8–100)
Black‡
69·6 (67·2–72·1)
47·9 (44·2–51·9)
51·8 (48·5–55·4)
45·1 (39·1–51·9)
45·1 (39·3–51·8)
47·1 (43·9–50·6)
50·5 (47·6–53·6)
100 (99·3–100)
White‡
83·3 (82·6–84·0)
59·7 (58·3–61·2)
60·2 (58·9–61·6)
55·9 (53·8–58·1)
60·2 (58·1–62·4)
58·7 (57·5–59·9)
60·4 (59·3–61·6)
100 (99·8–100)
Detroit, MI (all races), S
83·0 (81·9–84·0)
60·6 (58·4–62·9)
58·2 (56·2–60·3)
55·7 (52·5–59·0)
57·4 (54·2–60·9)
59·2 (57·3–61·0)
58·0 (56·3–59·8)
93·8 (92·8–94·8)
Black
71·7 (68·9–74·6)
50·6 (45·9–55·8)
51·3 (47·6–55·4)
48·4 (40·9–57·2)
44·5 (37·4–53·0)
49·8 (45·7–54·2)
50·5 (47·1–54·3)
88·7 (86·4–91·1)
White
85·4 (84·3–86·5)
62·7 (60·2–65·3)
60·7 (58·3–63·2)
57·4 (53·9–61·0)
59·6 (55·9–63·4)
61·1 (59·1–63·2)
60·3 (58·3–62·4)
95·3 (94·2–96·4)
Nebraska (all races), N
85·4 (84·0–86·8)
60·4 (57·3–63·7)
64·3 (61·4–67·2)
58·3 (53·9–63·0)
60·6 (55·9–65·7)
59·8 (57·3–62·5)
63·6 (61·1–66·1)
92·9 (91·3–94·4)
Black‡
83·1 (72·7–94·9)
69·6 (46·5–88·2) R
48·2 (29·9–66·4) R
60·0 (24·9–90·5) R
77·4 (22·6–100) R
66·9 (47·5–83·5) R
52·6 (34·9–69·7) R
78·7 (68·4–90·6)
White
85·4 (83·9–86·8)
59·9 (56·7–63·2)
64·9 (62·1–67·9)
57·8 (53·4–62·6)
60·5 (55·7–65·7)
59·3 (56·7–62·0)
64·0 (61·5–66·6)
93·1 (91·6–94·7)
New Jersey (all races), N
83·4 (82·7–84·1)
61·5 (60·1–62·9)
61·2 (59·9–62·6)
56·1 (54·1–58·3)
58·4 (56·4–60·6)
59·7 (58·6–60·9)
60·6 (59·5–61·7)
91·2 (90·4–91·9)
Black
73·1 (70·2–76·1)
51·6 (46·4–57·4)
51·5 (47·7–55·6)
46·4 (38·3–56·2)
45·1 (38·5–53·0)
50·3 (45·8–55·2)
50·3 (46·9–53·9)
81·0 (78·5–83·5)
White
83·8 (83·1–84·6)
61·4 (60·0–62·9)
61·8 (60·4–63·2)
56·0 (53·9–58·3)
58·9 (56·7–61·1)
59·6 (58·4–60·9)
61·1 (59·9–62·3)
90·8 (90·0–91·7)
(Continues on next page)
See Online for webpanel
Articles
14 http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7
The proportion of survivors is constrained in the range zero to one (or 0 to 100%), but confidence intervals (CIs) for relative survival derived in the usual way, from the Normal approximation, can produce implausible values (1). SEER*Stat provided the standard error of the cumulative relative survival based on the Greenwood formula,61 but did not provide CIs. We used these standard errors to estimate CIs on the logarithmic scale (webpanel).
For the USA, we constructed funnel plots of relative survival for each cancer and sex, to obtain further insight into the variability of survival by race and state, and to avoid spurious ranking of the survival estimates.62 The plots show how much a particular survival estimate deviates from the pooled US value, given the precision of each estimate. The precision depends on the number of deaths included in the analysis, which depends in turn on the size of the population and the frequency and lethality of the cancer in that population. 5-year relative survival estimates for each population, age-standardised and adjusted for race-specific and state-specific background mortality, were plotted against the precision of the estimates, taken as the inverse square of their standard errors (webpanel). The horizontal line in each plot, the target, was estimated as the pooled 5-year relative survival for all participating US populations, age-standardised to the same weights. Raw survival estimates were not plotted. The 99·8% control limits superimposed on each plot represent about three standard deviations from the pooled US survival at each level of precision.
Breast
Colon
Rectum
Colorectum
Prostate
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
Men RS (%) (95% CI)
Women RS (%) (95% CI)
RS (%) (95% CI)
(Continued from previous page)
New Mexico (all races), S
84·6 (82·8–86·4)
62·1 (58·1–66·3)
61·7 (57·9–65·7)
52·6 (47·2–58·7)
59·1 (53·0–65·8)
59·0 (55·8–62·4)
61·0 (57·8–64·4)
92·4 (90·7–94·2)
White
84·7 (82·8–86·6)
61·7 (57·7–66·0)
61·4 (57·5–65·6)
52·7 (47·1–58·9)
59·0 (52·8–65·9)
58·9 (55·6–62·4)
60·9 (57·6–64·4)
92·7 (91·0–94·4)
New York State (all races), N
81·0 (80·5–81·5)
56·8 (55·8–57·8)
56·5 (55·6–57·5)
55·0 (53·5–56·5)
56·7 (55·2–58·3)
56·3 (55·4–57·1)
56·7 (55·9–57·5)
85·9 (85·3–86·5)
Black
67·2 (65·4–69·1)
45·9 (42·8–49·2)
46·0 (43·5–48·6)
42·8 (37·6–48·7)
46·8 (42·2–51·9)
45·1 (42·4–47·9)
46·2 (44·0–48·5)
75·9 (74·2–77·7)
White
82·1 (81·5–82·6)
57·3 (56·2–58·4)
57·2 (56·2–58·2)
55·8 (54·2–57·4)
57·4 (55·8–59·1)
56·9 (56·0–57·8)
57·4 (56·5–58·2)
86·5 (85·8–87·2)
New York City, NY (all races), N
77·6 (76·8–78·4)
54·5 (52·9–56·2)
53·8 (52·3–55·3)
50·9 (48·4–53·5)
52·6 (50·2–55·1)
53·5 (52·1–54·9)
53·5 (52·3–54·8)
82·3 (81·2–83·4)
Black
65·8 (63·7–67·9)
45·2 (41·7–49·1)
45·0 (42·2–48·0)
44·4 (38·3–51·4)
46·5 (41·3–52·3)
45·0 (41·9–48·3)
45·3 (42·8–48·0)
74·0 (71·9–76·1)
White
79·6 (78·7–80·6)
55·6 (53·7–57·6)
54·9 (53·1–56·7)
51·9 (49·1–54·9)
53·3 (50·5–56·3)
54·5 (52·9–56·2)
54·5 (53·0–56·1)
83·3 (81·8–84·7)
Rhode Island (all races), N
84·6 (82·7–86·4)
64·7 (60·9–68·7)
63·4 (60·0–67·1)
60·1 (54·5–66·3)
59·9 (54·5–65·7)
63·4 (60·2–66·7)
62·7 (59·8–65·8)
90·9 (88·5–93·3)
Black‡§
82·9 (65·8–100)
58·6 (28·5–85·9) R
45·0 (16·5–71·8) R
NA
79·6 (28·8–100) R
65·5 (35·6–90·7) R
57·5 (31·4–78·5) R
75·5 (59·5–89·0) R
White
84·9 (83·1–86·8)
64·9 (61·1–69·0)
63·7 (60·2–67·4)
60·2 (54·5–66·4)
59·3 (53·9–65·3)
63·6 (60·4–66·9)
62·8 (59·8–65·9)
91·4 (89·0–93·9)
Seattle, WA (all races), S
88·7 (87·6–89·8)
63·9 (61·5–66·4)
64·2 (61·9–66·6)
60·8 (57·4–64·5)
65·5 (61·9–69·3)
63·2 (61·1–65·3)
64·9 (62·9–66·9)
95·3 (94·3–96·4)
Black
64·7 (55·5–75·3)
54·9 (42·5–71·0)
63·9 (45·4–80·2) R
46·9 (26·6–67·1) R
48·7 (20·1–75·1) R
51·9 (41·0–65·6)
54·9 (42·1–71·8)
89·6 (84·0–95·4)
White
89·3 (88·2–90·4)
64·4 (61·9–67·0)
64·1 (61·7–66·5)
61·7 (58·1–65·6)
65·7 (61·9–69·6)
63·8 (61·7–66·0)
64·8 (62·8–66·9)
95·4 (94·3–96·4)
Utah (all races), S
85·8 (84·0–87·7)
60·8 (56·8–65·1)
58·6 (54·5–63·0)
59·9 (54·2–66·2)
61·3 (55·0–68·2)
61·1 (57·8–64·6)
59·6 (56·2–63·3)
93·7 (92·1–95·2)
White
85·9 (84·0–87·9)
60·7 (56·6–65·1)
58·7 (54·6–63·2)
59·7 (53·8–66·2)
62·6 (56·3–69·8)
61·0 (57·6–64·6)
60·2 (56·6–63·9)
93·5 (91·9–95·1)
Wyoming (all races), N
84·2 (80·8–87·7)
59·5 (52·5–67·4)
58·5 (52·1–65·6)
46·4 (37·2–57·9)
52·2 (42·7–63·9)
55·9 (50·1–62·4)
57·7 (52·2–63·8)
92·2 (89·2–95·2)
White
84·3 (80·9–87·8)
60·5 (53·5–68·4)
58·1 (51·7–65·3)
46·2 (37·0–57·9)
52·5 (42·7–64·4)
56·5 (50·6–63·0)
57·5 (52·0–63·7)
92·1 (89·2–95·1)
NPCR (all races)
83·1 (82·8–83·4)
59·8 (59·3–60·4)
59·6 (59·1–60·1)
56·3 (55·5–57·1)
58·8 (58·0–59·7)
58·8 (58·3–59·2)
59·6 (59·1–60·0)
89·5 (89·2–89·8)
Black
70·7 (69·6–71·8)
52·1 (50·2–54·1)
50·5 (49·0–52·0)
46·9 (43·7–50·2)
49·1 (46·4–51·9)
50·7 (49·1–52·5)
50·3 (49·0–51·6)
81·1 (80·2–82·1)
White
84·0 (83·7–84·3)
60·1 (59·6–60·7)
60·4 (59·8–60·9)
56·7 (55·8–57·5)
59·4 (58·5–60·3)
59·1 (58·6–59·6)
60·2 (59·8–60·7)
90·0 (89·7–90·3)
SEER (all races)
86·1 (85·6–86·5)
61·9 (61·0–62·8)
62·1 (61·2–62·9)
58·5 (57·1–59·8)
61·8 (60·4–63·2)
60·9 (60·2–61·7)
62·2 (61·5–62·9)
93·1 (92·7–93·5)
Black
72·6 (70·8–74·5)
52·1 (48·9–55·5)
52·8 (50·2–55·5)
51·1 (45·8–56·9)
50·0 (45·1–55·6)
51·9 (49·2–54·9)
52·5 (50·2–55·0)
87·2 (85·7–88·7)
White
87·0 (86·6–87·5)
62·3 (61·3–63·3)
62·8 (61·9–63·8)
58·9 (57·5–60·4)
62·7 (61·2–64·2)
61·3 (60·5–62·2)
63·0 (62·2–63·8)
93·5 (93·0–93·9)
US registries (all races)
84·0 (83·8–84·2)
60·2 (59·8–60·6)
60·2 (59·8–60·6)
57·0 (56·4–57·6)
59·9 (59·2–60·5)
59·3 (58·9–59·6)
60·3 (60·0–60·6)
92·3 (92·1–92·5)
Black
70·9 (70·0–71·8)
51·5 (50·0–53·1)
51·0 (49·8–52·3)
47·4 (44·7–50·1)
49·4 (47·1–51·7)
50·5 (49·1–51·8)
50·8 (49·7–51·9)
85·8 (85·0–86·6)
White
84·7 (84·5–84·9)
60·5 (60·0–60·9)
60·8 (60·4–61·2)
57·3 (56·6–57·9)
60·4 (59·7–61·1)
59·6 (59·2–59·9)
60·8 (60·5–61·2)
92·4 (92·2–92·7)
RS=relative survival. S=Surveillance, Epidemiology and End Results (SEER) registry. N=National Program of Cancer Registries (NPCR) registry. See text for attribution of registries to NPCR and SEER.
R=raw (not age-standardised) survival estimate: too few cases in one or more age groups. *International Cancer Survival Standard (see text). †95% CIs were calculated by use of a logarithmic transformation (see text). ‡Survival truncated if greater than 1·0 (100%). §Survival estimates based on fewer than five patients are not shown (NA=not applicable). Black populations are not shown separately for Hawaii, Idaho, New Mexico, Utah, or Wyoming, because it was not possible to estimate relative survival for blacks in these states with race-specific life tables (see text).
Table 3: 5-year relative survival (%) by use of state-specific and race-specific life tables and age-standardised to ICSS weights* with 95% CIs† for adults (aged 15–99 years) diagnosed with cancer of the breast (women), colon, rectum, or prostate during 1990–94 and followed up to Dec 31, 1999, by race: US populations
Articles
http://www.thelancet.com/oncology Published online July 17, 2008 DOI:10.1016/S1470-2045(08)70179-7 15
Differences between survival estimates are presented as the absolute value, eg, 15% is given as 5% (not 50%) higher than 10%.
We analysed individual data for almost 2 million adults who were diagnosed with a first, primary, malignant, invasive neoplasm of the breast (women), colon, rectum, or prostate during the period 1990–94 and who had been followed up to ascertain their vital status for at least 5 years after diagnosis until the end of 1999 or later. Data were contributed by 101 population-based cancer registries covering a combined population of almost 300 million persons living in 31 countries (table 1 and webfigure 1). Canada and the USA contributed 1·07 million patients (54% of the total) from a population base of 125 million. The 24 European countries contributed 740 000 patients (37%) from a population base of 126 million, indicating lower mean incidence of cancer than in North America.
The smallest dataset came from Sétif (Algeria), covering a population of 1·1 million, some 4% of the national popu-lation. The registry could only provide data for the period 1992–94, the population is young, and cancer risks are currently low on the global scale.63 The dataset was there-fore small, a total of 300 patients. This decreases the statistical precision of survival estimates, but no patient was detected solely at death certification or autopsy, and the vital status of every patient was ascertained at a home visit by registry staff, something no other registry could deliver. Some of the datasets for black patients in US states were of similar size (webtable). California provided the largest single dataset of 240 000 patients diagnosed during 1990–94 in a population of 31 million (12% of the US population), with a very high cancer risk on the global scale (table 1).
For 16 of the 31 countries, the data covered 100% of the national population (table 1). The proportion of the national population covered by the data for the other 15 countries ranged from less than 10% (Algeria, Brazil, Japan, Austria, Czech Republic, France, Germany, Poland) to 10–29% (Italy, Portugal, Spain, Switzerland) and 30% or more (Canada, USA, the Netherlands).
Most registries provided data on patients diagnosed during the entire 5-year period 1990–94, but ten registries provided data for shorter periods (table 1).
Data for all four index cancers were provided by 89 of the 101 registries. Two specialised registries in Côte-d’Or (France) only collect data on cancers of the breast or colorectum, respectively, whereas ten general registries that collect data for all cancers only contributed data for selected cancers: breast (Isère, France; northern Nether-lands; all five Swiss registries); breast, colon, and prostate (Campinas, Brazil; Nova Scotia, Canada), or breast, colon, and rectum (Granada, Spain; table 1).
Ethical approval for the CONCORD study33 was obtained from the Istituto Superiore di Sanità, Rome, Italy (CE-ISS 02/03, May 20, 2002) and from the Institutional Review Board of the CDC, Atlanta, GA, USA (IRB #3551, July 24, 2002). SEER data were obtained from the public-use dataset.38 For other registries, anonymised data were trans-mitted to the CONCORD Data Analysis Centre at the Istituto Superiore di Sanità by use of special courier delivery of encrypted and password-protected CD-ROMs with separate email transmission of the password, or pre-planned deposition of password-protected files on a specially created File Transfer Protocol (FTP) site from which the data were immediately removed in Rome. Each tumour record included a serial number for the purposes of quality control with the originating cancer registry.
Role of the funding source
The pilot study (January, 2000 to March, 2000) was funded by the UK Department of Health (£75 000). The CDC funded data collection and the costs of linkage to the National Death Index for the phase I study in participating registries in the National Program of Cancer Registries (US$3 million). The Cancer Survival Group (including BR, MQ) in the London School of Hygiene and Tropical Medicine, London, UK, has been funded by Cancer Research UK (grant C1336/A5735) since April, 2005. Fund-ing applications were open and competitive. None of the funding sources had any role in design, data collection, analysis, interpretation of the data, or writing of this article. MPC, MQ, RdA, RC, SF, MSantaquilani, and AV had access to the raw data. The corresponding author had full access to all of the data and the final responsibility to submit for publication.
Results
The background risk of death in the general population varied widely between the participating countries and regions. The mean life expectancy at birth during the decade 1990–99 ranged from 63·7 to 77·6 years in men and from 70·9 to 83·7 years in women.46 In the USA, the range of life expectancies in white and black populations did not overlap at all in the states and metropolitan areas for which life tables could be constructed for both groups. The ranges for men were 64·0–70·1 years in blacks and 71·1–75·9 years in whites, whereas the ranges in women were 73·3–76·5 years in blacks and 78·8–80·9 years in whites.
The cumulative risk of death from all causes over the age range 15–59 years in the general population of the partici-pating countries and regions ranged widely, from 9% to 34% in men and from 5% to 17% in women. Over the age range 60–84 years, the cumulative risk of death ranged from 60% to 86% in men and from 40% to 75% in women.46
Of 785 255 records of breast cancer submitted for analysis, 45 020 (6%) related to women registered with a previous primary cancer, and were excluded (available on-line34) Of the 740 235 eligible first primary invasive breast cancers, 9215 records were excluded as death-certificate-only (DCO) registrations (1%), 239 as autopsy-detected tumours (<1%) and 2064 with major errors (<1%), leaving 728 717 patients for analysis (98% of those eligible), of whom 370 000 (51%) were resident in North America and 304 000 (42%) in Europe (table 1). Almost all (97%) of the
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tumours included in the analyses were microscopically verified, less than 1% of patients were censored from the analysis within 5 years of diagnosis, and 2·3% died within 1 month of diagnosis.
Relative survival at 5 years, age-standardised to the International Cancer Survival Standard weights, ranged from 80% or over in North America, Sweden, Japan, Finland, and Australia to less than 60% in Brazil and Slovakia, and below 40% in Algeria (table 2 and figure 1). Survival in the 24 European countries that contributed to CONCORD was mostly in the range 70–79%.
The survival estimate of 38·8% (95% CI 31·4–46·2) for Sétif (Algeria) is based on 180 patients, and it is not age-standardised because there were too few patients for analysis in some age groups, but age-standardisation for breast cancer in other datasets rarely altered the raw estimate by more than 5% in either direction (data not shown), and survival from breast cancer was undoubtedly much lower in Algeria than in all the other countries.
The pooled estimate of 5-year survival for the two Brazilian registries was 58·4%, but the estimate for Goiânia (65·4%) is more reliable than the very low figure for Campinas (36·6%), where high proportions of patients were excluded as DCO or with major errors (available online34). The proportion of metastatic tumours was higher in Campinas, however. The 5-year survival estimate for Cuba was 84·0%, but this was likely to be an over-estimate: some 28% of records were excluded because they were registered solely from a death certificate.
The pooled estimate of 5-year survival for Canada was 82·5%, with a narrow range from 79·3% in Nova Scotia to 85·4% in British Columbia (table 2 and figure 1). In the USA, 5-year relative survival for all races combined ranged from 78–81% in New York City, New York State, and Louisiana to 89–90% in Hawaii and Seattle, WA (table 2), but most of the estimates were within a fairly narrow range, from 82% to 87% (figure 2). Survival in metropolitan areas covered by SEER registries was similar to that in the respective states: Detroit, MI 83·0% and Michigan State 82·3%; San Francisco, CA 86·2% and California State 84·6%. 5-year survival was 77·4% for residents of New York City, NY (with 40% of the state population), slightly lower than for New York State as a whole, 81·0%.
Survival was lower for blacks than for whites in all 17 populations in the USA for which this could be assessed with race-specific life tables (webfigure 2). The age-adjusted pooled estimate of 5-year survival was 84·7% for whites (range 80–90%) and 70·9% for blacks (table 3). The range in survival was wider for blacks (60–83%), but the values at both extremes of the range were based on relatively few patients and have wider CIs. Within a given US population, the absolute difference in age-adjusted relative survival be-tween blacks and whites ranged from 2% (Rhode Island, Nebraska) to 25–27% (Iowa and Seattle, WA; table 3 and webfigure 2). Even in areas where blacks comprise 25% or more of the population, survival for black women was 8–14% below the lowest estimate for white women (79·6%) in any of the participating areas: Atlanta, GA (71·1%), Detroit, MI (71·7%), New York City, NY (65·8%), and Louisiana (69·9%). The pooled estimate of 5-year survival for the USA was 84·0%, with 86·1% in areas covered by SEER and 83·1% in areas covered by NPCR (table 3).
Survival in black women was always lower than the mean survival for all US populations included, and often more than three standard deviations below it (below the 99·8% control limits), after controlling for the precision of the estimates. Survival in white women is generally within or above the upper control limits, especially in territories covered by the SEER Program. A notable exception is for white women in New York State, including New York City, where the survival estimates are precise, but well below the lower control limits (webfigure 3).
The pooled estimate of 5-year survival for breast cancer in Japan was 81·6%. Survival in Osaka (79·4%) was lower than in Fukui (83·1%) and Yamagata (87·3%; table 2 and figure 1).
5-year relative survival for breast cancer in Europe, age-standardised to the ICSS weights, ranged from 57·9% in Slovakia to 82·0% in Sweden (table 2 and figure 1), whereas the pooled estimate derived from the data of 58 registries in the 24 participating European countries was 73·1%. Survival estimates for most of these countries have been reported.27 The CONCORD study includes additional data from four countries: 5-year survival was 69·6% in Ireland and 72·0% in Northern Ireland, similar to the UK mean value of 69·7% (table 2). In Switzerland, 5-year survival in the cantons of St Gallen-Appenzell, Grau-bunden-Glarus, and Valais was 72–75%, about 4–7% lower than in Geneva or Basel. 5-year survival was 77·8% in northern Netherlands, similar to that in Amsterdam and southern Netherlands (76–78%).
The national estimate of 5-year survival for breast cancer in Australia was 80·7%. Survival was virtually identical in the six largest states (96% of the national population), in the range 80–82%, but notably lower in the two smallest regions: 71·9% in Northern Territory (1·0% of the population) and 77·1% in Tasmania (2·6%).
Of 488 741 colon cancer records submitted for analysis, 45 862 records (9%) were excluded for a previous cancer, leaving 442 879 first, primary, invasive colon cancers eligible for analysis (available online34). A further 13 102 (3%) were excluded as DCO registrations, 1534 (<1%) as autopsy-detected tumours, and 1144 (<1%) as major errors, leaving 427 099 patients for inclusion in the analyses (96% of those eligible). Of these, 214 000 (50%) were resident in North America, 170 000 (40%) in Europe, and 30 300 (7%) in Australia. Cancers of the colon comprised 67% of all colorectal tumours (table 1). Microscopic verification was high (94%), and less than 1% of patients were censored from the analysis within 5 years of diagnosis. Almost 11% of patients died within the first month after diagnosis.
Relative survival at 5 years, age-standardised to the ICSS weights, ranged from about 60% in North America, Japan, Australia, and some western European countries down to
See Online for webfigures 2 and 3
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40% or less in Algeria, Brazil, Czech Republic, Estonia, Poland, Slovenia, and Wales (table 2 and figure 3).
The survival estimates of 11·4% (95% CI 0·7–40·9) for men and 30·6% (9·5–56·1) for women in Sétif (Algeria) were based on fewer than 20 patients, and are not age-standardised, but survival was clearly lower in Algeria than in all the other countries.
The estimate of 5-year relative survival for Goiânia (48·1% in men, 44·8% in women) was more plausible for Brazil than the low estimates for Campinas, where 26% of patients had to be excluded with errors.34 5-year survival in Cuba was about 60% in both sexes, although more than half the patients were excluded from analysis as DCOs.34
In Canada, the pooled estimate of 5-year survival was 56·1% for men and 58·7% for women. Variation between provinces was small, from 54–57% in men and 58–60% in women (table 2 and figure 3). In the USA, 5-year relative survival for all races combined was 60·1% in both sexes, with a range from 53·6% for women in New York City to 67·9% for men in Hawaii (table 2 and figure 2). Again, most of the estimates were within a narrow range, 59–64%.
5-year survival for colon cancer among blacks in the USA was lower than among whites. In 34 paired observations of this difference in survival (men and women in 17 popu-lations), only three exceptions were noted, in men and women in Iowa and men in Nebraska. The estimates for blacks in those three areas were based on fewer than 50 patients, have wide confidence intervals and were not age-standardised (table 3 and webfigure 4). The pooled estimate of age-adjusted 5-year relative survival for the USA was 61% for white men and women, and 51–52% for black men and women. Within a given population, the absolute difference between blacks and whites ranged from 2·6% in men and 7·3% in women in Los Angeles, CA to 14·3–17·2% in Colorado. The geographical range in black–white differences in survival is affected by small populations to some extent, but even in areas where blacks comprise 25% or more of the population (Atlanta, GA, Detroit, MI, New York City, NY, Louisiana), 5-year survival from colon cancer in blacks was 6–12% lower than for whites in the same population (table 3). The pooled estimate of 5-year survival in areas covered by NPCR was 59·8% for men and 59·6% for women, and 61·9% for men and 62·1% for women in SEER areas.
Age-standardised survival in whites ranged from 54·9% to 67·9% (table 3 and webfigure 4). The range of age-standardised survival for blacks was 45·0% to 59·9%. Survival in blacks was generally lower than the mean value for all included US populations and often more than three standard deviations below the mean, after controlling for precision of the survival estimates. Survival in whites was generally within the control limits. The main exception was for white women in New York State, including New York City, NY, where survival estimates were precise, but more than three standard deviations below the lower control limits around the pooled US estimate (webfigure 3).
In Japan, the pooled survival estimate was 63·0% in men and 57·1% in women, although survival was about 10% lower in Osaka prefecture than in Fukui or Yamagata (table 2 and figure 3).
In Europe, 5-year relative survival for colon cancer in men ranged from 28·5% in Poland to 54–57% in Spain, Finland, Austria, and France. In women, the lowest estimate was also for Poland (30·9%), while survival was in the range 55–60% in nine countries (table 2 and figure 3). The pooled estimates for the 51 contributing registries in 23 European countries were 46·8% in men and 48·4% in women. Data on colon cancer were not available for the five Swiss registries, Isère (France), or northern Netherlands. Survival estimates for most of these countries have been published elsewhere.27 This study included additional data from two countries. 5-year survival in Ireland was 49·1% in men and 48·5% in women. The estimates for Northern Ireland were 47·3% in men and 49·0% in women, slightly higher than the pooled estimate for the UK, 43·5% in men and 44·4% in women (table 2).
The national estimate of 5-year survival for colon cancer in Australia was 57·8% in men and 57·7% in women. Survival ranged from 50–62% in the eight states and territories: it was highest in New South Wales, the Australian Capital Territory, and Queensland, and lowest in Tasmania, Northern Territory, and Western Australia (9·6% of the population; table 1).
Of 233 176 rectal-cancer records submitted for analysis, 15 731 records (7%) were excluded for a previous cancer, leaving 217 445 first, primary, invasive rectal cancers eligible for analysis (available online34). A further 3213 (1%) were excluded as DCO registrations, 517 (<1%) as autopsy-detected tumours and 574 (<1%) as major errors, leaving 213 141 patients for inclusion in the analyses (98% of those eligible). Of these, 83 000 (39%) were resident in North America, 106 000 (50%) in Europe, and 16 800 (8%) in Australia. Cancers of the rectum comprised 33% of all colorectal tumours (table 1). Microscopic verification was high (96%). Less than 1% of patients were censored from the analysis within 5 years of diagnosis. Almost 8% died within the first month after diagnosis.
5-year relative survival from rectal cancer, age-standardised to the ICSS weights, ranged from about 60% to around 20% in both sexes, with Japan, Canada, the USA, France, the Netherlands, Sweden, and Australia at the upper end of the range, and Algeria, Estonia, Poland, and Slovakia at the lower end (table 2 and figure 3).
The 5-year survival estimates of 25·9% (95% CI 11·4–43·7) for men and 18·2% (6·6–34·6) for women in Sétif (Algeria) were each based on 30 patients, and were not age-standardised because data were too sparse in some age groups.
5-year relative survival in Goiânia, Brazil, was 49·3% in men and 38·4% in women. No data were available for Campinas. 5-year survival in Cuba was 59·2% in men and 62·8% in women, based on analysis of about 700 patients
See Online for webfigure 4
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JapanUSANetherlandsAustraliaCanadaSwedenFranceIcelandNorwaySpainFinlandBrazilNorthern IrelandGermanyItalyAustriaDenmarkPortugalScotlandIrelandEnglandWalesMaltaSloveniaEstoniaCzech RepublicPolandSlovakiaAlgeriaFranceCuba†USAAustraliaCanadaSwedenJapanNorwayNetherlandsFinlandMaltaIrelandGermanySpainItalyIcelandScotlandDenmarkEnglandAustriaPortugalNrthern IrelandWalesCzech RepublicBrazilSloveniaSlovakiaEstoniaPolandAlgeriaCuba†FranceUSAAustriaCanadaMaltaAustraliaJapanSpainGermanyNetherlandsIcelandSwedenFinlandNorwayItalyNorthern IrelandDenmarkIrelandScotlandPortugalEnglandSlovakiaSloveniaEstoniaWalesCzech RepublicBrazilPolandAlgeriaJapanUSACuba†AustraliaFranceAustriaCanadaFinlandSpainNetherlandsSwedenItalyGermanyNorwayIrelandPortugalIcelandNorthern IrelandScotlandDenmarkEnglandSlovakiaWalesEstoniaMaltaCzech RepublicSloveniaBrazilPolandAlgeria0204060801000204060801002·16·940·2502·47·449·339·97·039·4502·78·249·738·5Colon (women)Rectum (women)Rectum (men)Colon (men)AfricaAmerica, Central and SouthData covering less than 100% of countryAmerica, NorthAsiaEuropeOceania5-year relative survival (%)5-year relative survival (%)
Figure 3: 5-year relative survival (%), age-standardised to the ICSS weights* with 95% CIs for adults (aged 15–99 years) diagnosed with cancer of the colon or rectum during 1990–94 and followed up to Dec 31, 1999: country
Vertical bar on the right of each graphic shows the contribution (%) of each continent to the total number of cases analysed (contributions under 1% are not labelled). Red vertical line represents mean survival for the 22 European countries that participated in EUROCARE-3, age-standardised to the ICSS weights. *Age-standardised to ICSS weights, except for Sétif, Algeria (all cancers), Austria (rectum [women]), Iceland (rectum [men and women]), Ireland (rectum [women]), Malta (colon [men] and rectum [men and women]), which were unstandardised values (see text). †Problems with data quality might have led to over-estimation (see text).
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in each sex, although 782 (36%) patients had been excluded as DCO (available online34).
In Canada, the pooled estimate of 5-year survival was 58·7% for women and 53·1% for men, slightly lower in the global range than for cancers of the breast, colon, or prostate in Canada. Survival in men ranged from 51·1% (Ontario) to 64·6% (British Columbia), and from 57·8% to 62·8% in women. In the USA, 5-year relative survival for all races combined was 56·9% in men and 59·8% in women, with a range from 46–67% in men and 52–66% in women (table 2 and figure 2). Again, most of the estimates were within a narrow range, from 55–60% in men and 57–62% in women. By contrast with colon cancer, survival from rectal cancer was slightly higher in women than in men.
5-year survival for rectal cancer in the USA was generally lower for blacks than for whites, in both sexes (webfigure 4). The overall estimate of 5-year survival in men was 47·4% for blacks and 57·3% for whites; for women, the estimates were 49·4% for blacks and 60·4% for whites (table 3). When survival for blacks was above 60%, or higher than for whites in the same population (Colorado, Connecticut, Nebraska, Rhode Island), the estimates for blacks were based on around 50 or fewer patients, with wide CIs, and were usually not age-standardised (table 3 and webfigure 4). Even where blacks comprised 25% or more of the population (Atlanta, GA, Detroit, MI, New York City, NY, Louisiana), 5-year survival was 6–16% lower than for whites in the same area. The pooled estimate of 5-year survival in areas covered by NPCR was 56·3% for men and 58·8% for women, some 2–3% lower than for SEER areas (58·5% men, 61·8% women; table 3 and figure 2).
5-year survival ranged from 46·2% to 67·9% in whites; in blacks, the range of age-standardised survival was from 42·8% to 63·5% (table 3 and webfigure 4). Survival in blacks was generally lower than the mean value for all included US populations, although more often within the control limits. Survival for whites was also generally within the control limits, with the exception of New York City, NY, where survival was below the control limits (webfigure 3).
In Japan, the pooled survival estimate for colon cancer was 58·2% for men and 57·6% for women, although survival was lower in Osaka (54–55%) than in Fukui or Yamagata (60–64%; table 2 and figure 3).
In Europe, the geographical pattern for age-standardised 5-year survival was similar to that for colon cancer. For men, the range was from 28–30% in Poland, West Bohemia (Czech Republic), and Slovakia to 53–55% in France, Sweden, and the Netherlands; whereas for women, the range was from 30–32% in Poland, Estonia, and Slovakia up to 63·9% in France, where three of the four contributing registries ranked the highest in Europe (table 2 and figure 3). The pooled estimates for the 51 contributing registries in 23 European countries were 43·2% in men and 47·4% in women. Data on rectal cancer were not available for Isère (France), northern Netherlands, or the five Swiss registries. 5-year survival in Ireland was 41·1% in men and 52·5% in women. The estimate for women is not age-standardised, but it is based on over 200 patients (table 1), and similarity between the raw and standardised estimates for cancers of the colon and colon and rectum combined (less than 1%, data not shown) suggests that an age-standardised estimate for rectal cancer would not have been very different. In Northern Ireland, the estimates were 48·2% in men and 43·8% in women (pooled UK estimates were 40·6% in men and 45·3% in women; table 2).
The national estimate of age-standardised 5-year survival for rectal cancer in Australia was 54·8% in men and 59·2% in women. Survival ranged from 45–57% in men and from 55–61% in women.
Of 663 621 men with prostate cancer, 35 934 (5%) were excluded for a previous cancer, leaving 627 687 eligible first, primary, invasive cancers of the prostate (available online34). After 11 163 (2%) exclusions for DCO, 1640 (<1%) for autopsy-detection and 801 (<1%) for major error, 614 083 men were included in the analyses (98% of those eligible). Of these, 403 000 (66%) were resident in North America, 162 000 (26%) in Europe, and 43 000 (7%) in Australia (table 1). Microscopic verification was available for 96% of the tumours. Less than 1% of men were cen-sored from the analysis within 5 years of diagnosis, but 3·2% died within 1 month of diagnosis.
5-year relative survival, age-standardised to the ICSS weights, ranged from 80% or higher in the USA (92%), Canada and Austria to less than 40% in Denmark, Poland, and Algeria (table 2 and figure 1).
The 5-year survival estimate of 21·4% (95% CI 8·7–38·9) in Sétif (Algeria) was based on 36 patients, and was not age-standardised.
In Brazil, 5-year survival was 34·4% in Campinas and 55·7% in Goiânia. Some 30% of tumour records in Campinas were excluded with major errors. Notably, 20 (13·4%) men in Campinas and 71 (21·8%) men in Goiânia died within 1 month of diagnosis, which are the highest proportions of any of the participating registries (available online34). 5-year survival in Cuba was 69·7% (table 3). This estimate was based on 4300 patients, but 54% of the original data set of 9500 patients had been excluded as DCO (table 1 and data available online34).
The pooled estimate of 5-year survival for prostate cancer in Canada was 85·1%, ranging from 77·5% in Saskatchewan to 89·3% in British Columbia (table 2 and figure 1). In the USA, 5-year relative survival from prostate cancer was 91·9% for all races combined, with a range from 81·6% in New York City, NY up to 95·0% in Seattle, WA (table 2 and figure 2), but most of the estimates were within a fairly narrow range, from 88·6% (Louisiana) to 94·0% (Atlanta, GA). The relative survival estimate for the state of Michigan was 100%, although in the city of Detroit, MI, with 42% of the state population (webtable), survival from prostate cancer in the same period was 93·8%.
Age-standardised 5-year relative survival for prostate cancer in blacks was lower than for whites in all
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populations for which this could be separately assessed with race-specific life tables (webfigure 2). The overall estimate of 5-year survival was 85·8% for blacks and 92·4% for whites, with an overall difference of 6·6% (table 3). The difference in survival between blacks and whites ranged from 5·0% (Florida) to 14–16% (Nebraska, Rhode Island), and although the largest differences arise where the black populations are smallest, each survival estimate was based on at least 70 patients (webtable). Survival in whites ranged from 83·3% (New York City, NY) to 96·1% (Atlanta, GA), and in blacks from 74·0% (New York City, NY) to 89·6% (Seattle, WA). The pooled estimate of 5-year survival was 89·5% in areas covered by NPCR, and 93·1% in SEER areas (table 3).
Survival in blacks was usually lower than the pooled US estimate, and often more than three standard deviations below it, after controlling for precision (webfigure 3). Survival in whites was generally within the control limits. 5-year survival for whites was above the upper 99·8% control limit in three SEER populations (Atlanta, GA, Seattle, WA, and Detroit, MI). Survival in whites was below the lower control limit in four NPCR populations, but for California and Florida the difference was small (2–3%). In New York State, including New York City, NY, survival estimates are precise, but 6–9% below the pooled US estimate of 92·3% and well below the lower control limit (webfigure 3).
The 5-year relative survival estimates for Michigan State (100% in both blacks and whites) were too high, and they are not shown in webfigure 3, although the data were included in the pooled estimate. Information about the death had not been linked to the tumour record for some of the apparent 5-year survivors from prostate cancer in Michigan State, leading to an inflated estimate. This error did not affect the survival estimates for prostate cancer in Detroit, MI or those for other cancers in Michigan State.
The pooled estimate of 5-year survival in Japan was 50·4%, much lower on the global scale than for cancers of the breast, colon, or rectum in Japan. Survival estimates were similar in all three prefectures (table 2 and figure 1).
The range of 5-year survival in Europe was especially wide for prostate cancer, from less than 40% in Poland and Denmark to more than 80% in Austria (table 2 and figure 1). The pooled estimate for the 49 contributing registries in 23 European countries was 57·1%. Data were not available for nine registries: Switzerland (five registries), Isère and Côte d’Or (France), Granada (Spain), and northern Netherlands. 5-year survival in the Ireland was 62·8%. In Northern Ireland, the estimate was 54·0%, slightly higher than the pooled estimate of 51·1% for the UK (table 2).
The national estimate of age-standardised 5-year survival for prostate cancer in Australia was 77·4%. Survival was closely similar in the six largest states, in the range 76–80%, but notably lower in the two smallest regions: 63·7% in Northern Territory (based on 78 patients, estimate not age-standardised) and 70·2% in Tasmania (1321 patients).
Discussion
To our knowledge, the CONCORD study is the first attempt to provide directly comparable data on cancer survival from many countries around the world by use of central quality-control procedures, standard analytic methods, and a single, centralised analysis of individual tumour records from population-based cancer registries. The findings should eventually complement the international data series on cancer incidence63,64 and mortality65–67 that have been available for several decades. Cancer-mortality statistics have often been used for international comparisons of pro-gress against cancer,68–72 but they are also affected by well-known problems of comparability, both between countries and between successive revisions of the ICD.72–75 The findings presented here should help joint consideration of trends in incidence, survival, and mortality as indicators of cancer control. None of these indicators is perfect, but none is adequate on its own.76–78
Around 2800 life tables were created to enable the esti-mation of relative survival by age, sex, country, and race.46 The life tables are available on the CONCORD website.34
5-year relative survival for breast, colorectal, and prostate cancers was generally higher in North America, Australia, Japan, and northern, western, and southern Europe, and lower in Algeria, Brazil, and eastern Europe.
Exclusions for a previous cancer (5–9%) were not un-expected. Population-based cancer survival analyses are usually restricted to patients with a first, primary invasive cancer, therefore, to the extent that patients with a previous cancer have been completely excluded in this study, this improves the comparability of the findings with other studies. Participating registries began operation between 1950 and 1990. The data from newer registries are more likely to include unrecognised second and subsequent cancers, because any previous cancer(s) in a given patient might have been diagnosed before the registry began operation.
The main indices of data quality for cancer survival are the proportions of registered patients known to the registry by DCO, or lost to follow-up, and histologically verified. Data quality varied between registries (available online34), but was high overall: very few records were excluded with a major error. Exclusions for major errors were high in Cam-pinas, Brazil (26–47%). The overall proportion of patients who died within 1 month of diagnosis was low for breast cancer (2·3%) and prostate cancer (3·2%), but higher for colon (10·9%) and rectal cancers (7·8%). These values varied between registries, but the overall pattern is plaus-ible; up to a third of colorectal cancers present as an emer-gency with bowel obstruction. Fewer than 1% of patients were censored from the analysis within 5 years of diagnosis.
Three registries were excluded after quality control, because of high losses to follow-up or inefficient regional or national linkage of information on the deaths of patients with cancer. The data for three other registries, Cuba, Campinas (Brazil) and, for prostate cancer, Michigan State
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(USA), are less reliable than those from other registries, although for different reasons, discussed below. As with the first global compilation of cancer incidence data, in the 1960s, retention of the two registries from Central and South America was partly prompted by the paucity of information on cancer survival from that region: “in this situation, even incomplete data have value”.64
Overall, the exclusion of DCO registrations accounted for only 1% (9215) of the eligible records for breast cancer, 3% (13 102) for colon cancer, 1% (3213) for rectal cancer, and 2% (11 163) for prostate cancer (available online34). The per-centage was less than 1% in Algeria, USA, Canada, and Australia, and in the range 0–5% in most European coun-tries and in Brazil, but higher in Osaka (Japan; 5–22%),79 south Thames (UK); 10–16%), and Cuba (28–60%).80
The proportion of DCOs is not particularly useful as a comparative index of data quality,81 but a high proportion of DCO records does suggest that routine data-collection systems might not be complete. The relevance of this index also varies with the system of data collection. Sweden does not use DCOs because the registration of patients with cancer at the time of diagnosis is close to 100%; by contrast, hospitals in Cuba are not allowed to retain the clinical records of deceased persons for more than 5 years.80
The different proportions of DCO records are unlikely to explain the differences in survival between Europe and North America, however. The survival of patients whose tumour is registered as a DCO is generally lower than the mean for all registered cancer patients,82 so if they could have been included, the transatlantic differences in survival would have been slightly greater. Furthermore, most DCO records in the European data are for patients aged 75 years or over,43 where the survival differences are in any case more marked.9 By contrast, if a high proportion of DCO records is taken to suggest under-registration of long-term survivors, this might produce lower survival estimates. Adjustment for both DCOs and incompleteness of registration in Thames (UK) and Finland had surprisingly little effect on survival, however, even when 10–20% of registrations were DCOs, because the two corrections tended to off-set one another.83 Under-reporting of incident tumours by up to 5% has been shown not to affect international comparisons of survival greatly.84
A plateau was imposed on the relative survival curve at some point during the first 5 years after diagnosis in about 7% of the 6500 age-specific survival estimates by registry, cancer, sex, and race (data not shown). The effect on the age-standardised survival estimates at national level was almost always less than 1%.
Diagnostic variability between pathologists might contri-bute to international differences in cancer survival. Thus, survival from colorectal cancer in Japan is among the highest reported here, especially for men. In western countries, invasive colorectal carcinoma is diagnosed when neoplastic tissue invades beyond the submucosa of the bowel. Severe cytological or architectural changes confined to the mucosa (in situ or intramucosal carcinoma) have no metastatic potential, and are often labelled high-grade dysplastic aden-oma. Japanese pathologists rely more on cytological fea-tures, however, and do not consider evidence of invasion into the submucosal layer as a mandatory requirement for the diagnosis of colorectal carcinoma.85 Pathological practice on this issue might vary substantially between western pathologists. Islands of dysplastic tissue might also be displaced or herniated beyond the muscularis mucosae without implying invasive potential (pseudo-invasion), and differential diagnosis can be very difficult.86,87
Assessment of the extent to which international survival differences might be attributable to differences in the pathological definition of disease would need blinded review of pathological diagnoses of a sample of patients by an international panel of expert pathologists. Such reviews are invaluable, but rare.88
Survival in Sétif (Algeria) was the lowest of all the popu-lations in the CONCORD study for each cancer. Even though the dataset was small, and covers only 4% of the national population, there is little doubt that survival in Algeria is very low. The age distribution of patients was younger than in most populations (available online34) and it cannot explain the low overall survival. Survival in Sétif was similar to or even lower than survival in blacks diagnosed during 1993–97 in Harare, the Zimbabwean capital, where the very low survival was attributed to inadequate access to facilities for early diagnosis, clinical investigation, and treatment.89
Survival in the two Brazilian registries was generally low, although rectal-cancer survival in Goiânia was close to the European mean. Data quality issues prevented the inclusion of data from three of the 20 population-based registries in state capitals: these registries should be used to provide a broader picture of cancer survival in Brazil. Relative survival reported here for patients with cancer diagnosed in Cuba during 1990–94 was about 20% higher than estimates for those diagnosed during 1988–89, just a few years earlier.80 Cancer survival for children diagnosed in Cuba during 1988–89 was lower than in more developed countries.90 The high proportion of DCOs in the 1988–89 data was considered less likely to be biased with respect to survival than in other registries, because of the way data were collected,80 but the survival estimates for Cuba reported here are still likely to be considerably inflated, and should be interpreted accordingly.
National estimates of survival for patients with cancer diagnosed in Japan during 1993–96 were slightly higher than the estimates for 1990–94 reported here.79 They were based on data from seven prefectures, including the three reported here (Yamagata, Fukui, and Osaka). As in the CONCORD data, survival in Osaka was generally lower than the mean survival for Japan.
Variation in survival between the provinces of Canada and the states and territories of Australia was generally small, and overall survival was high: this suggests health care of a high standard in most areas. Variation between the countries of Europe was much wider.
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The substantial differences in survival between Australia and the UK have been noted before.91 They are unlikely to be because of differences in data quality. For breast cancer, survival from both localised and regional disease was higher in Australia, but survival from metastatic disease was similar. Elderly women in England had especially poor survival. More effective treatment in Australia is a plausible explanation.92
Comparisons of cancer survival between Europe and the USA since 2000 have identified wide differences, with survival usually higher in the USA.9 Closer assessment of these differences with more detailed data, not routinely collected by all registries, has enabled the explanatory effect of clinical variables such as stage at diagnosis, investigative approach, anatomical site, and morphology to be quantified for colorectal cancer12,93 and breast cancer,10 and for a range of cancers in children.11 In those studies, the USA has always been represented by data from the SEER Program registries, representing some 10% of the US population at that time, because no other data have been available. The availability of data from a large number of state-wide population-based cancer registries that began operation around 1990, and meet data quality standards comparable with those of the SEER registries, now enables a larger proportion of the US population to be included in national and international comparisons of cancer survival. The CONCORD study provided the first opportunity for the cancer registries of 11 US states in the NPCR to follow up all their patients for vital status and to undertake analyses of cancer survival, and 42% of the US population is included in these analyses.
The survival differences between US and European patients with cancer, especially in the oldest patients, seem unlikely to be attributable to artefacts of cancer registration. The CONCORD study has nonetheless identified two methodological issues that probably do explain some of the well-known differences in survival between Europe and the USA, from which only SEER data have been available until now.
First, relative survival was about 2–4% higher in SEER-9 areas than in participating NPCR areas of the USA. Consequently, cancer survival in the 42% of the US population covered by the CONCORD study was 1–3% lower than survival in the SEER areas alone (10% of the US population). Direct estimation of cancer survival for other areas of the USA would be desirable.
Second, census-derived US national life tables give higher estimates of all-cause mortality than are noted in the SEER areas, especially with the gradual decline of mortality in the decade after a census.46 Use of census-derived national life tables to estimate relative survival (the SEER approach) therefore produces estimates that are almost always higher than those obtained with state-specific life tables for each calendar year in the decade (CONCORD approach), which we believe to be more appropriate because it provides tighter control for changes over time in background mortality. With the CONCORD approach, age-standardised 5-year survival in the 22 participating areas of the USA was up to 3% lower than with the SEER approach for breast cancer in women, up to 4% lower for colorectal cancer, and up to 5% lower for prostate cancer (available online34).
The differences in cancer survival between blacks and whites of both sexes in the USA are large, and remarkably consistent in 16 states and six metropolitan areas—more populations than it has been possible to study in the past.94 The differences were adjusted for age and for differences in background mortality between blacks and whites within each state or metropolitan area. It would be interesting to know if the differences were attributable to artefact, or differences between blacks and whites in tumour biology, in stage at diagnosis, in access to health care, or in com-pliance with treatment. The survival differences seen in this study are consistent with those in other studies.47–53 Data-collection systems were identical for all races. The black–white differences in relative survival that we report would have been even larger if we had used race-specific national life tables instead of race–state life tables, because background mortality is higher (and expected survival lower) in blacks than in whites in all the populations studied.23,95
Survival from cancers of the breast, colorectum, and prostate varied with the type of health insurance in a population-based study:96 survival was highest in patients who had private insurance, intermediate with federal insurance, and lowest with no insurance. Another study97 suggested that prostate cancer is not more biologically aggressive in blacks than whites. Late stage,98 less treat-ment, and higher mortality seem to be associated with black race, low socioeconomic status, and poor survival in the USA.99–101 Extensive reviews have led to the conclusion that racial disparities in cancer treatment, which are not explained by clinical factors, lead to worse outcomes in blacks.102,103 Analysis of SEER data suggested that some racial differences in treatment and cause-specific survival persist after adjustment for poverty.104 By contrast, the racial difference in survival from colorectal cancer was almost absent in patients managed under the equal-access, integrated health-care Veterans’ Affairs system.105 Finally, overviews of race, socioeconomic status, and cancer outcomes strongly suggest that equal treatment yields equal outcome, irrespective of race.53,106 The data presented here extend the evidence that cancer survival in the USA is lower in blacks than in whites.
Simple ranking of countries by overall survival can be misleading. Survival is very similar in many European countries, at the centre of the global range, and a small shift in the survival estimate in either direction can entail a large change in the rank. Thus, even the national survival estimates for Iceland and Malta have wide confidence intervals and unstable rankings because they are based on populations of around 250 000 (figures 1 and 3). The detailed data by country and region are tabulated by continent, country, and region, rather than ranked: some
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estimates, based on sparse data, could not be age-standardised (table 2).
The numbers of patients included in the analysis varied widely, as did the proportion of the national population covered by the data. These proportions affect the extent to which the survival estimates can be deemed representative of the country concerned. For example, in Algeria, Brazil, and Germany, only 1–4% of the national populations were covered by the data. Population coverage of participating registries in Italy was about 15%, but they were concentrated in the wealthier north of the country.22,30 The same point also applies to the USA, however, because the data pre-sented here confirm suggestions107 that cancer survival in the SEER Program areas (10% population coverage during the 1990s) was higher than in other parts of the country. By contrast, regional variation in survival in Australia and Canada was much less marked than in the USA. Similarly, survival for 1990–94 in the four French départements reported here (6% national coverage) was high on the European scale for most cancers,27 and a much larger study for the same period in 14 départements (20% coverage) showed similar patterns of survival.108,109
For countries with more than one contributing registry but less than 100% population coverage, we have presented estimates of survival derived from the pooled data, not weighted means of the regional estimates of survival. The question of whether pooled survival esti-mates derived from regional registries with less than 100% national coverage can properly be considered representative of cancer survival in the whole country has been discussed elsewhere.22 If population-based estimates of cancer survival are deemed reliable, however, they do suggest a potentially achievable level of survival, irrespec-tive of whether the estimate is for a whole country or only one region in that country. Regional variation in survival within a country tends to prompt efforts to improve survival in regions where it is low. The same argument should apply on an international scale. This has already happened in Europe.110
No overall worldwide estimate for cancer survival has been presented. The proportionate contributions from each continent to the CONCORD study are very different from the worldwide distribution of cancers of the breast, colon, rectum, and prostate. The national data for Australia alone represented 63% of the population of Oceania in 1995,111 and the survival estimates for North America included 44% of the combined populations of USA and Canada around 1992, but for Africa, Asia, and South America, the population coverage of these data was much lower. The survival data for Europe were based on 25% of the continental population of 512 million in 1992,112 but the EUROCARE study (ongoing since 1989) is the largest and most widely cited international study of cancer survival, and all 57 cancer registries in that study, and six others, contributed to CONCORD. To provide an international summary measure of cancer survival for visual comparison, we therefore used the overall estimates for 23 countries in EUROCARE-3, but age-standardised to the ICSS weights used in CONCORD, instead of the weights used in EUROCARE-3.113 We have presented pooled estimates of survival for Europe and North America (table 3), but not for other continents.
The size of the population covered by the data affects the statistical precision of the survival estimates. This is shown by 95% CIs, but ranked graphics do not provide visual appreciation of the extent to which the survival estimate for a given country or region falls outside the distribution of survival estimates that might be expected, under the hypothesis that survival should be the same in all areas. In that situation, regional variation in relative survival should arise only from random variation around some underlying average. We used funnel plots62 to provide that visual effect for geographical and racial variation in survival in the USA, with the target value as the pooled estimate for the USA, age-standardised to the ICSS weights.60 These plots display striking geographical and racial variation in survival.
Clinical practice has continued to evolve in the 15 years or so since the patients included in this study were diagnosed. Changes in diagnosis, screening, and treatment have undoubtedly improved the prognosis for cancer patients, at least in wealthier countries.
Survival has increased substantially for cancers of the breast (women), colon, rectum, and prostate in the 17 areas of the USA covered by the SEER Program during 1996–2003,114 and in Canada (1996–98)115 and Australia (1994–2004).116,117 Smaller increases have been reported in 11 of the 47 Japanese prefectures.118 These estimates of relative survival, published for national purposes, cannot be compared with the data reported here, however, because of differences in the quality control of incidence data or completeness of follow-up, and in methods of analysis. Some estimates were not age-standardised for international comparison, whereas others were standardised to country-specific age weights, rather than the ICSS age weights that we used.
The only recent international study of cancer survival is EUROCARE-4, which included patients diagnosed in 23 countries during all or part of 1995–2002 and followed up to 2003.29,30 Survival increased substantially in eastern European countries, where it was much lower than in other parts of Europe during 1990–94. This narrowing of the east–west gap suggests substantial improvements in cancer care. The rise in breast cancer survival in several countries was associated with a fall in mortality, possibly because of improved care and screening programmes; the rise in prostate-cancer survival (and incidence) might be a result of more widespread PSA testing. In western Europe, survival in the UK and Denmark was still low for several cancers in the late 1990s.
CONCORD is, by chance, reasonably well-timed to provide a baseline for international comparisons of cancer survival to assess the effect of several major public health initiatives for the control of breast,
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colorectal, and prostate cancers. In 1990, mass population screening for breast cancer with mammography was beginning in many (but not all) participant countries. At that time, intense early diagnostic activity with prostate-specific antigen (PSA) had recently become widespread in the USA, but was little used elsewhere. In Denmark, for example, the 50-year increase in prostate cancer incidence is considered real,119 but the Danish Society for Urology assessed the evidence in 1990120 and decided not to advocate PSA testing in asymptomatic men, because the therapeutic benefit was very small;121 only symptomatic patients were offered treatment. Mass screening for colorectal cancer with faecal occult blood (FOB) testing or endoscopy had not begun during 1990–94 in any contributing country as far as we are aware. Opportunistic screening with the FOB test began in Japan in 1992; by 2004, about 20% of people aged 40 years or over had been tested within the previous year.122 Opportunistic endoscopy had already become widespread in some parts of the US population by 1990.
The CONCORD study was planned in three phases. The study reported here (phase I, low resolution) was designed to quantify international differences in population-based relative survival by age, sex, country, or region for patients diagnosed during 1990–94 with a cancer of the breast, colon, rectum, or prostate. Phase II (high resolution) was designed to help interpret those international differences in survival, by use of a subset of registries that could re-abstract detailed clinical data, including stage at diagnosis and treatment, from the original medical records for large random samples of patients diagnosed with one of the same cancers during 1996–98. Findings will be reported in due course. Phase III was designed as a blinded, expert review of the pathological diagnosis for a subset of patients from the phase II study, to assess the extent to which international survival differences might be attributable to differences in the pathological definition of disease in participating countries.
The range of survival estimates for each cancer is very wide. Population-based cancer registries are increasingly important in the comparative assessment of cancer outcomes,123 and even allowing for differences in data quality or statistical robustness, there is little doubt that the chances of survival after a cancer diagnosis vary hugely on a global scale.
The comparability of cancer survival estimates between countries is criticised far more often than the comparability of cancer incidence data from the same registries. There is no statistical basis for this distinction. National sensitivities about cancer survival seem to be much greater than sensitivities about cancer incidence. Cancer survival is a measure of the overall effectiveness of cancer treatment services, whereas cancer incidence is a measure of the long-term effect of prevention policies, which are less visible on a day-to-day basis and can, incorrectly, be seen as less important.
Cancer survival is a valuable indicator for international comparison of progress in cancer control,76,124,125 despite the fact that part of the variation in cancer survival identified in this study could be attributable to differences in the intensity of diagnostic activity (case-finding) in participating populations. Notably, the very same point applies to international comparisons of cancer incidence. If over-diagnosis—which depends on diagnostic intensity—is more marked in one country than another, then it will certainly be harder for researchers to compare incidence, mortality, and survival in those countries. But over-diag-nosis has different connotations for health-care systems and patients. In each country, the health-care system will have to be funded, staffed, and equipped to cope with the diagnostic and therapeutic burden of all patients with cancer, however they are diagnosed. The health-care system must make provision accordingly, and monitor the outcome of that provision; cancer survival is one such overall indicator.
Furthermore, a patient with cancer is still a patient with cancer, whether or not they represent over-diagnosis. If it were possible to distinguish the one from the other reliably, it would be done routinely. As it is, a cancer diagnosis represents the best that medicine has to offer in a given country at a given time, and that best is variable. PSA testing for prostate cancer is an example. No matter how a patient with cancer is diagnosed, they have to cope with the consequences, both psychological and physical, and will usually want to be treated. Such patients cannot be excluded from either incidence or survival analyses. We do not know who they are. In this sense, cancer incidence and survival estimates describe as accurately as possible the occurrence and the outcome, respectively, of cancer as it is diagnosed and treated at a given time in a given population.
Most of the wide global range in survival is probably attributable to differences in access to diagnostic and treatment services.3,82,89,91,126 International variation in survival in Europe has been associated with national levels of economic development, as measured by total national expenditure on health.29 Survival is positively associated with gross domestic product and the amount of investment in health technology such as CT scanners.124 Part of the international variation in survival is thus probably attributable to under-investment in health resources.127,128 The variation in survival might be considered intuitively obvious, given wide global variation in expenditure on health care, whether that is expressed in absolute terms or as a proportion of national resources. A parallel could be drawn with differences in survival between rich and poor patients with cancer in a given country, which have frequently been reported.129,130
Until now, however, direct international comparisons of cancer survival between high-income and low-income countries have not generally been available. The infor-mation provided here might therefore be a useful stimulus for change.
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Contributors
All authors were involved in the study design. JML, MPC, GG, and MSant undertook the pilot study. RC, SF, RdA, MSantaquilani, MQ, GG, MSant, FB, JML, TH, SK, and AV were involved in data preparation and quality control. MQ, RdA, BR, FB, PB, TH, JLY, and MPC did the data analyses. MPC, FB, JLY, TH, HW, JML, MQ, BR, RdA, AM, PB, JME, SK, GAS, and HHS contributed to interpretation of findings. MPC, MQ, BR, FB, PB, HW, JLY, JML, TH, AM, GG, MSant, GAS, HHS, and HT drafted the report. All authors revised the report.
Conflicts of interest
The authors declared no conflicts of interest.
Acknowledgments
We are grateful to the many cancer registry staff around the world whose meticulous and sustained efforts at data collection, linkage, and quality control have enabled the survival of patients to be analysed and compared in this study. We thank Dee Bhakta and Adrian Cousins (London School of Hygiene and Tropical Medicine, London, UK) for help in undertaking the pilot study and for producing webfigure 1, respectively. The findings and conclusions in this report are those of the authors and do not necessarily represent the views of the US CDC.
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87 Cooper HS, Deppisch LM, Kahn E, et al. Pathology of the malignant colorectal polyp. Hum Pathol 1998; 29: 15–26.
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92 Woods LM. International differences in breast cancer survival and ‘cure’ by social deprivation: a comparative study of England and Australia [PhD dissertation]. London: London School of Hygiene and Tropical Medicine; 2006.
93 Ciccolallo L, Capocaccia R, Coleman MP, et al. Survival differences between European and US patients with colorectal cancer: role of stage at diagnosis and surgery. Gut 2005; 54: 268–73.
94 Young JL, Ries LG, Pollack ES. Cancer patient survival among ethnic groups in the United States. J Natl Cancer Inst 1984; 73: 341–52.
95 Woods LM, Rachet B, Coleman MP. Choice of geographic unit influences socioeconomic inequalities in breast cancer survival. Br J Cancer 2005; 92: 1279–82.
96 McDavid K, Tucker T, Sloggett A, Coleman MP. Cancer survival in Kentucky and health insurance coverage. Arch Intern Med 2003; 163: 2135–44.
97 Sinha AA, Morgan JL, Buus RJ, et al. Cathepsin B expression is similar in African-American and Caucasian prostate cancer patients. Anticancer Res 2007; 27: 3135–41.
98 Halpern MT, Ward EM, Pavluck AL, Schrag NM, Bian J, Chen AY. Association of insurance status and ethnicity with cancer stage at diagnosis for 12 cancer sites: a retrospective analysis. Lancet Oncol 2008; 9: 222–31.
99 Bradley CJ, Given CW, Roberts C. Race, socioeconomic status and breast cancer treatment and survival. J Natl Cancer Inst 2002; 94: 490–96.
100 VanEenwyk J, Campo JS, Ossiander EM. Socioeconomic and demographic disparities in treatment for carcinomas of the colon and rectum. Cancer 2002; 95: 39–46.
101 Mayberry RM, Coates RJ, Hill HA, et al. Determinants of black/white differences in colon cancer survival. J Natl Cancer Inst 1995; 87: 1686–93.
102 Shavers V, Brown ML. Racial and ethnic disparities in the receipt of cancer treatment. J Natl Cancer Inst 2002; 94: 334–57.
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104 Ward E, Jemal A, Cokkinides V, et al. Cancer disparities by race/ethnicity and socioeconomic status. CA Cancer J Clin 2004; 54: 78–93.
105 Rabeneck L, Souchek J, El-Serag HB. Survival of colorectal cancer patients hospitalized in the Veterans Affairs health care system. Amer J Gastroenterol 2003; 98: 1186–92.
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117 English DR, Farrugia H, Thursfield V, Chang P, Giles GG. Cancer survival, Victoria, 2007: estimates of survival in 2004 and comparisons with earlier periods. Melbourne: The Cancer Council Victoria, 2007.
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121 Dansk Urologisk Selskab. Prostatacancer 2006—status og nye udfordringer. Ugeskr Læger 2006; 168: 1243.
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128 Sankaranarayanan R, Swaminathan R, Black RJ. Global variations in cancer survival. Cancer 1996; 78: 2461–64.
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http://graphics.thomsonreuters.com/10/04/GLB_HEALTH0410.gif
Global healthcare access
Would it be easy or difficult for a family member to get quality affordable healthcare

Mandibular prognathism (progenism)

Pathologic mandibular prognathism is a potentially disfiguring, genetic disorder where the lower jaw outgrows the upper, resulting in an extended chin.
Comedian Jay Leno, a well-known person with mandibular prognathism.

The condition colloquially is known as Habsburg jaw, Habsburg lip or Austrian Lip (see House of Habsburg) due to its prevalence in that bloodline.[4] The trait is easily traceable in portraits of Habsburg family members.[5] This has provided tools for people interested in studying genetics and pedigree analysis. Most instances are considered polygenetic.[6]

It is alleged to have been derived through a female from the princely Polish family of Piasts, its Masovian branch. The deformation of lips is clearly visible on tomb sculptures of Mazovian Piasts in the St. John's Cathedral in Warsaw. However this may be, there exists evidence that the trait is longstanding. It is perhaps first observed in Maximilian I (1459–1519).

Traits such as these that were common to royal families are believed to have been passed on and exaggerated over time through royal intermarriage which caused acute inbreeding. Due to the large amount of politically motivated intermarriage among Habsburgs, the dynasty was virtually unparalleled in the degree of its inbreeding. Charles II of Spain is said to have had the most pronounced case of the Habsburg jaw on record. His jaw was so deformed that he was unable to chew.

Many dog breeds have underbite, particularly those with short faces, like Shih Tzus and Boxers. This may be due, as in the case of bulldogs, to a slower growing maxilla in relation to the mandible.

http://biz.yahoo.com/p/522qpmd.html
Industry Browser – Healthcare – Health Care Plans – Company List

http://www.economist.com/blogs/democracyinamerica/2010/03/health_care_reform
Are health insurers making huge profits?

Mar 5th 2010, 14:15 by M.S.

Warhol dollarYESTERDAY Barack Obama dropped in on Kathleen Sibelius's meeting with executives of America's top five health insurers and read a letter from a constituent. Natoma Canfield, a self-employed house cleaner, had carcinoma 16 years ago; it has been in remission for 11 years. Last year Anthem Blue Cross, who provide her with a high-deductible ($2,500) individual plan, raised her premiums 25%, to $6,075. This year they're raising them another 40%, to $8,500. Ms Canfield closes her letter, "Please stay focused in your reform attempts as I and many others are in desperate need of your help."

There's no doubt that the Obama health-care reform bill would help Ms Canfield; she's exactly the kind of person (low-income, pre-existing condition, self-employed) it's designed to help. But in their report ABC's Jake Tapper and Sunlen Miller quickly segue to the related issue of whether insurance companies are greedy monsters who hurt policyholders by raking in big profits. They say no.

Certainly no one can easily defend the health insurance industry policies of denying coverage to those with pre-existing conditions or dropping coverage for individuals once they get sick. But Dr. Mark J. Perry, a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan, has noted that, according to data from Yahoo business, the health insurance industry, with an average profit margin of 3.3 percent, is the 86th most profitable industry.

As the Washington Post’s Ezra Klein notes, that’s a lower margin of profit than many other players in health care, such as the pharmaceutical industry (16.5 percent), "health information services (9.3 percent), home health care (8.4 percent), medical labs and research (8.2 percent), medical instruments and supplies (6.8 percent), biotech firms (6.7 percent), and generic drug manufacturers (6.6 percent)."

It's commendable that Mr Tapper and Ms Miller take the time to present the underlying issue. But there are a couple of things that are off here. The main problem is that "profit" isn't the right measure to use in this context. Profit is a deceptive measure when used with insurance, because the amount of money that flows through insurance companies is vastly disproportionate to the work they do or the value they add, just by the nature of the business. To put it more simply: private insurance companies' "costs" are probably about half of all the healthcare spending in America, since that's the proportion they cover. And their revenues are somewhat higher than that (currently about 4.3% higher, according to Yahoo business). But it's not as if they're actually doing half the work in America's health-care system; they're just collecting premiums and paying bills, plus a lot of administration and advertising. If I had a business that consisted of people giving me $100 bills and me paying them back $96, it would be silly to describe that as a very low-profit industry.

This issue was well treated in a thread on Tyler Cowen's website last fall. As commenters suggested, the better measurement is not profit, but return on invested capital (ROIC). ROIC measures how much money it takes to set up and run an insurance company, versus how much profit it brings in. Unfortunately it's not so easy to find good ROIC figures. The closest equivalent Yahoo business has is return on equity (ROE), but that can vary according to whether firms are financed through equity or debt. Still, across the entire industry this hopefully evens out a bit, and what it shows is that ROE in health insurance is about 16.1%, roughly the same as for the health-care industry as a whole, and a good deal higher than the average ROE in most sectors of the economy.

If what you're interested in is how much we can cut health-care spending by eliminating insurance-company profits, then what Ezra Klein says is true: it'll help, but not too much. But it's misleading to use the industry's low apparent profit margins to make it appear as though insurance executives are selfless folks who are just trying to eke out a little profit while doing their best to help people. The health-insurance industry provides very healthy returns to investment, and its executives want to make sure it continues to do so. The question is whether their efforts to pursue healthy returns to investment are good for Americans as a whole. Last year Wellpoint, which owns Ms Canfield's insurer (Anthem Blue Cross), showed profits of 18%, far above the industry average; its ROE was 27%. Ms Canfield paid them over $5,000 more than they paid out in claims in 2009, and the following year they hit her with rate increases so punitive they seem designed to push her, and her pre-existing condition, off their rolls, so they can book their profit and drop her risk. These are the incentives that exist for Wellpoint; this is how our system works. It's broken. And with regard to these particular problems, Obamacare would help fix it.

Why is tort reform even on the national agenda yet, at a time when insurance industry profits are booming, tort filings are declining, only 2 percent of injured people sue for compensation, punitive damages are rarely awarded, liability insurance costs for businesses are minuscule, medical malpractice insurance and claims are both less than 1 percent of all health care costs in America, and premium-gouging underwriting practices of the insurance industry have been widely exposed?

As I've stated on this forum before, why tort reform will not work is that the doctors are the insurance companies. According to the Physician Insurers Association of America, a trade group of about 50 doctor-owned malpractice insurers, they cover about 60% of U.S. doctors in private practice and hospitals.

Limits on the rights of people hurt by medical malpractice will victimize them and their families further while helping neither patients nor doctors. The real beneficiaries will be insurance companies, including the doctor-owned malpractice insurers.

The real malpractice crisis is the fraction of doctors who commit most of the negligence and medical errors. Just 5.3% of doctors are responsible for 56% of medical malpractice payouts nationally, according to the NPDB. Doctors who get sued this often are the bad doctors. Of those bad doctors, only 7.6% have ever been disciplined by state medical boards.

The only people who benefit by medical malpractice reform are the doctors and hospitals who commit the malpractice in the first place. Why should innocent victim's rights to seek compensation be limited? That just rewards the wrongdoers. To help eliminate medical malpractice, state Medical boards have to do a better job of weeding out the bad doctors who cause most of the harm.

http://www.cbo.gov/doc.cfm?index=4968&type=0
The following is a quotation from that analysis:

"A 2003 study that examined state data from 1993 to 2002 found that two restrictions–a cap on noneconomic damages and a ban on punitive damages–would together reduce premiums by more than one-third (all other things being equal).(11) And based on its own research on the effects of tort restrictions, the Congressional Budget Office (CBO) estimated that the provisions of the Help Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2003 (H.R. 5) would lower premiums nationwide by an average of 25 percent to 30 percent from the levels likely to occur under current law. (The savings in each state would depend in part on the restrictions already in effect there.)

Savings of that magnitude would not have a significant impact on total health care costs, however. Malpractice costs amounted to an estimated $24 billion in 2002, but that figure represents less than 2 percent of overall health care spending.(12) Thus, even a reduction of 25 percent to 30 percent in malpractice costs would lower health care costs by only about 0.4 percent to 0.5 percent, and the likely effect on health insurance premiums would be comparably small.(13)

Effects on Defensive Medicine
Proponents of limiting malpractice liability have argued that much greater savings in health care costs would be possible through reductions in the practice of defensive medicine. However, some so-called defensive medicine may be motivated less by liability concerns than by the income it generates for physicians or by the positive (albeit small) benefits to patients. On the basis of existing studies and its own research, CBO believes that savings from reducing defensive medicine would be very small."

http://blogs.ngm.com/.a/6a00e0098226918833012876a6070f970c-800wi
OECD Countries health care cost vs. average life expectancy at birth

http://moneywatch.bnet.com/retirement-planning/blog/money-life/3-big-myths-about-medicare/2505/

3 Big Myths About Medicare

By Steve Vernon | Jan 17, 2011
With Social Security in the news so much lately due to benefit reductions recommended by the Deficit Commission, it recently seemed like a good time to bust some common myths about Social Security benefits. Now let’s do the same for Medicare.

Myth #1: Medicare will cover my long-term care expenses.

Medicare only covers medical expenses that are needed to treat an illness or accident. Long-term care expenses are for help with daily living activities, such as taking medications, bathing, using the restroom, etc. These aren’t true medical expenses and generally aren’t covered by Medicare or most medical insurance plans.

The confusion might come from the fact that Medicaid might pay for some of your long-term care expenses, but only for citizens who have exhausted their financial resources.

Since there’s a good chance you’ll need some form of long-term care over your lifetime, it’s important to have a strategy to pay for long-term care expenses.

Myth #2: Health care reform eliminated my Medicare Advantage plan.

Medicare Advantage (MA) plans are alternatives to conventional Medicare benefits, and they operate similar to an HMO. A few years ago, Congress thought MA plans would be an efficient way to deliver health care, and they encouraged their use through special subsidies. Now these subsidies are being phased out by health care reform to put MA plans on similar footing with conventional Medicare benefits. But this is not an elimination of your MA plan.

Myth #3: I’m entitled to my Medicare benefits because I’ve paid for them.

It’s true that we’ve all paid for a portion of Medicare’s costs, but the amounts we’ve paid directly aren’t even close to the full cost of the program. To see why I say this, let’s take a look at how Medicare is financed (my MoneyWatch colleague Carla Fried has also written recently about the sources of Medicare funding). According to the August 2010 Medicare Spending and Financing Fact Sheet, prepared by the Henry J. Kaiser Foundation, here are the sources of Medicare funding:

* 37 percent is funded by payroll taxes into the federal government’s Hospital Insurance (HI) Trust Fund, paid from payroll taxes while we’re working and shared equally between employers and employees.
* 13 percent is paid by premiums collected current retirees.
* 43 percent is funded by general revenues — in other words, by taxpayers collectively.
* 7 percent comes from miscellaneous resources.

After looking at these numbers, you could argue that a person has directly paid for about 31.5 percent — or almost one-third the cost — of the benefits they could receive over their lifetime. That’s 18.5 percent paid in HI taxes (the employee’s half of 37 percent), plus the 13 percent paid in premiums. Others might argue that you’ve also paid for the 18.5 percent that’s contributed by your employer to the HI Trust Fund, since your employer would have paid that to you in wages if it wasn’t paying the money into the HI Trust Fund. While this last point is debatable, if we concede that point, then you’ll pay for roughly half of your Medicare benefits over your lifetime.

And it’s just this reason why I conclude it’s not fair to say we’re entitled to Medicare benefits because we paid for them. At best, we only directly pay for half of the cost of our Medicare benefits through our HI taxes while we’re working, and premiums paid while we’re retired. Of course, we also pay for part of the other half of the cost through our income taxes.

Don’t get me wrong — I think it’s a good thing for our society to help pay for the medical expenses of our senior citizens. But in our democratic society, we need to have honest debates about the appropriate amount of taxes our government needs to take to cover Medicare expenses from workers who are struggling to just meet daily living expenses.

We also need to keep in mind that our lifestyle choices regarding nutrition, exercise, stress management, and alcohol/cigarette consumption will significantly impact the amount of taxes our government needs to withhold from these hard-working families to pay for the cost of Medicare.

I’m at the age now where Medicare eligibility isn’t too far away, and some my relatives and friends have been covered by Medicare for several years. I’ve gladly paid my HI taxes as part of the bargain. But I also recognize that it’s my responsibility to do everything possible with my lifestyle choices to minimize the burden on the next generation of workers. I hope you feel the same.

http://www.kff.org/medicare/7305.cfm

Medicare Spending and Financing Fact Sheet

This updated fact sheet provides an overview of spending on the Medicare program and how the program is financed. It includes the latest available data on Medicare financing and incorporates reductions in the rate of growth of Medicare spending attributable to the 2010 health reform law, including an updated estimate showing the law will extend the solvency of the Medicare Part A Hospital Insurance Trust Fund until 2029.

http://www.kff.org/medicare/upload/7305-05.pdf

Fa c t S h e e t
ME D ICARE
The Henry J. Kaiser Family Foundation Headquarters: 2400 Sand Hill Road, Menlo Park, CA 94025 (650) 854-9400 Fax: (650) 854-4800
Washington Offices and Barbara Jordan Conference Center: 1330 G Street, NW, Washington, DC 20005 (202) 347-5270 Fax: (202) 347-5274 Website: http://www.kff.org
The Kaiser Family Foundation is a non-profit private operating foundation, based in Menlo Park, California, dedicated to producing and communicating the best possible
analysis and information on health issues.
AUGUST 2010
OVERVIEW OF MEDICARE SPENDING
Medicare, the federal health insurance program for 47 million
elderly and disabled Americans, helps to pay for hospital and
physician visits, prescription drugs, and other acute and postacute
services. In 2010, spending on Medicare accounts for
12% of the federal budget.
Medicare benefit payments are expected to total $509 billion
in 2010 (Figure 1):
? Part A – Hospital Insurance (HI) = 36%
? Part B – Supplementary Medical Insurance (SMI) = 29%
? Part C – Medicare Advantage (private health plans) = 23%
? Part D – Prescription drug benefit = 11%
Medicare plays a major role in the health care system
because it accounts for 23% of total national health care
spending. Medicare accounts for nearly one-third (30%) of
total national spending on hospital care and 20% of total
spending on physician services.
THE 2010 HEALTH REFORM LAW AND MEDICARE SPENDING
Medicare spending is projected to increase from $519 billion
in 2010 to $929 billion in 2020, taking into account changes
to Medicare incorporated in the Affordable Care Act of 2010
(CBO, August 2010). The law is projected to reduce annual
growth in Medicare spending over the next decade and
beyond, by reducing the growth in Medicare payments to
health care providers and Medicare Advantage plans,
establishing several new policies and programs designed to
reduce costs and improve quality of patient care, and
establishing a new Independent Payment Advisory Board to
recommend Medicare spending reductions if projected
spending exceeds target growth rates. The law also increases
the Medicare Part A payroll tax rate for higher-income
people, and increases Part B and Part D premiums for higherincome
beneficiaries.
Average annual growth in Medicare spending is projected to be
5.8% between 2012 and 2020, according to CBO. Total Medicare
spending for the ten-year period between 2010 and 2019 is
projected to be $322 billion lower than had been estimated for
the same period, partly as a result of the Medicare provisions
included in the health reform law (Figure 2). The average annual
growth rate in Medicare spending between 2010 and 2019 is
estimated to be 5.9%, nearly one percentage point lower than
projections for this period prior to the passage of the health
reform law. These projections do not take into account
additional spending that would be needed to offset the physician
payment reductions that are required under current law
according to the Sustainable Growth Rate formula.
MEDICARE’S SHARE OF TOTAL MEDICAL SPENDING
In 2006, Medicare paid just under half (48%, or $8,344) of the
$17,231 in average total medical and long-term care
expenses per beneficiary in fee-for-service (FFS) Medicare
(Figure 3). Beneficiaries paid 25% of this total out-of-pocket,
including premiums. Medicare spending per beneficiary is
highly skewed, with the top 10% of beneficiaries in FFS
MEDICARE SPENDING AND FINANCING
Sources of Payment for Medicare Fee-for-Service
Beneficiaries’ Health Care Spending, 2006
Includes Medical, Long-Term Care, and Premium Expenses
Figure 3
Medicare
48%
Services
15%
Premiums
10%
Private
Insurance
14%
Medicaid
9%
4%
Average Total Medical and Long-Term Care Expenses
per Medicare Fee-for-Service Beneficiary, 2006: $17,231
Total
Out-of-Pocket
25%
Other/Uncollected
NOTE: Excludes Medicare Advantage enrollees. Includes institutionalized and non-institutionalized beneficiaries.
Numbers may not sum to total due to rounding.
SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Cost and Use File, 2006.
$521
$570 $580
$635
$696
$725
$787
$819
$854
$943
$524
$566 $569
$617
$652
$684
$741
$771
$805
$878
$400
$500
$600
$700
$800
$900
$1,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Change in Projected Medicare Spending, 2010-2019,
Between March 2009 and August 2010
NOTE: Estimates for Medicare total outlays do not take into account additional spending to offset the physician
payment reductions that are required under current law according to the Sustainable Growth Rate formula.
SOURCE: CBO, Medicare Baseline, March 2009 and August 2010.
Medicare Baseline Spending
(in $ billions)
MARCH 2009
AUGUST 2010
Figure 2
Hospital
Inpatient
Services
Skilled Nursing
Facilities
Medicare
Advantage (Part C)
Home Health
Other Services
Physician
Payments
Hospital
Outpatient
Services
Outpatient
Prescription Drugs
(Part D)
Total Benefit Payments = $509 billion
NOTE: Total does not include administrative expenses and is net of recoveries.
SOURCE: CBO Medicare Baseline, August 2010.
Medicare Benefit Payments
By Type of Service, 2010
13%
10%
4%
5%
27%
11%
6%
Part A
Part A and B
Part B
Part D
23%
Figure 1
Medicare accounting for 58% of total Medicare spending in
2006 – on a per capita basis, nearly six times greater than the
average across all FFS beneficiaries ($48,210 versus $8,344).
HOW IS MEDICARE FINANCED?
Medicare is funded primarily from three sources: general
revenues (43%), payroll tax contributions (37%), and
beneficiary premiums (13%) (Figure 4). Medicare Parts A, B,
and D are financed separately, as follows:
? Part A is financed largely through a 2.9% tax on earnings
paid by employers and employees (1.45% each)
(accounting for 85% of Part A revenue). The health
reform law increases the Medicare payroll tax for higherincome
taxpayers (more than $200,000/individual and
$250,000/couple) by 0.9 percentage points (from 1.45% to
2.35%), beginning in 2013.
? Part B is financed through general revenues (74%) and
beneficiary premiums (25%). Beneficiaries who have
higher annual incomes (over $85,000/individual,
$170,000/couple) pay a higher, income-related monthly
Part B premium reflecting a larger share of total spending,
ranging from 35% to 80%; beginning in 2011, the health
reform law freezes the income thresholds at 2010 levels
through 2019.
? Part D is financed through general revenues (82%),
beneficiary premiums (10%), and state payments for dual
eligibles (7%). The health reform law establishes a new
income-related Part D premium similar to the Part B
premium, beginning in 2011, where higher-income
beneficiaries will pay a larger share of the cost of standard
drug coverage and receive a smaller premium subsidy.
MEASURING MEDICARE’S FINANCIAL CONDITION
Medicare’s financial condition is measured in a number of
ways, including assessing the status of the Part A Trust Fund
and comparing total Medicare spending to the gross domestic
product, the federal budget, and national health spending.
Over time, Medicare spending is projected to represent a
growing share of the economy, federal spending, and the
nation’s total health spending.
According to the 2010 Medicare Trustees report, the Part A
trust fund will be depleted in 2029, at which point Medicare
will not have sufficient funds to pay full benefits, unless
Congress acts as it has in the past to make changes to
improve the fiscal outlook of Part A (Figure 5). Medicare is
projected to grow from 3.6% of GDP in 2010 to 3.9% in 2020
and 5.1% in 2030. These estimates are lower than previous
years’ projections due to spending reductions enacted in the
2010 health reform law. SMI trust fund assets are projected
to be adequate because beneficiary premiums and general
revenue contributions are set to match expected outlays for
Part B and Part D each year.
FUTURE CHALLENGES
Sustained increases in health care costs are placing upward
pressure on Medicare spending, as for other payers. Annual
growth in Medicare spending is influenced by the same
factors that affect health spending in general: increasing
prices of health care services, increasing volume and use of
services, and new technologies. Moving forward, systemwide
efforts to curtail overall health care costs, such as those
enacted as part of the 2010 health reform law, could help to
improve Medicare’s financial outlook. Over the long term, an
aging population, a decline in the number of workers per
beneficiary, and increasing life expectancy will present fiscal
challenges for Medicare. From 2010 to 2030, the number of
beneficiaries is projected to rise from 47 million to 80 million,
while the ratio of workers per beneficiary is expected to
decline from 3.5 to 2.3.
Medicare provides essential coverage for its beneficiaries and
enjoys broad public support. Yet many people on Medicare
face significant out-of-pocket costs for both premiums and
non-premium expenses to meet their medical and long-term
care needs. With health costs rising faster than beneficiaries’
incomes, median out-of-pocket health spending as a share of
income increased from 11.9% in 1997 to 16.2% in 2006. How
to ensure Medicare’s financial stability over the long term
without shifting excessive costs onto beneficiaries, while
meeting the health care needs of an aging population, is a
pressing challenge for the nation.
7%
1%
3%
6%
1%
0% 7%
13% 1% 25% 10%
37%
85%
43%
74%
82%
General Revenue
Payroll Taxes
Beneficiary
Premiums
Payments from
States
Taxation of Social
Security Benefits
Interest and Other
SOURCE: 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds; fiscal year estimates. Numbers may not sum to 100% due to rounding.
PART A
$218 Billion
PART D
$63 Billion
PART B
$219 Billion
TOTAL
$499 Billion
Estimated Sources of Medicare Revenue, 2010
Figure 4
Solvency Projections of the Medicare Part A
Hospital Insurance Trust Fund, 1990-2010
Figure 5
NOTE: ‘Insolvency’ refers to the depletion of the trust fund.
SOURCE: Intermediate projections from 1990-2010 Annual Reports of the Boards of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
Projected Number of Years to Insolvency (Projected Year of Insolvency):
19
8
11
12
15
28
25
10
5
7
10
13
2010
2009
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
(2019)
(2003)
(2002)
(2001)
(2001)
(2008)
(2025)
(2030)
(2018)
(2019)
(2029)
(2017)

http://thinkprogress.org/2011/01/26/insurance-company-veteran-cents/
Insurance Company Drops Cancer Patient And Veteran Because He Accidentally Underpaid By Two Cents

One of the worst abuses of the private health insurance industry is the practice of denying claims to pay for necessary care or revoking the coverage of policyholders for frivolous reasons. A Vietnam veteran from Thornton, Colorado, is the latest victim of this practice.

Vietnam vet Ronald Flanagan has been battling cancer for more than two years. Two weeks ago, Flanagan was getting prepped for a bone biopsy at the local Exempla Rock Creek Medical Center. But at the last minute, his wife called the hospital and told them to stop the procedure because she had just received notice that they no longer have insurance. The reason why? The couple had accidentally underpaid their insurer by two pennies and it decided to drop them from their plan:

Two pennies. That’s the difference between a potentially life-saving surgery, and a dropped insurance plan. Those two cents could cost Vietnam veteran Ronald Flanagan everything. “Everybody we talk to is very surprised that two cents is enough to do this,” said Flanagan.

It was an innocent enough mistake, according to Ron’s wife, Frances Flanagan. “If I only had just hit the nine instead of the seven,” Frances said. When she was paying their monthly health insurance premium online in November, Frances swapped a 7 for a 9, leaving their $328.69 payment two cents short.

In a statement provided to a local news station, the couple’s insurer, Ceridian Cobra Services, explained, “Since the payment was not full, it fit into the definition in the regulations of an ‘insufficient payment’ … Ceridian understands nothing is more important than one’s health.” Local station ABC 7 interviewed the Flanagans about their plight. “I felt that it was all my fault,” said Mrs. Flanagan, who made the accounting error, choking back tears. Watch it:

The recently passed health care law — which congressional Republicans are unanimously trying to repeal — includes a whole host of protections that would rein in the ability for health insurers to drop patients for frivolous reasons like this. If Republicans are successful, these protections would disappear.

However, in the long run, it’s worth noting that one of the best ways to prevent the situation that the Flanagans are in is to offer them access to a public, not-for-profit system like Medicare, which has a higher approval rating than private insurance, runs more efficiently than any private insurer, and that most Americans want to be able to join.

http://www.sacbee.com/2010/12/31/3290271/sacramento-girl-needed-amputations.html
Sacramento girl needed amputations after 5-hour wait at emergency room
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By Cynthia Hubert
chubert@sacbee.com
Published: Friday, Dec. 31, 2010 – 12:00 am | Page 1B
Last Modified: Monday, Jan. 3, 2011 – 7:15 am

As his tiny daughter's skin turned blotchy and her body went limp during a lengthy wait at Methodist Hospital's emergency room, Ryan Jeffers panicked.

"This wasn't a simple flu," he said. "My daughter needed help."

Little did he know that the girl was near death from a common infection that had invaded her blood and was raging out of control, ultimately causing the amputation of both of her feet and one of her hands.

Malyia Jeffers, 2, is still fighting for her life at Stanford University's Lucile Packard Children's Hospital, and her Sacramento parents are left wondering how a simple Strep A bug turned into a medical horror story.

"What could I have done differently?" asked Jeffers, who along with the girl's mother, Leah Yang, has been keeping vigil in Palo Alto for nearly a month. He wonders, he said, whether he should have pushed harder to get his daughter care in the emergency room where the family waited for five hours to see a doctor.

"I'm angry, but I can't deal with that right now," he said. "I just want my daughter to get better."

A Methodist spokeswoman, Erin MacEneaney, said the hospital cannot comment on specific cases because of privacy laws. "However, Methodist Hospital does everything to ensure the appropriate level of care for our patients," she said.

The family's ordeal began on a Sunday morning in early December, when the normally rambunctious Malyia developed a fever and became lethargic, Ryan Jeffers recalled.

When her symptoms persisted the next day, Jeffers and Yang, his fiancé, took their daughter to an urgent care center, where specialists told them to go to the emergency room. By the time they arrived at Methodist, he said, splotches that looked like bruises had developed on Malyia's cheeks, and she was "getting really weak," he said. "After a while, she couldn't even walk," and her fever had jumped to 103 degrees.

Jeffers, 29, said he pushed for immediate care, but was rebuffed. After about five hours, he said, he ambushed a nurse and demanded to see a doctor. The physician took blood samples that suggested Malyia was in liver failure, Jeffers said. She was taken by ambulance to the pediatric intensive care unit at Sutter Memorial Hospital. Doctors there had her flown to Stanford aboard a helicopter.

It turned out the girl was in septic shock from a Streptococcus A infection that somehow invaded her blood, muscles and internal organs. About 10,000 cases of "invasive group A streptococcus" infections occur every year in the United States, and as many as 20 percent of patients die from the condition, according to the Centers for Disease Control and Prevention.

Early treatment can reduce death and disability from the disease, but "even the best medical care does not prevent death" in every case, according to the CDC.

One of Malyia's doctors at Stanford, Deborah Franzon, said a combination of the girl's genetics and an unusually virulent strain of Strep A probably combined to make her so sick. The bacteria could have been passed to her from someone else, then entered her blood through a small cut, she said. Once in the bloodstream, it could cause fatal complications.

The youngster was close to death when she arrived at Stanford's hospital, Franzon said.

"She was still awake and talking a bit, but she was ice cold, and her legs were so pale," Franzon said.

The Stanford team put the girl on life support and gave her medicine to boost her blood pressure. They ultimately had to perform operations to amputate her lower legs and her left hand, which had been irreversibly damaged by a lack of oxygen.

Franzon said it is unclear whether immediate emergency care would have prevented amputation of her limbs. The decision to go forward with surgery, she said, was wrenching for both Malyia's doctors and her parents. Doctors were unsure whether she would even survive an operation.

But a series of surgical procedures have been successful and, with prosthetics and rehabilitation, Malyia should "be able to do whatever she wants to do" in life, Franzon said.

In recent days, Malyia has shown flashes of her former spirit, said Jeffers. On dialysis and with a breathing tube in her throat, she has opened her eyes, is responding to questions and is watching television.

"She's a spirited little thing, and she's definitely daddy's girl," said Franzon.

While Malyia's parents have medical insurance, many of their daughter's bills will go uncovered, including a $26,000 tab for her helicopter ride from Sacramento to Palo Alto, Jeffers said. The couple are paying just $10 a day to stay at the Ronald McDonald House, but must cover their food and transportation costs.

In addition to Malyia, Jeffers and Yang are raising a son, Jaden, 6, and Yang's son Christian, 9. Jeffers works part time for a family storage business, he said, and Yang recently graduated from cosmetology school.

"It's been hard, but we're not thinking about money right now," he said. "We're just thinking about Malyia."

http://www.star-telegram.com/2010/03/25/2068267/crowley-newborn-with-heart-defect.html#tvg
Crowley newborn with heart defect is denied insurance coverage

In 2007, CIGNA refused to pay for the liver transplant 17-year-old Nataline Sarkisyan desperately needed to survive because it was "too experimental." News of Sarkisyan's case spread and about 150 people protested outside of the insurer's offices. CIGNA eventually yielded to the protesters and agreed to the procedure, but Sarkisyan died the same day.

In 2002, Chris Turner, a health insurance agent from Tampa, Florida, was drugged and raped during a business trip. A few months later, when Turner was forced to buy new insurance on the individual market, she called a series of insurance underwriters and asked them about a hypothetical client who had been treated for rape. Every insurer she called had the same response: “Nope, we won’t take her.” Her rape, Turner said, had become a pre-existing condition, and she no longer qualified for coverage.

After 17-year-old college student Jerome Mitchell tested positive for HIV in 2002, his health insurance company retroactively annulled his coverage. Fortis Insurance, claimed that a nurse's note written before his coverage began may have indicated that Mitchell had already known he had contracted HIV. The note turned out to be an error, and earlier this year, the South Carolina Supreme Court called the company's behavior "reprehensible" and ordered it to pay Mitchell $10 million in damages.

Last fall, Rocky Mountain Health Plans refused to extend coverage to Alex Lange, a four-month-old baby, because his "obesity," the insurer said, qualified as a pre-exisitng condition. After it received substantial media attention, Rocky Mountain reversed the decision.

The Huffington Post Investigative Fund reported last year that Benjamin French, a 12-year-old boy who was born with only one arm, had been denied coverage for his prosthesis on the grounds that he had reached his "lifetime maximum benefit for prosthetic devices." The insurer, Blue Cross Blue Shield of Michigan, later reversed its decision — but on a one-time-only basis.

Otto Raddatz, a lymphoma patient, lost his health care coverage while still undergoing chemotherapy. Fortis Insurance said it terminated his policy because he didn't disclose a note that a doctor once wrote in his file — that he didn't know about — indicating he had a small aneurysm and gallstones.

http://www.huffingtonpost.com/2009/09/14/when-getting-beaten-by-yo_n_286029.html
It turns out that in eight states, plus the District of Columbia, getting beaten up by your spouse is a pre-existing condition.

Under the cold logic of the insurance industry, it makes perfect sense: If you are in a marriage with someone who has beaten you in the past, you're more likely to get beaten again than the average person and are therefore more expensive to insure.

In human terms, it's a second punishment for a victim of domestic violence.

In 2006, Democrats tried to end the practice. An amendment introduced by Sen. Patty Murray (D-Wash.), now a member of leadership, split the Health Education Labor & Pensions Committee 10-10. The tie meant that the measure failed.

All ten no votes were Republicans, including Sen. Mike Enzi (R-Wyoming), a member of the "Gang of Six" on the Finance Committee who are hashing out a bipartisan bill. A spokesman for Enzi didn't immediately return a call from Huffington Post.

At the time, Enzi defended his vote by saying that such regulations could increase the price of insurance and make it out of reach for more people. "If you have no insurance, it doesn't matter what services are mandated by the state," he said, according to a CQ Today item from March 15th, 2006.

Robert Zirkelbach, a spokesman for an insurance industry trade group, America's Health Insurance Plans (AHIP), said that the National Association of Insurance Commissioners (NAIC) has proposed ending the discrimination. "The NAIC has a model on this that we strongly supported. That model bans the use of a person's status as a victim of domestic violence in making a decision on coverage," he said.
Story continues below

During the last health care reform push, in 1993 and 1994, the industry similarly promised to end discrimination against people with pre-existing conditions.

Murray pushed to include the domestic violence concern in this year's comprehensive health care bill. "Senator Murray continues to believe that victims of domestic violence should not be punished for the crimes of their abusers. That is why she worked to include language in the Senate HELP Committee's health insurance reform bill that would ban this discriminatory and harmful insurance company practice," said spokesman Eli Zupnick.

In 1994, then-Rep. Charles Schumer (D-N.Y.), now a member of Senate leadership, had his staff survey 16 insurance companies. He found that eight would not write health, life or disability policies for women who have been abused. In 1995, the Boston Globe found that Nationwide, Allstate, State Farm, Aetna, Metropolitan Life, The Equitable Companies, First Colony Life, The Prudential and the Principal Financial Group had all either canceled or denied coverage to women who'd been beaten.

The Service Employees International Union asked members to write letters to Congress regarding the exclusion and have quickly generated hundreds, says an SEIU spokeswoman.

The relevant provision:

SEC. 2706. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL PARTICIPANTS AND BENEFICIARIES BASED ON HEALTH STATUS.

'(a) IN GENERAL.–A group health plan and a health insurance issuer offering group or individual health insurance coverage may not establish rules for eligibility (including continued eligibility) of any individual to enroll under the terms of the plan or coverage based on any of the following health status-related factors in relation to the individual or a dependent of the individual:

(1) Health status.

(2) Medical condition (including both physical and mental illnesses).

(3) Claims experience.

(4) Receipt of health care.

(5) Medical history.

(6) Genetic information.

(7) Evidence of insurability (including conditions arising out of acts of domestic violence).

(8) Disability.

(9) Any other health status-related factor determined appropriate by the Secretary.

UPDATE: The eight states that still allow it are Idaho, Mississippi, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota and Wyoming, according to a report by the National Women's Law Center.

UPDATE II: Scratch the Tar Heal state from that list. North Carolina insurance commissioner Wayne Goodwin had his staff research the state's law and his attorneys concluded that insurers in that state would not be allowed to use domestic violence as a pre-existing condition. Group plans were specifically forbidden from using it thanks to a 1997 law, he said. For individuals and non-group plans, it's more complicated.

"Though there is not a specific statute for individual plans or non-group plans, there is another statute that our attorneys here tell us addresses this issue. For example, North Carolina law defines what a preexisting condition is. Now, here in North Carolina, it says a preexisting condition means – quote – those conditions for which medical advice, diagnosis, care or treatment was received or recommended within a one year period immediately preceding the effective date of the person's coverage." Domestic violence, he said, doesn't met the state's definition of a medical condition and so can't be used as a pre-existing condition.

Wyoming Department of Insurance staff attorney James Mitchell said the state's insurance laws do not ban insurers from using domestic violence as a pre-existing condition, but his staffers were unable to find cases of insurers having done so and he said they had not received any complaints. "We are not aware of any policies that have been submitted to us that addressed domestic violence as a pre-existing condition," he said. The remaining six states have yet to respond.

UPDATE TO UPDATE II: A few readers have noted that the ambiguity of North Carolina's law regarding individual and non-group plans could still leave domestic violence victims vulnerable to discrimination. And Commissioner Goodwin himself, in a Facebook note summarizing my conversation with him, does say "that North Carolina's law on this subject vis-a-vis individual/non-group plans could be clarified and made more direct, and that we should also consider the NAIC national model law on the subject, too. The legislature doesn't return until May 2010, so there is time to work on the best way to clarify this issue for folks while educating them in the meanwhile."

He posted his response on the FB page of journalist Christine Tatum, who had posted a link to this story and asked her friends to contact him. Goodwin noted on her wall that allowing insurance companies to discriminate against domestic violence victims is a tragedy and something he wouldn't allow in his state.

North Carolina, however, given the fuzziness of the law, still belongs on a list of states whose laws could be clarified to assure that domestic violence victims aren't denied coverage or charged higher premiums. Forty-two states have made that specific clarification and the Senate health committee bill would do so nationally.

If you're an attorney with experience in this field and want to weigh in, write me at ryan@huffingtonpost.com.

UPDATE III: Mississippi Insurance Commissioner Mike Chaney provided the following statement through a spokeswoman:

Mississippi does not at this time have a law which bans insurance companies from considering domestic violence as a pre-existing condition. However, the reason there is not such a law is that there has not been a problem with insurance companies denying coverage or refusing to pay the claims of domestic violence victims in this state. If it were an issue, the Legislature and the Department would have addressed it by now.

The Mississippi Department of Insurance is unaware of any insurance company operating in this state that would deny coverage if the applicant had been a victim of domestic violence. Nor have we received any complaint from a consumer stating their insurance company refused to pay their medical bills incurred from domestic violence. Such action by an insurance company would not be tolerated by the Department.

It is the position of the Department that if an insurance company denied payment of a claim incurred in an act of domestic violence, such action would be a violation of the Unfair Trade Practices Act, as promulgated in Miss. Code Ann. §§ 83-5-29 through 83-5-51, and the Department would take the appropriate action.

Should the Mississippi Legislature choose to enact legislation addressing this issue, the Mississippi Insurance Department would be very supportive of the passage of such legislation.

UPDATE TO UPDATE III: Mississippi Insurance Commissioner Mike Chaney was much blunter in an interview with the Jackson Free Press:

"The truth is we've got eight states in the union that count domestic abuse as a pre-existing condition, and Mississippi is one of them," Chaney told the Jackson Free Press. "I've got to get some of my lawyers to do some research on this, but we have only six mandated (conditions that must be covered) in our state statues, and we have 25 or more optional coverages, but domestic abuse doesn't seem to be one of them."

Chaney said all insurance companies in the state can take advantage of the state's limited coverage mandate, and that he would prefer the state to change its law to force insurance companies to cover victims of domestic abuse.

"Would I do something about it? Hell, yeah, I'd do something about it, but I'm a regulator, not a legislator. I have to come to terms with that every week," Chaney said. "The whole situation is bad. Let's say a woman works with a company that had Blue Cross/Blue Shield, and she gets beat up in her house and Blue Cross says 'we're not covering you because getting beat up is your pre-existing condition.' That's terrible."

Read the whole story here.

UPDATE IV: North Dakota Insurance Commissioner Adam Hamm, a former violent-crimes prosecutor, told the Huffington Post that he and Gov. John Hoeven (R) are working to change the standing policy in their state. "To put it mildly, Wayne and I are on the same page," he said, referring to the North Carolina insurance commissioner.

After a consumer alerted him Tuesday via e-mail, Hamm said, "Quite frankly, I was stunned and I couldn't believe it." His office then contacted Blue Cross-Blue Shield, Medica, John Alden and American Family, who together account for 98 percent of the state's health insurance policies, and none of the four companies treat domestic violence as a preexisting condition, he said. Nor has the state insurance department recorded any complaints of being denied care on those grounds.

"We have no record of any of that ever occurring in our state," Hamm said. "So we're obviously happy about that."

To keep it from happening in the future, the state insurance department will push legislation as soon as possible, Hamm said. Since the North Dakota legislature only meets every other year, he projected a 2011 vote.

In the meantime, Hamm said he wants to know why North Dakota never joined the 42 other states who passed bans years ago. Agents are combing legislative files going back to the mid-1990s to see if such a measure was ever introduced, he said.

UPDATE V: State Farm writes in to note that it has changed its policy since that 1995 Boston Globe story and no longer discriminates against victims of domestic violence.

A follow-up Globe item reported that "recent 'media attention,' and the company's own research, caused the company to revise its policy, [spokeswoman K.C.] Eynatten said. State Farm no longer 'rates or denies life or health insurance to battered women, even if there's a history of domestic violence.'

It went on: "'We realized our position was based on gut feelings, not hard numbers,' Eynatten said, explaining the change. 'And we became aware that we were part of the reason a woman and her children might not leave an abuser. They were afraid they'd lose their insurance. And we wanted no part of that.'"

Blue Cross agreed to insure Wittney Horton and accepted her premium payments — until she got sick. After Horton sought treatment, Blue Cross opened an investigation into her medical records and found a note from one of her doctors suggesting that she might have polycystic ovaries. Based on the note, which Horton never knew about, Blue Cross rescinded her medical coverage.

Ian Pearl, who was diagnosed with muscular dystrophy soon after birth, survives with the help of medical technology, including the ventilator he needs to breathe. Late last year, however, his insurer, Guardian, scaled back his coverage even though the limited care is, according to his family, likely to kill him.

Shortly before Robin Beaton was scheduled to undergo a double mastectomy in 2008, her insurance company revoked her policy. Beaton, a breast cancer patient, never disclosed that she'd previously seen a dermatologist for acne, a condition her insurer, Blue Cross, said qualified as a pre-existing condition. "The sad thing is, Blue Cross gladly took my high premiums, and the first time I filed a claim and was suspected of having cancer, they searched high and low for a reason to cancel me," Beaton told a House committee.

After Sally Marrari was diagnosed with a thyroid disorder, lupus and fluid in her heart, Blue Cross revoked her coverage on the grounds that she had an undisclosed "back problem." Marrari's treatment cost $25,000, and when she was later diagnosed with pancreatic cancer, her bills skyrocketed to more than $200,000.

http://www.huffingtonpost.com/2010/03/26/heather-galeotti-kaiser-p_n_514712.html
Heather Galeotti: Kaiser Permanente Pulled Plug On Woman's Insurance While She Was In A Coma

http://thinkprogress.org/2009/09/17/csection-preexisting/
Health Insurers Consider A Caesarean-Section Pregnancy A Pre-Existing Condition

prenatal-test Earlier this week, the Huffington Post’s Ryan Grim reported on the fact that in seven states plus the District of Columbia, “getting beaten up by your spouse is a pre-existing condition.” The insurance industry figures that if “you are in a marriage with someone who has beaten you in the past, you’re more likely to get beaten again than the average person and are therefore more expensive to insure,” but what it really does is punish these victims for something that wasn’t their fault.

But that isn’t the only policy that health insurers have that primarily discriminate against women. First of all, most individual health insurance markets don’t cover maternity care. In fact, according to the Kaiser Family Foundation, only 14 states have a requirement for such coverage, and the number of plans without maternity coverage continues to rise dramatically. Why? Anthem Blue Cross — which has been actively fighting health care reform — considers pregnancy optional and therefore not necessary to insure:

“The point of insurance is to insure against catastrophic care costs. That’s what you’re trying to aggregate and pool for such things as heart attacks and cancer,” said an Anthem Blue Cross spokesman. “Having a child is a matter of choice. Dealing with an adult onset illness, such as diabetes, heart disease breast or prostate cancer, is not a matter of choice.”

Even Louisiana Gov. Bobby Jindal (R) spoke an unintentional truth when he said of his parents: “When they arrived in Baton Rouge, my mother was already four-and-a-half-months pregnant. I was what folks in the insurance industry now call a pre-existing condition.”

When a woman isn’t currently pregnant, she often still cannot get coverage. Many insurers consider a Caesarean-section pregnancy a pre-existing condition and refuse to cover women who have had the procedure. From a 2008 New York Times story about a Colorado woman who had Golden Rule Insurance:

She was turned down because she had given birth by Caesarean section. Having the operation once increases the odds that it will be performed again, and if she became pregnant and needed another Caesarean, Golden Rule did not want to pay for it. A letter from the company explained that if she had been sterilized after the Caesarean, or if she were over 40 and had given birth two or more years before applying, she might have qualified.

The number of C-sections performed in the United States has been “growing steadily,” with approximately 30 percent of women having the procedure. Other insurance companies that don’t necessarily reject women with C-sections often do charge them higher premiums or “factor in chronic or recurring problems that might have led to the Caesarean.” What’s even worse is that once you’re denied by one company, it’s harder to get coverage somewhere else because you’ve been red-flagged.

Today, Golden Rule CEO Richard Collins is testifying before the House Subcommittee on Domestic Policy about “Bureaucracy of Private Health Insurance.”

http://www.nytimes.com/2008/06/01/health/01insure.html?_r=1
June 1, 2008
After Caesareans, Some See Higher Insurance Cost
By DENISE GRADY

When the Golden Rule Insurance Company rejected her application for health coverage last year, Peggy Robertson was mystified.

“It made no sense,” said Ms. Robertson, 39, who lives in Centennial, Colo. “I’m in perfect health.”

She was turned down because she had given birth by Caesarean section. Having the operation once increases the odds that it will be performed again, and if she became pregnant and needed another Caesarean, Golden Rule did not want to pay for it. A letter from the company explained that if she had been sterilized after the Caesarean, or if she were over 40 and had given birth two or more years before applying, she might have qualified.

Ms. Robertson had been shopping around for individual health insurance, the kind that people buy on their own. She already had insurance but was looking for a better rate. After being rejected by Golden Rule, she kept her existing coverage.

With individual insurance, unlike the group coverage usually sponsored by employers, insurance companies in many states are free to pick and choose the people and conditions they cover, and base the price on a person’s medical history. Sometimes, a past Caesarean means higher premiums.

Although it is not known how many women are in Ms. Robertson’s situation, the number seems likely to increase, because the pool of people seeking individual health insurance, now about 18 million, has been growing steadily — and so has the Caesarean rate, which is at an all-time high of 31.1 percent. In 2006, more than 1.2 million Caesareans were performed in the United States, and researchers estimate that each year, half a million women giving birth have had previous Caesareans.

“Obstetricians are rendering large numbers of women uninsurable by overusing this surgery,” said Pamela Udy, president of the International Caesarean Awareness Network, a group whose mission is to prevent unnecessary Caesareans.

Although many women who have had a Caesarean can safely have a normal birth later, something that Ms. Udy’s group advocates, in recent years many doctors and hospitals have refused to allow such births, because they carry a small risk of a potentially fatal complication, uterine rupture. Now, Ms. Udy says, insurers are adding insult to injury. Not only are women feeling pressure to have Caesareans that they do not want and may not need, but they may also be denied coverage for the surgery.

“You have women just caught in the middle of this huge triangle of hospitals, insurance companies and doctors pointing the finger at each other,” Ms. Udy said.

Insurers’ rules on prior Caesareans vary by company and also by state, since the states regulate insurers, said Susan Pisano of America’s Health Insurance Plans, a trade group. Some companies ignore the surgery, she said, but others treat it like a pre-existing condition.

“Sometimes the coverage will come with a rider saying that coverage for a Caesarean delivery is excluded for a period of time,” Ms. Pisano said. Sometimes, she said, applicants with prior Caesareans are charged higher premiums or deductibles.

“In many respects it works a lot like other situations where someone has a condition that will foreshadow the potential for higher costs going forward,” Ms. Pisano said.

Her group has reported that although most Americans with health insurance, 160 million, have group plans through employers, the number needing individual policies will probably keep rising, because more and more people are becoming self-employed or taking jobs without health benefits.

In a letter to Ms. Robertson, Golden Rule, which sells individual policies in 30 states, said it would insure a woman who had had a Caesarean only if it could exclude paying for another one for three years. But in Colorado, such exclusions are considered discriminatory and are forbidden, so Golden Rule simply rejects women who have had the surgery, unless they have been sterilized or meet the company’s age requirements.

“If you don’t work for someone who has insurance, and you have to get insurance on your own, this is terrifying,” Ms. Robertson said.

A spokeswoman for Golden Rule declined to explain how long it had been excluding Caesareans, how it had decided to do so or how many were affected, saying the information was proprietary. The company, based in Indianapolis, is owned by UnitedHealthcare, which collects more than $50 billion a year in premiums and has 26 million members, most with group coverage.

In Colorado, people denied individual health insurance can obtain it through a state program, Cover Colorado, which insures about 7,200 people. But the premiums are high, 140 percent of standard rates, a spokeswoman said, adding that some women had enrolled specifically because prior Caesareans had disqualified them from private insurance.

Blue Cross Blue Shield of Florida, which has about 300,000 members with individual coverage, used to exclude repeat Caesareans, but recently began to cover them — for a 25 percent increase in premiums for five years. Like Golden Rule, the company exempts women if they have been sterilized.

“After five years, if there is not a complication of pregnancy, another C-section, or if they get their tubes tied and are no longer in that risk situation, that rate-up goes away,” said Randy M. Kammer, the vice president for regulatory affairs and public policy.

The higher rate is based on a Caesarean costing an average of $2,700 more than a vaginal birth (assuming no complications in either type of delivery). Ms. Kammer said Blue Cross Blue Shield could not provide a tally of how many members were paying the higher rates because of Caesareans.

“The aggravating thing is, there are a lot of elective Caesareans, and that adds to costs,” she said.

Elizabeth Bonet, who lives in Sunrise, Fla., learned about the higher rates this year when she applied to Blue Cross Blue Shield of Florida.

“I was very angry, outraged, shocked,” Ms. Bonet said. “It made me feel very helpless. These were not Caesareans I wanted. They were not elective Caesareans. I very much wanted natural births with both babies and was not able to have them, and to have to pay for that for years is outrageous, and I feel it’s discriminatory as well.”

Each state’s Blue Cross Blue Shield plan sets its own policies. In Texas, a spokeswoman said, a prior Caesarean will not affect a woman’s premiums or insurability, as long as she has recovered fully.

A spokeswoman for another major insurer, Wellpoint, said the company’s decisions about prior Caesareans varied case by case, but declined to explain further.

Aetna does not treat a Caesarean itself as a pre-existing condition, but does factor in chronic or recurring problems that might have led to the Caesarean, like diabetes or high blood pressure, a spokeswoman said.

A spokeswoman for another company, Mega Life and Health Insurance, in North Richland Hills, Tex., said: “If the Caesarean section was considered by the physician to be medically necessary for the safety of the mother or child then coverage is issued without conditions. If the procedure was determined to be ‘elective,’ coverage would be offered with a temporary waiver or at a higher premium rate.”

Insurers often accuse women and obstetricians of scheduling unneeded Caesareans for their own convenience — to deliver the baby at a certain time, or to avoid labor. But it is not known how much of the overall increase in Caesareans is because of a rise in unnecessary operations, or how many Caesareans are done at the mother’s request, according to a 2006 report by the National Institutes of Health.

“I think it’s really a very small amount, but we need more data,” said Dr. Mary D’Alton, chief of obstetrics and gynecology at Columbia University Medical Center, and an author of the report.

She said she was amazed to hear that insurers would charge higher premiums or deny coverage because of a past Caesarean.

“I would think if it’s happening, the medical profession has to take a stand,” Dr. D’Alton said.

But to people familiar with the rough and tumble world of individual insurance, the companies’ practices are no surprise.

Individual insurance differs sharply from the group coverage with which most people are familiar. Group policies generally require that the insurer cover everybody in the group, and charge the same rates for all. But with individual coverage, insurers in many states can vary their prices based on medical history, exclude certain services or reject anyone they consider a bad risk. (Several states, however, including New York, New Jersey and Massachusetts, ban such practices.)

Insurers say they need these strategies to protect themselves, because some customers apply only after they get sick or pregnant, skewing the pool toward people with high expenses.

Ms. Robertson said that had she known a Caesarean was grounds for rejection, she would not have even applied to Golden Rule, because the denial may be held against her in the future. Insurers routinely ask applicants if they have ever been denied, and red-flag anyone who says yes.

“My understanding is that once you’re denied it’s hard to get other insurance,” Ms. Robertson said. “Man, is that a scary thing.”

http://www.desmoinesregister.com/article/20100221/OPINION01/2210320/-1/caucus/Basu-5-pasta-dinner-fundraiser-shows-need-for-health-reform
Basu $5 pasta dinner fundraiser shows need for health reform

REKHA BASU • rbasu@dmreg.com • February 21, 2010

Friends and family of a Des Moines cancer patient will gather today at an east-side Eagles lodge to raise money for her treatment. They hope proceeds from the $5 pasta dinner, silent auction and raffle will make a dent in Deb Robben's $48,000 medical bills.

It's a lovely gesture of support for the uninsured grandmother. But it's no substitute for a national health-care policy.

That fundraisers like these are becoming common to help sick people pay their medical bills is a sad indictment of a failed system. Even the family of U.S. Rep. Bruce Braley has relied on them since his nephew was diagnosed at 18 months with liver cancer.

Robben, 51, cleans houses for a living. Her husband is a roofer. They've had no health insurance for 14 years because both were self-employed, and it cost too much. She was making between $7,000 and $10,000 a year, working part time. He made $12,000 in 2008. But after a good year four years ago, she applied for insurance and was turned down because of benign cysts in her breasts.

There was nothing significantly wrong with Robben’s breasts, but such routine denials by insurers have become commonplace.

So in December, when she was diagnosed with colon cancer, she was uninsured. For a year, her husband has been working for a roofing company that doesn’t provide insurance. He earns about $39,000 annually, too much to qualify for Medicaid, government health insurance for low-income people.

Robben had to borrow money from a sister-in-law for everything from the colonoscopy and diagnostic tests to the surgery to remove her lower colon. She tried to cut costs by having the chemo administered directly into her veins, without a port. But her arms swelled up so badly, she couldn’t continue.

It’s easy to blame people for not having made plans years earlier for a catastrophic medical event. But for many of the self-employed, living paycheck to paycheck, it literally is a choice between food, gas or insurance. You put off other things to cover immediate needs.

And here’s the other rub. Years ago, when Robben did work for an employer and got family health coverage, the insurer wouldn’t pay when her husband fell off a roof and hurt his head doing his job. Wondering why she bothered working just for the insurance while paying for child care, she became self-employed. After one of her three, now-grown, sons broke his arm at age 10, it took a couple of years to pay off the bills. But for the most part, the family was lucky.

Robben has been told it would cost $1,200 a month to buy private insurance for both of them – if someone would even sell it to her with her pre-existing condition. Robben doesn't like to take money from others. "There's a lot more people out there that are worse off than I am," she says. She's been following the national health-care debate with concern, wanting reform but understandably scared she could be forced to buy insurance at prevailing costs. She wonders what she'd have to give up to pay for it. That's why a public option that keeps costs in check must be part of any legislation.

It's a scary world without insurance, but many people have no choice. The marketplace has done a lousy job of regulating itself to prevent companies from overcharging, turning people down for flimsy reasons or pre-existing conditions or refusing to cover treatments. That's why government has to step in.

Congress can get this done through the budget reconciliation process. It must. In the meantime, if you want to help Deb Robben, there's an event today at Eagles Lodge No. 109, 6567 Bloomfield Rd., Des Moines, from 3 to 7 p.m.

Finance

########## Risk-free Interest Rate

The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no default risk.
Though a truly risk-free asset exists only in theory, in practice most professionals and academics use short-dated government bonds of the currency in question. For USD investments, usually US Treasury bills are used, while a common choice for EUR investments are German government bills or Euribor rates.

These securities are considered to be risk-free because the likelihood of these governments defaulting is extremely low,

######### Fiat Currency

fiat currency or fiat money is money that has value primarily because a government demands it in payment of taxes, and that government has credible enforcement of its demand

The term “fiat” money has been used to distinguish such money from representative money, which is pegged or fixed to a quantity or mass of precious metal. While representative money is often associated with a legal requirement that the bank of issue pay in fixed weights of a given precious metal or (in theory) fixed amount of any other precious good, fiat money’s value is fixed only to its value in transactions controlled by government authority, such as taxation.

Fiat money is a subset of general credit money, but a special one in which a government, often through a central bank or reserve bank, has taken the responsibility (monetary authority) of being the major creditor backing the currency. An economy may function on credit money which is not fiat money, such as United States paper currency during periods when the U.S. did not have a central bank, or the banknotes of the Scottish clearing banks, which function in Scotland as currency, even though not backed by the government of Scotland.

Usually, a fiat-money currency loses value once the government which acts as the creditor refuses to further guarantee its value through taxation, but a strong private banking system and consensus of the population may prevent this. For example, the so-called Swiss dinar continued to retain value as a type of credit money in Kurdish Iraq, as a result of backing by private banks and acceptance from individuals there, even after its fiat-money status was officially completely withdrawn by the backing government (the central government of Iraq).

######### risk premium

A risk premium (plural risk premia) is the minimum difference between the expected value of an uncertain bet that a person is willing to take and the certain value that he is indifferent to.

Let’s assume that in a game, a contestant is given two choices of each either an offer behind door 1, $1000 or door 2, $0 (or the two choices can be $4000 and $2000 for door 1 and 2, respectively). In addition, a third choice is offered that the contestant can take without actually playing the game, take $500 and walk away (or for the second set, $3000 and walk off).

Statistically, if the game is played long enough, on average, a contestant gets $500 (or in case of the second set of choices, $3000) — that’s drived from 1000 + 0 /2 = 500 or 4000 + 2000 / 2 = 3000 — remember these numbers, 500 and 3000 are “expected value,” in this case deduced from an average of both good and bad door. So the risk that the contestant is willing to take on such cirumstances is $500 and $3000 respectively. It’s wise for him/her to take the money because the probability of him getting $500 or $3000 in either case is pretty much equal.

In this case, the contestant is “indifferent” (he gets $500 or $3000 if he goes with the third choice) to the “value of an uncertain bet” (choice between the good door or bad door) he is “willing to take” because the outcome of choosing between the good and bad door are much likely to be the same amount he would get by just taking the cash offer without actually playing the game. In this case, we say the premium risk is (less than or equal to) zero because [($1000 – $0) / 2] – $500 = 0 or [($4000 – $2000) / 2) – $3000 = 0.

However, if the offer behind the good door is to increase to $2000 (up from $1000) for the first set of offers ($1000 and $0), or $6000 (up from $4000) for the second set of offers ($4000 and $2000), the risk premium goes up — For the first set, it becomes [($2000 + $0) / 2] – $500 = 1000 and for the second set [($6000 + $2000) / 2] – $3000 = 1000. Now if the third offer remains the same, $500 for the first set, and $3000 for the second set, obviously, the contestant is more likely to “take a risk” and choose one of the doors rather than quit the game and take the third choice, the offered cash value. Because at this point, the chances of making more money (risk premium of $1000 as oppose to $500 and risk premium of $4000 as oppose to $3000) has increased.

In finance, the risk premium can be the expected rate of return above the risk-free interest rate. That should be clear by now why; examining the example described above, you can see that the higher the risk premium, the more willing the contestant (or the risk taker) is to go with two options presented to him because the return (of that risk) is higher than the average (of risk-free) outcome. In reality, such measurement of risk is based with “virtually” risk-free return on Treasuary bons (T-bills) and the very risky return on other investments (of course with higher rate of return). The difference between these two returns can be interpreted as a measure of the excess return on the average risky asset. This excess return is known as the risk premium.

http://www.casact.org/pubs/forum/04wforum/04wf001.pdf
Equity Risk Premium: Expectations Great and Small

######### Annuity

In its most general sense, an annuity is an agreement for one person or organization to pay another a stream or series of payments. Usually the term “annuity” relates to a contract between you and a life insurance company, but a charity or a trust can take the place of the insurance company.

There are many categories of annuities. They can be classified by:

* Nature of the underlying investment – fixed or variable
* Primary purpose – accumulation or pay-out (deferred or immediate)
* Nature of pay-out commitment – fixed period, fixed amount, or lifetime
* Tax status – qualified or nonqualified
* Premium payment arrangement – single premium or flexible premium

######### Capital Gains Tax
In finance, a capital gain is profit that results from the sale or exchange of a capital asset with proceeds of sale exceeding purchase price. A capital loss arises if the sale proceeds of a capital asset are less than the purchase price. Capital gains arise in relation to real assets, such as property, financial assets, such as shares or bonds, and intangible assets such as Goodwill.

A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. These fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes companies pay to the state.

In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income. The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. Short-term capital gains are taxed at the investor’s ordinary income tax rate, and are defined as investments held for a year or less before being sold. Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains.

The “holding period” is the amount of time you held some security before you sold it. For reasons explained later, the IRS cares about how long you have held capital assets that you have sold. The nominal start of the holding period clock is the day after the trade date, not the settlement date. (I say nominal because there are various IRS rules that will change the holding period in certain circumstances.) For example, if your trade date is March 18, then you start counting the holding period on March 19. Then, you compute the length of the holding period using the day of the month (not the number of days). Continuing the example, on April 18, your holding period is one month, on April 19 your holding period is more than one month, and so on.

In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets. After 2010, dividends will be taxed at the taxpayer’s ordinary income tax rate, regardless of his or her tax bracket. After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

The United States is unlike other countries in that its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise as tax havens, U.S. law requires reporting of income from those accounts and failure to do so constitutes tax evasion.

Capital gains tax can be deferred or reduced if a seller utilizes the proper sales method and/or deferral technique. The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the Structured sale (Ensured Installment Sale), charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange.

* Deferred Sales Trust – Allows the seller of property to defer capital gains tax due at the time of sale over a period of time.
* 1031 exchange – Defer tax by exchanging for “like kind” property. Pay capital gains when it is realized.
* Structured sale annuity (aka Ensured Installment Sale) – Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income.

* Charitable trust – Defer and reduce capital gains by giving equity to a charity.
* Installment Sale – Defer capital gains by taking payments from a buyer over a period of years. No protection from buyer default.
* Self Directed Installment Sale (SDIS) – Allows for the deferral of capital gains taxes while removing the risks from buyer default under a traditional installment sale.

http://www.irs.gov/taxtopics/tc409.html
According to the IRS literature, “The highest tax rate on a net capital gain is generally 15% (or 5%, if it would otherwise be taxed at 15% or less). There are 3 exceptions:”

* “The taxable part of a gain from qualified small business stock is taxed at a maximum 28% rate.”
* “Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.”
* “The part of any net capital gain from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum 25% rate.”

http://market-ticker.denninger.net/2007/12/year-in-review-and-look-ahead.html
Saturday, December 29, 2007
The Year In Review And a Look Ahead for 2008

They “defend” lending rate target by either injecting liquidity (cash) into the banking system, or withdrawing it from the banking system. To inject “cash” they temporarily take in various debt securities (Treasuries and others) from banks, and issue them cash – much like you’d pawn your Rolex, diamond ring or handgun.

Let’s say you have a good income and a car that only has a minimum liability coverage insurance. A week later, your car is stolen; in order to scramble enough money to purchase a new one, since you are desperate to get to work so you don’t lose your job, you’d pawn some of your assets (i.e. Jewlery, famous painting, etc.). In fact what you are doing is “liquidating” and get an equivalent of amount of cash for what you just sold.

However, you have to get these assets back later on by repurchasing them from the pawn shop “with interest.” This is an equivalent of a personal TOMO (Temporary Open Market Operation). TOMO’s are conducted daily in the normal course of operation of the banking system and are relatively short term (up to a month) and when they expire, you are “required” to give the pawn shop (or the Fed) back the cash with “interest.”

You have to realize that your liquidation automatically puts you under feduciary of repurchasing the assets. That is, at some near future you have to go back and return the “cash” with some interest and get your belongings back. In case of Fed, these debts are work out in various securities such as Treasuries and Bonds “from banks” which later on have to be returned.

So what’s exactly what you do; you work for a month, become spend thrift and manage your expenditure tightly so you can acquire a new car to get to work. Now you have a means of transportation and you keep your job — you are saved. At the same time, after a month you need to repurchase your stuff back from the pawn shop because the TOMO matured, but this time you have an interest payment on your back as well.

When The Fed “injects liquidity” they have not created money; in fact, they have made the bank’s balance sheets more encumbered because the interest has to be paid too. “liquidity” isn’t hard cash. It’s a loan, it carries interest, and it has to be paid back – on a short term basis. The Fed is powerless to impact what is going on in this fashion in the end, as loans always have to be paid back, they would lose the only real weapon they have: The power of the mouth.

Inflation is always a monetary phenomenon, as is deflation. The effects of inflation or deflation are usually found in prices for goods and services, but they may show up in various items in different ways. The monetary supply, to maintain balance, must grow at a rate which approximates the growth in productive output, otherwise the money system will eventually starve itself of liquidity. An example will make this clear.

To keep the money from being destroyed when a value of paid merchant for instance drops and things from getting out of control, the banking regulators are supposed to enforce reserve requirements, and the markets are supposed to enforce margin requirements. This is done because although there are deflationary pressures in any market, if they ever get out of control, asset prices will fall and quite rapidly this becomes a self-fulfilling spiral.

If you wish to buy a car (or house), but see that the prices for cars are going down rather than up or remaining stable, assuming you do not immediately need the car (your old one still runs) and you have the cash you are well ahead of the game to wait! After all, if cars will be cheaper in six months, why buy now? This destroys demand, which in turn means that the guy who makes cars can’t pay his suppliers because he hasn’t sold his stock of vehicles. That results in more defaults on debt which further deflates the money supply. This, in turn, causes prices to fall further, and on it goes!

Let’s say that you have 1,000 mortgages that you’ve written to all sorts of people. Their actual risk if defaulting on their mortgages is reasonably low, especially when you look at all 1,000 of them as a pool, instead of each individual mortgage. Let’s say for the sake of argument that the actual “risk premium” – that is, the reasonable cost of the money compared to a “risk free” investment such as US Treasury bonds, is 200 basis points – that is, a 2% higher interest rate “fairly” compensates for the risk you won’t pay.

So if the long-term Treasuary bond is yielding at 5% (risk-free, or default-rate interest rate that the morgage company is “indifference” to because that’s the rate in which company can make eventually without much of disturbance to the outcome), the risk premium would be 7% (“2% higher interest rate” with respect to “risk free”: 5% + 2%).

Everyone who touches that pool wants a piece of the action. If I’m an investment bank I can’t possibly do this work for free, so I want 25 basis points of that 200 for my profit in “putting all these together and managing them.” Then there is the company that services the loans. They take the payments from each homeowner and make sure that they’re correctly accounted for. This requires staff, phones, computers, etc. They too want to be paid – let’s call that another 25 basis points.

So now we have 150 basis points left of “margin” over the 10 year Treasury rate. If we sold “slices” of this debt off, at best we could “allow” a coupon that reflected that 150 basis points (1.5%) — unfortunately greed got into the equation.

The banks figured out that they could structure these 1,000 mortgages into different “tranches” with different characteristics, risk-wise. If you take all the money coming in (from the interests) and look at this as one big pool, that gives everyone only one thing to buy. But if we take that pool and split it up into a bunch of different levels of risk, we can now offer slices that have different levels of return (i.e. high risk at 11%, midum at 7%, and low risk at 5%. Of course, the percentage of each slice and category of risks should be such that the total premium risk would end up being 2%, i.e. 200 of loans are paid at 11%, the rest can be calculated by solving this equation: 200 x 11% + (800 – y) x 7% + y x 5% / 1000 = 7% which yields y = 400. That means we have 200 loans at 11%, 400 at 7%, and 400 at 5%).

http://www.ncpa.org/pub/st/st307/st307f.html
The Bush Capital Gains Tax Cut after Four Years: More Growth, More Investment, More Revenues
Did the 2003 Tax Cut Increase the Budget Deficit?

Over the past 30 years a consistent pattern has emerged: every time the capital gains tax has been cut, capital gains tax revenues have risen. Every time the capital gains tax has been raised, capital gains tax revenues have fallen

http://www.cbo.gov/doc.cfm?index=3856&type=0
REVENUE AND TAX POLICY BRIEF
CBO A series of issue summaries from
the Congressional Budget Office
October 9, 2002

Capital Gains Taxes and Federal Revenues

http://www.heritage.org/Research/Taxes/wm47.cfm
October 11, 2001
Capital Gains Tax Cuts: Myths and Facts
by The Heritage Foundation

http://www.taxfoundation.org/news/show/716.html
April 1, 1995
Issues in the Indexation of Capital Gains
by Arthur P. Hall, Ph.D.

A capital gain occurs, in general, when a taxpayer sells an asset for a price that exceeds the purchase price. Indexing capital gains means adjusting the dollar value of an asset’s purchase price (usually upward) for inflation. This procedure reduces the amount of a capital gain subject to taxation.

Historically, U.S. taxpayers have had to pay taxes on capital gains that result solely from inflation. This practice has led, in many instances, to effective tax rates on inflation-adjusted capital gains that substantially exceed 100 percent.

For an average stock purchased in June of different years and sold in June of 1994, the current capital gains tax results from real versus inflation-induced gains. The average stock, as bible / describes, is represented by the value of the Standard and Poor’s index of 500 stocks in June of each year from 1954 to 1994. Therefore, the fraction of the capital gains tax that is on real gains fluctuates, depending upon both the real and inflation-induced price of the stock at the time of purchase date and sale date.

http://online.wsj.com/article_print/SB115983941679680708.html
Counting Capital Gains
October 3, 2006

http://www.philkerpen.com/?q=node/121
Inflation Index Capital Gains
Phil Kerpen – Thursday, March 22, 2007 – 10:37am

The better question is why in our tax system do we reward capital more than work? Are we trying to say that we would prefer you to be rich and lazy, instead of middle of the road and hard working? As your post is about indexing capital gains I won’t get into how ridiculous the tax system is, instead I will easily refute this idea.

All gains are inflated. Not just capital gains. Interest income by the very financial definition is nothing more than a inflation. So if you are a risk adverse saver and keep your money in treasuries rather than stocks you will get an average return of 3-5%, presuming you are in a 30% tax bracket your return is diminished to 2-3.5%. Long term inflation is 2-3.5% so therefore you have not made any money, just beat inflation.

As a libertarian you should be grossly against indexing capital gains. Think about it, the free market already prices inflation into stock price. By indexing inflation you have now corrupted the free market inputs into the price of the stock and artificially changed returns.

Additionally should our incomes be adjusted for inflation? Well I got a 2% raise but inflation was 3% so…….. exactly it’s ludicrous. Some of these financial reporters are without question some of the biggest morons out there. Richard Brahn needs to give his head a shake.

http://www.ctj.org/pdf/capgainsdivtaxcuts.pdf
Citizens for Tax Justice
May 13, 2008 Contact: Bob McIntyre (202) 299-1066 x22
Capital Gains and Dividends Tax Cuts Offer Almost No Benefit to
Middle-Income Americans and Add to the Nation’s Fiscal Problems

in every single state, the benefits from the capital gains and dividends tax breaks are concentrated among the richest one percent. The average
tax cut for these fortunate households runs in the tens of thousands of dollars, while the average tax cut for the poorest 60 percent is perhaps enough to buy a single meal, and in many states is even less. They argue that a large number of Americans have investment income, but they fail to mention that most of that is not taxable investment income.

AGI group Total # of % of all # with CGD tax Total CGD tax Average tax % of total tax
returns returns cut cut $billions cut breaks
Under $30K 66,636,249 49.6% 3,079,593 $ –0.4 $ –5 0.4%
$30-50K 24,558,911 18.3% 3,372,812 –0.8 –34 0.9%
$50-75K 18,351,037 13.7% 4,126,681 –1.7 –93 1.9%
$75-100K 10,449,989 7.8% 3,280,362 –1.9 –184 2.1%
$100-200K 10,810,367 8.0% 5,148,904 –6.4 –595 7.0%
$200-500K 2,737,802 2.0% 1,976,715 –13.1 –4,789 14.3%
$500K-1 mill 524,506 0.4% 433,693 –10.8 –20,662 11.8%
$1-2 mill 184,540 0.1% 156,743 –9.8 –53,132 10.7%
$2-5 mill 84,070 0.1% 72,054 –12.3 –146,125 13.4%
$5-10 mill 21,431 0.02% 18,189 –8.5 –396,105 9.3%
$10 mill+ 13,776 0.01% 11,433 –25.8 –1,876,280 28.2%
TOTAL 134,372,678 100.0% 21,677,179 $ –91.7 $ –682 100.0%

Addendum:
$500K + 828,323 0.6% 692,112 –67.3 –81,204 73.4%

First 81.6% lower tax bracket [(0.496 x 5) + (0.183 x 34) + (0.137 x 93)] / (0.816) = 18.65
15.226

89.4%……….[15.226 + (0.078 x 184)] / (0.894) = 33.08
29.578

97.4%……….[29.578 + (0.08 x 595)] / (0.974) = 79.23
77.178

Top 2.6%
[(0.02 x 4789) + (0.004 x 20662) + (0.001 x 53132) + (0.001 x 146125) + (0.0002 x 396105) + (0.0001 x 1876280)] / (0.0263) = 24507
644.534

# The special low tax rates on capital gains and dividends reduced income tax payments
by $91.7 billion in 2005.
# The 67 million tax filers who reported adjusted gross incomes of less than $30,000 —
half of all filers — got virtually none of the benefits of the capital gains and dividends
tax breaks.
# In contrast, the 828,000 filers with reported incomes above $500,000 — 0.6 percent of
all filers — got 73.4 percent of the total tax reductions, saving an average of $81,204
each.
# Most amazing, the 13,776 tax filers with adjusted gross incomes in excess of $10
million — a mere 0.01 percent of all filers — got 28.2 percent of the total tax savings.
Their average tax break was $1,876,280 each.

The tax cuts were deficit-financed, meaning they resulted in an increase in the national debt that must eventually be paid off — with interest. To accomplish this, Congress will have to increase taxes, cut back public services that Americans depend on, or both. About three trillion dollars have been added to the national debt during the Bush years, and about half of that is due to the Bush tax cuts.

Presidential candidate John McCain recently said on ABC’s “This Week” that it would be a terrible idea to allow the Bush tax cut for capital gains to expire because “100 million people have investments.” The reality is that most stock owned by middle-income people is in 401(k) plans, Individual Retirement Accounts (IRAs) or other similar retirement savings vehicles. Taxes on these investments are deferred until retirement, at which point they are taxed as “ordinary income,” meaning they don’t benefit from the tax cuts for capital gains and dividends.

This is supported by the IRS data in the table above. The figures show that in 2005, fewer than 22 million taxpayers received any benefit at all from the special low rates for capital gains and dividends — far fewer than the 100 million implied by Senator McCain.

A small group of ideologues associated with “supply-side economics” believes that tax cuts —
especially capital gains tax cuts — can actually increase revenues. They ignore the fact that the
revenue collected from the capital gains tax steadily climbed and then reached its peak during
the Clinton years, when the tax rate was higher.

A capital gain is the profit one makes when selling property that has increased in value since it
was purchased. The supply-siders’ idea is that lowering the tax on that profit will lure more
people to make investments and sell them later at a profit (to “realize” gains). These increased
“realizations,” supply-siders argue, will be so large that more capital gains taxes will be paid
even at the lower tax rate.

The chart below is based on data from the non-partisan Congressional Budget Office.1 It shows
that the ups and downs in revenue collected by the capital gains tax seem to have more to do
with what’s happening in the stock market and the broader economy than with tax policy. In
the early and mid-1990s, when the top capital gains tax rate was 28 percent, capital gains tax
revenues shot through the roof. They continued to climb for a while after the rate was lowered
to 20 percent in 1997, but at no faster rate than the previous trend. Then in 2001 and 2002,
capital gains taxes fell precipitously. This was not due to any change in tax policy, but was
instead clearly linked to the bursting of the “dot.com” bubble and its ramifications for the
stock market.

Capital gains tax revenue did increase after 2003, when the rate was cut again to 15 percent,
but we would expect the revenue to rise from the low point of the recession, regardless of
what changes were made to the tax code. (In fact, it would have been shocking if capital gains
revenue did not swing back upwards after the recession of the early 2000s.)

The rate increase that he was referring to was part of the 1986 Tax Reform Act that was signed
by President Reagan, which set capital gains tax rates the same as the rates on other income.
Capital gains realizations surged in anticipation of the rate increase (which took effect in
1987). In other words, an increase in the tax rate actually increased realizations, albeit
temporarily, as people rushed to cash in their gains before the new, higher rate took effect.
After that, with fewer gains to realize, realizations predictably declined, and eventually
returned to their normal level — until the Clinton administration, when the stock market went
up so much that realizations boomed.

There is one sense in which the supply-siders are right. Yes, capital gains realizations might
increase somewhat if taxes on capital gains are reduced. But one big reason for that is that
wealthy people can convert ordinary income (which for them is taxed at a rate of 35 percent)
into capital gains (which are only taxed at 15 percent) through various tax sheltering schemes.

http://www.theatlanticwire.com/opinions/view/opinion/Financial-Reform-Is-Floundering-2735#comment-38035170
Volcker Rule or any regulation will do nothing as long as short term speculation is so profitable.

The banks and investment houses will always reap huge profits either at the expense of clients and/or shareholders as long as it is so profitable to do versus the risk. How do you change that equation, without one single extra regulaiton or regulator? Change the tax code on short term capital gains, derivatives income and gains, and futures trading PLUS establish uniform margin requirements on all trading that requires 80% collateral behind any trade.

Those 2 elements are what changed in the US markets since the 1980s and those 2 specific facts: low taxes on trading (certain option income is actually now taxes at only 10%!) and laxed margin lending requirements (FX Carry Trade by hedge funds lever 1 to 100 now) led to the collapse of the financial system and still pose an ongoing risk to any financial stability.

Leveraged speculation today is incredibly profitable – extremely low short term capital gains taxes and preferred tax treatment for option trading and margin debt expense. When middle income America is facing higher and higher taxes with fewer and fewer services, it is ironic they pay higher taxes than a trader of a hedge fund – and by a wide margin.

After WWII the typical short term cap gains tax was tied to the top marginal income tax rate, which was up to 70%. Under Reagan the top marginal tax rate dropped by nearly 50%. The cap gains tax difference between long term gains (investment held over one year) vs. short term gains (investment held under one year) decreased immensely (28% vs. 20%) making short term trading very, very profitable. There was no incentive to buy and “hold” since the tax rate difference was minimal.

On top of that Reagan’s tax changes up held the deductibility of margin interest expense (interest paid on borrowed money used to buy investments) yet deductions for credit card debt, auto debt, school debt, etc. were eliminated!! Again middle America saw their taxes go up while speculators benefited from lower rates.

By 1986 Wall Street had a tax code that mimicked the 1920s: extremely low cap gains taxes, available credit, and a new Fed. Reserve chairman who was not going to interfere with the big roulette table.
Right now, income from the riskiest transaction in stock trading – selling a put or call on a major market index (i.e. S&P 500) – is only taxed at 10%. This one example emphasizes how the US tax code supports speculation by giving the riskiest behavior the lowest tax rate.

The remedy?
1. Capital gains tax rate brackets based on length of holding period. When trades are held under one day, gains taxed at 90%. Graduate the tax down the longer the holding period, i.e. investment held over 10 years sees a tax rate of 5% for the first $100,000.

2. All derivative transactions (options, swaps, futures etc.) taxed at 80%, on both income and gains.

3. Eliminate the deductibility of margin interest expense.

4. Raise the Federal Reserve Margin Requirement (the amount of money the investor has to put up himself) to 80% for all investment classes (bonds, stocks, etc.). No exception for hedge funds, off-shore, FX, futures, etc.

5. Limit preferential capital gains and dividend tax rates (now at 15%) to only the first $100,000. Then establish new Federal gains/dividend tax brackets ($1.0 million, $10 MM, $100 MM, etc) where the highest tax rate reaches 75% as in the 1970s. This change would not only decrease speculation in the US financial markets, but it would start to shift the tax burden away from the middle class.
################# coupon

n finance, coupons are “attached” to bonds, either physically, as with old bonds (with a stapler), or electronically. Each coupon represents a predetermined payment promised to the bond-holder in return for his or her loan of money to the bond-issuer. The bond-holder is typically not the original lender, but receives this payment for effectively lending the money.

The coupon rate, the amount promised per dollar of the face value of the bond, helps determine the interest rate or yield on the bond.

n finance, with respect to bonds, a coupon is the interest rate that the issuer pays to the bond holders.

########### speculators
http://www.dailyspeculations.com/vic/spec_as_hero.html

Victor Niederhoffer
2/10/1989
The Speculator as Hero

Let’s consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.

Another service provided by speculators to a market is that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs.

Speculators may trade with other speculators as well as with hedgers. In most financial derivatives markets, the value of speculative trading is far higher than the value of true hedge trading. As well as outright speculation, derivatives traders may also look for arbitrage opportunities between different derivatives on identical or closely related underlying securities.

############## Basis point
A basis point (often denoted as bp, bps -basis points- or rarely, permyriad) is a unit that is equal to 1/100th of a percentage point. It is frequently used to express percentage point changes less than 1. It avoids the ambiguity between relative and absolute discussions about rates. For example, a “1% increase” in a 10% interest rate could mean an increase from 10% to 10.1%, or from 10% to 11%.
A rate change from 5% to 6%, reflects a change of 1 percentage point or 100 basis points.

A rate change from 6.7% to 6.9% reflects a change of 0.2 of a percentage point or 20 basis points.

A rate change from 2.75% to 3.20% reflects a change of 0.45 of a percentage point or 45 basis points.

############## Securitization
Securitization is the method which participants of structured finance utilize to create the pools of assets that are used in the creation of the end product financial instruments.

Securitization is a structured finance process, which involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors. The name “securitization” is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities.

All assets can be securitized so long as they are associated with cash flow. Hence, the securities, which are the outcome of securitization processes, are termed asset-backed securities (ABS). From this perspective, securitization could also be defined as a financial processes leading to an emission of ABS.

“Structured finance” is a broad term used to describe a sector of finance that was created to help transfer risk using complex legal and corporate entities.

There are several main types of structured finance instruments.

* Asset-backed securities (ABS) are bonds or notes based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets.
* Mortgage-backed securities (MBS) are asset-backed securities whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
* Collateralized debt obligations (CDOs) consolidate a group of fixed income assets such as high-yield debt or asset-backed securities into a pool, which is then divided into various tranches.
* Collateralized mortgage obligations (CMOs) are CDOs backed primarily by mortgages.
* Collateralized bond obligations (CBOs) are CDOs backed primarily by corporate bonds.
* Collateralized loan obligations (CLOs) are CDOs backed primarily by leveraged bank loans.
* Credit derivatives are contracts to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset.

Securitization often utilizes a special purpose vehicle (SPV) (alternatively known as a special purpose entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and thereby obtain lower interest rates from potential lenders.

a mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans.

Residential mortgagors in the United States have the option to pay more than the required monthly payment (curtailment) or to pay off the loan in its entirety (prepayment). Because curtailment and prepayment affect the remaining loan principal, the monthly cash flow of an MBS is not known in advance, and therefore presents an additional risk to MBS investors.

######### special purpose entity
special purpose entity (SPE) (sometimes, especially in Europe, “special purpose vehicle”) is a body corporate (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives, primarily to isolate financial risk, usually bankruptcy but sometimes a specific taxation or regulatory risk.

A special purpose entity may be owned by one or more other entities and certain jurisdictions may require ownership by certain parties in specific percentages. Often it is important that the SPE not be owned by the entity on whose behalf the SPE is being set up (the sponsor). For example, in the context of a loan securitisation, if the SPE securitisation vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank’s group for regulatory, accounting, and bankruptcy purposes, which would defeat the point of the securitisation. Therefore many SPEs are set up as ‘orphan’ companies with their shares settled on charitable trust and with professional directors provided by an administration company to ensure there is no connection with the sponsor.

######### Hedging
Insurance and Hedging

One use of derivatives is to be used as a tool to transfer risk by taking the opposite position in the underlying asset. For example, a wheat farmer and a wheat miller could enter into a futures contract to exchange cash for wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the wheat miller, the availability of wheat.

########## Derivative
Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, and swaps.

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a huge range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives).

########## ETF
ETFs are securities certificates that state legal right of ownership over part of a basket of individual stock certificates. Several different kinds of financial firms are needed for ETFs to come into being, trade at prices that closely match their underlying assets, and unwind when investors no longer want them. Laying all the groundwork is the fund manager. This is the main backer behind any ETF, and they must submit a detailed plan for how the ETF will operate to be given permission by the SEC to proceed.

In theory all that a fund manager needs to do is establish clear procedures and describe precisely the composition of the ETF (which changes infrequently) to the other firms involved in ETF creation and redemption. In practice, however, only the very biggest institutional money management firms with experience in indexing tend to play this role, such as The Vanguard Group and Barclays Global Investors. They direct pension funds with enormous baskets of stocks in markets all over the world to loan stocks necessary for the creation process. They also create demand by lining up customers, either institutional or retail, to buy a newly introduced ETF.

The creation of an ETF officially begins with an authorized participant, also referred to as a market maker or specialist. Highly scrutinized for their integrity and operational competence, these middlemen assemble the appropriate basket of stocks and send them to a specially designated custodial bank for safekeeping. These baskets are normally quite large, sufficient to purchase 10,000 to 50,000 shares of the ETF in question. The custodial bank doublechecks that the basket represents the requested ETF and forwards the ETF shares on to the authorized participant. This is a so-called in-kind trade of essentially equivalent items that does not trigger capital gains for investors.

Once the authorized participant obtains the ETF from the custodial bank, it is free to sell it into the open market. From then on ETF shares are sold and resold freely among investors on the open market.

Redemption is simply the reverse. An authorized participant buys a large block of ETFs on the open market and sends it to the custodial bank and in return receives back an equivalent basket of individual stocks which are then sold on the open market or typically returned to their loanees.

The fund manager takes a small portion of the fund’s annual assets as their fee, clearly stated in the prospectus available to all investors. The investors who loan stocks to make up a basket make a small interest fee for the favor. The custodial bank makes a small portion of assets likewise, usually paid for by the fund manager out of management fees. The authorized participant is primarily driven by profits from the difference in price between the basket of stocks and the ETF and on part of the bid-ask spread of the ETF itself. Whenever there is an opportunity to earn a little by buying one and selling the other, the authorized participant will jump in.

The process might seem cumbersome but it does allow for transparency and liquidity at modest cost. Everyone can see what goes into an ETF, investor fees are clearly laid out, investors can be confident that they can exit at any time, and even the authorized participant’s fees are guaranteed to be modest. If one allows ETF prices to deviate from the underlying net asset value of the component stocks, another can step in and take profit on the difference, so their competition tends to keep ETF prices very close to it underlying Net Asset Value (value of component stocks).

############ Short Selling

When you short sell, your losses can be infinite. A short sale loses when the stock price rises, and a stock is (theoretically, at least) not limited on how high it can go. On the other hand, a stock can’t go below 0, so your upside is limited. Bottom line: you can lose more than you initially invest, but the best you can earn is a 100% gain if a company goes out of business.

Shorting stocks involves using borrowed money, otherwise known as margin trading. Just as when you go long on margin, it’s easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you’ll be subject to a margin call – you’ll be forced to put in more cash or liquidate your position.

hedge funds were taking advantage of loopholes in the existing regulation to short stock without actually locating the stock to be borrowed first and/or not delivering the shorted stock within the 3 day settlement period.

############ Naked Short Selling
Naked short selling, or naked shorting, is the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed. Naked shorting is not necessarily a violation of the federal securities laws, and can contribute to market liquidity, but is illegal when it drives down stock prices.

This is what has been in the papers lately because you can theoretically manipulate the price of a stock by shorting a lot of shares you do not have/temporarily increasing the float, and driving the price down.

To do this, the trader simply enters a naked short with no intention of ever delivering the shares.[3] A large enough short sale could cause the price to fall, as is the case with any stock being sold. As long as the trade is large enough to move the share price, the short sale is likely to be profitable. On the other hand, the short seller is vulnerable to a “short squeeze.”[citation needed] That is the condition where the stock price unexectedly (from the short sellers’ point of view) rises and short sellers try, all at once, to close out their money-losing short positions by buying back in the open market the shares they had shorted, thereby driving prices ever higher in a self-reinforcing feedback loop.

It also can batter down the price by increasing the number of shares on the market to be sold. When there are more sell orders then buy orders the price is going to go down. So essentially with naked shorting, you are shorting shres of stock you do not have, so in theory you could take down the price of a stock (if you were a fund manager and had that kind of capital) In the short term, a stocks prices are determined by supply and demand, not fundimentals.

http://www.deepcapture.com/category/4-the-crime-naked-shorts-other-insincere-ious/
January 20th, 2008 by Patrick Byrne

I will explain to you a financial crime that is occurring on Wall Street. It will not be difficult to understand. In fact, the crime’s simplicity will probably amaze you.

From three years of experience explaining this crime to many people, however, I know that there are two hurdles people face in understanding it. The first seems big but is, in fact, easy to surmount. The second is small, but is the one that trips people up. I have an easy way to get you over both hurdles, but to do so, I will ask you, esteemed reader, to make two promises to me. If you keep these promises you will overcome both hurdles.

Hurdle #1: Because it is a financial crime, people who are not too conversant with financial issues may shrink from technical-sounding jargon. The way over that hurdle is this:

1) I will start by giving a super-simplified explanation that any high school kid could follow. It will be accurate, but only metaphorically accurate.

2) Then I will give an explanation that is literally accurate, but is still somewhat simplified, and uses just a little jargon.

3) Next I will give an explanation that is literally accurate, and includes technical jargon.

4) Last, I will provide links to numerous articles, news reports, interviews, and explanations that have appeared in academic papers and the financial media, for those who want to bury themselves in the technical details.

In sum, I will start with simplified explanation, then move through the explanation again and again, getting more accurate with each pass, but also, more technical.

Promise #1: Please make the first promise to yourself that you will not plough through this material until it defeats you. Instead, start by reading the first, metaphorical explanation and, if you understand to your own satisfaction, stop. If you are not sure you understand or remain unconvinced, read through the second, literal-but-simple explanation. If you get it then, stop. If you still are not sure you get it or remain unconvinced, read on through the fuller literal explanation, etc. etc. That is, promise that you will not wade through this material until it leaves you defeated and unconvinced. Instead, just read as far as you need to before you feel you get it, then feel free to bail out.

Hurdle #2: I have discovered that, given the right explanation, anyone can understand this crime. The second hurdle, however, is that when people start to understand it, their minds react as follows: “No way. No way. There’s no way that could be happening in our country. No way.”

Promise #2: Please make a second promise to yourself. That is, when you reach the point where your mind is reacting this way, you’ll go back and read Promise #1.

Posted in 4) The Crime: “Naked Shorts” & Other Insincere IOUs | 1 Comment »
The Simple, Metaphorical Explanation
January 20th, 2008 by Patrick Byrne

When you or I travel to another country, the first thing we do when we land is change some US dollars into the local currency. Perhaps you change enough to get a cab to the hotel, go out and buy a meal, etc. For the duration of your stay you keep changing your dollars into the local currency to get around. Then when you are ready to leave, you take whatever you have left and you convert it back into dollars, or spend it, or give it away, and board the plane back to the United States.

Yet imagine that there are some travelers to whom special privilege is granted. When they go to a foreign country, they are allowed to take a small machine that prints out the local currency. If they are in Paris, it prints out Euros. If they are in London, it spits out British Pounds. When in Mexico City, it prints pesos. And so on and so forth. On every trip, however, this special “currency machine” keeps track of how many Euros, pounds, or pesos it has spit out. When its owner goes to the airport to leave the country, a government official reads the machine’s printout and makes the traveler settle his account. For example, if the traveler visits Paris, then as he stands in the airport ready to depart, the official reads his machine and says, “Monsieur, you printed out €1,000 (one thousand euros) while you were here. At today’s exchange rate that is equal to $1,500 US.” The traveler hands over US $1,500 in cash, then boards his plane for the US.

Why are such boxes allowed? Because the people to whom this privilege is granted are wealthy hedge fund managers and Wall Street brokers. It is more convenient for them to carry these currency machines, and print what is in effect “temporary” local currency, than to do what the rest of us do, changing currency every morning at our hotel’s front desk. Besides, they’re rich. Everyone knows they are good for it: in fact, when one of them arrives in a new country, before he gets to use his curency machine he has to prove that he is wealthy, so that no matter how much local currency he prints and spends, he’ll have the dollars to buy them all back at the end of his trip, at current exchange rates. That way, when he is ready to leave the country and at the airport his machine is read to find out how much of the temporary local currency he printed on his visit, and that number is converted into US dollars, he can simply reach into his valise and pull out the requisite cash, even if it is thousands, or millions, of US dollars.

Imagine now that between the two Caribbean nations of St. Bart’s and St. Maarten’s there is a small island nation, St. Smallcap. It may be poor in comparison with the United States, but it has a working, even vibrant, economy. Its currency trades at parity with the US dollar (that is, one of the first converts to one of the other, and vice-versa). No one knows what the future holds for St. Smallcap. Perhaps it will stay as it is for generations. Perhaps it will develop into a prosperous island nation like Bermuda. Maybe it will become a destitute, impoverished nation like many other small island nations. Perhaps it will become an economic powerhouse, like Hong Kong or Singapore. There is no way to tell.

One day, as if on cue, a dozen hedge fund managers and Wall Street bankers show up in St. Smallcap. No one thinks much of it as these fellows start driving around Smallcap with their special machines. They print off the local currency with great abandon, using that currency to buy drinks and dinners on the town, pay for taxis, and gamble at the casino. In time, they begin buying the island’s houses, cars, yachts, and cargo ships. They even buy Smallcap National Airline’s sole 727 jet. They buy anything that is not nailed down, paying for it all along with the local currency, which they print off their special currency machines as they need it.

After a few weeks something funny begins to happen. There is so much extra currency floating around, it begins to affect the economy. As everyone realizes that there is a lot of extra currency sloshing around the island, prices for goods rise in anticipation that Smallcap’s currency will become less valuable. It may even happen that prices soar, as they did in Weimar Republic Germany after WWI, in a bout of hyper-inflation. Of course, as this happens, the rate at which Smallcap’s currency can be exchanged against other currencies, including the dollar, collapses.

There is an even more insidious effect, however, that one can understand by thinking about the nature of prices. There are many ways to think about prices. Often we see them simply as obstacles preventing us from getting what we want (”Jim wants a new Mercedes but on his teacher’s salary he cannot pay the price.”) Another way to think of prices, however (a way many economists think of them), is to see prices as little bits of information passing back-and-forth around the economy, permitting millions of strangers to coordinate their economic activities. Prices for corn are going up and prices for wheat are dropping? That is a signal to farmers that they should cut back on wheat production and plant corn instead. Rents soar in a city while prices for office space stagnate? That is a signal that someone should convert some office space to apartments and condominiums. A city is washed out because of a hurricane, and prices for flashlights are soaring? That is a signal to surivivors within the city to share the scarce resource of flashlights, and a signal to outsiders to start trucking in flashlights for resale (i.e., “profiteering,” which to economists means, “responding quickly to price signals without regard for ethical concerns such as loyalty”).

Like any other normal economy, in order to function St. Smallcap’s economy relies on prices to pass information around the economy. The hedge fund managers and their special currency machines, however, print out so much of their “temporary” currency that Smallcap’s economy becomes awash in it. Imagine listening to a radio playing across the room while someone plays white noise in speakers set up next to your ears: you would not be able to hear what was being said. Similarly, this flood of “temporary” currency washes out the signals that prices normally carry within St. Smallcap’s economy. No one knows whether to grow wheat or corn, and since seed prices are rising but no one knows what income can be generated from any crop, fewer farmers plant anything. Savings drop: it makes less and less sense to save, because what is the point of delaying consumption today in return for a future benefit that cannot be estimated? Since less money is being saved, banks have less capital to loan to businesses to expand, or even maintain, current production. As a result, manufacturing on the island also collapses.

One can imagine a situation where, if Smallcap’s economy were small enough, and the Wall Street bankers and hedge funds swept down on Smallcap with enough currency-printing machines, that they could flood Smallcap with so much of its own currency that the price signals of the local economy would be mostly lost. The white noise of massive amounts of this “temporary” currency would disrupt real economic activity, like farming and manufacturing, until the economy of Smallcap cracked. Hyper-inflation, starvation, and mass unemployment might set in. People would begin trading anything they have in return for a ticket to flee the island.

Throughout it all, the Wall Street bankers and hedge fund managers continue using their machines to print local currency with which they can buy, buy, buy.

After six months, when nothing of value is left on the island that they do not already own, the bankers and hedge fund managers take everything they bought and load it onto their new cargo ships and yachts. They gather at the airport to board their new jet.

A government official arrives and sets about to find out how much of the local currency they printed while visiting the island. The official reads the print-out from each of their machines, sums it up and exclaims, “100 million!”

One hedge fund managers speaks for the rest: “Yes, but that is not 100 million US dollars. It is 100 million in your local currency. And while we have been visiting your country your local currency seems to have collapsed. That is hardly surprising, given that your farms are vacant and your factories are boarded up. It seems that on the international markets your currency is worth 1/10,000th of what it was worth when we arrived six months ago. Thus, in US currency, we owe you precisely… $10,000.” He flashes his thick wallet and counts out the sum. Laughing, his hedge fund colleagues and banker friends board their jet and take off, banking to watch their new cargo ships sail out of the harbor loaded with the wealth of the country, for which, in the end, they paid $10,000.

Imagine also that surprisingly few reporters seem interested in these events, or notice the pattern of it happening to one small island nation after another. Those who do notice it take it for granted that small island nations are supposed to be the way they are: destitute and impoverished. Only rarely does a reporter challenge the bankers and fund managers on their actions, but the financiers respond in unison so perfect it appears rehearsed, “Are you kidding? Don’t you know what a dump that island is? The last time I saw St. Smallcap its farms were barren, its businesses were boarded up, and everyone was fleeing. I tell you, the place is just a disaster.”

If you can understand the story above, then you can understand the crime that is occurring in our financial markets (the metaphor is a sound one, if I say so myself). The point of subsequent posts in this category will be to convert the story you just read into Wall Street lingo, one step at a time. You will see how the preceding story precisely expresses behavior that is occurring on Wall Street, routinely, today.

In reality, of course, the “special machines” that bankers and hedge fund managers are using are not actual physical machines, and what they are destroying are not “small island nations,” and what they are printing is not “currency.” In reality, the “special machines” are loopholes in our legal system, what the bankers and hedge funds are destroying are small companies, and the “currency” they are printing off to do so are shares of stock in those small companies.

Posted in 4) The Crime: “Naked Shorts” & Other Insincere IOUs | 1 Comment »
The Simple, Literal Explanation
February 11th, 2008 by Patrick Byrne

The “St. Smallcap” example conveyed the dynamics of the manipulation, but it was only a metaphor. This blog will provide an explanation whose truth is more literal.

You and I enter a stock trade. You buy a share of stock from me. You hand over your money, and I hand over the share of stock. That is called, “settlement.”

It may surprise you to learn that there are loopholes in our nation’s regulations that permit some people, when it comes time to settle, to hand over nothing but an IOU. By using one of these loopholes, when the time comes for settlement I can take your money but say, “I’m not delivering you any stock. I’m just giving you an IOU for a share of stock that I will deliver later.”

There are reasons these loopholes came into existence. If someone made a mistake by signing the wrong line on a form, for example, or mistakenly sold more shares than he really had, one would not want the entire system to vapor-lock as the mistake was rectified. So the system has been designed so that the gears do not get hung up on minor mistakes. The general idea is that, if someone sells shares it turns out he cannot deliver, he can create these IOU’s and send them on as though they were real shares, giving himself time to clean up whatever error he is experiencing, and sending the real shares a couple days later.

There is no system in place to alert you to the fact that you sent me your money and received nothing but an IOU. The system treats these IOU’s just as though they were real shares. Your brokerage statement will say that you got shares, even though I never sent anything but an IOU. You can sell them, and that IOU will pass on through the system into someone else’s account.

The problem is, suppose I (having mastered these loopholes) start using the system’s “forgiveness” strategically? Suppose I find a company that is likely to need capital to expand, or simply survive, in the near future? They plan on raising that capital by issuing shares of stock to the public (there is no crime in that: for example, lots of young pharmaceutical companies sip at the capital markets for years as they get going). Imagine that I target one of them, and deliberately go out selling that company’s shares into the marketplace, yet instead of delivering stock, I deliver nothing but IOU’s. I flood the market with them, always standing ready to sell more than anyone wants to buy. My IOU’s are anything but temporary: they drift around in the market for weeks, months, and eventually years. If anyone gets mad and tells me that I have to deliver real shares against one of the IOU’s I sold, I say, “Sure, I’ll deliver shares against that IOU,” but what I deliver is … just another IOU. Eventually I flood the market with so many IOU’s that people end up reselling them, and they go and on until there are more share-IOU’s bouncing around than there are actual shares.

What will the effect be on the price of those shares? If I have chosen a company like, for example, IBM, the effect will be negligible (just as in the example of the preceding blog, if the hedge funds brought their money machines to Paris and printed off 100 million “temporary” Euros to spend around France and Germany, it would not cause any real harm before they bought them all back as they departed).

But remember how the hedge fund managers destroyed the economy of St. Smallcap, so that the “temporary” currency they had issued could be paid off in the end for next-to-nothing? Similarly, if instead of choosing IBM I choose a tiny company, and I generate more IOU’s than there are shares of stock in the company, then the market in those shares will crack just as surely as $100 million of fake currency would crack the tiny island economy of St. Smallcap. Once cracked, the stock becomes next-to-worthless. And if I manage to issue enough IOU’s in my target company’s stock that it cracks and becomes near-worthless, they become barely an obligation at all. Who cares about millions of IOU’s, if those IOU’s are for something with infinitesimal value?

I walk away with my winnings. The company, however, is in a fix: they planned on issuing stock to raise capital, but now their stock price has been destroyed through my manipulations, and they cannot raise capital. Maybe they run out of funds and disappear, or maybe they go into hibernation mode in order to nurse what capital they have. In either case, society is deprived of the output and the jobs that would have existed were it not for my villainy.

It may be hard to believe, but such loopholes really do exist (I will be explaining several of them in subsequent blogs). In reality, however, neither you (if you are like most Americans) nor I can actually use them. Only large hedge funds and broker-dealers can access these loopholes to create IOU’s (just as, in the story of St. Smallcap, only hedge funds were allowed to own the currency machines with which to print off that “temporary” currency). As we will see in more detail, these hedge funds and broker-dealers have learned how to manipulate these loopholes in the stock settlement system so as to flood the market with over a billion IOU’s (maybe many billion) in hundreds of companies. In doing so, they have disrupted the market for shares of companies that are researching cures for cancer and other illnesses, figuring out how to make blood substitutes to treat cases of acute blood loss, and building mine-resistant vehicles for troops in Iraq. Hundreds of such corporate “St. Smallcaps” have been damaged or destroyed. Thus, cancer patients are being deprived of treatments, accident victims are dying of acute blood loss, and soldiers in Iraq are dying from IED’s, so that some hedge fund ass-clowns can drive new Ferraris.

It really is that simple.

I have explained the issue through metaphor (”St. Smallcap”), and now, provided this literal explanation. I will continue with more detailed explanations and citations for further reading for those who wish to gain a more thorough understanding of the workings of the US stock settlement system and precisely how loopholes permeate it. The general reader, however, may feel satisfied with the account thus far and, feeling no need to learn intricacies of stock settlement, may wish to move on to subsequent chapters, where I discuss in greater detail the harms being done to society, who is doing it, and who has taken part in the cover-up.

Posted in 4) The Crime: “Naked Shorts” & Other Insincere IOUs | 3 Comments »

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############ Margin Trading
Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally. To trade on margin, you need a margin account. This is different from a regular cash account, in which you trade using the money in the account. By law, your broker is required to obtain your signature to open a margin account.

The margin account may be part of your standard account opening agreement or may be a completely separate agreement. An initial investment of at least $2,000 is required for a margin account, though some brokerages require more. This deposit is known as the minimum margin. Once the account is opened and operational, you can borrow up to 50% of the purchase price of a stock. This portion of the purchase price that you deposit is known as the initial margin. It’s essential to know that you don’t have to margin all the way up to 50%. You can borrow less, say 10% or 25%. Be aware that some brokerages require you to deposit more than 50% of the purchase price.

You can keep your loan as long as you want, provided you fulfill your obligations. First, when you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid. Second, there is also a restriction called the maintenance margin, which is the minimum account balance you must maintain before your broker will force you to deposit more funds or sell stock to pay down your loan. When this happens, it’s known as a margin call.

Borrowing money isn’t without its costs. Regrettably, marginable securities in the account are collateral. You’ll also have to pay the interest on your loan. The interest charges are applied to your account unless you decide to make payments. Over time, your debt level increases as interest charges accrue against you. As debt increases, the interest charges increase, and so on.

The Federal Reserve Board regulates which stocks are marginable. As a rule of thumb, brokers will not allow customers to purchase penny stocks, over-the-counter Bulletin Board (OTCBB) securities or initial public offerings (IPOs) on margin because of the day-to-day risks involved with these types of stocks.

Let’s say that you deposit $10,000 in your margin account. Because you put up 50% of the purchase price, this means you have $20,000 worth of buying power. Then, if you buy $5,000 worth of stock, you still have $15,000 in buying power remaining. You have enough cash to cover this transaction and haven’t tapped into your margin. You start borrowing the money only when you buy securities worth more than $10,000.

In volatile markets, prices can fall very quickly. If the equity (value of securities minus what you owe the brokerage) in your account falls below the maintenance margin, the brokerage will issue a “margin call”. A margin call forces the investor to either liquidate his/her position in the stock or add more cash to the account.

Let’s say you purchase $20,000 worth of securities by borrowing $10,000 from your brokerage and paying $10,000 yourself. If the market value of the securities drops to $15,000, the equity in your account falls to $5,000 ($15,000 – $10,000 = $5,000). Assuming a maintenance requirement of 25%, you must have $3,750 in equity in your account (25% of $15,000 = $3,750). Thus, you’re fine in this situation as the $5,000 worth of equity in your account is greater than the maintenance margin of $3,750. But let’s assume the maintenance requirement of your brokerage is 40% instead of 25%. In this case, your equity of $5,000 is less than the maintenance margin of $6,000 (40% of $15,000 = $6,000). As a result, the brokerage may issue you a margin call.

If for any reason you do not meet a margin call, the brokerage has the right to sell your securities to increase your account equity until you are above the maintenance margin. Even scarier is the fact that your broker may not be required to consult you before selling! Under most margin agreements, a firm can sell your securities without waiting for you to meet the margin call. You can’t even control which stock is sold to cover the margin call.

Why use margin? It’s all about leverage. Just as companies borrow money to invest in projects, investors can borrow money and leverage the cash they invest. Leverage amplifies every point that a stock goes up. If you pick the right investment, margin can dramatically increase your profit.

############ dead cat bounce

A dead cat bounce is a term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals of the stock. It is derived from the notion that “even a dead cat will bounce if it falls from a great height”.

The reasons for such a bounce can be technical, as investors may have standing orders to buy shorted stocks if they fall below a certain level or to cover certain option positions. Once those limits are reached, the buy orders are activated and the sudden rise in demand causes the price of the stock to rise as well. The bounce may also be the result of speculation. Since bounces often occur, traders buy into what they hope is the bottom of the market, expecting a bounce and thus making a quick profit. Thus, the very act of anticipating a bounce can create and magnify it.

############# CDO/CMO
http://marketplace.publicradio.org/display/web/2008/10/03/whiteboard_crisis_explainer_uncorking_cdos/
Crisis explainer: Uncorking CDOs

Marketplace Senior Editor Paddy Hirsch gives a bubbly explanation of the intricacies of “collateralized debt obligations” — those financial instruments that got us into this financial mess.

Decades ago, when you wanted to buy a house you went to local bank and applied for a mortgage. If the mortgage was less than three times your annual income and you had a good credit history, the bank would loan you the money and you would pay them interest and some principal every month for 30 years. Then Wall St. got a bright idea: buy up all the mortgages from the banks, collect a few thousand into a pool called a CDO (Collateralized Debt Obligation) and sell shares in it. The owner of each share would get a pro-rata share of the incoming monthly mortgage payments, analogous to what a bond owner gets.

What happened? It sounded like a great idea and soon all mortgages were sold and repackaged into shares. It didn’t take long before the banks realized that they could issue mortgages of five, six, even eight times the buyer’s annual income or sell them to people with terrible credit histories. After all, the shaky mortgages would soon be somebody else’s headache. That’s what happened. Lehman, Merrill, and others bought billions of dollars of mortgages that the homeowners had no hope of ever repaying on schedule and nobody wanted to buy shares in these worthless CDOs, so the brokers got stuck holding the bag with billions in worthless loans.

############## Trader Tax Status

http://ragingbull.quote.com/bullseye/node/275
By Jim Forester, Tax Director of Traders Accounting*
Posted: September 14, 2007

The Internal Revenue Service has two tax classifications for individuals who buy and sell securities, mutual funds, options, futures, commodities and other derivatives: Trader and investor.

The minority who trade for a living under the IRS definition are classified as traders and afforded an attractive menu of tax breaks. The majority, who trade part-time in addition to full-time W-2 employment or as a retirement hobby, do not enjoy the tax advantages that accompany trader status.

So, how do the two match up come tax time? If your trading left you in the black, you could save thousands. If your trading resulted in a substantial loss, however, the ability to write off that loss in the year it occurred could result in a windfall of $20,000 or more.

How Traders Trump Investors

As a trader, you trump investors in two main ways: You can fully deduct all of your trading expenses, and you can write off 100 percent of your losses in one year (provided you elected the mark-to-market accounting method).

Investors who itemize their deductions on Schedule A are limited to a handful of deductible investment expenses, including legal and accounting fees, investment counseling and advice and investment newsletters. These must be listed as miscellaneous itemized deductions and can only be deductible to the extent that they exceed 2 percent of adjusted gross income.

As a trader, however, you can deduct all your business-related expenses, including your datafeed, dues and subscriptions, equipment, utilities, seminars, transportation, travel and entertainment. You can also take advantage of the home office deduction if you work from home.

So far, the IRS has left further delineation in the hands of the tax court, whose rulings tend to uphold the denial of trader status without shedding much light on how individuals might qualify for trader status in the first place.

Expense Deductions Add Up Fast

Here’s how the additional expense deductions would benefit Janet Trader compared to Johnny Investor if both had identical trading gains and business expenses. Note that Johnny Investor is subject to the 2 percent threshold for the few deductible expenses he is qualified to claim:

* Total household income: $140,000
* Trading profits: $40,000
* Trading expenses: $24,230
* Janet Trader’s tax savings: $7,269
* Johnny Investor’s tax savings: $1,644
* Benefit of trader tax status: $5,625
* Risk insurance: The Capital Loss Deduction

When it comes to covering losses, traders fare even better: The IRS allows traders who elected mark-to-market to write off their entire loss in one year. You can even apply the loss to taxable income from past years and generate a tax refund!

Investors, meanwhile, have a maximum allowable net capital loss of $3,000 in any tax year. That means if you lose more than $3,000, your only recourse is to carry over the remaining balance until it’s used up but, again, only to a maximum of $3,000 a year.

Here’s how a $40,000 loss would affect Janet Trader and Johnny Investor. (Note that Janet Trader was able to offset her regular $100,000 income with her $40,000 loss while Johnny Investor is limited to the $3,000 capital loss deduction.)

* Total household income: $140,000
* Trading loss:
* Trading expenses: $24,230
* Janet Trader’s tax savings: $19,269
* Johnny Investor’s tax savings: $984
* Benefit of trader tax status: $18,285

Investors also face another limit: They may only deduct investment interest up to the amount of their net investment income, defined as total investment income (earnings, interest, dividends and royalty income) less the deductible investment expenses previously discussed. Any investment interest that exceeds that cap is non-deductible but may be carried forward to future tax years.

One of the best ways to secure and protect your trader tax status is to trade as a business entity. The IRS treats business filers in a far more consistent and advantageous way than it does individual traders.

http://www.fairmark.com/traders/benefits.htm

Benefits of Trader Status

How trader status may reduce your income tax.

What’s the big deal about being a trader? How do you end up being treated better than an investor? Here’s a rundown on major tax benefits of trader status:
Interest Expense

Investors can claim interest expense only if they itemize, and only to the extent permitted under the investment interest limitation. Traders deduct their interest expense on Schedule C, so they don’t have to itemize and the investment interest limitation doesn’t apply.
Seminars

Investors aren’t permitted to claim a deduction for the cost of investment seminars. If a trader attends a seminar to improve his ability to trade, the cost may be deductible.
Home Office

Home office deductions are not allowed in connection with investing. A trader may be able to claim a home office deduction, however.
Other Expenses

Various other expenses of an investor, such as the cost of books and subscriptions, are “miscellaneous deductions” that are allowed only if the investor itemizes, and only to the extent the total miscellaneous deductions exceed 2% of adjusted gross income. A trader deducts these items on Schedule C.
Mark-to-Market

Being a trader makes you eligible for mark-to-market accounting — but only if you make the mark-to-market election. If you qualify as a trader and you make this election, the following additional benefits are available:

* The wash sale rule won’t apply to your trading activity.
* If you have an overall loss for the year, your loss deduction won’t be subject to the $3,000 capital loss limitation.

Disadvantages?

The biggest disadvantage of filing as a trader is audit risk. There are no clear standards for determining whether you are a trader. If you claim to be a trader, and the IRS determines that you are not a trader, you may end up with substantial liability for tax, interest and penalties.
If you make the mark-to-market election, you have two other potential disadvantages to deal with:

* Your trading profits are ordinary income, not capital gains.
* At the end of the year you have to report all your profits, including profits from unsold stocks.

There’s another disadvantage of filing as a trader: relatively few tax professionals are familiar with the rules. You may have difficulty finding someone who can provide competent help with your tax return.
Bottom Line

Because of uncertainty about the definition of trader, and the potential for inviting an IRS audit, I counsel against filing as a trader unless both of the following are true:

* You have enough at stake so that the tax benefit outweighs the hassle of going through an audit, and
* You have at least a reasonably strong claim to trader status by reason of an extended period of extensive short-term trading.

http://www.tradersaccounting.com/faq_answers.php?id=23
Do “traders” have to pay Social Security and Medicare self employment taxes? And do they lose long-term capital gains rates?
Most traders will enjoy not paying taxes for self employment such as Social Security and Medicare.
One of the interesting features of the unique trader tax status is that, unlike other sole proprietors and unincorporated businesses, traders will not be paying taxes on Social Security and Medicare, also known as self-employment taxes. These tax consequences of day trading apply regardless of whether you use the mark-to-market or cash accounting method. That’s because trading gains are not considered “earned income” by the IRS for stock trading tax purposes.

As with many aspects of stock trading taxes, there are exceptions. If you work as an independent contractor, most commonly to manage a sub-trading account for a broker/dealer, you likely will pay into Social Security and Medicare. That’s because independent contractor trading gains, captured on your employer’s Form 1099-Misc. from the IRS are considered “earned income,” and therefore subject to self-employment taxes.

On the question of capital gains, if you elect the mark-to-market accounting method, you convert those capital gains/losses into ordinary income/loss for tax purposes. (The tradeoff, of course, is that you also are exempt from the $3,000 capital gains limit, leading some to call this feature “loss insurance.”)

The best way to protect the capital gains on your long-term, non-trader holdings is to establish a separate account for these investments, preferably with a brokerage that does not handle your day trading business. If you take gains to keep separate, detailed records of your personal investments and never commingle your long-term and short-term accounts, you’ll enjoy the best of both worlds.

############## Wash Sale
http://www.fairmark.com/capgain/wash/ws101.htm
How the wash sale rule works

By Kaye A. Thomas
Updated May 30, 2007

Accounting for Active Traders

A rule that postpones losses if you buy replacement shares around the same time.

When the value of your stock goes down you get that sinking feeling — you’ve lost money. But the tax law doesn’t allow that loss until you sell the stock. In a way that’s good, because it means you can control the timing of your deduction, taking it when the benefit is the greatest.

The problem is, you may have a conflict. You want to deduct the loss, but you also want to keep the stock because you think it’s going to bounce back. It’s tempting to think you can sell the stock and claim the loss, then buy it back right away. And that’s where the wash sale rule comes in. If you buy replacement stock shortly after the sale — or shortly before the sale — you can’t deduct your loss.
General Rule

In general you have a wash sale if you sell stock at a loss, and buy substantially identical securities within 30 days before or after the sale.

Example: On March 31 you sell 100 shares of XYZ at a loss. On April 10 you buy 100 shares of XYZ. The sale on March 31 is a wash sale.

The wash sale period for any sale at a loss consists of 61 days: the day of the sale, the 30 days before the sale and the 30 days after the sale. (These are calendar days, not trading days. Count carefully!) If you want to claim your loss as a deduction, you need to avoid purchasing the same stock during the wash sale period. For a sale on March 31, the wash sale period includes all of March and April.

Basis Adjustment

The basis adjustment is important: it preserves the benefit of the disallowed loss. You’ll receive that benefit on a future sale of the replacement stock.

Example: Some time ago you bought 80 shares of XYZ at $50. The stock has declined to $30, and you sell it to take the loss deduction. But then you see some good news on XYZ and buy it back for $32, less than 31 days after the sale.

You can’t deduct your loss of $20 per share. But you add $20 per share to the basis of your replacement shares. Those shares have a basis of $52 per share: the $32 you paid, plus the $20 wash sale adjustment. In other words, you’re treated as if you bought the shares for $52. If you end up selling them for $55, you’ll only report $3 per share of gain. And if you sell them for $32 (the same price you paid to buy them), you’ll report a loss of $20 per share.

Because of this basis adjustment, a wash sale usually isn’t a disaster. In most cases, it simply means you’ll get the same tax benefit at a later time. If you receive the benefit later in the same year, the wash sale may have no effect at all on your taxes.

There are times, though, when the wash sale rule can have truly painful consequences.

* If you don’t sell the replacement stock in the same year, your loss will be postponed, possibly to a year when the deduction is of far less value.
* If you die before selling the replacement stock, neither you nor your heirs will benefit from the basis adjustment.
* You can also lose the benefit of the deduction permanently if you sell stock and arrange to have a related person — or your IRA — buy replacement stock.
* As explained in my book, Consider Your Options, a wash sale involving shares of stock acquired through an incentive stock option can be a planning disaster.

Holding Period

When you make a wash sale, your holding period for the replacement stock includes the period you held the stock you sold. This rule prevents you from converting a long-term loss into a short-term loss.

Example: You’ve held shares of XYZ for years and it’s been a dog. You sell it at a loss but then buy it back within the wash sale period. When you sell the replacement stock, your gain or loss will be long-term — no matter how soon you sell it.

In many situations you get more tax savings from a short-term loss than a long-term loss, so this rule generally works against you.
Additional Rules

There’s a lot more to the wash sale rule. We get questions on our message board about all of the following issues:

* You don’t have a wash sale unless you acquire (or enter into a contract or option to acquire) substantially identical securities.
* You don’t have a wash sale, even though you bought identical shares within the previous 30 days, if the shares you bought aren’t replacement shares.
* There are mechanical rules to handle the situation where you don’t buy exactly the same number of shares you sold, or where you bought and sold multiple lots of shares. See Wash Sale Mechanics.
* If a person who’s related to you — or an entity related to you, such as your IRA — buys replacement property, your loss may be disallowed under a different rule: you may be treated as if you made an indirect sale to a related person.
* You don’t actually have to purchase stock within the wash sale period to have a wash sale. It’s enough if you merely enter into a contract or option to acquire replacement stock.
* Short sales present a special problem in connection with the wash sale rule.
* There are special considerations in applying the wash sale rule to traders.

Losses Only

The wash sale rule only applies to losses. You can’t wipe out a gain from a sale by buying the same stock back within 30 days.
Planning for Wash Sales

What can you safely do to plan around the wash sale rule? No technique is completely safe. Here are some ideas to consider.

* Most obviously, you can sell the stock and wait 31 days before buying it again. (Check your calendar carefully!) The risk here is that the stock may rise in price before you can repurchase it.
* If you’re truly convinced the stock is at rock bottom, you might consider buying the replacement stock 31 days before the sale. If the stock happens to go up during that period your gain is doubled, and if it stays even you can sell the older stock and claim your loss deduction. But if you’re wrong about the stock, a further decline in value could be painful.
* If your stock has a strong tendency to move in tandem with some other stock, you may be able to reduce your risk of missing a big gain by purchasing stock in a different company as “replacement” stock. This is not a wash sale because the stocks are not substantially identical. Thirty-one days later you can switch back to your original stock if that is your wish. But there’s no guarantee that any two stocks will move in the same direction, or with the same magnitude.

There’s no risk-free way to get around the wash sale rule. But then again, continuing to hold a stock that has lost value isn’t risk-free, either. In the end it’s up to you to evaluate all the risks, and balance them against the benefit you’ll receive if you can claim a deduction for your loss.

Pending Mergers

Suppose you own stock in a company that’s about to be acquired by Bigco. Usually that means a boost in the stock price, but if you have a loss on your shares, the following plan may seem to make sense. Just before the merger you sell your stock and buy shares of Bigco — shares you would have received in the merger if you hadn’t sold your original shares. That shouldn’t be a wash sale because Bigco isn’t substantially identical to the company you sold, right?

Wrong. The tax regulations say that if two different stocks are linked together in such a way that any change in the price of one will be reflected in the price of another, they’re likely to be treated as substantially identical securities for purposes of the wash sale rule. If you use this maneuver, the wash sale rule disallows the loss.

http://www.fairmark.com/capgain/wash/wsreplac.htm
Wash Sales and Replacement Stock

By Kaye A. Thomas
Updated June 1, 2007

You don’t have a wash sale unless the shares you bought “replace” the shares you sold.

In general, the wash sale rule prevents you from reporting a loss on the sale of stock if you acquired substantially identical stock on the same day as the sale, or within 30 days before or after that day. But the wash sale rule doesn’t apply if the stock you bought wasn’t replacement stock.

This rule is best understood through a series of examples. In all of these examples, assume that there are no purchases or sales of stock other than those described.
1: Selling All

On June 1 you buy 200 shares of XYZ for $10,000. On June 12 you sell all 200 shares for $8,000 (a loss of $2,000).

Most people wouldn’t even think about applying the wash sale rule here. You know instinctively it shouldn’t apply, even though there’s a purchase of identical stock less than 31 days before the sale. Your instincts are correct: the wash sale rule doesn’t apply because the stock you bought isn’t replacement stock for the stock you sold. That’s true because you sold the same stock you bought.
2: Selling Half

On June 1 you buy 200 shares of XYZ for $10,000. On June 12 you sell 100 shares for $4,000 (a loss of $1,000). You continue to hold the other 100 shares.

The answer here is a little less obvious. After the sale, you hold shares identical to the shares you sold, and you bought those shares less than 31 days before the sale. But you probably still feel that the wash sale rule shouldn’t apply here. And the IRS agrees, in the situation where you bought the 200 shares in a single lot. Furthermore, although the IRS doesn’t say this, the result shouldn’t change if you gave a single buy order for 200 and your broker happened to execute it by buying two lots of 100 shares each. It’s clear the shares you have left after the sale weren’t bought to replace the shares you sold.
3: Separate Purchases

You buy 100 shares of XYZ in the morning, and decide to buy another 100 shares in the afternoon of the same day. Within 30 days, you sell the morning shares at a loss.

For all we know, the price of this stock dropped between morning and afternoon, and your afternoon purchase is for the purpose of claiming a loss while maintaining your investment. In other words, you may have been trying to get the result the wash sale rule is designed to prevent. So the IRS will probably contend that the wash sale rule applies in this situation.

The result should be different, though, if you gave a single buy order for 200 and your broker happened to execute it by buying two lots of 100 shares each. In this case it’s clear the shares you have left after the sale weren’t bought to replace the shares you sold.
4: Old Shares

You have held 100 shares of XYZ for more than 30 days. You buy an additional 100 shares for $5,000. Less than 31 days later, you sell these shares (the new ones) for $4,000 (a $1,000 loss). You continue to hold the old shares.

There are no rulings that mention this situation. But the requirement for replacement stock should prevent the wash sale rule from applying here. The older shares shouldn’t be considered replacement shares for the newer ones.

Note that you have to use specific identification to sell the newer shares. Unless you follow this procedure, the tax law assumes you sold the older shares. If you have a loss on those shares, the wash sale rule applies.
5: Not So Old Shares

Same as the previous example, except the “old” shares aren’t as old. You bought the old shares on June 1, the new shares on June 10, and sold the new shares at a loss on June 20.

Once again, you had to use specific identification to sell the new shares. The question is, do you have a wash sale here because of the fact that you bought the old shares less than 31 days before you sold the new ones?

As a matter of logic, it’s clear that the answer should be no. The old shares can’t possibly be replacement shares for the newer ones. You bought them before you bought the shares you sold, so they should be ignored in applying the wash sale rule.

Unfortunately, in a ruling dealing with an unrelated point, the IRS gave an example like the one above, and said the wash sale rule applied. The ruling was designed to establish that shares bought on margin are subject to the wash sale rule. It’s possible that the person who drafted the ruling simply didn’t think about the fact that the shares in that example weren’t replacement shares.

My feeling is that the wash sale rule should never apply if the “replacement” shares were bought at the same time as, or earlier than, the shares that were sold. There isn’t any opportunity for abusive tax planning in this situation. But the issue is in doubt because the IRS has issued a ruling that, in my opinion, is erroneous.

############### Order Type

# The limit price for buy orders is placed below the current market price. The limit price for sell orders is placed above the current market price. Limit orders will be filled at the limit price or better, but are not guaranteed a fill.
# MARKET (also known as “not held”) – order used to guarantee an execution, but not guarantee a price or time of execution. The risk of market orders is that you have no control over what the execution price is. We strongly suggest you avoid using them with options, especially option spreads.

STOP (also known as “stop loss”) – order used to open or close a position by buying if the market rises or selling if the market falls. The stop price for buy orders is placed above the current market price. The stop price for sell orders is placed below the current market price. A stop order turns into a market order when the stop is triggered, so the final execution price or time of a stop order is not guaranteed. The same risks of market orders apply to stop orders.

# STOP LIMIT – order used to open or close a position by buying if the market rises or selling if the market falls, but that turns into a limit order when the stop price is triggered. Stop limit orders have a stop price and a limit price. When the stop price is triggered, the limit order is activated. The stop price for buy orders is placed above the current market price. The stop price for sell orders is placed below the current market price. The stop price does not need to be the same as the limit price. Just as with a limit order, the stop limit order will be filled at the limit price or better, but may not be filled at all.
# TRAILING STOP – stop order that continually adjusts the stop price based on changes in the market price. A trailing stop to sell raises the stop price as the market price increases, but does not lower the stop price when the market price decreases. A trailing stop to buy lowers the stop price as the market price decreases, but does not increase the stop price as the market price increases. In both cases, the stop “trails” the market price. When the stop price is reached, the order becomes a market order. The same risk of market orders applies to trailing stops.

############# Who is a Trader
The word trader has a special meaning in the tax law. It refers to someone who trades to catch short-term swings in market prices (not long-term appreciation or dividends and interest), and does so in a large enough volume, consistently over a long enough period of time. The biggest problem with trader status is the absence of a clear definition. There are no precise standards telling us when trades are considered short-term, or how large a volume you need, or how long a period you must continue the activity to be considered a trader. Sometimes it’s easy to determine that someone is or is not a trader, but in many cases the answer isn’t clear.

Tax Benefits

If you’re a trader, you’re likely to be able to claim more deductions than an investor. Some deductions that would be claimed as itemized deductions subject to various limits will be allowed as business deductions, without such limits. And there are some deductions traders can claim even though investors can’t claim them at all.
In addition, traders are eligible to make the mark-to-market election. If you make this election, your trading losses won’t be subject to the $3,000 capital loss limitation. This limitation can be very painful for a trader who has a bad year.
Filing as a Trader

If you’re a trader who has not made the mark-to-market election, your trading expenses go on Schedule C, the form used to report business income and expenses. But your trading income is capital gain, and has to be reported on Schedule D. This looks very strange indeed to tax professionals who are not familiar with trader filing, but this is how it is done.

Trading Activity Test

The first test distinguishes between the activity of investing and the activity of trading. Your activity is investing if it’s designed to benefit from long-term appreciation in securities, or to produce a significant amount of dividend or interest income. Investors are likely to be interested in a company’s balance sheet, market share, industry trends and other indicators of long-term viability. They typically ignore short-term price fluctuations — or try to, anyway.
Trading activity, for purposes of this test, consists of trying to capture short-term price swings. Many traders have little interest in the long-term prospects of the companies they trade. They may know little about the company other than the way the price of its stock has moved in the recent past. If a trader happens to capture a dividend, that’s likely to be merely coincidental. Traders seek their profits in the market’s zigs and zags.
The precise limits of this test have never been established. It’s reasonably clear that you don’t have to be a day trader to be a trader. People who hold positions overnight, or for a few days at a time, are still engaged in trading activity. The point where your average holding period indicates you’re an investor rather than a trader is almost surely more than a few days, and probably less than six months. There isn’t a lot to go on if you’re looking for a more refined answer than that. If your typical holding period is 60 days, you’re in no man’s land.
Substantial Activity Test

Even if you engage in trading activity, you have to do enough of it, regularly enough, over a long enough period of time, to be considered a trader. I call this the substantial activity test.
Different words have been used to express this test. The Supreme Court said the taxpayer must be “involved in the activity with continuity and regularity.” The Tax Court has used the words “frequent, regular and continuous.” The basic point is that you aren’t a trader unless you do a lot of trading, and keep at it on a regular basis over an extended period of time.
Here again there is no bright line. Are 10 trades a week enough? 20? No one can say for certain. My feeling about the way the courts should decide the question is to look at whether the activity was carried on the way someone would if they treated it as a serious business. If you have a good business reason for executing only a few trades, or none at all, for a period of time, then your absence from the market should not disqualify you from trader status. But if your spotty trading activity, or low volume, indicates a lack of commitment to trading as a business, then you aren’t a trader. It remains to be seen whether the courts will take the approach I advocate.

Strictly speaking, trader status isn’t an election. Either you are a trader, or you are not. Traders are eligible to make the mark-to-market election, but you can be a trader without making this election or any other election.
Yet the IRS is never going to audit a non-trader return and say you should have filed as a trader. In theory there could be a reason for the IRS to do that, but as a practical matter it’s almost never a disadvantage to be a trader.
That means you don’t have to file as a trader if you don’t want to do so. You may feel that the tax benefits are too small to justify the risk that filing as a trader may provoke an audit of your tax return. Or you may just want to keep things simple. The bottom line: filing as a trader isn’t an election, but it is effectively elective.

Part-Time Traders

The IRS’ Frequently Asked Questions about trader status includes the following statement:

“Basically, if your day trading activity goal is to profit from short-term swings in the market rather than from long-term capital appreciation of investments, and is expected to be your primary income for meeting your personal living expenses, i.e. you do not have another regular job, your trading activity might be a business.”

That seems to imply that you can’t be a trader if you have another regular job, which is plainly incorrect. It’s firmly established that you can have a part-time activity that’s recognized as a “trade or business” under the tax law, and there’s no reason to suppose that the business of trading securities is different from all other businesses in this regard. Naturally, if your activity is part-time you will have a greater burden in showing that it was substantial enough to qualify as a business, but having a different full-time job doesn’t prevent you from qualifying as a trader.

############ Mark-to-market
Consequences of the Election

Marking to market. The most obvious consequence of the election is that at the end of each year you must mark your securities to market. What this means is you treat any stocks you hold at the end of the day on December 31 as if you sold them on that day for the current market value. If the stock has gone down, you get to report a loss without actually selling it. If the stock has gone up, you have to report that gain. Your basis for the stock is adjusted to reflect the gain or loss you report, so that you don’t report the same gain or loss again when you actually sell the stock.
For a true day trader, this aspect of the election is of no significance. You don’t hold stocks at the end of the day, so you don’t hold stocks at the end of the year. Your gains and losses are already in the book. This isn’t true for a position trader (a trader who holds positions longer than a day trader). A position trader who makes the mark-to-market election loses the ability to do year-end tax planning by selling losers and holding winners.

No wash sales. The wash sale rule doesn’t apply to a trader who has made the mark-to-market election. There’s a simple logic to this: if all your gains and losses are going to be flushed out on December 31, there’s no reason for the tax law to be concerned about wash sales that may occur during the year.
Wash sales can be a significant headache for a trader even if they don’t affect the amount of tax the trader has to pay. If you make hundreds of trades in the same stock, many of the trades are likely to result in wash sales. At some point, accounting for all the wash sales becomes nearly impossible. Eliminating this concern is a significant benefit of the mark-to-market election.

Ordinary income and loss. If you make the mark-to-market election, your trading gains and losses are converted to ordinary income and loss. You’ll report the gains and losses on Form 4797 (sales of business property), not Schedule D (capital gains and losses).
This does not mean that your trading gains are now subject to self-employment tax. In a 1998 tax law, Congress clarified that although your trading income becomes ordinary income, it is not self-employment income. This also means you can’t use this income to support a contribution to an IRA or other retirement plan.
Traders usually generate all or nearly all of their gains as short-term capital gains, which are taxed at the same rate as ordinary income. In most situations, changing to a system where the trader reports the gains as ordinary income will not have any tax cost. If the trader has capital losses from an investment that isn’t part of the trading activity, though, the trader will lose the ability to offset those losses with capital gains from trading.
For many traders, the flip side will be more important. Even good traders sometimes have losing years. When they do, the capital loss limitation rears its ugly head. A trader who has not made the mark-to-market election can deduct only $3,000 of net capital loss, with the excess loss carrying forward only, not back to earlier, profitable years. If you make the election, your trading loss isn’t subject to this limitation, and can carry back as well as forward. The difference can be huge.

three impulse waves in his Elliott Wave theory, and many of the most reliable candlestick chart patterns require three candlesticks to reveal what is happening with price action. Prices often unfold in three phases reflecting the psychological attitude of the trading masses –

the unbelieving or skeptic phase,
then a realization and acceptance of the developing trend,
then a period of jumping on the bandwagon of the trend move before it all starts to unravel,
first with doubts about a trend change as the original trend loses momentum,
then with fear about missing or not being onboard the new trending move and
then with giving in to the reality of the trend change.

The cycle repeats itself over and over, as analysts from both the East and West have recognized with their different styles of charts. There is something in this type of price action that seems to be universal and basic to human behavior in any chart language.

############## Banks

http://online.wsj.com/article/SB124182740622102431.html#mod=article-outset-box
* MAY 12, 2009

Excerpt
Inside the Fall of Bear Stearns
In 72 nail-biting hours, an investment bank turned from healthy to nearly insolvent

By KATE KELLY

Bear Stearns Cos., the 85-year-old Wall Street firm known for its tough trading culture, was rescued from impending bankruptcy by a deal with J.P. Morgan Chase & Co. on March 16, 2008 — making Bear the first major casualty of the financial crisis. The firm spiraled from being healthy to practically insolvent in about 72 hours.
[Street Fighters]

Adapted from “Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street” by Kate Kelly, to be published by Portfolio, a member of Penguin Group (USA) Inc., on Tuesday. Copyright 2009 by Kate Kelly.

The meltdown began in earnest the evening of Thursday, March 13, 2008, when Bear executives made a shocking discovery: They were nearly out of cash. Faced with a slew of withdrawals from worried clients and a sudden pullback from lenders, the firm had less than $3 billion on hand — not enough to open for business on Friday.

Bear chief executive Alan Schwartz immediately called J.P. Morgan, which as Bear’s clearing agent managed its cash, to ask CEO Jamie Dimon for an overnight loan. Mr. Schwartz knew that if a deep-pocketed creditor like J.P. Morgan didn’t come through, Bear’s only option was bankruptcy, and he later phoned New York Federal Reserve Bank president Tim Geithner to say so.

Mr. Dimon, a veteran dealmaker, was willing to try to help. But, concerned about making a major financial commitment after just a few hours of research, he prevailed on the Federal Reserve Board for the funding instead.

During the wee hours of March 14, Fed officials relied on legislative powers that hadn’t been used since the 1930s to find a temporary solution: a loan to Bear of undetermined size, to be provided through J.P. Morgan. What follows is an account of some of the events that surrounded their move.

Thursday, March 13, around 7:45 p.m.

Tim Geithner wasn’t surprised to hear that night from Bear. Early Thursday morning, he had received a call from Alan Schwartz, who had warned him that a cash crisis might be looming.
72 Hours

Government officials and bankers raced the clock through the weekend to sell Bear Stearns.
[Thursday] Corbis
Thursday, March 13, 2008

6:00 p.m.

Chief Executive Alan Schwartz, Chief Financial Officer Sam Molinaro, and other senior Bear executives meet to discuss the firm’s cash position. The shocking news: They’re down to less than $3 billion, not enough to open for business on Friday.
[Geithner] Bloomberg News
Friday, March 14

4:45 a.m.

Federal Reserve Chairman Ben Bernanke, Tim Geithner, president of the Federal Reserve Bank of New York at the time, left, then-Treasury Secretary Hank Paulson, and other government officials hold a nail-biting conference call. They discuss Bear’s precarious position and what a Bear bankruptcy could mean for the broader markets. Fearing disaster, Fed Board members authorize an emergency loan to the troubled investment bank, to be provided through J.P. Morgan.
[Nasdaq] Bloomberg News

7:30 p.m.

En route home from his worst day on the job ever, Mr. Schwartz gets a call from Messrs. Geithner and Paulson, who tell him he must have a deal to sell Bear by Sunday evening. He calls Mr. Molinaro with the news, and they prepare to meet first thing the next morning at the office.
Saturday, March 15

6:00 p.m.

After a long day of due-diligence meetings with executives from J.P. Morgan, who are interested in buying Bear, Mr. Schwartz receives a tentative bid from the large bank: between $8 and $12 per share. He and his team are grim that the price isn’t higher, but relieved to have a potential deal in the works.
[Sunday] Getty Images
Sunday, March 16

9:00 a.m.

J.P. Morgan executives meet to discuss the Bear purchase after a sleepless night of reviewing the smaller firm’s books. Hearing of his team’s grave concerns about the quality of mortgage assets in Bear’s portfolio, J.P Morgan Chase & Co. chairman and CEO Jamie Dimon decides to call off the talks.

Mr. Geithner alerts Messrs. Paulson, right, and Bernanke to the latest development. They discuss whether the government can backstop a J.P. Morgan purchase of Bear by agreeing to absorb potential losses.
[Losses] Reuters

4:45 p.m.

Bear’s investment banker gets a call from J.P. Morgan with the bank’s final bid: $2 per share. Despite misgivings among Bear’s board members, including chairman Jimmy Cayne, directors reluctantly approve the deal.

7:05 p.m.

The down-to-the-wire purchase is announced to the world. About 10 minutes later, the Fed reveals plans to “open the discount window” and allow investment banks to borrow directly from the government, an unprecedented move designed to aid other struggling firms.

Mr. Geithner had spent much of the day talking to his staff and other regulators about the issues that faced the troubled investment bank, trying to gauge how swiftly it might slide downhill. Unlike some officials at the Securities and Exchange Commission, he had taken cold comfort in knowing that Bear had opened that morning with close to $10 billion. What mattered, he felt, wasn’t the hard cash the firm kept on hand, but how long that cash could last under such punitive market conditions. Not long, had been his guess.

The New York Fed president had spoken to Mr. Schwartz earlier in the evening and knew he was contacting J.P. Morgan for a loan. Until he got an update, however, all Mr. Geithner could do was wait. He was eating dinner with his wife and children at their suburban home when Bear’s CEO called with terrible news.

“We’re down to three or four billion and we feel like we’ve got no option but to file,” Mr. Schwartz said, in a reference to bankruptcy.

Mr. Schwartz had also spoken to Jamie Dimon that evening, interrupting the J.P. Morgan chief’s 52nd birthday celebration with his family. “Let’s do something,” the Bear CEO had told him. It was too short notice for a wholesale purchase of Bear, he knew, but the firm wouldn’t open on Friday without a quick cash infusion. He asked Mr. Dimon to consider providing a $25 billion line of credit. Mr. Dimon agreed to look in to it.

After hanging up with Mr. Schwartz, the J.P. Morgan CEO focused on tracking down Steve Black, his point person on a deal of this nature. On vacation with his family in Anguilla, Mr. Black, the co-chief of J.P. Morgan’s investment bank and an old ally of Mr. Dimon’s from their shared days at Citibank, had left his cellphone back at the hotel while he dined out with his wife. Mr. Dimon needed to figure out where his division head was eating and get the phone number of that restaurant.

Friday, 8:30 a.m.

On the sixth floor of Bear’s Madison Avenue headquarters, it was chaos. The elation people had felt at hearing about the Fed’s emergency loan soon gave way to a panicked obsession over the language of the press release that would announce it. Naturally, Bear wanted the wording to sound as upbeat as possible, as though they’d be carrying on business as usual. They also wanted to hint that, just in case things didn’t go well, J.P. Morgan was keen to buy them. But there was debate over how explicit to be about Bear’s merger talks with other parties, which were still at a very early stage.

Another flashpoint was the length of time the Fed money would last. Government officials and J.P. Morgan had proposed suggesting 28 days, a figure that would take Bear well beyond the critical day ahead and give the public the idea that Bear was safe for the moment. Bear lawyers, however, wanted to say “at least 28 days,” in order to leave their options open. But the other side held firm. It would be 28 days at the most, Bear was told.

During these debates, Bear Treasurer Bob Upton scurried between executives’ offices, collecting opinions on the text. But after 90 minutes going back and forth, Mr. Upton snapped. “We gotta get this thing done!” he told Richie Metrick, one of Bear’s senior investment bankers. “Get it into the marketplace.”
Full Coverage

* Bear Stearns — A Year Later
* From Fabled to Forgotten (3/14/09)

But the executives couldn’t figure out which version was the final copy. The treasurer made a quick round of checks, grabbed a printout of what he thought was the right draft, and was rushing over to a copier when Mr. Metrick came screaming out of the CFO’s corner office, where Mr. Schwartz was waiting. “Give me the f- document already!” Mr. Metrick bellowed at Mr. Upton. “I’m trying to get it f- finished!” the treasurer screamed back. He hurtled toward the copier, draft in hand.

Some 15 minutes later, at 9:13, J.P. Morgan’s official press release went out on the business wire and was blasted all over computer news feeds and on CNBC. “JP Morgan Chase and Federal Reserve Bank of New York to Provide Financing to Bear Stearns,” it read. The release went on to say that the bank and the government would together lend Bear “secured funding,” or money backed by collateral, for “an initial period of up to 28 days.” Its last sentence was the most intriguing: “JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.”

Then, at 9:21, a similarly worded release from Bear was issued. Neither press release contained a statement of support from the Fed, whose full board had not yet met to officially approve the loan.

View Full Image
Bear Stearns
Associated Press
Bear Stearns
Bear Stearns

A few minutes later, the New York Stock Exchange opened for business, and In the 17 minutes between the issuance of the first release and the opening of U.S. stock markets for official trading, Bear shares launched an impressive rally, rising more than 9%. Mortgage traders on the seventh floor were thrilled. “We’re alive!” somebody yelled. The cost of purchasing insurance protection against a default by Bear on its debts was dropping to its lowest point in days, and there was gleeful talk about how the so-called “shorts” — traders hoping to make money on Bear shares’ decline — would get “squeezed,” or lose their shirts.

Mr. Black was packing his things in Anguilla when he caught word of the stock activity. J.P. Morgan had located a corporate jet in Miami, and it was on its way to whisk the executive and his family back to New York, where he could advise on whether to purchase Bear — one of the options now on the table. He shook his head. “People don’t understand what just happened here,” he told his wife. “I guarantee by the time we land, that stock is going to be in half.”

View Full Image
Bear
Associated Press

J.P. Morgan CEO Jamie Dimon, left, and Bear Stearns CEO Alan Schwartz, right, testify before the Senate Banking Committee in April 2008. “I just simply have not been able to come up with anything,” Mr. Schwartz said, “even with the benefit of hindsight, which would have made a difference.”
Bear
Bear

A few minutes later, the New York Stock Exchange opened for business, and those purchasing Bear shares during the light before-market trading period were replaced by a gusher of sellers. The stock quickly erased its gains and began a swift drop.

In Washington, Treasury Secretary Hank Paulson was just beginning a conference call with industry executives. He wanted to get the tone right, so he had sketched out some potential talking points on a legal pad. He didn’t want rapacious trading tactics to further wound a gravely injured Bear, so he decided to put it to the firms straight: I expect you to behave yourselves.

The call began ominously. Technical difficulties made it hard to hear some people. Mr. Schwartz was dialing in from a patchy cellphone, and Mr. Dimon didn’t surface until the conversation was 15 or 20 minutes under way.

When things finally settled down, Mr. Paulson was the first to speak. “I want you to deal with Bear Stearns as a responsible counterparty,” he told the group. “When you’re at a company, you think about protecting yourself at all times,” he added. But these were not normal times. He expected firms not to make unreasonable collateral demands, or calls for extra cash or securities to back up loans, and to trade in good faith with Bear.

Meanwhile, in the nation’s stock markets, Bear wasn’t the only one hurting. Within the first hour of trading, the Dow Jones Industrial Average, the index that tracks blue chip stocks, had fallen more than 300 points, with 29 of its 30 component stocks taking losses. Other financial names, including J.P. Morgan itself, were tumbling.

Having arrived at the airport, Mr. Black found a television. He couldn’t believe how fast the stock declines had been. He had expected Bear shares to fall by the time he landed in four or five hours — not 45 minutes after the opening.

“Paul Friedman liked to joke that Bear people were “not big on titles,” but his was chief operating officer of the firm’s all-important fixed-income division, which handled the trading of mortgages and other bonds” Read the diary of a Bear Stearns Executive

By then the Federal Reserve Board had gathered in its headquarters in the Foggy Bottom section of Washington and approved the emergency loan. Fed Chairman Ben Bernanke and his colleagues hated the thought of financing a bank run with government dollars, but they believed that helping Bear survive the day would be better than allowing it to collapse.

The vote in favor was unanimous.

Sunday, 8:30 a.m.

Mr. Schwartz stood in the twelfth-floor boardroom, surrounded by more than 100 Bear employees. He spoke to the merits of the potential Bear-J.P. Morgan combination. It was the right thing to do, he told the group, and already the cultures seemed to be meshing well, under stressful circumstances.

“We have a deal,” he told the group, “but you’re not going to like it.”

http://money.cnn.com/2008/08/27/news/companies/demos_bnp.fortune/index.htm?postversion=2008082712
How one bank avoided the meltdown
BNP Paribas helped spark the global credit crunch when it froze three funds a year ago. So why is it the largest bank in the world that hasn’t had to raise any capital?
By Telis Demos, writer-reporter
Last Updated: August 27, 2008: 12:27 PM EDT

NEW YORK (Fortune) — Not every player in banking is getting clobbered these days. BNP Paribas, which sparked part of the very first global credit-crunch panic when it froze three funds on Aug. 9, 2007, may emerge as the bank least affected by the industry’s carnage.

The third-biggest bank in Europe by market value, behind Britain’s HSBC and Spain’s Banco Santander, is the largest bank in the world that has not had to raise any capital since the middle of last year. (Those three funds, frozen because BNP could not decide how to value their securities, re-opened a few weeks later and sustained only small losses.)

The once-government controlled bank, headquartered in an elegant eighteenth-century building in Paris’s opera district, has not had an unprofitable quarter since the crisis began  an honor it shares only with Goldman Sachs (GS, Fortune 500) among comparable financial institutions. Its write-downs and loan losses have been relatively limited: only $3.6 billion worth of subprime-backed debt and leveraged loans out of its $1.8 trillion in assets (vs., say, Merrill Lynch’s (MER, Fortune 500) $51.8 billion in write-downs with just half the asset base). BNP now has the highest S&P creditworthiness rating, AA+, of any global bank of its size. As its competitors flail, BNP has moved up to the world’s tenth-largest bank by market capitalization.

So how did a bank so big manage to avoid the market chaos around it? Unlike many of its peers with sizable investment bank operations, about two-thirds of BNP Paribas’s revenues come from retail banking, mostly in France, Italy, and Spain. With substantial retail deposits (about $650 billion at the end of 2007), it can fund its investment-banking operations with existing capital instead of having to tap short-term lending markets or highly leveraging itself. “People have forgotten that retail banking is a good business model,” says Lewis Kaufman, a portfolio manager at Thornburg Investments who is long on the bank.

Investment banking is seen as an add-on to the core retail business, so BNP Paribas’s focus is on client services that generate fees, not trading those assets to make money for itself. By contrast, the Big Five U.S. investment banks (including the late Bear Stearns) generated more than half their revenues from trading in 2006, up from 41% in 2000, a big chunk of that in mortgage-backed securities. But all that, of course, came crashing down in the second half of last year.

BNP Paribas avoided the temptation of that gusher. “They are very conservative, very traditional bankers,” says Kimon Kalamboussis, an equity analyst at Citigroup in London, “and they won’t touch things unless they understand exactly what they are.”

In 2005, when the worst of the worst subprime-backed securities were being created and sold, BNP was just setting up its desk to trade on behalf of clients who wanted to invest in the U.S. mortgage market. Most of what it bought, it hedged by buying insurance. In June, CEO Baudoin Prot, a former French civil servant who started working at the bank in the early ’80s when it was still state controlled, told analysts that only $1 billion of the bank’s investment assets had been exposed to subprime mortgages.

That prudence is now translating into new opportunities. BNP Paribas has improved its market share in M&A advisory, snagging key roles in deals like Time Warner’s spinoff of its cable business and UBS’s stock sale. It has moved up the league tables in global leveraged-loan issuance (deals in which clients look for strong balance sheets in their lenders), from No. 14 to No. 9, according to deal-tracking firm Dealogic.

With momentum like that, some are wondering whether the bank ought to loosen the reins to take on a bit more risk and raise capital to finance faster growth. Analysts and some within the bank are now urging BNP to buy a big competitor on the cheap to put itself permanently in the bulge bracket. Not likely, say some observers, a few jokingly citing the bank’s use of Carla Bruni to advertise its mutual funds in the 1990s as one of its riskiest moves.

BNP has made several smaller deals this year, including nabbing Bank of America’s prime brokerage unit after other reeling suitors backed off, buying asset-management firms in the Netherlands and the U.K., and taking a stake in a Libyan bank. But CEO Prot and his team who did an $11 billion deal for bank BNL in Italy in 2006 passed on the chance to bid for Société Générale after it was smacked by a rogue trader, and on Citigroup’s Germany retail banking operations when they were put up for sale.

Published speculation that Wachovia would make a good fit proved unfounded, as BNP said it wasn’t considering the move. Same for a suggestion by Merrill Lynch’s analysts that Zions Bank, based in Utah and with branches around the Pacific Northwest, would be a good addition to BNP’s existing U.S. retail subsidiary, Bank of the West in California. “We would rather not invest even if we may miss some short-term revenue opportunities,” says head of asset management and services Alain Papiasse, speaking for the bank.

Though they have not ruled out a capital raise to get a deal done, BNP Paribas’s top management says it isn’t going to be tempted by fire-sale prices. “We are not fashion victims,” says Papiasse. “We are ambitious but still cautious.” French banking, a bastion of stability – who knew

http://money.cnn.com/2008/03/28/news/economy/disaster_sloan.fortune/index.htm?postversion=2008033113

Chaos on Wall Street
The big banks’ fear of big losses is threatening to bring down the entire system, with dire consequences for all of us. Here’s what’s going on, and what we can do about it.
By Allan Sloan, senior editor at large

(Fortune Magazine) — What in the world is going on here? Why is Washington spending billions to bail out Wall Street titans while leaving struggling homeowners to fend for themselves? Why are the Federal Reserve and the Treasury acting as if they’re afraid the world may come to an end, while the stock market seems much less concerned? And finally, what does all this mean to those of us who aren’t financial professionals?

Okay, take a few breaths, pour yourself a beverage of your choice, and I’ll tell you what’s happening – and what I think is going to happen. Although I expect these problems will resolve themselves without a catastrophic meltdown, I’ll also tell you why I’m more nervous about the world financial system now than I’ve ever been in my 40 years of covering business and markets.

Finally, I’ll tell you why I fear that the Wall Street enablers of the biggest financial mess of my lifetime will escape with relatively light damage, leaving the rest of us – and our children and grandchildren – to pay for their misdeeds.

We’re suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. Like Tink, the famous fairy from Peter Pan, this market could exist only as long as everyone agreed to believe in it.

So because it was convenient – and oh, so profitable! – players embraced fantasies like U.S. house prices never falling and cheap short-term money always being available. They created, bought, and sold, for huge profits, securities that almost no one understood. And they goosed their returns by borrowing vast amounts of money.
The first shoe

The fantasies began to fade last June when Bear Stearns (BSC, Fortune 500) let two of its hedge funds collapse because of mortgage-backed-securities problems. Debt market – both here and abroad – went sour big-time. That, in turn, became a huge drag on the U.S. economy, bringing on the current economic slowdown.

And before you ask: It’s irrelevant whether or not we’re in a recession, which National Bureau of Economic Research experts define as “a significant decline in economic activity spread across the economy, lasting more than a few months.” What matters is that we’re in a dangerous and messy situation that has produced an economic slowdown unlike those we’re used to seeing.

How is this slowdown different from other slowdowns? Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy – a crucial distinction, because markets are harder to fix than the economy.

A leading political economist, Allan Meltzer of Carnegie Mellon, calls it “an unusual situation, but not unprecedented.” When was the last time it happened in the U.S.? “In 1929,” he says. And it touched off the Great Depression.

No, Meltzer isn’t saying that a Great Depression – 25% unemployment, social unrest, mass hunger, millions of people’s savings wiped out in bank collapses – is upon us. Nor, for that matter, am I. But the precedent is unsettling, to say the least. You can only imagine how unsettling it is to Federal Reserve chairman Ben Bernanke, a former economics professor who made his academic bones writing about the Great Depression.

Academics now feel that the 1929 slowdown morphed into a Great Depression in large part because the Fed tightened credit rather than loosening it. With that precedent in mind, you can see why Bernanke’s Fed is cutting rates rapidly and throwing everything but the kitchen sink at today’s problems. (Bernanke will probably throw that in too, if the Fed’s plumbers can unbolt it.) None of this Alan Greenspan (remember him?) quarter-point-at-a-time stuff for him.
Fear is the culprit

So why hasn’t the cure worked? The problem is that vital markets that most people never see – the constant borrowing and lending and trading among huge institutions – have been paralyzed by losses, fear, and uncertainty. And you can’t get rid of losses, fear, and uncertainty by cutting rates.

Giant institutions are, to use the technical term, scared to death. They’ve had to come back time after time and report additional losses on their securities holdings after telling the market that they had cleaned everything up. It’s whack-a-mole finance – the problems keep appearing in unexpected places. Since the Tink market began tanking, so many shoes have dropped that it looks like Imelda Marcos’s closet.

We’ve had problems with mortgage-backed securities, collateralized debt obligations, collateralized loan obligations, financial insurers, structured investment vehicles, asset-backed commercial paper, auction rate securities, liquidity puts. By the time you read this, something else – my bet’s on credit default swaps – may have become the disaster du jour.

To paraphrase what a top Fednik told me in a moment of candor last fall: You realize that you don’t know what’s in your own portfolio, so how can you know what’s in the portfolio of people who want to borrow from you?

Combine that with the fact that big firms are short of capital because of their losses (some of which have to do with accounting rules I won’t inflict on you today) and that they’re afraid of not being able to borrow enough short-term money to fund their obligations, and you can see why credit has dried up.

The fear – a justifiable one – is that if one big financial firm fails, it will lead to cascading failures throughout the world. Big firms are so interlinked with one another and with other market players that the failure of one large counterparty, as they’re called, can drag down counterparties all over the globe. And if the counterparties fail, it could drag down the counterparties’ counterparties, and so on. Meltdown City.
The long-term view

In 1998 the Fed orchestrated a bailout of the Long-Term Capital Management hedge fund because it had $1.25 trillion in transactions with other institutions. These days that’s almost small beer, because Wall Street has created a parallel banking system in which hedge funds, investment banks, and other essentially unregulated entities took over much of what regulated commercial banks used to do.

But there’s a vital difference. Conventional banks have reason to take something of a long-term view: Mess up and you have no reputation, no bank, no job, no one talking to you at the country club.

In the parallel system a different ethos prevails. If you take big, even reckless, bets and win, you have a great year and you get a great bonus – or in the case of hedge funds, 20% of the profits. If you lose money the following year, you lose your investors’ money rather than your own – and you don’t have to give back last year’s bonus. Heads, you win; tails, you lose someone else’s money.

Bernanke and his point man on Wall Street, New York Fed president Tim Geithner, know everything I’ve said, of course. As does Treasury Secretary Hank Paulson, former head of Goldman Sachs (GS, Fortune 500).

They know a lot more too – such as which specific institutions are running out of the ability to borrow and have huge obligations they need to refinance day in and day out. Walk by Fed facilities in New York City or Washington, and you can feel the fear emanating from the building.

Because these aren’t normal times, the Fed has tried to reassure the markets by inventing three new ways to inundate the financial system with staggering amounts of short-term money. This is in addition to the Fed’s existing mechanisms, which are vast.

http://www.minyanville.com/articles/WB-wm-washington-wachovia-Mutual/index/a/18973/p/2
Alt-A is the New Subprime

By now, everyone in the world is aware of how bad the subprime mortgage business was. Now it’s time to get ready to hear the same tale, told again, about Alt-A mortgages. These are mortgages made to borrowers with better credit scores than subprime borrowers, but who couldn’t or decided not to document their income. One estimate is that 70% of Alt-A borrowers may have exaggerated their incomes (Wholesale Access). More than half of those people exaggerated their incomes by 50% or more! (Mortgage Asset Research Institute)

How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. $400 billion of that was sold in 2006. Almost 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late.

Many of these loans (around $270 billion) were interest-only or with a low teaser rate, and the resets were at 3- and 5-year lengths. These are called Option ARMs. That means we’re going to start to see a wave of mortgages resetting to new rates. And it’s no modest increase: Rates can jump 4-8% or more from teaser levels. Some Option ARMs are resetting at 12.25%. That can double a payment.

Wachovia (WB) and Washington Mutual (WM) were big sellers of Alt-A loans, and had $122 billion and $53 billion, respectively, on their books at the end of the second quarter. Is it any wonder their stocks are under pressure?

That’s why it’s so hard to quantify how many more write-offs there will be. You don’t write down a mortgage until it starts to develop problems. These problems may not show up for a few years. I continue to stress I don’t want to own a financial stock that has exposure to mortgage paper. Write-downs are going to continue for a long time.

This means there will be a steady wave of foreclosures for the next 2 years in communities all over the US. As long as these homes keep coming onto the market, they are going to exert downward pressure on prices. Foreclosure sales are up by 109 from this time last year.

3.5 Million Unemployed and Counting

The number of people receiving unemployment benefits jumped to 3.525 million, the highest level since 2003. My friend, Wachovia Chief Economist John Silvia, forecasts that unemployment will rise to 6.7% in 2009 (from 5.5% today) and above 7% in 2010.

Given the inability of US consumers to borrow against their homes, and with rising unemployment, is it any wonder that consumer spending data released this morning showed retail sales dropping 0.3% in August for the second month in a row (July was down 0.5%)? Excluding automobiles, sales dropped 0.7% in August – the most this year.

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=316

Countrywide Bondholders Settle; Paulson Bails as Next Wave of Approaches
October 14, 2008

Before we get to the evolution of the bailout, some pending business from the land of restructuring, where the Countrywide Financial saga continues.

On or about October 10, 2008, Bank of New York Mellon (NYSE:BK) and mortgage lender Countrywide Financial, a subsidiary of Bank of America (NYSE:BAC), agreed to settle a Delaware Chancery Court lawsuit involving Countrywide bondholders. “Under the settlement agreement, Countrywide has agreed to commence a tender offer by Oct. 20 for its Series B floating rate convertible senior debentures due 2037. The purchase price for the tender offer will be $980 per $1,000 principal amount of bonds, plus accrued interest,” reports CNN Money.

A reader named Michele writes in agitated spirit, accusing us of poor journalism and worse for not predicting that BAC, behalf of the Countrywide Financial bond holders, would fold so quickly and make these creditors whole. Could Michele be short the CDS? Remember dear friends, The IRA is not an investment advisory service, merely our thoughts on the world. Those of you who speculate on the possible default on a given name or security should seek the counsel of a cleric or bartender.

Says Michele: “There are 2 tranches of convertible debt, the series A and the series B. How do you explain that the series A which are puttable at par this week have been paid off voluntarily by BAC? Secondly the series B action was regarding change of control language, nothing to do with fear of bankruptcy, and finally did you know (apparently not) that BAC in exchange for the MSR put in a 20 billion $ on demand promissory note to pay off all CFC debt obligations. I can’t imagine any explanation on your part other than you got this one wrong.”

No Michele, we was and are right. But let us again go through the saga, the final endgame of which even we still don’t entirely understand. The key to being a good analyst/journalist is always say when you don’t know.

First, even with the $20 billion consideration paid by BAC for the Countrywide servicing business, there still may not be enough assets remaining to satisfy the liquidated and unliquidated claims. This is the key point we made with respect to BAC’s peculiar handling of the Countrywide purchase, a point which was confirmed by the trustee’s lawsuit in Delaware Court. For our original report on the Countrywide/BAC union, (See “Are Countrywide Financial Bonds Bankruptcy Remote?”).

Second, to the holders of Series B floating rate convertible senior debentures due 2037, all we can say is don’t count your chickens until 90 days have elapsed since the payment date. An aggressive bankruptcy trustee might well seek to recover the funds paid out in the tender. But it may not come to a restructuring. And just where are the other indenture trustees behalf of the other countrywide debt holders given the action in DE court?

A cynic might say that BAC has had it both ways with Countrywide; BAC purchased the servicing portfolio out of Countrywide as Michele correctly states, keeping this asset safely out of the way of a bankruptcy, and paying well for same with a $20 billion IOU. This generosity caused the indenture trustee for at least one class of Countrywide Financial debt to rouse itself and to demand repayment, but that still leaves the other creditors and, most important, the unliquidated claims currently in litigation, unresolved. Do we discern a pattern?

Keep in mind that the FDIC-insured bank subsidiary of the firm now known as Countrywide, Countrywide Bank FSB, is losing money at a pretty rapid clip. ROE as of June 30, 2008 was -36% and ROA was -2.58% vs. the bank’s $118 billion in total assets. From a creditor perspective, you have to wonder what if anything will be left if Countrywide Bank must be recapitalized with the remaining assets in the parent holding company. The bank had over 6% tier one capital leverage as of the end of Q2 2008, but look at the negative ROE and the 275bp of default (annualized) through the same date and do the math.

Third, no, we see nothing nefarious in BAC paying the Series A as contracted. To us, the key pattern of consistency in this strange saga has been that the BAC personnel (a) have nothing to say on or off the record and (b) have played the liquidation of Countrywide Financial entirely straight. There is nothing we know of in the public record that suggests that BAC has been anything but fair in administering the claims against Countrywide Financial. Who is to say that BAC is not hoping to pay all or most of the liquidated claims against Countrywide Financial, and then allow one of the remaining creditors to flush the litigation in a bankruptcy?

Note the way in which BAC has been content to allow other parties to make the moves with respect to Countrywide Financial. BAC has allowed one creditor to extricate themselves from the Countrywide mess sans bankruptcy. Given the settlement announcement Friday, there appears to be sufficient basis for the other indenture trustees to demand repayment as well. Meanwhile, various civil plaintiffs and state AGs continue to press their as yet unliquidated claims in the courts.

We see BAC strategy with respect to Countrywide as the classic passive aggressive. The BAC managers won’t do anything unless compelled to do so, so as not to create the basis for an adversarial claim in a possible bankruptcy. But what happens when the bank sub starts consuming the remaining assets? Our view only, you understand.

Why Bailout the Banksters?

And now to the crisis. The equity infusion concept seems to have penetrated the thick cranial cavities of the Washington elite, yet according to today’s headlines some $250 billion in public largesse seems to be flowing to the investment banking friends of Hank Paulson instead of to support banks. What gives?

According to our friend Josh Rosner, the money gets distributed accordingly: New capital for $25 billion each to Citi & JPMorgan; $20 billion to BAC & Wells Fargo (NYSE:WFC); $10 billion each for Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS); $2 to $3 billion for BK and State Street (NYSE:STT); WFC will get additional $5 billion for Wachovia and BAC gets additional $5 billion for acquiring Merrill Lynch (NYSE:MER).

Click here to see the September 23, 3008 letter to member of Congress by John Allison, Chairman & CEO of BB&T (NYSE:BBT). Writes Allison: “We think it is important that Congress hear from the well run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.” We support equity injections into solvent depositories to support loans and customer deposits, but subsidizing the broker-dealer operations of the remaining banksters and their rancid derivatives books seems a tad ridiculous.

In the wake of the bankruptcy of Lehman Brothers, it is clear to us, at least, that the GS and MS should be sold to or merged with commercial banks and as soon as possible. The legacy, “franchise value” of these firms will never be higher. And of course the Mitsubishi UFJ Financial Group (NYSE:MTU) arrives in the nick of time. Yet again our friends in Tokyo are shown to be a lagging indicator.

But do we really want to lend taxpayer support to floating the last dinosaurs on Wall Street? Please. The reason we are a seller of the GS and MS franchises has to do with the changing business model. That special culture that made GS, MS and other independent dealer firms swashbuckling, borderline criminal enterprises is heading for extinction. Why? Because both of these securities dealers are about to become regulated banks or part of banks, that is, utilities, where payouts to deal guys and gals will be constrained.

Within a matter of weeks or even months, the exodus of smart people will begin as the deal makers migrate to alternative platforms where they can best be compensated for ideas and relationships. Investment banking, after all, is about communicating ideas, nothing more, so the lower the SG&A, the better the yield to commission. The rise of new boutique banking firms is already well underway, but they may well be spending most of their time on restructuring.

In practical terms, due to the depth of the hole which the financial markets have dug for themselves in the US, EU and elsewhere, there must be a substantial role for the government as market maker and capital provider for depository institutions. But we should not expect the government to replace private capital or banking professionals in making the markets function, nor use public funds to bailout speculative activities.

It’s All About Deflation

Six months ago, the problem affecting the markets was perceived to be liquidity or lack thereof. More recently, we have seen the emphasis shift to solvency or the fear of not getting paid, the difference between a market disturbance and a systemic panic.

But ahead lies the prospect of global deflation as the combination of greatly reduced credit availability and sharply lower consumption send the US and the Rest of the World into a prolonged period of economic contraction. It’s not that we are bearish, you understand, but instead we merely observe the global economic system adjusting to significant changes in the underlying financial model.

Just as the financial system skewed to the downside during the 2004-2007 mortgage bubble, pretending that risk equaled zero and value was price, now we are skewing to the other extreme, where risk is infinite and price is effectively zero for many asset classes, whether performing or not. This environment makes writing new business difficult if not impossible for banks.

James Bianco observed to a thread the other day: “The problem is more than banks unwilling to lend to each other, they are also unwilling to borrow from each other. Banks can get all the funding they need (and then some) from their central bank so they do not need to seek a loan from another bank.” True, but we have also eliminated trillions of dollars in financing capacity from the global economy.

We can foresee a situation where it may be necessary to allow counterparties in the interbank/interdealer markets to face the DTCC, with the federal reserve banks and clearinghouse members in each district guaranteeing trades for a short period, say from now through the end of 2008. This could help to eliminate counterparty risk and restore function to the markets. But to Bianco’s point, such moves may not even be necessary.

In fact, maybe the first sign of true recovery will be when the Fed slowly starts to force banks back into the private markets to seek funding, this even while Treasury very publicly makes capital available. To this end, it might be useful for the banking industry to proactively embrace some type of cross-guarantee structure, using the carrot of lower insurance premiums and the stick of enforcement actions to keep all institutions in line when it comes to performance and safety and soundness. Given the FDIC’s power to tax bank capital and earnings, a cross-guarantee scheme seems an obvious way for banks to bolster confidence and claim credit for being proactive.

In our view, the FDIC should combine an aggressive program to work through the troubled bank list with an enhanced regime of performance benchmarking to bolster the industry for approaching losses in 2H 2008 and 2009. Remember, just as the risk skew on the downside during 2004-2007 period was extreme, the mean reversion process now underway could take bank loan loss rates in the US well above early 1990s levels, the highest peak loss rate period since the Depression. The $250 billion in capital injections for the Friends of Hank will be just the down payment to get through the wave of loan losses headed for some of the larger players in the US banking sector. But don’t forget that most smaller, better managed banks in the US will neither want nor need government assistance. More on this next week.

http://finance.yahoo.com/tech-ticker/article/yftt_98280/Bailout-Nation-More-Govt.-Control-of-JPMorgan-Citi-BofA-Coming;_ylt=AmEMYUAAya1NNAhIBpTvpDJk7ot4?tickers=JPM,C,BAC,XLF,WFC,AIG,FNM

Bailout Nation: More Govt. Control of JPMorgan, Citi, BofA Coming
Posted Oct 20, 2008 11:32am EDT by Aaron Task in Investing, Recession, Banking
Related: JPM, C, BAC, XLF, WFC, AIG, FNM

Rather than resolving the crisis, the government’s plan to inject capital into big banks is “merely the appetizer and soup course” in what will ultimate be a multi-course meal, says Christopher Whalen, managing director at Institutional Risk Analytics.

So what does Whalen see as the main course? Greater government control, if not outright ownership, of the nation’s biggest banks, including:

* Citigroup, which Whalen says is the “riskiest” of the group because of its exposure to consumer loans.
* Bank of America, which faces more Countrywide-related litigation and keeps more of its loans in house, meaning it has “whole loan” risk.
* JPMorgan, which is heavily exposed to potential defaults by businesses and is what Whalen calls an “over-the-counter derivatives exchange with a bank attached.”

Whalen, lauded for forecasting the banking crisis when most others were sanguine, believes the U.S. banking system is going to face $250 billion to $300 billion in additional loan losses in the coming 6 to 9 months. In anticipation of such heavy losses, banks are now diverting capital into loan loss reserves rather than seeking to make new loans.

So when policymakers and politicians say the taxpayer monies injected into the banks is going to be used to make loans, “they are lying to us,” Whalen says, using the kind of candor others are afraid of or can’t afford.

http://www.spinwatch.org/-articles-by-category-mainmenu-8/68-us-politics/5231-federal-reserve-sets-stage-for-weimar-style-hyperinflation

Federal Reserve sets stage for Weimar-style Hyperinflation PDF Print E-mail

F. William Engdahl, 17 December 2008

The Federal Reserve has bluntly refused a request by a major US financial news service to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and to reveal the assets the central bank is accepting as collateral. Their lawyers resorted to the bizarre argument that they did so to protect ‘trade secrets.’ Is the secret that the US financial system is de facto bankrupt? The latest Fed move is further indication of the degree of panic and lack of clear strategy within the highest ranks of the US financial institutions. Unprecedented Federal Reserve expansion of the Monetary Base in recent weeks sets the stage for a future Weimar-style hyperinflation perhaps before 2010.

On November 7 Bloomberg filed suit under the US Freedom of Information Act (FOIA) requesting details about the terms of eleven new Federal Reserve lending programs created during the deepening financial crisis.

The Fed responded on December 8 claiming it’s allowed to withhold internal memos as well as information about ‘trade secrets’ and ‘commercial information.’ The central bank did confirm that a records search found 231 pages of documents pertaining to the requests.

The Bernanke Fed in recent weeks has stepped in to take a role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program (TARP). The difference between a Fed bailout of troubled financial institutions and a Treasury bailout is that central bank loans do not have the oversight safeguards that Congress imposed upon the TARP. Perhaps those are the ‘trade secrets the hapless Fed Chairman,Ben Bernanke, is so jealously guarding from the public.

Coming hyperinflation?

The total of such emergency Fed lending exceeded $2 trillion on Nov. 6. It had risen by an astonishing 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA. They did so knowing that on the following day a dramatic shock to the financial system would occur because they, in concert with the Bush Administration, had decided to let it occur.

On September 15 Bernanke, New York Federal Reserve President, Tim Geithner, the new Obama Treasury Secretary-designate, along with the Bush Administration, agreed to let the fourth largest investment bank, Lehman Brothers, go bankrupt, defaulting on untold billions worth of derivatives and other obligations held by investors around the world. That event, as is now widely accepted, triggered a global systemic financial panic as it was no longer clear to anyone what standards the US Government was using to decide which institutions were ‘too big to fail’ and which not. Since then the US Treasury Secretary has reversed his policies on bank bailouts repeatedly leading many to believe Henry Paulson and the Washington Administration along with the Fed have lost control.

In response to the deepening crisis, the Bernanke Fed has decided to expand what is technically called the Monetary Base, defined as total bank reserves plus cash in circulation, the basis for potential further high-powered bank lending into the economy. Since the Lehman Bros. default, this money expansion rose dramatically by end October at a year-year rate of growth of 38%, has been without precedent in the 95 year history of the Federal Reserve since its creation in 1913. The previous high growth rate, according to US Federal Reserve data, was 28% in September 1939, as the US was building up industry for the evolving war in Europe.

By the first week of December, that expansion of the monetary base had jumped to a staggering 76% rate in just 3 months. It has gone from $836 billion in December 2007 when the crisis appeared contained, to $1,479 billion in December 2008, an explosion of 76% year-on-year. Moreover, until September 2008, the month of the Lehman Brothers collapse, the Federal Reserve had held the expansion of the Monetary Base virtually flat. The 76% expansion has almost entirely taken place within the past three months, which implies an annualized expansion rate of more than 300%.

Despite this, banks do not lend further, meaning the US economy is in a depression free-fall of a scale not seen since the 1930’s. Banks do not lend in large part because under Basle BIS lending rules, they must set aside 8% of their capital against the value of any new commercial loans. Yet the banks have no idea how much of the mortgage and other troubled securities they own are likely to default in the coming months, forcing them to raise huge new sums of capital to remain solvent. It’s far ‘safer’ as they reason to pass on their toxic waste assets to the Fed in return for earning interest on the acquired Treasury paper they now hold. Bank lending is risky in a depression.

Hence the banks exchange $2 trillion of presumed toxic waste securities consisting of Asset-Backed Securities in sub-prime mortgages, stocks and other high-risk credits in exchange for Federal Reserve cash and US Treasury bonds or other Government securities rated (still) AAA, i.e. risk-free. The result is that the Federal Reserve is holding some $2 trillion in largely junk paper from the financial system. Borrowers include Lehman Brothers, Citigroup and JPMorgan Chase, the US’s largest bank by assets. Banks oppose any release of information because that might signal ‘weakness’ and spur short-selling or a run by depositors.

Making the situation even more drastic is the banking model used first by US banks beginning in the late 1970’s for raising deposits, namely the acquiring of ‘wholesale deposits’ by borrowing from other banks on the overnight interbank market. The collapse in confidence since the Lehman Bros. default is so extreme that no bank anywhere, dares trust any other bank enough to borrow. That leaves only traditional retail deposits from private and corporate savings or checking accounts.

To replace wholesale deposits with retail deposits is a process that in the best of times will take years, not weeks. Understandably, the Federal Reserve does not want to discuss this. That is clearly also behind their blunt refusal to reveal the nature of their $2 trillion assets acquired from member banks and other financial institutions. Simply put, were the Fed to reveal to the public precisely what ‘collateral’ they held from the banks, the public would know the potential losses that the government may take.

Congress is demanding more transparency from the Federal Reserve and US Treasury on its bailout lending. On December 10 in Congressional hearings by the House Financial Services Committee, Representative David Scott, a Georgia Democrat, said Americans had ‘been bamboozled,’ slang for defrauded.

Hiccups and Hurricanes

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system. The Freedom of Information Act obliges federal agencies to make government documents available to the press and public.

In early December the Congress oversight agency, GAO, issued its first mandated review of the lending of the US Treasury’s $700 billion TARP program (Troubled Asset Relief Program). The review noted that in 30 days since the program began, Henry Paulson’s office had handed out $150 billion of taxpayer money to financial institutions with no effective accountability of how the money is being used. It seems Henry Paulson’s Treasury has indeed thrown a giant ‘tarp’ over the entire taxpayer bailout.

Further adding to the troubles in the world’s former financial Mecca, the US Congress, acting on largely ideological grounds, shocked the financial system when it refused to give even a meager $14 billion emergency loan to the Big Three automakers-General Motors, Chrysler and Ford.

While it is likely that the Treasury will extend emergency credit to the companies until January 20 or until the newly elected Congress can consider a new plan, the prospect of a chain-reaction bankruptcy collapse of the three giant companies is very near. What is being left out of the debate is that those three companies account for a combined 25% of all US corporate bonds outstanding. They are held by private pension funds, mutual funds, banks and others. If the auto parts suppliers of the Big Three are included, an estimated $1 trillion of corporate bonds are now at risk of chain-reaction default. Such a bankruptcy failure could trigger a financial catastrophe which would make what has happened since Lehman Bros. appear as a mere hiccup in a hurricane.

As well, the Federal Reserve’s panic actions since September, by their explosive expansion of the monetary base, has set the stage for a Zimbabwe-style hyperinflation. The new money is not being ‘sterilized’ by offsetting actions by the Fed, a highly unusual move indicating their desperation. Prior to September the Fed’s infusions of money were sterilized, making the potential inflation effect ‘neutral.’

Defining a Very Great Depression

That means once banks begin finally to lend again, perhaps in a year or so, that will flood the US economy with liquidity in the midst of a deflationary depression. At that point or perhaps well before, the dollar will collapse as foreign holders of US Treasury bonds and other assets run. That will not be pleasant as the result would be a sharp appreciation in the Euro and a crippling effect on exports in Germany and elsewhere should the nations of the EU and other non-dollar countries such as Russia, OPEC members and, above all, China not have arranged a new zone of stabilization apart from the dollar.

The world faces the greatest financial and economic challenges in history in coming months. The incoming Obama Administration faces a choice of literally nationalizing the credit system to insure a flow of credit to the real economy over the next 5 to 10 years, or face an economic Armageddon that will make the 1930’s appear a mild recession by comparison.

Leaving aside what appears to have been blatant political manipulation by the present US Administration of key economic data prior to the November election in a vain attempt to downplay the scale of the economic crisis in progress, the figures are unprecedented. For the week ended December 6 initial jobless claims rose to the highest level since November 1982. More than four million workers remained on unemployment, also the most since 1982 and in November US companies cut jobs at the fastest rate in 34 years. Some 1,900,000 US jobs have vanished so far in 2008.

As a matter of relevance, 1982, for those with long memories, was the depth of what was then called the Volcker Recession. Paul Volcker, a Chase Manhattan appendage of the Rockefeller family, had been brought down from New York to apply his interest rate ‘shock therapy’ to the US economy in order as he put it, ‘to squeeze inflation out of the economy.’ He squeezed far more as the economy went into severe recession, and his high interest rate policy detonated what came to be called the Third World Debt Crisis. The same Paul Volcker has just been named by Barack Obama as chairman-designate of the newly formed President’s Economic Recovery Advisory Board, hardly grounds for cheer.

The present economic collapse across the United States is driven by the collapse of the $3 trillion market for high-risk sub-prime and Alt-A home mortgages. Fed Chairman Bernanke is on record stating that the worst should be over by end of December. Nothing could be farther from the truth, as he well knows. The same Bernanke stated in October 2005 that there was ‘no housing bubble to go bust.’ So much for the predictive quality of that Princeton economist. The widely-used S&P Schiller-Case US National Home Price Index showed a 17% year-year drop in the third Quarter, trend rising. By some estimates it will take another five to seven years to see US home prices reach bottom. In 2009 as interest rate resets on some $1 trillion worth of Alt-A US home mortgages begin to kick in, the rate of home abandonments and foreclosures will explode. Little in any of the so-called mortgage amelioration programs offered to date reach the vast majority affected. That process in turn will accelerate as millions of Americans lose their jobs in the coming months.

John Williams of the widely-respected Shadow Government Statistics report, recently published a definition of Depression, a term that was deliberately dropped after World War II from the economic lexicon as an event not repeatable. Since then all downturns have been termed ‘recessions.’ Williams explained to me that some years ago he went to great lengths interviewing the respective US economic authorities at the Commerce Department’s Bureau of Economic Analysis and at the National Bureau of Economic Research (NBER), as well as numerous private sector economists, to come up with a more precise definition of ‘recession,’ ‘depression’ and ‘great depression.’ His is pretty much the only attempt to give a more precise definition to these terms.

What he came up with was first the official NBER definition of recession: Two or more consecutive quarters of contracting real GDP, or measures of payroll employment and industrial production. A depression is a recession in which the peak-to-bottom growth contraction is greater than 10% of the GDP. A Great Depression is one in which the peak-to-bottom contraction, according to Williams, exceeds 25% of GDP.

In the period from August 1929 until he left office President Herbert Hoover oversaw a 43-month long contraction of the US economy of 33%. Barack Obama looks set to break that record, to preside over what historians could likely call the Very Great Depression of 2008-2014, unless he finds a new cast of financial advisers before Inauguration Day, January 20. Required are not recycled New York Fed presidents, Paul Volckers or Larry Summers types. Needed is a radically new strategy to put virtually the entire United States economy into some form of an emergency ‘Chapter 11′ bankruptcy reorganization where banks take write-offs of up to 90% on their toxic assets, that, in order to save the real economy for the American population and the rest of the world. Paper money can be shredded easily. Not human lives. In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal Government as the Constitution originally specified, and make the entire process easier for all. If this sounds extreme, perhaps revisit this article in six months again.

########## TED Spread
The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt (“T-bills”).

Initially, the TED spread was the difference between the interest rates for three-month U.S. Treasuries contracts and the three-month Eurodollars contract as represented by the London Interbank Offered Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped T-bill futures, the TED spread is now calculated as the difference between the three-month T-bill interest rate and three-month LIBOR.

TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract. The size of the spread is usually denominated in basis points (bps). For example, if the T-bill rate is 5.10% and ED trades at 5.50%, the TED spread is 40 bps. The TED spread fluctuates over time, but historically has often remained within the range of 10 and 50 bps (0.1% and 0.5%), until 2007. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.

Indicator

The TED spread is an indicator of perceived credit risk in the general economy.[1] This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. Interbank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases.[2]

[edit] Historical levels

During 2007, the subprime mortgage crisis ballooned the TED spread to a region of 150-200 bps. On September 17, 2008, the record set after the Black Monday crash of 1987 was broken as the TED spread exceeded 300 bps.[3] Some higher readings for the spread were due to inability to obtain accurate LIBOR rates in the absence of a liquid unsecured lending market.[4] On October 10, 2008, the TED spread reached another new high of 465 basis points. The longterm average of the TED has been 30 basis points.

[If] you’re lending your money to the U.S. government for three months, you feel pretty much 100 percent certain that in three months the U.S. government is going to be in a position to pay you back. That’s seen as the base of the whole global risk system. Nothing should be cheaper than that, because nothing is less risky.

But pretty close to the second least risky thing is banks lending money to other banks for a period of something like three months. … LIBOR is the London Interbank Offered Rate; it’s the rate set every morning by the British Bankers Association. Basically LIBOR is — if one major top bank in the world wants to lend money for three months to another major top bank in the world, that’s the rate that they do it at. …

The TED Spread, the distance between the Treasury rate and the LIBOR rate, should be very small because that should just be the tiny bit of additional risk between the U.S. government and one of the top banks in the world. It’s mostly been for the last several years before this time around 20 basis points, which means 0.2 percent. Very little daylight between these two rates. Most of its history, I think around 50 basis points, very small, very close together. And suddenly it starts skyrocketing up.

In August ’07.

In August ’07. … It’s close to unprecedented. And really weird stuff happening. In the past, you would see it spike, and then it would come down right away. But it’s sustaining that high, high level. And that’s telling you that banks are not lending money to other banks unless they’re really coaxed into it by giving them a lot of money in return.

And that for sure is beginning to scare the Treasury secretary, the Fed chairman, lots of market players. This is the base of capitalism. This is the base of our financial system — banks lending money to other banks.

############## Derivatives

The Definition
Derivatives are financial products with value that stems from an underlying asset or set of assets. These can be stocks, debt issues, or almost anything. A derivative’s value is based on an asset, but ownership of a derivative doesn’t mean ownership of the asset.

Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps.

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI)

The Future of Healthy Hen Farms
Gail, the owner of Healthy Hen Farms, is worried about the volatility of the chicken market with all the sporadic reports of bird flu coming out of the east. Gail wants a way to protect her business against another spell of bad news. Gail meets with an investor who enters into a futures contract with her.

The investor agrees to pay $30 per bird when the birds are ready for slaughter, say, in six months time, regardless of the market price. If, at that time, the price is above $30, the investor will get the benefit as he or she will be able to buy the birds for less than market cost and sell them onto the market at a higher price for a gain.

If the price goes below $30, then Gail will be receiving the benefit because she will be able to sell her birds for more than the current market price, or what she would have gotten for the birds in the open market.

By entering into a futures contract, Gail is protected from price changes in the market, as she has locked in a price of $30 per bird. She may lose out if the price flies up to $50 per bird on a mad cow scare, but she will be protected if the price falls to $10 on news of a bird flu outbreak.

By hedging with a futures contract, Gail is able to focus on her business and limit her worry about price fluctuations.

Swapping
Gail has decided that it’s time to take Healthy Hen Farms to the next level. She has already acquired all the smaller farms near her and is looking at opening her own processing plant. She tries to get more financing, but the lender, Lenny, rejects her.

The reason is that Gail financed her takeovers of the other farms through a massive variable-rate loan and the lender is worried that, if interest rates rise, Gail won’t be able to pay her debts. He tells Gail that he will only lend to her if she can convert the loan to a fixed-rate. Unfortunately, her other lenders refuse to change her current loan terms because they are hoping interest rates will increase too.

Gail gets a lucky break when she meets Sam, the owner of a chain of restaurants. Sam has a fixed-rate loan about the same size as Gail’s and he wants to convert it to a variable-rate loan because he hopes interest rates will decline in the future.

For similar reasons, Sam’s lenders won’t change the terms of the loan. Gail and Sam decide to swap loans. They work out a deal by which Gail’s payments go toward Sam’s loan and his go toward Gail’s loan. Although the names on the loans haven’t changed, their contract allows them both to get the type of loan they want

This is a bit risky for both of them because if one of them defaults or goes bankrupt, the other will be snapped back into his or her old loan, which may require a payment for which either Gail of Sam may be unprepared. But it allows for them to modify their loans to meet their individual needs.

Buying Debt
Lenny, Gail’s financier, ponies up the additional capital at a favorable interest rate and Gail goes away happy. Lenny is pleased as well because his money is out there getting a return, but he is also a little worried that Sam or Gail may fail in their business.

To make matters worse, Lenny’s friend Dale comes to him asking for money to start his own film company. Lenny knows Dale has a lot of collateral and that the loan would be at a higher interest rate because of the more volatile nature of the movie industry, so he’s kicking himself for loaning all his capital to Gail.

Fortunately for Lenny, derivatives offer another solution. Lenny spins Gail’s loan into a credit derivative and sells it to a speculator at a discount to the true value. Although Lenny doesn’t see the full return on the loan, he gets his capital back and can issue it out again to his friend Dale.

Lenny likes this system so much that he continues to spin out his loans as credit derivatives, taking modest returns in exchange for less risk of default and more liquidity.

Options
Years later, Healthy Hen Farms is a publicly traded corporation (the ticker symbol is (obviously) HEN) and is America’s largest poultry producer. Gail and Sam are both looking forward to retirement.

Over the years, Sam bought quite a few shares of HEN. In fact, he has more than $100,000 invested in the company. Sam is getting nervous because he is worried that some shock, another case of bird flu for example, might wipe out a huge chunk of his retirement money. Sam starts looking for someone to take the risk off his shoulders. Lenny, financier extraordinaire and an active writer of options, agrees to give him a hand.

Lenny outlines a deal in which Sam pays Lenny a fee to for the right (but not the obligation) to sell Lenny the HEN shares in a year’s time at their current price of $25 per share. If the share prices plummet, Lenny protects Sam from the loss of his retirement savings.

Lenny is OK because he has been collecting the fees and can handle the risk. This is called a put option, but it can be done in reverse by someone agreeing to buy a stock in the future at a fixed price (called a call option).

################## Collateral

What does it Mean? Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.
Investopedia Says… Collateral is a form of security to the lender in case the borrower fails to pay back the loan.

For example, if you get a mortgage, your collateral would be your house. In margin trading, the securities in your account act as collateral in the case of a margin call.

################ Liquidity

Liquidity is the term used to describe how easy it is to convert assets to cash. The most liquid asset, and what everything else is compared to, is cash. This is because it can always be used easily and immediately.

Certificates of deposit are slightly less liquid, because there is usually a penalty for converting them to cash before their maturity date. Savings bonds are also quite liquid, since they can be sold at a bank fairly easily. Finally, shares of stock, bonds, options and commodities are considered fairly liquid, because they can usually be sold readily and you can receive the cash within a few days. Each of the above can be considered as cash or cash equivalents because they can be converted to cash with little effort, although sometimes with a slight penalty

Moving down the scale, we run into assets that take a bit more effort or time before they can be realized as cash. One example would be preferred or restricted shares, which usually have covenants dictating how and when they might be sold. Other examples are items like coins, stamps, art, and other collectibles. If you were to sell to another collector, you might get full value but it could take a while, even with the internet easing the way. If you go to a dealer instead, you could get cash more quickly, but you may receive less of it.

The least liquid asset is usually considered to be real estate because that can take weeks or months to sell.

When we invest in any assets, we need to keep their liquidity levels in mind because it can be difficult or time consuming to convert certain assets back into cash.

Other than selling an asset, cash can be obtained by borrowing against it. While this may be done privately between two people, it is more often done through a bank. A bank has the cash from many depositors pooled together and can more easily meet the needs of any borrower.

Furthermore, if a depositor needs cash right away, that person can just withdraw it from the bank rather than going to the borrower and demanding payment of the entire note. Thus, banks act as financial intermediaries between lenders and borrowers, allowing for a smooth flow of money and meeting the needs of each side of a loan.

Liquidity and the Stock Market
In the market, liquidity has a slightly different meaning, although still tied to how easily assets, in this case shares of stock, can be converted to cash. The market for a stock is said to be liquid if the shares can be rapidly sold and the act of selling has little impact on the stock’s price. Generally, this translates to where the shares are traded and the level of interest that investors have in the company. Company stock traded on the major exchanges can usually be considered liquid. Often, approximately 1% of the float trades hands daily, indicating a high degree of interest in the stock. On the other hand, company stock traded on the pink sheets or over the counter are often non-liquid, with very few, even zero, shares traded daily.

Another way to judge liquidity in a company’s stock is to look at the bid/ask spread. For liquid stocks, such as Microsoft or General Electric, the spread is often just a few pennies – much less than 1% of the price. For illiquid stocks, the spread can be much larger, amounting to a few percent of the trading price

Liquidity and Companies
One last understanding of liquidity is especially important for investors: the liquidity of companies that we may wish to invest in.

Cash is a company’s lifeblood. In other words, a company can sell lots of widgets and have good net earnings, but if it can’t collect the actual cash from its customers on a timely basis, it will soon fold up, unable to pay its own obligations.

A more stringent measure is the quick ratio, sometimes called the acid test ratio. This uses current assets (excluding inventory) and compares them to current liabilities. Inventory is removed because, of the various current assets such as cash, short-term investments or accounts receivable, this is the most difficult to convert into cash. A value of greater than one is usually considered good from a liquidity viewpoint, but this is industry dependent.

############### Intagible Assets

What can explain the runaway success of an initial public offering from a company with no earnings history? On the other hand, why can a bit of bad news or an earnings report that just misses market expectations send a healthy company’s share price into a nosedive?

When the market ignores a company’s historical financial performance, the market is often responding to “information asymmetry”. The asymmetry occurs because traditional financial reporting methods – audited financial reports, analyst reports, press releases and the like – disclose only a fraction of the information that is relevant to investors. The value of intangible assets – research and development (R&D), patents, copyrights, customer lists and brand equity – represents a large part of that information gap.

Any business professor will tell you that the value of companies has been shifting markedly from tangible assets, “bricks and mortar”, to intangible assets like intellectual capital. These invisible assets are the key drivers of shareholder value in the knowledge economy, but accounting rules do not acknowledge this shift in the valuation of companies. Statements prepared under generally accepted accounting principles do not record these assets. Left in the dark, investors must rely largely on guesswork to judge the accuracy of a company’s value.

A study comparing market value to the book value of 3,500 U.S. companies over a period of two decades shows the dramatic upward rise in intangible value. In 1978, market value and book value were pretty much matched: book value was 95% of market value. Twenty years on, book value was just 28% of market value. Lev Baruch, an accounting professor at New York University’s Stern School of Business, reckons that in the late 1990s businesses invested a staggering $1 trillion per year in intangible assets.

Accounting rules have not kept pace. For instance, if the R&D efforts of a pharmaceuticals company create a new drug that passes clinical trials, the value of that development is not found in the financial statements. It doesn’t show up until sales are actually made, which could be several years down the road. Or consider the value of an e-commerce retailer. Arguably, almost all of its value comes from software development and copyrights and its user base. While the market reacts immediately to clinical trial results or online retailers’ customer churn, these assets slip through financial statements.

There is a serious disconnection between what happens in capital markets and what accounting systems reflect. Accounting value is based on the historical costs of equipment and inventory, whereas market value comes from expectations about a company’s future cash flow, which comes in large part from intangibles such as R&D efforts, patents and good ol’ workforce “know-how”.

Investors’ jumpiness about valuation hardly comes as a surprise. Imagine investing in a company with $2 billion market capitalization but with revenues to date of only $100 million. You would probably suspect that there is a big grey area in the valuation picture. Perhaps you would turn to analysts to supply missing information. But analysts’ metrics help only so much. Rumor and innuendo, PR and the press, speculation and hype tend to fill the information space.

In order to better milk their patents and brands, many companies do measure their worth. But these numbers are rarely available for public consumption. Even when used internally, they can be troublesome. Miscalculating the future cash flows generated from a patent, say, could prompt a management team to build a factory that it cannot afford.

To be sure, investors could benefit from financial reporting that includes improved disclosure. Already a dozen or so countries, including the U.K. and France, allow recognition of brand as a balance sheet asset. The Financial Accounting Standards Board is currently involved in a study to determine whether or not it should require intangibles on the balance sheet. However, because of the enormous difficulty of actually valuing intangibles and the big risk of inaccurate measurements or surprise write-downs, investors should not expect that decision to come any time soon.

It nevertheless pays for investors to try to get a grip on intangibles. Much accounting research is devoted to coming up with ways of valuing them, and, fortunately, techniques are improving. While opinions on suitable approaches still vary sharply, it is worthwhile for investors to take a look.

Here is a place to start: try calculating the total value of a company’s intangible assets. One method is calculated intangible value (CIV). This method overcomes drawbacks of the market-to-book method of valuing intangibles, which simply subtracts a company’s book value from its market value and labels the difference. Because it rises and falls with market sentiment, the market-to-book figure cannot give a fixed value of intellectual capital. CIV, on the other hand, examines earnings performance and identifies the assets that produced those earnings. In many cases, CIV also points to the enormity of the unrecorded value.

Using microprocessor giant Intel as an example, CIV goes something like this:

Step 1: Calculate average pre-tax earnings for the past three years. For Intel, that’s $9.5 billion.

Step 2: Go to the balance sheet and get the average year-end tangible assets for the same three years, which, in this case, is $37.6 billion.

Step 3: Calculate Intel’s return on assets (ROA), by dividing earnings by assets: 25% (nice business to be making chips).

Step 4: For the same three years, find the industry’s average ROA. The average for the semiconductor industry is around 11%.

Step 5: Calculate the excess ROA by multiplying the industry average ROA (11%) by the company’s tangible assets ($37.6 billion). Subtract that from the pre-tax earnings in step one ($9.5 billion). For Intel, the excess is $5.36 billion. This tells you how much more than the average chip maker Intel earns from its assets.

Step 6: Pay the taxman. Calculate the three-year average income tax rate and multiply this by the excess return. Subtract the result from the excess return to come up with an after-tax number, the premium attributable to intangible assets. For Intel (average tax rate 34%), that figure is $3.53 billion.

Step 7: Calculate the net present value of the premium. Do this by dividing the premium by an appropriate discount rate, such as the company’s cost of capital. Using an arbitrary discount rate of 10% yields $35.3 billion.

That’s it. The calculated intangible value of Intel’s intellectual capital – what doesn’t appear on the balance sheet – amounts to a whopping $35.3 billion! Assets that big deserve to see the light of day.

############ Money Market

The money market is a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.

One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems.

The easiest way for us to gain access to the money market is with a money market mutual funds, or sometimes through a money market bank account. These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like Treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets.

Treasury Bills (T-bills) are the most marketable money market security. Their popularity is mainly due to their simplicity. Essentially, T-bills are a way for the U.S. government to raise money from the public. In this tutorial, we are referring to T-bills issued by the U.S. government, but many other governments issue T-bills in a similar fashion.

T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturities. T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity. For example, if you bought a 90-day T-bill at $9,800 and held it until maturity, you would earn $200 on your investment. This differs from coupon bonds, which pay interest semi-annually.

Treasury bills (as well as notes and bonds) are issued through a competitive bidding process at auctions. If you want to buy a T-bill, you submit a bid that is prepared either non-competitively or competitively. In non-competitive bidding, you’ll receive the full amount of the security you want at the return determined at the auction. With competitive bidding, you have to specify the return that you would like to receive. If the return you specify is too high, you might not receive any securities, or just a portion of what you bid for. (More information on auctions is available at the TreasuryDirect website.)

The biggest reasons that T-Bills are so popular is that they are one of the few money market instruments that are affordable to the individual investors. T-bills are usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million. Other positives are that T-bills (and all Treasuries) are considered to be the safest investments in the world because the U.S. government backs them. In fact, they are considered risk-free. Furthermore, they are exempt from state and local taxes.

********** Commercial Bank
A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits.[1] After the Great Depression, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term “commercial bank” to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.

Commercial bank has two possible meanings:

* Commercial bank is the term used for a normal bank to distinguish it from an investment bank.

This is what people normally call a “bank”. The term “commercial” was used to distinguish it from an investment bank. Since the two types of banks no longer have to be separate companies, some have used the term “commercial bank” to refer to banks that focus mainly on companies. In some English-speaking countries outside North America, the term “trading bank” was and is used to denote a commercial bank. During the great depression and after the stock market crash of 1929, the U.S. Congress passed the Glass-Steagall Act 1933-35 (Khambata 1996) requiring that commercial banks engage only in banking activities (accepting deposits and making loans, as well as other fee based services), whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.

It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds.

* Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking).

Types of loans granted by commercial banks

[edit] Secured loan

A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral (i.e., security) for the loan.

[edit] Mortgage loan

A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase the property. Commercial banks, however, are given security – a lien on the title to the house – until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing.

Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers.

In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults.

[edit] Unsecured loan

Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved). These may be available from financial institutions under many different guises or marketing packages:

* credit card debt,
* personal loans,
* bank overdrafts
* credit facilities or lines of credit
* corporate bonds

************** Investment banking

An Investment Bank is a financial institution that deals with raising capital, trading in securities and managing corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in the capital markets (both equity, bond) and insuring bonds (selling CDS or Credit Default Swaps), as well as providing advice on transactions such as mergers and acquisitions. To perform these services in the United States, an adviser must be a licensed broker-dealer, and is subject to SEC (FINRA) regulation. Until the late 1980s, the United States maintained a separation between investment banking and commercial banks. Other developed countries (including G7 countries) have not maintained this separation historically. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) was referred to as the “sell side”.

Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consumed the products and services of the sell-side in order to maximize their return on investment constitutes the “buy side”. Many firms have buy and sell side components.

The last two major bulge bracket firms on Wall Street were Goldman Sachs and Morgan Stanley until both banks elected to convert to traditional banking institutions on September 22, 2008, as part of a response to the U.S. financial crisis.[1] Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JP Morgan Chase, and UBS AG are “universal banks” rather than bulge-bracket investment banks, since they also accept deposits (though not all of them have U.S. branches).

Front office

* Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and advise on mergers and acquisitions. These jobs pay well, so are often extremely competitive and difficult to land. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the investment banking division include mergers and acquisitions (M&A) and corporate finance. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt.

* Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Asset Management market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients’ orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.

* Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. The necessity for numerical ability has created jobs for physics and math Ph.D.s who act as quantitative analysts.

* Merchant banking is a private equity activity of investment banks.[2] Current examples include Goldman Sachs Capital Partners and JPMorgan’s One Equity Partners. (Originally, “merchant bank” was the British English term for an investment bank.)

* Research is the division which reviews companies and writes reports about their prospects, often with “buy” or “sell” ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.

* Strategy is the division which advises external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products.

[edit] Middle office

* Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent ‘bad’ trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as “operational risk” and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.

* Finance areas are responsible for an investment bank’s capital management and risk monitoring. By tracking and analyzing the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm’s global risk exposure and the profitability and structure of the firm’s various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer.

* Compliance areas are responsible for an investment bank’s daily operations’ compliance with government regulations and internal regulations. Often also considered a back-office division.

[edit] Back office

* Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some[who?] believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank, many banks have outsourced operations. It is, however, a critical part of the bank. Due to increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment banks.[citation needed] A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank.

* Technology refers to the information technology department. Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes.

[edit] Chinese wall

An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information.

Size of industry

Global investment banking revenue increased for the fifth year running in 2007, to $84.3 billion.[3] This was up 21% on the previous year and more than double the level in 2003. Despite a record year for fee income, many investment banks have experienced large losses related to their exposure to U.S. sub-prime securities investments.

The United States was the primary source of investment banking income in 2007, with 53% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 32% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 15%. Over the past decade, fee income from the US increased by 80%. This compares with a 217% increase in Europe and 250% increase in Asia during this period. The industry is heavily concentrated in a small number of major financial centres, including New York City, London and Tokyo.

Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, it is only known that many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.[citation needed]

For example, trading bonds and equities for customers is now a commodity business[citation needed], but structuring and trading derivatives retains higher margins in good times – and the risk of large losses in difficult market conditions, such as the credit crunch that began in 2007. Each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities.

In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients).

The fastest growing segment of the investment banking industry are private investments into public companies (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors. These PIPE transactions are non-rule 144A transactions. Large bulge bracket brokerage firms and smaller boutique firms compete in this sector. Special purpose acquisition companies (SPACs) or blank check corporations have been created from this industry.[citations needed]

[edit] Vertical integration

In the U.S., the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities which led to segregation of investment banks from commercial banks. Glass-Steagall was effectively repealed for many large financial institutions by the Gramm-Leach-Bliley Act in 1999.

Another development in recent years has been the vertical integration of debt securitization.[citation needed] Previously, investment banks had assisted lenders in raising more lending funds and having the ability to offer longer term fixed interest rates by converting the lenders’ outstanding loans into bonds. For example, a mortgage lender would make a house loan, and then use the investment bank to sell bonds to fund the debt, the money from the sale of the bonds can be used to make new loans, while the lender accepts loan payments and passes the payments on to the bondholders. This process is called securitization. However, lenders have begun to securitize loans themselves, especially in the areas of mortgage loans. Because of this, and because of the fear that this will continue, many investment banks have focused on becoming lenders themselves,[4] making loans with the goal of securitizing them. In fact, in the areas of commercial mortgages, many investment banks lend at loss leader interest rates[citation needed] in order to make money securitizing the loans, causing them to be a very popular financing option for commercial property investors and developers.[citation needed] Securitized house loans may have exacerbated the subprime mortgage crisis beginning in 2007, by making risky loans less apparent to investors.

[edit] Possible conflicts of interest

Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between investment banking on one side and equity research and trading on the other.

Some of the conflicts of interest that can be found in investment banking are listed here:

* Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble.[citation needed]

* Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.

* Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running. Front running is the illegal practice of a stock broker executing orders on a security for their own account before filling orders previously submitted by their customers, thereby benefiting from any changes in prices induced by those orders.

********** Spin out
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Spin out refers to a type of spin off where a company “splits off” sections of itself as a separate business.

The common definition of spin out is when a division of a company or organization becomes an independent business. The “spin out” company takes assets, intellectual property, technology, and/or existing products from the parent organization.

Many times the management team of the new company are from the same parent organization. Often, a spin-out offers the opportunity for a division to be backed by the company but not be affected by the parent company’s image or history, giving potential to grow existing ideas that had been languishing in an old environment and help them grow in a new environment.

In most cases, the parent company or organization offers support doing one or more of the following:

* investing equity in the new firm,
* being the first customer of the spin-out (helps to create cash flow),
* providing incubation space (desk, chairs, phones, internet access, etc.) or
* providing services such as legal, finance, technology, etc.

All the support from the parent company is provided with the explicit purpose of helping the spin-out grow.

************* J.P. Morgan & Co.
From Wikipedia, the free encyclopedia
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J.P. Morgan & Co. J. P. Morgan & Co. Logo ( 2008 )
Fate Acquired by Chase Manhattan Bank
Successor JPMorgan Chase & Co.
Founded 1871
Founder(s) J. Pierpont Morgan
Defunct 2000
Headquarters New York, NY
J.P. Morgan & Co. logo prior to its merger with Chase Manhattan Bank in 2000
JPMorgan logo prior to its 2008 rebranding

See also: JPMorgan Chase and J.P. Morgan

J.P. Morgan & Co. was a commercial and investment banking institution based in the United States founded by J. Pierpont Morgan and commonly known as the House of Morgan or simply Morgan.

The firm is the direct predecessor of two of the largest banking institutions in the United States and globally, JPMorgan Chase and Morgan Stanley.

In 2000, J.P. Morgan was acquired by Chase Manhattan Bank to form JPMorgan Chase & Co., one of the largest global banking institutions. Today, the J.P. Morgan brand is used to market certain JPMorgan Chase wholesale businesses, including investment banking, commercial banking and asset management. The J.P. Morgan branding was revamped in 2008 to return to its more traditional appearance after several years of depicting the “Chase symbol to the right of a condensed and modernized “JPMorgan”.

Between 1959 and 1989, J.P. Morgan operated as the Morgan Guaranty Trust, following its merger with .
Contents
[edit] Early History
23 Wall Street. Former headquarters of J.P. Morgan & Co.

The origins of the firm date back to 1854 when Junius S. Morgan joined a London-based banking business headed by George Peabody. Over the next ten years, Junius took control of George Peabody & Co., changing the name to J.S. Morgan & Co. Junius’s son, J. Pierpont Morgan, came to work with his father and would later found what would later become J.P. Morgan & Co.

J.P. Morgan & Co., was founded in New York in 1871 as Drexel, Morgan & Co. by J. Pierpont Morgan and Philadelphia banker Anthony J. Drexel.[1] The new merchant banking partnership served initially as an agent for Europeans investing in the United States.

[edit] The House of Morgan

In 1895, Drexel, Morgan & Co. became J.P. Morgan & Co. (see also: John Pierpont Morgan). It financed the formation of the United States Steel Corporation, which took over the business of Andrew Carnegie and others and was the world’s first billion-dollar corporation. In 1895, it supplied the United States government with $62 million in gold to float a bond issue and restore the treasury surplus of $100 million. In 1892, the company began to finance the New York, New Haven and Hartford Railroad and led it through a series of acquisitions that made it the dominant railroad transporter in New England.
September 16 1920: a bomb exploded in front of the headquarters of J.P. Morgan Inc. at 23 Wall Street, injuring 400 and killing 38 people.

Built in 1914, 23 Wall Street was known as “The Corner” and “The House of Morgan,” and for decades the bank’s headquarters was the most important address in American finance. At noon, on September 16, 1920, an anarchist bomb exploded in front of the bank, injuring 400 and killing 38. Shortly before the bomb went off, a warning note was placed in a mailbox at the corner of Cedar Street and Broadway. The warning read: “Remember we will not tolerate any longer. Free the political prisoners or it will be sure death for all of you. American Anarchists Fighters.” While theories abound about who was behind the Wall Street bombing and why they did it, after twenty years of investigation the FBI rendered the file inactive in 1940 without ever finding the perpetrators.

In August 1914, Henry P. Davison, a Morgan partner, traveled to the UK and made a deal with the Bank of England to make J.P. Morgan & Co. the monopoly underwriter of war bonds for UK and France. The Bank of England became a “fiscal agent” of J.P. Morgan & Co. and vice versa. The company also invested in the suppliers of war equipment to Britain and France. Thus, the company profited from the financing and purchasing activities of the two European governments.

[edit] Glass-Steagall and Morgan Stanley

In the 1930s, all J.P. Morgan & Co. along with all integrated banking businesses in the United States, was required by the provisions of the Glass-Steagall Act to separate its investment banking from its commercial banking operations. J.P. Morgan & Co. chose to operate as a commercial bank, because at the time commercial lending was perceived to be more profitable and prestigious business in the post depression era. Additionally, many within J.P. Morgan believed that a change in the climate would allow the company to resume its securities businesses but it would be nearly impossible to reconstitute the bank if it were disassembled.

In 1935, after being barred from securities business for over a year, the heads of J.P. Morgan made the decision to spin off its investment banking operations. Led by J.P. Morgan partners Henry S. Morgan (son of Jack Morgan and grandson of J. Pierpont Morgan) and Harold Stanley, Morgan Stanley was founded on September 16, 1935 with $6.6 million of nonvoting preferred stock from J.P. Morgan partners. In its infancy, Morgan Stanley was headquartered at 2 Wall Street, just down the street from J.P. Morgan and Morgan Stanley bankers routinely used 23 Wall Street for transaction closings.

[edit] Morgan Guaranty Trust

In the years following the spin-off of Morgan Stanley, the securities business proved robust while the parent firm, which incorporated in 1940,[2] was a sleepy firm. By the 1950s J.P. Morgan was only a mid-size bank. In order to bolster its position, in 1959, J.P. Morgan merged with the Guaranty Trust Company of New York to form the Morgan Guaranty Trust Company. As a result of the numerous relationships between the two banks and the complementary characteristics (J.P. Morgan brought a prestigious name and high quality clients and bankers while Guaranty Trust brought significant amounts of capital). Although Guaranty Trust was nearly four times the size of J.P. Morgan at the time of the merger in 1959, the newly-formed Morgan Guaranty was managed primarily by legacy J.P. Morgan employees and J.P. Morgan was considered the buyer.

[edit] Return of J.P. Morgan & Co.

Although ten years after the merger, Morgan Guaranty would establish a bank holding company called J.P. Morgan & Co. Incorporated, it would continue to operate as Morgan Guaranty through the 1980s before beginning to migrate back toward the use of the J.P. Morgan brand. In 1988, the company once again began operating exclusively as J.P. Morgan & Co.

Also, in the 1980s, J.P. Morgan along with other commercial banks pushed the envelope of product offerings toward investment banking, beginning with the issuance of commercial paper. In 1989, the Federal Reserve permitted J.P. Morgan to be the first commercial bank to underwrite a corporate debt offering[3] In the 1990s, J.P. Morgan moved quickly to rebuild its investment banking operations and by the late 1990s would emerge as a top-five player in securities underwriting.

[edit] JPMorgan Chase

By the late 1990s, J.P. Morgan had emerged as a large but not dominant commercial and investment banking franchise with an attractive brand name and a strong presence in debt and equity securities underwriting. Beginning in 1998, J.P. Morgan openly discussed the possibility of a merger and speculation of a pairing with banks including Goldman Sachs, Chase Manhattan Bank, Credit Suisse and Deutsche Bank AG were prevalent.[4] In 2000, Chase Manhattan Bank, which had emerged as one of the largest and fastest growing commercial banks in the United States through a series of mergers over the previous decade, was looking for yet another transformational merger to improve its position in investment banking. On September 13, 2000, Chase Manhattan Bank announced the acquisition of J.P. Morgan & Co. for $30.9 billion.[5][6]

The Gramm-Leach-Bliley Act, passed just a year earlier, repealed the restrictions of Glass-Steagall and allowed consolidation of investment banking and commercial banking operations allowing for the merger of J.P. Morgan and Chase as well as the purchase of Donaldson, Lufkin & Jenrette by Credit Suisse earlier in 2000.

The combined JPMorgan Chase would become one of the largest banks both in the United States and globally offering a full complement of investment banking, commercial banking, retail banking, asset management, private banking and private equity businesses.

*********** Exchange-traded fund
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An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. In a survey of investment professionals conducted in March 2008, 67% called ETFs the most innovative investment vehicle of the last two decades and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios. [1] [2]

Only so-called authorized participants (typically, large institutional investors) actually obtain or redeem shares of an ETF directly from the fund manager, and only then in creation units, large blocks of tens of thousands of ETF shares that can be exchanged in-kind with baskets of the underlying securities. Authorized participants may hold the ETF shares or they may act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets.[3] Other investors, such as individuals using a retail brokerage, trade ETF shares on this secondary market.

An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs

*********** Bulge bracket

The term ‘bulge bracket’ also refers to the first group of investment banks listed on the “tombstone” (financial industry advertisement) notifying the public of a financial transaction or deal. In a public securities offering, within the underwriting syndicate, the bookrunning manager (the bank responsible for maintaining the order book when marketing the offering and therefore in control of allocation of securities to investors) appears above the others in the tombstone and on the cover of the prospectus. The font size of the name of this bank, or banks if there are co-bookrunning managers, is larger and it may “bulge” out.

In common use, the term ‘bulge bracket’ refers loosely (in the US) to the group of investment banks considered to be the largest and most profitable in the world, as measured by various league table standings. Since the criteria for this judgment are unclear, there is often debate over which banks form part of the bulge bracket.

Ultimately it is a subjective term, sometimes based on Thomson Reuters League Tables[1] or other deal and market share rankings. It is also a reference to the most prestigious institutions.

[edit] Firms considered part of the Bulge Bracket
Commonly, the following banks are widely considered to have Bulge Bracket status:[citation needed]

* Bank of America
* Barclays Capital
* Citigroup
* Credit Suisse
* Deutsche Bank
* Goldman Sachs
* JPMorgan
* Morgan Stanley
* UBS

Prior to 2007-08 Subprime Mortgage Crisis

The five American Bulge Bracket firms on Wall Street prior to late 2008 were, from largest to smallest: Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns.

This list shrunk to none as a result of the 2008 subprime mortgage crisis, with Bear Stearns being purchased by JPMorgan Chase, Lehman Brothers having filed for bankruptcy, Merrill Lynch being purchased by Bank of America, and Goldman Sachs and Morgan Stanley moving to become bank holding companies.

[edit] Banks formerly part of the Bulge Bracket

* Bear Stearns, acquired by JPMorgan Chase in March 2008.
* Dillon, Read & Co., acquired by Swiss Bank Corporation in 1997.
* First Boston, acquired by Credit Suisse in 1988 and branded Credit Suisse First Boston, later renamed to Credit Suisse.
* Kuhn, Loeb & Co., merged with Lehman Brothers in 1977, forming Lehman Brothers, Kuhn, Loeb Inc.
* Lehman Brothers, declared bankrupt in September 2008. The Asian and European operations were bought by Nomura. Barclays Capital acquired the North American Lehman operations.
* Merrill Lynch, acquired by Bank of America in September 2008.
* Salomon Brothers, acquired by Travelers (eventually Citigroup) in 1998.

**************** Salomon Brothers

was a Wall Street investment bank. Founded in 1910, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm then known as Phibro Corporation. This proved a “wag the dog” type merger as the parent company became first Phibro-Salomon and then Salomon Inc.[1] and the commodity operations were sold. Eventually Salomon (NYSE:SB) was acquired by Travelers Group in 1998, and following the latter’s merger with Citicorp that same year, Salomon became part of Citigroup.

Period of Innovation

John Gutfreund became managing partner in 1978 and took the company public, staying on as CEO. During its time of greatest prominence in the 1980s, Salomon became noted for its innovation in the bond market, selling the first mortgage-backed security, a hitherto obscure species of financial instrument created by Ginnie Mae. Shortly thereafter, Saloman purchased home mortgages from thrifts throughout the United States and packaged them into mortgage-backed securities, which it sold to local and international investors. Later, it moved away from traditional investment banking (helping companies raise funds in the capital market and negotiating mergers and acquisitions) to almost exclusively proprietary trading (the buying and selling of stocks, bonds, options, etc. for the profit of the company).

Salomon had an expertise in fixed income trading, betting large amounts of money on certain swings in the bond market on a daily basis. The top bond traders called themselves “Big Swinging Dicks”, and were the inspiration for the books The Bonfire of the Vanities and Liar’s Poker (see below).

During this period however the performance of the firm was not to the satisfaction of its upper management. The amount of money being made relative to the amount being invested was small, and the company’s traders were paid in a flawed way which was disconnected from their true profitability (fully accounting for both the amount of money they used and the risk they took). There were debates as to which direction the firm should head in, whether it should prune down its activities to focus on certain areas. For example, the commercial paper business (providing short term day to day financing for large companies), was apparently unprofitable, although some in the firm argued that it was a good activity because it kept the company in constant contact with other businesses’ key financial personnel. It was decided that the firm should try to imitate Drexel Burnham Lambert, using its investment bankers and its own money to urge companies to restructure or engage in leveraged buyouts which would result in financing business for Salomon Brothers. The first moves in this direction were for the firm to compete on the leveraged buyout of RJR Nabisco, followed by the leveraged buyout of Revco stores (which ended in failure).

[edit] Treasury Bond Scandal

In 1991, Salomon trader Paul Mozer was caught submitting false bids to the U.S. Treasury by Deputy Assistant Secretary Mike Basham, in an attempt to purchase more Treasury bonds than permitted by one buyer between December 1990 and May 1991. Salomon was fined $290 million, the largest fine ever levied on an investment bank at the time, weakening it and eventually leading to its acquisition by Travelers Group. CEO Gutfreund left the company in August 1991; a SEC settlement resulted in a fine of $100,000 and his being barred from serving as a chief executive of a brokerage firm.[2] The scandal is covered extensively in the 1993 book Nightmare on Wall Street.

After the acquisition, the parent company (Travelers Group, and later Citigroup) proved culturally averse to the volatile profits and losses caused by proprietary trading, instead preferring slower and more steady growth. Salomon suffered a $100 million loss when it incorrectly bet that MCI Communications would merge with Sprint instead of Worldcom. Subsequently, most of its proprietary trading business was disbanded.

For some time after the mergers the combined investment banking operations were known as Salomon Smith Barney, but reorganization has renamed this entity as Citigroup Global Markets Inc. The Salomon Brothers name, like the Smith Barney name, is now a division and service mark of Citigroup Global Markets.

*************** Bank holding company
A bank holding company is a company which controls one or more banks.

Bank holding company status

New or smaller banks often re-structure themselves into bank holding companies to take advantage of the greater financial flexibility this corporate and legal status permits. Becoming a bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal authority to conduct share repurchases of its own stock.

The downside includes responding to an additional regulatory authorities, especially if there are more than 300 shareholders, at which point the bank holding company is forced to register with the Securities and Exchange Commission. There are also added expenses of operating with an extra layer of administration.

[edit] 2008 Credit Crisis

As a result of the Global financial crisis of 2008, many traditional investment banks and finance corporations such as Goldman Sachs, American Express, CIT Group and General Motors Acceptance Corporation[3] successfully converted to bank holding companies in order to gain access to liquidity and funding. This arrangement allows them access to the Federal Reserve’s discount window and benefit from the Troubled Assets Relief Program, but the companies are now subject to more regulation and their ability to have exposure to risk will be limited.

*********** Morgan Stanley

Morgan Stanley (NYSE: MS) is a global financial services provider headquartered in New York City, New York, United States. It serves a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 33 countries around the world with 600 offices, with an approximate employee workforce of 45,000.[3] The company reports US$779 billion as assets under its management[4].

The corporation, formed by J.P. Morgan & Co. employees Henry S. Morgan (grandson of J.P. Morgan), Harold Stanley and others, came into existence on September 16, 1935. In its first year the company operated with a 24% market share (US$1.1 billion) in public offerings and private placements. The main areas of business for the firm today are Global Wealth Management, Institutional Securities and Investment Management.

The company found itself in the midst of a management crisis in the late 1990s[5] that saw it lose a lot of talent and competence[6] and ultimately saw the firing of its then CEO Philip Purcell in 2005.

On September 21, 2008, it was reported that the Federal Reserve allowed Morgan Stanley to change its status from investment bank to bank holding company. On September 29, 2008, it was announced that Mitsubishi UFJ Financial Group, Japan’s largest bank, will take a stake of $9 billion in Morgan Stanley equity.[7] In the midst of the October 2008 stock market crash, concerns over the completion of the Mitsubishi deal caused a dramatic fall in Morgan Stanley’s stock price to levels last seen in 1994. The stock grew considerably after Mitsubishi UFJ closed the deal to buy 21% of Morgan Stanley on October 14, 2008.

Recent years: 1991–present
Historical logo used by Morgan Stanley in the early 2000s

In 1996, Morgan Stanley acquired Van Kampen American Capital. On February 5, 1997, the company merged with Dean Witter Reynolds, and Discover & Co. the spun-off financial services business of Sears Roebuck. The merged company was briefly known as “Morgan Stanley Dean Witter Discover & Co.” until 1998 when it was known as “Morgan Stanley Dean Witter & Co.” until late 2001. To foster brand recognition and marketing the Dean Witter name was dropped and the firm became “Morgan Stanley”. Morgan Stanley acquired AB Asesores of Spain and entered India in a joint venture with JM Financials in 1999.

In 2001, Morgan Stanley lost ten employees in the September 11, 2001 attacks. In 2005 it moved 2,300 of its employees back to lower Manhattan, at that time the largest such move [13].

In 2004, Morgan Stanley co-managed the Google IPO which is the largest internet IPO in U.S. history. In the same year Morgan Stanley acquired the Canary Wharf Group. On December 19, 2006, after reporting 4th quarter earnings, Morgan Stanley announced the spin-off of its Discover Card unit. In order to cope up with the write-downs during the Subprime mortgage crisis, Morgan Stanley announced on December 19, 2007 that it would receive a US$5 billion capital infusion from the China Investment Corporation in exchange for securities that would be convertible to 9.9% of its shares in 2010.[14]

In August 2008, Morgan Stanley was contracted by the United States Treasury to advise the government on potential rescue strategies for Fannie Mae and Freddie Mac [15].

On September 17, 2008, the British evening-news analysis program Newsnight reported that Morgan Stanley was facing difficulties after a 42% slide in its share price. CEO John Mack wrote in a memo to staff “we’re in the midst of a market controlled by fear and rumours and short-sellers are driving our stock down.” The company was said to explore merger possibilities with CITIC, Wachovia, HSBC, Banco Santander and Nomura.[16]

On September 22, 2008, the last two bulge bracket investment banks in the US, Morgan Stanley and Goldman Sachs, both announced that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street. [17] The Federal Reserve’s approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp. [18]

[edit] Organization

Morgan Stanley splits its businesses into three core business units. These follow below.

[edit] Institutional Securities

Institutional Securities has been the most profitable business segment[19] for Morgan Stanley in recent times. This business segment provides institutions with services such as capital raising and financial advisory services including advice on mergers and acquisitions, restructurings, real estate and project finance, corporate lending etc. The segment also encompasses the Equities and the Fixed Income divisions of the firm.

[edit] Global Wealth Management Group

Global Wealth Management Group provides brokerage and investment advisory services. As of 2008 Q1 this segment has reported an annual increase of 12 percent in the pre-tax income[20]. This segment provides financial and wealth planning services to its clients who are mainly high net worth individuals and hedge funds.

[edit] Asset Management

Asset Management provides global asset management products and services in equity, fixed income, alternative investments and private equity to institutional and retail clients through third-party retail distribution channels, intermediaries and Morgan Stanley’s institutional distribution channel. Morgan Stanley’s asset management activities are principally conducted under the Morgan Stanley and Van Kampen brands. It provides asset management products and services to institutional investors worldwide, including pension plans, corporations, private funds, non-profit organizations, foundations, endowments, governmental agencies, insurance companies and banks. As of 2008 Q1 the segment posted a pre-tax loss of US$161 million

********** Smith Barney
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Smith Barney Smith Barney logo
Type Subsidiary of Citigroup
Founded 1873
Founder(s) Charles D. Barney
Edward B. Smith
Headquarters New York, USA
Key people Charles Johnston President
Industry Finance and Insurance
Products Brokerage
Investment Banking
Asset Management
Revenue $10.5 Billion USD 2007
Net income $1.4 Billion USD 2007
Employees 14,858
Website http://www.smithbarney.com

Smith Barney is a division of Citigroup Global Capital Markets Inc., a global, full-service financial firm, that provides brokerage, investment banking and asset management services to corporations, governments and individuals around the world. In 800 offices, Financial Advisors service 9.6 million domestic client accounts representing $1.562 trillion in client assets worldwide.[1] Clients range from individual investors to small- and mid-sized businesses, as well as large corporations, non-profit organizations and family foundations.
Contents

[edit] Origins

Smith Barney & Co. was formed in 1938 through the merger of Charles D. Barney & Co., founded in 1873, and Edward B. Smith & Co., founded in 1892. In the late 1980s the retail brokerage firm Smith Barney was owned by Primerica Financial Services. Commercial Credit purchased Primerica in 1988, for $1.5 billion. In 1992, they paid $722 million to buy a 27 percent share of Travelers Insurance. By the end of 1993, the merged company was known as Travelers Group Inc. In September 1997, Travelers acquired Salomon Inc. (parent company of Salomon Brothers Inc.), for over $9 billion in stock, and merged it with its own investment arm to create Salomon Smith Barney.

In April 1998 Travelers Group announced an agreement to undertake a $76 billion merger between Travelers and Citicorp, creating the largest single financial services company in the world. It now has over one trillion U.S. dollars in assets.

On January 13, 2009, Morgan Stanley and Citigroup announced the merger of Smith Barney with Morgan Stanley’s Global Wealth Management Group, with Morgan Stanley paying US$2.7 billion cash upfront to Citigroup for a 51 percent stake in the joint venture. The joint venture will operate under the name Morgan Stanley Smith Barney.[2]

************* Gramm-Leach-Bliley Act

http://www.fool.com/investing/general/2009/04/06/whos-more-to-blame-wall-street-or-the-repealers-of.aspx

Who’s More to Blame: Wall Street or the Repealers of the Glass-Steagall Act?

http://www.fool.com/investing/general/2009/04/06/whos-more-to-blame-wall-street-or-the-repealers-of.aspx

Morgan Housel and Christopher Barker
April 6, 2009

Join the Fool as we assess blame for this financial meltdown — March Madness bracket style! Below is the final matchup for ultimate blame. With your vote, you will declare the worst offender!

The case for Wall Street, by Morgan Housel
How ironic that as the masses are irked over the ever-growing role of government in our economy, many of the same people are furious with a group of political renegades who allowed free markets to reign.

But it’s true: The repealers of the Glass-Steagall Act really, really screwed things up. Every time you think of the damage Citigroup (NYSE: C) and Bank of America (NYSE: BAC) continue to inflict on our economy, please, think of those lawmakers and clench your fists.

They should not, however, be targeted as more to blame than Wall Street itself. Ambition, instability, and most importantly greed flourished on Wall Street well before Glass-Steagall was canned a decade ago. The act’s enforcement would not have prevented a tremendous amount of our financial fiasco.

For example, the shadow banking system — nonbank lenders like Bear Stearns, Lehman Brothers, and the former incarnations of Goldman Sachs (NYSE: GS), and Morgan Stanley (NYSE: MS) — sits at the epicenter of the financial meltdown, yet resides largely outside of Glass-Steagall’s reach. Such joys as 30-to-1 leverage, unfettered risk taking, and the threat of “too big to fail” could — and did — occur with Glass-Steagall in place. Anyone remember Long-Term Capital Management?

Besides, plenty of commercial banks collapsed without the investment banking units Glass-Steagall would have prevented. Look no further than the failures and absurd lending practices of Washington Mutual, Wachovia, or IndyMac. Many of these commercial banks were also pioneers of lending practices that fueled the housing boom. The machine of lax underwriting by standalone commercial banks securitized by the shadow banking system could have operated efficiently and legally with Glass-Steagall in place.

The repeal of Glass-Steagall did indeed add fuel to a roaring fire, but the fire itself was the greed, immorality, and stupidity of Wall Street.

The case for the repealers of the Glass-Steagall act, by Christopher Barker
When Shamu the killer whale performs, decked out in nature’s tuxedo, the only threat to audience members is the soaking from a choreographed splash.

In the regulated aquarium environment, Shamu’s predatory instincts are tamed into submission. In the wild, however, orcas are fierce and crafty predators, feasting mercilessly upon cute little seals and beloved dolphins. As deplorable as their behavior might be to the fans of charismatic sea mammals, we don’t condemn the wild orca for being a killer whale.

The culture of greed that pervades Wall Street presents a similar conundrum. In boom times, greed is cheered as the engine of capitalism, and even touted in the mantras of oracles like Berkshire-Hathaway’s (NYSE: BRK-A) Warren Buffett. Now that we’ve gone bust once more, greed is again unfashionable, and regulatory controls like those set by Glass-Steagall after the prior depression are destined to return.

The sharks on Wall Street have committed outrageous acts, and they swim within a sea of shame, but the greater shame belongs to their would-be handlers. In removing the Glass-Steagall safety net, Congress betrayed its constituents, Alan Greenspan doomed his legacy, and lobbyists for companies like Citigroup and JPMorgan Chase (NYSE: JPM) earned their keep.

By setting banks and brokerages free from the regulated swimming pool, the repealers of Glass-Steagall knowingly unleashed a swarm of killer whales into the ocean of global finance. Thomas Jefferson considered banks “more dangerous than standing armies,” while Andrew Jackson called them “a den of vipers and thieves,” so the nature of the beast has been well known for centuries. For ignoring that danger and permitting systemic risk to multiply in the shadows — most notably through the $1 quadrillion global market for derivatives — the repealers of Glass-Steagall unmistakably carry the greatest burden of blame for this ongoing crisis.

The Motley Fool: Print Article (12 May 2009)

http://www.fool.com/server/printarticle.aspx?file=/investing/general/2009/04/06/whos-more-to-blame-wall-street-or-the-repealers-of.aspx

http://snipurl.com/hvuq1

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999, is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services under brands including Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process [1]. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

Legislative history
Final Congressional vote by chamber and party, November 4th, 1999

The banking industry had been seeking the repeal of the 1933 Glass-Steagall Act since the 1980s, if not earlier. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.[1]

The bills were introduced in the U.S. Senate by Phil Gramm (R-Texas) and in the U.S. House of Representatives by Jim Leach (R-Iowa). The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. (R-Virginia), Chairman of the House Commerce Committee from 1995 to 2001. On May 6, 1999, the Senate passed the bills by a 54-44 vote along party lines (53 Republicans and one Democrat in favor; 44 Democrats opposed).[2] On July 20, the House passed a different version of the bill on an uncontested and uncounted voice vote. When the two chambers could not agree on a joint version of the bill, the House voted on July 30 by a vote of 241-132 (R 58-131; D 182-1) to instruct its negotiators to work for a law which ensured that consumers enjoyed medical and financial privacy as well as “robust competition and equal and non-discriminatory access to financial services and economic opportunities in their communities” (i.e., protection against exclusionary redlining) [3] [4] The bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November.[3] [5] On November 4, the final bill resolving the differences was passed by the Senate 90-8 [6] and by the House 362-57.[7] This legislation was signed into law by Democratic President Bill Clinton on November 12, 1999.[8]

[edit] Changes caused by the Act

Many of the largest banks, brokerages, and insurance companies desired the Act at the time. The justification was that individuals usually put more money into investments when the economy is doing well, but they put most of their money into savings accounts when the economy turns bad. With the new Act, they would be able to do both ‘savings’ and ‘investment’ at the same financial institution, which would be able to do well in both good and bad economic times.

Prior to the Act, most financial services companies were already offering both saving and investment opportunities to their customers. On the retail/consumer side, a bank called Norwest which would later merge with Wells Fargo Bank led the charge in offering all types of financial services products in 1986. American Express attempted to own almost every field of financial business (although there was little synergy among them). Things culminated in 1998 when Travelers, a financial services company with everything but a retail/commercial bank, bought out Citibank, creating the largest and the most profitable company in the world. The move was technically illegal and provided impetus for the passage of the Gramm-Leach-Bliley Act.

Also prior to the passage of the Act, there were many relaxations to the Glass-Steagall Act. For example, a few years earlier, commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage. Insurance underwriting was the only main operation they weren’t allowed to do, something rarely done by banks even after the passage of the Act.

Much consolidation occurred in the financial services industry since, but not at the scale some had expected. Retail banks, for example, do not tend to buy insurance underwriters, as they seek to engage in a more profitable business of insurance brokerage by selling products of other insurance companies. Other retail banks were slow to market investments and insurance products and package those products in a convincing way. Brokerage companies had a hard time getting into banking, because they do not have a large branch and backshop footprint. Banks have recently tended to buy other banks, such as the 2004 Bank of America and Fleet Boston merger, yet they have had less success integrating with investment and insurance companies. Many banks have expanded into investment banking, but have found it hard to package it with their banking services, without resorting to questionable tie-ins which caused scandals at Smith Barney.

Remaining restrictions

Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a “less than satisfactory [sic] rating at its most recent CRA exam”, essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the Community Reinvestment Act (CRA).[9]. This was an issue of hot contention, and the Clinton Administration stressed that it “would veto any legislation that would scale back minority-lending requirements.” [10]

The GLBA also did not remove the restrictions on banks placed by the Bank Holding Company Act of 1956 which prevented financial institutions from owning non-financial corporations. It conversely prohibits corporations outside of the banking or finance industry from entering retail and/or commercial banking. Many assume Wal-Mart’s desire to convert its industrial bank to a commercial/retail bank ultimately drove the banking industry to back the GLBA restrictions.

Some restrictions remain to provide some amount of separation between the investment and commercial banking operations of a company. For example, licensed bankers must have separate business cards, e.g., “Personal Banker, Wells Fargo Bank” and “Investment Consultant, Wells Fargo Private Client Services”. Much of the debate about financial privacy is specifically centered around allowing or preventing the banking, brokerage, and insurances divisions of a company from working together.

In terms of compliance, the key rules under the Act include The Financial Privacy Rule which governs the collection and disclosure of customers’ personal financial information by financial institutions. It also applies to companies, regardless of whether they are financial institutions, who receive such information. The Safeguards Rule requires all financial institutions to design, implement and maintain safeguards to protect customer information. The Safeguards Rule applies not only to financial institutions that collect information from their own customers, but also to financial institutions – such as credit reporting agencies – that receive customer information from other financial institutions.

Regulatory changes 1995

In July 1993, President Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden.[15] Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton’s strategy to “deal with the problems of the inner city and distressed rural communities”. Discussing the reasons for the Clinton administration’s proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen, Secretary of the Treasury at that time, affirmed his belief that availability of credit should not depend on where a person lives, “The only thing that ought to matter on a loan application is whether or not you can pay it back, not where you live.” Bentsen said that the proposed changes would “make it easier for lenders to show how they’re complying with the Community Reinvestment Act”, and “cut back a lot of the paperwork and the cost on small business loans”.[13]

In 1995, the CRA regulations were substantially revised to address criticisms that the regulations, and the agencies’ implementation of them through the examination process, were too process-oriented, burdensome, and not sufficiently focused on actual results. The agencies also changed the CRA examination process to incorporate these revisions.[15] Information about banking institutions’ CRA ratings were made available via web page for public comment.[13] The Office of the Comptroller of the Currency (OCC) also revised its regulations, allowing lenders subject to the CRA to claim community development loan credits for loans made to help finance the environmental cleanup or redevelopment of industrial sites when it was part of an effort to revitalize the low- and moderate-income community where the site was located.[25]

During March 1995 congressional hearings William A. Niskanen, chair of the Cato Institute, criticized the proposals for political favoritism in allocating credit and micromanagement by regulators, and that there was no assurance that banks would not be expected to operate at a loss. He predicted they would be very costly to the economy and banking system, and that the primary long term effect would be to contract the banking system. He recommended Congress repeal the Act.[26]

Responding to concerns that the CRA would lower bank profitability, a 1997 research paper by economists at the Federal Reserve found that “[CRA] lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other mortgage-oriented commercial banks”.[27] Speaking in 2007, Federal Reserve Chair Ben Bernanke noted that, “managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable” and that the loans “usually did not involve disproportionately higher levels of default”.[9]

According to a 2000 United States Department of the Treasury study of lending trends in 305 U.S. cities between 1993 and 1998, $467 billion in mortgage credit flowed from CRA-covered lenders to low- and medium-income borrowers and areas. In that period, the total number of loans to poorer Americans by CRA-eligible institutions rose by 39% while loans to wealthier individuals by CRA-covered institutions rose by 17%. The share of total US lending to low and meduim income borrowers rose from 25% in 1993 to 28% in 1998 as a consequence. [28]

In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied “AAA” rating.[29][22] The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.[30]

[edit] Legislative changes 1999

In 1999 the Congress enacted and President Clinton signed into law the Gramm-Leach-Bliley Act, also known as the “Financial Services Modernization Act,” which repealed the part of the Glass-Steagall Act, which prohibited a bank from offering a full range of investment, commercial banking, and insurance services. The bill was killed in 1998 because Senator Phil Gramm wanted the bill to expand the number of banks which no longer would be covered by the CRA. He also demanded full disclosure of any financial deals which community groups had with banks, accusing such groups of “extortion.” In 1999 Senators Christopher Dodd and Charles E. Schumer broke another deadlock by forcing a compromise between Gramm and the Clinton administration which wanted to prevent banks from expanding into insurance or securities unless they were compliant with the CRA. In the final compromise, the CRA would cover bank expansions into new lines of business, community groups would have to disclose certain kinds of financial deals with banks, and smaller banks would be reviewed less frequently for CRA compliance.[31][32][33] On signing the Gramm-Leach-Bliley Act, President Clinton said that it, “establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act”.

Credit defaults swaps (CDS) are financial instruments used as a hedge and protection for debtholders, in particular MBS investors, from the risk of default. As the net worth of banks and other financial institutions deteriorated because of losses related to subprime mortgages, the likelihood increased that those providing the insurance would have to pay their counterparties. This created uncertainty across the system, as investors wondered which companies would be required to pay to cover mortgage defaults.

Like all swaps and other financial derivatives, CDS may either be used to hedge risks (specifically, to insure creditors against default) or to profit from speculation. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. CDS are lightly regulated. As of 2008, there was no central clearinghouse to honor CDS in the event a party to a CDS proved unable to perform his obligations under the CDS contract. Required disclosure of CDS-related obligations has been criticized as inadequate. Insurance companies such as American International Group (AIG), MBIA, and Ambac faced ratings downgrades because widespread mortgage defaults increased their potential exposure to CDS losses. These firms had to obtain additional funds (capital) to offset this exposure. AIG’s having CDSs insuring $440 billion of MBS resulted in its seeking and obtaining a Federal government bailout.[140]

Like all swaps and other pure wagers, what one party loses under a CDS, the other party gains; CDSs merely reallocate existing wealth. Hence the question is which side of the CDS will have to pay and will it be able to do so. When investment bank Lehman Brothers went bankrupt in September 2008, there was much uncertainty as to which financial firms would be required to honor the CDS contracts on its $600 billion of bonds outstanding.[141][142] Merrill Lynch’s large losses in 2008 were attributed in part to the drop in value of its unhedged portfolio of collateralized debt obligations (CDOs) after AIG ceased offering CDS on Merrill’s CDOs. The loss of confidence of trading partners in Merrill Lynch’s solvency and its ability to refinance its short-term debt led to its acquisition by the Bank of America.[143][144]

Economist Joseph Stiglitz summarized how credit default swaps contributed to the systemic meltdown: “With this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one’s own position. Not surprisingly, the credit markets froze.”[145]

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The Wall Street Fix FRONTLINE
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mr. weill goes to washington

The politics and the impact of Sandy Weill’s creation of Citigroup, the first full-service superbank, and the repeal of the Glass-Steagall Act that stood in his way.

Citigroup, formed by the 1998 merger of Travelers and Citicorp, is the biggest financial institution in the world, combining one of the largest insurance companies (Travelers), one of the largest investment banks (Salomon Smith Barney), and the largest commercial bank (Citibank) in America. But before it could come together, Travelers CEO Sanford I. Weill, who had proposed the merger to Citicorp’s John Reed, had to overcome one major obstacle: the historic Glass-Steagall Act of 1933, which in the wake of the 1929 crash had prohibited commercial banks from underwriting securities. The law, still on the books in 1998 but weakened over the years, separated investment banking from commercial banking in order to prevent conflicts of interest and protect investors.

Sandy Weill’s creation of Citigroup — the first so-called “superbank” — and his successful lobbying for repeal of the Glass-Steagall Act that stood in his way, was a demonstration of Weill’s and Wall Street’s political muscle. But what has been the impact of Glass-Steagall’s demise and the merging of investment banks and commercial banks within a single financial behemoth? Did the emergence of full-service superbanks like Citigroup contribute to the abuses of the late-1990s bubble? Addressing these questions, in excerpts from their FRONTLINE interviews, are former SEC Chairman Arthur Levitt, former Federal Reserve Board member Alan Blinder, New York State Attorney General Eliot Spitzer, financial historian Charles Geisst, the Precusor Group’s Scott Cleland, and Kenneth Guenther of the Independent Community Bankers of America.

Related Feature

[ The Long Demise of Glass-Steagall ]
A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup’s Sandy Weill dealt the coup de grâce.
Related Links

[ “The New York Times: Banking Reform” ]
A resource from The New York Times on the repeal of Glass-Steagall and its impact. Includes a timeline and articles from The Times’ archive back to 1933.

[ “How Citigroup’s CEO Rewrote the Rules…” ]
“[Sandy Weill] outlasted Glass-Steagall, and tore down the wall between commercial and investment banking, but his victory could prove to be his undoing.” (Slate, Nov. 20, 2002)

[ “One Helluva Candy Store!” ]
A definitive article on Weill, this is the story of how Citicorp and Travelers came together, and the men who made it happen, as told by Fortune magazine’s Carol Loomis. (Fortune, May 11, 1998)

Greenspan, Weill & Company:

The Washington Connection
photo of levitt

arthur levitt
A former investment banker and chairman of the American Stock Exchange, he served as chairman of the Securities and Exchange Commission from 1993 to 2001.
read the full interview

When you came in as head of the SEC in the early 1990s, what was the situation with Glass-Steagall and the banking laws?

It was apparent to me that the protections of Glass-Steagall had already largely eroded. But Congress, at several times, nearly passed a bill to do away with Glass-Steagall. It was clear that it was a question not of whether but when Glass-Steagall would go. Millions of dollars were pouring in the campaign coffers of senators and congressmen who were set to do this.

Who was pushing?

The insurance industry, the Federal Reserve Board, the White House, the investment bankers, the commercial bankers — just about everybody wanted it. …

It was an incredible scene, but I saw it played through twice. Once was during a period of time when Al D’Amato chaired the [Senate] Banking Committee — and was not successful in getting the repeal of Glass-Steagall — where hundreds of lobbyists descended upon the Congress, were in the hallways morning, day, and night. Lobbyists for the insurance companies, for the investment banks, for the commercial banks, pulling for their own parochial interests.

Then when Phil Gramm became chairman of the banking committee, the same group came down, only they were now supplemented by lobbyists for the derivatives industry, for other new products that had developed, and for the stock exchanges and the options exchanges. They were buttonholing senators and congressmen, morning, day, and night.

From the standpoint of investors, I was concerned that the vital investor protection, in terms of SEC oversight of securities matters, would be eroded by turning over to the banks all of the responsibility for initiatives that, in the past, were the province of securities firms under the SEC jurisdiction.

This wasn’t merely a turf battle. This was a question of two different cultures: a culture of risk, which was the securities business, and a culture of protection of depositors, which was the culture of banking. Two very different cultures. …

Now at the Federal Reserve, which oversees banking, they had gradually been granting more and more exceptions to Glass-Steagall. … What had been going on in the 1980s and 1990s?

Clearly, over the 1980s and 1990s, a number of exemptions were granted by the Federal Reserve regulators, in terms of what banks could and could not do. The Comptroller of the Currency had involvement in this, as well. … They allowed the banks to do things that they could not do in the past. They permitted certain practices that were not acceptable in the past, and as a result of that, the protections of Glass-Steagall were almost totally eroded by the time this bill passed. …

So when Congress finally acts, it’s basically to ratify?

Congress gave legislative sanction to practices that the regulators had allowed to develop over the past two decades.

And the dramatic development, in 1998, was the merger of Citibank and Travelers. …

The merger of Travelers and Citibank was the death knell of Glass-Steagall, obviously. …

photo of blinder

alan blinder
Professor of economics at Princeton, former vice chairman of the Federal Reserve Board, and former member of the Council of Economic Advisors under President Bill Clinton.

read the full interview

Dr. Blinder, take me back to the late 1980s and early 1990s, and explain to me about the steps that were being taken by the Federal Reserve Board to relax, to liberalize, the provisions of the Glass-Steagall Act.

In the late 1980s, after some agitation before that, banks started getting even more serious about getting into securities, from which they had been more or less banned since the Glass-Steagall Act in the 1930s. There were, first, some legal cases. Then there was a ruling by the Federal Reserve Board, allowing a greater participation by banks in, for example, underwriting securities stocks. The amount by which they were allowed to do that gradually went up in a couple of stages — the biggest stage happening in 1996, when it was raised to a degree [25 percent of overall revenues] that, except in some extraordinary cases, was probably enough for almost any bank to do almost any amount of securities underwriting that they’d actually want to do.

In other words, it was very close to repeal of Glass-Steagall, although not literally repealing Glass-Steagall. Glass-Steagall was still on the books. …

You were on the Federal Reserve Board at this time. What was the thinking?

The thinking was manifold. One was that the market had practically repealed Glass-Steagall, anyway. The lines among insurance, securities, and banking had been becoming successively blurred. Securities companies like Merrill Lynch were into things that looked a lot like banking. Banks like J.P. Morgan were looking a lot like securities houses, and so on — all under the current legal framework. So the market had almost done away with it.

Secondly, there was a belief that you could enhance competition in all of these domains if the banks could compete in the domains of the securities houses, and the securities houses could compete in the domains of the banks, and so on. You’d have a more competitive and, therefore, more efficient financial system. …

For those few organizations that couldn’t do what they’d like to do under the existing regulatory framework, repeal of Glass-Steagall would make it possible. Citigroup was the most prominent example, because of the scale of the insurance company. With Travelers, an immense insurance company, and an immense bank [Citibank], and a pretty immense brokerage [Salomon Smith Barney], coming together under Citigroup, they really needed repeal of Glass-Steagall or even greater liberalization of the regulations — more than was likely. …

What was Chairman Alan Greenspan’s role in this? What was his thinking? Was he for this? Was he an advocate? What did he do?

He was certainly for it. The Federal Reserve Board, in fact, had been for repeal repeatedly through the 1990s. … I think [Greenspan] played a substantial role, in the sense that were he against it, it could not have happened. He could not have stopped the market from encroaching over boundaries — those were sort of natural market events. But he could’ve stopped — at least slowed down and, I think, probably stopped — the friendlier regulatory environment. …

I don’t think in any sense — at least from my knowledge — was he driving the political process that led eventually to repeal. But he was definitely an advocate. He was called to testify on this many times in front of the Congress over many years, and was always in favor of repealing Glass-Steagall. …

What about, then, the decision [by the Fed] to approve the merger of Citibank and Travelers — which goes well beyond the 25 percent rule?

I think, actually, they had very little choice about that. There are merger guidelines. The guidelines were met, including the possibility that if the repeal of Glass-Steagall didn’t come through — which it did — Citigroup would’ve had to divest itself of at least a large part of Travelers. … Probably, in fact, it would’ve meant the whole thing. So Citi was prepared, if they had to, if the law wasn’t changed, to make the proper divestitures that would’ve kept them legal. So the Fed had really no grounds to oppose it. …

Doesn’t Sandy Weill have rather special access if he’s talking directly to Alan Greenspan and to Bob Rubin at Treasury and to the president of the United States?

Absolutely, he does, and not every country banker in America can get that kind of access. … But you’ve got to remember this deal that Sandy Weill was coming to talk to these people about was not opening a new branch in Texas or something. This was a very big deal. They were creating the biggest financial company on the face of the earth. I think it’s very, very appropriate.

It would’ve been foolish as a pure business matter — never mind politics, which, of course, gets involved — as a pure business matter, it would’ve been foolish to just bull ahead with that without informing Alan Greenspan, Bob Rubin, and so on, even if it’s just as a courtesy.

You say, “Never mind politics,” but politics does get involved. What do you mean, “politics?”

Politics gets involved, because [Weill and Reed] knew at the time that they were going to need a change in the law to hold this enterprise together. … And that was going to come out of the political system. Alan Greenspan couldn’t do it for them. Bob Rubin couldn’t do it for them — though both of them can help, of course, by saying that they like the idea. The Congress had to do it.

photo of guenther

kenneth guenther
President and CEO, Independent Community Bankers of America.

We are talking about the largest financial merger in the world. We are talking about, for the first time in the modern history of the United States, since 1933, the largest bank, one of the largest securities firms, one of the largest insurance firms, being put together under common ownership.

Legislation is pending to make that legal, and here you have the leadership — Sandy Weill of Travelers and John Reed of Citicorp — saying, “Look, the Congress isn’t moving fast enough. Let’s do it on our own. To heck with the Congress. Let us effect this.” And so they move towards effecting it, and they get the blessing of the chairman of the Federal Reserve system in early April, when legislation is pending.

I mean, this is hubris in the worst sense of the word. Who do they think they are? Other people, firms, cannot act like this. … Citicorp and Travelers were so big that they were able to pull this off. They were able to pull off the largest financial conglomeration — the largest financial coming together of banking, insurance, and securities — when legislation was still on the books saying this was illegal. And they pulled this off with the blessings of the president of the United States, President Clinton; the chairman of the Federal Reserve system, Alan Greenspan; and the secretary of the treasury, Robert Rubin.

And then, when it’s all over, what happens? The secretary of the treasury becomes the vice chairman of the emerging Citigroup.

photo of geisst

charles geisst
A professor of finance at Manhattan College, he is the author of numerous books on Wall Street and financial history.

read the full interview

The decisions of the Federal Reserve had pretty well washed away Glass-Steagall. Nonetheless, does Sandy Weill need legislation to put Glass-Steagall in a coffin — to kill it?

Yes, he does. …

Did Sandy Weill push for legislation in Congress? And why?

Certainly, Citigroup pushed for legislation to get rid of Glass-Steagall, pass what was called HR10 at the time, which became the Financial Services Modernization Act [of 1999].

Part of [Weill’s] deal with the Federal Reserve was to get rid of all Glass-Steagall violations in the new Citigroup within two years. Otherwise, he would have been faced with a divestiture of a company which had just been put together, because of an old law which is still on the books. So it clearly behooved him, and many other people in the financial services industry who wanted to accomplish essentially the same sort of thing in the future, to push to get Glass-Steagall repealed. …

So they pushed hard?

Pushed very hard. … They pushed so hard that the legislation, HR10, House Resolution 10, which became the Financial Services Modernization Act, was referred to as “the Citi-Travelers Act” on Capitol Hill. …

Did the Fed’s approval of the Citibank-Travelers merger really give impetus to Congress to pass the act?

Yes. Without the Fed’s approval, Congress would have probably dragged their feet. … But once the Fed gave its imprimatur, it was only a matter of time before it would fall. Part of this had to do with the general halo effect around Alan Greenspan on Wall Street at the time. …

What was the impact politically on Congress of Sandy Weill’s pushing for repeal of Glass-Steagall?

When Weill clearly wanted to get rid of Glass-Steagall so that his new organization would survive, many in Congress — important folks in Congress, who had previously been opposed to modernizing legislation — decided to get on board. …

They were brought into the stream by the same sorts of arguments which Alan Greenspan had been making for the past 10 years, which Weill had been making and others, Merrill Lynch, had been making. I think they realized if they didn’t get on board, they could be seen to be getting in the way of financial progress.

What made Sandy Weill so influential with Congress?

His success. … Sandy Weill proved that when, for instance, Smith Barney and Travelers could join up and succeed, that the old prohibitions maybe were based on politics from [the past] which were no longer valid. His success was showing people that the old law was exactly that, it was antiquated.

Did he do much personal lobbying? Phone calls to key members of Congress, like Paul Sarbanes, and what-not?

Yes, his organization did. … In the year previous to the Financial Services Modernization Act, the thing that overruled Glass-Steagall, Citibank spent $100 million on lobbying and public relations, which is a good indication.

And most or all of that to repeal Glass-Steagall?

Yes. They spent a small fortune, a king’s ransom, if you will, getting rid of Glass-Steagall. In fact, when thrown in with other financial firms’ lobbying, it was closer to $200 million over the short period of time. …

What Sandy Wrought:

The Impact of the Superbank
photo of cleland

scott cleland
A top telecom strategist, Cleland is the founder and CEO of the Precursor Group, a research boutique for institutional investors.

read the full interview

What difference did it make that Glass-Steagall was repealed, and you could put these megabanks together?

The repeal of Glass-Steagall was a big deal. It enabled kind of colossal combinations that just weren’t envisioned before, where you brought the savvy of an investment banking house like Salomon Smith Barney together with a Citibank. Citibank could loan an enormous amount of money. So when you put those two things together, it’s kind of an unbeatable combination. Saying you can investment bank them and commercial bank them at the same time, it’s a very powerful combination.

So Sandy Weill and his team can market across the board to [WorldCom CEO] Bernie Ebbers. “You don’t need to go anywhere else, Bernie.”

It’s a one-stop shop strategy. It’s very powerful.

How much is that responsible for the investment fever, and this “get on the team,” “get on the bandwagon” feeling that you’ve got in the late 1990s?

The repeal of Glass-Steagall was an important contributor to the bubble.

In what way?

Well, it added to the frenzy. It added to the investment banking fervor. It added to the amount of money that was staked on this. Essentially, you had a bigger shoulder pushing that rock up the hill. …

The death knell of Glass-Steagall is really the Citibank-Travelers merger, which comes in 1998, through an exception granted by the Federal Reserve Board. If you look back at this, do you understand what Sandy Weill was up to when he was pushing for this merger, and that he was changing the whole landscape of banking?

… No, at the time I don’t think people connected the dots. But in hindsight, the repeal of Glass-Steagall was an accelerator for the telecom bubble, because remember, telecom companies need to raise an enormous amount of capital, both through equity and through debt. And these Glass-Steagall-enabled companies were able to provide whatever capital a telecom company could ever hope to raise. …

photo of levitt

arthur levitt
A former investment banker and chairman of the American Stock Exchange, he served as chairman of the Securities and Exchange Commission from 1993 to 2001.

read the full interview

The idea [of Glass-Steagall] was separating different kinds of banking so that you didn’t get the kind of collapse that you got in 1929?

Yes. … Glass-Steagall was enacted [in 1933] to respond to some of the scandals of the early part of the century, where individual investors were grievously hurt by banks who were promoting stocks that were of interest to the banks, rather than to investors. That was a very sensible division of investment banking and commercial banking.

What worries me about combining those two interests once again is the inducement, the likelihood, that commercial banks will tie their lending activities to their investment activities. …

Were you worried about a climate in which anything goes? “Trust the market, and the investors can take care of themselves?”

Yes, I worried about the power assumed by the commercial banks that now had the ability to be a financial services warehouse that could satisfy the needs of everybody, but whose overriding interest, I felt, would favor their corporate interests as opposed to the individual investor. …

So you worried that the individual investor and depositor and their protections get lost in the superbank concept?

Yes, I was very worried about that, because I felt that the culture of banking and the culture of investment banking were so different. … The lure of investment banking, and the amount of money that that meant to the commercial banks, was so much greater than whatever they got from depositors that the weighting of their emphasis would favor commercial business over the individual investor. …

You were worried about the erosion of the standards of commercial banking. …

The kind of scrutiny that a commercial bank would give to a loan has to erode. … One of the inducements offered to that bank would be, “We’ll give you not only our lending business but we’ll give you our investment banking business, as well.” …

Let’s say that a commercial bank underwrites a company. Millions of shares are outstanding in the public’s hands, and the company’s fortunes sink. Ordinarily, that commercial bank would place the interests of their depositors above all others at that point. … What kind of judgment are they going to make at this point, where they have perhaps a million investors out there who have bought shares in the company that their name is on? They will probably go a step further and lend more money and more money, and more money. Then we have the shareholders and the depositors in the bank at risk. …

Will that bank have the same kind of restraint, the same kind of controls on their lending operation, that they might have had if they were free of that investment banking obligation to the millions of shareholders that they’ve marketed shares to? … You can’t let this company go down. It’s the reputation of the bank that’s at stake now. So that’s where the nexus of Glass-Steagall becomes very, very sticky. …

The merger of investment bank and commercial bank interests has created conflicts of interest that clearly hurt the public investor. Only extraordinary activity by both the banking and security regulators can begin to address [the] issue.

photo of blinder

alan blinder
Professor of economics at Princeton, former vice chairman of the Federal Reserve Board, and former member of the Council of Economic Advisors under President Bill Clinton.

read the full interview

What about [the argument that] the bigger the institution, the broader the spread, the greater potential conflict of interest? … Were any of those issues salient in your mind [when you were on the Federal Reserve Board in the mid-1990s]? Concern about conflicts of interest in a superbank?

I don’t think too much, because there had been a fair amount of what some people would call “revisionist history” — but I could call “history” — of what went on in the 1930s … the cauldron that gave birth to Glass-Steagall. I think a fair reading of that would’ve been there were many, many misdeeds, many things went on that should never have been allowed to go on — plenty of crookedness — but very little, nearly zero of it, had its roots in the joining of banking and securities underwriting.

That is, look what’s just happened in the last few years, with the scandals in the securities industry. This hasn’t really had to do with the conjoining of banking and securities. It had to do with shenanigans going on in companies I won’t name here, with analysts and others, that should never have happened. But the fact that some of them might’ve been associated with banks was pretty much irrelevant to them. …

Are you saying that none of the abuses that we see on Wall Street were a product of this merger of all these different services?

Yes, very nearly. That is right. There were abuses. Some of them needed to be legislated against; some of them need to be penalized in the legal system; but I think precious little, if any, have to do with [repeal of Glass-Steagall]. …

You can argue, people did argue in the long-standing debate over Glass-Steagall, that there was a cultural difference between, say, the securities business and banking, and the bad side of that is that the more the securities culture “infected” banking, the worse banking would be.

There was another way to run the argument, which was the more the banking relationship culture, quote, “infected” — or, I should say “affected”? — securities, the better the securities industry would be. So this can go both ways. …

The point is that I’m not at all convinced — it would take a lot to convince me of this — I just don’t see the evidence that [the late-1990s] bubble was made worse, not to mention immeasurably worse, by the conjoining of some banks and some securities companies. … Citi happened to be combined with a very big bank. But lots of the same things — as bad or worse — were going on where there was no such agglomeration.

See, if you want to make the case that a lot of shady things were happening in this period and a lot of bad judgment was exercised, I’m with you 100 percent. But if you want to make the case that it was in large measure because of the tearing down of the barriers among insurance, banking, and securities, I just don’t see that. …

photo of spitzer

Eliot Spitzer
Spitzer is the attorney general of New York. He spearheaded the investigations into Wall Street practices that led to the historic $1.4 billion settlement announced on April 28, 2003.

read the full interview

One of the allegations made by a number of people who follow the banking industry is that the mere formation of a superbank like Citigroup — and putting insurance, brokerage, investment banking, and commercial banking under one roof — inherently increases the conflicts of interests. … Does the formation of superbanks increase conflicts of interest that have the potential of hurting investors?

Absolutely. No question about it. There is no question that we have created a web of relationships that provide the opportunity for massive abuse. And what we uncovered last year demonstrates there was massive abuse. The only remaining question, then, is do you create, and can you create, a way to mediate among these conflicts to protect the consumer? Or do you have to rip apart the structure? I think we have an enormous policy debate that is facing us.

You’re saying, in other words, we have to go back and reconsider whether or not it was smart to allow the formation of these superbanks?

I think that’s absolutely something we have to reconsider. I don’t think that the Congress and the Fed right now are willing to ask that fundamental question. I think they are trying to create firewalls between or among these various pieces to protect against the conflicts. But the enormous question facing us is how do you protect consumers, and businesses that are consumers in their own way, against this web of conflicts of interest? …

Specifically, I was wondering whether or not you all looked at the fact that the Travelers arm of Citigroup granted a $1 billion mortgage to [WorldCom CEO] Bernie Ebbers? …

We looked at some of those issues relating to CEOs and Bernie Ebbers and the way that money flowed to him, and in fact we brought law suits against some CEOs alleging that these conflicts were civil wrongs. So, yes, we are deeply troubled by that and it’s one more manifestation of the failure of the bank to operate within proper business parameters.

Are you talking about that billion-dollar mortgage?

We’re talking about the fact that loans were being made and at the same time that those CEOs were being solicited for investment banking, underwriting business. We view that as intentionally — and in some cases, illegally — improper. …

So you’re saying the repeal of Glass-Steagall and the permission for these huge superbanks is one of the proximate causes of the corruption on Wall Street?

Absolutely. There’s no question about it. On the day that I announced the global settlement, on Dec. 20, [2002], I began by saying that the problem at its root is a flawed business model, and that business model is the product of a government regulatory decision to repeal Glass-Steagall administratively and legislatively, and to seek this tremendous concentration of power, and then the abuse of that power by the investment houses.

But it was that effort to create these one full-service banks, and that model that was the proximate cause for all of this.

And do you see evidence that anybody wants to break that model up?

I see evidence that very thoughtful people are questioning it. I don’t see any evidence in Washington that there is a will to do so.

Do you see Sandy Weill doing it at Citigroup?

The bankers are never going to do it themselves. They benefit from it. Only when Congress, which has the power to pass the laws, or the Fed, that has the power ultimately to make the rules about banks, or the SEC, determines that the conflicts of interest are so intractable and so beyond the capacity of the investment houses to mediate, only when they reach that conclusion will they be forced to say this model isn’t going to work.

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
The Long Demise of Glass-Steagall

A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup’s Sandy Weill dealt the coup de grâce.

1933

Glass-Steagall Act creates new banking landscape

Following the Great Crash of 1929, one of every five banks in America fails. Many people, especially politicians, see market speculation engaged in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) introduce the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors. The new law bans commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also establishes the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits, and strengthens the Federal Reserve’s control over credit.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

In 1956, the Bank Holding Company Act is passed, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.

1960s-70s

First efforts to loosen Glass-Steagall restrictions

Beginning in the 1960s, banks lobby Congress to allow them to enter the municipal bond market, and a lobbying subculture springs up around Glass-Steagall. Some lobbyists even brag about how the bill put their kids through college.

In the 1970s, some brokerage firms begin encroaching on banking territory by offering money-market accounts that pay interest, allow check-writing, and offer credit or debit cards.

1986-87

Fed begins reinterpreting Glass-Steagall; Greenspan becomes Fed chairman

In December 1986, the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being “engaged principally” in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase “engaged principally” in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three “outside checks” on corporate misbehavior had emerged since 1933: “a very effective” SEC; knowledgeable investors, and “very sophisticated” rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures – a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

In March 1987, the Fed approves an application by Chase Manhattan to engage in underwriting commercial paper, applying the same reasoning as in the 1986 Bankers Trust decision, and in April it issues an order outlining its rationale. While the Board remains sensitive to concerns about mixing commercial banking and underwriting, it states its belief that the original Congressional intent of “principally engaged” allowed for some securities activities. The Fed also indicates that it will raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The Board believes the new reading of Section 20 will increase competition and lead to greater convenience and increased efficiency.

In August 1987, Alan Greenspan — formerly a director of J.P. Morgan and a proponent of banking deregulation — becomes chairman of the Federal Reserve Board. One reason Greenspan favors greater deregulation is to help U.S. banks compete with big foreign institutions.

1989-1990

Further loosening of Glass-Steagall

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20, because the revenue limit for underwriting business is still at 5 percent. Later in 1989, the Board issues an order raising the limit to 10 percent of revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

1980s-90s

Congress repeatedly tries and fails to repeal Glass-Steagall

In 1984 and 1988, the Senate passes bills that would lift major restrictions under Glass-Steagall, but in each case the House blocks passage. In 1991, the Bush administration puts forward a repeal proposal, winning support of both the House and Senate Banking Committees, but the House again defeats the bill in a full vote. And in 1995, the House and Senate Banking Committees approve separate versions of legislation to get rid of Glass-Steagall, but conference negotiations on a compromise fall apart.

Attempts to repeal Glass-Steagall typically pit insurance companies, securities firms, and large and small banks against one another, as factions of these industries engage in turf wars in Congress over their competing interests and over whether the Federal Reserve or the Treasury Department and the Comptroller of the Currency should be the primary banking regulator.

1996-1997

Fed renders Glass-Steagall effectively obsolete

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed’s 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on “Section 20 subsidiaries” by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be “manageable,” and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

1997

Sandy Weill tries to merge Travelers and J.P. Morgan; acquires Salomon Brothers

In the summer of 1997, Sandy Weill, then head of Travelers insurance company, seeks and nearly succeeds in a merger with J.P. Morgan (before J.P. Morgan merged with Chemical Bank), but the deal collapses at the last minute. In the fall of that year, Travelers acquires the Salomon Brothers investment bank for $9 billion. (Salomon then merges with the Travelers-owned Smith Barney brokerage firm to become Salomon Smith Barney.)

April 1998

Weill and John Reed announce Travelers-Citicorp merger

At a dinner in Washington in February 1998, Sandy Weill of Travelers invites Citicorp’s John Reed to his hotel room at the Park Hyatt and proposes a merger. In March, Weill and Reed meet again, and at the end of two days of talks, Reed tells Weill, “Let’s do it, partner!”

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world’s largest financial services company, in what was the biggest corporate merger in history.

The transaction would have to work around regulations in the Glass-Steagall and Bank Holding Company acts governing the industry, which were implemented precisely to prevent this type of company: a combination of insurance underwriting, securities underwriting, and commecial banking. The merger effectively gives regulators and lawmakers three options: end these restrictions, scuttle the deal, or force the merged company to cut back on its consumer offerings by divesting any business that fails to comply with the law.

Weill meets with Alan Greenspan and other Federal Reserve officials before the announcement to sound them out on the merger, and later tells the Washington Post that Greenspan had indicated a “positive response.” In their proposal, Weill and Reed are careful to structure the merger so that it conforms to the precedents set by the Fed in its interpretations of Glass-Steagall and the Bank Holding Company Act.

Unless Congress changed the laws and relaxed the restrictions, Citigroup would have two years to divest itself of the Travelers insurance business (with the possibility of three one-year extensions granted by the Fed) and any other part of the business that did not conform with the regulations. Citigroup is prepared to make that promise on the assumption that Congress would finally change the law — something it had been trying to do for 20 years — before the company would have to divest itself of anything.

Citicorp and Travelers quietly lobby banking regulators and government officials for their support. In late March and early April, Weill makes three heads-up calls to Washington: to Fed Chairman Greenspan, Treasury Secretary Robert Rubin, and President Clinton. On April 5, the day before the announcement, Weill and Reed make a ceremonial call on Clinton to brief him on the upcoming announcement.

The Fed gives its approval to the Citicorp-Travelers merger on Sept. 23. The Fed’s press release indicates that “the Board’s approval is subject to the conditions that Travelers and the combined organization, Citigroup, Inc., take all actions necessary to conform the activities and investments of Travelers and all its subsidiaries to the requirements of the Bank Holding Company Act in a manner acceptable to the Board, including divestiture as necessary, within two years of consummation of the proposal. … The Board’s approval also is subject to the condition that Travelers and Citigroup conform the activities of its companies to the requirements of the Glass-Steagall Act.”

1998-1999

Intense new lobbying effort to repeal Glass-Steagall

Following the merger announcement on April 6, 1998, Weill immediately plunges into a public-relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999). One week before the Citibank-Travelers deal was announced, Congress had shelved its latest effort to repeal Glass-Steagall. Weill cranks up a new effort to revive bill.

Weill and Reed have to act quickly for both business and political reasons. Fears that the necessary regulatory changes would not happen in time had caused the share prices of both companies to fall. The House Republican leadership indicates that it wants to enact the measure in the current session of Congress. While the Clinton administration generally supported Glass-Steagall “modernization,” but there are concerns that mid-term elections in the fall could bring in Democrats less sympathetic to changing the laws.

In May 1998, the House passes legislation by a vote of 214 to 213 that allows for the merging of banks, securities firms, and insurance companies into huge financial conglomerates. And in September, the Senate Banking Committee votes 16-2 to approve a compromise bank overhaul bill. Despite this new momentum, Congress is yet again unable to pass final legislation before the end of its session.

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

Oct.-Nov. 1999

Congress passes Financial Services Modernization Act

After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

On Oct. 21, with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill’s effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.

Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill’s chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, “You’re buying the government?”

http://mises.org/story/3098
More Awful Truths About Republicans

Daily Article by Robert B. Ekelund and Mark Thornton | Posted on 9/4/2008 12:00:00 AM

As the economic debacle facing Americans continues to materialize, those responsible are running for cover with ten Republican senators refusing to attend their own national convention. Four years ago we observed that the so-called “Republican philosophy” of small government, sound money, and balanced budgets was illusory in terms of the history and then-current policies of the Republican Party.[1] However, even we would never have guessed how awful the Republican Party economic policy would become. From mere mercantilism, the Republican Party is now flirting with comprehensive socialist economic policy and another Great Depression.

The Republican Party was founded on big government and economic intervention with roots in the economic platforms of Federalist icon Alexander Hamilton and Whig leader Henry Clay. Indeed, the term “New Deal” was coined in 1865 to characterize Lincoln and his Republican Party economic platform. Republicans became the “mercantile” party of big business, big government, external protection, centralized monetary control, strong restrictions on immigration, and aggressive foreign policy.

From FDR’s New Deal to LBJ’s Great Society, Democratic policies forced many free-market activists into the Republican fold. People like Robert Taft, Barry Goldwater, Ronald Reagan, and of course Ron Paul, represent this free-market faction in the Republican Party. For example, free markets, deregulation, and balanced budgets became the Republican mantra (if not reality) during the Reagan administration. The orchestrated marginalization of Ron Paul is just one indicator that the free-market faction has been routed and that the mercantilists are firmly in control. In fact, as we endure the current economic malaise, we can note that the Republican-dominated Congress (1994–2006) and the administrations of George W. Bush have morphed Republican-style mercantilism into corporate socialism.

Harmful military spending, unbalanced budgets, fiscal irresponsibility, protectionist and monopoly handouts to friends is the old style Republican playbook. The new style is audacious, unprecedented, and truly awful for the economy. It begins with the Republican-controlled Federal Reserve, which, under Alan Greenspan and Ben Bernanke, has flooded the economy with money and credit and bailed out every economic crisis since 1987. Greenspan’s admonitions against “irrational exuberance” apparently were not intended to restrain the Federal Reserve’s irresponsible monetary policy. Who in their right mind could honestly say that the Fed had nothing to do with the housing bubble after driving the nominal interest rate to 1% and proclaiming that the mortgage market was well regulated?

But an insidious form of “market-based policy” is also a real culprit in the current mess. In 1999 a bill was passed by a Republican Congress and signed by Democratic President Bill Clinton that rescinded the Depression era’s divorce of commercial banking activities from investment banking, called the Glass-Stegall Act of 1933. That opened a floodgate of “creative” financial instruments backed by notes and other commercial paper. Much of the banking regulation of the Roosevelt administration — including abandonment of the gold standard — made absolutely no sense, but markets can fail with dire short-run consequences under a fiat monetary system. With Glass-Stegall, Congress put its finger on and mitigated the tendency and temptations of banks to create massive costly externalities to society, in this case, by holding bundled mortgage-backed securities which were deemed safe by rating agencies but which ultimately failed the market test.

The Financial Services Modernization Act of 1999 would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance; but in the world as it is, this “deregulation” amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly. Such government privileges are nothing new to Republicans — consider the effective subsidies to the pharmaceutical, sugar, and steel industries — but this particular gift to financial institutions is what allowed the credit bubble to expand to such absurd proportions, because it allowed banks of all types to engage in increasingly risky transactions and to greatly expand the leverage of their balance sheets. As the crisis unfolds, credit continues to contract, the risk of bank failures increases, and the possibility of far more serious economic consequences become more apparent. The S&L crisis cost the taxpayers a few hundred billion, but this crisis has the potential of saddling the taxpayer with several trillion in bailouts.

So far, the Republican solution has been to bail out lenders — wealthy financial-industry professionals for the most part — who made unwise market decisions with subsidies and election-year subventions. With Hank Paulson, the former CEO of Goldman Sachs, as Secretary of the Treasury and the big banks on the Board of Directors of the New York Fed, it should not be too surprising that the Fed has been listening only to Wall Street while ignoring Main Street.

But the real problem is that their policies will lead to the nationalization of much of the mortgage-real-estate market. On July 30, 2008, President George Bush signed a bill into law that bails out Fannie Mae and Freddie Mac to the tune of an estimated $25 billion dollars in taxpayer losses, according to the Congressional Budget Office (CBO). The bailout is intended to stabilize the short-term economy, but this ill-conceived nod to socialism will have disastrous long-term effects. First, according to most economic estimates, the bill that taxpayers would have to eat is many times larger than the laughably small CBO estimate. Economist Don A. Rich has calculated the possible losses at as low as $1.3 to $1.6 trillion given likely housing price declines and as high as $2.5 trillion (if the housing price fall mimics that of the Great Depression).[2] The fallout from either of these scenarios would be catastrophic as the Federal Reserve accommodated (within the fiat money system) the taxpayer-backed debt. The real debt would be inflated away and America’s real income could be reduced by as much as twenty percent.

The expansion of Federal Reserve authority is almost as alarming as nationalizing the mortgage industry. While the bailout includes the typical reductions in the Federal Funds Rate and the Discount Rate, it also includes the unprecedented moves to auction off discount rate loans, accept mortgage-backed securities in exchange for the Fed’s Treasury Notes and the financing of J.P. Morgan’s takeover of Bear Sterns. In May, the Fed began to allow investment firms to draw emergency loans directly from the central bank, and in July, it began to allow Fannie Mae and Freddie Mac to do the same even though such lending privileges had traditionally been restricted to commercial banks that have been subject to stricter regulatory supervision. All of this is predictable given the repeal of Glass-Stegall, which expanded the bad business practices that now “require” an expansion of the bailout.

But we see an even more insidious long-term economic problem, if that is imaginable. Moral hazard is endemic to this Bush-backed scheme to “relieve” an election-year economy. While the bill passed in late July does include some tighter regulation for the mortgage companies, it undeniably increases incentives for market participants — buyers and sellers — to engage in risky behavior. That is one of the products of financial socialism under a fiat monetary system — a system that mainly benefits wealthy lenders. Heads you win, tails you do not lose.

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Further, every incentive by profit-seeking lenders and asset-poor buyers will be in place for a continuing or recurrent mortgage debacle. Financial institutions will not only have mercantile “protection” from the federal government in terms of regulations; they will become social arms of that government. While Democrats certainly facilitated these economic actions as fellow travelers, Republicans, most especially George W. Bush, acquiesced. (His only objection was a $4 billion grant to states and cities to “refurbish” foreclosed homes). The economic choice is clear: either maintain a fiat-money-creation system and reinstate the asset proscriptions of the Glass-Stegall Act or abandon or modify the existing system of money and banking altogether, possibly including elements of a gold standard. Without some basic alteration in rules, the entire economic system will continue to be at risk, as will America’s predominance in the world of finance.

http://www.pbs.org/wgbh/pages/frontline/meltdown/interviews/feldstein.html

What did you think of Alan Greenspan, [chairman of the Federal Reserve Board, 1987-2006], at the time he was leaving office?

Greenspan had a really good record over a large number of years. His most memorable decision was recognizing that the productivity growth in the late ’90s was stronger than the rest of us understood. So he allowed the economy to expand more, allowed unemployment to come down more, allowed incomes to rise more than I think others making monetary policy at the time would have done. I think that’s really probably, more than anything else, what gained him his reputation. …

What was the bold thing that Greenspan did? …

Deregulation was one of the most important things he did. That looked better at the time than it does to some people now. My sense is that deregulation gets a bad name. It was deregulation without adequate supervision by the bank supervisors and by the SEC and others. Deregulation was a bold step. It allowed banks to broaden their activities; it allowed banks to operate in national markets in a way they hadn’t before.

But in terms of the growth of the economy, when the unemployment rate was coming down in the late ’90s, and a lot of people were saying, “Well, we’ve got to slow this economy down; we can’t continue to grow at this rate,” Greenspan said, “No, what’s really going on now is not excessive demand, but a more rapid productivity growth than we’ve been accustomed to in the past, and therefore the old speed limits don’t count. We can grow at this faster rate and still have low inflation.”

That was true for a number of years there. And so we got more years of growth, more declines in unemployment, higher real incomes than somebody without his judgment … would have allowed.

Was there a mistake that he made, something he missed?

… He may have kept it going too long. He certainly kept it going longer than most of us, including myself, would have wanted, and yet he was right for most of that time.

So where was he wrong? …

I think [Greenspan] was wrong in the early part of this decade, when fearing deflation, fearing of falling prices, he brought down interest rates very dramatically and announced that interest rates would be held at a low level. The advantage of that, he thought correctly, was that it would bring down medium-term rates. … But by promising that those rates would be kept low for quite a while, he brought down longer-term rates. That, in turn, brought down mortgage rates; that stimulated the housing market and took us away from the deflation that he feared.

He explained at the time that it was a balance of risks. On the one hand, if you didn’t do something like this, there was the danger that the price level would continue to decline. Since you could only bring interest rates down to zero, if the price level was actually falling, the real cost of funds, meaning interest rates adjusted for inflation, would be greater than zero, and the economy could slow more and we could deflate faster, and so the real interest rate would be even higher, and we’d be in a trap from which the Fed could not rescue us. So that was the risk on one hand.

But there was also the risk that if you lowered interest rates a lot, it would lead to inflation. And he said: “There are these two risks, and I have to make the judgment about which was the greater risk.” And he said, I think correctly, that between those two risks, the greater risk was deflation, because if we had moved back up to an inflation rate of, say, 4 or 5 percent, well, the Fed knows how to cure that problem.

What he didn’t take into account was the risk of a rapid rise in asset prices. … And it’s the asset bubble, particularly in housing, but also in the stock market, that has become a major problem for us now in the ending years of this decade.

[What are the tools available to the Federal Reserve?]

What the Fed does is called monetary policy, and more recently might be called credit market policy. What the Treasury does — taxes, tax cuts, tax increases, spending — is called fiscal policy. … Monetary policy means changes in interest rates, changes in the money supply. It’s what the Fed does.

Credit policy — we’ve seen recently the Fed providing all kinds of credit and credit guarantees, offering to buy commercial paper and things like that. The Treasury can also engage in credit policies, providing guarantees to money market mutual funds as they did. And fiscal policy, actual outright purchases of goods and services, spending on everything from transfer payments to defense, that’s the job of the Treasury and the Congress, of course. …

Seems like we always heard about Greenspan, but Treasury secretaries were not in the headlines in quite the same way.

No, that’s a very important point. Until this recent downturn, economists would say — I would be one of them — that fiscal policy ought to aim at the long run. We ought to get our tax incentives right; we ought to spend money on the things we need to spend money on, but we shouldn’t be using fluctuations in taxes or fluctuations in spending to try to stabilize the economy. That’s the job of the Federal Reserve and of monetary policy. …

What’s happening now is really an exception to what we’ve done over the last several decades, and it’s an exception to what the textbooks would say, because we are in a very different kind of recession now than we’ve been in for the entire postwar period.

Unlike anything you’ve seen in your life?

Unlike anything I’ve seen or anything since the Depression that I’ve studied. So it’s a very different kind of downturn that requires us to go beyond the traditional tool of monetary policy and to use fiscal policy, to use government spending and tax changes to stimulate the economy.

We’re out a little into terra incognito?

We are, but again, I think we have little choice about what needs to be done. I think the Federal Reserve under Ben Bernanke has tried to do everything that was in the textbook or outside the textbook. They’ve been very bold. Nobody will accuse Ben Bernanke and this Federal Reserve of not trying everything. But there’s only a limit to what the Federal Reserve can do. Indeed, many people would think they’ve gone beyond the normal limits of what a central bank should do. And so it really is up to the Treasury; it’s up to the government with the backing of the Congress to do more if we’re going to get out of this very serious downturn. …

Did you know about these sort of sophisticated, fancy instruments, all the credit default swaps [CDS] and —

Yeah, I knew a lot about those. …

[What are credit default swaps, and what role did they play in the crisis?]

A credit default swap is a kind of insurance policy. A bank makes a loan to a company; it’s a concern that it’s a large loan. … It says either I have to sell off some of this loan to others, or I have to find some way of getting a guarantee or getting somebody who will back up this loan in case it defaults.

So it buys what is called a credit default swap. It buys a kind of insurance policy that says if that loan fails, then the people who have sold the credit default insurance will pay up the amount of default to the first bank. So it’s a very good idea because it allows banks to make loans to institutions they know and yet not have to bear all of the risk, and it does it in a very efficient way.

The trouble is that once this good idea got going, people realized that this could be used not just to provide insurance for somebody who made a loan, but any two people who had different views about the likely solvency, the ability of Ford Motor Company to pay the interest on its bonds, could agree to buy and sell a credit default swap. And so we ended up having vastly more credit default swaps outstanding than there were really insurable interests, people who had the initial claims; $62 trillion of credit default swaps were out there. And anything anybody had any risk on, there was an opportunity for people to take a gamble on that, in some cases to protect a position, in other cases just because two consenting adults wanted to gamble with each other.

It was a casino.

It was a market. We have lots of markets. We have puts and calls on stocks where you don’t have to own the stock to buy a put or a call. And so it’s not different from a lot of other markets, but it was very, very, very big.

And once defaults began to happen, then a lot of institutions that had sold this insurance were in trouble because they had to pay up to others who were the recipients of this, who had bought the insurance. And it wasn’t just somebody who had an insurable interest, somebody who had made a loan or held a bond, but somebody who was just speculating on the risk that that particular default would occur.

And it wasn’t just Joe paying Peter and Peter paying Bill; some of those institutions went bankrupt. When they went bankrupt, they couldn’t pay. So half of the transaction paid and the other half didn’t pay, and that added to the chaos. …

So what did you think?

I thought, and spoke about it at a Federal Reserve conference in the summer of 2007, that this combination of credit default swaps on mortgage-backed securities, that all of this was a potentially very, very dangerous combination; that the decline in house prices that had begun in the summer of 2006 was because of these mortgage-backed securities and because of the derivatives based on these mortgage-backed securities, that this could do tremendous damage to the balance sheets of financial institutions.

You knew how broad the problem was? …

Yes. Once you understood that that was out there, then you had a pretty good idea that this was a very serious problem, and that as house prices came down, we would see more mortgages becoming greater than the value of the house; we’d see more people with less equity in the house, with negative equity in their homes, meaning their loans would be greater than the value of the house, and that that would cause very serious problems. …

Things are happening with the banks around then, too, yes? There’s a kind of credit crisis starting?

… The credit crisis in the banks, the unwillingness to lend to each other and to others, really reflected the fact that there was a lack of confidence on the part of the banks in the creditworthiness of other financial institutions. And why? Because everybody knew that everybody else had these mortgage-backed securities and fancy derivatives based on these mortgage-backed securities. They didn’t know how much, but what they knew was that those things were not worth what they claimed to be on paper, and therefore the danger was that another institution to which you lent wasn’t going to be able to pay you back. …

So the easiest thing for a financial institution was to say: “Thanks, but no thanks. I don’t want to lend to other financial institutions.” So our credit markets really froze up, and lending stopped.

What are the implications that suggest themselves?

One implication is that if we don’t fix this, the economy is going to be in very serious trouble; that it’s not just a problem about the financial institutions, because if the financial institutions won’t lend, then if we don’t have credit, then businesses can’t borrow. If businesses can’t borrow, they can’t invest, can’t get to the demand for equipment. We don’t get the productivity gains and growth that comes from that. If households can’t borrow, then the consumer spending freezes. …

So while we had excessive borrowing, excessive leverage by households, and to some extent by businesses until 2007, once this problem became clear to the financial institutions, we had a freezing up in the availability of credit.

When you know, does Bernanke know?

… It’s very hard to know what they actually know, because in part they don’t want to alarm the public; they don’t want to alarm financial markets.

But I think it’s fair to say that they underestimated the magnitude of the problem. They didn’t really begin cutting interest rates in a serious way until early 2008. And at that point, they recognized that this was serious, and rates started coming down very quickly.

But if you know it, are you alone in this world?

No, I wasn’t alone. But people have different views, and many people said at the time: … “This is a problem with subprime mortgages. That’s just a small part of the mortgage market. The mortgage market is a small part of the credit markets more generally. Therefore, it’s a self-contained problem, and it will work itself out.”

That was wrong. It was wrong because the problem was a more fundamental one. It was that credit in general had been badly priced. People were giving out loans too generously to not just subprime borrowers, but other borrowers. We saw many loans, 90 and 100 percent loan-to-value ratios. We saw share prices which were very high relative to underlying earnings and dividends. But it took a while for market participants, including officials, to recognize that.

Where were the regulators? Where were the people supposedly watching this?

The bank supervisors from the Fed, from the controller of the currency part of the Treasury, from the state banking, their job is to make sure that the banks have adequate capital and that they have quality assets appropriate for a banking institution.

They were asleep at the switch. They really did not adequately evaluate the quality of the assets. They said: “Well, look, some rating agency has said this mortgage-backed security, this complicated synthetic thing that has been put together, is a AAA security. Well, that’s good enough for us if it was good enough for Moody’s and S&P to put that Good Housekeeping Seal of Approval on it.”

And when it came to capital, we kept hearing that the banks were well capitalized. Basically what the banks did, in order to conform to the capital requirements, was to set up these off-balance-sheet entities, these so-called special-purpose vehicles, which somehow were not subject to the same kind of capital requirements as the rest of the bank’s balance sheet.

So yes, they technically conformed to the capital requirements, but you would think that a savvy, even not a brilliant, supervisor — and we’re not talking about Ben Bernanke; we’re talking about the staff that are out there in the trenches — they should have recognized that there were all these off-balance-sheet accounts which were somehow undercapitalized, and that if anything started to go wrong, the banks would find themselves with inadequate capital.

You said they were asleep at the switch. How can that be?

How did it happen? They went in, and they looked at the assets, and they saw that these were highly rated assets, AAA mortgage-backed securities. They asked themselves about the off-balance-sheet special-purpose vehicles. The banks could reply, “Well, under the international banking rules, the so-called Basel rules, those don’t have to have as much capital as ordinary on-balance-sheet obligations.” Mortgages are allowed to have half the capital of loans to AAA companies. So these are strange rules, but the supervisors didn’t make them up.

And you can then say, well, why in the world did the international banking folk come up with these rules? I suppose they looked at history and said: “Well, mortgages have been very safe assets, while companies are not so safe. And we have to have rules that were in many countries, and so we can’t have different standards for a AAA U.S. company and a AAA German company, so that’s the way we do it.”

These mortgage-backed securities that were rated AAA were a relatively recent invention of the financial engineers. They could take a group of low-quality mortgages and create out of that a series of bonds, of mortgage-backed securities — that’s a fancy way of saying bonds — some of which were considered very risky, but others were considered very safe.

This is a CDO that you’re talking about now?

Yeah, it’s a particular form of collateralized debt obligation. Let me describe a very simple way in which this might work. You take 1,000 subprime mortgages; each one of those is a risky security. But you know they’re not all going to fail, so you agree on the following thing: Somebody will get the payments on the first 100 to fail. So if none fail, he gets full interest on whatever the obligation is. But the first 100 to fail are his problem, that institution’s problem. So that’s very risky. He knows that. He says, “I’ll only buy that security if you give me a very high interest rate,” and that’s agreed.

But the chance that there will be more than 100 failures is pretty small. So the next 100 to fail is considered a different security, and that security carries a lower interest rate … therefore the fellow who’s got the 201st mortgage, very low. So that’s already probably a AA or a AAA security because it’s so unlikely based on history that it would fail.

So you take these tranches — these slices — one after another, and by the time you get to the third or fourth slice, people would say: “Well, there’s no chance at all based on the history that we have examined that there will be any defaults there at all. That is better than a AAA bond; that is better than a U.S. government security.” And so those things were called super senior debt.

So the idea was that they created these different-quality mortgage-backed securities out of a pool of otherwise look-alike, very poor-quality underlying mortgages.

One of the problems was that when they did this, they based this rating, how likely or unlikely it is that these will default, on very recent history, last five years or so. Well, those were five wonderful years for the real estate market. House prices were going up, in some years at double-digit rates. So it was very unlikely that there would be defaults on individual mortgages, and therefore, things looked much better than [they] turned out to be.

Once house prices peaked and started coming down, then we began to see very substantial defaults, and the thing that triggered the crisis in the middle of 2006 and on into 2007 was that there were many more defaults on subprime loans than anybody expected, because all of these ratings were based on a favorable period in which house prices were rising, and now we were in an unfavorable period in which house prices were falling.

So instead of going back 20 years and saying what’s the worst year, what’s the best year, and finding a good average that way?

Right. But the rating agencies, in their defense, would say the world is always changing, and so we look at the recent past because the distant past may be very different. Well, it turns out that the future may be very different from the recent past as well, and that’s where they got it wrong. …

Some people say there wasn’t enough regulation, there weren’t enough regulators out there. Other people say there were plenty of regulators out there.

I would change the word “regulator” to “supervisor,” and yes, there were a lot of supervisors, but they obviously were not asking the right question. They were looking at the fact that others more technical than themselves had evaluated these mortgage-backed securities and given them AAA ratings or super senior ratings. And so they, the supervisor on the ground in the banks, could say: “Well, we’re not supposed to dig down more deeply into these complex securities. Somebody else has done it for us, and we’ll take their word for it.” That was the mistake.

There were also in these processes lots of people who say to us: “I’m at a party. The punch bowl is there; I’m not going to leave the party.” …

People get drunk doing that. [William] McChesney Martin was chairman of the Federal Reserve back a number of years ago, [from 1951 to 1970], who said the job of the Federal Reserve was to take away the punch bowl when the party is just getting good. He was talking about it in terms not of individual securities but of an economy that could be overheating. And so it was the job of the Fed to slow the economy down to prevent inflation. But you could use that same analogy here and say the supervisors should have done something; perhaps even the Fed in its monetary policy should have done something to slow down this housing bubble. …

When you see storm clouds gathering in 2007, are you seeing them specifically around Bear Stearns?

Not specifically. …

So you’re looking at the world. Is your worry as specific as Bear, Lehman [Brothers], Merrill [Lynch], Goldman Sachs, private investment banks, or is it they’ll fall first and then something will happen? Are you creating doomsday scenarios in your mind, or calculations?

Not company by company, not company-specific ones, but [at] this talk that I gave at the Federal Reserve Bank’s conference in 2007, I painted this picture in which we were going to see what was already beginning to happen: that there would be a lack of confidence by financial institutions in each other, and therefore unwillingness to lend, and therefore a totally dysfunctional credit market. And so it didn’t matter what the names of the institutions were or even whether they were investment banks or commercial banks; they were going to have a hard time getting credit, and they were going to be unwilling to give credit. …

They’re all just kind of circling each other, I suppose, and worried about each other. When in that incredible week in March Bear Stearns goes from pretty good liquidity, I guess —

They said they had lots of liquidity, right. But then nobody wanted to extend or roll over liquidity to them, didn’t want to keep giving them liquidity, and that’s how they got in trouble.

Why didn’t they want to give it to them?

Because, again, you weren’t sure. You’re a financial institution; you need liquidity; you need to be able to pay your bills. If you give some of your cash to another institution, and they promise to give it back to you, well, that in the old days was good enough. But now you weren’t sure that the people you were about to give it to would be able to give it back to you next week or next month when you needed it. So you said: “It’s not worth doing. I’ll hold onto it. I want to be liquid.”

Are you surprised at how fast Bear Stearns went down?

… Once you think about the way in which liquidity goes away, … it’s not surprising. Once people are afraid to lend, then the spigots get turned off and there’s no money available. And all these institutions depend on being able to get liquidity, being able to get credit quickly from each other.

… Were you surprised at all that the government was involved in the brokering of a marriage between JPMorgan and Bear Stearns?

… No. If you go back to a decade or so earlier when we had the S&L problems, savings and loan problems, the government did a lot of marriage making. It went around findings savings and loans that were in trouble and found others that were healthy that could absorb them. So it’s not at all unprecedented. …

What do you think the rationale was for saving Bear Stearns? Was there a valid argument to let them go?

No, I think these institutions — and you’re going to ask me about Lehman next — these institutions are so interdependent that there are so many credit lines and credit-related instruments, like credit default swaps, out there that the failure of one of these institutions has very widespread repercussions. So the fact that they could prevent that in the case of Bear Stearns by getting JPMorgan to take over the entire balance sheet, all of the risks, except for a relatively small amount that the Fed agreed to take onto its balance sheet, was a sensible way of preventing what could have been a very harmful episode in the financial markets.

So the counterargument, which is let them go; let the market wash itself out?

This was letting the market work with a little help. In other words, this was not the government taking it onto its balance sheet; it was the government providing some relatively small piece of guarantee for a small part of the money that Morgan put up. So Morgan and its people went in and looked at the entrails of Bear Stearns, all of their assets, all of their liabilities, and said: “This is a good business, and it’s worth our having. The assets exceed the liabilities, but there are some pieces of it that are very risky. Maybe it will all work out, but we’d like to have some guarantee on this” — I think it was [the] $30 billion piece of it. And the Fed said, “Yes, that’s worth it to us to provide that guarantee.”

So far, months later, the Fed has recognized, I think, $2 billion of losses on that. The magnitude of the losses that could have occurred had they allowed Bear Stearns to fail could have been much, much bigger. …

The conservatorship of Fannie [Mae (Federal National Mortgage Association)] and Freddie [Mac (Federal Home Mortgage Corp.)], again, a surprise that this step would be taken, or a necessity?

I think it was a necessity. These were government entities. They were a strange, inappropriate hybrid of a government lending institution and a privately owned — that is, shareholder-owned — company. So between the two of them, they had $5 trillion of either outright liabilities, bonds or guarantees, which the federal government was guaranteeing, and yet they were out there to make profits for their shareholders. Quite unusual — nothing like it elsewhere in the economy. Their purpose on paper was to facilitate lower interest rates and the spread of mortgage availability to low-income individuals, but because there were no creditors watching, of course, why would you care what risks they were taking if you had a U.S. government guarantee? They were able to take outrageous risks, and that’s what we saw happen.

And they contributed to the problem in a sort of big and fundamental way.

They did, yes.

So then, by early September, Lehman is in big trouble. It’s almost like a replay of Bear Stearns except the government decides not to help them.

Again, not being an insider, I don’t know everything there is to know. The Fed and the Treasury have said about Lehman that they did not then have the legal authority to take over Lehman. Unlike Bear Stearns, where they could find a private buyer, there was no private buyer for Lehman. … And they did not have the TARP [Troubled Asset Relief Program] at the time, and so there was no way that they could save Lehman, they said.

Now, could they have? Could they have found, with the help of their clever lawyers, a way around it? I don’t know. But it was certainly something that had very adverse consequences in global capital markets. …

… Some say the entire Lehman circumstances, the overlay is the idea of moral hazard brought to bear: Look, we’ve just got to send a message to the Street that this excess, these fat cats can’t just live off the government. It’s not going to work if we do this.

We’ll never know. At least I don’t know, and perhaps at some point we will get a more detailed accounting from the insiders. But at this point, they are sticking to their story that the Fed didn’t feel that this was something they could just take onto their balance sheet with all of the potential losses associated with it. And the Treasury was not in a position to say, “Well, that’s OK then; we will guarantee those losses.” So in that sense, it was very different from Bear.

Can you give me a definition of moral hazard?

Moral hazard has nothing to do with morals or morality. It is that people will respond, institutions will respond, to incentives to take risks or to do other things that are inappropriate because of the incentive structure.

So, what’s a good example of that? If people have very good insurance, they may be less careful about locking their car when they park it, because if it’s stolen, well, the insurance company will pay for it. An economist would say that’s an example of moral hazard. If they didn’t have that insurance, they’d have locked the car.

So translating that into Wall Street, if you think you can take very big risks as a financial institution and in the end get saved by the Federal Reserve or the Treasury coming along, then you’re going to take very big risks. You’re not going to bother to lock the car. And so that’s the moral hazard that they worry about.

I don’t think you could convince the people at Bear Stearns that what happened to them represented an example of getting away easily. The senior executives of those firms were completely wiped out; many of the less senior executives lost all of their deferred compensation, their shares and everything, and their jobs. So it wasn’t at all obvious that you had to have an outright failure to punish people so that they wouldn’t succumb to the temptations of moral hazard.

How surprised were you by the events of that Tuesday, then? Lehman goes down on Sunday night, and the stock market is kind of up on Monday, and by Tuesday, everything kind of stops. Money stops.

Absolutely amazing. Around the world, people said, “This is a new world we’re in.” And people just said: “We’re not sure what’s going to happen. The government is clearly not going to be there to protect us the way we thought they were a few days ago.”

That’s the moment, isn’t it?

I think so. I can’t say to the hour, but people around the world tell me that they felt it in the days after the Lehman collapse.

What did they feel? What is it?

They saw a lot of losses happening immediately. Securities that they thought were worth 100 cents were worth nothing. Banks that were dependent upon those securities saw that they were taking big losses, and they had thought that if something like this happened, that this institution would be deemed to be too big to fail and that the Fed or the Treasury would come in and rescue them.

Now, of course Lehman was not a bank; it was an investment bank. It was not a member of the Federal Reserve, and as a member of the Federal Reserve in principle, it might have been able to go to the Fed and ask for a line of credit. But in the old days, if it didn’t have an adequate amount of quality collateral to post, it wouldn’t get that credit. These days, collateral standards, both here and in Europe, have been relaxed dramatically. But they may not have had even that much. In any case, they weren’t eligible because they were an investment bank. And as we’ve seen, other investment banks have now rushed to convert themselves into commercial banks and to sign up for the Fed so that at least as long as they have what the Fed would deem to be adequate collateral, they would be able to get lines of credit.

So Merrill jumps into Bank of America. Merrill goes into Bank of America, right? And Goldman and Morgan Stanley basically become commercial banks to protect themselves?

Right. So we worried for a long time about how the Fed would regulate investment banks. We don’t have any investment banks, so that problem has gone away.

Gone forever, maybe.

In a sense. I mean, other institutions will come to play the role of investment banks. We’ll have to give them a new name. Maybe we’ll call them investment banks eventually again. …

Then there’s the TARP moment, the bailout moment. Paulson and Bernanke come to Congress. Finally Congress enters our story. Where have they been through all of this?

They’ve been leaving it to the Fed.

As usual?

Yeah. I mean, this is, again, a very different thing. It’s not fiscal policy; it’s not monetary policy. It’s a kind of credit policy and going beyond the risks that the Fed can appropriately take. So the Fed looks correctly to government to say, “Yes, you can do these things and we will take the risk, or we will just do them.”

[Was Bernanke uniquely prepared for this because his research was on the Great Depression?]

There’s a lot of relevance to it. But it certainly is a different world now. It’s a globalized world. It’s a world of capital markets rather than banks. …

There really are two sets of problems. One is the modern analog of the collapsing bank in the 1930s, and that’s the fact that all these financial institutions are frozen and won’t lend to each other. So that isn’t the problem of the ’30s, but it is the financial-sector side of the story.

The other side is this fact that unemployment is rising rapidly, that with the destruction of household wealth, consumer spending is going to fall very rapidly, and something has to be done to replace that. And that’s the fiscal part of this that the Obama administration will turn its attention to.

But nobody really knows whether any of that stuff is going to work?

It’s very hard to imagine that it won’t work to some extent. The question is how much they do, the form in which they do it. Those things will determine how effective it is. In the 1930s there were a lot of programs, but there wasn’t that much government spending. We had programs to stabilize prices and programs to protect unions and programs to do this and do that. But until the Lend-Lease programs of developing military equipment to lend to the British and others got going, and until we went into World War II, the economy still languished with an unemployment rate of over 10 percent.

So the government has to get involved — that’s the one thing we all sort of know — and involved in big ways?

We at least think that that is the lesson of history with respect to this. We’ve gone as far as we can with monetary policy. Credit policies are stopping things from spinning down. It’s hard to see what you can do other than either government spending or really massive tax cuts of one sort or another.

And making all this money, trillions and trillions of dollars, worried about inflation? It seems inevitable, yes?

Not inevitable, possible. Depends on how the Fed undoes this money, takes it back later on. After all, they don’t drop it from helicopters; they do buy assets. They either buy government bonds or they buy private bonds in exchange for money. So they’ve got those, and when the time comes, they can sell them, put them back into the market and take that money back out.

That’s the hope? That’s the plan?

That’s the implicit plan.

Let’s back up just for a second. … When Paulson and Bernanke sit in [Speaker of the House] Nancy Pelosi’s office with all the heads of the House and Senate and [Chairman of the House Financial Services Committee] Barney Frank [D-Mass.] and [Chairman of the Senate Banking Committee] Chris Dodd [D-Conn.], and they say, “If we don’t do something about this by Monday, there is no economy,” was it hyperbole or a genuine fear?

I’m sure it was a genuine fear. Whether it was correct or not, I don’t know. Well, I suppose the answer is it was not correct because they got the $700 billion, they didn’t do much with it, and the economy is still here. It’s not getting better, but it didn’t disappear. …

Did you think TARP was a good idea?

No, I did not. No, I said that at the time.

Why?

Remember, the TARP started with a strategy that they were going to buy back these impaired securities, these mortgage-backed securities. There were $2.5 trillion worth of negative equity securities, so they didn’t have enough money to buy them back, even if they could pinpoint and target them. The way they were going to buy them back, by so-called reverse auction, that couldn’t possibly work with as much [of a] heterogeneous group of securities as was out there.

And they didn’t deal with the fundamental problem, which was that house prices were falling. The decline in house prices was creating an incentive to walk away because people had more and more negative equity in their homes. And in the United States, unlike every other country in the world, if you have negative equity and you want to walk away, you walk away, and in general, they cannot take more than the house itself. … Unlike the rest of the world, where people know that the creditors will take whatever other assets they have and then will attach their future wage income, here it led to, and would continue to lead to, defaults and foreclosures, pushing prices down. And this original plan for the TARP did nothing to deal with that.

Why?

Because that would have been a bigger, more complicated thing to do than to go and buy securities.

Now, in fact, they never did buy many securities, because they decided it was too hard. So they changed the strategy, and TARP II was [designed] to inject capital into the banks. And that they did do, because that was very easy to do. You’ve got 10 people in the room, and you can hand out $250 billion or something close to it. But that didn’t do anything either, because that wasn’t really the problem. And again, they didn’t do anything to deal with the true root cause of this, which was the downward spiral and the potential downward spiral in house prices associated with growing negative equity and the lack of recourse on loans.

Seems a little bit like they were just kind of veering from thing to thing?

They were making up new things that they thought would help. In each case, they had a story, a reason to think it would help. But in fact, quantitatively, it didn’t make sense.

You have a bank of the size of Citigroup with a $2 trillion balance sheet, and you invest $25 billion in them, what’s that going to do? It’s not going to do much. It’s not going to make Citigroup look more creditworthy to others. If you were nervous about how much they were underwater before, $25 billion isn’t going to change things very much, and it wasn’t going to induce them, Citi, to go and lend that money out, because they’re trying to get as much liquidity as they can. So these were bad ideas. …

The film airs in the middle of February, but here we stand: Is it possible that we just don’t know what to do; that it’s bad enough, that it’s new enough, that it’s big enough, that it’s worldwide enough that we just don’t know what to do?

In February, we’re going to think we know what we’re doing. We’re going to hope that it’s going to work. But we’re certainly not going to be sure that it’s going to work.

What do you mean?

At this time, we know that the Fed has brought the interest rate down essentially to zero. We know that the Obama administration has introduced a massive and unprecedented peacetime spending program. What we don’t know is how successful it’s going to be. And we can hope that this program is going to substitute for a lot of the private demand that has been lost because people are cutting back on consumer spending; construction is down; business investment is down. But we really can’t be sure of how much additional stimulus is actually going to come from these hundreds of billions of dollars of spending commitment by the new administration.

I mean, the fact is we’ve never been here before.

That’s true. Well, we haven’t been here since the 1930s.

http://www.youtube.com/watch?v=oUZwL9GPcNw

Please, take a look at this clip where Ron Paul asks McCain about the role of president’s Working Group on Financial Markets (this is a team that battle in the “finacial” war room when market goes haywire) which for certainly has been meeting and assembling for the last few days to discuss the turmoil in the financial market. Watch how McCain veers off on a tangent line, babbling about how he is planning to secure advising positions for likes of Phil “Foreclosure” Gramm who incidentally has been blamed as one of the player to drill a regulatory hole to ease the sub-prime market and creation of CDO, CLO, and grotesque CDO squared’s.

Ron Paul DID NOT ASK ABOUT YOUR FUCKING CIRCLE OF AQUANTANCES; THAT WAS A CLEAR CUT QUESTION WITH REGARD TO THE RESPONSIBILITY OF Plung Protection Team, YOU DUMB FUCK… There is no one there tell this guy, “HEY! MORON, YOU STILL NEED TO ANSWER THE QUESTION.” I am so fucking upset at this moment that this guy probably going to be our next president while letting cronies and vultures devoure and rape our country — I sincerely wish I could restrain my anger in not burying a fist in to the monitor at this moment. “Phil Gramm… Phil Gramm” ARRRRGHHHHHHH! He doesn’t even know which counsile on his adminstration deals with the market, let alone be considered as an expert in dealing with market crisis. I can’t stand this inanity. Here’s another clip — almost the same — catching McCain touting about his “expertise” on economy:

http://www.youtube.com/watch?v=_1KxgH9l3n4

Ok, if I wasn’t scared… Now I am.

http://www.senseoncents.com/2008/11/the-wall-st-model-is-broken-and-wont-soon-be-fixed/

The Wall St. Model is Broken . . . and Won’t Soon be Fixed!!

Posted by Larry Doyle on November 12, 2008 12:15 pm

Despite billions and now trillions of dollars in capital injections and equity investments made by our government, private equity, and sovereign wealth funds, our economic turmoil is a long way from being over. I do find it interesting that despite numerous Wall St. titans having indicated to us at different points over the last year that we were in the 7th inning of this fiasco, that now a recurring theme is that we should not expect any real economic recovery until 2010. Actually maybe we were in the 7th inning but it was the 7th inning of the first game of a 4 game set.

Well, if we want to figure out where and when we are moving forward, I think it would be beneficial to know from where and when we came.

For those over 50 years of age, perhaps you remember when mortgage money dried up. Perhaps you also recall the days of putting down 20% before you even thought of buying a home. In any event, the growth of the secondary mortgage market in the mid 1980s was a result of some very sharp financial minds on Wall St. who engineered a product called a Collateralized Mortgage Obligation (CMO).

CMOS and their cousins that grew from that model were and are not necessarily bad structures. However, much like prescription drugs. if and when they are abused. they can be deadly.

CMOs used the stream of cash flows from a standard fixed rate mortgage to create specific bonds which met the investment desires of a wide array of investors, including money market funds, bank portfolios, insurance companies, money managers, and pension funds. Prior to the development of the CMO, mortgages were an investment that typically only met the needs of bank portfolios.

As the CMO market grew, two developments occurred. First and foremost, Wall St. firms (which were making on average 1 point on each deal … on an average deal size of 300 million, the Wall St. underwriter made $3 million dollars … not too shabby) had an appetite for more and more mortgage collateral to do more and more deals.

In the mid-1980s, most CMO deals were done with private homebuilders such as Pulte Homes, Centex, Ryland et al. The second development was more substantial. If Wall St. could use mortgage collateral to execute CMOs, why couldn’t they use other forms of loans/assets to create similar sorts of structured products. Thus in the late 1980s the Asset Backed Securities market was launched using credit card loans, auto loans, computer leases, equipment leases, and the like. Again, all Wall St. was doing was using the stream of cash flows from these well underwritten loans to create securities that met the guidelines and needs of a wide array of investors. Again prior to the developments of these markets, the banks underwrote these loans at rates and terms that met their own portfolio needs (REMEMBER THIS POINT!!).

In the late ’80s Freddie Mac and Fannie Mae got a whiff of the profitability of these CMO deals and used their significant lobbying power to get legislation passed that made it advantageous from a tax standpoint for CMOs to be launched through them. While some Wall St. firms were reluctant to support Freddie and Fannie in this process, given F/F ’s position in the business they won out. (REMEMBER THIS POINT!!)

As the CMO and ABS engines grew ever stronger throughout the early to mid 90s, Wall St. needed to find more and more collateral to continue to feed this profit monster. Some Wall St. firms either purchased or made strategic alliances with originators (Lehman Bros bought Aurora Mortgage in Aurora, Colorado … Bear Stearns owned EMC Mortgage in Texas … Merrill Lynch purchased First Franklin, a sub-prime originator, from National City Bank) while some originators formed their own broker dealers to retain the profits of distributing these products (Countrywide Mortgage formed Countrywide Securities, JPM Chase grew its own investment banking presence in the late ’90s as did Bank of America)

In the midst of this growth, Wall St. continued to use this CMO model not only across other consumer asset classes but then branched out and used it with corporate loans as well. Thus Wall St. structured CLOs (collateralized loan obligations using the same financial engineering).

While there were hiccups with different deals for the most part the machine ran smoothly. The machine, though, was built on the premise of strict underwriting of the underlying loans and a robust ratings process.

However, at the turn of the century there were two critically important developments that occurred to truly escalate the disastrous situation we have currently. A number of individuals from Wall St. realized that they could form their own firms (hedge funds) which allowed them a greater share of the profits from this structured financial engineering with less internal or external oversight. (REMEMBER THIS POINT!!)

A large number of qualified analysts from the rating agencies left those firms to come to Wall St. to participate in the profit machine. This shift of talent both to hedge funds and from ratings agencies dramatically exacerbated and accelerated the financial meltdown of the last two years. (***given the amount of money in these hedge funds as well as the amount “earned” by the hedge fund managers it should be no surprise that they became very influential in currying political favor … especially with Barack this go round!!)

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Hedge funds factored into the fray in two ways. They partnered with their friends on Wall St. in managing CBOs and CLOs and they purchased the cheapest bonds in the deals or so they thought. Rating agencies either were not smart enough to know what they were rating or were blinded by their own stream of profits given the growing volume of deals. They were negligent or complicit or both. Honestly there was nobody who truly was looking out for the investors, who it was assumed should look out for themselves. Where was the SEC when you really needed them??!! This was all hunky dory as long as the economy was humming and delinquencies and defaults by consumers, homeowners, and corporations were well behaved.

In 2005 or thereabouts Wall St. had such a voracious appetite for volume of collateral product that they pressed the envelope even further and came up with “synthetic” structures. These structures purely used a pool of known collateral (be it sub-prime mortgages, home equity loans, corporate loans, et al) as a reference pool for the stream of cash flows in the deal. Wow!!

Without the need for actual collateral Wall St. really rocked. (REMEMBER THIS POINT)

Under the “originate to distribute” model Wall St. hired reams of financial quants and engineers to structure deals. Wall St. grew their distribution efforts globally to sell these products far and wide.

Life was good!! … or so they thought.

Wall St. actually started to think they were as smart as everybody told them. Wall St. thought that their own models were so robust because they had the smartest minds build them. Wall St. thought that they had become so effective at “distributing” risk that they were blind to the fact of just how much risk they “created”. Then the music stopped. The Fed needed to increase rates to slow the pace of inflation that was emanating from global economic growth especially in Asia. Mortgage rates reset at higher levels. Freddie and Fannie started to show signs of distress. Wall St. pressed so hard that they “killed the goose that had laid the golden eggs”.

Against that backdrop, through the 3rd quarter in 2008, check out the volume of underwritings in these respective sectors vs 3rd quarter 2007.
Deals using mortgage collateral … … down 95%!!!!!!!!
Deals using commercial mortgage collateral … … down 89%!!!!!!!!
Deals using consumer assets … … down 75%!!!!!!!!

The mortgage and asset backed markets (including commercial mortgages) are twice the size of the overall U.S. government bond market and app half the size of the U.S. equity markets. The mortgage market doubled in size from the end of 2003 until the end of 2007!!!

Investors now fully appreciate that with the economy slowing and seemingly picking up speed that delinquencies and defaults will continue to ratchet higher. The embedded losses are only exacerbated by the massive leveraging that occurred via the use of “synthetic” cash flows. No, the media has no appreciation for this and will not share it with the public.

Where are the other shoes that have yet to drop??

Please refer back to the “synthetic” structure that I discussed. These synthetic structures grew exponentially with the growth of a product called the “credit default swap” or CDS. This product, in theory, is outstanding because it acts to protect investors against defaults on the underlying referenced corporation or entity (such as sub-prime mortgages). That said, instead of helping to distribute risk the CDS market has effectively “created” risk because it has grown to the point where it now is 10 times the size of the overall corporate bond market that it is supposed to be tracking.

Yes, the tail is very much wagging the dog. Hedge funds dominate the trading activity with close to 60% of the overall trading volume. Hedge funds have gotten good press so far for not having had many “blow ups”!!

Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt that they have positions that are grossly mismarked and that they have many positions that are totally illiquid. For many investors in these funds these are truly “roach motels”. Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.

Read more how “Hedge Funds on Hot Seat.”

In the S&L crisis of the late ’80s the overall cost was estimated to be $100bln+ with the government taking over and liquidating failed institutions. Now given the tremendous systemic risk that links Wall. St investment banks to hedge funds to insurance companies, to sovereign wealth funds to commercial banks to municipalities the losses are untold.

To think that a stimulus package of even $300bln along with the $700bln commitment that has already been made is going to “fix” our economy is foolhardy. We will definitely get “bear market” rallies in the stock market and politicians and market timers who will tell you that all is well but don’t get fooled by “that man behind the curtain”. The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.

When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!

Please read this article in Monday’s WSJ highlighting how Uncle Sam is reworking the terms of the rescue package for AIG. This article highlights the systemic risk (Goldman Sachs is widely speculated to have the greatest counterparty risk exposure to AIG) and the very fluid nature of the deteriorating situation. Guess what? As taxpayers we have the bulk of the risk as we own 80% of AIG and will very likely lose a lot of money on this deal. That said, the near term losses would very likely be even greater if AIG were not propped up by the government. It is not a given that our longer term losses and negative impact on GDP won’t exceed the perils of immediate losses. We have a high stakes game of craps on our hands.

“Government, AIG Near Pact to Scrap Original Terms of Deal” … oh what fun!!

I have little doubt that we will also in large measure “nationalize” the auto industry. Read here how the “Auto Makers Force Bailout Issue” …

IMO, there are only a few moves that Obama, Summers, Geithner, Volcker, Buffet or Rubin can do to change this situation for the better. Those moves include:

1. lowering the tax rate on capital gains (I’m not so sure that Barack wants to do that)
2. categorically state that tax rates will not change (not sure he will do that either)
3. spending freeze!! (also not sure he wants to do this either).

Even with those moves, it may only shorten the length of our very deep recession but will not negate it.

Honestly, I have to believe that Barack is kicking himself thinking that his entire program to create social change may very well be at the mercy of these economic constraints. IMO, if he and/or the Democratic leadership aggressively push the tax/spend agenda, the markets will punish them in very short order.

With the unemployment rate headed higher, to at least 8% if not 9% or 10%+, I firmly believe that people will use any money from the government to simply pay off existing debt. That is the rational move at this point. Our U.S. personal savings rate is 1%!!! In China the personal savings rate is 40%!! The party’s over, the lights have come back on, and somebody has to pay the bill. Yep, that’s right and regrettably that bill is on the U.S. taxpayer. Screwed again.

The government has already massively increased it’s own debt and will “crowd out ” lending into other sectors.

If we go back to the first point I asked you to remember, with the “originate to distribute” model broken and not soon if ever to return, banks will now only underwrite those loans (consumer or corporate) that they feel comfortable putting into their own portfolio at terms and rates that are amenable to both sides. That is why I think rates for these loans will be higher and volumes will be lower. Batten down the hatches.

Paulson knew of the consequences of this scenario earlier this year. He hoped the banks could sell assets, he says as much in this piece … “Paulson, Bernanke Strained for Consensus In Bailout.”

As Maryann Hurley a Vice-President of D.A. Davidson recently said, “When the banks shed their balance sheets of a lot of these unwanted and poorly performing assets.” they may start to lend again. Hurley added that consumers need to fix their balance sheets as well after years of going into debt. The lack of a rigorous underwriting process is coming home to roost.

She adds, “I’m guessing it’s not going to be before 2010 at best and it’s most likely 2011 before the economy really starts to turn around.”

7th inning of game 1 of a 4 game series …

http://www.theatlantic.com/doc/200905/imf-advice

May 2009

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

by Simon Johnson
The Quiet Coup

Image credit: Jim Bourg/Reuters/Corbis

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Click the chart above for a larger view

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5trillion (or 10percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

Prophet and Loss
Brooksley Born warned that unchecked trading in the credit market could lead to disaster, but power brokers in Washington ignored her. Now we’re all paying the price.
BY RICK SCHMITT
PHOTOGRAPHY BY ERIKA LARSEN

Shortly after she was named to head the Commodity Futures Trading Commission in 1996, Brooksley E. Born was invited to lunch by Federal Reserve chairman Alan Greenspan.

The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington lawyer with a track record for activist causes. Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences.

“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.

“What is there not to agree on?” Born says she replied.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself.

For the incoming regulator, the meeting was a wake-up call. “That underscored to me how absolutist Alan was in his opposition to any regulation,” she said in the interview.

Over the next three years, Born, ’61, JD ’64, would learn first-hand the potency of those absolutist views, confronting Greenspan and other powerful figures in the capital over how to regulate Wall Street.

More recently, as analysts sort out the origins of what has become the worst financial crisis since the Great Depression, Born has emerged as a sort of modern-day Cassandra. Some people believe the debacle could have been averted or muted had Greenspan and others followed her advice.

As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. Derivatives get their name because the value is derived from fluctuations in, for example, interest rates or foreign exchange. They started out as ways for big corporations and banks to manage their risk across a range of investments. One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling.
FRONT AND CENTER: Born became the first woman at Stanford Law School to be president of the Law Review. In this 1964 photo, she is pictured with senior editors and classmates (back row, from left) Bruce Gitelson, Robert Johnson and Paul Ulrich, and (front row) Richard Roth and James Gaither.

The swaps were sold as a kind of insurance—the insured paid a “premium” as protection in case the creditor defaulted on the loan, and the insurer agreed to cover the losses in exchange for that premium. The credit-default swap market—estimated at more than $45 trillion—helped fuel the mortgage boom, allowing lenders to spread their risk further and further, thus generating more and more loans. But because the swaps are not regulated, no one ensured that the parties were able to pay what they promised. When housing prices crashed, the loans also went south, and the massive debt obligations in the derivatives contracts wiped out banks unable to cover them.

Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. The economy was sailing along, and the growth of derivatives was considered a sign of American innovation and a symbol of the virtues of deregulation. The instruments were also a growing cash cow for the Wall Street firms that peddled them to eager takers.

Ultimately, Greenspan and the other regulators foiled Born’s efforts, and Congress took the extraordinary step of enacting legislation that prohibited her agency from taking any action. Born left government and returned to her private law practice in Washington.

‘History already has shown that Greenspan was wrong about virtually everything, and Brooksley was right. If there is one person we should have listened to, it was Brooksley.’

“History already has shown that Greenspan was wrong about virtually everything, and Brooksley was right,” says Frank Partnoy, a former Wall Street investment banker who is now a professor at the University of San Diego law school. “I think she has been entirely vindicated. . . . If there is one person we should have listened to, it was Brooksley.”

Speaking out for the first time, Born says she takes no pleasure from the turn of events. She says she was just doing her job based on the evidence in front of her. Looking back, she laments what she says was the outsized influence of Wall Street lobbyists on the process, and the refusal of her fellow regulators, especially Greenspan, to discuss even modest reforms. “Recognizing the dangers . . . was not rocket science, but it was contrary to the conventional wisdom and certainly contrary to the economic interests of Wall Street at the moment,” she says.

“I certainly am not pleased with the results,” she adds. “I think the market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been.”

Greenspan, who retired from the Fed in 2006, acknowledged in congressional testimony last October that the financial crisis, which he described as a “once in-a-century credit tsunami,” had exposed a “flaw” in his market-based ideology.

He says Born’s characterization of the lunch conversation she recounted does not accurately describe his position on addressing fraud. “This alleged conversation is wholly at variance with my decades-long held view,” he said in an e-mail, citing an excerpt from his 2007 book The Age of Turbulence, in which he wrote that more government involvement was needed to root out fraud. Born stands by her story.

Robert Rubin, who was treasury secretary when Born headed the CFTC, has said that he supported closer scrutiny of financial derivatives but did not believe it politically feasible at the time.

A third regulator opposing Born, Arthur Levitt, who was chairman of the Securities Exchange Commission, says he also now wishes more had been done. “I think it is fair to say that regulators should have considered the implications . . . of the exploding derivatives market,” Levitt told STANFORD.

In a way, the battle had the look and feel of a classic Washington turf war.

The CFTC was created in the ’70s to regulate agricultural commodities markets. By the ’90s, its main business had become overseeing financial products such as stock index futures and currency options, but some in Washington thought it should stick to pork bellies and soybeans. Born’s push for regulation posed a threat to the authority of more established cops on the beat.

“She certainly was not in their league in terms of prominence and stature,” says a lawyer who has known Born for years and requested anonymity to avoid appearing critical of her. “They probably thought, ‘Here is a little person from one of these agencies trying to assertively expand her jurisdiction.’”

Some of the other regulators have said they had problems with Born’s personal style and found her hard to work with. “I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.” Levitt says Born was “characterized as being abrasive.”

Her supporters, while acknowledging that Born can be uncompromising when she believes she is right, say those are excuses of people who simply did not want to hear what she had to say.

“She was serious, professional, and she held her ground against those who were not sympathetic to her position,” says Michael Greenberger, a Washington lawyer who was a top aide to Born at the CFTC. “I don’t think that the failure to be ‘charming’ should be translated into a depiction of stridency.”

Others find a whiff of sexism in the pushback. “The messenger wore a skirt,” says Marna Tucker, a Washington lawyer and a longtime friend of Born. “Could Alan Greenspan take that?”

Greenspan dismisses the notion that he had problems with Born because she is a woman. He points out that when he took a leave from his consulting firm in the 1970s to accept a job in the Ford administration, he placed an all-female executive team in charge.

It was not the first time that Born, 68, had pushed back against convention.

Her doggedness over a career spanning more than 40 years propelled her into the halls of power in Washington. She was a top commercial lawyer at a major firm, as well as a towering figure in the area of women’s rights, and a role model for women lawyers. She was on Bill Clinton’s short list for attorney general.

One of seven women in the Class of 1964 at Stanford Law School, she graduated at the top of her class, and was elected president of the law review, the first woman to hold either distinction. She is credited with being the first woman to edit a major American law review.

In the early 1970s, at a time when women had few role models at major law firms, she became a partner at the Washington, D.C., firm of Arnold & Porter, despite working part time while raising her children.

She helped establish some of the first public-interest firms in the country focused on issues of gender discrimination. She helped rewrite American Bar Association rules that made it possible for more women and minorities to sit on the federal bench, and she prodded the group into taking stands against private clubs that discriminated against women or blacks.

She was used to people trying to push her around, or being perceived as a potential troublemaker. She remembers being shouted down during an ABA meeting in the 1970s when she proposed that the organization take a position supporting equal rights for gay and lesbian workers. A former ABA president stood up and said, “that the subject was so unsavory that it should not be discussed . . . and was not germane to the purposes of the ABA,” she recalls. She lost that fight, although the group reversed its stand years later.

“She looks at things not just from a technical perspective or the perspective of an insider. She looks at the perspective of outsiders and how people without power are going to be affected,” says Esther Lardent, a Washington lawyer who worked with Born on various ABA matters. “That is a theme constantly running through her life and career.”

“She is a very polite and low-key person but she is never somebody who steps back from a disagreement or a fight if it is a matter of importance to her,” Lardent adds. “Did that make people uncomfortable? Did that make the men who dominated the leadership fail to take her seriously enough? I am sure that was the case.”

SHE WAS BORN in San Francisco. Her mother, an English teacher, and her father, the head of the city’s public welfare department, were both Stanford graduates.

An early mentor was her mother’s best friend from Stanford, Miriam E. Wolff, JD ’40, who became a deputy state attorney general and judge and the first woman to ever head a major port.

Born entered Stanford with the thought of being a doctor, but switched majors after a career counselor interpreted her answers on a series of vocational tests. In those days, women were assessed for their interest in nursing or teaching, men for the professional jobs, including law and medicine. The tests were even color coded—pink for women, blue for men.

Born says she insisted on taking both. Her mother, who had a master’s degree in psychology, felt that was the only way her daughter’s professional interests could be evaluated properly.

She scored high on being a doctor—and low on being a nurse. But rather than suggest she pursue a career as a physician, the counselor said the test proved that her interest in medicine was not genuine and that she was really only interested in making a lot of money. Born quit premed and majored in English.

“It was a turning point. What can I say? I was 18 years old. I didn’t know any better,” Born says. “Unfortunately, I was, you know, a member of the society as it was then. I was hurt by the advice, and kind of believed in it. I don’t believe in it now. It is ridiculous in retrospect.”

A decade later, one of the public-interest firms she founded challenged the tests as discriminatory.

Law school was welcoming and intellectually stimulating, even if some people were still getting used to the idea of having women around. Male law students got their own dormitory; women were left to make their own housing arrangements in off-campus boarding houses or apartments. “I also had . . . one student in my class tell me I was taking the place of a man who had to go to Vietnam and was risking his life because of me, which was sobering to say the least,” she recalls.

Making a mark in the classroom could also be a challenge. Some professors refused to call on women, thinking it rude or unbecoming. She remembers an episode in her first year when her professor appeared to have the class stumped after quizzing several men about a problem. “The little girl has it!” she recalls the professor declaring, after she blurted out the right answer.

“I was very worried that I would not do well and that I would disgrace myself, and women,” Born says. “I worked very hard during my first year because I was afraid I would flunk out.” In those Darwinian times in law schools, that was not an idle concern: professors tried to weed out all but the most qualified students, and about a third were dismissed from school after the first year. That would not be her fate.

“She was off the charts,” says Pamela Ann Rymer, JD ’64, a judge on the federal appeals court in Pasadena. “Brooksley never wore it on her sleeve. She is not quiet, but she is a very unpretentious kind of person, just plainly and obviously with a brilliant mind.”

Despite her grades, Born was passed over for a clerkship on the U.S. Supreme Court, the most coveted opportunity for a young lawyer. Stanford’s top students were good candidates for the clerkships, but a faculty committee decided to recommend two men for the positions even though Born had a superior academic record. It was a bitter introduction to a gender-biased legal culture. “They were sure I would understand that it would be unseemly for women to be clerks on the Supreme Court,” she says of the committee members. “I felt very disappointed and angry.”

Undaunted, she headed to Washington, and arranged an interview on her own with Arthur Goldberg, then one of the most liberal members of the high court. Goldberg would not hire her either but recommended her to a judge on the federal appeals court in Washington. Henry Edgerton, who wrote an opinion that became a basis for the landmark Supreme Court decision in the Brown v. Board of Education school desegregation case, gave her a clerkship. (Law school professor emerita Barbara Babcock also clerked for Edgerton.)

A year later, taken with the Washington scene and its place on the front lines of the civil rights movement, Born scrapped plans to return to San Francisco. “I wanted in,” she says. Arnold & Porter, a firm with a liberal tradition of public service, offered her a job, and she started work the same day that a former name partner of the firm, Abe Fortas, was sworn in as a justice of the Supreme Court.

The firm was one of a few that were beginning to hire women and treat them on par with men. But there were challenges, especially for those interested in a career and a family. Many firms up to that point refused to hire women who were married or who were interested in children.

The lone woman partner at Arnold & Porter at the time was married to Fortas and was renowned for her “misanthropic toughness,” including a preference for “thick cigars,” according to Charles Halpern, an associate with Born at the firm in the 1960s. “Our swimming pool has two deep ends,” Halpern recalls her once saying, “so that people aren’t tempted to drop by with their small children for a swim on a hot summer day.”

Born soon faced a difficult choice. She took a one-year leave when her then-husband got a Nieman fellowship at Harvard, where her first child was born. Returning to Washington, she tried to juggle full-time work and child rearing but it quickly became apparent that the arrangement didn’t work.

“I went to the partner I was working with the most and said I just didn’t think I could do this,” she says. “I thought I had to resign.” To her surprise, the partner suggested she work three days a week with the understanding she would not be considered for partner until she returned full time.

In 1974, when she had a 4-year-old and a 2-year-old, she was still working part time. The firm promoted her anyway. The family-friendly development was a stunning breakthrough at a time when law firms were focused on billable hours and the bottom line, and little else. It further raised her profile.

“When I met her I was in awe of her because the idea that she could be a partner in that firm was just unbelievable,” says Tucker, her longtime friend. The women bonded after being asked to teach a course on women and the law at two Washington-area law schools, and being horrified at what they found during their research. “We were surprised to find the degree to which discrimination was embodied in the law,” Born says. “It was a real consciousness-raising experience.”

Lawyer Marcia Greenberger sought out Born in the 1970s when she was named to start a new women’s rights project in Washington. Born agreed to chair an advisory board for the project, and became a guiding force, mentor and opener of doors, leveraging her contacts and credibility, Greenberger says. One of the first broad-based challenges to how universities were implementing Title IX—the 1972 law requiring equal programs and activities for women and men—was brought after Born passed along the name of a colleague who was incensed at the poor athletic facilities his daughter was forced to use at her school. Born also helped win Ford Foundation grants that enabled the project to hire its second lawyer. What is now called the National Women’s Law Center today has a staff approaching 60 and a budget of almost $10 million. Born remains chair of its board of directors.

Clinton named her to head the CFTC in 1996. She was not without experience: at Arnold & Porter she had represented the London Futures Exchange in rule making and other matters before the commodities agency.

She also knew how markets could be manipulated, having represented a major Swiss bank in litigation stemming from an attempt by the Hunt family of Dallas to corner the silver market in the 1980s.

“Brooksley had the advantage of knowing the law and understanding the fragility of the system if it weren’t regulated,” says Michael Greenberger, her former adviser at the CFTC. “She could see that the data points, by lack of regulation, were heading the country into a serious set of calamities, each calamity worse than the one before.”

Under a Republican predecessor, the CFTC had in 1993 largely exempted from regulation more exotic derivatives that involved just two parties. The thinking was that sophisticated entities negotiating individually tailored derivatives could look out for themselves. More generic derivatives still had to be traded on exchanges, which were subject to regulation.

By 1997, the over-the-counter derivatives market had more than doubled in size, by one measure, reaching an estimated $28 trillion, based on the value of the instruments underlying the contracts. (It has now reached an estimated $600 trillion.)

And some cracks were already surfacing in the landscape. Several customers of Bankers Trust, including Procter & Gamble, sued for fraud and racketeering in connection with several OTC derivative deals. Orange County, Calif., had gone bankrupt in part because of an OTC derivative-trading scheme gone awry.

What is more, all the growth had taken place at a time of economic prosperity. Some people were beginning to ask what would happen if the market suffered a major reversal.

“The exposures were very, very big and if it was your job to worry about things that could go wrong, and I think it was, this is one of the things you couldn’t help but notice,” says Daniel Waldman, a Washington lawyer who was the CFTC general counsel under Born. “It was only your blind faith in the participants that could give you much comfort because you really did not know much about the real risks.”

‘There was no transparency of these markets at all. No market oversight. No regulator knew what was happening,” Born says. “There was no reporting to anybody.’

“There was no transparency of these markets at all. No market oversight. No regulator knew what was happening,” Born says. “There was no reporting to anybody.”

She chose what she thought was a middle ground, circulating a draft “concept release,” to regulators and trade associations, which was intended to gather information about how the markets operated. She and her staff suspected the industry was trying to exploit the earlier regulatory exemption.

But even the modest proposal got a vituperative response. The dozen or so large banks that wrote most of the OTC derivative contracts saw the move as a threat to a major profit center. Greenspan and his deregulation-minded brain trust saw no need to upset the status quo. The sheer act of contemplating regulation, they maintained, would cause widespread chaos in markets around the world.

“We would go to conferences and it would be viciously attacked,” Waldman says. “They would just be stomping their feet and pounding the tables.” With Born unlikely to change her mind, the industry focused on working through the other regulators.

Born recalls taking a phone call from Lawrence Summers, then Rubin’s top deputy at the Treasury Department, complaining about the proposal, and mentioning that he was taking heat from industry lobbyists. She was not dissuaded. “Of course, we were an independent regulatory agency,” she says.

The debate came to a head April 21, 1998. In a Treasury Department meeting of a presidential working group that included Born and the other top regulators, Greenspan and Rubin took turns attempting to change her mind. Rubin took the lead, she recalls.

“I was told by the secretary of the treasury that the CFTC had no jurisdiction, and for that reason and that reason alone, we should not go forward,” Born says. “I told him . . . that I had never heard anyone assert that we didn’t have statutory jurisdiction . . . and I would be happy to see the legal analysis he was basing his position on.”

She says she was never supplied one. “They didn’t have one because it was not a legitimate legal position,” she says.

Greenspan followed. “He maintained that merely inquiring about the field would drive important and expanding and creative financial business offshore,” she says. CFTC economists later checked for any signs of that, and came up with no evidence, Born says.

“It seemed totally inexplicable to me,” Born says of the seeming disinterest her counterparts showed in how the markets were operating. “It was as though the other financial regulators were saying, ‘We don’t want to know.’”

She formally launched the proposal on May 7, and within hours, Greenspan, Rubin and Levitt issued a joint statement condemning Born and the CFTC, expressing “grave concern about this action and its possible consequences.” They announced a plan to ask for legislation to stop the CFTC in its tracks.

At congressional hearings that summer, Greenspan and others warned of dire consequences; Born and the CFTC were cast as a loose cannon.

Reverting to a theme Born claims he raised at their earlier lunch, Greenspan testified there was no need for government oversight, because the derivatives market involved Wall Street “professionals” who could patrol themselves.

Summers, Rubin’s deputy (and now director of the National Economic Council), said the memo had “cast the shadow of regulatory uncertainty over an otherwise thriving market, raising risks for the stability and competitiveness of American derivative trading.”

Born assailed the legislation, calling it an unprecedented move to undermine the independence of a federal agency. In eerily prescient testimony, she warned of potentially disastrous and widespread consequences for the public. “Losses resulting from misuse of OTC derivatives instruments or from sales practice abuses in the OTC derivatives market can affect many Americans,” she testified that July. “Many of us have interests in the corporations, mutual funds, pension funds, insurance companies, municipalities and other entities trading in these instruments.”

That September, seemingly bolstering her case, the Federal Reserve Bank of New York was forced to organize a rescue of a large private investment firm, Long Term Capital Management, which was a big player in the OTC derivatives market. Fed officials said they acted to avoid a meltdown that could have impacted the wider economy.

But the tide of opinion that had risen up against Born was irreversible. Language was slipped into an agriculture appropriations bill barring the CFTC from taking action in the six months left in her term.

“I felt as though that, at least, relieved me and the commission of any public responsibility for what was happening,” she says. Clinton aides sounded her out about a second term, but she said she wasn’t interested and left the agency in June 1999.

A year later, Congress enacted the Commodity Futures Modernization Act, which effectively gutted the ability of the CFTC to regulate OTC derivatives. With no other agency picking up the slack, the market grew, unchecked.

Some observers say now the episode and infighting showed how even a decade ago a patchwork system of regulating Wall Street was badly in need of reform.

“The fact that the . . . issue created such a threat to the marketplace to me confirmed the fact that something was not right,” says Richard Miller, a lawyer and editor of a widely read newsletter on derivatives. “How could we have a system that hangs together by such a narrow thread?” Miller testified at the time that the idea Born proffered should at least have been considered.

The Obama administration has pledged an overhaul of the financial system, including the way derivatives are regulated. Worrisome to some observers is the fact that his economic team includes some former Treasury officials who were lined up in opposition to Born a decade ago.

Born, who retired from her law firm in 2003, is not playing a formal role in the process. An outdoor enthusiast, she was planning a trip to Antarctica this winter, as the Obama team was settling in. “The important thing,” she advises, “is that the new administration should not be listening to just one point of view.”

“Private sector?” The government had to intervene through no fault of its own to save several companies — we, the people, are the owners. If this wasn’t democracy and the people had no way of electing the public officials, who are “temporarily” “over sighting/chaperoning” their management, then it’d constitute socialism. Your sophomoric blather stems from lack of rudimentary understanding of simple social/economical concepts.

The take over of AIG and its subsequent capital injection was absolutely paramount to maintain an unfaltering financial system and avoid imminent fall out to “systemic risk”– if this requires further explanation, then all hopes are lost. I suppose being clueless, intentionally or otherwise, to how much the largest insurance company in the world contributed to rape of our nation is how you plan to spend your unexamined life.

And I suppose, it doesn’t trouble you when the AIG’s London and CT departments got involved in a cesspool of CDS to fallaciously spread the risk of insured underlying investment assets (i.e. CDO’s and the horror of them all, CDO Squard’s) that were not remotely assessed just so later on balloon these “infinite risk” liabilities into multiple of trillions toxic assets.

Now you are crying your eyes out for the government (read: us taxpayers) booting the CEO of a company we owned for his blood-soaked hands in being a part of a reason of our economical collapse! Are you even listening to yourself?

After several months of researching AIG, I have realized that the company’s literal plunder into CDS market wasn’t solely for a lucrative revenue but indeed they were thinly capitalized hence a venture into an “reinsurance” business (aka surplus renting) to meet the regulatory standards while in actuality the contracts were never meant to be paid. ARGH!

Enter the CDS market to inject more artificial hormone BGH into a cash-cow machine and the rest is history. But none of the aforementioned insidious business decisions contrived by the former AIG CEO’s does not make an iota of vexation in your conscious. Rather, torch in hand, pitch fork flailing while biting on a red meat tossed out of some right wing drive-by pundit’s circus caravan is more desirable than vital issues at hand.

No, no, rather than examining the events, suggestions, and implementations, you have to resort this gratuitous name calling, “SOCIALISM!’ We’ve gone overboard of “super-capitalism” now there is an attempt to tediously collect the “free and fair market” out of this flotsam of economical debauchery, yet the rabid crowd are crying “SOCIALISM!”

Don’t even bother examining Chrysler balance sheet and germane financial structure? If this is news to you, they are going to flatly bankrupt if they do not accept an acquisition. So your cry of foul is utterly ridiculous. Either merge or go out of business; which do you prefer? Take your pick.

And once again, missy here rather make comments without having an ensemble of intellectual perspicacity to realize the reason, then Secretary of Treasury, Paulson asked those banking institutions who were not in dire need of capital injection to accept the bailout money was because of sustaining the overall financial stability.

If Mr. Paulson was to pick who would have gotten a piece of pie, a psychological fallout would have ensured for those large entities that received the bailout for being categorically singled out and labeled as unstable. This would have indeed propagated into a real systemic risk because the market would have automatically shifted itself from the “perceived” failure (bailout recipients) to the ones with no bailout money.

As a matter of fact, his exigent action, which was in reality pushed by Bernanke, muzzled the collapse of institutions. I highly suggest spend your time educating yourself about the issues rather than being imprisoned in a simpleton ideological bubble.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/#_ftn7

Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit”
Published in January 31st, 2009
Posted by Steve Keen in Debtwatch

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.” [1]

Ten years ago, a quote from Marx would have one deemed a socialist, and dismissed from polite debate. Today, such a quote can (and did, along with Charlie’s photo) appear in a feature in the Sydney Morning Herald—and not a few people would have been nodding their heads at how Marx got it right on bankers.F

He got it wrong on some other issues,[2] but his analysis of money and credit, and how the credit system can bring an otherwise well-functioning market economy to its knees, was spot on. His observations on the financial crisis of 1857 still ring true today:

“A high rate of interest can also indicate, as it did in 1857, that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people’s pockets (whereby, however, they help to determine the rate of interest for all), and meanwhile they live in grand style on anticipated profits.

Simultaneously, precisely this can incidentally provide a very profitable business for manufacturers and others. Returns become wholly deceptive as a result of the loan system…”[1]

One and a half centuries after Marx falsely predicted the demise of capitalism, the people most likely to bring it about are not working class revolutionaries, but the “Roving Cavaliers of Credit”, against whom Marx quite justly railed.

This month’s Debtwatch is dedicated to analysing how these Cavaliers actually “make” money and debt—something they think they understand, but in reality, they don’t. A sound model of how money and debt are created makes it obvious that we should never have fallen for the insane notion that the financial system should be self-regulating. All that did was give the Cavaliers a licence to run amok, with the consequences we are now experiencing yet again—150 years after Marx described the crisis that led him to write Das Kapital.
The conventional model: the “Money Multiplier”

Every macroeconomics textbook has an explanation of how credit money is created by the system of fractional banking that goes something like this:

* Banks are required to retain a certain percentage of any deposit as a reserve, known as the “reserve requirement”; for simplicity, let’s say this fraction is 10%.
* When customer Sue deposits say 100 newly printed government $10 notes at her bank, it is then obliged to hang on to ten of them—or $100—but it is allowed to lend out the rest.
* The bank then lends $900 to its customer Fred, who then deposits it in his bank—which is now required to hang on to 9 of the bills—or $90—and can lend out the rest. It then lends $810 to its customer Kim.
* Kim then deposits this $810 in her bank. It keeps $81 of the deposit, and lends the remaining $729 to its customer Kevin.
* And on this iterative process goes.
* Over time, a total of $10,000 in money is created—consisting of the original $1,000 injection of government money plus $9,000 in credit money—as well as $9,000 in total debts. The following table illustrates this, on the assumption that the time lag between a bank receiving a new deposit, making a loan, and the recipient of the loan depositing them in other banks is a mere one week.

This model of how banks create credit is simple, easy to understand (this version omits the fact that the public holds some of the cash in its own pockets rather than depositing it all in the banks; this detail is easily catered for and is part of the standard model taught to economists),… and completely inadequate as an explanation of the actual data on money and debt.
The Data versus the Money Multiplier Model

Two hypotheses about the nature of money can be derived from the money multiplier model:

1. The creation of credit money should happen after the creation of government money. In the model, the banking system can’t create credit until it receives new deposits from the public (that in turn originate from the government) and therefore finds itself with excess reserves that it can lend out. Since the lending, depositing and relending process takes time, there should be a substantial time lag between an injection of new government-created money and the growth of credit money.

2. The amount of money in the economy should exceed the amount of debt, with the difference representing the government’s initial creation of money. In the example above, the total of all bank deposits tapers towards $10,000, the total of loans converges to $9,000, and the difference is $1,000, which is the amount of initial government money injected into the system. Therefore the ratio of Debt to Money should be less than one, and close to (1-Reserve Ratio): in the example above, D/M=0.9, which is 1 minus the reserve ratio of 10% or 0.1.

Both these hypotheses are strongly contradicted by the data.

Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990.[3] If the hypothesis were true, changes in M0 should precede changes in M2. The time pattern of the data should look like the graph below: an initial injection of government “fiat” money, followed by a gradual creation of a much larger amount of credit money:

Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:

“There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly. (p. 11)

The difference in the behavior of M1 and M2 suggests that the difference of these aggregates (M2 minus M1) should be considered… The difference of M2 – M1 leads the cycle by even more than M2, with the lead being about three quarters.” (p. 12)

Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.

It doesn’t take sophisticated statistics to show that the second prediction is wrong—all you have to do is look at the ratio of private debt to money. The theoretical prediction has never been right—rather than the money stock exceeding debt, debt has always exceeded the money supply—and the degree of divergence has grown over time.(there are attenuating factors that might affect the prediction—the public hoarding cash should make the ratio less than shown here, while non-banks would make it larger—but the gap between prediction and reality is just too large for the theory to be taken seriously).

Academic economics responded to these empirical challenges to its accepted theory in the time-honoured way: it ignored them.

Well, the so-called “mainstream” did—the school of thought known as “Neoclassical economics”. A rival school of thought, known as Post Keynesian economics, took these problems seriously, and developed a different theory of how money is created that is more consistent with the data.

This first major paper on this approach, “The Endogenous Money Stock” by the non-orthodox economist Basil Moore, was published almost thirty years ago.[4] Basil’s essential point was quite simple. The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend,

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.[5]

Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found. The main mechanism behind this are the “lines of credit” that major corporations have arranged with banks that enable them to expand their loans from whatever they are now up to a specified limit.

If a firm accesses its line of credit to, for example, buy a new piece of machinery, then its debt to the bank rises by the price of the machine, and the deposit account of the machine’s manufacturer rises by the same amount. If the bank that issued the line of credit was already at its own limit in terms of its reserve requirements, then it will borrow that amount, either from the Federal Reserve or from other sources.

If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:

* refuse to issue new reserves and cause a credit crunch;
* create new reserves; or
* relax the reserve ratio.

Since the main role of the Federal Reserve is to try to ensure the smooth functioning of the credit system, option one is out—so it either adds Base Money to the system, or relaxes the reserve requirements, or both.

Thus causation in money creation runs in the opposite direction to that of the money multiplier model: the credit money dog wags the fiat money tail. Both the actual level of money in the system, and the component of it that is created by the government, are controlled by the commercial system itself, and not by the Federal Reserve.

Central Banks around the world learnt this lesson the hard way in the 1970s and 1980s when they attempted to control the money supply, following neoclassical economist Milton Friedman’s theory of “monetarism” that blamed inflation on increases in the money supply. Friedman argued that Central Banks should keep the reserve requirement constant, and increase Base Money at about 5% per annum; this would, he asserted cause inflation to fall as people’s expectations adjusted, with only a minor (if any) impact on real economic activity.

Though inflation was ultimately suppressed by a severe recession, the monetarist experiment overall was an abject failure. Central Banks would set targets for the growth in the money supply and miss them completely—the money supply would grow two to three times faster than the targets they set.

Ultimately, Central Banks abandoned monetary targetting, and moved on to the modern approach of targetting the overnight interest rate as a way to control inflation.[6] Several Central Banks—including Australia’s RBA—completely abandoned the setting of reserve requirements. Others—such as America’s Federal Reserve—maintained them, but had such loopholes in them that they became basically irrelevant. Thus the US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.[7]

However, neoclassical economic theory never caught up with either the data, or the actual practices of Central Banks—and Ben Bernanke, a leading neoclassical theoretician, and unabashed fan of Milton Friedman, is now in control of the Federal Reserve. He is therefore trying to resolve the financial crisis and prevent deflation in a neoclassical manner: by increasing the Base Money supply.

Give Bernanke credit for trying here: the rate at which he is increasing Base Money is unprecedented. Base Money doubled between 1994 and 2008; Bernanke has doubled it again in just the last 4 months.

If the money multiplier model of money creation were correct, then ultimately this would lead to a dramatic growth in the money supply as an additional US$7 trillion of credit money was gradually created.

If neoclassical theory was correct, this increase in the money supply would cause a bout of inflation, which would end bring the current deflationary period to a halt, and we could all go back to “business as usual”. That is clearly what Bernanke is banking on:

“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days.

What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation…

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.” [8]

However, from the point of view of the empirical record, and the rival theory of endogenous money, this will fail on at least four fronts:

1. Banks won’t create more credit money as a result of the injections of Base Money. Instead, inactive reserves will rise;

2. Creating more credit money requires a matching increase in debt—even if the money multiplier model were correct, what would the odds be of the private sector taking on an additional US$7 trillion in debt in addition to the current US$42 trillion it already owes?;

3. Deflation will continue because the motive force behind it will still be there—distress selling by retailers and wholesalers who are desperately trying to avoid going bankrupt; and

4. The macroeconomic process of deleveraging will reduce real demand no matter what is done, as Microsoft CEO Steve Ballmer recently noted: “We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy”.[9]

The only way that Bernanke’s “printing press example” would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed—so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money.

Measured on this scale, Bernanke’s increase in Base Money goes from being heroic to trivial. Not only does the scale of credit-created money greatly exceed government-created money, but debt in turn greatly exceeds even the broadest measure of the money stock—the M3 series that the Fed some years ago decided to discontinue.

Bernanke’s expansion of M0 in the last four months of 2008 has merely reduced the debt to M0 ratio from 47:1 to 36:1 (the debt data is quarterly whole money stock data is monthly, so the fall in the ratio is more than shown here given the lag in reporting of debt).

To make a serious dent in debt levels, and thus enable the increase in base money to affect the aggregate money stock and hence cause inflation, Bernanke would need to not merely double M0, but to increase it by a factor of, say, 25 from pre-intervention levels. That US$20 trillion truckload of greenbacks might enable Americans to repay, say, one quarter of outstanding debt with one half—thus reducing the debt to GDP ratio about 200% (roughly what it was during the DotCom bubble and, coincidentally, 1931)—and get back to some serious inflationary spending with the other (of course, in the context of a seriously depreciating currency). But with anything less than that, his attempts to reflate the American economy will sink in the ocean of debt created by America’s modern-day “Roving Cavaliers of Credit”.

How to be a “Cavalier of Credit”

Note Bernanke’s assumption (highlighted above) in his argument that printing money would always ultimately cause inflation: “under a fiat money system“. The point made by endogenous money theorists is that we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it.

We are therefore not in a “fractional reserve banking system”, but in a credit-money one, where the dynamics of money and debt are vastly different to those assumed by Bernanke and neoclassical economics in general.[10]

Calling our current financial system a “fiat money” or “fractional reserve banking system” is akin to the blind man who classified an elephant as a snake, because he felt its trunk. We live in a credit money system with a fiat money subsystem that has some independence, but certainly doesn’t rule the monetary roost—far from it.

The best place to start to analyse the monetary system is therefore to consider a model of a pure credit economy—a toy economy in which there is no government sector and no Central Bank whatsoever—and see how that model behaves.

The first issue in such a system is how does one become a bank?—or a “cavalier of credit” in Marx’s wonderfully evocative phrase? The answer was provided by the Italian non-orthodox economist Augusto Graziani: a bank is a third party to all transactions, whose account-keeping between buyer and seller is regarded as finally settling all claims between them.

Huh? What does that mean? To explain it, I’ll compare it with the manner in which we’ve been misled to thinking about the market economy by neoclassical economics.

It has deluded us into thinking of a market economy as being fundamentally a system of barter. Every transaction is seen as being two sided, and involving two commodities: Farmer Maria wants to sell pigs and buy copper pipe; Plumber Joe wants to sell copper pipe and buy pigs.

Money simply eliminates the problem that it’s very hard for Plumber Joe to find Farmer Maria. Instead, they each sell their commodity for money, and then exchange that money for the commodity they really want. The picture appears more complicated—there are two markets introduced as well, with Farmer Maria selling pigs to the pig market in return for money, Plumber Joe doing the same thing in the copper market, and then armed with money from their sales, they go across to the other market and buy what they want. But it is still a lot easier than a plumber going out to try to find a pig farmer who wants copper pipes.

In this model of the economy, money is useful in that it replaces a very difficult search process with a system of markets. But fundamentally the system is no different to the barter model above: money is just a convenient “numeraire”, and anything at all could be used—even copper pipe or pigs—so long as all markets agreed to accept it. Gold tends to be the numeraire of choice because it doesn’t degrade, and paper money merely replaces gold as a more convenient form of numeraire.

Importantly, in this model, money is an asset to its holder, but a liability to no-one. There is money, but no debt. The fractional banking model that is tacked onto this vision of bartering adds yet another market where depositors (savers) supply money at a price (the rate of interest), and lenders buy money for that price, and the interaction between supply and demand sets the price. Debt now exists, but in the model world total debt is less than the amount of money.

If this market produces too much money (which it can do in a fractional banking system because the government determines the supply of base money and the reserve requirement) then there can be inflation of the money prices of commodities. Equally if the money market suddenly contracts, then there can be deflation. It’s fairly easy to situate Bernanke’s dramatic increase in Base Money within this view of the world.

If only it were the world in which we live. Instead, we live in a credit economy, in which intrinsically useless pieces of paper—or even simple transfers of electronic records of numbers—are happily accepted in return for real, hard commodities. This in itself is not incompatible with a fractional banking model, but the empirical data tells us that credit money is created independently of fiat money: credit money rules the roost. So our fundamental understanding of a monetary economy should proceed from a model in which credit is intrinsic, and government money is tacked on later—and not the other way round.

Our starting point for analysing the economy should therefore be a “pure credit” economy, in which there are privately issued bank notes, but no government sector and no fiat money. Yet this has to be an economy in which intrinsically useless items are accepted as payment for intrinsically useful ones—you can’t eat a bank note, but you can eat a pig.

So how can that be done without corrupting the entire system. Someone has to have the right to produce the bank notes; how can this system be the basis of exchange, without the person who has that right abusing it?

Graziani (and others in the “Circuitist” tradition) reasoned that this would only be possible if the producer of bank notes—or the keeper of the electronic records of money—could not simply print them whenever he/she wanted a commodity, and go and buy that commodity with them. But at the same time, people involved in ordinary commerce had to accept the transfer of these intrinsically useless things in return for commodities.

“Therefore for a system of credit money to work, three conditions had to be fulfilled:

In order for money to exist, three basic conditions must be met:

a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);

b) money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money);

c) money must not grant privileges of seignorage to any agent making a payment.” [11]

In Graziani’s words, “The only way to satisfy those three conditions is …:

“to have payments made by means of promises of a third agent, the typical third agent being nowadays. When an agent makes a payment by means of a cheque, he satisfies his partner by the promise of the bank to pay the amount due.

Once the payment is made, no debt and credit relationships are left between the two agents. But one of them is now a creditor of the bank, while the second is a debtor of the same bank. This insures that, in spite of making final payments by means of paper money, agents are not granted any kind of privilege.

For this to be true, any monetary payment must therefore be a triangular transaction, involving at least three agents, the payer, the payee, and the bank.” ( p. 3).

Thus in a credit economy, all transactions are involve one commodity, and three parties: a seller, a buyer, and a bank whose transfer of money from the buyer’s account to the seller’s is accepted by them as finalising the sale of the commodity. So the actual pattern in any transaction in a credit money economy is as shown below:

This makes banks and money an essential feature of a credit economy, not something that can be initially ignored and incorporated later, as neoclassical economics has attempted to do (unsuccessfully; one of the hardest things for a neoclassical mathematical modeller is to explain why money exists, apart from the search advantages noted above. Generally therefore their models omit money—and debt—completely).

It also defines what a bank is: it is a third party whose record-keeping is trusted by all parties as recording the transfers of credit money that effect sales of commodities. The bank makes a legitimate living by lending money to other agents—thus simultaneously creating loans and deposits—and charging a higher rate of interest on loans than on deposits.

Thus in a fundamental way, a bank is a bank because it is trusted. Of course, as we know from our current bitter experience, banks can damage that trust; but it remains the wellspring from which their existence arises.

This model helped distinguish the realistic model of endogenous money from the unrealistic neoclassical vision of a barter economy. It also makes it possible to explain what a credit crunch is, and why it has such a devastating impact upon economic activity.

First, the basics: how does a pure credit economy work, and how is money created in one? (The rest of this post necessarily gets technical and is there for those who want detailed background. It reports new research into the dynamics of a credit economy. There’s nothing here anywhere near as poetic as Marx’s “Cavaliers of Credit”, but I hope it explains how a credit economy works, and how it can go badly wrong in a “credit crunch”)
How the Cavaliers “Make Money”

Several economists—notably Wicksell and Keynes—envisaged a “pure credit economy”. Keynes imagined a world in which “investment is proceeding at a steady rate”, in which case:

“the finance (or the commitments to finance) required can be supplied from a revolving fund of a more or less constant amount, one entrepreneur having his finance replenished for the purpose of a projected investment as another exhausts his on paying for his completed investment.” [12]

This is the starting point to understanding a pure credit economy—and therefore to understanding our current economy and why it’s in a bind. Consider an economy with three sectors: firms that produce goods, banks that charge and pay interest, and households that supply workers. Firms are the only entities that borrow, and the banking sector gave loans at some stage in the past to start production. Firms hired workers with this money (and bought inputs from each other), enabling production, and ultimately the economy settled down to a constant turnover of money and goods (as yet there is no technological change, population growth, or wage bargaining).

There are four types of accounts: Firms’ Loans, Firms’ Deposits, Banks’ Deposits, and Households Deposits. These financial flows are described by the following table. I’m eschewing mathematical symbols and just using letters here to avoid the “MEGO” effect (”My Eyes Glaze Over”)—if you want to check out the equations, see this paper:

1. Interest accrues on the outstanding loans.

2. Firms pay interest on the loans. This is how the banks make money, and it involves a transfer of money from the firms deposit accounts to the banks. The banks then have to acknowledge this payment of interest by recording it against the outstanding debt firms owe them.

3. Banks pay interest to firms on the balances in their deposit accounts. This involves a transfer from Bank Deposit accounts to Firms; this is a cost of business to banks, but they make money this way because (a) the rate of interest on loans is higher than that on deposits and (b) as is shown later, the volume of loans outstanding exceeds the deposits that banks have to pay interest on;

4. Firms pay wages to workers; this is a transfer from the firms deposits to the households.

5. Banks pay interest to households on the balances in their deposit accounts.

6. Banks and households pay money to firms in order to purchase some of the output from factories for consumption and intermediate goods.

This financial activity allows production to take place:

1. Workers are hired and paid a wage;

2. They produce output in factories at a constant level of productivity;

3. The output is then sold to other firms, banks and households;

4. The price level is set so that in equilibrium the flow of demand equals the flow of output

The graphs below show the outcome of a simulation of this system, which show that a pure credit economy can work: firms can borrow money, make a profit and pay it back, and a single “revolving fund of finance”, as Keynes put it, can maintain a set level of economic activity. [13]

These stable accounts support a flow of economic activity in time, giving firms, households and banks steady incomes:

Output and employment also tick over at a constant level:

That’s the absolutely basic picture; to get closer to our current reality, a lot more needs to be added. The next model includes, in addition to the basic system shown above:

1. Repayment of debt, which involves a transfer from the Firms’ deposit account to an account that wasn’t shown in the previous model that records Banks unlent reserves; this transfer of money has to be acknowledged by the banks by a matching reduction in the recorded level of debt;

2. Relending from unlent reserves. This involves a transfer of money, against which an equivalent increase in debt is recorded;

3. The extension of new loans to the firm sector by the banks. The firms sector’s deposits are increased, and simultaneously the recorded level of debt is increased by the same amount.

4. Investment of part of bank profits by a transfer from the banking sector’s deposit accounts to the unlent reserves.

5. Variable wages, growing labour productivity and a growing population.

The financial table for this system is:

As with the previous model, this toy economy “works”—it is possible for firms to borrow money, make a profit, and repay their debt.

With the additional elements of debt repayment and the creation of new money, this model also lets us see what happens to bank income when these parameters change.

Though in some ways the answers are obvious, it lets us see why banks are truly cavalier with credit. The conclusions are that bank income is bigger:

* If the rate of money creation is higher (this is by far the most important factor);
* If the rate of circulation of unlent reserves is higher; and
* If the rate of debt repayment is lower—which is why, in “normal” financial circumstances, banks are quite happy not to have debt repaid.

In some ways these conclusions are unremarkable: banks make money by extending debt, and the more they create, the more they are likely to earn. But this is a revolutionary conclusion when compared to standard thinking about banks and debt, because the money multiplier model implies that, whatever banks might want to do, they are constrained from so doing by a money creation process that they do not control.

However, in the real world, they do control the creation of credit. Given their proclivity to lend as much as is possible, the only real constraint on bank lending is the public’s willingness to go into debt. In the model economy shown here, that willingness directly relates to the perceived possibilities for profitable investment—and since these are limited, so also is the uptake of debt.

But in the real world—and in my models of Minsky’s Financial Instability Hypothesis—there is an additional reason why the public will take on debt: the perception of possibilities for private gain from leveraged speculation on asset prices.

That clearly is what has happened in the world’s recent economic history, as it happened previously in the runup to the Great Depression and numerous financial crises beforehand. In its aftermath, we are now experiencing a “credit crunch”—a sudden reversal with the cavaliers going from being willing to lend to virtually anyone with a pulse, to refusing credit even to those with solid financial histories.

I introduce a “credit crunch” into this model by changing those same key key financial parameters at the 30 year mark, but decreasing them rather than increasing them. Firms go from having a 20 year horizon for debt repayment to a 6.4 year horizon, banks go from increasing the money supply at 10% per annum to 3.2% per annum, while the rate of circulation of unlent reserves drops by 68%.

There is much more to our current crisis than this—in particular, this model omits “Ponzi lending” that finances gambling on asset prices rather than productive investment, and the resulting accumulation of debt compared to GDP—but this level of change in financial parameters alone is sufficient to cause a simulated crisis equivalent to the Great Depression. Its behaviour reproduces much of what we’re witnessing now: there is a sudden blowout in unlent reserves, and a decline in the nominal level of debt and in the amount of money circulating in the economy.

This is the real world phenomenon that Bernanke is now railing against with his increases in Base Money, and already the widespread lament amongst policy makers is that banks are not lending out this additional money, but simply building up their reserves.

Tough: in a credit economy, that’s what banks do after a financial crisis—it’s what they did during the Great Depression. This credit-economy phenomenon is the real reason that the money supply dropped during the Depression: it wasn’t due to “bad Federal Reserve policy” as Bernanke himself has opined, but due to the fact that we live in a credit money world, and not the fiat money figment of neoclassical imagination.

The impact of the simulated credit crunch on my toy economy’s real variables is similar to that of the Great Depression: real output slumps severely, as does employment.

The nominal value of output also falls, because prices also fall along with real output.

This fall in prices is driven by a switch from a regime of growing demand to one of shrinking demand. Rather than there being a continuous slight imbalance in demand’s favour, the imbalance shifts in favour of supply—and prices continue falling even though output eventually starts to rise.

The unemployment rate explodes rapidly from full employment to 25 percent of the workforce being out of a job—and then begins a slow recovery.

Finally, wages behave in a perverse fashion, just as Keynes argued during the Great Depression: nominal wages fall, but real wages rise because the fall in prices outruns the fall in wages.

This combination of falling prices and falling output means that despite the fall in nominal debts, the ratio of debt to nominal output actually rises—again, as happened for the first few years of the Great Depression.

Though this model is still simple compared to the economy in which we live, it’s a lot closer to our actual economy than the models developed by conventional “neoclassical” economists, which ignore money and debt, and presume that the economy will always converge to a “NAIRU”[14] equilibrium after any shock.

It also shows the importance of the nominal money stock, something that neoclassical economists completely ignore. To quote Milton Friedman on this point:

“It is a commonplace of monetary theory that nothing is so unimportant as the quantity of money expressed in terms of the nominal monetary unit—dollars, or pounds, or pesos… Let the number of dollars in existence be multiplied by 100; that, too, will have no other essential effect, provided that all other nominal magnitudes (prices of goods and services, and quantities of other assets and liabilities that are expressed in nominal terms) are also multiplied by 100.” [15]

The madness in Friedman’s argument is the assumption that increasing the money supply by a factor of 100 will also cause “all other nominal magnitudes” including commodity prices and debts to be multiplied by the same factor.

Whatever might be the impact on prices of increasing the money supply by a factor of 100, the nominal value of debt would remain constant: debt contracts don’t give banks the right to increase your outstanding level of debt just because prices have changed. Movements in the nominal prices of goods and services aren’t perfectly mirrored by changes in the level of nominal debts, and this is why nominal magnitudes can’t be ignored.

In this model I have developed, money and its rate of circulation matter because they determine the level of nominal and real demand. It is a “New Monetarism” model, in which money is crucial.

Ironically, Milton Friedman argued that money was crucial in his interpretation of the Great Depression—that the failure of the Federal Reserve to sufficiently increase the money supply allowed deflation to occur. But he a trivial “helicopter” model of money creation that saw all money as originating from the operations of the Federal Reserve:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated… [16]

When the helicopter starts dropping money in a steady stream— or, more generally, when the quantity of money starts unexpectedly to rise more rapidly— it takes time for people to catch on to what is happening. Initially, they let actual balances exceed long— run desired balances…” (p. 13)

and a trivial model of the real economy that argued that it always tended back to equilibrium:

“Let us start with a stationary society in which … (5) The society, though stationary, is not static. Aggregates are constant, but individuals are subject to uncertainty and change. Even the aggregates may change in a stochastic way, provided the mean values do not… Let us suppose that these conditions have been in existence long enough for the society to have reached a state of equilibrium…” (pp. 2-3)

One natural question to ask about this final situation is, “ What raises the price level, if at all points markets are cleared and real magnitudes are stable?” The answer is, “ Because everyone confidently anticipates that prices will rise.” (p. 10)

Using this simplistic analysis, Milton Friedman claimed that inflation was caused by “too many helicopters” and deflation by “too few”, and that the deflation that amplified the downturn in the 1930s could have been prevented if only the Fed had sent more helicopters into the fray:

“different and feasible actions by the monetary authorities could have prevented the decline in the money stock—indeed, produced almost any desired increase in the money stock. The same actions would also have eased the banking difficulties appreciably. Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the contraction’s severity and almost as certainly its duration.” [17]

With a sensible model of how money is endogenously created by the financial system, it is possible to concur that a decline in money contributed to the severity of the Great Depression, but not to blame that on the Federal Reserve not properly exercising its effectively impotent powers of fiat money creation. Instead, the decline was due to the normal operations of a credit money system during a financial crisis that its own reckless lending has caused—the Cavaliers are cowards who rush into a battle they are winning, and retreat at haste in defeat.

However, with his belief in Friedman’s analysis, Bernanke did blame his 1930 predecessors for causing the Great Depression. In his paean to Milton Friedman on the occasion of his 90th birthday, Bernanke made the following remark:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” [18]

In fact, thanks to Milton Friedman and neoclassical economics in general, the Fed ignored the run up of debt that has caused this crisis, and every rescue engineered by the Fed simply increased the height of the precipice from which the eventual fall into Depression would occur.

Having failed to understand the mechanism of money creation in a credit money world, and failed to understand how that mechanism goes into reverse during a financial crisis, neoclassical economics may end up doing what by accident what Marx failed to achieve by deliberate action, and bring capitalism to its knees.

Neoclassical economics—and especially that derived from Milton Friedman’s pen—is mad, bad, and dangerous to know.

Debtwatch Statistics February 2009

My discussion of the most recent monthly data is abbreviated given the length of this Report, but it now appears that the debt bubble has started to burst. Private debt fell by $A$5 billion in the last month, the first fall since 2003, and the steepest monthly fall on record.

As a result, Australia’s Debt to GDP ratio has started to fall.

However, it might rise once more if deflation takes hold. This was the Depression experience when the debt to GDP ratio rose even as nominal debt levels fell. Leaving that possibility aside for the moment, it appears that Australia’s peak private debt to GDP ratio occurred in March 2008, with a ratio of 177% of GDP including business securities (or 165% excluding business securities).

[1] Marx, Capital Volume III, Chapter 33, The medium of circulation in the credit system, pp. 544-45 [Progress Press]. http://www.marx.org/archive/marx/works/1894-c3/ch33.htm. Emphases added.

[2] Notably the “labour theory of value”, which argues erroneously that all profit comes from labour, the notion that the rate of profit has a tendency to fall, and the alleged inevitability of the demise of capitalism; see my papers on these issues on the Research page of my blog under Marx.

[3] Kydland & Prescott, Business Cycles: Real Facts and a Monetary Myth, Federal Reserve Bank of Minneapolis Quarterly Review, Spring 1990.

[4] “The Endogenous Money Stock”, Journal of Post Keynesian Economics, 1979, Volume 2, pp. 49-70.

[5] Basil Moore 1983, “Unpacking the post Keynesian black box: bank lending and the money supply”, Journal of Post Keynesian Economics 1983, Vol. 4 pp. 537-556; here Moore was quoting a Federal Reserve economist from a 1969 conference in which the endogeneity of the money supply was being debated.

[6] This policy “worked” in the sense that Central Banks were successful in controlling short run interest rates, and appeared to work in controlling inflation; but it is now becoming obvious that its success on the latter front was a coincidence—the era of low inflation coincided with the dramatic impact of China and offshore manufacturing in general on consumer and producer prices—and it led to Central Banks completely ignoring the debt bubble that has caused the global financial crisis. As a result, interest rate targetting is also going the way of the Dodo now.

[7] see Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries” , Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary A¤airs, Federal Reserve Board, 2007-54, Washington, D.C;. The US rule implies that the main reason for the “reserve requirement” these days is to meet household demand for cash.

[8] Bernanke 2002: Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C., November 21, 2002. Deflation: Making Sure “It” Doesn’t Happen Here. Emphasis added.

[9] “Microsoft resorts to first layoffs, cutting 5,000“, Yahoo Finance January 22nd 2009.

[10] And, for that matter, by Austrian economics, whose analysis of money is surprisingly simplistic. Though Austrians advocate a private money system in which banks would issue their own currency, they assume that under the current money system, all money is generated by fractional reserve lending on top of fiat money creation. This is strange, since if they advocate a private money system, they need a model of how banks could create money without fractional reserve lending. But they don’t have one.

[11] Graziani A. (1989). The Theory of the Monetary Circuit, Thames Papers in Political Economy, Sprin, pp.:1-26. Reprinted in M. Musella and C. Panico (eds) (1995). The Money Supply in the Economic Process, Edward Elgar, Aldershot.

[12] Keynes 1937, “ Alternative theories of the rate of interest” , Economic Journal, Vol. 47, pp. 241-252: p. 247

[13] The parameters were an initial loan of $100, loan rate of interest of 5%, deposit rate of 1%, 3 month lag between financing production and receiving the sales proceeds, 1/3rd of the surplus from production going to firms as profits and the remainder to workers as wages, a one year lag in price adjustments, a money wage of $1, worker productivity of 1.1 units of physical output per worker per year, and a one year lag in spending by bankers and a two week lag by workers.

[14] “Non-Accelerating Inflation Rate of Unemployment”, another one of Milton’s mythical constants.

[15] Milton Friedman 1969, “The Optimal Quantity of Money”, in The Optimal Quantity of Money and Other Essays, Macmillan, Chicago, p. 1.

[16] Milton Friedman 1969, pp. 5-6

[17] Milton Friedman and Anna Schwartz 1963, A Monetary History of the United States 1867-1960, Princeton University Press, Princeton, p. 301.

[18] Remarks by Governor Ben S. Bernanke At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois November 8, 2002 On Milton Friedman’s Ninetieth Birthday.

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Bailout: It’s About Capital, Not Liquidity; Seeking Beta: Interview with Robert Arvanitis
September 29, 2008

Click here to download the “Emergency Economic Stabilization Act of 2008” draft released on September 28, 2008.

Click here to download a section by section analysis of the draft legislation.

The events of the past few weeks have been coming so fast and have inspired so much emotion and stress among all Americans, ourselves included, that it is time to step back from the heat of politics and refocus on the substance of risk and finance. That is, after all, why people read The IRA. We’re not giving up the fight for sanity in Washington by any means, but we’ve got clients to serve and real work to do. It is the duty of citizens in a free and democratic society to speak up when we believe that our elected and appointed leaders are getting it wrong. This we shall continue to do, looking at the world through a prism concerned first and foremost by the national interest. But we are going to turn down the volume and, to recall the words of our old friend Alejandro Junco at El Norte in Monterrey, Mexico, declare war on adjectives, especially when it comes to personalities.

Last week also made us very aware of the privilege and responsibility we have at IRA to have access to the Big Media. Our friends at CNBC, Bloomberg, the New York Times, and many other print and broadcast outlets have generously given us enormous visibility over the past few months. As we travel around the country, people now stop us on the street, the train, in the lobbies of office building and airports, to ask: “What the hell is going on with the banks?” We appreciate the fact that people care about our views and we will work to deserve such confidence.

Finally, we want to thank the hundreds of readers, new and old, that we have heard from in the past week, supporting many of the opinions we express about the financial assistance legislation being formulated in Washington. The few who did not support our views at least appreciate our efforts. Said one reader: “It would make your ideas more palatable if they were presented with a little humility and a recognition that you are not infallible.” Let us just state for the record that we are not sure of anything at the moment, but we put faith in first principles of individual freedom and responsibility to guide our efforts. And please do keep those cards and letters coming.

Memo to Ben Bernanke & Hank Paulson: Confidence is a Function of Capital, Not Liquidity

During the presidential debates on Friday, Senator John McCain (R-AZ) said that we are “at the end of the beginning” of the economic recession that is affecting the US and the entire world. We completely agree. So let us try to describe in financial terms why we believe that the legislation currently being finalized in Washington will be ineffective in achieving the stated goal of restoring liquidity to financial institutions and thereby make it possible for banks to begin to expand their balance sheets and lending books, both of which are currently contracting at an alarming and accelerating rate. In a soon to be published article by Alex Pollock and John Makin, both of American Enterprise Institute, “The RTC or the RFC: Taxpayers as Involuntary Equity Investors,” the two respected financial observers write:

“Do we need a ‘new RTC’ as the U.S. Treasury is proposing-or something else? We believe that an alternative framework is needed. Its key elements should be two: recognition of systemic risk embedded in the illiquidity of mortgage-backed securities and capture of the upside of a rescue for taxpayers, not for banks and (former) investment banks that created the bubble…. A better model for a fair solution to the incipient solvency problem is the Reconstruction Finance Corporation, or RFC, of the 1930s. This was one of the most powerful and effective of the agencies created to cope with the greatest U.S. financial crisis ever. When financial losses have been so great as to run through bank capital, when waiting and hoping have not succeeded, when uncertainty is extreme and risk premia therefore elevated, what the firms involved need is not more debt, but more equity capital.”

Pollock and Makin point out that simply buying bad assets from banks does not solve the most basic problem, naming restoring confidence in one another among financial institutions by ending questions regarding solvency. In this regard, click here to see a proposal circulated by and among individual members of Professional Risk Managers International Association over the weekend. The plan has two big virtues from our perspective: 1) it minimizes the outlays by the Treasury by keeping bad assets in private hands and 2) it provides a capital facility for solvent banks, a provision that is missing from the drafts we’ve seen of the assistance proposal now under consideration in Washington.

It is important for all Americans to understand that this financial crisis began more than a year ago with the collapse of liquidity in many types of mortgage assets, but the battle is quickly shifting to concerns about capital and solvency. The Federal Reserve System, Federal Home Loan Banks and the Treasury have already advanced huge amounts of liquidity in the form of debt to financial institutions in an attempt to help them stabilize their funding sources and slowly begin to re-liquefy. Click here to see a map of the balance sheet of the Federal Reserve Bank of New York maintained by our friends at Cumberland Advisers. But unfortunately neither these existing sources of funding nor the proposal to provide even more debt-financed support gets to the core issue that is undermining in the financial system, namely worries about solvency.

Consider two models for government assistance. The first is the Resolution Trust Corporation (“RTC”) model of the 1980s, which was used to buy up bad assets following the S&L crisis of the 1980s. The older model comes from the 1930s and the Reconstruction Finance Corporation (“RFC”), the most authoritarian federal agency that has ever existed in the United States. Directed by Jesse R. Jones, the RFC used its vast legal powers to test the solvency of banks and commercial companies and, when those institutions were proven solvent, they were allowed to re-open. Those financial institutions that were determined not to be solvent were closed by the FDIC and either sold whole or in pieces to other institutions.

Below are two very simplified numerical illustrations to highlight the failings of the current plan in Washington by way of a comparison between (1) the RTC/Paulson model and (2) the 1930s RFC model, which is conveniently illustrated by the purchase of WaMu by JPMorgan Chase (NYSE:JPM). Of note, in the WaMu resolution, equity and bond holders of the parent holding company were effectively wiped out – a significant landmark for bank investors that probably kills the private market for bank equity for the foreseeable future. Significantly, the advances from the FHLBs and the covered bonds issued by WaMu’s bank subsidiary were conveyed through the receivership and assumed by JPM. More on this in our next comment.

The RTC/Paulson Model

Suppose the Treasury’s bailout fund purchases $1 billion dollars worth of illiquid assets from a participating bank at par value, which for laymen is the face value of a loan or security. In that $1 billion, the bank actually receives $900 million of cash that was raised via deposits or other forms of debt and $100 million in its own capital, assuming a 10:1 leverage ratio. This is how bank operations work, a little bit of capital and a lot of leverage — as described in the Jimmy Stewart film “Its a Wonderful Life.” If the bank sells assets to the Treasury below par value (or the current, adjusted value if an adjustment or write-down has already been made), then the selling bank takes a capital loss and the other providers of liquidity, whether via deposits, debts or official sources of funding like the Federal Reserve System and Federal Home Loan Banks, are also taking an implicit if as yet unrealized loss.

In this first example, the overall solvency of the bank is actually hurt and the issues of confidence and safety and soundness are left unresolved or even worsened. This is why we believe the proposal being considered in Washington will be ineffective at best and may actually worsen the crisis of confidence in US banks. The RTC/Paulson model does nothing to arrest the de-leveraging of the commercial banking system and may even worsen the crisis of confidence. In our view, Senator Dick Shelby (R-AL), the House Republicans and the members of either party who want to have political careers in two year’s time are right to vote no on this proposal.

The RFC/WaMu Model

In the second example, imagine that Treasury takes a $1 billion preferred equity position in a solvent but illiquid bank. Instead of only receiving 10% of the amount of the cash infusion from the Treasury as capital, the bank receives the full $1 billion as new capital to absorb losses and then serve as a basis to re-lever the bank’s balance sheet and make new loans. By putting capital into solvent but illiquid banks, the Treasury can help them to offset losses of existing assets and provide new capital to use to make new loans to support the real economy. Remember, when new capital is invested in a bank under the RFC model, all of those funds are available to support the bank’s balance sheet, including deposits and bond holders.

If an insolvent bank is resolved by the FDIC, but its asset quality problems are too severe for a purchaser to assume the full burden of dealing with these assets (unlike the JPM/WaMu transaction), then the Treasury bailout fund could subsidize the transaction by purchasing preferred equity in the purchaser and providing a small but still significant option for the taxpayer to benefit from any recovery on the failed bank’s assets. This allows the FDIC to minimize the number of troubled institutions that it must operate as receiver and keeps the troubled assets in private hands, where the cost of resolution will be minimized in order to maximize profit. But as suggested by the proposal advanced by individual members of PRMIA mentioned at the top of this comment, the first goal is to keep as many banks and assets as possible out of government hands.

The difference between the current, RTC type model and the 1930s RFC model can be summarized succinctly: The bailout proposal now before Congress does not deal sufficiently with the issue of solvency and ensures that the US banking system will continue to deflate and de-lever, meaning that less and less credit will be available to the private economy and the recession is likely to be far longer and deeper. The present situation in the US economy is not nearly as bad as the 1930s, but if Ben Bernanke and Hank Paulson don’t soon refocus their attention from liquidity to solvency of depository institutions, the US economy could end up in a situation that is much worse that the 1930s given the huge inflation of asset values seen over the past decade. This situation is soluable and can be quickly repaired, but only if we make capital and the leverage it can support work for us, not aganst us as is now the case.

With the RFC model, on the other hand, by quickly moving to inject capital into solvent banks, we can actually reverse the process of deleveraging and deflation that is currently grinding the global banking system — and the world economy — into the ground. By using new leverage and private capital, we can not only re-liquefy the banking system but also decrease the length and severity of the now present recession. As we’ve said before and will no doubt say again, the roadmap for how to achieve this positive end is in Jones’ memoir, Fifty Billion Dollars: My Thirteen Years at the RFC. We know for a fact that the Library of Congress has many copies of this excellent book as well as copies of the congressional hearings regarding the creation of the RFC and Jones’ periodic reports to the Congress. But will anyone in Washington bother to read them?

Seeking Beta: Interview with Robert Arvanitis

Robert Arvanitis of Risk Finance Advisers is a Wall Street veteran who has managed to avoid some of the more spectacular disasters in recent financial history. An actuary by training and a member of PRMIA, he learned the reinsurance business from Hank Greenberg at AIG. Seeing the need to broaden the industry model, he moved into investment banking. At Merrill Lynch (NYSE:MER) he was managing director of Global New Derivatives, responsible for the very first “catastrophe” bond, among other innovations. Robert took the money off the table just in time, leaving MER before the dot.com bust. He now has the leisure to pursue the cross-sector arbs between insurance and banking, as we discuss below.

The IRA: Bob, we’ve been wanting to talk to you for some time about the current financial crisis. You have a unique perspective given your work in both the insurance and banking worlds.

Arvanitis: My first observation is that we do not learn from the past – we find new and more subtle errors to commit. History does not repeat itself, people repeat the same mistakes over and over. Second, in the case of the financial markets, they are perpetually slicing and dicing what they know because they cannot have access to or understand what they don’t know. They only way to break out of these well-worn paths, the familiar X/Y plane is go off in a different direction, call it Z. The insurance industry deals with wind and death and hurricanes, while Wall Street deals with what’s described in the Bloomberg terminal. BTW, I also have just described the difference between mark-to-market and buy and hold forever.

The IRA: Give us an example of the law of repetition.

Arvanitis: Back in the late ’80s, a interesting thing happened at Lloyd’s of London, the famous insurance marketplace. That venerable institution was driven by a host of forces to seek growth, find new revenue sources.

The IRA: Sounds like Wall Street post-deregulation.

Arvanitis: Oh yes. Since insurance only grows naturally with the overall economy, the clever brokers at Lloyd’s hit on a new scheme. When an insurer has too much risk, it often reinsures itself, or passes risk on to a reinsurer. Reinsurers do likewise to protect themselves, and retrocede risk on to another reinsurer. Well to keep revenues growing, the London brokers started a chain, call it the London Market Excess (“LMX”). They circulated risks ’round and ’round from insurer to reinsurer to retrocessionaire, each time taking out a commission bite, and at each step, losing details about the actual underlying risks. This “LMX Spiral” was a great game for a while. Eventually, of course, claims had to be settled. With the loss of detail at each turn of the spiral, that was hard. Even worse, after all the brokers’ commissions, there was no money left to actually pay claims.

The IRA: Why does AIG, MBIA (NYSE:MBI) and Ambac (NYSE:ABK) spring to mind? Also nicely describes securitization.

Arvanitis: Precisely. Roll forward twenty years. An interesting thing happened on Wall Street. The banks found themselves driven by a host of forces to seek growth, find new revenue sources. Since true investment and commercial banking only grows naturally with the overall economy, the clever bankers of Wall Street hit on a new scheme. When a bank has too much risk, it often sells assets, or borrows, or both, since that’s cheaper than raising equity. But then the bank needs to create new assets, for fee income, for market share, and not least to keep its origination channels busy and loyal.

The IRA: We call it “yield to commission.”

Arvanitis: Well to keep revenues growing, Wall Street started a chain, call it the CDO excess spiral. Package assets. Circulate them. Buy pieces, re-package and re-circulate, taking out a commission bite at each step. This CDO spiral was a great game for a while. Eventually of course, assets had to perform. With the same risks in every package, correlations soared to 1. In the end, there was no money in the smallest Matryoshka doll.

The IRA: Why do such spirals happen?

Arvanitis: Well, it happened at Lloyds because with insurance, the brokers who distribute are distinct from, and competitive with, the underwriters who take the risks. This came about because from the start in shipping, a sinking loss was far too big for any one underwriter, so all risks were syndicated. Distribution grew up as an independent function. Capital markets are more sophisticated. Distribution and underwriting are under one roof, albeit separated by a Chinese wall. So we don’t find one function merely cozening the other. No, in banking we must resort to more subtle errors, deeper flaws in the system.

The IRA: Why does this not make us feel good…

Arvanitis: Because you and Dennis are honest analysts who don’t work for broker dealers, at least in your case not any longer. I too am a refugee. The flaw in capital markets is the Rube Goldberg apparatus that passes for regulation. Whatever else history decides, the current financial contretemps did not result from lack of regulation. Rather, it arose from human weakness on both sides-industry and government. The amorality of industry is widely discussed. What is not so often recognized is the human weakness in government.

The IRA: Those weaknesses are very visible this week.

Arvanitis: Congress delegates to SEC, which delegates to PCAOB/FASB, which delegate to auditors, who hope that giving information to shareholders, on the theory that it will let them govern the boards, who in their own turn just may be able to rein in management. Meanwhile, Congress via ERISA tries to define “prudent.” They do this by delegating great power – but not accountability – to rating agencies. Yet the NRSROs are paid by the Buy and Sell Side interests to say “Yes.” Coming along after the fact, shareholder suits are a very blunt corrective. They increase uncertainty, and raise D&O premiums, but have no effect on management and emphatically do not discipline boards. This scheme is worse than no feedback mechanism at all for it deceives us into believing someone, somewhere, is responsible.

The IRA: As our friend Timothy Dickinson noted in an interview this year, the idea that institutions are led by people sufficiently informed to make rational decisions is an illusion (‘The Tyranny of Reason: Interview with Timothy Dickinson’, July 30, 2008).

Arvanitis: Precisely. With so many moving parts, no specific bureaucrat can ever be called to account. Being mortal, the bureaucrats desire to avoid pain is as dear to them as the desire by their counterparts in private industry to seek gain. And it is far more profitable to game the rules, for example, than to enforce them. And any system can be gamed. Witness the over-reaction of SarbOx, and the subsequent avoidance.

The IRA: So your answer is to focus on the Z axis, namely low beta transactions. Give our readers a clear, simple definition of the difference between Alpha and Beta.

Arvanitis: Alpha, to use the securities market example, is when an investor performs above the perceived level of risk. As risk goes to zero, if you have anything left, then you are making free money. Another way to put it is “I’m a genius.” Of course, in the markets some people lose money, thus others make money due to those mistakes. But I personally believe that there is no “free” alpha. That said, there is a way to earn returns that may look like alpha, especially if you are an astute student of human nature. You can make a bet when other people are behaving irrationally, as when you buy when there is blood in the street.

The IRA: Or Warren Buffet buying a chunk of Goldman Sachs (NYSE:GS) as it was pushed into the arms of the Fed?

Arvanitis: Yes, but that is not really alpha. It does not come from the market but instead from human fallacy and exploitation thereof, like being a good salesman. So that is alpha. Beta means correlation to the market. If it is correlated to the market, then you should get paid like anybody else, namely union wages. If you take X risk then you get Y return, that is the market rate. No better, no worse, just the average.

The IRA: But you have chosen to focus your firm on brokering “low beta” risks. What is that?

Arvanitis: Low beta is uncorrelated, non-market risk. This is the type of risk that insurers used to price, the sinking of ships, hurricanes. Non-market, uncorrelated risks. Now 300 years before Harry Markowitz, landed English gentry instinctively realized that their money came from land rents and crops, so they put some of their money to work by investing in Lloyds of London. If the crop was good this year, but a few ships sank, you made money on crops and lost on ships. The next year, the crops were lousy but no ships sank, so you made money on insurance. Lloyds was the insurance industry’s first effort at diversification and they stuck to their knitting and underwrote real world risk events like hurricanes and fires, which were uncorrelated to other markets.

The IRA: So what happened to the insurance industry? How did AIG, MBI and ABK get lured away from low beta into something as reckless and speculative as credit default swaps (“CDS”)?

Arvanitis: The insurance industry grew out of its crib and now does more and more underwriting in high-beta risks. They sell liability insurance, D&O coverage, surety, and, good lord, they even get into bond insurance. CDS is a bridge even further removed from the basic, low-beta model from which insurance comes. The risk taken by insurers is more and more high beta, and by doing so they spoiled a perfectly good racket.

The IRA: Precisely. Why on earth would AIG or the monolines leave a low risk, double digit rate of return business to gamble on municipal bond issuers or CDS? Makes no sense. Were they just chasing earnings growth?

Arvanitis: If they were chasing earnings they’d be smart. They were chasing revenue. D&O liability is very high beta and far, far removed from the relatively uncorrelated risks upon which the insurance industry was built. Now this is where a great opportunity exists to create a new class of assets to feed to the insurers, pension funds, etc, who don’t forget, still live largely in the world of buy-and-hold. By creating an asset based on whether there won’t be a hurricane or that the wind does not blow in the Midwest at the wind farm, or that there is not sufficient traffic on the toll road, we can created a counter-cyclical bet. There are numerous ways to carve counter-cyclical trades out of capital markets transactions.

The IRA: So what’s the problem? Why isn’t Wall Street all over these types of low-beta transactions?

Arvanitis: Because the data needed to construct these transactions is not found on the Bloomberg and, let’s face it, Wall Street rarely rewards imagination. If they did, you and I would be running Goldman Sachs or Morgan Stanley and those business models would be very different. It is hard to get a low beta transaction through the commitment or risk committee of a major bank because they cannot find a quote on wind or weather patterns on the Bloomberg terminal.

The IRA: Yes, we’ve been there. Back in the late 1990s, IRA co-founder Chris Whalen tried to get his colleagues at Bear, Stearns to look at a small, KS-based start up that wrote the original standard for the 802.11 wireless internet protocols. They said the opportunity was too small. We eventually showed the idea to Sony (NYSE:SNE), but they didn’t get it either. But back on track, how do we deal with the mess on Wall Street? What would you tell members of Congress if you were in Washington today?

Arvanitis: As you state in the comment above this interview, it is all about capital. Firms need capital to demonstrate that they CAN hold assets to maturity. Therefore, they do NOT need to liquidate assets at distressed levels, so those assets ARE valuable. This, in turn, means the firm’s equity is in good shape, so that it in fact HAS capital. The logic is quite circular. Capital is what you have in order that you do not ever need it.

The IRA: But now capital is in doubt because of the fear of insolvency, thus the need for new capital is infinite.

Arvanitis: Banks need capital against risk, but they also need new revenues to feed that capital. Hence the constant search for holes in the regulatory scheme, especially for wide margin assets. Of course the widest margins are in the most illiquid assets, and off we go. The FASB mark-to-market rule is truly an economists’ nightmare. How can mark-to-market possibly matter in a market filled with illiquid assets? It merely lines up the dominos!

The IRA: Sadly, yes. As we pointed out last week, the FASB pricked the structured asset bubble that has caused the meltdown on Wall Street. I doubt any of the members of the FASB board understood the significance of their actions at the time. But by next year, enraged politicians and business leaders are going to be calling for the abolition of the FASB. If we were SEC Chairman Christopher Cox, FASB Chairman Bob Hertz or the other members of the FASB Board who voted to implement FAS 157, immigration would be on the top of the list of priorities for 2009.

Arvanitis: Well, here’s the rub. We want to trade in the most illiquid assets, but can’t afford to capitalize them without getting back on the circular mark-to-market spiral. Take my experience at MER as an example. When we did the very first “catastrophe” bond for USAA, we had to agent, not underwrite. Risk management officials at MER had no way to capitalize the bond for less than 100% if we positioned it. To solve this seeming problem, we must stop dealing with the full spread (on credit, or the equivalent full premium for equity.) Instead, we parse the spread into component drivers.

The IRA: Sounds a lot like the proposal from several PRMIA members we included in the top of this comment. Do continue.

Arvanitis: Traditionally, the market considers alpha, or “I’m a genius” returns, separately from beta, or “everyone gets paid” returns. The idea that there is ever a real alpha has been debunked repeatedly. Think “survivorship fallacy.” So we’re left with beta. It’s in the low-beta markets that real value lies. But those are the risks which Wall Street finds so very hard to mark-to market or to capitalize.

The IRA: So is it an impossible task to reorient Wall Street to new opportunities?

Arvanitis: No. Enter the insurance sector, from above. Insurers emphatically do NOT price on blinking Bloomberg quotes. They use actuarial methods to price from first principles. And as hungry for revenue as they are, there is an enormous arbitrage opportunity between Wall Street’s reaction-“we don’t know what to do with this, so it’s 100% capital”- and the insurer’s price “We’ll take it for 7¢.”

The IRA: When the smoke clears from the meltdown on Wall Street, we’ll come back to the “how to do it” discussion regarding low beta. Thanks Bob.

http://seekingalpha.com/article/129141-aig-before-credit-default-swaps-there-was-reinsurance
AIG: Before Credit Default Swaps, There Was Reinsurance
by: Christopher Whalen April 02, 2009 | about stocks

What do many corporate buyers of insurance have in common with American International Group? Perhaps more than they would like to admit. Like AIG, many companies in the past few years have bought finite insurance, which transfers a prescribed amount of risk for a particular liability. What regulators now want to know is, how many companies, like AIG, have used finite insurance to artificially inflate their financial results?

“Infinite Risk?”
CFO Magazine
June 1, 2005

In the regulatory world, a ‘side letter’ is perhaps the most insidious and destructive weapon in the white-collar criminal’s arsenal. With the flick of a pen, underhanded executives can cook the books in enormous amounts and render a regulator helpless.

Fraud Magazine
July/August 2006

PRMIA Event: Market & Liquidity Risk Management for Financial Institutions

First, a housekeeping item. On Monday, May 4, 2009, in partnership with the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS), the Washington DC chapter of Professional Risk Managers’ International Association (PRMIA) is presenting an important day-long conference on managing liquidity and market risk for financial institutions. Speakers include some of the leading risk practitioners, investors, researchers, bank executives and regulators in the US financial community. PRMIA free and sustaining members may register on the PRMIA web site. Members of the regulatory community may register via the FDIC University. IRA co-founder Christopher Whalen will participate in the conference and serve as MC. See the PRMIA web site for more information on the program and speakers. And yes, our favorite bank regulator is making the opening remarks.

For some time now, we have been trying to reconcile the apparent paradox of American International Group (NYSE:AIG) walking away from the highly profitable, double-digit RAROC business of underwriting property and casualty (P&C) risk and diving into the rancid cesspool of credit default swaps (“CDS”) contracts and other types of “high beta” risks, business lines that are highly correlated with the financial markets.

In our interview with Robert Arvanitis last year, “‘Bailout: It’s About Capital, Not Liquidity; Seeking Beta: Interview with Robert Arvanitis’, September 29, 2008,” we discussed the difference between high and low beta. We also learned from Arvanitis, who worked for AIG during much of the relevant period, that the decision by Hank Greenberg and the AIG board to enter the CDS market was, at best, chasing revenue. No rational examination of the business opportunity, assuming that Greenberg and his directors were acting based on a reasoned analysis, could have resulted in a favorable decision to pursue CDS and other “high beta” risks, at least from our perspective.

In an effort to resolve this conundrum, over the past several months, The IRA has interviewed a number of forensic experts, insurance regulators and members of the law enforcement community focused on financial fraud. The picture we have assembled is frightening and suggests that, far from just AIG, much of the insurance industry has been drawn into the world of financial engineering and has thus become part of the problem.

Below we present our preliminary findings and invite your comments. One of the first things we learned about the insurance world is that the concept of “shifting risk” for a variety of business and regulatory reasons has been ongoing in the insurance world for decades. Finite insurance and other scams have been at least visible to the investment community for years and have been documented in the media, but what is less understood is that firms like AIG took the risk shifting shell game to a whole new level long before the firm’s entry into the CDS market.

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks.

No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community. As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are “valid legal contracts” is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.

Does Reinsurance + Side Letters = CDS?

One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.

Let’s say that an insurer needs to enhance its capital surplus by $100 million in order to meet regulatory capital requirements. They can enter into what appears to be a completely legitimate form of reinsurance contract, an agreement that appears to transfer the liability to the reinsurer. By doing so, the “ceding company” – an insurance company that transfers a risk to a reinsurance company – gets to drop that $100 million in liability and its regulatory surplus increases by $100 million. The reinsurer assuming the risk does actually put up the $100 million in liability, but with the knowledge that they will never have to actually pay out on the contract. This is good for the reinsurer because they are paid a fee for this transaction, but it is bad for the ceding company, the insurer with the capital shortfall, because the transaction is actually a sham, a fraud meant to deceive regulators, counterparties and investors into thinking that the insurer has adequate capital. Typically the fee is 6% per year or what is called a “loan fee” in the insurance industry.

When it operates in this fashion, the whole reinsurance industry could be described as a “surplus rental” proposition, whereby an insurer literally loans another insurer capital in the form of risk cover, but with a secret understanding in the form of a side letter that the loan will be reversed without any recourse to the seller of protection. You give me $6 million in cash today, and I will give you a promise that we both know I will never honor.

Does this sound familiar? What our contacts in the insurance industry describe is almost a precise description of the CDS market, albeit one that evolved in the reinsurance industry literally decades ago and has been the cause of numerous insurance insolvencies and losses to insured parties.

Or to put it another way, maybe the inspiration for the CDS market – at least within AIG and other insurers — evolved from the reinsurance market over the past two decades. As best as we can tell, the questionable practice of using side letters to mask the economic and business reality of reinsurance transactions started in the mid-1980s and continued until the middle of the current decade. This timeline just happens to track the creation and evolution of the OTC derivatives markets. In particular, the move by AIG into the CDS market coincides with the increased awareness of and attention to the use of side letters by insurance regulators and members of the state and federal law enforcement community.

Keep in mind that what we are talking about here are not questionable risk management policies but acts of deliberate and criminal fraud, acts that often result in jail time for those involved. As one senior forensic accountant who has practiced in the insurance sector for three decades told The IRA:

In every major criminal fraud case in which I have worked, at the center of the investigation were these side letters. It was always very strange to me that on-site investigators and law enforcement officials consistently found that these side letters were being used to mask the true financial condition of an insurer, and yet none of the state regulators, the National Association of Insurance Commissioners (NAIC), nor federal law enforcement authorities ever publicly mentioned the practice. They certainly did not act like the use of side letters was a commonplace thing, but it was widespread in the industry.

It is important to understand that a side letter is a secret agreement, a document that is often hidden from internal and external auditors, regulators and even senior management of insurers and reinsurers. We doubt, for example, that Warren Buffet or Hank Greenberg knew the details of side letters, but they should have. Just as a rogue CDS trader at a large bank like Societe General (NYSE:SGE) might seek to hide losing trades, the underwriters of insurers would use sham transactions and side letters to enhance the revenue of the insurer, but without disclosing the true nature of the transaction.

There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided. As the use of these secret side letters began to become more and more prevalent in the insurance industry, and these secret side deals were literally being stacked on top of one another at firms like AIG, the SEC began to investigate. And they began to find instances of fraud and to crack down on the practice. One of the first cases to come to the surface involved AIG helping Brightpoint (NASDAQ:CELL) commit accounting fraud, a case that eventually led the SEC to fine AIG $10 million in 2003.

Wayne M. Carlin, Regional Director of the SEC’s Northeast Regional Office, said of the settlements:

In this case, AIG worked hand in hand with CELL personnel to custom-design a purported insurance policy that allowed CELL to overstate its earnings by a staggering 61 percent. This transaction was simply a ’round-trip’ of cash from CELL to AIG and back to CELL. By disguising the money as ‘insurance,’ AIG enabled CELL to spread over several years a loss that should have been recognized immediately.

Another case involved PNC Financial (NYSE:PNC), which used various contracts with AIG to hide certain assets from regulators, even though the transaction amounted to the “rental” of capital and not a true risk transfer.

As the SEC noted in a 2004 statement:

The Commission’s action arises out of the conduct of Defendant AIG, primarily through its wholly owned subsidiary AIG Financial Products Corp. (“AIG-FP”), (collectively referred to as “AIG”) in developing, marketing, and entering into transactions that purported to enable a public company to remove certain assets from its balance sheet.

Click here to see the SEC statement regarding the AIG transactions with PNC.

The SEC statement reads in part:

In its Complaint, filed in the United States District Court for the District of Columbia, the Commission alleged that from at least March 2001 through January 2002, Defendant AIG, primarily through AIG-FP, developed a product called a Contributed Guaranted Alternative Investment Trust Security (“C-GAITS”), marketed that product to several public companies, and ultimately entered into three C-GAITS transactions with one such company, The PNC Financial Services Group, Inc. (“PNC”). For a fee, AIG offered to establish a special purpose entity (“SPE”) to which the counter-party would transfer troubled or other potentially volatile assets. AIG represented that, under generally accepted accounting principles (“GAAP”), the SPE would not be consolidated on the counter-party’s financial statements. The counter-party thus would be able to avoid charges to its income statement resulting from declines in the value of the assets transferred to the SPE. The transaction that AIG developed and marketed, however, did not satisfy the requirements of GAAP for nonconsolidation of SPEs.

In both cases, AIG was engaged in transactions that were meant not to reduce risk, but to hide the true nature of the risk in these companies from investors, regulators and the consumers who rely on these institutions for services. Keep in mind that while the SEC did act to address these issues, the parties involved received light punishments when you consider that these are all felonies that arguably would call for criminal prosecution for fraud, securities fraud, conspiracy and racketeering, among other things. Indeed, this is one of those rare cases where we believe AIG itself, as a corporate person, should be subject to criminal prosecution and liquidation.

Birds of a Feather: AIG & GenRe

Click here to see a June 6, 2005 press release from the SEC detailing criminal charges against John Houldsworth, a former senior executive of General Re Corporation (“GenRe”), a subsidiary of Berkshire Hathaway (NYSE:BRK.A), for his role in aiding and abetting American International Group, Inc. in committing securities fraud.

The SEC noted:

In its complaint filed today in federal court in Manhattan, the Commission alleged that Houldsworth and others helped AIG structure two sham reinsurance transactions that had as their only purpose to allow AIG to add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001. The transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company’s loss reserves in the third quarter of 2000.

But the involvement of the BRKA unit GenRe in the AIG mess was not the first time that GenRe had been involved in the questionable use of reinsurance contracts and side letters.

Click here to see an example of a side letter that was made public in a civil litigation in Australia a decade ago. The faxed letter, which bears the ID number from the Australian Court, is from an insurance broker in London to Mr. Ajit Jain, a businessman who currently heads several reinsurance businesses for BRKA, regarding a reinsurance contract for FAI Insurance, an affiliate of HIH Insurance. Notice that the letter states plainly the intent of the transaction is to bolster the apparent capital of FAI. Notice too that several times in the letter, the statement is made that “no claim will be made before the commutation date,” which may be interpreted as being a warranty by the insured that no claims shall be made under the reinsurance policy. By no coincidence, HIH and FAI collapsed in a $5.3 billion dollar fiasco that ranks as Australia’s biggest ever corporate failure.

Click here to read a March 9, 2009 article from The Age, one of Australia’s leading business publications, regarding the collapse of HIH and FAI. In 2003, an insurer named Reciprocal of America (“ROA”) was seized by regulators and law enforcement officials. An investigation ensued for 3 years. According to civil lawsuits filed in the matter, GenRe provided finite insurance to ROA in order to make the troubled insurer look more solvent than it was in reality. Several regulators and law enforcement officials involved in that case tell The IRA that the ROA failure forced insurers like AIG and Gen Re to start looking for new ways to “cook the books” because the long-time practice of side letters was starting to come under real scrutiny. “These reinsurance deals made ROA look better than it really was,” one investigator with direct knowledge of the ROA matter tells The IRA.

They went into the ROA home office in VA with the state insurance regulators and law enforcement, and directed the employees away from the computers and records. During that three-year investigation, GenRe learned that local regulators and forensic examiners had put everything together and that we now understood the way the game was played. I believe the players in the industry realized that that they had to change the way in which they cooked the books. A sleight- of-hand trick that had worked for 25 years under the radar of regulators and investors was now revealed.

Several senior officials of ROA eventually were prosecuted, convicted of criminal fraud and imprisoned, but DOJ officials under the Bush Administration reportedly blocked prosecution of the actual managers and underwriters of ROA who were involved in these sham transactions, this even though state officials and federal prosecutors in VA were anxious to proceed with additional prosecutions.

AIG: From Reinsurance to CDS

While some reinsurers are large, well-capitalized entities that generally avoid these pitfalls, AIG was already a troubled company when it began to write more and more of these risk-shifting transactions more than a decade ago. It is easy to promise the moon when people think that they can deliver, but because AIG and their clients saw how easy it was to fool regulators and investors, the practice grew and most regulators did absolutely nothing to curtail the practice. It was easy for AIG to become addicted to the use of side letters. The firm, which had already encountered serious financial problems in 2000-2001, reportedly saw the side letters as a way to mint free money and thereby help the insurer to look stronger than it really was. AIG not only helped banks and other companies distort and obfuscate their financial condition, but AIG was supplementing its income by writing more and more of these reinsurance deals and mitigating their perceived exposure via side letters.

A key figure in AIG’s reinsurance schemes, according to several observers, was Joseph Cassano, head of AIG-FP. Whereas the traditional use of side letters was in reinsurance transactions between insurers, in the case of both CELL and PNC neither was an insurer! And in both cases, AIG used sham deals to make two non-insurers, including a regulated bank holding company, look better by manipulating their financial statements. Falsifying the financial statements of a bank or bank holding company is an felony. AIG-FP was simply doing for non-insurers what was common practice inside the secretive precincts of the insurance world.

The SEC did investigate and they did finally obtain a deferred prosecution agreement with AIG, which was buried in the settlement with then-New York AG Elliott Spitzer. The key thing to understand is that if you look at many of these reinsurance contracts between ROA and Gen Re, they look perfect. They appear to transfer risk and seem to be completely in order. But, if you don’t get to see the secret agreement, the side letter that basically says that the reinsurance contract is a form of window dressing, then you cannot understand the full implications of the transaction, the reinsurance agreement. Not, several experts speculate, can you understand why AIG decided to migrate away from reinsurance and side letters and into CDS as a mechanism for falsifying the balance sheets and earnings of non-insurers.

Several observers believe that at some point in the 2002-2004 period, Cassano and his colleagues at AIG began to realize that state insurance regulators and the FBI where on to the reinsurance/side letter scam. A number of experts had been speaking and writing about the issue within the accounting and fraud communities, and this attention apparently made AIG move most of its shell game into the world of CDS.

By no coincidence, at around this time side letters began to disappear in the insurance industry, suggesting to many observers that the industry finally realized that the jig was up. It appears to us that, seeing the heightened attention from regulators and federal law enforcement agencies such as the FBI on side letters, AIG began to move its shell game to the CDS markets, where it could continue to falsify the balance sheets and income statements of non-insurers all over the world, including banks and other financial institutions. AIG’s Cassano even managed to hide the activity in a bank subsidiary of AIG based in London and under the nominal supervision of the Office of Thrift Supervision in the US, this it is suggested to hide this ongoing activity from US insurance regulators. Even though AIG had been investigated and sanctioned by the SEC, Cassano and his colleagues at AIG apparently were recalcitrant and continued to build the CDS pyramid inside AIG, a financial pyramid that is now collapsing. The rest, as they say is history.

Now you know why the Fed and EU officials are so terrified about an AIG liquidation, because it will result in heavy losses to or even the insolvency of banks and other corporations around the globe. Notice that while German Chancellor Angela Merkel has been posturing and throwing barbs at President Obama, French President Nicolas Sarkozy has been conciliatory toward the US. But for the bailout of AIG, you see, President Sarkozy would have been forced to bailout SGE for a second time in two years. So long as the Fed and Treasury can subsidize AIG’s mounting operating losses, the EU will be spared a financial bloodbath. But this situation is unlikely to remain stable for long with members of the Congress demanding an investigation of the past bailout, a process that can only result in bankruptcy for AIG.

Are the CDS Contracts of AIG Really Valid?

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams – with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world. Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple.

Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing. Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3225213/AIG-trail-leads-to-London-casino.html

AIG trail leads to London ‘casino’
Since 1987 the American financier Joseph Cassano has divided his time between London and Connecticut, where AIG, the world’s largest insurance company, runs a subsidiary called AIG Financial Products.

By Peter Koeing
Last Updated: 10:29PM BST 18 Oct 2008

For most of those 21 years life has been good for the bespectacled, intellectual-looking Cassano.

The Wall Street veteran rose to run his part of the insurer, AIG Financial Products. When in London he commuted from a company flat behind Harrods to his unit’s office at 1 Curzon Street in Mayfair’s hedge fund alley.

Cassano’s pay over the past eight years, according to US Congressional records, totalled $280m (£162m).

Then at the end of 2007 Cassano’s fortunes changed. The company’s accountants changed the basis on which they valued much of the collateral held by its units. Some half a trillion dollars worth of credit default swaps written by AIG Financial Products were marked down.

Credit default swaps, or CDSs, are quasi-insurance products bought by investors seeking protection against defaults on mortgage-backed securities and other credits.

In contrast to the remarkable profits it had tallied until 2007, the AIG subsidiary headed by Cassano began to report quarterly losses. The unit went from being star performer to vortex of a gathering nightmare.

On April 1 Cassano was nudged into retirement. In keeping with the bubble-time executive compensation practises established in the City and on Wall Street, however, the blow was softened. Cassano was allowed to continue using the company flat behind Harrods. He was given a consultancy and, according to former AIG chief executive Martin Sullivan, testifying to the US Congress, helped AIG unwind the rapidly devaluing CDSs held by AIG Financial Products. Cassano’s pay for this work was $1m a month for nine months.

“The question,” said Henry Waxman, the US Congressman chairing an October 7 Washington hearing into AIG, “was whether AIG’s executive compensation practices were fair and appropriate.”

None of this would seem to be of particular concern to the British public beyond AIG’s role generally in the world financial meltdown.

On September 16 the American insurer suffered a liquidity crisis following the downgrade of its credit rating. AIG had to beg the Federal Reserve Bank for an $85bn credit facility in return for giving up 80 per cent of its equity to the US government. This poured fuel on the fire ignited by the bankruptcy of Wall Street investment bank Lehman Brothers a day earlier.

A Sunday Telegraph investigation has determined, however, that there is a row brewing between the scores of regulators responsible for AIG’s activities in 130 countries. In the forefront of this row stands Britain’s financial regulator, the Financial Services Authority.

The operations of Cassano and his colleagues at 1 Curzon Street are attracting the attention of government officials in Washington, New York and Paris as well as London. Bumbling by the FSA, according to regulators in other countries, may have played an instrumental role in sparking the credit crunch that brought the global financial system to the brink of collapse.

This is already making political waves. Distancing himself and his government from the bad news, the Prime Minister Gordon Brown has repeatedly contended the financial crisis was made in the USA – where poor Americans in Rust Belt cities like Cleveland and Detroit fell behind on mortgage payments.

The reality has always been more complex. A financial chain links American sub-prime mortgages to the packagers and sellers of those mortgages in the City, as well as on Wall Street.

Now the role of AIG’s London office, and the FSA in overseeing what went on inside it may change all that.

On Friday, the Conservative Party Treasury spokesman Philip Hammond called for a public inquiry into the FSA’s oversight of AIG Financial Products in Mayfair. “We must not allow London to become a bolthole for companies looking for a place to conduct questionable activities,” he said.

“This sounds like a monumental cock-up by the FSA,” said Lib Dem shadow chancellor Vince Cable. “It is deeply ironic,” he added, that Brown was in Brussels last week calling for tougher global financial regulation just as the scandal over the FSA’s role in one of the key regulatory failures at the root of the global panic emerged as an international issue.

“We need an inquiry to establish what happened with the FSA’s regulation of AIG’s London operation,” Cable said.

Since AIG’s collapse in September, insurance regulators in various jurisdictions have played pass the parcel, each regulator seeking to distance itself from the CDS firm’s London business, according to politicians in Washington, such as the US Congress’s Waxman, as well as here.

The spectacle is reminiscent of the regulatory response to the collapse in the early 1990s of BCCI, a bank with operations in London, Luxembourg and the Middle East. BCCI regulators in its multiple jurisdictions, including London, dodged responsibility for not spotting BCCI’s $10bn fraud by blaming each other.

On Friday, Adair Turner, the FSA’s chairman, declined to answer questions about AIG’s London operation.

Meanwhile, people close to the City regulator explained that AIG Financial Products, the unit responsible for the insurer’s failure, fell outside its jurisdiction.

Under FSA rules, these people said, AIG Financial Products was deemed an “internal treasury operation” and, like the internal treasury operations of other companies, was not regulated.

But the FSA does have regulatory oversight responsibility for a number of AIG units in London, including a company called AIG FP Capital Management registered at 1 Curzon Street.

People close to the FSA said AIG FP Capital Management is a separate company from AIG Financial Products and is not involved in the business of creating credit default swaps.

There is little doubt, nevertheless, that US lawmakers consider London an epicentre of the AIG Financial Products disaster. During the hearing into the causes and effects of the AIG bail-out on October 7, the US House of Representatives Oversight Committee, led by Congressman Waxman, politicians pmentioned London a dozen times. California Congresswoman Jackie Speier referred to AIG’s Mayfair business as “the casino in London”.

Testimonies by former AIG chief executives Martin Sullivan and Robert Willumstad, along with a New York Times article on September 28, sketch the story of the AIG Financial Products unit in London.

It was originally staffed by executives, including Cassano, from defunct Wall Street investment bank Drexel Burnham Lambert. Drexel’s legendary junk bond king, Michael Milken, was investigated for insider trading in the 1980s and pleaded guilty to six charges.

As New Labour came to power in 1997 and established the FSA with a mandate to avoid regulatory failures such as BCCI, Cassano rose to the top of the AIG subsidiary where he worked.

By the end of last year AIG held $562bn of CDS contracts on its books, and in their October 7 testimony before the House Oversight Committee company executives acknowledged that a cockpit for this business was 1 Curzon Street.

In contrast to standard practice, however, AIG Financial Products did not hedge its exposure to a possible fall in the CDS market. In a footnote to AIG’s 2007 accounts spotted by Forbes magazine, the company declared: “In most cases AIGFP does not hedge its exposures to credit default swaps it has written.”

Last November, when AIG’s accountants asked the insurer to change the way it valued CDS’s, the comparatively small base of capital on which AIG Financial Products had built a mountain of business became visible. This began the unravelling that led to AIG’s central role in sparking the global financial crisis.

To date, no British authorities have said anything about AIG. In the US, in contrast, there are multiple investigations. In addition to the October 7 Congressional hearing into AIG, the insurer’s London business is now under scrutiny by the Office of Thrift Supervision in Washington and the New York State Department of Insurance in Manhattan.

Last week New York State Attorney General Andrew Cuomo sent a letter to AIG informing the company it was under investigation for “irresponsible and damaging” expenditures, among other things, for executive compensation packages that were not cut even as AIG drew down on the Federal Reserve’s $85bn credit facility to keep itself afloat.

Although the FSA will not comment on AIG Financial Products, there are indications from America that it is belatedly looking into the unit’s operations.

“There have been meetings and conversations” between Washington’s Office of Thrift Supervision and the FSA,” said Janet French, a spokeswoman for the Washington agency.

A person close to the New York State Department of Insurance said: “You can be certain there have been talks with the FSA.”

AIG did not return phone calls to its New York headquarters. Cassano did not return a call to his Connecticut home.

In the weeks ahead the British public may hear more about the obscure AIG business at 1 Curzon Street – if only because it links the financial crisis to the Prime Minister by way of the City regulator he created when he became Chancellor in 1997.

“The Prime Minister has used the City as his milch cow,” said Tory Treasury spokesman Hammond.

“He borrowed from it. He taxed it. Now, it appears, he allowed it to operate without adequate regulation.”

http://voices.washingtonpost.com/livecoverage/2008/10/joe_cassano_the_man_who_brough.html

Joe Cassano: The Man Who Brought Down AIG?

Moments ago, members of the House oversight committee concluded their hammering of the two most recent AIG chief executives. Topic: Joe Cassano, the man who some credit with bringing down the insurance giant.

Cassano was president of AIG’s financial products division, which trafficked in the credit-default swaps, or CDS, which we learned earlier proved so dangerous.

Rep. Bruce Braley (D-Iowa) angrily recited the tale of Cassano’s tape: He earned $280 million in cash — more than AIG chief executives — and for every dollar his financial products unit made, 30 cents came back to Cassano and other top execs.

After the unit lost $11 billion, Cassano was fired Feb. 29 of this year, Braley pointed out, and got to keep $34 million in bonuses and was kept on as an AIG consultant at a salary of $1 million per month.

Braley asked the witnesses, former AIG chief executives Michael Sullivan and Robert
Willumstad, if they had exercised their authority to fire Cassano from his consultant’s role, given all the damage he had brought to AIG.

“No,” both said.

Then oversight committee Chairman Henry Waxman (D-Calif.) really lit into them.

Asked why they didn’t fire Cassano, Sullivan said they needed to “retain the 20-year knowledge of the transactions.”

Waxman was impressed.

“When I retire I want to come work for you at $1 million a month,” he said, The Post’s Peter Whoriskey reports.

“What would he have had to have done for you to fire him?” Waxman asked rhetorically.

http://www.nytimes.com/2008/09/28/business/28melt.html

The Reckoning
Behind Insurer’s Crisis, Blind Eye to a Web of Risk

Published: September 27, 2008

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.

But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Mr. Cassano, 53, lives in a handsome, three-story town house in the Knightsbridge neighborhood of London, just around the corner from Harrods department store on a quiet square with a private garden.

He did not respond to interview requests left at his home and with his lawyer. An A.I.G. spokesman also declined to comment.

At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had a long and storied history of deftly juggling risks. It insured people and properties against natural disasters and death, offered sophisticated asset management services and did so reliably and with bravado on many continents. Even now, its insurance subsidiaries are financially strong.

When Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.

These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.

The unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. Operating income at the unit also grew, rising to 17.5 percent of A.I.G.’s overall operating income in 2005, compared with 4.2 percent in 1999.

Profit margins on the business were enormous. In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.

Mr. Cassano and his colleagues minted tidy fortunes during these high-cotton years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.

In fact, compensation expenses took a large percentage of the unit’s revenue. In lean years it was 33 percent; in fatter ones 46 percent. Over all, A.I.G. Financial Products paid its employees $3.56 billion during the last seven years.

The London unit’s reach was also vast. While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.

At the 2007 conference he noted that his company worked with a “global swath” of top-notch entities that included “banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.”

Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box.

Goldman Sachs was a member of A.I.G.’s derivatives club, according to people familiar with the operation. It was a customer of A.I.G.’s credit insurance and also acted as an

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

Later that same day, the government announced its two-year, $85 billion loan to A.I.G., offering it a chance to sell its assets in an orderly fashion and theoretically repay taxpayers for their trouble. The plan saved the insurer’s trading partners but decimated its shareholders.

Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.”

Mr. van Praag declined to comment on what communications, if any, took place between Mr. Blankfein and the Treasury secretary, Mr. Paulson, during the bailout discussions.

A Treasury spokeswoman declined to comment about the A.I.G. rescue and Goldman’s role. The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil.

An Executive’s Optimism

Regardless of Goldman’s exposure, by last year, A.I.G. Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million a year in income on insurance premiums, Mr. Cassano told investors.

Because it was not an insurance company, A.I.G. Financial Products did not have to report to state insurance regulators. But for the last four years, the London-based unit’s operations, whose trades were routed through Banque A.I.G., a French institution, were reviewed routinely by an American regulator, the Office of Thrift Supervision.

A handful of the agency’s officials were always on the scene at an A.I.G. Financial Products branch office in Connecticut, but it is unclear whether they raised any red flags. Their reports are not made public and a spokeswoman would not provide details.

For his part, Mr. Cassano apparently was not worried that his unit had taken on more than it could handle. In an August 2007 conference call with analysts, he described the credit default swaps as almost a sure thing.

“It is hard to get this message across, but these are very much handpicked,” he assured those on the phone.

Just a few months later, however, the credit crisis deepened. A.I.G. Financial Products began to choke on losses — though they were only on paper.

In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.

Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped A.I.G. Financial Products and its legendary, sprawling parent.

Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. Last fall, however, the methods that A.I.G. used to value its derivatives portfolio began to come under fire from trading partners.

In February, A.I.G.’s auditors identified problems in the firm’s swaps accounting. Then, three months ago, regulators and federal prosecutors said they were investigating the insurer’s accounting.

This was not the first time A.I.G. Financial Products had run afoul of authorities. In 2004, without admitting or denying accusations that it helped clients improperly burnish their financial statements, A.I.G. paid $126 million and entered into a deferred prosecution agreement to settle federal civil and criminal investigations.

The settlement was a black mark on A.I.G.’s reputation and, according to analysts, distressed Mr. Greenberg, who still ran the company at the time. Still, as Mr. Cassano later told investors, the case caused A.I.G. to improve its risk management and establish a committee to maintain quality control.

“That’s a committee that I sit on, along with many of the senior managers at A.I.G., and we look at a whole variety of transactions that come in to make sure that they are maintaining the quality that we need to,” Mr. Cassano told them. “And so I think the things that have been put in at our level and the things that have been put in at the parent level will ensure that there won’t be any of those kinds of mistakes again.”

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion.

As those losses mounted, and A.I.G.’s once formidable stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering two weeks ago with a plea for help.

Mr. Greenberg, who has seen the value of his personal A.I.G. holdings decline by more than $5 billion this year, dumped five million shares late last week. A lawyer for Mr. Greenberg did not return a phone call seeking comment.

For his part, Mr. Cassano has departed from a company that is a far cry from what it was a year ago when he spoke confidently at the analyst conference.

“We’re sitting on a great balance sheet, a strong investment portfolio and a global trading platform where we can take advantage of the market in any variety of places,” he said then. “The question for us is, where in the capital markets can we gain the best opportunity, the best execution for the business acumen that sits in our shop?”

http://oversight.house.gov/documents/20081007102452.pdf

Joseph W. St. Denis
October 4,2008
Henry A. Waxman, Chairman
Thomas M. Davis III, Ranking Member
House of Representatives
Committee on Oversight and Govemment Reform
2157 Rayburn House Office Building
Washington, DC 205 | 5’61 43
Dea¡ Chairman Wacman and Ranking Member Davis:
I am providing this letter in resporu¡e to the Committee’s subpoena in lieu of a
deposition pr. ugr..rirnt with Commiitee staff. The staffhas provided questions’ which
are addressed below.
¡¡tt¡1.d.
Ouestion l: Briefly describe your professional history’
I received a B.A. and M.B.A. from the university of colorado at Boulder, and
have been a licensed Certified Public Accountant in Colorado since 1993′ I began my
career as an auditor in the Denver offrçe of Coopers & Lybrand’ I served as a Staff
Accountant and later as an Assistant Chief Accóuntant in the Division of Enforcement of
the united states securities and Exchange commission from 1998 to 2004′
Ouestion 2: ll’hat was your position at AIG?
I served a ing Policy at AIG Financial Products
(,,AIGFp”) from t,2OOl. My responsibilities included
documenting the
around that proposed accounting with my a(
Financial Services Division (“FSD”) and Cc
(“OAP”). Additionally, I served initially as a reso
AIGFP’s Transaction’Review committee, which w¿N responsible for tl?l,YlTfl *d
documenting the accounting for proposed transactions by customers ot AlLiFr”
I My understanding was that the Transaction Review Committee, orîRC’ was formed in response to the
Interagency Statement on Sound Practices Concerning Complex Structured Finance Activities’ The TRC
My understanding was that the position was created l) as part of an entity-wide
effort to address material weaknesses tit.d by desire on
tfr. putt of FSD and OAP for greater visibility perations
and accounting policy process-of AIGFP and, for
AIGFP busineis people as they developed proposed transactions’
Question 3: lh’hat were your duties as Vice President for Accounting Policy?
My duties as Vice President for Accounting Policy were to research and
documeniAlGFP’s accounting policy issues and conclusions through a rigorous process
of consens c”s Financial Services
Division(.eprocessofbuilding
consensus the Progression below
for material and/or unusual transactions:
a) Meet with business people at AIGFP responsible {o^r
the proposed transactions to
gainan understanding of the transactionänd identiff potential accounting and
financial rePorting issues :
b) prepare a memorandum describing the prop_osed transaction and documenting the ‘
ana-lysis and disposition of accounting and frnancial reporting issues;
c) Share the memorandum with the CFO of FSD. Discuss and clear any review
comments and resolve any new issues identified at this level of review, and
update the draft to reflect FSD’s review;
d) Share the updated draft with OAP’ Discuss and and
resolve any-new issues, and update the draft to r noff’
Upon signoff by OAP, the documentation was c . , , ot’
Pricewaterhour.coop.rs (“PwC”) identified new issues or suggested changes
that all the parties agreed should be made;
e) Provide relevant conclusions to appropriate operational personnel within AIGFP
for implementation;
Ð Share the final memorandum with the PwC auditors; and
g) Revisit previous conclusions arrived at through the above process and update
related documentation as necessary’
included Joseph cassano, President; Doug Poling, General counsel and later head of the Transaction
Development Group; Pieire Micottis, Chief Risk Officer; and others at various times’
The above process did not necessarily involve intermediate review of accounting
analyses by AIGFÈ personnel. The CFO of AIGFP generally did not review my work
product unl.r, he had specifically requested it, nor, to my knowledge, did Joseph
burruno, president otRlCf’p. lriy understanding of my role, as noted above, was in large
part to pióvide a control point aná window for FSD and OAP into the operations and
à..ouniing policy pro..r, for AIGFP transactions. This understanding was confirmed
through nume.orrs conversations with senior managers within FSD and OAP’
Ouestion 4: Wat dates were you employed by AIG?
I was employed at AIGFP from late June of 2006 through September 30,2007 ‘
During this entiie period, I worked out of the Wilton, CT office of AIGFP’
Ouestion 5: To whom did You rePort?
1 Balfan. Upon Mr. Balfan’s transfer to the consulting
position January 2007,I reported to William Kolbert, Executive
Vice pre trative Offrcer. Mr. Balfan’s successor as CFO started
on S.pt..Uer 10, 2007,and I reported to her briefly prior to my resignation on October
1,2007′.
Functionally, I reported to the leaders of the Marketing and Transaction
.
Development groups at ¡GFP, and to the senior financial managers of FSD and OAP’
ouestion 6: what was your relationship with Joseph cassano?
My relationship with Mr. cassano was one of employer and employe.e. until the
late summe r of 2007,i hud .t .ry minimal contact with Mr. Cassano. Beginning in early
2007,I replaced trrtait Balfan ón AIGFP’s Transaction Review Committee, which met
briefly twice per month to, as noted above, review the accounting by AIGFP’s customers
in proposed tiansactions. Mr. Cassano also participated in this committee’
Ouestion 7: How was your perþrmance rated and when?
I received two “formal” performance evaluations at AIGFP. The f,irst was in mid-
December of 2006, in connection with the awarding of my 2006 bonus. This evaluation
2 As detailed below, I resigned on Septembe r 9,2007 , but withdrew that resignation on September l0′ My
final resignation was effective at 8 a.m’ on October 1,2007 ‘
was with Doug poling, then Chief Administrative Officer; and Mark Balfan, then CFO of
AIGFp. Duriig this ãvaluation I was told that senior management of AIGFP thought that
I was a “fantastic hire,” and they were “thrilled” to have me as an employee’ I was
awarded a bonus that ôxceeded the guaranteed amount by $50,000, or l5Yo. According to
Mr. Poling, “this [was not] ,,rppor.á to happen,” but my outstanding performance had
wananted it.
I received the second evaluation in June of 2006, from AIGFP President Joseph
Cassano and V/illiam Kolbert, then Chief Administrative Officer. During this evaluation,
Mr. Cassano told me that I was “doin g a greatjob,” and that I “should continue to work
closely with [FSD] and OAP.” Mr. Cassano told me that AIGFP’s relationship with AIG
was AIGFP’s “most important asset,” and that my position was “critical” to that
relationship.
euestion 8: Prior to your departure, did AIG initiate a review of the valuation of AIG’s
îapt, Srrør Credit bt¡o”n Swaps portfotio? Ilhat was your role? Did you have any
concerns about this?
Historically, my understanding was that the Super Senior Credit Default Swaps
(“SSCDS”) portfoiio had been accounted for at m ty with
Statement of Financial Accounting Standards No’ rivatives and
Hedging Activities (“SFAS 133”), as amended’ P turbulence in
the iáte summer of à007, it was my understanding that AIGFP’s SSCDS portfolio was in
an aggtegate unrealized gain posit-ion. However, as there was no active market for these
bespote instrumentr, ,.cãgniiion of a day-one gain on these instruments would not have
been in conformity with fÁSg Emerging Issues Task Force Issue No’ 02-3,lssues
Involved in Accountingfor Derivative contracts Heldfor Trading Purposes and
Contracts Involved in-Energ Trading and Risk Management Activities (“EITF 02-3”)’
Therefore, no mark-to-rnur[ôt adjustments were made to these instruments through the
quarter ended June 30, 2007. My understanding was that the instruments were monitored
for signific ant deteriorationthrough the use of a “value at risk” (“vaR”) model that
tracked movements in credit ratings for the underlying collateral’
As the credit crunch began to unfold in July and August of 2007, and with the
planned implementation of SFÃS 157, Fair Va superseded
parts of EIiF 02-3),effective January 1, 2008, financial
.unug.rn.nt in AIó, Inc.’s FSD and OAP turn FP’s SSCDS
portfolio.
Upon returning from a vacation in early September of 2007,1 learned that AIGFP
had received a multi-billion dollar margin call on certain SSCDS. I was gravely
concerned about this, as the mantra at AIGFP had always been (in my experience) that
there could never be iosses on the SSCDS. I was questioning this mantra in light of the
margin call, as were the professionals in FSD and OAP, in my belief’ I am not an expert
in the valuation of derivatives, but I was concerned that the valuation model of at least
one of AIGFP SSCDS counterparties apparently indicated that AIGFP was in a
potentially material liability position.
Despite my position and FSD’,s and oAP’s interest in the issue, I had no
involvemenì with eiforts to value AIGFP’s SSCDS portfolio. This was, in my
understanding, due to the actions of Mr. Cassano to exclude me from the SSCDS
valuation pro..rr. During the final week of September of 2007, the final week of my
employmËnt at AIGFP, iã a meeting with Mr. Cassano, the newly hired CFO of AIGFP’
urrd- uo AIGFP quantitative risk expert, Mr. Cassano made the following statement to me:
,,I have deliberately excluded you from the valuation of the Super Seniors because
I was concemed that you would pollute the process.”
My belief is that the “pollution” Mr. Cassano was concerned about was the
transparency I brought to AIGFP’s accounting policy process.
My understanding is that sometime during the late summer or early fall of 2007,
AIGFp executive and Crãdit Risk personnel began an effort to develop a so-called
,,Binomial Expansion Technique” (“BET”; model to provide valuations for the SSCDS
portfolio that would reflec in
this process whatsoever, o
September of 2007, a few
discussed. My knowledge of the process war
meeting. AIG’s Controller, Director of Inter ls
meetin!, held at AIGFP’s Wilton office. During this meeting, Mr. Cassano had one of
the Risk Management people distribute a PowerPoint presentation that purported to show
the applicatioriof the ÉEl’model to AIGFP’,s SSCDS portfolio and represented to the
urr”-fl.d group that the SSCDS portfolio continued to be in an aggregate unrealized
gain position.
Question 9: What precipitated your resignation?
I resigned because on multiple instances beginning in the late summer of 2007,
Mr. Cassanolook actions that I believed were intended to prevent me from performing
the job duties for which I was hired. One such instance involved AIGFP’s investment in
Tenaska, a natural gas storage and distribution operation in Omaha, NE’
In Decemb er 2006,I traveled to Omaha to perform pre-transaction accounting due
diligence and immediately identifred effors in Tenaska’s hedge accounti¡g’ I
communicated these findings to AIGFP’s senior management, specifically Doug Poling
and Mark Balfan, and to Tenaska. Tenaska told me that it would fix these problems prior
to the effective date of the merger. In June of 2007,I went back to Tenaska and found
that it had not corrected the problems. Again I reported these findings to Poling and
Balfan. At the time I left AIGFP, it was my understanding that Tenaska had indeed
conected the issues, but I left before I was able to verify this’
During August of 2007 , Mark Balfan pulled me out of a meeting with Doug
poling and broughi into AIGFP’s HALO room where Mr. Cassano was on from London.
Mr. Cãssano berated me for several minutes for going to Tenaska and finding the
problems. He shouted obscenities at me, and seemed especially aî9ry with Elias
i{abayeb, the CFO of FSD, whom he repeatedly referred to in disparaging language. The
source of Cassano’s anger was, in my understanding, a list of “closing issues” that Mr’
Habayeb had prepared ielating to third quarter issues. At one point Mr. Cassang held up
the liit and shrieked, “I’ve bent over backwards for this fexpletive deleted] and still I get
these [expletive deleted] lists!!” Mr. Habayeb had expressed interest in my f,rndings at
Tenasla, which was nof surprising to me given that it was his job to make sure that
AIGFp’s accounting followèd GÀ¿.p, and an error in Tenaska’s financial results would
be carried through tó AIGpP’s flrnancial statements through the equity pickup’ Mr.
Habayeb had inðluded the item “Tenaska hedge accounting” on the list, apparently to
pro¡¡pt him to follow up. Mr. Cassano told me in no uncertain terms during this session
ihat I worked for him, not FSD or OAP. Doug Poling, Mark Balfan, and William Kolbert
also attended this meeting.
This was the first time Mr. Cassano had expressed criticism of any of my close
working relationships with FSD or OAP. As previously noted, during my evaluation
with Mi. Cassano in June of 2007 two months earlier, Mr. Cassano had told me that I was
.,doing a great job,” and that I should “work closely with [AIG].” He also volunteered
aurin[tnis *r.ting in June 2007,which was also attended by William Kolbert, that he
had,,io desire to bi promoted, because it would separate [him] from the money,” and
that AIG’s corporate management was “scared to death” of him’
Another instance occurred in early September of 2007. While on vacation in
puerto Rico, I began receiving emails from the credit traders in London asking me for
assurances that RlGpp would not have to consolidate the Nightingale structured
investment vehicle (“SIV”) if AIGFP were to purchase all of the outstanding debt of the
vehicle. This was the beginning of the Credit Crunch, and the SIV could not roll its
paper. I said no; I could not make such assurances’ as this would likely be a
ieóonsideration event under FASB Interpretation No. 46(R), Consolidation of Variable
Interest Entities (“F[N 46(R)”), and the èxpected gain/loss model, originally formulated
in late 2006,would have to be revisited. Upon return from my vacation,I began
conversations with one of the quantitative risk experts at AIGFP and an accountant in
OAP to evaluate this reconsideration event.
Also upon return from my vacation,I found a new organizational chart on my
desk. It indicáted that I would report to the controller of AIGFP going forward. I felt this
to be a change that was designed to isolate me from OAP and FSD accounting policy
personnel, ui I b.li.u.d thatlhe controller would require all communications with OAP
änd FSD to go through him. The change also represented a substantial demotion, as I had
previously b-een a peõr to the controller. This, in addition to the episode described above
regarding Tenaska, placed me in a conflicted position in that I believed that there was a
iuõiáfy eîcahting iwel of interference in my communrcations with OAP and FSD’
furtnér, I believed that this interference repiesented a fundamental departure from the
terms of the position I had agreed to undertake in June of 2006.
on Sunday, September 9,2007 ‘ I was contacted on
that the organizational chart was the result of a
ort to the new CFO, who was to start on Monday’
september 10,2007.I was also told that no one was trying to control or interfere with my
communications with FSD and OAp. I agreed to meet and discuss potentially staying at
AIGFP on Monday morning, September 10′
I came into AIGFp on Monday morning and discussed the situation with Mr’
cassano, again in AIGFP’,s HALO room. Mr. Cassano assured me during this meeting
e going forward, although he insisted that
Elias Habayeb and go straight to OAP’
he said. I decided to give it one more
chance. I had moved my wife and myself from Washington, DC to Connecticut and now
had a substantial investment of time in AIGFP. I had also put a lot of effort into building
relationships with the business people at AIGFP P
and FSD. Given Mr. Cassano’s assurances that I
Inc. going forward, as well as the fact that by res
from a substantial guaranteed bonus (which was
work.
morning of Tuesday, Septembet25,2007,I was at my
dMr.Cas_.sanowalkedup.Heappearedtobeagitated.He
a sis,’was, and told me that he had been asking for it for
th¡ee weeks. I did not recall his ever having asked for the sIV analysis, although, as
indicated above, I had been working on it wittr the AIGFP business people and with
OAp. I indicated to Mr. Cassano that I was to have a conference call with an accountant
in AIG’,s OAP at t0:30 that moming to discuss it. Mr. cassano glared at me and walked
off.
returned from vacation that AIGFP had alre
of the SIV.) At the time of my resignation,
event had not been signed off by OAP.
3 I spoke later in the day to Mark Balfan, who told me that he had “told those guys that when Joe sees the
orgiorganization] chaá, he’s going to resign.” This indicated to me that the organization chart was not a
“clerical error.”
The instant the call was over, Mr. Cassano burst into the conference loom we
were in. He appeared to be highly agitated. “What the [expletive deleted] is going on
here?,, he asked. I replied: “Ñe’ïe just finished a call with OAP, they agree with our
approach…,, Mr. Cassano cut me oif and shouted several expletives regarding the OAP
person we had sPoken to on the call.
This was after I had told him earlier about the call with this individual, one of the
highly experienced accountants in houted at me for several minutes’
and then said, as previously noted: excluded you from the valuation
of the Super Seniãrs because I was concerne, would pollute the process'”
I finished out a very busy week that included attending the meeting referenced
above with the controller ornla during which the topic of AIGFP’,s SSCDS valuation
was discussed.
Over the weekend I had time to reflect, and determined that I believed Mr.
Cassano,s actions to be inconsistent with the terms we had agreed to in.our. HALO room
meeting on september 10. I could not continue in light of what I perceived to be Mr’
Cassano,s efforts to isolate me from OAP and FSP personnel, and in light of Mr.
Cassano’s decision to exclude me from the valuation of the SSCDS portfolio’
On Monday morning, October I,2007,I called Bill Shirley, general counsel of
AIGFP, and re-submitteî my resignation. My message to Mr’ Shirley was that I had lost
faith in the senior-most manâgemãnt of AIGÉp and cóuld not accept the risk to AIG and
myself of being isolated from corporate accounting policy personnel, especially given the
situation with the SSCDS.
ouestion L0: Did you speak to anyone within AIG about the reasons for your departure?
D e s crib e the s e communic at i ons ?
Subsequent to my resignation, in October of 2007,AIG’s Chief Auditor, Michael
Roemer, contácted *.. Mr. Rõemer told me that he wanted to understand the reasons for
,ny J.párture, and that he would report tho ‘ I
had intended to write a detailed memorand
decided to speak to Mr. Roemer in lieu of w
telephonically to Mr. Roemer for approxima ber’
I related the events described above to Mr. R my
resignation – e.g. Cassano’s statement that he had excluded me from discussions relating
to the valuation of AIGFP’s SSCDS.
When I related this to him, Mr. Roemer stated that I had been “painted into a
corner,, by Mr. Cassano and had no choice but to resign. In addition to Mr. Roemer, the
PwC engagement partner on AIGFP also contacted me to inquire as to my. reasons for
leaving Árôfp. I had a similar, though much higher-level conversation with him’ I did
not get into specific conversations with the PwC engagement partner. I did, however,
relate to himihat I had left because of what I perceived to be Mr. Cassano’s efforts to
impede my communications with my counterparts at the parent organization.
Question 11: How were bonuses awarded in AIG Financial Products? What is your
,raÃtonairg of the aruangement between AIG Corporate and AIG FP regording the
calculation of AIG FP’s annual bonus pool?
I had no access to payroll records or any compensation-related materials. The
following is based on my èxperience and conversations with other AIGFP employees.
My undeistanding is thai bonuses were paid in cash in late December of each year, based
on results through November 30. For “highly compensated” employees, my
understanding is that salaries were capped at $125,000 per year, and that bonuses could
be substantiai- in some cases running to eight figures. It was also my understanding that
certain portions of some employee’s bonuses were deferred’
My bonus for 2006 was $375,000, and I never received my contractually
guaranteed bonus for 2007 of$325,000.
My understanding of the arrangement between AIGFP and AIG regarding the
bonus poól *ur derived *noUy from conversations with other AIGFP employees. This
undersìanding was that for euCh doilar of AIGFP’s operating earnings – which excluded
certain GAAP accruals, such as mark-to-market adjustments on derivative positions –
AIGFP received 30 cents, which went to AIGFP’s bonus pool’
euestion 12: Do you have any concerns about the accuracy of AIG’s public disclosures
regarding its swaps portfolio?
I have not reviewed all of AIG’s public disclosures regarding its SSCDS portfolio
subsequent to my departure from AIGFP, and do not feel that it would be appropriate to
comment on their accuracy.
That said I have been shocked at the speed at which the losses in AIGFP’s
SSCDS portfolio have apparently developed. There are two things that I would note:
l. In my understanding and experience, AIG has always been a staunch defender of its
assets. As an outside observer, it has struck me as odd throughout the SSCDS crisis
that A,IG,was apparently unable to defend itself from claims on those portions of the
SSCDS that were written on subprime collateral. It is common knowledge that
underwriting standards on subprime loans had deteriorated dramatically, even going
back to the ãarlier vintages. Given this, I have been surprised that AIGFP apparently
either did not write the SSCDS contracts to provide exclusions for collateral that was
non-compliant with prudent underwriting standards, o1]ras been ineffective at
enforcin[ such exclusions. Having never reviewed a SSCDS agreement, I cannot
answer the question, but I would aik munagement, “how did this happen?”
2. I believe that certain statements made by Mr. Cassano and other senior AIG managers
in the early stages of the SSCDS crisis were ill-advised. Specifically, statements
made at the December 5,2007lnvest ar
AIGFP had received from its SSCDS
especially given the apparent state of , that
I would not have made’or condoned. :lieved at the time of the Investor Meeting
and continue to believe that full disclosure of margin calls by, and resulting collateral
postings to, AIGFP’,s SSCDS counterparties was of critical importance.
Sincerely,
10

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup’s Sandy Weill dealt the coup de grâce.

1933

Glass-Steagall Act creates new banking landscape

Following the Great Crash of 1929, one of every five banks in America fails. Many people, especially politicians, see market speculation engaged in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) introduce the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors. The new law bans commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also establishes the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits, and strengthens the Federal Reserve’s control over credit.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

In 1956, the Bank Holding Company Act is passed, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.

1960s-70s

First efforts to loosen Glass-Steagall restrictions

Beginning in the 1960s, banks lobby Congress to allow them to enter the municipal bond market, and a lobbying subculture springs up around Glass-Steagall. Some lobbyists even brag about how the bill put their kids through college.

In the 1970s, some brokerage firms begin encroaching on banking territory by offering money-market accounts that pay interest, allow check-writing, and offer credit or debit cards.

1986-87

Fed begins reinterpreting Glass-Steagall; Greenspan becomes Fed chairman

In December 1986, the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being “engaged principally” in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase “engaged principally” in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three “outside checks” on corporate misbehavior had emerged since 1933: “a very effective” SEC; knowledgeable investors, and “very sophisticated” rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures – a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

In March 1987, the Fed approves an application by Chase Manhattan to engage in underwriting commercial paper, applying the same reasoning as in the 1986 Bankers Trust decision, and in April it issues an order outlining its rationale. While the Board remains sensitive to concerns about mixing commercial banking and underwriting, it states its belief that the original Congressional intent of “principally engaged” allowed for some securities activities. The Fed also indicates that it will raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The Board believes the new reading of Section 20 will increase competition and lead to greater convenience and increased efficiency.

In August 1987, Alan Greenspan — formerly a director of J.P. Morgan and a proponent of banking deregulation — becomes chairman of the Federal Reserve Board. One reason Greenspan favors greater deregulation is to help U.S. banks compete with big foreign institutions.

1989-1990

Further loosening of Glass-Steagall

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20, because the revenue limit for underwriting business is still at 5 percent. Later in 1989, the Board issues an order raising the limit to 10 percent of revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

1980s-90s

Congress repeatedly tries and fails to repeal Glass-Steagall

In 1984 and 1988, the Senate passes bills that would lift major restrictions under Glass-Steagall, but in each case the House blocks passage. In 1991, the Bush administration puts forward a repeal proposal, winning support of both the House and Senate Banking Committees, but the House again defeats the bill in a full vote. And in 1995, the House and Senate Banking Committees approve separate versions of legislation to get rid of Glass-Steagall, but conference negotiations on a compromise fall apart.

Attempts to repeal Glass-Steagall typically pit insurance companies, securities firms, and large and small banks against one another, as factions of these industries engage in turf wars in Congress over their competing interests and over whether the Federal Reserve or the Treasury Department and the Comptroller of the Currency should be the primary banking regulator.

1996-1997

Fed renders Glass-Steagall effectively obsolete

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed’s 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on “Section 20 subsidiaries” by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be “manageable,” and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

1997

Sandy Weill tries to merge Travelers and J.P. Morgan; acquires Salomon Brothers

In the summer of 1997, Sandy Weill, then head of Travelers insurance company, seeks and nearly succeeds in a merger with J.P. Morgan (before J.P. Morgan merged with Chemical Bank), but the deal collapses at the last minute. In the fall of that year, Travelers acquires the Salomon Brothers investment bank for $9 billion. (Salomon then merges with the Travelers-owned Smith Barney brokerage firm to become Salomon Smith Barney.)

April 1998

Weill and John Reed announce Travelers-Citicorp merger

At a dinner in Washington in February 1998, Sandy Weill of Travelers invites Citicorp’s John Reed to his hotel room at the Park Hyatt and proposes a merger. In March, Weill and Reed meet again, and at the end of two days of talks, Reed tells Weill, “Let’s do it, partner!”

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world’s largest financial services company, in what was the biggest corporate merger in history.

The transaction would have to work around regulations in the Glass-Steagall and Bank Holding Company acts governing the industry, which were implemented precisely to prevent this type of company: a combination of insurance underwriting, securities underwriting, and commecial banking. The merger effectively gives regulators and lawmakers three options: end these restrictions, scuttle the deal, or force the merged company to cut back on its consumer offerings by divesting any business that fails to comply with the law.

Weill meets with Alan Greenspan and other Federal Reserve officials before the announcement to sound them out on the merger, and later tells the Washington Post that Greenspan had indicated a “positive response.” In their proposal, Weill and Reed are careful to structure the merger so that it conforms to the precedents set by the Fed in its interpretations of Glass-Steagall and the Bank Holding Company Act.

Unless Congress changed the laws and relaxed the restrictions, Citigroup would have two years to divest itself of the Travelers insurance business (with the possibility of three one-year extensions granted by the Fed) and any other part of the business that did not conform with the regulations. Citigroup is prepared to make that promise on the assumption that Congress would finally change the law — something it had been trying to do for 20 years — before the company would have to divest itself of anything.

Citicorp and Travelers quietly lobby banking regulators and government officials for their support. In late March and early April, Weill makes three heads-up calls to Washington: to Fed Chairman Greenspan, Treasury Secretary Robert Rubin, and President Clinton. On April 5, the day before the announcement, Weill and Reed make a ceremonial call on Clinton to brief him on the upcoming announcement.

The Fed gives its approval to the Citicorp-Travelers merger on Sept. 23. The Fed’s press release indicates that “the Board’s approval is subject to the conditions that Travelers and the combined organization, Citigroup, Inc., take all actions necessary to conform the activities and investments of Travelers and all its subsidiaries to the requirements of the Bank Holding Company Act in a manner acceptable to the Board, including divestiture as necessary, within two years of consummation of the proposal. … The Board’s approval also is subject to the condition that Travelers and Citigroup conform the activities of its companies to the requirements of the Glass-Steagall Act.”

1998-1999

Intense new lobbying effort to repeal Glass-Steagall

Following the merger announcement on April 6, 1998, Weill immediately plunges into a public-relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999). One week before the Citibank-Travelers deal was announced, Congress had shelved its latest effort to repeal Glass-Steagall. Weill cranks up a new effort to revive bill.

Weill and Reed have to act quickly for both business and political reasons. Fears that the necessary regulatory changes would not happen in time had caused the share prices of both companies to fall. The House Republican leadership indicates that it wants to enact the measure in the current session of Congress. While the Clinton administration generally supported Glass-Steagall “modernization,” but there are concerns that mid-term elections in the fall could bring in Democrats less sympathetic to changing the laws.

In May 1998, the House passes legislation by a vote of 214 to 213 that allows for the merging of banks, securities firms, and insurance companies into huge financial conglomerates. And in September, the Senate Banking Committee votes 16-2 to approve a compromise bank overhaul bill. Despite this new momentum, Congress is yet again unable to pass final legislation before the end of its session.

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

Oct.-Nov. 1999

Congress passes Financial Services Modernization Act

After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

On Oct. 21, with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill’s effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.

Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill’s chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, “You’re buying the government?”

http://tpmmuckraker.talkingpointsmemo.com/2009/03/the_rise_and_fall_of_aigs_financial_products_unit.php

The Rise And Fall Of AIG’s Financial Products Unit
By Zachary Roth and Ben Buchwalter – March 20, 2009, 9:36AM

As we delve into the back-story behind the collapse of AIG, we thought it might be useful to lay out some key factual information about the firm’s Financial Products unit, known as AIGFP, whose disastrous credit default swaps brought the company to its knees. How and when did AIG Financial Products get started? Who ran it, and from where? How did it get into credit default swaps, and what exactly are they, anyway? And how did this group of derivatives traders eventually wind up bringing down one of the most admired financial firms in the world?

So here’s a rundown of some of the key developments in AIGFP’s tumultuous history — many gleaned from a superb three-part December 2008 Washington Post series on the unit (parts 1, 2, and 3):

From a Humble Start, A Swift Rise

– AIGFP was founded on January 27, 1987, when three Drexel Burnham Lambert traders, led by finance scholar Howard Sosin, convinced AIG CEO Hank Greenberg to branch out from his core insurance business by creating a division focused on complex derivatives trades that took advantage of AIG’s AAA credit rating.

– In addition to his two partners, Randy Rackson and Barry Goldman, Sosin brought 10 other staffers from DBL with him — including future AIGFP CEO Joseph Cassano. The team of 13 set to work in a windowless makeshift room, at first without full-size desks and chairs, in an accounting office on Third Avenue. AIGFP’s first significant deal, made in July 1987, was a $1 billion interest-rate swap with the Italian government.

– In its first 6 month of existence, the unit earned more than $60 million. Under the agreement that Greenberg and Sosin had signed, 38 percent of that went immediately to AIGFP, with the remaining 62 percent going to AIG proper. Crucially, the agreement also called for AIGFP received its profits up front, even though its deals generally took years to play out. AIG itself, not AIGFP, would be on the hook down the road if things went wrong. This arrangement would be modified, but only partially, after Sosin left in 1993.

Picture Subject- AIGFP soon moved to a swanky Madison Avenue office. A few years later, it would relocate again to Wilton, Conn, which remains the unit’s headquarters today.

– By 1990, AIGFP had expanded, opening offices in London, Paris and Tokyo.

– In 1993, Sosin left AIGFP, in part thanks to a strained relationship with Greenberg. (He got a reported $150 million payout). Tom Savage — a Midwestern math whiz who had joined AIGFP in 1988, after beginning his career at First Boston writing computer models for collateralized mortgage obligations, the very instruments that would later help cause the current crisis — soon took over as CEO.

– By that year, AIGFP employed 125 people, and was consistently raking in more than $100 million each year.

– By 1998, the unit had a revenue of $500 million. But it still had never made a single credit default swap.

The Seed Of Ruin Is Planted

– That year, JP Morgan approached AIG, proposing that, for a fee, AIG insure JP Morgan’s complex corporate debt, in case of default. According to computer models devised by Gary Gorton, a Yale Business Professor and consultant to the unit, there was a 99.85 percent chance that AIGFP would never have to pay out on these deals. Essentially, this would happen only if the economy went into a full-blown depression, in which case, the AIGers believed, the counter-parties would be wiped out, and therefore would hardly be in a position to demand payment anyway. With the backing of Cassano, then the COO, Savage greenlighted the deals. Credit default swaps were born.

– In 2000, Congress passed the Commodity Futures Modernization Act, which further reduced the already weak regulation of derivatives like credit default swaps*.

– Later that year, Cassano, now based in London, who in addition to serving as COO had been running AIGFP’s Transaction Development Group, replaced Savage as CEO. Cassano, the scrappy son of a Brooklyn cop, was no expert in the sophisticated computer models that assessed risk, but he had a gift for credit and accounting, and a fierce drive to succeed. At this time, the unit brought in $1 billion a year, and had 225 employees. By 2005, it would have 400.

– In 2002, the Justice Department charged that AIGFP had illegally helped another firm, PNC Financial Services, to hide bad assets from its books. To do so, AIGFP had set up a separate company, known as a “special purpose entity” to take on the assets. It had violated securities law, the Feds alleged, by setting up sham “companies” to invest in the entities, making them appear real. In 2004, AIG settled the charges by paying an $80 million fine, and gave back over $45 million in fees and interest it had earned on the deal. By the terms of its “deferred prosecution” agreement, it was placed on a short leash by the Justice Department. There is no evidence that anyone at AIGFP was formally sanctioned as a result of the episode.

– In March 2005, Greenberg, who had run AIG since 1968, stepped down as CEO, amid an investigation by New York Attorney General Eliot Spitzer into questionable accounting practices at the firm. Though the issue was unrelated to AIGFP, the unit would soon feel the ripple effects: the credit ratings agencies responded to Greenberg’s departure, and the allegations of irregularities, by downgrading AIG’s rating from AAA to AA. That, in turn triggered provisions in some of AIGFP’s credt default swaps, requiring AIG proper to over $1 billion in collateral for the deals. It was the beginning of the end.

– Later that year, an AIGFP exec named Eugene Park took a close look at the firm’s credit default swaps portfolio, and became alarmed. Many of the CDOs that were being insured contained too large a proportion of sub-prime mortgages, meaning the risk of default was high if the housing market collapsed. And with AIG proper’s credit rating having been downgraded, there was an increased chance that it would have to come up with collateral to cover those bets. Park told Cassano and others about his concerns.

– In response, Cassano worked with researchers from the investment banks to assess the risk form subprime mortgages, and decided in late 2005 it was time to stop making credit default swaps. But he couldn’t undo the nearly $80 billion worth of collateralized debt obligations that AIGFP had made swaps on that were already on its books*.

– Still, as late as August 2007, Cassano was sanguine about the deals, telling investors on a conference call: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.”

Things Fall Apart

Picture Subject- But that same month, with the housing market collapsing and sub-prime assets plummeting in value, Goldman Sachs demanded $1.5 billion in collateral from AIG, to cover the mortgage-backed securities that AIG’s credit default swaps had insured. Under the terms of its contract, AIGFP was required to post more collateral than it would have had its credit rating remained at AAA. By October, it had posted almost $2 billion, and other counter-parties were beginning to make their own collateral demands.

-Between early October and mid November, AIG’s stock price fell 25 percent. That month, AIGFP reported that its swaps portfolio had lost $352 million. A month later, Cassano put the figure at $1.1 billion

– Late that month, Pricewaterhouse Coopers, AIG’s auditing firm, told AIG CEO Martin Sullivan that no one knew whether AIGFP’s valuation of its derivatives portfolio was accurate. That process had been led by Casssano, who, it appears, had shut out the firm’s internal accountant, Joseph St. Denis. (St. Denis would describe Cassano’s high-handed behavior and unwillingness to allow AIGFP’s transactions to be properly audited, in a letter (pdf) to congressional investigators sent the following year.)

– And yet, Cassano and Sullivan were continuing to paint a rosy picture for investors. At a December 5 presentation, Cassano declared: “It is very difficult to see how there can be any losses in these portfolios.” Sullivan added: “”AIG has accurately identified all areas of exposure to the US residential-housing market … we are confident in out markets and the reasonableness of our valuation methods.” This presentation is currently being scrutinized by the Feds as evidence of possible fraud.

– In February 2008, AIG announced estimated losses of $11.5 billion, and that it had posted $5.3 billion in collateral.

– The following day, Sullivan announced that Cassano would step down, effective March 31. Only later, during a congressional investigation, did it come out that Cassano would get a $1 million a month consulting contract (the contract was cancelled in September 2008). It was also revealed that Cassano had made $43.6 million in salary and bonuses in 2006, and $24.2 million in 2007.

– That summer, it was reported that the Justice Department was investigating AIGFP for possible criminal fraud. The UK’s Serious Fraud Office would later announced its own probe.

Picture Subject- In September 2008, AIG executives learned that the ratings agencies planned to downgrade the company’s rating again. That would trigger more collateral calls, which AIG knew it couldn’t begin to cover. Desperate negotiations to keep the company afloat — including a possible $75 billion bridge loan from Goldman and JP Morgan, both major counter-parties on the credit default swaps — ensued. Tim Geithner, then the head of the New York fed, called in. But in the following days, it became clear that AIG’s level of exposure to its credit default swap losses was higher than anyone had yet understood. On Sept 16, the Federal Reserve Board, announced that it would take a nearly 80 percent equity stake in AIG — effectively taking over the firm — and would provide an $85 billion “loan”.

– In October 2008, Gerry Pasciucco, a vice chair at Morgan Stanley, was brought in to wind down AIGFP. The unit, Pasciucco found, had $2.7 trillion worth of swap contracts and positions, and 50,000 outstanding trades with 2000 different firms, and 450 employees in six offices around the world.

– In March 2009, amid outrage over multi-million dollar bonuses for those employees, AIGFP would post armed guards outside Wilton headquarters.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3225213/AIG-trail-leads-to-London-casino.html

AIG trail leads to London ‘casino’
Since 1987 the American financier Joseph Cassano has divided his time between London and Connecticut, where AIG, the world’s largest insurance company, runs a subsidiary called AIG Financial Products.

By Peter Koeing
Last Updated: 10:29PM BST 18 Oct 2008

For most of those 21 years life has been good for the bespectacled, intellectual-looking Cassano.

The Wall Street veteran rose to run his part of the insurer, AIG Financial Products. When in London he commuted from a company flat behind Harrods to his unit’s office at 1 Curzon Street in Mayfair’s hedge fund alley.

Cassano’s pay over the past eight years, according to US Congressional records, totalled $280m (£162m).

Then at the end of 2007 Cassano’s fortunes changed. The company’s accountants changed the basis on which they valued much of the collateral held by its units. Some half a trillion dollars worth of credit default swaps written by AIG Financial Products were marked down.

Credit default swaps, or CDSs, are quasi-insurance products bought by investors seeking protection against defaults on mortgage-backed securities and other credits.

In contrast to the remarkable profits it had tallied until 2007, the AIG subsidiary headed by Cassano began to report quarterly losses. The unit went from being star performer to vortex of a gathering nightmare.

On April 1 Cassano was nudged into retirement. In keeping with the bubble-time executive compensation practises established in the City and on Wall Street, however, the blow was softened. Cassano was allowed to continue using the company flat behind Harrods. He was given a consultancy and, according to former AIG chief executive Martin Sullivan, testifying to the US Congress, helped AIG unwind the rapidly devaluing CDSs held by AIG Financial Products. Cassano’s pay for this work was $1m a month for nine months.

“The question,” said Henry Waxman, the US Congressman chairing an October 7 Washington hearing into AIG, “was whether AIG’s executive compensation practices were fair and appropriate.”

None of this would seem to be of particular concern to the British public beyond AIG’s role generally in the world financial meltdown.

On September 16 the American insurer suffered a liquidity crisis following the downgrade of its credit rating. AIG had to beg the Federal Reserve Bank for an $85bn credit facility in return for giving up 80 per cent of its equity to the US government. This poured fuel on the fire ignited by the bankruptcy of Wall Street investment bank Lehman Brothers a day earlier.

A Sunday Telegraph investigation has determined, however, that there is a row brewing between the scores of regulators responsible for AIG’s activities in 130 countries. In the forefront of this row stands Britain’s financial regulator, the Financial Services Authority.

The operations of Cassano and his colleagues at 1 Curzon Street are attracting the attention of government officials in Washington, New York and Paris as well as London. Bumbling by the FSA, according to regulators in other countries, may have played an instrumental role in sparking the credit crunch that brought the global financial system to the brink of collapse.

This is already making political waves. Distancing himself and his government from the bad news, the Prime Minister Gordon Brown has repeatedly contended the financial crisis was made in the USA – where poor Americans in Rust Belt cities like Cleveland and Detroit fell behind on mortgage payments.

The reality has always been more complex. A financial chain links American sub-prime mortgages to the packagers and sellers of those mortgages in the City, as well as on Wall Street.

Now the role of AIG’s London office, and the FSA in overseeing what went on inside it may change all that.

On Friday, the Conservative Party Treasury spokesman Philip Hammond called for a public inquiry into the FSA’s oversight of AIG Financial Products in Mayfair. “We must not allow London to become a bolthole for companies looking for a place to conduct questionable activities,” he said.

“This sounds like a monumental cock-up by the FSA,” said Lib Dem shadow chancellor Vince Cable. “It is deeply ironic,” he added, that Brown was in Brussels last week calling for tougher global financial regulation just as the scandal over the FSA’s role in one of the key regulatory failures at the root of the global panic emerged as an international issue.

“We need an inquiry to establish what happened with the FSA’s regulation of AIG’s London operation,” Cable said.

Since AIG’s collapse in September, insurance regulators in various jurisdictions have played pass the parcel, each regulator seeking to distance itself from the CDS firm’s London business, according to politicians in Washington, such as the US Congress’s Waxman, as well as here.

The spectacle is reminiscent of the regulatory response to the collapse in the early 1990s of BCCI, a bank with operations in London, Luxembourg and the Middle East. BCCI regulators in its multiple jurisdictions, including London, dodged responsibility for not spotting BCCI’s $10bn fraud by blaming each other.

On Friday, Adair Turner, the FSA’s chairman, declined to answer questions about AIG’s London operation.

Meanwhile, people close to the City regulator explained that AIG Financial Products, the unit responsible for the insurer’s failure, fell outside its jurisdiction.

Under FSA rules, these people said, AIG Financial Products was deemed an “internal treasury operation” and, like the internal treasury operations of other companies, was not regulated.

But the FSA does have regulatory oversight responsibility for a number of AIG units in London, including a company called AIG FP Capital Management registered at 1 Curzon Street.

People close to the FSA said AIG FP Capital Management is a separate company from AIG Financial Products and is not involved in the business of creating credit default swaps.

There is little doubt, nevertheless, that US lawmakers consider London an epicentre of the AIG Financial Products disaster. During the hearing into the causes and effects of the AIG bail-out on October 7, the US House of Representatives Oversight Committee, led by Congressman Waxman, politicians pmentioned London a dozen times. California Congresswoman Jackie Speier referred to AIG’s Mayfair business as “the casino in London”.

Testimonies by former AIG chief executives Martin Sullivan and Robert Willumstad, along with a New York Times article on September 28, sketch the story of the AIG Financial Products unit in London.

It was originally staffed by executives, including Cassano, from defunct Wall Street investment bank Drexel Burnham Lambert. Drexel’s legendary junk bond king, Michael Milken, was investigated for insider trading in the 1980s and pleaded guilty to six charges.

As New Labour came to power in 1997 and established the FSA with a mandate to avoid regulatory failures such as BCCI, Cassano rose to the top of the AIG subsidiary where he worked.

By the end of last year AIG held $562bn of CDS contracts on its books, and in their October 7 testimony before the House Oversight Committee company executives acknowledged that a cockpit for this business was 1 Curzon Street.

In contrast to standard practice, however, AIG Financial Products did not hedge its exposure to a possible fall in the CDS market. In a footnote to AIG’s 2007 accounts spotted by Forbes magazine, the company declared: “In most cases AIGFP does not hedge its exposures to credit default swaps it has written.”

Last November, when AIG’s accountants asked the insurer to change the way it valued CDS’s, the comparatively small base of capital on which AIG Financial Products had built a mountain of business became visible. This began the unravelling that led to AIG’s central role in sparking the global financial crisis.

To date, no British authorities have said anything about AIG. In the US, in contrast, there are multiple investigations. In addition to the October 7 Congressional hearing into AIG, the insurer’s London business is now under scrutiny by the Office of Thrift Supervision in Washington and the New York State Department of Insurance in Manhattan.

Last week New York State Attorney General Andrew Cuomo sent a letter to AIG informing the company it was under investigation for “irresponsible and damaging” expenditures, among other things, for executive compensation packages that were not cut even as AIG drew down on the Federal Reserve’s $85bn credit facility to keep itself afloat.

Although the FSA will not comment on AIG Financial Products, there are indications from America that it is belatedly looking into the unit’s operations.

“There have been meetings and conversations” between Washington’s Office of Thrift Supervision and the FSA,” said Janet French, a spokeswoman for the Washington agency.

A person close to the New York State Department of Insurance said: “You can be certain there have been talks with the FSA.”

AIG did not return phone calls to its New York headquarters. Cassano did not return a call to his Connecticut home.

In the weeks ahead the British public may hear more about the obscure AIG business at 1 Curzon Street – if only because it links the financial crisis to the Prime Minister by way of the City regulator he created when he became Chancellor in 1997.

“The Prime Minister has used the City as his milch cow,” said Tory Treasury spokesman Hammond.

“He borrowed from it. He taxed it. Now, it appears, he allowed it to operate without adequate regulation.”

http://boombustblog.com/20080611417/Doo-Doo-32-Bank-Drill-Down-1.5-The-Forensic-Analysis-of-Wells-Fargo.html
Doo Doo 32 Bank Drill Down 1.5: The Forensic Analysis of Wells Fargo

Written by Reggie Middleton
Wednesday, 11 June 2008

**************** Statistical arbitrage
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In the world of finance and investments statistical arbitrage is used in two related but distinct ways:

* In academic literature, statistical arbitrage is opposed to (deterministic) arbitrage. In deterministic arbitrage a sure profit can be obtained from being long some securities and short others. In statistical arbitrage there is a statistical mispricing of one or more assets based on the expected value of these assets. (For a simple example, consider a game in which one flips a coin and collects $1 on heads or pays $0.50 on tails. In any single flip it is uncertain if one will win or lose money. However, in the statistical sense, there is an expected value of $1×50% – $0.50×50% = $0.25 for each flip. According to the law of large numbers, the mean return on actual flips will approach this expected value as the number of flips increases. This is precisely the way in which a gambling casino makes a profit.) In other words, statistical arbitrage conjectures statistical mispricings or price relationships that are true in expectation, in the long run when repeating a trading strategy.

* Among those who follow the hedge fund industry statistical arbitrage refers to a particular category of hedge funds (other categories include global macro, convertible arbitrage, and so on). In this narrower sense Statistical arbitrage is often abbreviated as StatArb. According to Prof. Andrew Lo, StatArb “refers to highly technical short-term mean-reversion strategies involving large numbers of securities (hundreds to thousands, depending on the amount of risk capital), very short holding periods (measured in days to seconds), and substantial computational, trading, and IT infrastructure”.

[edit] StatArb, the trading strategy

As a trading strategy, statistical arbitrage is a heavily quantitative and computational approach to equity trading. It involves data mining and statistical methods, as well as automated trading systems.

Historically StatArb evolved out of the simpler pairs trade strategy, in which stocks are put into pairs by fundamental or market-based similarities. When one stock in a pair outperforms the other, the poorer performing stock is bought long with the expectation that it will climb towards its outperforming partner, the other is sold short. This hedges risk from whole-market movements.

StatArb considers not pairs of stocks but a portfolio of a hundred or more stocks (some long, some short) that are carefully matched by sector and region to eliminate exposure to beta and other risk factors. Portfolio construction is automated and consists of two phases: in the first or ‘scoring’ phase each stock in the market is assigned a numeric score or rank that reflects its desirability; high scores indicate stocks that should be held long and low scores indicate stocks that are candidates for shorting. The details of the scoring formula vary and are highly proprietary, but generally (as in pairs trading) they involve a short term mean reversion principle so that, e.g., stocks that have done unusually well in the past week receive low scores and stocks that have underperformed receive high scores. In the second or ‘risk reduction’ phase the stocks are combined into a portfolio in carefully matched proportions so as to eliminate (or at least greatly reduce) market and factor risk. This phase often uses commercially available risk models like MSCI Barra/APT/Northfield/Axioma to constrain or eliminate various risk factors[1].

Broadly speaking, StatArb is actually any strategy that is bottom-up, beta-neutral in approach and uses statistical/econometric techniques in order to provide signals for execution. Signals are often generated through a contrarian mean-reversion principle, but can also be formed by lead/lag effects, extreme psychological barriers[citation needed], corporate activity, as well as short-term momentum. This is usually referred to as a multi-factor approach to StatArb.

Because of the large number of stocks involved, the high portfolio turnover and the fairly small size of the effects one is trying to capture, the strategy is implemented in an automated fashion and great attention is placed on reducing trading costs.

Statistical arbitrage has become a major force at both hedge funds and investment banks. Many bank proprietary operations now center to varying degrees around statistical arbitrage trading.

[edit] Other forms of statistical arbitrage

Volatility arbitrage is a form of statistical arbitrage in which options, rather than equities, are the primary vehicle of the strategy.

[edit] Risks

In the general sense, statistical arbitrage only is demonstrably correct as the amount of trading time approaches infinity and the liquidity, or size of an allowable bet, approaches infinity. To put it another way, it does not take into consideration the same problems as the martingale betting system. Over any finite period of time, a series of low probability events may occur that impose heavy short term losses. If those short term losses are greater than the liquidity available to the trader, default may even occur, as in the case of Long-Term Capital Management.

Statistical arbitrage is also subject to model weakness as well as stock-specific risk.

The statistical relationship on which the model is based may be spurious, or may break down due to changes in the distribution of returns on the underlying assets. Factors which the model may not be aware of having exposure to could become the significant drivers of price action in the markets, and the inverse applies also. The existence of the investment based upon model itself may change the underlying relationship, particularly if enough entrants invest with similar principles. The exploitation of arbitrage opportunities themselves increases the efficiency of the market, thereby reducing the scope for arbitrage, so continual updating of models is necessary.

On a stock-specific level, there is risk of M&A activity or even default for an individual name. Such an event would immediately end any historical relationship assumed from empirical statistical analysis.

[edit] Events of summer 2007

During July and August 2007 a number of StatArb (and other Quant type) Hedge funds experienced significant losses at the same time (which is difficult to explain unless there was a common risk factor). While the reasons are not yet fully understood, several published accounts blame the emergency liquidation of a fund that experienced customer withdrawals or margin calls. By closing out its positions quickly, the fund put pressure on the prices of the stocks it was long/short. (The fund is not identified in the published articles but is thought by some to be AQR or GSAM). Because other StatArb funds had similar positions (due to the similarity of their alpha models and risk-reduction models) the other funds experienced adverse returns.[2]

In a sense, a stock “heavily involved in StatArb” is itself a risk factor, one that is new and thus was not taken into account by the StatArb models.

These events showed that StatArb has developed to a point where it is a significant factor in the marketplace, that existing funds have similar positions and are in effect competing for the same returns. Simulations of simple StatArb strategies by A. Lo show that the returns to such strategies have been reduced considerably from 1998 to 2007 (presumably because of competition).

********* Deferred compensation

It is an arrangement in which a portion of an employee’s income is paid out at a date after which that income is actually earned. Examples of deferred compensation include pensions, retirement plans, and stock options. The primary benefit of most deferred compensation is the deferral of tax to the date(s) at which the employee actually receives the income.

********** Unfunded Obligations

Retiring Unfunded Obligations
by Ward Bower
October 2004

Unfunded obligations are off-balance sheet liabilities to departed partners secured by contract. In professional corporations they generally take the form of deferred compensation so they are deductible to the firm.
Rationale

Unfunded obligations (UOs) are created for a variety of reasons:

* To reward founders and early partners for the entrepreneurial risk and investment in starting and growing the firm.
* To reward departing partners for the value of WIP and AR left with the firm (offset by working capital initially required until the lawyer became economically viable when joining the firm).
* To provide a source of income in retirement, especially in the era before tax deferred retirement funding schemes became available, with time to build a meaningful retirement fund.
* To give retiring partners reason to help ensure the ongoing success and survival of the firm after their departure.

Altman Weil survey data shows that fewer firms today have such arrangements than five or ten years ago, fewer than even three years ago. About 28 percent of firms participating in Altman Weil’s 2002 survey have such an arrangement. UOs are quantified in a number of ways, based on AR and WIP at date of retirement, compensation points. Final average earnings formulae, or ongoing revenues from the partner’s clients after retirement.
Impact on the Firm

The move to reduce or eliminate UOs comes from the economic burden on the “surviving” partners, as UOs are paid from then-current earnings of the firm, reducing partner incomes. UOs have caused some firms to dissolve rather than carry this burden. They also make merger difficult where the other firm does not have such an obligation.

Firms with a UO seek to reduce the one-year impact of the UO by “capping” the amount of UO payments in any given year to a percentage of either gross fee revenues (typically one to two percent) or net income (typically three to six percent). The delicate balancing act is to establish an UO which is bearable by the firm so its receipt is reasonably assured to the departed partner ¾ i.e., not so burdensome as to cause partners to withdraw or the firm to collapse.
Reducing/ Eliminating the UO

Many firms in recent years have reduced or eliminated altogether the UO. Generally that requires sacrifice on the part of individual partners who may view the UO as a contractual obligation on which they are relying as part of their retirement income. This issue is more sensitive the more senior the partner, so it is always best to address it sooner rather than later.

Reduction/ Elimination of the UO

Law firms in recent years have employed many schemes to reduce or eliminate the UO. They include:

* Use of life insurance with cash values applied to offset the UO, or to reimburse the firm for the UO previously paid to the partner on death, or to transfer to the retiree in place of his/ her UO.
* Use of annuities to fund the projected UO, even though the premiums are not deductible.
* Use of “rabbi trusts” as a funding vehicle.
* Considering “excess profits” (e.g., partner incomes in excess of 120 percent of prior year incomes, for example) as offsets against UOs ultimately due.
* Offsetting UOs by firm contributions (or a percentage of them) to tax-deferred retirement plans (401k’s, defined contribution plans, etc.), even though it is arguably the partner’s “own money” used for such a purpose.
* “Grandfathering” more senior partners and cutting off the UO entirely for more junior partners (easier where there is an age gap).
* Diminishing the benefit over time ¾ e.g. 100 percent of UO to partners retiring in the next two years, 75 percent in two to five years, 50 percent in five to ten years, etc.

The method selected will depend on the specific circumstances of the firm ¾ burden, amounts involved, economics, demographics, sources of tax-deferred retirement funds, etc. The key to reducing this burden is to obtain universal understanding of the issue and reasonable concessions by partners for the long term good of the firm, or even for its survival. In recent years some firms have chosen to recast their UO as a deciding percentage of fees received from clients of the retired partner, providing an incentive for partners to transition their client relationships so that clients remain with the firm.

(Lewin Group is) part of Ingenix, which is owned by United Healthcare Group, the insurance behemoth that has been buying up insurance companies left and right, expanding its reach into just about every segment of the health-insurance market. Its flagship, UnitedHealthcare, helps make it the largest health insurer in the country. It’s a safe bet that United is not too keen on a public plan that might shrink its business.

Ya! Very reliable source of “researched” study. The pinnacle of journalism is being practiced by Washington Times. You have lost the credibility that you never had.

http://www.vanityfair.com/business/features/2009/11/too-big-to-fail-excerpt-200911?printable=true

Wall Street’s Near-Death Experience
With the implosion of Lehman Brothers, in September 2008, the realization dawned: Morgan Stanley and Goldman Sachs could be next. In an excerpt from his new book, the author reveals the incredible scramble that took place—desperate phone calls, seat-of-the-pants merger proposals, flaring tempers—as Washington got tough and Wall Street titans Lloyd Blankfein and John Mack fought for survival.
By Andrew Ross Sorkin
November 2009

Excerpted from Too Big to Fail, by Andrew Ross Sorkin, to be published this month by Viking, a member of Penguin Group (USA) Inc.; © 2009 by the author. This account is based on hundreds of hours of interviews with dozens of the participants, many of whom agreed to be interviewed on the condition that they not be identified as sources.
Day One
Wednesday, September 17, 2008: After Lehman and A.I.G.

When Tim Geithner, president of the Federal Reserve Bank of New York, began his run that morning along the southern tip of Manhattan and up the East River just after six, the sun had yet to come up. He was tired and stressed, having slept only several hours in one of the three tiny, grubby bedrooms in the New York Fed’s headquarters.

As he stared at the Statue of Liberty and the first of the morning’s commuter ferries from Staten Island gliding across the harbor, he tried desperately to clear his mind. For five days his brain had been trapped in a maze of numbers—huge, inconceivable, abstract numbers, ranging in the span of 24 hours from zero for Lehman to $85 billion for A.I.G. Eighty-five billion dollars was more than the annual budgets of Singapore and Taiwan combined; who could even begin to understand a figure of that size? Geithner hoped that the sum would be sufficient to rescue the insurance giant from bankruptcy—and that the financial crisis would finally be over.

Andrew Ross Sorkin on wrangling Wall Street’s C.E.O.’s. Plus: How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Illustration by Brad Holland.

Those ferries, freighted with office workers, gave him pause. This is what it was all about, he thought, the people who rise at dawn to go to their jobs, all of whom rely to some extent on the financial industry to help power the economy. Never mind the staggering numbers. Never mind the ruthless complexity of structured finance and derivatives, or the million-dollar bonuses of those who had made bad bets. This is what saving the financial industry is really about: protecting ordinary people with ordinary jobs.

But as he passed the South Street Seaport and then went under the Brooklyn Bridge, he inadvertently began thinking about what fresh hell the day would bring.

Due to disastrous bets on Lehman paper, the giant Reserve Primary Fund had broken the buck a day earlier, causing an investor run on the money-market funds. Between that, Geithner thought, and billions of dollars of investors’ money locked up inside the now bankrupt Lehman Brothers, that meant only one thing: the two remaining broker-dealers—Morgan Stanley and Goldman Sachs—could actually be next.

The panic was already palpable in John Mack’s office at Morgan Stanley’s Times Square headquarters. Sitting on his sofa with his lieutenants, Walid Chammah, 54, and James Gorman, 50, drinking coffee from paper cups, Mack was railing: the major news on Wednesday morning, he thought, should have been the strength of Morgan Stanley’s earnings report, which he had released the afternoon before, a day early, to stem any fears of the firm’s following in Lehman’s footsteps. His stock had fallen 28 percent in a matter of hours on Tuesday, and he decided he needed to do something to turn it around. The quarterly earnings report had been a good one—Morgan had announced $1.43 billion in profits, down a mere 7 percent from the quarter a year earlier. But the headline on The Wall Street Journal was gnawing at him: goldman, morgan now stand alone; fight on or fold? And as the futures markets were already indicating, his attempt to show strength and vitality had largely failed to impress.

Apart from the general nervousness about investment banks, he was facing a more serious problem than anyone on the outside realized: at the beginning of the week, Morgan Stanley had had $178 billion in the tank—money available to fund operations and lend to its hedge-fund clients. But in the past 24 hours, more than $20 billion of it had been withdrawn by anxious hedge-fund clients, in some cases closing their prime-brokerage accounts entirely.

“The money’s walking out of the door,” Chammah told Mack.

“Nobody gives a shit about loyalty,” Mack complained. The question was: how much more could they afford to let go? “We can’t do this forever,” Chammah said.

While Mack was beginning to believe that the hedge funds were conspiring against the firm—“This is what they did to Dick [Fuld, of Lehman Brothers]!” he roared, referring to the Monday implosion of Lehman—there was fresh evidence that some of them actually did need the cash. Funds that had accounts at Lehman’s London office couldn’t get at them and came begging to Morgan Stanley and Goldman.

And Morgan needed to keep paying out the money. It was essential in the midst of a crisis that the firm not display even the slightest sign of panic, or the entire franchise would be lost. Under normal circumstances, Mack, 63, was unflappable, but he was starting to come unwound.

‘T his is an economic 9/11!” There was chilling silence in Treasury Secretary Hank Paulson’s office as he spoke. Nearly two dozen Treasury staffers had assembled there Wednesday morning, sitting on windowsills, on the arms of sofas, or on the edge of Paulson’s desk, scribbling on legal pads. Paulson was seated in a chair in the corner, slouching, nervously tapping his stomach. He had a pained look on his face as he explained to his inner circle at Treasury that in just the past four hours the crisis had reached a new height, one he could compare only to the World Trade Center attacks, seven years earlier, almost to the week. While this time no lives may have been at stake, companies with century-long histories and hundreds of thousands of jobs lay in the balance.

The entire economy, he said, was on the verge of collapsing. Paulson was no longer worried about just investment banks; he was worried about General Electric, the world’s largest company and an icon of American innovation. Jeffrey Immelt, G.E.’s C.E.O., had told him that the conglomerate’s commercial paper, used to fund its day-to-day operations, could stop rolling. Paulson had also heard murmurs that JPMorgan Chase had stopped lending to Citigroup; that Bank of America had stopped making loans to McDonald’s franchisees; that Treasury bills were trading for less than 1 percent interest, as if they were no better than cash, as if the full faith of the government had suddenly become meaningless.

Paulson knew this was his financial panic. The night before, chairman of the Federal Reserve Ben Bernanke had agreed it was time for a systemic solution; deciding the fate of each financial firm one at a time wasn’t working. It had been six months between the implosions of Bear Stearns and Lehman, but if Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that.

And so Paulson stood in front of his staff in search of a holistic solution, a solution that would require intervention. He still hated the idea of bailouts, but now he knew he needed to succumb to the reality of the moment. “The only way to stop this thing may be to come up with a fiscal response,” he said.

‘It’s ridiculous that I can’t deal with Goldman at a time like this!” Paulson complained to his general counsel, Bob Hoyt. Paulson was supposed to take part in a three p.m. call with Bernanke, Geithner, and S.E.C. chairman Christopher Cox to discuss Goldman Sachs and Morgan Stanley, but unless he could get a waiver, he would be unable to participate.

With Morgan Stanley on the ropes, Paulson had been growing increasingly worried about Goldman, where he had worked for 30 years and where he was C.E.O. from 1999 to 2006. If Goldman were to topple, it would, he believed, represent a complete destruction of the system. He’d had enough of recusing himself. Part of him regretted signing the original ethics letter agreeing not to get involved in any matter related to Goldman.

Former Treasury secretary and Goldman C.E.O. Henry Paulson. By Nigel Parry/CPi Syndication.

Geithner had raised this very issue back in March after the Bear Stearns deal. “You know, Hank, if another one of these banks goes,” he said, “I don’t know who would have the ability to take them over other than Goldman, and we have to do something about your waiver-recusal situation because I don’t know how we can do one of these without you.”

Given the extreme situation in the market, Hoyt told Paulson he thought it was only fair that he try to seek a waiver; Hoyt had in fact already drafted the material needed to request one. Paulson appreciated that the “optics” of a waiver to engage with his former employer were problematic, but he hoped it would remain a secret and he and Hoyt discussed keeping it confidential. Hoyt reached out to Fred F. Fielding, counsel to the White House and a longtime Washington hand, who knew his way around the system, and to Bernard J. Knight Jr., the D.A.E.O., or designated agency ethics official, at Treasury. Given the gravity of the situation, they quickly accepted Hoyt’s recommendation. Unknown to the public, Paulson was now officially free to help Goldman Sachs.

Kevin Warsh, a 38-year-old governor at the Federal Reserve, whose office was a few doors down from that of his boss, Ben Bernanke, was having his own worries over Morgan Stanley. He had worked as an M&A banker there six years earlier. He could tell that his former firm was quickly losing the confidence of the marketplace. To him, there was an obvious solution to its problems: Morgan Stanley needed to buy a large bank with deposits. His top choice? Wachovia, a commercial bank with a large deposit base that itself was struggling. Wachovia’s 2006 acquisition of Golden West, the California-based mortgage originator, was turning into a catastrophe, saddling the bank with a giant pile of bad debt that was beginning to reveal itself. After getting clearance to make contact with his old employer, based on an “overwhelming public interest,” Warsh contacted Wachovia C.E.O. Bob Steel and instructed him to call Mack in 20 minutes.

“Very interesting times,” Steel said to Mack when they reached each other. “I imagine you’ve already heard from Kevin. He told me he thought we should connect.”

Steel went on, intentionally keeping the discussion vague until he gauged Mack’s intentions: “There might be an opportunity for us. We’re thinking about a lot of things. I think this could be the right time to talk. But we’d need to move fast.”

“I could see something,” Mack replied, intrigued but noncommittal. “What’s your timing?”

“We’re moving in real time,” Steel said.

For Steel, a Morgan Stanley deal happened to be both commercially and personally attractive. It could present an elegant solution to Morgan’s succession problems down the road and could be Steel’s big opportunity to finally run a top Wall Street firm.

After speaking with Steel, Mack called Robert Scully, his top deal-maker, and told him about the conversation. Scully had his doubts; he didn’t know much about Wachovia’s books, but what he did know alarmed him. He agreed, however, that at this point no options could be automatically ruled out. Scully in turn called Rob Kindler, a vice-chairman. In the relatively straitlaced banker culture of Morgan Stanley, Kindler was an outlier—loud, indiscreetly blunt, and predisposed to threadbare old suits. Despite his idiosyncrasies, when it came to deal-making, his advice was highly valued. Kindler didn’t initially like the notion of a Wachovia merger, either, he told Scully, and took a reflexively cynical view. “Let’s put this in context for a moment: Bob Steel comes from Goldman; Wachovia’s investment bankers are Goldman; Hank Paulson is obviously from Goldman. The only reason we’re having this meeting with Wachovia is because Goldman won’t do the deal!”

Scully had been thinking much the same thing, but he and Kindler got Jonathan Pruzan, co-head of Morgan Stanley’s financial-institutions practice, to start running the numbers on Wachovia. The obvious concern was its gargantuan subprime exposure, some $122 billion worth. As the Wachovia due diligence got under way, Mack got a callback from Citigroup C.E.O. Vikram Pandit, whom he’d telephoned earlier that morning after Citigroup’s vice-chairman, Stephen Volk, had hinted they’d be open to a merger. Pandit delivered what amounted to a soft no on the merger talks. “The answer is no. The timing isn’t right, but at some point we’d like to do something.”

Mack clicked off, exasperated. Wachovia was nobody’s idea of a dream date, but at the moment it was the only girl at the dance.

By midafternoon, Morgan Stanley’s stock had fallen 42 percent. The rumors were flying: the latest gossip had the company as a trading partner with A.I.G., with more than $200 billion at risk. The gossip was inaccurate, but it didn’t matter; hedge funds were now seeking nearly $50 billion in redemptions. John Mack was meeting with his brain trust. “It’s outrageous what’s going on here,” Mack almost shouted, arguing that the raid on Morgan Stanley’s stock was “immoral if not illegal.” Intellectually he understood that short-sellers kept the market more efficient—after all, many were his clients—but at risk now was his own survival.

Colm Kelleher, Morgan Stanley’s 51-year-old C.F.O., was more fatalistic—the short-sellers couldn’t be stopped, he believed, or even necessarily blamed. They were market creatures, doing what they had to do to survive. “They are cold-blooded reptiles,” he told Mack. “They eat what’s in front of them.”

Mack had just gotten off the phone with one of his closest friends, Arthur J. Samberg, the founder of Pequot Capital Management, then with $4 billion under management, who had called about withdrawing some money.

“Take your money,” Mack told him, “and you can tell all your peers to take their credit balances out.”

Mack believed negative speculation was purposely being spread by his rivals and repeated uncritically on CNBC. He was so furious with what he believed was “bullshit coverage” that he called to complain to Jeff Immelt. (G.E. owns CNBC as part of its NBC Universal unit.)

Tom Nides, Mack’s chief administrative officer, thought they needed to go on the offensive. He encouraged his boss to start working the phones in Washington and impress upon them the need to put in place a ban on short-selling. “We’ve got to shut down these assholes!” he told Mack.

Desperate for an ally, Mack contacted his most serious rival, Lloyd Blankfein, of Goldman. “Lloyd, you guys are in the same boat as I am.” He asked Blankfein to appear on CNBC with him, as a show of force.

While the 53-year-old Goldman C.E.O. kept a television in his office, he was so disgusted with what he believed was CNBC’s Charlie Gasparino’s “rumor-mongering” that he had turned it off in protest. “That’s not my thing,” he told Mack. “I don’t do TV.”

As Goldman wasn’t in total crisis mode, Blankfein explained, he was disinclined to join Mack in a war on the shorts until he absolutely needed to.

Making little progress, Nides had another, perhaps shrewder, angle to play. He could call Andrew Cuomo, the New York State attorney general. Nides had a hunch that Cuomo might be willing to put a scare into the shorts. It was an easy populist message to get behind: Rich hedge-fund managers were betting against teetering banks amid a financial crisis.

“If you do this,” Nides told Cuomo, “we’ll come out and praise you.” Nides knew Mack would be reluctant—he’d be assailing his own clients—but this was a matter of survival.

‘What’s wrong?” Mack asked in alarm as Colm Kelleher walked into his office later in the day, his face ashen. “John, we’re going to be out of money on Friday,” Kelleher said with his staccato British inflection. He had been nervously watching the firm’s tank—its liquid assets—shrink, the way an airline pilot might stare at the fuel gauge while circling an airport, waiting for landing clearance.

Current Treasury secretary Timothy Geithner. By Ben Baker/Redux.

“That can’t be,” Mack said anxiously. “Do me a favor: go back to the financing desk—go through it again.”

Kelleher returned to Mack’s office 30 minutes later, less shaken, but only slightly. After finding some additional money trapped in the system between trades that hadn’t yet settled, he revised his prognosis: “Maybe we’ll make it through early next week.”
Day Two
Thursday, September 18, 2008: Fortress Goldman Under Attack

The panic at Goldman Sachs could no longer be denied. Perhaps the greatest sign of anxiety was the fact that Gary Cohn, Goldman’s co-president, who usually remained perched in his 30th-floor office, had relocated himself to the office of Harvey M. Schwartz, head of global-securities-division sales, who had a glass wall looking onto the trading floor. The door was left open; Cohn wanted to see and hear exactly what was going on.

Goldman’s shares opened down 7.4 percent. Investors were quickly beginning to believe the unthinkable: that Goldman, too, could falter. In two days, its share price had dropped from $133 to $108.

Every five minutes a salesman would tear into Schwartz’s office with news of another hedge fund announcing its plan to move its money out of Goldman, and would hand Cohn a piece of paper with the hedge fund’s phone number so he could try to talk some sense into them. With Morgan Stanley slowing down its payouts, some investors were now testing Goldman, asking for $100 million just to see if it could afford to pay. In every case, Cohn would wire the money immediately, concerned that if he didn’t the client would abandon the firm entirely.

Nevertheless, Stanley Druckenmiller, a George Soros acolyte worth more than $3.5 billion, had taken most of his money out earlier that week, concerned about the firm’s solvency. If word got around that a hedge-fund manager of Druckenmiller’s reputation had lost confidence in Goldman, that alone could cause a run. Cohn called him and tried to persuade him to return the money to the firm. “I have a long memory,” Cohn, who was taking this personally, told Druckenmiller, in whose honor he had even once hosted a charity cocktail party. “Look, the one thing I’m doing is I’m learning who my friends are and who my enemies are, and I’m making lists.”

Druckenmiller, however, was unmoved. “I don’t really give a shit—it’s my money!” he shot back. Unlike most hedge funds, Druckenmiller’s consisted primarily of his own money. “It’s my livelihood,” he said. “I’ve got to protect myself, and I don’t really give a shit what you have to say.”

“You can do whatever you want,” Cohn said in carefully measured tones. But, he added, “this will change our relationship for a long time.”

‘Listen, [JPMorgan Chase C.E.O.] Jamie [Dimon] just called me fishing around for something,” Colm Kelleher told John Mack midday Thursday as he marched into Mack’s office. “He said he was calling to see if he could be of help. It was strange.”

James Gorman, the firm’s co-president, had just reported receiving a similar call, Mack replied, and Geithner had phoned earlier to suggest that he talk to Dimon as a possible merger partner, too.

“It’s clear that, for him to be calling us, he wants to do a deal,” Kelleher said. “Jamie is always hanging around the hoop.… You know Jamie’s saying, ‘Let’s make friends with these guys before I eat them.’”

Mack was irritated by these suggestions; he didn’t particularly want to do a deal with Dimon, as he believed it would involve far too much overlap. But he decided to stop guessing what Dimon might be up to and ask him directly.

“Jamie, Geithner says I should call you,” Mack said abruptly when he reached Dimon on the phone a few minutes later. “Let’s get this out in the open: do you want to do a deal?”

“No, I don’t want to do a deal,” Dimon said flatly.

“Well, that’s interesting,” Mack retorted. “You’re calling my C.F.O. and you’re calling my president—why would you do that?”

“I was trying to be helpful,” Dimon repeated.

“If you want to be helpful, then talk to me. I don’t want you calling my guys,” Mack said, hanging up the phone.

Lloyd Blankfein, his top shirt button undone and tie slightly askew, looked at his computer screen and saw in dismay that his stock price had dropped 22 percent over the past several hours to $89.29.

In his e-mail in-box was a message from one of his traders saying that JPMorgan was trying to steal his hedge-fund clients by telling everyone that Goldman was going under. It was becoming a vicious circle.

Blankfein had been hearing these rumors for the past 24 hours, but he had finally had enough. He was furious. The rumormongering, he felt, had gotten out of control. And he couldn’t believe JPMorgan was trashing his firm to his own clients. He could feel himself becoming as anxious as Mack had sounded when they spoke the day before.

He called Dimon, too. “We’ve got to talk,” Blankfein began, then tried to calmly explain his problem. “I’m not saying you’re doing it, but there are a lot of footprints here.”

“Well, people may be doing something that I don’t know about,” Dimon replied. “But they know what I’ve said, which is that we’re not going after our competitors in the middle of all this.”

Blankfein, however, wasn’t buying this explanation. “But, Jamie, if they’re still doing it, you can’t be telling them not to!” Trying to get his point across, Blankfein, a movie buff, started doing his own rendition of A Few Good Men: “Did you order the Code Red? Did you say your guys would never do anything?” Dimon just listened patiently, eager not to get Blankfein even more wound up.

“Jamie, the point is, I don’t think you’re telling them to do this, but if you wanted to stop them in your organization, you could scare them into not doing it,” Blankfein said.

Even in its panicked state, Goldman was still Goldman, and Dimon didn’t want a war. Within half an hour he had his deputies Steve Black and Bill Winters send out a companywide e-mail: “We are operating as business as usual with Morgan Stanley and Goldman Sachs as counterparties. While they are both formidable competitors, during this period, we do not want anyone approaching their clients or employees in a predatory way.”

The 50th-floor office of Goldman’s fixed-income trading unit, in Lower Manhattan, was in near meltdown by lunchtime on Thursday. No trading was taking place, and the traders themselves were glued to their terminals, staring at the GS ticker as the market continued its swoon. Goldman’s stock dropped to $85.88, its lowest level in nearly six years.

Jon Winkelried, Goldman’s other co-president, had been walking the floors, trying to calm everyone’s nerves. “We could raise $5 billion in an hour if we wanted to,” he told a group of traders, as if to suggest that nothing was amiss. But just then, at one p.m., the market—and Goldman’s stock—suddenly turned around, with Goldman rising to $87 a share, and then $89. Traders raced through their screens trying to determine what had been responsible for the lift and discovered that the Financial Services Authority in the U.K. had announced a 30-day ban on short-selling 29 financial stocks, including Goldman Sachs’s.

The squawk boxes on Goldman’s trading floor soon crackled to attention. A young trader found a recording of “The Star-Spangled Banner” on the Internet and broadcast it over the speakers to commemorate the moment. About three dozen traders stood up from their desks, placed their hands over their hearts, and sang aloud, accompanied by rounds of high-fives and cheers.

Goldman Sachs C.E.O. Lloyd Blankfein. By Michelle V. Agins/The New York Times/Redux.

At exactly 3:01 p.m. the market took off. Traders all over Wall Street turned up the volume on the trading-floor flat-screens when Charlie Gasparino reported what he was hearing from his sources on Wall Street: the federal government was preparing “some sort of R.T.C.-like plan” (referring to the Resolution Trust Corporation, formed in 1989 during the savings-and-loan crisis) that would “get some or all of the toxic waste off the balance sheets of the banks and brokerages.” Between the time Gasparino began his report and the segment ended, the market jumped 108 points.

But Blankfein was not mollified by the market’s late turnaround, with Goldman’s stock ending the day up at $108. Gary Cohn had been on the phone earlier in the day with Kevin Warsh at the Federal Reserve, brainstorming a way to get in front of the financial tsunami. Warsh had thrown out the idea that perhaps Goldman should be looking at a merger with Citigroup, a fit that could solve major problems for both parties. Goldman could get a huge deposit base, while Citigroup would acquire a management team that investors could support.

Cohn expressed his doubts about the suggestion. “It probably doesn’t work, because I could never buy their balance sheet,” he explained. “And the social issues would be enormous.” The expression “social issues” was yet more Wall Street code, for who would run the firm. Goldman’s management didn’t exactly have high regard for Pandit and his team.

“Don’t worry about the social issues,” Warsh told him. “We’ll take care of them.” That was a not-so-subtle hint that, if a deal was struck, Pandit might be out of a job.

But Blankfein wasn’t particularly interested in either alternative. Goldman’s lawyer Rodgin Cohen, from Sullivan & Cromwell, had been encouraging him to think about transforming the firm into a regulated bank-holding company, such as JPMorgan and Citigroup. That would give Goldman unlimited access to the Fed’s discount window, enabling it to borrow funds at the same cheap rate as the government and to raise capital more easily, among other things.

Blankfein had always resisted the idea, however, because it came with a hefty price tag in the form of increased regulatory oversight. But these were extraordinary circumstances, to say the least, and the C.E.O. sensed that the world might be moving inexorably in that direction.

John Mack was still at his office in Times Square when Tom Nides told him the good news: his sources at the S.E.C. had confirmed that the agency was preparing to finally put in place a ban on shorting financial stocks, affecting some 799 different companies.

Rumors of the pending action were already moving on the wires. James Chanos, perhaps the best known of the short-sellers, who had pulled his money from Morgan Stanley because of Mack’s support for the ban, was already on the warpath.

That day, Morgan Stanley’s stock had fallen 46 percent, only to turn around in the last hours of trading, ending up 3.7 percent, or 80 cents. Between word of the government’s intervention and the short-selling ban, Mack was hoping that he’d finally have some breathing room.

He knew, though, that beneath the surface the firm was hurting. Hedge funds continued to seek redemptions. What the firm needed most was an investor to step up and take a big stake in the company to shore it up. “I don’t know how this happened,” he confided in Nides.

Mack could think of only one investor that might be seriously interested in making a sizable investment in the firm: China Investment Corporation (C.I.C.), China’s first sovereign-wealth fund. Wei Sun Christianson, C.E.O. of Morgan Stanley China, a 51-year-old dynamo with close relationships throughout the Chinese government, had initiated discussions with Gao Xiqing, president of C.I.C., within the past 24 hours. She happened to be in Aspen at a conference with him hosted by Teddy Forstmann, the leveraged-buyout king. C.I.C. already held a 9.9 percent stake in Morgan Stanley, and Gao had indicated to Christianson that he’d be interested in buying up to 49 percent of the firm. Gao had a major incentive to keep Morgan Stanley alive: he had invested $5 billion in the firm in December 2007, which was now worth half that. If Morgan Stanley filed for bankruptcy, he might lose his job.

Mack and Nides discussed the deal, and while neither man was particularly interested, given their choices, they knew it might prove to be the only solution. Gao was planning to fly to New York Friday night to meet with them.

Earlier in the day, Mack had spoken with Hank Paulson, who prided himself on his extensive Chinese contacts, trying to persuade him to call the Chinese government and encourage them to pursue the deal. It was a tad unusual to ask the government to serve as a broker, but Mack was desperate. “The Chinese need to feel as if they are being invited in,” Mack explained. Paulson said he’d work on it and see if President Bush would be willing to call Chinese president Hu Jintao. “We need an independent Morgan Stanley,” Paulson affirmed.

Nides, however, had a more cynical view of Paulson’s desire to protect Morgan Stanley. “He’ll keep us alive,” Nides told Mack, “because if he doesn’t, then Goldman will go.”
Day Three
Friday, September 19, 2008: The Asians Are Coming

Hoarse and a little haggard, Paulson made his way to the podium in the pressroom of the Treasury Building to formally announce and clarify what he had christened earlier that morning as the Troubled Asset Relief Program, soon known as tarp, a vast series of guarantees and outright purchases of “the illiquid assets that are weighing down our financial institutions and threatening our economy.” John Mack had been watching CNBC on Friday morning when he received a phone call from Lloyd Blankfein. “What do you think of becoming a bank-holding company?” Blankfein asked Mack.

Mack hadn’t really studied the issue and asked, “Would that help us?”

Blankfein said that Goldman had been investigating the possibility and explained to him the benefits.

“Well, in the long run it would really help us,” Mack said. “In the short run, however, I don’t know if you can pull it off fast enough to help us.”

“You have to hang on,” Blankfein urged him, clearly still anxious about how punishing the markets had become, “because I’m 30 seconds behind you.”

Meanwhile, Jon Pruzan, the Morgan Stanley banker who had been assigned to review Wachovia’s $122 billion mortgage portfolio—to crack the tape—finally had some answers. A team of Morgan bankers in New York, London, and Hong Kong had worked overnight to sift through as many mortgages as they humanly could.

“Now I know why they didn’t want to give us the tape!” Pruzan announced dourly at a meeting before they headed over to Sullivan & Cromwell to begin due diligence on Wachovia. “It shows they’re expecting a 19 percent cumulative loss.”

“You’ve got to be fucking kidding me,” Robert Scully exclaimed. “We obviously can’t do this deal.”

To make it work, Morgan Stanley would have to raise some $20 to $24 billion of equity to capitalize the combined firms, a virtual impossibility under the current market conditions. Scully described Wachovia’s mortgage book as “a $40 to $50 billion problem. It’s huge. The junior Wachovia team is not disputing our analysis.”

Kelleher, who had been keeping a careful watch over the firm’s dwindling cash pile, had just taken a look at Wachovia’s numbers for himself and observed, “That’s a shit sandwich even I can’t get my big mouth around.”

It became increasingly clear to everybody that the only way this deal was going to take place was if the government provided a guarantee, which nobody thought would happen. Steel and Mack agreed they’d get back in touch, but before he hung up, Steel asked Mack for a favor. “It wouldn’t be helpful if it leaked out that we’re not talking,” he said.

Morgan Stanley C.F.O. Colm Kelleher. Courtesy of Morgan Stanley.

The waiter at Blue Fin had just brought several massive plates of sushi—spicy lobster rolls, pieces of yellowtail tuna, and tobiko—when Colm Kelleher’s cell phone rang. He had gone to get a late lunch with his Morgan Stanley colleagues, including James Gorman, Walid Chammah, and Tom Nides, and the group had been chatting about their plan to meet later that night with Gao Xiqing and his team. With Wachovia effectively out of the picture, the Chinese were now their sole prospect.

When Kelleher looked down at the caller ID, he saw it was a number in Japan and walked to the corner of the restaurant.

Jonathan Kindred, president of Morgan Stanley’s securities business in Tokyo, greeted him and said excitedly, “This is interesting. I just got a call from Mitsubishi. They want to do the deal.” Mitsubishi UFJ, Japan’s biggest bank, was interested in buying a stake in Morgan Stanley.

The call had come completely unexpectedly and was totally unsolicited. Earlier in the week Morgan Stanley’s management had actually ruled out calling Mitsubishi after its chairman, Ryosuke Tamakoshi, said publicly that following Lehman’s bankruptcy his firm would not be making any investments in the United States.

Kindred said he thought Mitsubishi was prepared to move quickly. But Kelleher, rolling his eyes, was skeptical. He had worked with other Japanese banks before, and in his experience, they had always lived up to their reputation as being slow, risk-averse, and deeply bureaucratic.

James Gorman’s eyes widened when Kelleher returned to the table with Kindred’s news. This could be exactly what they needed, he thought.

Kelleher only scoffed. “This is a waste of time—they’re never going to do anything.”

“Colm, I really feel they’re going to do something,” Gorman insisted. He thought the fact that Mitsubishi had initiated the call to express interest was an encouraging sign. “This stuff doesn’t happen by accident.”

Kevin Warsh had taken the US Airways shuttle to New York late on Friday to help Geithner think through how to handle the upcoming weekend. Just as important, he would be Bernanke’s eyes and ears on the ground. As his driver made his way from La Guardia Airport through traffic to the New York Fed, Warsh received a call from Rodgin Cohen, the Sullivan & Cromwell lawyer who by now was advising both Wachovia on its talks with Morgan Stanley, and Goldman Sachs on its bank-holding-company status. He told Warsh he had an idea—a potentially big one. It wasn’t an officially sanctioned plan by his clients, just a friendly suggestion from an old-timer in the business.

He suggested to Warsh that the government attempt a shotgun wedding between Goldman and Wachovia. He knew it was a long shot—the “optics,” he acknowledged, would be problematic, given that Paulson and Bob Steel were both former Goldman men—but it would solve everyone’s problems: Goldman would get the deposit base it had been seeking, and Wachovia would have its death sentence stayed.

Warsh listened to the proposal and, almost to his own surprise, liked it.

Gao Xiqing, dressed in a sporty turtleneck and blazer, arrived at Morgan Stanley with his team just after nine p.m., having flown into New York with Morgan Stanley’s Wei Sun Christianson on a private jet from Teddy Forstmann’s Aspen conference. Gao’s bad back was causing him so much pain that when James Gorman went to introduce himself he found Gao lying on the floor of a conference room on the 40th floor, in the middle of a telephone call. Mack, ever the accommodating host, had a couch brought from the executive dining room for his guest to lie on.

Over dinner, ordered in from Mack’s favorite restaurant, San Pietro, they discussed a possible transaction. Alternating between standing up and lying down, Gao reiterated his interest in buying 49 percent of Morgan Stanley. As he had told Christianson on the flight over, he was now prepared to provide the firm with a credit line of as much as $50 billion and a nominal equity investment—no more than $5 billion, maybe less.

Mack was stunned. He knew the price that would be offered might be low, but to him this was absurdly so—the company was worth nearly $40 billion. This offer was effectively just a loan. While it might help Morgan Stanley stay in business, Gao was clearly taking advantage of its weakened condition. To Gao, the offer presented a way to reset the price he had paid for the 10 percent stake he had acquired in Morgan Stanley, in 2007, which was now worth far less. Unlike deals that other sovereign-wealth funds had struck then, giving them the right to reset the value of the deal if the firms sold equity at a lower price later, C.I.C. hadn’t had the presence of mind to insist on that stipulation. For some inexplicable reason, Gao had convinced himself that the agreement did include such a provision until Morgan Stanley got him a copy to show him that it didn’t.

However insulting Gao’s proposal, Mack recognized that his situation was desperate. Despite the market rally, the firm had continued to bleed cash. Kelleher had given him the cash balances, and they were not good—about $40 billion left in the tank. A few bad days could wipe them out, and most days lately had been bad ones.

When Mack returned to his office and huddled with Christianson and his team, they were flabbergasted; Chammah initially thought he had misheard Christianson when she presented the offer.

“That’s a ludicrous ask,” Kelleher said. “They are being unreasonable.”

Gorman, trying to calm everyone down, said they should all hope it might just be an opening bid: “They ask for the moon and then maybe they get more reasonable?”
Day Four
Saturday, September 20, 2008: Shall We Dance?

Tim Geithner hadn’t slept well on Friday night, having again decided to stay in one of the grim rooms on the 12th floor of the Federal Reserve. By six a.m., he had returned upstairs to his office dressed in an oxford dress shirt and sweatpants.

In his mind, he was already making battle plans. He had made it safely to the weekend but was worried about what would happen on Monday.

“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.

On note cards that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JPMorgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and C.I.C. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.

It was the ultimate Wall Street chessboard.

Lloyd Blankfein arrived at his office at just past seven on Saturday morning. On Friday, Gary Cohn had had another conversation with the Fed’s Kevin Warsh, who encouraged him to keep looking at merger options, especially at Citigroup. Initially Cohn’s notion was that Citi should buy Goldman; he had even established an asking price. But Warsh suggested that Cohn approach it the other way around: Goldman should be the buyer. To Cohn, that made no sense, given that Citi was so much bigger. But what Warsh knew—and hadn’t yet shared with Cohn—was that Citigroup’s balance sheet had so many holes that its value was likely a lot lower than its current stock price reflected.

Blankfein was reading an e-mail when John Rogers, Goldman’s chief of staff, arrived. As they were reviewing their own battle plans, Geithner called. In his usual impatient tone, he insisted that Blankfein immediately call Vikram Pandit, Citigroup’s C.E.O., and begin merger discussions. Blankfein, surprised at the directness of the request, agreed he would place the call.

“Well, I guess you know why I’m calling,” Blankfein said when he reached Pandit a few minutes later.

“No, I don’t,” Pandit replied with genuine puzzlement.

Citigroup C.E.O. Vikram Pandit. By Chip Somodevilla/Getty Images.

There was an awkward pause on the phone. Blankfein had assumed that the Fed had pre-arranged the call. “Well, I’m calling you because at least some people in the world might be thinking that combining our firms would be a good idea,” he said.

After another few moments of uncomfortable silence Pandit finally replied, “I want you to know I’m flattered by this call.”

Blankfein now began to wonder if Pandit was putting him on. “Well, Vikram,” he said briskly, “I’m not calling with any flattery towards you in mind.”

Pandit hurriedly ended the call: “I’ll have to talk to my board. I’ll call you back.”

Blankfein hung up and looked up at Rogers. “Well, that was embarrassing. He had no idea what I was talking about!” From Blankfein’s perspective, he had done what he was asked to do, only to be shown up.

Blankfein phoned Geithner back immediately. “I just called Vikram,” he said testily. “As I think about it, you never told me whether Vikram was expecting a call, but I inferred it. He behaved as if he wasn’t expecting the call, and he convinced me that he wasn’t expecting the call.”

Geithner had miscalculated—could Pandit not see the gift that was being handed to him? It defied all reason. But Geithner had no time to deal with anybody’s injured feelings. “O.K., I’ll talk to you later,” he said and then hung up. Blankfein sat there, wondering what the hell had just happened.

Bob Steel, of Wachovia, had considered canceling his appearance on the second day of Teddy Forstmann’s weekend conference, but flew into Aspen that morning, having left the East Coast at four a.m. to arrive on time. But as the moderator, Charlie Rose, got to the Q&A portion of the panel, “Crisis on Wall Street: What’s Next?,” Steel was nervously checking his watch because he knew he had to get to New York fast. Jumping into a red Jeep Wrangler that he had rented at the airport, he finally had a minute to check his BlackBerry and discovered that Kevin Warsh had sent him several e-mails urging him to contact him immediately.

“Listen, I have a call for you to make,” Warsh told Steel when he finally reached him. “We think you should connect with Lloyd!”

Steel, reading between the lines, was stunned: the government was trying to orchestrate a merger between Goldman Sachs and Wachovia! On its face, he knew that it could be a politically explosive deal, considering the two firms’ connections to Treasury. Paulson, he imagined, must be involved somehow. But, given Steel’s former role at Treasury, Paulson wasn’t allowed to contact him directly. Steel was immediately anxious about the idea. If Goldman had really wanted to buy Wachovia, he thought, it would have done so long ago. After all, up until this week, when he spoke to Mack, Goldman had been on Wachovia’s payroll as its adviser and, as such, knew every aspect of its internal numbers. So, if there was a bargain to be had, then Goldman hadn’t seen it. Still, Steel saw the merits in such a deal, and because it was being encouraged by the Federal Reserve, he imagined it might just happen.

“I spoke to Kevin, and he said to give you a call,” Steel began when he got through to Blankfein.

This call, unlike the Citigroup fiasco, had been pre-wired. “Yes, I know,” Blankfein said. “We’d be interested in putting a deal together.”

As his plane headed to New York, Steel mused how a deal with Goldman would be something of a homecoming, even if it had been the result of a direct order from the government. Perhaps he could even wrangle the chairmanship.

Jamie Dimon had been hoping to take his first day off in two weeks. That was until Geithner called him early Saturday morning and instructed him—the president of the New York Federal Reserve seldom suggested anything—to start thinking about whether he’d like to buy Morgan Stanley.

“You’ve got to be kidding me,” Dimon replied.

No, Geithner said, he was quite serious.

“I did Bear,” Dimon objected, referring to JPMorgan’s taking over Bear Stearns the previous March at Paulson’s behest. “I can’t do this.”

Geithner ignored the answer. “You’ll be getting a call from John Mack,” he said and hung up the phone.

Mack, who had had a similar peremptory call from Geithner, phoned Dimon five minutes later. Dimon reiterated that he didn’t want to buy Morgan Stanley, which he had already told Mack earlier in the week. But Dimon was under orders to try to help Mack, so the two rivals talked about whether JPMorgan could offer Morgan Stanley a credit line that might give it some breathing room. Dimon said he’d think about it and come back to him with a decision.

As soon as he got off the phone with Mack, Dimon called Geithner. “I talked to John,” he said. “We’re talking about getting him a credit line.”

“I don’t know if that’ll be enough,” Geithner said, frustrated at the news. He wasn’t the slightest bit interested in any temporary measures.

Dimon immediately shot off an e-mail to his operating committee summoning them to the office, and within an hour, dressed in golf shirts and khakis, they had assembled in a conference room on the 48th floor.

Dimon had a grimace on his face as he related the call he’d received from Geithner. On a whiteboard Dimon used a black marker to sketch out what he had been thinking. “We can either buy them, buy part of them, or give them some type of financing.”

But what, exactly, would they be buying? The overlap between the firms was enormous. And what were Morgan Stanley’s toxic assets really worth? These were all but unanswerable questions.

Geithner was by now seriously miffed. He had been trying to reach Pandit since eight in the morning and had just heard back from Blankfein, who had somehow actually managed to get through to Pandit again. The only problem was that Pandit had turned Goldman down, and Geithner hadn’t even had a chance to speak with him.

Finally, he got through.

“I haven’t been able to reach you for four hours,” Geithner barked into the phone. “That’s unacceptable on a day like today!”

Apologizing, Pandit explained that he had been talking to his team about the Goldman proposal, which they had ultimately rejected. “We’re concerned about taking on Goldman,” Pandit said, trying to explain his rationale for turning them down. “I don’t need another trillion dollars on my balance sheet.”

Geithner could only laugh to himself—Pandit should have been so lucky as to own Goldman. “This is a bank,” Pandit said. “And a bank takes deposits and a bank has a prudency culture. I cannot envision a bank taking its deposits and investing them all in hedge funds. I know that’s not what Goldman is, but the perception is that they’d be taking deposits and putting them to work against a proprietary trade. That can’t be right philosophically!”

Having dispensed with pushing Goldman and Citigroup together, Geithner moved on to his next idea: merging Morgan Stanley and Citigroup. Pandit had been considering that option, too, and while he was more predisposed to merging with Morgan Stanley, he still was reluctant. “It’s still not our choice to do this deal, but we could think about it,” he told Geithner.

By two p.m., John Mack had grown concerned that the talks with C.I.C. were going nowhere. Gao hadn’t budged on what Mack was describing around the office as an “offensive” offer. He had no idea what Jamie Dimon would come up with, and he hadn’t heard anything from Mitsubishi.

Downstairs, Paul Taubman, the firm’s head of investment banking, was experiencing much the same panic as Mack. A disarmingly young-looking 48-year-old, Taubman had worked his entire career at Morgan Stanley, rising to become one of the most trusted merger advisers in the nation, and could now only wonder if it was all going to come to an end this weekend.

Morgan Stanley chairman John Mack. By Michele Asselin/Corbis.

Taubman and his colleague Ji-Yeun Lee were on the phone to Tokyo, where it was past midnight, with Kohei Yuki, Morgan Stanley’s vice-chairman and director in Japan, who was trying to coordinate talks with Mitsubishi.

“I think they’ve gone to bed for the night—we’ll pick it up in the morning,” Yuki said.

“That’s not going to work,” Taubman answered. “You need to call them at home and wake them up.”

There was a long pause; this was certainly a breach of Japanese protocol.

“O. … K.,” he said.

Twenty minutes later, Yuki was back on the phone: “I got him.” Mitsubishi was going to wake up its entire deal team and get working.

Goldman co-president Gary Cohn had agreed to engage in talks with Wachovia only on the presumption the Fed would help Goldman off-load some of Wachovia’s most toxic assets; Warsh, in a bold gesture, made a commitment that the Fed would strongly consider it. Paulson had spoken with Blankfein and told him to take the talks seriously. “If you go into this looking for all the problems and how much help you’re going to get, it’s never going to happen,” he said, adding, “You’re in trouble, and I can’t help you.”

In the meantime, Warsh instructed Cohn to make sure they could work out the personal dynamics. “Let’s not waste our time on economics if you guys are never going to solve the social issues,” he said. “If you aren’t willing to accommodate them, if Bob [Steel]’s not willing to do whatever, this isn’t going to happen.”

Steel was scheduled to land at Westchester County Airport, in White Plains, a suburb of New York City, in only a few hours, and Cohn walked into Blankfein’s office and made a suggestion.

“Lloyd, you should go pick Steel up at the airport,” Cohn said, believing it would be a gracious gesture to kick off the merger talks.

Blankfein looked seriously annoyed. He felt that he had not gotten along with Steel particularly well ever since Paulson had made them co-heads of Goldman’s equities division years earlier. “Do I have to?”

“Yes,” Cohn said firmly. “I would go with you, but it would be awkward. You should go pick him up.”

Blankfein was still resistant. “Can you go by yourself?”

“No,” said Cohn, who considered Steel a friend. “I already have a very good relationship with him.”

Blankfein relented. He’d head to the airport. Wearing slacks and a button-down shirt, he was waiting in the parking lot when Bob Steel arrived. As he walked out of the terminal, Steel, always perfectly coiffed, nonetheless looked as if he could use some sleep. He had already been awake for 15 hours, and his day was hardly done.

“What a birthday present!” Blankfein said to Steel brightly when he saw him. Blankfein, who turned 54 that day, was still hoping to get to a birthday dinner later that evening at Porter House New York, a steak restaurant, with his wife, Laura.

As the two men drove into the city they delicately began discussing the outlines of a deal and discussing their history together. Neither knew what to make of the merger idea or, for that matter, each other.

When they reached Goldman headquarters, Steel went directly to the 30th floor, where he once had an office. As he stepped into the conference room, he saw Chris Cole, who had been his firm’s adviser for the past five months. Now Cole would be on the other side, trying to buy Wachovia. Meanwhile, Steel’s lawyer, Rodgin Cohen, was also Goldman’s lawyer. It had all become so confusing and rife with conflicts, but they agreed that if they were going to do a deal they’d have to reach an agreement by Monday morning.

Goldman’s biggest issue was, as it had been with Morgan Stanley, trying to determine the scope of the hole. Wachovia owned $122 billion of pay-option arms—adjustable-rate mortgages—which Goldman Sachs felt weren’t going to be worth much. They each agreed to put teams on it to work up the numbers; Steel said he’d have his group fly up from North Carolina by morning.

Before decamping for the night, Blankfein invited Steel back to his office. He wanted to talk about titles, perhaps the most sensitive issue for men who often measure themselves as much by their business cards as by their wallets. Blankfein said he was thinking of making Steel one of three co-presidents, along with Gary Cohn and Jon Winkelried; Steel would continue to manage Wachovia as the consumer arm of Goldman Sachs.

Steel was taken aback and slightly offended. He was already the C.E.O. of a major bank; he’d been a vice-chairman of Goldman and a Treasury undersecretary in Washington. And now he was being asked to become one of three co-presidents?

“I’m not sure I want to be at the same level with Gary and Jon,” he said diplomatically. “But we’ll figure this out.”

As the sun was setting, Hank Paulson was still in his office and had just gotten off the phone with Geithner. The news was not promising. Geithner told him that Morgan Stanley had no plan apart from what he called the “naked” bank-holding-company scenario. Geithner said he was uncertain whether any investor—JPMorgan, Citigroup, the Chinese, or the Japanese—would come through. And he was skeptical of the Goldman-Wachovia deal.

“We’re running out of options,” he told Paulson.

Paulson, who had been living on barely three hours of sleep a night for a week, was beginning to feel nauseated. Watching the financial industry crumble in front of his eyes—the world he had inhabited his entire career—was getting to him. For a moment, he felt light-headed.

From outside his office, his staff could hear him vomit.

Saturday night, John Mack returned to his Upper East Side apartment, nursing a persistent cold. His wife, Christy, who had driven into the city from their weekend house in the suburban town of Rye to console him, was waiting up.

He was quieter than usual, wondering yet again how he would manage to raise billions of dollars in capital in only 24 hours. “You know, there’s a chance I could lose the firm,” he said, despair in his voice.

He needed some air, he told Christy, and decided to go out for a walk. As he roamed up Madison Avenue, he realized that his entire adult life, his entire professional career, was on the line. But this was not just about his personal survival; it was about the 45,000 people around the globe who worked for him, and for whom he felt a keen sense of responsibility. Images of Lehman employees streaming out of their building the previous Sunday night carrying boxes of their possessions still haunted him. He needed to buck himself up. Somehow, he was going to save Morgan Stanley.

When he stepped into his living room a few minutes later, he admitted to Christy with a grateful smile, “I’d rather be doing this than reading a book in North Carolina.”

Even before the black Suburban had come to a stop in his driveway, in a leafy enclave of Northwest Washington, D.C., on Saturday evening, Hank Paulson was stepping out of the car door, his Razr at his ear. His Secret Service agent preferred that Paulson wait inside until he got out of the vehicle, but Paulson had long since abandoned such protocol.

He raced inside to get on a call with Vice Premier Wang Qishan in China. For the past day, he had been trying to coordinate the call to press his case for China to pursue an investment in Morgan Stanley. Originally, he had wanted President Bush to call China’s president personally and had spoken with Josh Bolten, the president’s chief of staff, about it. But Bolten had concerns about whether it was appropriate for the president to be calling on behalf of a specific U.S. company.

Paulson had scheduled the call with Wang for 9:30 p.m. He knew Wang well from his trips to China as the C.E.O. of Goldman, and they had a comfortable rapport. He also knew it was highly unusual to be orchestrating a private market deal with another country, in this case the largest holder of U.S. debt. Before placing the call, Paulson had reached out to Stephen Hadley, the national-security adviser, to get some guidance. The instructions: Tread carefully.

JPMorgan Chase C.E.O. Jamie Dimon. By Joshua Roberts/Bloomberg.

When Paulson was finally connected to Wang, he moved quickly to the topic at hand, Morgan Stanley. “We’d welcome your investment,” Paulson told Wang. He also suggested that one of China’s biggest banks, such as the Industrial and Commercial Bank of China, should participate, making the investment a strategic one. Wang, however, expressed his anxiety about C.I.C.’s becoming involved with Morgan Stanley, given Lehman Brothers’ bankruptcy.

“Morgan Stanley is strategically important,” Paulson said, suggesting he would not let it fail.

Wang remained unimpressed, asking for a commitment that the U.S. government would guarantee any investment. Paulson, trying to avoid making an explicit promise but also trying to assuage him, said, “I can assure you that an investment in Morgan Stanley would be viewed positively.”
Day Five
Sunday, September 21, 2008: The Last Stand

By midday, Goldman Sachs and Wachovia were making rapid progress toward completing a deal. Peter Weinberg, Bob Steel’s main adviser and a former Goldman man, had constructed the outlines of an agreement. Just then, Joseph Neubauer, a Wachovia board member and the C.E.O. of Aramark, who was on hand at Goldman, got a call on his cell phone. It was Paulson. “This is not just about Goldman Sachs,” Paulson said, pressing him to do the deal. “I’m concerned about Wachovia. Aren’t you concerned?”

When Neubauer put down the phone, he looked at his fellow directors. “You’re not going to believe this. That was Hank.”

Warren Buffett was at his home in Omaha when he received a phone call from Byron Trott, a vice-chairman at Goldman Sachs. Buffett, who dislikes most Wall Street bankers, adored Trott, a mild-mannered midwesterner based in Chicago. For the past several weeks Trott had been trying in vain to persuade Buffett to make an investment in Goldman, but he had now come up with a new idea. He disclosed to Buffett that Goldman was in talks to buy Wachovia, with government assistance, and wanted to know whether Buffett might be interested in investing in a combined Goldman-Wachovia.

At first, Buffett wasn’t sure he was hearing Trott correctly. Government assistance? In a Goldman deal?

“Byron, it’s a waste of time,” he said in his folksy way after considering the new configuration. “By tonight the government will realize they can’t provide capital to a deal that’s being done by the former firm of the Treasury secretary with the company of a former vice-chairman of Goldman Sachs and former deputy Treasury secretary. There is no way. They’ll all wake up and realize, even if it was the best deal in the world, they can’t do it.”

John Mack had received some promising news that afternoon: Mitsubishi looked like it would actually pull through and make a sizable investment in Morgan Stanley. A conference call had been arranged for Mack to speak with Mitsubishi’s chief executive, Nobuo Kuroyanagi, that evening.

Just as they were going over the details, however, Paulson called.

“John, you have to do something,” Paulson said sternly.

“What do you mean I have to do something?” he asked, his voice rising with impatience, explaining that he had just learned that the Japanese were inclined to do the deal. “You’ve been so supportive—you said we can get through this.”

“I know,” Paulson said, “but you’ve got to find a partner.”

“I have the Japanese! Mitsubishi is going to come in,” he repeated, as if Paulson hadn’t heard him the first time around.

“Come on. You and I know the Japanese. They’re not going to do that. They’ll never move that quickly,” Paulson said, suggesting that Mack focus more on the deal with the Chinese or JPMorgan.

“No, I do know them. And I know I don’t agree with you,” Mack answered angrily. He explained that Mitsubishi had used Morgan Stanley as an adviser during its hostile bid for a part of Union Bank in California earlier in the year. “Japanese rarely do a hostile,” Mack reminded him. “They hired us, they followed through and got it done, so they’ll come through for us.”

Paulson was still skeptical. “They won’t do it,” he said with a sigh.

“You and I disagree,” Mack sputtered.

Calling Kevin Warsh out of a meeting at the Fed to come to the phone, Gary Cohn outlined the preliminary Goldman-Wachovia terms for him. They had agreed to a deal at market—Friday’s closing price of $18.75—and considering that Wachovia’s stock had jumped 29 percent that day on the back of the tarp news, Cohn thought it was a generous concession.

But then he wound up for his big pitch: to complete the deal, he said, Goldman would need the government to guarantee, or ring-fence, Wachovia’s entire portfolio of pay-option arm mortgages—all $122 billion worth.

Warsh stopped Cohn in midsentence. “We’re just not prepared to do that,” he said. “We can’t look as if we’re just writing a blank check.” He suggested that if they structured it so that Goldman would take a first loss—in the same way that JPMorgan had agreed to accept the first $1 billion of losses at Bear Stearns before the Federal Reserve would step in and guarantee the next $29 billion—the government might well consider acting as a backstop.

At Treasury, Jim Wilkinson, Paulson’s chief of staff, was by now practically sleepwalking down the halls. Paulson had just updated him on the Goldman-Wachovia talks and asked him for his counsel. Should the government provide assistance? Wilkinson, in his stupor, said he thought that it sounded like a reasonable idea.

But a half-hour later, after a cup of coffee and further reflection, Wilkinson changed his mind. He realized that such a deal would be a public-relations nightmare at the worst possible time, just as they were trying to pass tarp. Paulson would lose all credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.

Wilkinson ran back into Paulson’s office. “Hank, if you do this, you’ll get killed,” Wilkinson said frantically. “It would be fucking crazy.”

Ben Bernanke was being piped in over the speakerphone in Geithner’s conference room, where Warsh was reviewing the new terms of the Goldman-Wachovia agreement. Cohn and Steel had come back to him with a slight revision to the previous proposal, allowing for Goldman Sachs to take the first $1 billion of losses, per Warsh’s suggestion. Cohn and Steel said they were committed to completing the deal that afternoon if the government would agree to provide assistance. The boards of both companies had been put on standby.

The general view in the room seemed to be that it was a good transaction, but Geithner was quick to point out its drawbacks. “Does it make Goldman look weaker than they are?” he asked—a question Blankfein had raised earlier in the day. Geithner also wondered whether the Fed should be the one lending the money. Since Wachovia’s regulator was the F.D.I.C., perhaps it ought to be the one to bear that burden.

Terry Checki from the New York Fed couldn’t believe the gall of Goldman’s request. “They’re still driving these negotiations as though they have leverage,” he said. But he opposed the merger for a different reason: he was concerned that neither side had enough time to make a thoughtful decision, referring to the situation as “the shotgun-wedding syndrome.”

Then the New York Fed’s Bill Dudley, a former Goldman man himself, who thought the deal was unattractive for the government, raised the same objection that Buffett had raised just hours earlier: it would prove a public-relations disaster for the government.

“What are we doing here?” Dudley asked. “Look at all of the connections you’ve got: Treasury and Steel and me. Goldman is everywhere. We have to be careful.”

After Geithner and Bernanke called Paulson, all three agreed: they just couldn’t support the deal.

When Warsh delivered the news to Steel and Cohn, both men were flabbergasted. They had spent the last 24 hours trying to formulate an agreement at the behest of the government and were now being told it could not be carried out.

How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Illustration by Brad Holland.

“I’m sorry. I understand—I’m just as frustrated as you are. We just don’t have the money; we don’t have the authorization,” Warsh explained.

Steel, feeling particularly slighted, told Warsh that he felt as if he were running from one bride to another, trying to find the right marriage to save his firm. First Morgan Stanley, and now Goldman Sachs.

Cohn, realizing that the conversation was about to get testy, said, “I think I should step out.”

“No, you should listen to this,” Steel insisted, raising his voice for the first time. “You should sit here and listen to every goddamn word of this.”

Anxiously talking into the speakerphone in the center of the table, Steel became even more irate. “What do you want me to do? Tell me what to do? You can’t make this work, you don’t like this, you don’t like that. Do you want to do the Midtown deal?” he said, referring to Morgan Stanley. “Do you want me to call Citi? I’ve got to protect my shareholders. That’s my job. Just tell me what the fuck you want me to do because I’m tired of running in circles.”

Paulson had gotten word that the Goldman-Wachovia deal was off, which put even more pressure on him to find a solution for Morgan Stanley. To him, JPMorgan was the obvious answer. While Dimon may have been resisting Paulson’s overtures—Paulson had broached the subject with him several times already over the past day—Paulson felt he now needed to apply some serious pressure.

“Jamie,” Paulson said when he reached him, conferencing in Geithner and Bernanke, “I need you to really think about buying Morgan Stanley. It’s a great company with great assets.”

Dimon, who had been anticipating that the government might try to foist the deal on him, was adamant.

“You’ve got to stop. This is not doable,” he said intently. “It’s not possible. I would do anything for you and for this country, but not if it’s going to jeopardize JPMorgan.

“Even if you gave it to me, I couldn’t do it,” Dimon continued, explaining that he thought the deal would cost the bank $50 billion and countless jobs.

“I don’t want to do it, and John doesn’t want to do it,” Dimon told him.

“Well, I might need you to do it,” Paulson persisted.

A few moments of silence passed until Dimon relented, but only slightly. “We’ll consider it, but it’s going to be tough,” he said.

At about 3:30 p.m., John Mack’s assistant announced that Secretary Paulson was on the line. “Hi, John. I’m on with Ben Bernanke and Tim Geithner. We want to talk to you,” Paulson said.

“Well,” Mack said, “since you’re all on the line, can I put my general counsel on?”

Paulson agreed, and Mack hit the speakerphone button after the television was muted.

“Markets can’t open Monday without a resolution of Morgan Stanley,” Paulson told him in the sternest way he knew. “You need to find a solution—we want you to do a deal.”

Mack just listened, dumbstruck.

Bernanke, who was usually remote and silent in such situations, cleared his throat and added, “You don’t see what we see. We’re trying to keep the system safe. We really need you to do a deal.”

“We’ve spent a lot of time working on this and we think you need to call Jamie,” Geithner insisted.

“Tim, I called Jamie,” Mack replied, clearly exasperated. “He doesn’t want the bank.”

“No, he’ll buy it,” Geithner said.

“Yes. For a dollar!” Mack exclaimed. “That makes no sense.”

“We want you to do this,” Geithner persisted.

“Let me ask you a question: Do you think this is good public policy?” Mack asked, clearly furious. “There are 35,000 jobs that have been lost in this city between A.I.G., Lehman, Bear Stearns, and just layoffs. And you’re telling me that the right thing to do is to take 45,000 to 50,000 people, put them in play, and have 20,000 jobs disappear? I don’t see how that’s good public policy.”

For a moment, there was silence on the phone.

“It’s about soundness,” Geithner said impassively.

“Well, look, I have the utmost respect for the three of you and what you’re doing,” Mack said. “You are patriots, and no one in our country can thank you enough for that. But I won’t do it. I just won’t do it. I won’t do it to the 45,000 people that work here.”

The Morgan Stanley bankers were still waiting to find out if the Mitsubishi deal was a go. The Fed, they had learned, was going to grant them bank-holding-company status (and likely Goldman, too), but Geithner was still insisting the firm needed a big investment by Monday as a show of confidence in the company. Mitsubishi had sent over a proposal, a “letter of intent,” to buy up to 20 percent of the firm for as much as $9 billion. But all they were getting was a letter; it wouldn’t be an ironclad contract, as they couldn’t get a full deal turned around quickly enough. But they were just hoping investors in the market would take the Japanese at their word and have more faith in them than Paulson or Geithner did.

Upstairs, Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator trying to nail down the letter of intent. His assistant interrupted him, whispering, “Tim Geithner is on the phone—he has to talk to you.”

Cupping the receiver, Mack said, “Tell him I can’t speak now. I’ll call him back.”

Five minutes later, Paulson called. “I can’t. I’m on with the Japanese. I’ll call him when I’m off,” he told his assistant.

Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

Mack was minutes away from reaching an agreement. He looked at Ji-Yeun Lee, who was standing in his office helping with the deal, and told her, “Cover your ears.”

“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

‘Thank God. We’re out!” Jamie Dimon exclaimed as he ran across JPMorgan’s executive floor into his colleague Jimmy Lee’s office, where the management team had camped out waiting for their next orders, watching the Ryder Cup and the New York Giants game, chowing down on steaks from the Palm.

“Mack just called,” Dimon said, breathing a sigh of relief. “They got $9 billion from the Japanese!”

Purchase Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves on Amazon.com.

Andrew Ross Sorkin is a financial columnist for The New York Times.

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Taxpayers Help Goldman Reach Height of Profit in New Skyscraper
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By Christine Harper

Dec. 21 (Bloomberg) — In the first six months of 2010, about 6,000 employees of Goldman Sachs Group Inc. will take a break from their spreadsheets and move across the southern tip of Manhattan to a new 43-story, steel-and-glass skyscraper.

The building was a bargain — and not just because the final cost is expected to be $200 million less than the $2.3 billion price the company had estimated when construction began in November 2005. Goldman Sachs also benefited from the government’s determination to avoid losing jobs in lower Manhattan after the Sept. 11, 2001, terrorist attacks.

Building a new headquarters cater-cornered to where the World Trade Center once stood qualified the firm to sell $1 billion of tax-free Liberty Bonds and get about $49 million of job-grant funds, tax exemptions and energy discounts. Henry Paulson, then Goldman Sachs’s chief executive officer, threatened to abandon the project after delays in addressing his concerns about safety. To keep the plan on track, state and city officials raised the bond ceiling to $1.65 billion and added $66 million in benefits. The interest expense on the financing is about $175 million less over 30 years than if the company had issued corporate debt at the time, according to data compiled by Bloomberg.

“It was absolutely imperative that Goldman Sachs keep its world headquarters downtown,” says John Cahill, who took part in the negotiations as chief of staff to then-Governor George Pataki and now works at New York law firm Chadbourne & Parke LLP. “They had the financial resources to move anywhere.”

Unprecedented Aid

Goldman Sachs, which set a Wall Street profit record of $11.6 billion in 2007 and may have earned $11.4 billion this year, according to the average estimate of 15 analysts surveyed by Bloomberg, won new and larger concessions from taxpayers in 2008. This time it was the threat of a financial meltdown that prompted the U.S. government, with Paulson as Treasury secretary, and the Federal Reserve to supply an unprecedented amount of aid to firms deemed critical to the financial system, including Goldman Sachs.

The 140-year-old company received $10 billion in capital, guarantees on about $30 billion of debt and the ability to borrow cheaply from the Fed. The Fed’s bailout of American International Group Inc., and its decision to pay the insurer’s counterparties in full, funneled an additional $12.9 billion to Goldman Sachs.

“What was done was appropriate because the potential costs of not doing that were probably exceedingly high,” says Gary Stern, who stepped down in August as president of the Federal Reserve Bank of Minneapolis. “It certainly looked very threatening.”

‘Bad Deal’

That’s not how the Goldman Sachs rescue looks to William Black, a professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. He says the government has been far too generous in allowing the firm to get federal backing without either seizing equity or curbing risks.

“It’s just an unbelievably bad deal,” Black says. “We could hire any middle-tier guy or gal at Goldman, and they would tell us within 15 seconds that the deal we have made as a nation with Goldman is underpriced by many, many orders of magnitude and that we are insane.”

During the past year, Goldman Sachs’s profits and compensation outstripped those of its rivals. The firm, now the nation’s fifth-largest bank by assets, reported a record $8.44 billion in earnings for the first nine months of 2009 after setting aside $16.7 billion to pay employees. That comes to $527,192 for each person on the payroll, almost eight times the median U.S. household income.

Public Anger

The company’s stock is up 93 percent this year, above its price before Lehman Brothers Holdings Inc. collapsed. Meanwhile, the U.S. unemployment rate hit a 26-year high of 10.2 percent in October before dropping to 10 percent in November.

The perception that Goldman Sachs has profited at the expense of taxpayers has fueled public anger — even jabs from the television comedy show “Saturday Night Live.” Rolling Stone writer Matt Taibbi described the firm this year as “a great vampire squid wrapped around the face of humanity.” Conservative television commentator Glenn Beck devoted a 10- minute segment in July to diagramming Goldman Sachs’s connections to the government and arguing that taxpayers were being spun in “a web of lies.”

Bonus Plan

“People are just really angry; you can see it on the left and the right,” says Andy Stern, president of the 2.1 million- member Service Employees International Union, who led about 200 protesters outside Goldman Sachs’s Washington office on Nov. 16 to demand that the firm cancel its year-end bonuses and repay taxpayers instead. Some carried “Wanted” posters with pictures of Chairman and CEO Lloyd Blankfein.

The firm has made attempts to placate critics. On Nov. 17, it announced a five-year, $500 million program to provide education, capital and other forms of support to small businesses. On Dec. 10, it promised to pay the bonuses of the firm’s top 30 executives only in stock that they can’t sell for five years.

To Blankfein, the 55-year-old postal worker’s son who earned $68.5 million in 2007, the firm’s ability to generate profits and reward employees is a boon to society.

“Our shareholders are pensioners, mutual funds and individual investors, and they’re all taxpayers,” Blankfein told investors at a Nov. 10 conference hosted by Bank of America Corp. in New York. “The people of Goldman Sachs are one of the most productive workforces in the world.”

No ATMs

What Goldman Sachs’s workforce produces is different from what employees do at other financial institutions, leading some people to question why the firm is entitled to taxpayer support. It doesn’t operate branches or automated-teller machines. Only millionaires can open checking accounts. Instead, Goldman Sachs exists to serve large corporations, governments, institutions and wealthy individuals.

It makes money for them and for itself by trading assets ranging from stocks and bonds to oil futures and credit derivatives. In the first nine months of 2009, more than 90 percent of the company’s pretax earnings came from trading and principal investments, which include market bets, stakes in corporate debt and equity, and assets such as power plants.

“People who know the industry and know Goldman Sachs know that it is a giant hedge fund, but it’s wrapped in an investment banking wrapper,” says Samuel Hayes, a professor emeritus of investment banking at Harvard Business School in Boston. The public “would be horrified to think that their tax dollars were going to a hedge fund.”

Repaying TARP

Goldman Sachs repaid the $10 billion it received in October 2008 from the U.S. Treasury’s Troubled Asset Relief Program, and taxpayers got a return: $318 million in preferred dividends and $1.1 billion to cancel warrants to buy company stock the government was granted. Goldman Sachs says that’s a 23 percent annualized return for U.S. taxpayers, according to the firm’s calculation.

Other forms of support linger. By the end of September, Goldman Sachs’s $189.7 billion of long-term unsecured borrowings included $20.9 billion guaranteed by the Federal Deposit Insurance Corp. under a program started in October 2008 to unfreeze credit markets, according to the firm’s most recent quarterly filing. Most importantly, the Federal Reserve agreed on Sept. 21, 2008, to allow Goldman Sachs and smaller rival Morgan Stanley to become bank holding companies, giving them access to the Fed’s discount window and granting them a cheap source of borrowing traditionally reserved for commercial banks.

Interest Expense

“The issue that people have focused on — TARP and the payback of TARP money — is insignificant compared with the way they’ve been able to use federally guaranteed programs and their access to the Fed window,” says Peter Solomon, founder of New York-based investment bank Peter J. Solomon Co.

Those benefits, along with a drop in the Fed’s benchmark borrowing rate to as low as zero, have slashed Goldman Sachs’s interest costs to the lowest this decade, though its debt was higher in the first nine months of 2009 than in any comparable period except the previous two years. For those three quarters, the firm’s interest expense fell to $5.19 billion from $26.1 billion a year earlier.

“You can’t give a small group of firms this privilege, where they get free money from the Fed and a taxpayer guarantee and they can run the biggest hedge fund in the world,” Niall Ferguson, a professor of history at Harvard University and author of “The Ascent of Money: A Financial History of the World,” said at a Nov. 18 panel discussion in New York.

‘Using Your Money’

That view is shared by Solomon. “Everybody thinks they’re a bank, but they’re a hedge fund,” he says. “The difference is that this year they’re using your money to do it.”

Lucas van Praag, the partner responsible for the firm’s communications and the only Goldman Sachs executive willing to comment for this story, denies any similarity to hedge funds, the mostly private and unregulated pools of capital that managers use to buy or sell assets while participating in the profits.

“The assertion that we’re a hedge fund displays a substantial misunderstanding of our business,” says van Praag, 59, a British-born former public relations executive who joined Goldman Sachs after it went public in 1999. “We are in business primarily to facilitate transactions for our clients, and over 90 percent of our revenue and earnings come from doing that.”

Proprietary Trading

Proprietary trading, in which Goldman Sachs employees make bets with the company’s own money, has contributed only 12 percent of the firm’s revenue since 2003, van Praag says. Still, fixed-income, currency, commodity and some equity trading that takes place off exchanges blurs the line between client-driven transactions and proprietary wagers, says Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates Goldman Sachs stock “outperform.”

“It’s coming onto my balance sheet, I’m owning it and then I’m selling it,” Hintz says. “The fact that I’m taking a position means I’m taking risk, and if I’m taking risk, then I’m taking a proprietary bet.”

If Goldman Sachs agrees to buy $1 billion of mortgages that a client wants to sell and then decides to keep the mortgages, it’s not easy to determine whether that trade is aimed at helping a client or is a proprietary investment decision, Hintz says.

Van Praag says that Goldman Sachs, unlike some other banks, was never in imminent danger of going out of business during the financial crisis unless the entire system was allowed to implode.

‘We Didn’t Wait’

“We had cash and funding that would have allowed us to survive for quite a long time, even assuming that counterparties had decided to stop providing financing,” van Praag says. “When markets became very difficult, we didn’t wait for the government to act. We went out and raised money in the private sector.”

Two days after winning the Fed’s approval to become a bank holding company, Goldman Sachs sold $5 billion of preferred stock to billionaire Warren Buffett’s Berkshire Hathaway Inc. and then raised another $5.75 billion by selling common stock to the public. Those deals, plus a $5.75 billion public offering in April 2009, helped raise shareholder equity to $65.4 billion from $45.6 billion in August 2008.

Goldman Sachs also cut the amount of assets it owns to $882 billion from $1.08 trillion before the Lehman collapse. The firm holds $167 billion in cash or near-cash instruments, up from about $102 billion at the end of August 2008, which it can use to pay off debts if creditors stop making loans.

‘Classic Bank Run’

Treasury Secretary Timothy Geithner said in an interview with Bloomberg Television on Dec. 4 that no bank would have survived without the government’s help.

“The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run — a classic bank run,” he said.

Since the government stepped in, investors have been more willing to lend money to Goldman Sachs. The premium bondholders charge to own the firm’s bonds that mature in April 2018 instead of U.S. Treasuries of the same maturity has shrunk to less than 1.5 percentage points from as much as 6.8 percentage points on Nov. 20, 2008, according to data compiled by Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. The spread isn’t as narrow as the 0.99 percentage point premium to Treasuries that Goldman paid on new 10-year bonds in January 2006, the data show.

‘Backstopped’

At an Oct. 15 breakfast sponsored by Fortune magazine, Blankfein said that market prices prove that investors don’t think the bank has a government guarantee.

“We’re not exactly borrowing at the government rate,” he said. “The market isn’t behaving that way.”

Sean Egan — co-founder of Haverford, Pennsylvania-based Egan-Jones Ratings Co., which in October gave Goldman Sachs an AA rating, its third highest — has a different view.

“We’re in the business of doing credit analysis, and we’ve come to the conclusion that essentially Goldman Sachs is backstopped,” Egan says.

William Larkin, who manages about $250 million in fixed- income investments at Cabot Money Management Inc. in Salem, Massachusetts, says he owns Goldman Sachs bonds partly because he thinks the company won’t be allowed to go out of business.

“They would be bailed out” if anything went wrong, Larkin says. “Goldman right now is in a catbird seat because it’s very important to keep them healthy.”

Fewer Competitors

Chief Financial Officer David Viniar takes issue with the idea that the firm continues to benefit from an implied guarantee by the U.S. government.

“We operate as an independent financial institution that stands on our own two feet,” Viniar, 54, told reporters on an Oct. 15 conference call. “We don’t think we have a guarantee.”

The firm has grown more dominant in the past year, increasing its market share, Viniar told analysts on Oct. 15. It has benefited from having fewer competitors — Bear Stearns Cos., Merrill Lynch & Co. and Lehman Brothers were all subsumed into other banks during the financial crisis — while larger rivals such as Citigroup Inc. and UBS AG have been hobbled by writedowns and a lower appetite for risk.

“The crisis has created an oligopoly,” says Solomon, who founded his firm in 1989 after leaving Lehman Brothers.

Value-at-Risk

Goldman Sachs has also increased the size of the bets it’s making. Its value-at-risk — an estimate of how much the trading desk could lose in a single day — jumped to an average of $231 million in the first nine months of 2009, a record for the firm. At the end of September, the company estimated that a 10 percent drop in corporate equity held by its merchant-banking funds would cost it $1.04 billion, up from $987 million at the end of June.

Revenue generated by trading and investing, the most unpredictable part of Goldman Sachs’s business, accounted for 79 percent of the firm’s revenue in the first nine months of 2009, up from 28 percent in 1998. Early the next year, before Goldman Sachs’s initial public offering, executives, led by Paulson, told investors the company would try to decrease the percentage.

The government is acting schizophrenically by arguing that Goldman Sachs needs taxpayer support because it poses a risk to the financial system at the same time as it’s failing to do anything to curtail that risk, says Nobel Prize-winning economist Joseph Stiglitz, who teaches at Columbia University in New York.

“We say they’re too big to fail, but we refuse to do anything about their being too big to fail,” Stiglitz says. “We say that they represent systemic risk, but we don’t regulate them effectively.”

‘Biggest Single Gift’

Stiglitz also points to the Fed’s $182.3 billion AIG bailout as an example of how policy has been tilted to support Goldman Sachs.

“The biggest single gift was the AIG rescue,” he says. “No one has ever provided a good argument for why we did it other than we were bailing out Goldman Sachs.”

On Sept. 16, 2008, a day after Lehman filed the biggest bankruptcy in U.S. history, the Fed authorized Geithner, then president of the Federal Reserve Bank of New York, to lend $85 billion to help AIG avoid a similar fate by allowing it to continue to post collateral owed on contracts and to settle securities-lending agreements. Geithner later told a Congressional Oversight Panel that the government acted because “the entire system was at risk.”

$12.9 Billion

In November, the Fed created two entities: Maiden Lane II to repurchase securities that had been lent out in return for cash, and Maiden Lane III to purchase collateralized-debt obligations so AIG could cancel the credit-default swaps, similar to insurance policies, it had written on them. In the latter program, the Fed allowed the counterparties to settle contracts at 100 percent of their value.

Goldman Sachs was the biggest beneficiary, receiving a total of $12.9 billion in cash, consisting of $5.6 billion to cancel insurance on CDOs, $4.8 billion to repurchase securities and $2.5 billion of collateral.

If Goldman Sachs and AIG’s other counterparties hadn’t been paid off in full by the Fed, they might have taken losses on their contracts.

Other bond insurers had canceled agreements by paying less than par. Merrill Lynch accepted $500 million from Security Capital Assurance Ltd. in late July 2008 to tear up contracts guaranteeing $3.7 billion of CDOs. On Aug. 1, 2008, Citigroup agreed to accept $850 million from bond insurer Ambac Financial Group Inc. to cancel a guarantee on a $1.4 billion CDO.

Barofsky Report

In a Nov. 16 report on the AIG bailout, Neil Barofsky, special inspector general for TARP, said the Fed tried for two days to negotiate with counterparties, an effort that failed because the Fed felt obliged to make any discounts voluntary and because French counterparties said they couldn’t legally be required to comply. Goldman Sachs refused to negotiate because it felt it was hedged if AIG failed to pay, Barofsky wrote.

“Notwithstanding the additional credit protection it received in the market, Goldman Sachs (as well as the market as a whole) received a benefit from Maiden Lane III and the continued viability of AIG,” Barofsky wrote. Goldman Sachs would have been saddled with the risk of further declines in the market value of about $4.3 billion in CDOs as well as some $5.5 billion of CDSs, he added.

‘Fascination With AIG’

Viniar, who held a conference call in March to answer questions about the firm’s relationship with AIG, said Goldman Sachs didn’t need a bailout because the firm’s hedges meant it faced no significant losses if AIG failed.

“I am mystified by this fascination with AIG,” he said in an interview in April. “In the context of Goldman Sachs, they’re one of thousands and thousands of counterparties, and the results of any trading with AIG are completely immaterial to what we do. Always have been, and always will be.”

Suspicions that the fix was in for Goldman Sachs have been fanned by the firm’s political connections.

Paulson worked at the company for 32 years, the last eight of them as CEO, before becoming Treasury secretary in 2006. Geithner selected former Goldman Sachs lobbyist Mark Patterson to serve as his chief of staff at Treasury. Stephen Friedman, a former senior partner who serves on the company’s board, stepped down as chairman of the New York Fed in May amid controversy over his purchases of the firm’s shares in December 2008 and January 2009 after it became a bank holding company regulated by the Fed. Geithner and Lawrence Summers, President Barack Obama’s National Economic Council director, worked earlier in their careers under former Treasury Secretary Robert Rubin, who was once co-chairman of Goldman Sachs. Geithner’s successor as New York Fed president is William Dudley, a former chief U.S. economist at Goldman Sachs.

Political Contributions

Goldman Sachs and its employees have donated $31.4 million to U.S. political parties since 1989, more than any other financial institution and the fourth-highest amount of any organization, according to the Center for Responsive Politics, a Washington research group.

Regulators and lawmakers are attempting to make changes that they say will protect taxpayers in the future. One proposal being considered by the U.S. Congress is to require financial institutions whose failure could cause a breakdown of the entire system to hold more liquid assets and a larger buffer of capital to help absorb losses.

The bill would also empower regulators to step in and liquidate a major financial institution, or merge it with another, rather than bail it out or let it collapse.

Safety Net

That’s not enough for Paul Volcker, the former Fed chairman who serves as an economic adviser to Obama. Volcker, 82, has argued that the government safety net should be limited to financial institutions that provide utilitylike services such as deposit taking and business-payment processing essential to economic functioning. All risk-taking functions should be done separately, he says.

“I do not think it reasonable that public money –taxpayer money — be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial-banking organization,” Volcker said in a Sept. 16 speech at a conference in California.

Asked about Goldman Sachs in a Dec. 11 interview in Berlin, Volcker said, “They can do trading and do anything they want, but then they shouldn’t have access to the safety net.”

Black, the former bank regulator, agrees.

“The answer is not to give these guarantees but to make sure there are no more systemically dangerous institutions,” he says. “They shouldn’t be allowed to grow, and of course, that’s what they’re doing right now. They’re mostly growing like crazy.”

Ground Zero

On a cold, rainy morning in December, rust-colored beams poke above a fence that surrounds the construction pit at Ground Zero in lower Manhattan. Across West Street, workers in yellow slickers are landscaping the strips that separate the entrance to Goldman Sachs’s new headquarters from the highway. In the lobby, a brightly colored abstract painting by Ethiopian- American artist Julie Mehretu, which cost about $5 million, greets employees who have already relocated.

The new building has twice as much space and costs 14 times as much as Goldman Sachs’s old headquarters a half mile (0.8 kilometer) away. Two American flags the size of bed sheets dominate the stone and concrete facade of the 30-story building at 85 Broad St., constructed almost three decades ago when Goldman Sachs was a private partnership with about 2,700 employees in New York.

In 1983, the year the firm moved in, it had pretax earnings of $462 million, one-twenty-fifth of what it made in 2007.

While Goldman Sachs has outgrown its old headquarters, one thing hasn’t changed: It’s still getting subsidies to remain in lower Manhattan. When it built 85 Broad St., the company received about $9 million in incentives to stay, according to a press report at the time. Now, it’s getting $115 million — an amount dwarfed by the funds U.S. taxpayers provided in the heat of the 2008 financial crisis.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net
Last Updated: December 20, 2009 19:01 EST

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Banks Reorder Transactions & Consumers Pay Insufficient Fund Fees

Posted by: Micah Adkins
August 24, 2009
Topic: CONSUMER PROTECTION
Several nationwide class actions have been filed against some of the countries largest banking associations. The named plaintiffs allege the banks’ practice of reordering electronic transactions is deceptive and illegal, despite the banks’ customer agreements that state they can process customers’ transactions in any order. So what’s the big deal?

The following is an example of how banks are making millions of dollars by reordering customer transactions. Johnny and his family live paycheck to paycheck. Johnny makes his money the old fashion way, hard work and sweat at the local factory, and he gets paid every two weeks when his employer electronically deposits his check with his bank, Bank X. Its tough for Johnny and his family to pay all of their bills and expenses, and more often than not, Johnny’s paycheck is not enough to make ends meet. Johnny’s bank, Bank X, on the other hand, makes money the easy way, insufficient fund fees. Its quick, easy, and sweat free! While Johnny makes $15 per hour, Bank X has found a way to make $35 in less than one second!

For example, its Thursday Johnny has a balance of $200 in his Bank X checking account. Johnny started his morning like he does every Thursday, gassed up his truck, $50, and picks up a sausage biscuit and coffee, $5, for breakfast on his way to work. Later that same day, while on lunch break, Johnny picks up a burger and soda, $8, the family’s laundry from the cleaners, $35, and a birthday card for his grandmother, $4. After Johnny gets home from work, he takes his wife and three kids out for dinner, $65, then to the movies, $60. All 7 transactions were made with Johnny’s Bank X debit card and all 7 transactions were made on Thursday.

The total charges for Thursday total $ 227.00. As a result, his account is overdrawn on Friday. One would think that Johnny might expect one $35 overdraft fee for the insufficient funds and have an ending negative balance of $-62 ($27 overdraft + 35 insufficient fund fee) for the day, but instead Johnny is shocked to discover he has $105.00 in insufficient fund fees and has an ending negative balance of $-132.00. In other words, his checking account was debited by Bank X for three $35 overdraft fees. How? After all, he expected his account to be overdrawn by $23.00, but not according to Bank X’s records.

While Johnny’s transactions were made electronically throughout the day in the following order: $50; $5; $8; $35; $4; $65; and $60, Bank X has reordered the transactions from largest to smallest. Here is the order in which Bank X reorders Johnny’s debit card transactions for the day: $65; $60; $50; $35; $8; $5; and $4. Johnny’s account is now overdrawn after the fourth transaction, and he incurs $35 in overdraft fees for the next three transactions. Had Bank X processed the transaction in the order in which they were actually made, Johnny would have been charged $35 for one insufficient fund fee. Instead, Bank X charged Johnny’s account $105.00 in overdraft fees!

Sound familiar? If your bank has reordered your transactions or your bank has delayed posting deposits to your account and you have incurred overdraft fees, you need to contact attorney Micah Adkins.

http://consumereducation.suite101.com/article.cfm/banks_use_overdraft_fees_to_fleece_customers

Banks Use Overdraft Fees to Fleece Customers
Computerized Traps Sniff Out Time and Amount Opportunities

Aug 14, 2008 Rosemary E. Bachelor

Read more at Suite101: Banks Use Overdraft Fees to Fleece Customers: Computerized Traps Sniff Out Time and Amount Opportunities http://consumereducation.suite101.com/article.cfm/banks_use_overdraft_fees_to_fleece_customers#ixzz0buQ6uARI
As the mortgage crisis heightens and bank profits tumble, bank attempts to get non-service based fees have increased to nearly fraudulent proportions and the Federal Reserve is questioning these practices.
Banks Charge from When the Slip Is Signed

Now an overdraft fee can be charged before the transaction overdraws the account. This is a current practice of Bank of America, TD Banknorth and SunTrust.

Here’s how it works: Someone stops at the mall on the way home, sees that Penney’s has a two-for-one bargain on tee shirts and buys four, paying with a debit card. Thinking that may overdraw the account, the customer swings by the bank and makes a $100.00 deposit.

These three banks—and others—have computer programs that noticed insufficient funds when the purchase was signed for. That’s an automatic overdraft. Once upon a banking time, customers didn’t get charged unless they were short when the signature debit transaction cleared a few days later.
Largest Purchase Debited First

Banks also manipulate customer funds by the order in which they process debits and credits. The bank computer looks at the day’s transactions and sees the client made purchases totaling $99.00. A $100.00 deposit was made. The balance before these transactions was $75.00.

Watch these numbers: Spending power appears to be $175.00. Six purchases were made. The biggest is $76.00. There were five totaling $23.00.

First, all debits are charged before the credit (deposit) is processed. The $76.00 is first charged against the account, putting it in overdraft. The other five purchases wouldn’t have put it into overdraft so were processed last; each carries an overdraft charge.

There was enough money to pay the five purchases under $75.00 and the deposit (processed last) covered everything. Yet, there were six overdraft charges totaling $180.00. Uh-oh, the $100.00 deposit doesn’t cover them and now it’s overload mode. A $99.00 trip to WalMart is a $279.00 nightmare..

JPMorgan Chase is among banks that change the order of purchases so large debts get paid first, increasing the likelihood of incurring fees on smaller purchases.

The Federal Reserve has proposed giving customers the right to demand that banks deny transactions that overdraw their account. The Fed is also looking at banks processing transactions from high-to-low dollar amounts.
Online Account Balances Not Accurate

A disturbing revelation is that online account balances often aren’t accurate. With electronic transfers, ATMs, check cards, holds on accounts from hotel and rental car reservations, etc., banking is more complicated than banks expect customers to understand. Banks also sit on check deposits while the computer orders overdraft fees. The message? Don’t trust an online balance. It’s a moving target for your “financial partner”.

In 2007, banks collected a record $45.6 billion in overdraft fees, up 50% from 2001.

If the supermarket charged extra money when you didn’t buy more groceries you would be furious. The one-armed bandit used to be the casino slot machine. Now it is the bank!

SOURCES: Center for Responsible Lending; Center for Consumer Financial Services, Rochester Institute of Technology; Moebs Services, a Lake Bluff, IL consulting firm (selected by Federal Reserve and Congress to provide data for the Annual Report on Retail Services and Fees); Federal Reserve Proposal (Federal Register, Vol. 73, No. 97, Monday, May 19, 2008, Proposed Rules)

Read more at Suite101: Banks Use Overdraft Fees to Fleece Customers: Computerized Traps Sniff Out Time and Amount Opportunities http://consumereducation.suite101.com/article.cfm/banks_use_overdraft_fees_to_fleece_customers#ixzz0buQA7vTv

http://compliancex.typepad.com/compliancex/2008/11/behind-aigs-fal.html

November 03, 2008
Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test

Gary Gorton, a 57-year-old finance professor and jazz buff, is emerging as an unlikely central figure in the near-collapse of American International Group Inc.

Mr. Gorton, who teaches at Yale School of Management, is best known for his influential academic papers, which have been cited in speeches by Federal Reserve Chairman Ben Bernanke. But he also has a lucrative part-time gig: devising computer models used by the giant insurer to gauge risk in more than $400 billion of devilishly complicated deals called credit-default swaps.

AIG relied on those models to help figure out which swap deals were safe. But AIG didn’t anticipate how market forces and contract terms not weighed by the models would turn the swaps, over the short term, into huge financial liabilities. AIG didn’t assign Mr. Gorton to assess those threats, and knew that his models didn’t consider them. Those risks have cost AIG tens of billions of dollars and pushed the federal government to rescue the company in September.

The global financial crisis is studded with tales of venerable financial firms failing to protect themselves against the unexpected. In the case of AIG, as with many other firms, the financial horrors were hidden in the enormous market for credit-default swaps, which are a form of insurance against defaults on all sorts of debts.

A close look at AIG’s risk-management operations, and the rapid-fire chain of events that crippled the firm, raises questions about the run-up to the financial crisis: Did firms like AIG plunge into lucrative but perilous new markets without thoroughly understanding the pitfalls? Had the sheer complexity of the financial products made it all but impossible to fully calculate the risk? And did firms put too much faith in computer models to assess

The turmoil at AIG is likely to fan skepticism about the complicated, computer-driven modeling systems that many financial giants rely on to minimize risk. As chief executive of Berkshire Hathaway Inc., which owns insurance companies, Warren Buffett has been sounding the alarm about the issue for years. Recently, he told PBS interviewer Charlie Rose: “All I can say is, beware of geeks…bearing formulas.”

Last December, at a meeting with investors, Martin Sullivan, then AIG’s chief executive officer, told investors concerned about exposure to credit-default swaps that models helped give AIG “a very high level of comfort.” Mr. Gorton explained at the meeting that “no transaction is approved” by the chief of AIG’s financial-products unit “if it’s not based on a model that we built.”

Now, a federal criminal probe in Washington is examining whether AIG executives misled investors at that meeting, and whether any of its executives misled its outside auditor last fall. AIG itself has been forced to post about $50 billion in collateral to its trading partners, largely to offset sharp drops in the value of securities it insured with the credit-default swaps. These payments have continued to balloon after the bailout — raising the specter that the government will eventually have to lend more taxpayer money to AIG.

This account of AIG’s risk-management blunders is based on more than two dozen interviews with current and former AIG executives, AIG’s trading partners and others with direct knowledge of the firm, as well as internal AIG documents, regulatory filings and congressional testimony. Mr. Gorton, who continues to be a paid AIG consultant, referred questions about his role to AIG. Mr. Sullivan declined to comment.

AIG’s credit-default-swaps operation was run out of its AIG Financial Products Corp. unit, which had offices in London and Wilton, Conn. In essence, AIG sold insurance on billions of dollars of debt securities backed by everything from corporate loans to subprime mortgages to auto loans to credit-card receivables. It promised buyers of the swaps that if the debt securities defaulted, AIG would make good on them. AIG executives, not Mr. Gorton, decided which swaps to sell and how to price them.

The swaps expose AIG to three types of financial pain. If the debt securities default, AIG has to pay up. But there are two other financial risks as well. The buyers of the swaps — AIG’s “counterparties” or trading partners on the deals — typically have the right to demand collateral from AIG if the securities being insured by the swaps decline in value, or if AIG’s own corporate-debt rating is cut. In addition, AIG is obliged to account for the contracts on its own books based on their market values. If those values fall, AIG has to take write-downs.

Mr. Gorton’s models harnessed mounds of historical data to focus on the likelihood of default, and his work may indeed prove accurate on that front. But as AIG was aware, his models didn’t attempt to measure the risk of future collateral calls or write-downs, which have devastated AIG’s finances.

The problem for AIG is that it didn’t apply effective models for valuing the swaps and for collateral risk until the second half of 2007, long after the swaps were sold, AIG documents and investor presentations indicate. The firm left itself exposed to potentially large collateral calls because it had agreed to insure so much debt without protecting itself adequately through hedging.

The credit crisis hammered the markets for debt securities, sparking tough negotiations between AIG and its trading partners over how much more collateral AIG should have to post. Goldman Sachs Group Inc., for instance, has pried from AIG $8 billion to $9 billion, covering virtually all its exposure to AIG — most of it before the U.S. stepped in.

Such payments continued after the government bailout. AIG already has borrowed $83.5 billion from the Federal Reserve, a little more than two-thirds of the $123 billion in taxpayer loans made available to AIG so far. In addition, AIG affiliates recently obtained from the government as much as $21 billion in short-term loans called commercial paper. Much of the $83.5 billion has been used to meet the financial obligations of the financial-products unit. If turmoil in the markets causes prices of many assets to fall further, the government might have to cough up more money to help keep AIG afloat. Cutting it off would risk renewing the market upheaval the policy makers have struggled to tame.

Mr. Gorton, the son of a Phoenix psychiatrist, took a circuitous route to academia. He studied Mandarin, considered becoming an actor and briefly drove a cab in Cleveland, where he carried a gun for protection, he later told acquaintances. Eventually, he collected multiple degrees, including a Ph.D. in economics, and joined the faculty of the Wharton School of the University of Pennsylvania.

He drove an old Volkswagen Beetle, lived in a gritty North Philadelphia row house and accumulated a vast trove of jazz records, which he would cue up at night on two turntables to keep the music coming, recalls his wife at the time, Rachel Bliss.

He was passionate about mathematics, engaging in late-night conversations with fellow teachers, says Ms. Bliss. One of his academic interests was how banks could unload risk and sell loans to investors.

In 1987, AIG launched its financial-products unit with Howard Sosin, a math expert and former Drexel Burnham Lambert executive. Among his hires were Joseph Cassano, a former Drexel colleague. After Mr. Sosin left, Mr. Gorton joined as a consultant in the late 1990s. Mr. Cassano later took over the unit.

Early on, Mr. Gorton billed AIG about $250 an hour, which likely would have netted him about $200,000 a year, says a former senior executive at the unit. Eventually, his pay was far greater; another former colleague estimates it at $1 million a year.

Mr. Gorton collected vast amounts of data and built models to forecast losses on pools of assets such as home loans and corporate bonds. Speaking to investors last December, Mr. Cassano credited Mr. Gorton with “developing the intuition” that he and another top executive had “relied on in a great deal of the modeling that we’ve done and the business that we’ve created.”

AIG began selling credit-default swaps around 1998. Mr. Gorton’s work “helped convince Cassano that these things were only gold, that if anybody paid you to take on these risks, it was free money” because AIG would never have to make payments to cover actual defaults, according to the former senior executive at the unit. However, Mr. Gorton’s work didn’t address the potential write-downs or collateral payments to trading partners.

AIG became one of the largest sellers of credit-default-swap protection, according to a Moody’s Investors Service report last week. For years, the business was extremely lucrative. In a 2006 SEC filing, AIG said none of the swap deals now causing it pain had ever experienced high enough defaults to consider the likelihood of making a payout more than “remote, even in severe recessionary market scenarios.”

AIG charged its trading partners a fraction of a penny a year for every dollar of credit protection. The company realized, of course, that it might have to post collateral if the market values of the underlying securities declined. But AIG executives believed that such price moves were unlikely to occur, according to people familiar with AIG’s operation.

As the debt securities created by Wall Street became more complicated, so did the swaps AIG offered. Around 2004, it began selling swaps designed to provide insurance on securities called collateralized-debt obligations, or CDOs, that were backed by securities such as mortgage bonds. Merrill Lynch & Co., then a major seller of the CDOs, was a big client.

So-called multisector CDOs, in particular, were exceptionally complex, involving more than 100 securities, each backed by multiple mortgages, auto loans or credit-card receivables. Their performance depended on tens of thousands of disparate loans whose value was hard to determine and performance difficult to systematically predict. In assessing their risk, Mr. Gorton constructed worst-case scenarios that factored in the probability of defaults on the underlying securities.

In late 2005, senior executives at the unit grew worried about loosening lending standards in the subprime-mortgage market. AIG decided to stop selling credit protection on multisector CDOs, partly due to “concerns that the model was not going to be able to handle declining underwriting standards,” Mr. Gorton told investors last December. But by the time it stopped, in early 2006, its exposure to multisector CDOs had ballooned to $80 billion.

By mid-2007, as the housing slump took hold, the subprime mortgage market was weakening and many mortgage bonds were sinking in value. Ratings agencies began downgrading many mortgage securities, a departure from the historical pattern, Mr. Gorton later explained to investors. Concern began mounting about AIG’s credit-default swaps, even though AIG didn’t have large exposures to subprime-mortgage bonds issued in the worst years of 2006 and 2007.

AIG’s trading partners were worried. Goldman Sachs held swaps from AIG that insured about $20 billion of securities. In August 2007, Goldman demanded $1.5 billion in collateral, arguing that the assets backing the securities were falling in value. AIG argued that the demand was excessive, and the two firms eventually agreed that AIG would post $450 million to Goldman, this person says.

Late last October, Goldman asked for even more collateral, $3 billion. Again, AIG disagreed, and it ultimately posted $1.5 billion. Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG’s own debt, according to one person knowledgeable about this move.

When AIG’s outside auditor, PricewaterhouseCoopers LLP, learned about Goldman’s demands, it reviewed the value of the swaps, according to a Pricewaterhouse official cited in minutes of a meeting of the audit committee of AIG’s board. Last November, when AIG reported third-quarter results, it took its first major write-down on the swaps, lowering their value by $352 million.

That same month, collateral calls came in from Merrill and Société Générale SA, says the person familiar with AIG’s finances. It’s not clear how much those two banks asked for, or how much they got.

AIG decided to talk to investors last Dec. 5 about the financial-product unit’s exposure to the mortgage market. A Pricewaterhouse official said his firm told AIG’s then-CEO, Mr. Sullivan, and a deputy six days before the event that AIG might have a “material weakness” in its risk management, according to minutes of a Jan. 15 meeting of AIG’s audit committee. Pricewaterhouse declined to comment.

In his presentation to investors, held at New York’s Metropolitan Club, Mr. Sullivan praised the unit’s models as “very reliable” in analyzing many mortgages, saying they had helped give AIG “a very high level of comfort.”

Mr. Gorton was introduced. “The models are all extremely simple,” he said. “They’re highly data intensive.” He said he didn’t rely on the default-risk predictions of credit-rating services, and instead came up with his own estimates of what was safe enough for AIG to insure.

Mr. Cassano, the unit’s head, told investors: “We believe this is a money-good portfolio….As Gary said, the models we use are simple, they’re specific and they’re highly conservative.”

But the collateral calls kept coming. By the end of 2007, at least four other banks that had purchased swaps from AIG — UBS AG, Barclays PLC, Credit Agricole SA’s Calyon investment-banking unit and Royal Bank of Scotland Group PLC — had asked for money, according to people familiar with collateral calls. Deutsche Bank and Canadian banks CIBC and Bank of Montreal also have demanded collateral at various points, a person familiar with AIG’s finances says.

In February, AIG disclosed that Pricewaterhouse had found a “material weakness” in its accounting controls. Late that month, AIG announced a $5.3 billion fourth-quarter loss, its largest ever, driven largely by write-downs on the swaps. It also said it was “possible” that actual losses on the swaps could be material.

Mr. Sullivan told investors that Mr. Cassano, the unit’s head, was retiring. He remained a consultant, receiving, until recently, $1 million a month, according to a document later released by Congress.

In May, AIG announced another record quarterly loss, of $7.8 billion, largely driven by write-downs of the value of the swaps. That same month, Yale’s School of Management announced it had hired Mr. Gorton away from Wharton.

Mr. Sullivan was ousted in June. As of July 31, AIG had handed over $16.5 billion in collateral on its swaps, according to a regulatory filing.

By August, AIG had increased its estimates for what it might ultimately lose on the swaps in the case of defaults to as high as $8.5 billion. (The estimates are distinct from potential losses on write-downs and collateral calls.) That same month, Mr. Gorton attended the Federal Reserve Bank of Kansas City’s annual gathering in Jackson Hole, Wyo. He presented a 92-page paper, “The Panic of 2007,” which explained how the financial markets came unglued after a series of unexpected events, such as when clients of financial firms suddenly sought to reclaim assets put up as collateral. “It is difficult to convey,” he wrote, “the ferocity of the fights over collateral.”

Credit markets worsened in late August and September, and AIG’s trading partners demanded additional collateral. When Lehman Brothers Holdings Inc. filed for bankruptcy protection on Sept. 15, bond markets essentially froze. That same day, rating agencies slashed AIG’s credit ratings. Company executives figured the downgrade would require AIG to post more than $18 billion in additional collateral to its trading partners, according to a person familiar with the matter. Worried that a bankruptcy filing could roil markets world-wide, the government stepped in with a bailout.

The rescue didn’t stop the collateral calls, which have eaten up much of the government’s initial $85 billion loan commitment, which on Oct. 8 it boosted to $123 billion.

On a rainy morning last week, Mr. Gorton briefly discussed with his Yale students how perplexing the struggles of the financial world have become. About 30 graduate students listened as Mr. Gorton lamented how problems in one sector caused investors to question value all across the board. Said Mr. Gorton: “There doesn’t seem to be a fundamental reason why.”

Source: The Wall Street Journal

http://blogs.wsj.com/economics/2010/02/23/so-what-exactly-caused-the-financial-crisis/
So What Exactly Caused the Financial Crisis?
* February 23, 2010, 5:00 AM ET

By David Wessel

Gary Gorton, a finance professor at the Yale School of Management, takes a stab at explaining one key aspect of the recent crisis — the rise of the shadow banking system and the role that securitization plays — in testimony he’ll deliver later this week to the Financial Crisis Inquiry Commission.

The story isn’t as simple as the black hats vs. white hats version that politicians, the press and the public favor. In question-and-answer format, he offers a step-by-step explanation.

It’s wrong to blame this crisis on subprime mortgage lending, he says. Rather, this crisis is best seen as the latest of a series of banking crises throughout history. Banks borrow (or take deposits) short-term, promising to give money to their customers if they want it. They invest that money long-term, lending to businesses and consumers. This “intermediation” process is vital to the smooth functioning of the economy. But if depositors or others from whom banks have borrowed short-term demand their money back — a demand often sparked by panic — banks can’t instantly respond, and bad things ensue. In the old days, these runs were prompted by anxious depositors. Deposit insurance helped solve that problem. In our time, banks were reliant on short-term borrowing known as repurchase agreements — and the folks who held those panicked.

Gorton writes: “Repo is money… But, like other privately created bank money, it is vulnerable to a shock, which may cause depositors to rationally withdraw en masse, an event which the banking system — in this case the shadow banking system — cannot withstand alone. Forced by the withdrawals to sell assets, bond prices plummeted and firms failed or were bailed out with government money. In a bank panic, banks are forced to sell assets, which causes prices to go down, reflecting the large amounts being dumped on the market. Fire sales cause losses. The fundamentals of subprime [mortgages] were not bad enough by themselves to have created trillions in losses globally. The mechanism of the panic triggers the fire sales. As a matter of policy, such firm failures should not be caused by fire sales.”

“The crisis was not a one-time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default. There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo. The economy needs banks and banking. But bank liabilities have a vulnerability.”

Gorton also argues that securitization — the business of making loans and then selling them off as securities — was prompted by a simple fact of banking business life. “Holding loans on the balance sheets of banks is not profitable. This is a fundamental point. This is why the parallel or shadow banking system developed,” he says. “As traditional banking became unprofitable in the 1980s, due to competition from, most importantly, money market mutual funds and junk bonds, securitization developed. Bank funding became much more expensive. Banks could no longer afford to hold passive cash flows on their balance sheets. Securitization is an efficient, cheaper, way to fund the traditional banking system.”

In addition to being a scholarly analyst of finance, Gorton had a ringside seat during this crisis. He helped craft models that AIG used to assess the risk of its credit default swaps.

http://online.wsj.com/public/resources/documents/crisisqa0210.pdf
Best if viewed in color.
Questions and Answers about the Financial Crisis*
Prepared for the U.S. Financial Crisis Inquiry Commission
Gary Gorton
Yale and NBER
February 20, 2010
Abstract
All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprimerelated
bonds. These price declines were due to a banking panic in which institutional investors and
firms refused to renew sale and repurchase agreements (repo) – short-term, collateralized, agreements
that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized
bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and
creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears
about the locations of subprime risk concentrations among counterparties. This banking system (the
“shadow” or “parallel” banking system) — repo based on securitization — is a genuine banking system, as
large as the traditional, regulated and banking system. It is of critical importance to the economy
because it is the funding basis for the traditional banking system. Without it, traditional banks will not
lend and credit, which is essential for job creation, will not be created.
*Thanks to Lori Gorton, Stephen Partridge-Hicks, Andrew Metrick, and Nick Sossidis for comments and
suggestions.
1
“Unfortunately the subject [of the Panic of 1837] has been connected with the party
politics of the day. Nothing can be more unfavorable to the development of truth, on
questions in political economy, than such a connection. A good deal which is false, with
some admixture of truth, has been put forward by political partisans on either side. As
it is the wish of the writer that the subject should be discussed on its own merits and
free from such contaminating connection, he has avoided as much as possible all
reference to the political parties of the day” (Appleton (1857), May 1841).
“The current explanations [of the Panic of 1907] can be divided into two categories. Of
these the first includes what might be called the superficial theories. Thus it is
commonly stated that the outbreak of a crisis is due to a lack of confidence — as if the
lack of confidence was not itself the very thing which needs to be explained. Of still
slighter value is the attempt to associate a crisis with some particular governmental
policy, or with some action of a country’s executive. Such puerile interpretations have
commonly been confined to countries like the United States where the political passions
of a democracy had the fullest sway. . . . Opposed to these popular, but wholly
unfounded, interpretations is the second class of explanations, which seek to burrow
beneath the surface and to discover the more … fundamental causes of the periodicity
of crises” (Seligman (1908), p. xi).
“The subject [of the Panic of 1907] is technical. Opinions formed without a grasp of the
fundamental principles and conditions are without value. The verdict of the uninformed
majority gives no promise of being correct …. If to secure proper banking legislation now
it is necessary for a . . . campaign of public education, it is time it were begun”
(Vanderlip (1908), p. 18).
“Don’t bother me with facts, son. I’ve already made up my mind.” – Foghorn Leghorn
1. Introduction
Yes, we have been through this before, tragically many times.
U.S. financial history is replete with banking crises and the predictable political responses. Most people
are unaware of this history, which we are repeating. A basic point of this note is that there is a
fundamental, structural, feature of banking, which if not guarded against leads to such crises. Banks
create money, which allows the holder to withdraw cash on demand. The problem is not that we have
banking; we need banks and banking. And we need this type of bank product. But, as the world grows
and changes, this money feature of banking reappears in different forms. The current crisis, far from
being unique, is another manifestation of this problem. The problem then is structural.
In this note, I pose and try to answer what I think are the most relevant questions about the crisis. I
focus on the systemic crisis, not other attendant issues. I do not have all the answers by any means.
But, I know enough to see that the level of public discourse is politically motivated and based on a lack
2
of understanding, as it has been in the past, as the opening quotations indicate. The goal of this note is
to help raise the level of discourse.
2. Questions and Answers
Q. What happened?
A. This question, though the most basic and fundamental of all, seems very difficult for most people to
answer. They can point to the effects of the crisis, namely the failures of some large firms and the
rescues of others. People can point to the amounts of money invested by the government in keeping
some firms running. But they can’t explain what actually happened, what caused these firms to get into
trouble. Where and how were losses actually realized? What actually happened? The remainder of
this short note will address these questions. I start with an overview.
There was a banking panic, starting August 9, 2007. In a banking panic, depositors rush en masse to
their banks and demand their money back. The banking system cannot possibly honor these demands
because they have lent the money out or they are holding long-term bonds. To honor the demands of
depositors, banks must sell assets. But only the Federal Reserve is large enough to be a significant buyer
of assets.
Banking means creating short-term trading or transaction securities backed by longer term assets.
Checking accounts (demand deposits) are the leading example of such securities. The fundamental
business of banking creates a vulnerability to panic because the banks’ trading securities are short term
and need not be renewed; depositors can withdraw their money. But, panic can be prevented with
intelligent policies. What happened in August 2007 involved a different form of bank liability, one
unfamiliar to regulators. Regulators and academics were not aware of the size or vulnerability of the
new bank liabilities.
In fact, the bank liabilities that we will focus on are actually very old, but have not been quantitatively
important historically. The liabilities of interest are sale and repurchase agreements, called the “repo”
market. Before the crisis trillions of dollars were traded in the repo market. The market was a very
liquid market like another very liquid market, the one where goods are exchanged for checks (demand
deposits). Repo and checks are both forms of money. (This is not a controversial statement.) There have
always been difficulties creating private money (like demand deposits) and this time around was no
different.
The panic in 2007 was not observed by anyone other than those trading or otherwise involved in the
capital markets because the repo market does not involve regular people, but firms and institutional
investors. So, the panic in 2007 was not like the previous panics in American history (like the Panic of
1907, shown below, or that of 1837, 1857, 1873 and so on) in that it was not a mass run on banks by
individual depositors, but instead was a run by firms and institutional investors on financial firms. The
fact that the run was not observed by regulators, politicians, the media, or ordinary Americans has made
the events particularly hard to understand. It has opened the door to spurious, superficial, and
politically expedient “explanations” and demagoguery.
3
Q. How could there be a banking panic when we have deposit insurance?
A. As explained, the Panic of 2007 was not centered on demand deposits, but on the repo market which
is not insured.
As the economy transforms with growth, banking also changes. But, at a deep level the basic form of
the bank liability has the same structure, whether it is private bank notes (issued before the Civil War),
demand deposits, or sale and repurchase agreements. Bank liabilities are designed to be safe; they are
short term, redeemable, and backed by collateral. But, they have always been vulnerable to mass
withdrawals, a panic. This time the panic was in the sale and repurchase market (“repo market”). But,
before we come to that we need to think about how banking has changed.
Americans frequently experienced banking panics from colonial days until deposit insurance was passed
in 1933, effective 1934. Government deposit insurance finally ended the panics that were due to
demand deposits (checking accounts). A demand deposit allows you to keep money safely at a bank and
get it any time you want by asking for your currency back. The idea that you can redeem your deposits
anytime you want is one of the essential features of making bank debt safe. Other features are that the
bank debt is backed by sufficient collateral in the form of bank assets.
4
Before the Civil War the dominant form of money was privately issued bank notes; there was no
government currency issued. Individual banks issued their own currencies. During the Free Banking Era,
1837-1863, these currencies had to be backed by state bonds deposited with the authorities of
whatever state the bank was chartered in. Bank notes were also redeemable on demand and there
were banking panics because sometimes the collateral (the state bonds) was of questionable value. This
problem of collateral will reappear in 2007.
During the Free Banking Era banking slowly changed, first in the cities, and over the decades after the
Civil War nationally. The change was that demand deposits came to be a very important form of bank
money. During the Civil War the government took over the money business; national bank notes
(“greenbacks”) were backed by U.S. Treasury bonds and there were no longer private bank notes. But,
banking panics continued. They continued because demand deposits were vulnerable to panics.
Economists and regulators did not figure this out for decades. In fact, when panics due to demand
deposits were ended it was not due to the insight of economists, politicians, or regulators. Deposit
insurance was not proposed by President Roosevelt; in fact, he opposed it. Bankers opposed it.
Economists decried the “moral hazards” that would result from such a policy. Deposit insurance was a
populist demand. People wanted the dominant medium of exchange protected. It is not an exaggeration
to say that the quiet period in banking from 1934 to 2007, due to deposit insurance, was basically an
accident of history.
Times change. Now, banking has changed again. In the last 25 years or so, there has been another
significant change: a change in the form and quantity of bank liabilities that has resulted in a panic. This
change involves the combination of securitization with the repo market. At root this change has to do
with the traditional banking system becoming unprofitable in the 1980s. During that decade, traditional
banks lost market share to money market mutual funds (which replaced demand deposits) and junk
bonds (which took market share from lending), to name the two most important changes. Keeping
passive cash flows on the balance sheet from loans, when the credit decision was already made, became
unprofitable. This led to securitization, which is the process by which such cash flows are sold. I discuss
securitization below.
Q. What has to be explained to explain the crisis?
A. It is very important to set standards for the discussion. I think we should insist on three criteria.
First, a coherent answer to the question of what happened must explain why the spreads on asset
classes completely unrelated to subprime mortgages rose dramatically. (Or, to say it another way, the
prices of bonds completely unrelated to subprime fell dramatically.) The figure below shows the LIBOROIS
spread, a measure of interbank counterparty risk, together with the spreads on AAA tranches of
bonds backed by student loans, credit card receivables, and auto loans. The units on the y-axis are basis
points. The three types of bonds normally trade near or below LIBOR. Yet, in the crisis, they spiked
dramatically upwards and they moved with the measure of bank counterparty risk. Why?
5
Source: Gorton and Metrick (2009a).
The outstanding amount of subprime bonds was not large enough to cause a systemic financial crisis by
itself. It does it explain the figure above. No popular theory (academic or otherwise) explains the above
figure. Let me repeat that another way. Common “explanations” are too vague and general to be of
any value. They do not explain what actually happened. The issue is why all bond prices plummeted.
What caused that?
This does not mean that there are not other issues that should be explored, as a matter of public policy.
Nor does it mean that these other issues are not important. It does, however, mean that these other
issues – whatever they are – are irrelevant to understanding the main event of the crisis.
Second, an explanation should be able to show exactly how losses occurred. This is a different question
than the first question. Prices may go down, but how did that result in trillions of dollars of losses for
financial firms?
Finally, a convincing answer to the question of what happened must include some evidence and not just
be a series of broad, vague, assertions.
In what follows I will try to adhere to these criteria.
6
Q. Wasn’t the panic due to subprime mortgages going bad due to house prices falling?
A. No. This cannot be the whole story. Outstanding subprime securitization was not large enough by
itself to have caused the losses that were experienced. Further, the timing is wrong. Subprime
mortgages started to deteriorate in January 2007, eight months before the panic in August. The red line
below is the BBB tranche of the ABX index, a measure of subprime fundamentals. It is in the form of a
spread, so when it rises it means that the fundamentals are deteriorating. The two axes are measured
in basis points; the axis on the right side is for the ABX. The other line, the one that is essentially flat, is
the LIBOR minus OIS spread – a measure of counterparty risk in the banking system. It is measured on
the left-hand axis. The point is this: Subprime started significantly deteriorating well before the panic,
which is not shown here. Moreover, subprime was never large enough to be an issue for the global
banking system. In 2007 subprime stood at about $1.2 trillion outstanding, of which roughly 82 percent
was rated AAA and to date has very small amounts of realized losses. Yes, $1.2 trillion is a large number,
but for comparison, the total size of the traditional and parallel banking systems is about $20 trillion.
Source: Gorton and Metrick (2009a). LIBOIS is the LIBOR minus Overnight Index Swap spread. ABX
refers to the spread on the BBB tranche of the ABX index.
Subprime will play an important role in the story later. But by itself it does not explain the crisis.
Q. Subprime mortgages were securitized. Isn’t securitization bad because it allows banks to sell
loans?
A. Holding loans on the balance sheets of banks is not profitable. This is a fundamental point. This is
why the parallel or shadow banking system developed. If an industry is not profitable, the owners exit
7
the industry by not investing; they invest elsewhere. Regulators can make banks do things, like hold
more capital, but they cannot prevent exit if banking is not profitable. “Exit” means that the regulated
banking sector shrinks, as bank equity holders refuse to invest more equity. Bank regulation determines
the size of the regulated banking sector, and that is all. One form of exit is for banks to not hold loans
but to sell the loans; securitization is the selling of portfolios of loans. Selling loans – while news to
some people—has been going on now for about 30 years without problems.
In securitization, the bank is still at risk because the bank keeps the residual or equity portion of the
securitized loans and earns fees for servicing these loans. Moreover, banks support their securitizations
when there are problems. No one has produced evidence of any problems with securitization generally;
though there are have been many such assertions. The motivation for banks to sell loans is profitability.
In a capitalist economy, firms (including banks) make decisions to maximize profits. Over the last 25
years securitization was one such outcome. As mentioned, regulators cannot make firms do unprofitable
things because investors do not have to invest in banks. Banks will simply shrink. This is exactly what
happened. The traditional banking sector shrank, and a whole new banking sector developed – the
outcome of millions of individual decisions over a quarter of a century.
Q. What is this new banking system, the “parallel banking system” or “shadow banking system” or
“securitized banking system”?
A. A major part of it is securitization. Never mind the details for our present purposes (see Gorton
(2010 for details); the main point is that this market is very large. The figure below shows the issuance
amounts of various levels of fixed-income instruments in the capital markets. The green line shows
mortgage-related instruments, including securitization. It is the largest market.
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$ Billions
Issuance in US Capital Markets
Municipal
Treasury
Mortgage-Related
Corporate Debt
Federal Securities
Asset-Backed
8
Sources: U.S. Department of Treasury, Federal Agencies, Thomson Financial, Inside MBS & ABS,
Bloomberg.
Of greater interest perhaps is the comparison of the non-mortgage securitization (labeled “Asset-
Backed” in the above figure) issuance amounts with the amount of all of U.S. corporate debt issuance.
This is portrayed in the figure below.
Sources: U.S. Department of Treasury, Federal Agencies, Thomson Financial, Inside MBS & ABS,
Bloomberg.
The figure shows two very important points. First, measured by issuance, non-mortgage securitization
exceeded the issuance of all U.S. corporate debt starting in 2004. Secondly, the figure shows the effects
of the crisis on issuance: this market is essentially dead.
Q. So, traditional, regulated, banks sell their loans to the other banking system. Is that the
connection between the parallel or shadow banking system and the traditional banking system?
A. Yes. The parallel or shadow banking system is essentially how the traditional, regulated, banking
system is funded. The two banking systems are intimately connected. This is very important to
recognize. It means that without the securitization markets the traditional banking system is not going
to function. The diagram below shows how the two banking systems are related.
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$ Billions
Non-Mortgage ABS Issuance vs. Corporate Debt
Corporate Debt
Asset-Backed
9
Capital
Debt
Capital
CP, MTN &
Capital
Corporate
Borrower
Traditional
Banks
MMF
Securities
Lenders
Investment
Managers
Underexposed
Banks
Pension Co
Insurance Co
Loan
Loan
$/€
CP
MTN
CD
CP
Consumer
Borrower
Global: $11T*
Bank Conduits : $1T
SIVs
LPFCs
Securitizations:
ABS
RMBS
CMBS
Auto loans
CLOs
CBOs
CDOs
Specialist Credit
Managers $500B
Products
Parallel Banking System Investors
Bank
Equity
“Greek woes revive seven-year-old swaps story.”

Well, are these swaps evil? To paraphrase Bill Clinton, it depends on what your definition of “is” is. They don’t look fabulous now that Greece is on the verge of default because it mismanaged its debt. But the swaps weren’t illegal, and Goldman was giving its client — Greece — what it asked for. The bank followed all the rules to do it. True, the swaps weren’t disclosed, but you can blame the Maastricht rules for that: No country has to disclose these swaps, and that’s partly why they’re so popular with politicians and also why you never hear about them in the popular media. The trend recently has been to slap down regulations on stuff that was okay before but looks bad now, and several countries including France have officials looking at these swaps for that reason.

So is this entire thing mostly political? Need you even ask?

Whew! Glad it can’t happen here. Don’t be so sure. Most countries like to avoid talking about the size of their deficits, and they like to make the deficits look smaller so that they can keep issuing government bonds without paying a lot to borrow the money from investors. Government bonds pay for things like infrastructure, schools, public transportation — and more recently, bailouts. In fact, the entire U.S. bailout of the financial system is funded by a weird government-bond-buying circle that makes it hard to track our debt: The Federal Reserve created the financial-system bailouts, then Treasury issues bonds to pay for the bailouts, and the Fed buys the Treasuries to pay for the bailouts, which, you’ll remember, the Fed created. Then there’s Fannie Mae and Freddie Mac, which are wards of the state. The Fed has been the biggest buyer of Fannie Mae and Freddie Mac bonds in order to prop up the housing market; banks, knowing this, spent much of the year buying up Fannie Mae and Freddie Mac bonds to sell back to the government at a higher price, knowing the Fed would pay through the nose if necessary. Almost certainly, the Fed has paid more than it has to for some of these bonds because it is the main buyer in the market. In addition, Fannie and Freddie keep sinking into debt, but our government has ruled to exclude the two disastrous companies from our national deficit — no small matter when Fannie and Freddie have something like $6.3 trillion in liabilities. Then there’s California, whose disastrous finances could bring the entire country down, according to an op-ed in the Los Angeles Times. Recently, Moody’s Investor Service warned the U.S. that its vaunted triple-A credit rating might slip. Treasury Secretary Tim Geithner had to assure everyone that America wouldn’t lose the valuable rating, which keeps our borrowing costs low. But even he can’t be so sure.
By: Heidi N. Moore

http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004?printable=true

Betting on the Blind Side
Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession.
By Michael Lewis•
Photograph by Jonas Fredwall Karlsson
April 2010

Excerpted from The Big Short: Inside the Doomsday Machine, by Michael Lewis, to be published this month by W. W. Norton; © 2010 by the author.

In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings. He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds.

Every mortgage bond came with its own mind-numbingly tedious 130-page prospectus. If you read the fine print, you saw that each bond was its own little corporation. Burry spent the end of 2004 and early 2005 scanning hundreds and actually reading dozens of the prospectuses, certain he was the only one apart from the lawyers who drafted them to do so—even though you could get them all for $100 a year from 10kWizard.com.

The subprime-mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn’t called a subprime-mortgage bond. It was called an “A.B.S.,” or “asset-backed security.” If you asked Deutsche Bank exactly what assets secured an asset-backed security, you’d be handed lists of more acronyms—R.M.B.S., hels, helocs, Alt-A—along with categories of credit you did not know existed (“midprime”). R.M.B.S. stood for “residential-mortgage-backed security.” hel stood for “home-equity loan.” heloc stood for “home-equity line of credit.” Alt-A was just what they called crappy subprime-mortgage loans for which they hadn’t even bothered to acquire the proper documents—to, say, verify the borrower’s income. All of this could more clearly be called “subprime loans,” but the bond market wasn’t clear. “Midprime” was a kind of triumph of language over truth. Some crafty bond-market person had gazed upon the subprime-mortgage sprawl, as an ambitious real-estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called “Rockridge.” Simply by refusing to be called “Oakland,” “Rockridge” enjoyed higher property values. Inside the subprime-mortgage market there was now a similar neighborhood known as “midprime.”

But as early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry’s view, standards had not just fallen but hit bottom. The bottom even had a name: the interest-only negative-amortizing adjustable-rate subprime mortgage. You, the homebuyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the bank into a higher principal balance. It wasn’t hard to see what sort of person might like to have such a loan: one with no income. What Burry couldn’t understand was why a person who lent money would want to extend such a loan. “What you want to watch are the lenders, not the borrowers,” he said. “The borrowers will always be willing to take a great deal for themselves. It’s up to the lenders to show restraint, and when they lose it, watch out.” By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.

A lot of hedge-fund managers spent time chitchatting with their investors and treated their quarterly letters to them as a formality. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. In his quarterly letters he coined a phrase to describe what he thought was happening: “the extension of credit by instrument.” That is, a lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to justify handing them new money. “It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” Burry said. He could see why they were doing this: they didn’t keep the loans but sold them to Goldman Sachs and Morgan Stanley and Wells Fargo and the rest, which packaged them into bonds and sold them off. The end buyers of subprime-mortgage bonds, he assumed, were just “dumb money.” He’d study up on them, too, but later.

He now had a tactical investment problem. The various floors, or tranches, of subprime-mortgage bonds all had one thing in common: the bonds were impossible to sell short. To sell a stock or bond short, you needed to borrow it, and these tranches of mortgage bonds were tiny and impossible to find. You could buy them or not buy them, but you couldn’t bet explicitly against them; the market for subprime mortgages simply had no place for people in it who took a dim view of them. You might know with certainty that the entire subprime-mortgage-bond market was doomed, but you could do nothing about it. You couldn’t short houses. You could short the stocks of homebuilding companies—Pulte Homes, say, or Toll Brothers—but that was expensive, indirect, and dangerous. Stock prices could rise for a lot longer than Burry could stay solvent.

A couple of years earlier, he’d discovered credit-default swaps. A credit-default swap was confusing mainly because it wasn’t really a swap at all. It was an insurance policy, typically on a corporate bond, with periodic premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a 10-year credit-default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for 10 years. The most you could make was $100 million, if General Electric defaulted on its debt anytime in the next 10 years and bondholders recovered nothing. It was a zero-sum bet: if you made $100 million, the guy who had sold you the credit-default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table, but if your number came up, you made 30, 40, even 50 times your money. “Credit-default swaps remedied the problem of open-ended risk for me,” said Burry. “If I bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.”

He was already in the market for corporate credit-default swaps. In 2004 he began to buy insurance on companies he thought might suffer in a real-estate downturn: mortgage lenders, mortgage insurers, and so on. This wasn’t entirely satisfying. A real-estate-market meltdown might cause these companies to lose money; there was no guarantee that they would actually go bankrupt. He wanted a more direct tool for betting against subprime-mortgage lending. On March 19, 2005, alone in his office with the door closed and the shades pulled down, reading an abstruse textbook on credit derivatives, Michael Burry got an idea: credit-default swaps on subprime-mortgage bonds.

The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J. P. Morgan, of the first corporate credit-default swaps. He came to a passage explaining why banks felt they needed credit-default swaps at all. It wasn’t immediately obvious—after all, the best way to avoid the risk of General Electric’s defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit-default swaps had been a tool for hedging: some bank had loaned more than they wanted to to General Electric because G.E. had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to G.E. at all. Very quickly, however, the new derivatives became tools for speculation: a lot of people wanted to make bets on the likelihood of G.E.’s defaulting. It struck Burry: Wall Street is bound to do the same thing with subprime-mortgage bonds, too. Given what was happening in the real-estate market—and given what subprime-mortgage lenders were doing—a lot of smart people eventually were going to want to make side bets on subprime-mortgage bonds. And the only way to do it would be to buy a credit-default swap.

The credit-default swap would solve the single biggest problem with Mike Burry’s big idea: timing. The subprime-mortgage loans being made in early 2005 were, he felt, almost certain to go bad. But, as their interest rates were set artificially low and didn’t reset for two years, it would be two years before that happened. Subprime mortgages almost always bore floating interest rates, but most of them came with a fixed, two-year “teaser” rate. A mortgage created in early 2005 might have a two-year “fixed” rate of 6 percent that, in 2007, would jump to 11 percent and provoke a wave of defaults. The faint ticking sound of these loans would grow louder with time, until eventually a lot of people would suspect, as he suspected, that they were bombs. Once that happened, no one would be willing to sell insurance on subprime-mortgage bonds. He needed to lay his chips on the table now and wait for the casino to wake up and change the odds of the game. A credit-default swap on a 30-year subprime-mortgage bond was a bet designed to last for 30 years, in theory. He figured that it would take only three to pay off.

The only problem was that there was no such thing as a credit-default swap on a subprime-mortgage bond, not that he could see. He’d need to prod the big Wall Street firms to create them. But which firms? If he was right and the housing market crashed, these firms in the middle of the market were sure to lose a lot of money. There was no point buying insurance from a bank that went out of business the minute the insurance became valuable. He didn’t even bother calling Bear Stearns and Lehman Brothers, as they were more exposed to the mortgage-bond market than the other firms. Goldman Sachs, Morgan Stanley, Deutsche Bank, Bank of America, UBS, Merrill Lynch, and Citigroup were, to his mind, the most likely to survive a crash. He called them all. Five of them had no idea what he was talking about; two came back and said that, while the market didn’t exist, it might one day. Inside of three years, credit-default swaps on subprime-mortgage bonds would become a trillion-dollar market and precipitate hundreds of billions of losses inside big Wall Street firms. Yet, when Michael Burry pestered the firms in the beginning of 2005, only Deutsche Bank and Goldman Sachs had any real interest in continuing the conversation. No one on Wall Street, as far as he could tell, saw what he was seeing.

He sensed that he was different from other people before he understood why. Before he was two years old he was diagnosed with a rare form of cancer, and the operation to remove the tumor had cost him his left eye. A boy with one eye sees the world differently from everyone else, but it didn’t take long for Mike Burry to see his literal distinction in more figurative terms. Grown-ups were forever insisting that he should look other people in the eye, especially when he was talking to them. “It took all my energy to look someone in the eye,” he said. “If I am looking at you, that’s the one time I know I won’t be listening to you.” His left eye didn’t line up with whomever he was trying to talk to; when he was in social situations, trying to make chitchat, the person to whom he was speaking would steadily drift left. “I don’t really know how to stop it,” he said, “so people just keep moving left until they’re standing way to my left, and I’m trying not to turn my head anymore. I end up facing right and looking left with my good eye, through my nose.”

His glass eye, he assumed, was the reason that face-to-face interaction with other people almost always ended badly for him. He found it maddeningly difficult to read people’s nonverbal signals, and their verbal signals he often took more literally than they meant them. When trying his best, he was often at his worst. “My compliments tended not to come out right,” he said. “I learned early that if you compliment somebody it’ll come out wrong. For your size, you look good. That’s a really nice dress: it looks homemade.” The glass eye became his private explanation for why he hadn’t really fit in with groups. The eye oozed and wept and required constant attention. It wasn’t the sort of thing other kids ever allowed him to be unself-conscious about. They called him cross-eyed, even though he wasn’t. Every year they begged him to pop his eye out of its socket—but when he complied, it became infected and disgusting and a cause of further ostracism.

In his glass eye he found the explanation for other traits peculiar to himself. His obsession with fairness, for example. When he noticed that pro basketball stars were far less likely to be called for traveling than lesser players, he didn’t just holler at the refs. He stopped watching basketball altogether; the injustice of it killed his interest in the sport. Even though he was ferociously competitive, well built, physically brave, and a good athlete, he didn’t care for team sports. The eye helped to explain this, as most team sports were ball sports, and a boy with poor depth perception and limited peripheral vision couldn’t very well play ball sports. He tried hard at the less ball-centric positions in football, but his eye popped out if he hit someone too hard. He preferred swimming, as it required virtually no social interaction. No teammates. No ambiguity. You just swam your time and you won or you lost.

After a while even he ceased to find it surprising that he spent most of his time alone. By his late 20s he thought of himself as the sort of person who didn’t have friends. He’d gone through Santa Teresa High School, in San Jose, U.C.L.A., and Vanderbilt University School of Medicine, and created not a single lasting bond. What friendships he did have were formed and nurtured in writing, by email; the two people he considered to be true friends he had known for a combined 20 years but had met in person a grand total of eight times. “My nature is not to have friends,” he said. “I’m happy in my own head.” Somehow he’d married twice. His first wife was a woman of Korean descent who wound up living in a different city (“She often complained that I appeared to like the idea of a relationship more than living the actual relationship”) and his second, to whom he was still married, was a Vietnamese-American woman he’d met on Match.com. In his Match.com profile, he described himself frankly as “a medical resident with only one eye, an awkward social manner, and $145,000 in student loans.” His obsession with personal honesty was a cousin to his obsession with fairness.

Obsessiveness—that was another trait he came to think of as peculiar to himself. His mind had no temperate zone: he was either possessed by a subject or not interested in it at all. There was an obvious downside to this quality—he had more trouble than most faking interest in other people’s concerns and hobbies, for instance—but an upside, too. Even as a small child he had a fantastic ability to focus and learn, with or without teachers. When it synched with his interests, school came easy for him—so easy that, as an undergraduate at U.C.L.A., he could flip back and forth between English and economics and pick up enough pre-medical training on the side to get himself admitted to the best medical schools in the country. He attributed his unusual powers of concentration to his lack of interest in human interaction, and his lack of interest in human interaction … well, he was able to argue that basically everything that happened was caused, one way or the other, by his fake left eye.

This ability to work and to focus set him apart even from other medical students. In 1998, as a resident in neurology at Stanford Hospital, he mentioned to his superiors that, between 14-hour hospital shifts, he had stayed up two nights in a row taking apart and putting back together his personal computer in an attempt to make it run faster. His superiors sent him to a psychiatrist, who diagnosed Mike Burry as bipolar. He knew instantly he’d been misdiagnosed: how could you be bipolar if you were never depressed? Or, rather, if you were depressed only while doing your rounds and pretending to be interested in practicing, as opposed to studying, medicine? He’d become a doctor not because he enjoyed medicine but because he didn’t find medical school terribly difficult. The actual practice of medicine, on the other hand, either bored or disgusted him. Of his first brush with gross anatomy: “one scene with people carrying legs over their shoulders to the sink to wash out the feces just turned my stomach, and I was done.” Of his feeling about the patients: “I wanted to help people—but not really.”

He was genuinely interested in computers, not for their own sake but for their service to a lifelong obsession: the inner workings of the stock market. Ever since grade school, when his father had shown him the stock tables at the back of the newspaper and told him that the stock market was a crooked place and never to be trusted, let alone invested in, the subject had fascinated him. Even as a kid he had wanted to impose logic on this world of numbers. He began to read about the market as a hobby. Pretty quickly he saw that there was no logic at all in the charts and graphs and waves and the endless chatter of many self-advertised market pros. Then along came the dot-com bubble and suddenly the entire stock market made no sense at all. “The late 90s almost forced me to identify myself as a value investor, because I thought what everybody else was doing was insane,” he said. Formalized as an approach to financial markets during the Great Depression by Benjamin Graham, “value investing” required a tireless search for companies so unfashionable or misunderstood that they could be bought for less than their liquidation value. In its simplest form, value investing was a formula, but it had morphed into other things—one of them was whatever Warren Buffett, Benjamin Graham’s student and the most famous value investor, happened to be doing with his money.

Burry did not think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he thought Buffett could be copied. Indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. “If you are going to be a great investor, you have to fit the style to who you are,” Burry said. “At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.… I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it’d be the most popular school in the world, with an impossibly high tuition. So it must not be true.”

Investing was something you had to learn how to do on your own, in your own peculiar way. Burry had no real money to invest, but he nevertheless dragged his obsession along with him through high school, college, and medical school. He’d reached Stanford Hospital without ever taking a class in finance or accounting, let alone working for any Wall Street firm. He had maybe $40,000 in cash, against $145,000 in student loans. He had spent the previous four years working medical-student hours. Nevertheless, he had found time to make himself a financial expert of sorts. “Time is a variable continuum,” he wrote to one of his e-mail friends one Sunday morning in 1999: “An afternoon can fly by or it can take 5 hours. Like you probably do, I productively fill the gaps that most people leave as dead time. My drive to be productive probably cost me my first marriage and a few days ago almost cost me my fiancée. Before I went to college the military had this ‘we do more before 9am than most people do all day’ and I used to think I do more than the military. As you know there are some select people that just find a drive in certain activities that supersedes everything else.” Thinking himself different, he didn’t find what happened to him when he collided with Wall Street nearly as bizarre as it was.

Late one night in November 1996, while on a cardiology rotation at Saint Thomas Hospital, in Nashville, Tennessee, he logged on to a hospital computer and went to a message board called techstocks.com. There he created a thread called “value investing.” Having read everything there was to read about investing, he decided to learn a bit more about “investing in the real world.” A mania for Internet stocks gripped the market. A site for the Silicon Valley investor, circa 1996, was not a natural home for a sober-minded value investor. Still, many came, all with opinions. A few people grumbled about the very idea of a doctor having anything useful to say about investments, but over time he came to dominate the discussion. Dr. Mike Burry—as he always signed himself—sensed that other people on the thread were taking his advice and making money with it.

Once he figured out he had nothing more to learn from the crowd on his thread, he quit it to create what later would be called a blog but at the time was just a weird form of communication. He was working 16-hour shifts at the hospital, confining his blogging mainly to the hours between midnight and three in the morning. On his blog he posted his stock-market trades and his arguments for making the trades. People found him. As a money manager at a big Philadelphia value fund said, “The first thing I wondered was: When is he doing this? The guy was a medical intern. I only saw the nonmedical part of his day, and it was simply awesome. He’s showing people his trades. And people are following it in real time. He’s doing value investing—in the middle of the dot-com bubble. He’s buying value stocks, which is what we’re doing. But we’re losing money. We’re losing clients. All of a sudden he goes on this tear. He’s up 50 percent. It’s uncanny. He’s uncanny. And we’re not the only ones watching it.”

Mike Burry couldn’t see exactly who was following his financial moves, but he could tell which domains they came from. In the beginning his readers came from EarthLink and AOL. Just random individuals. Pretty soon, however, they weren’t. People were coming to his site from mutual funds like Fidelity and big Wall Street investment banks like Morgan Stanley. One day he lit into Vanguard’s index funds and almost instantly received a cease-and-desist letter from Vanguard’s attorneys. Burry suspected that serious investors might even be acting on his blog posts, but he had no clear idea who they might be. “The market found him,” says the Philadelphia mutual-fund manager. “He was recognizing patterns no one else was seeing.”

By the time Burry moved to Stanford Hospital, in 1998, to take up his residency in neurology, the work he had done between midnight and three in the morning had made him a minor but meaningful hub in the land of value investing. By this time the craze for Internet stocks was completely out of control and had infected the Stanford University medical community. “The residents in particular, and some of the faculty, were captivated by the dot-com bubble,” said Burry. “A decent minority of them were buying and discussing everything—Polycom, Corel, Razorfish, Pets.com, TibCo, Microsoft, Dell, Intel are the ones I specifically remember, but areyoukiddingme.com was how my brain filtered a lot of it I would just keep my mouth shut, because I didn’t want anybody there knowing what I was doing on the side. I felt I could get in big trouble if the doctors there saw I wasn’t 110 percent committed to medicine.”

People who worry about seeming sufficiently committed to medicine probably aren’t sufficiently committed to medicine. The deeper he got into his medical career, the more Burry felt constrained by his problems with other people in the flesh. He had briefly tried to hide in pathology, where the people had the decency to be dead, but that didn’t work. (“Dead people, dead parts. More dead people, more dead parts. I thought, I want something more cerebral.”)

He’d moved back to San Jose, buried his father, remarried, and been misdiagnosed as bipolar when he shut down his Web site and announced he was quitting neurology to become a money manager. The chairman of the Stanford department of neurology thought he’d lost his mind and told him to take a year to think it over, but he’d already thought it over. “I found it fascinating and seemingly true,” he said, “that if I could run a portfolio well, then I could achieve success in life, and that it wouldn’t matter what kind of person I was perceived to be, even though I felt I was a good person deep down.” His $40,000 in assets against $145,000 in student loans posed the question of exactly what portfolio he would run. His father had died after another misdiagnosis: a doctor had failed to spot the cancer on an X-ray, and the family had received a small settlement. The father disapproved of the stock market, but the payout from his death funded his son into it. His mother was able to kick in $20,000 from her settlement, his three brothers kicked in $10,000 each of theirs. With that, Dr. Michael Burry opened Scion Capital. (As a teen he’d loved the book The Scions of Shannara.) He created a grandiose memo to lure people not related to him by blood. “The minimum net worth for investors should be $15 million,” it said, which was interesting, as it excluded not only himself but basically everyone he’d ever known.

As he scrambled to find office space, buy furniture, and open a brokerage account, he received a pair of surprising phone calls. The first came from a big investment fund in New York City, Gotham Capital. Gotham was founded by a value-investment guru named Joel Greenblatt. Burry had read Greenblatt’s book You Can Be a Stock Market Genius. (“I hated the title but liked the book.”) Greenblatt’s people told him that they had been making money off his ideas for some time and wanted to continue to do so—might Mike Burry consider allowing Gotham to invest in his fund? “Joel Greenblatt himself called,” said Burry, “and said, ‘I’ve been waiting for you to leave medicine.’” Gotham flew Burry and his wife to New York—and it was the first time Michael Burry had flown to New York or flown first-class—and put him up in a suite at the Intercontinental Hotel.

On his way to his meeting with Greenblatt, Burry was racked with the anxiety that always plagued him before face-to-face encounters with people. He took some comfort in the fact that the Gotham people seemed to have read so much of what he had written. “If you read what I wrote first, and then meet me, the meeting goes fine,” he said. “People who meet me who haven’t read what I wrote—it almost never goes well. Even in high school it was like that—even with teachers.” He was a walking blind taste test: you had to decide if you approved of him before you laid eyes on him. In this case he was at a serious disadvantage, as he had no clue how big-time money managers dressed. “He calls me the day before the meeting,” says one of his e-mail friends, himself a professional money manager. “And he asks, ‘What should I wear?’ He didn’t own a tie. He had one blue sports coat, for funerals.” This was another quirk of Mike Burry’s. In writing, he presented himself formally, even a bit stuffily, but he dressed for the beach. Walking to Gotham’s office, he panicked and ducked into a Tie Rack and bought a tie. He arrived at the big New York money-management firm as formally attired as he had ever been in his entire life to find its partners in T-shirts and sweatpants. The exchange went something like this: “We’d like to give you a million dollars.” “Excuse me?” “We want to buy a quarter of your new hedge fund. For a million dollars.” “You do?” “Yes. We’re offering a million dollars.” “After tax!”

Somehow Burry had it in his mind that one day he wanted to be worth a million dollars, after tax. At any rate, he’d just blurted that last bit out before he fully understood what they were after. And they gave it to him! At that moment, on the basis of what he’d written on his blog, he went from being an indebted medical resident with a net worth of minus $105,000 to a millionaire with a few outstanding loans. Burry didn’t know it, but it was the first time Joel Greenblatt had done such a thing. “He was just obviously this brilliant guy, and there aren’t that many of them,” says Greenblatt.

Shortly after that odd encounter, he had a call from the insurance holding company White Mountain. White Mountain was run by Jack Byrne, a member of Warren Buffett’s inner circle, and they had spoken to Gotham Capital. “We didn’t know you were selling part of your firm,” they said—and Burry explained that he hadn’t realized it either until a few days earlier, when someone offered a million dollars, after tax, for it. It turned out that White Mountain, too, had been watching Michael Burry closely. “What intrigued us more than anything was that he was a neurology resident,” says Kip Oberting, then at White Mountain. “When the hell was he doing this?” From White Mountain he extracted $600,000 for another piece of his fund, plus a promise to send him $10 million to invest. “And yes,” said Oberting, “he was the only person we found on the Internet and cold-called and gave him money.”

In Dr. Mike Burry’s first year in business, he grappled briefly with the social dimension of running money. “Generally you don’t raise any money unless you have a good meeting with people,” he said, “and generally I don’t want to be around people. And people who are with me generally figure that out.” When he spoke to people in the flesh, he could never tell what had put them off, his message or his person. Buffett had had trouble with people, too, in his youth. He’d used a Dale Carnegie course to learn how to interact more profitably with his fellow human beings. Mike Burry came of age in a different money culture. The Internet had displaced Dale Carnegie. He didn’t need to meet people. He could explain himself online and wait for investors to find him. He could write up his elaborate thoughts and wait for people to read them and wire him their money to handle. “Buffett was too popular for me,” said Burry. “I won’t ever be a kindly grandfather figure.”

This method of attracting funds suited Mike Burry. More to the point, it worked. He’d started Scion Capital with a bit more than a million dollars—the money from his mother and brothers and his own million, after tax. Right from the start, Scion Capital was madly, almost comically successful. In his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away. “If he’d run his fund to maximize the amount he had under management, he’d have been running many, many billions of dollars,” says a New York hedge-fund manager who watched Burry’s performance with growing incredulity. “He designed Scion so it was bad for business but good for investing.”

Thus when Mike Burry went into business he disapproved of the typical hedge-fund manager’s deal. Taking 2 percent of assets off the top, as most did, meant the hedge-fund manager got paid simply for amassing vast amounts of other people’s money. Scion Capital charged investors only its actual expenses—which typically ran well below 1 percent of the assets. To make the first nickel for himself, he had to make investors’ money grow. “Think about the genesis of Scion,” says one of his early investors. “The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of.”

By the middle of 2005, over a period in which the broad stock-market index had fallen by 6.84 percent, Burry’s fund was up 242 percent, and he was turning away investors. To his swelling audience, it didn’t seem to matter whether the stock market rose or fell; Mike Burry found places to invest money shrewdly. He used no leverage and avoided shorting stocks. He was doing nothing more promising than buying common stocks and nothing more complicated than sitting in a room reading financial statements. Scion Capital’s decision-making apparatus consisted of one guy in a room, with the door closed and the shades down, poring over publicly available information and data on 10-K Wizard. He went looking for court rulings, deal completions, and government regulatory changes—anything that might change the value of a company.

As often as not, he turned up what he called “ick” investments. In October 2001 he explained the concept in his letter to investors: “Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick.’” A court had accepted a plea from a software company called the Avanti Corporation. Avanti had been accused of stealing from a competitor the software code that was the whole foundation of Avanti’s business. The company had $100 million in cash in the bank, was still generating $100 million a year in free cash flow—and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avanti would be worth a lot more than the market then assumed. To make money on Avanti’s stock, however, he’d probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

“That was a classic Mike Burry trade,” says one of his investors. “It goes up by 10 times, but first it goes down by half.” This isn’t the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn’t do this if he was at the mercy of very short-term market moves, and so he didn’t give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year.

Investing well was all about being paid the right price for risk. Increasingly, Burry felt that he wasn’t. The problem wasn’t confined to individual stocks. The Internet bubble had burst, and yet house prices in San Jose, the bubble’s epicenter, were still rising. He investigated the stocks of homebuilders and then the stocks of companies that insured home mortgages, like PMI. To one of his friends—a big-time East Coast professional investor—he wrote in May 2003 that the real-estate bubble was being driven ever higher by the irrational behavior of mortgage lenders who were extending easy credit. “You just have to watch for the level at which even nearly unlimited or unprecedented credit can no longer drive the [housing] market higher,” he wrote. “I am extremely bearish, and feel the consequences could very easily be a 50% drop in residential real estate in the U.S.…A large portion of current [housing] demand at current prices would disappear if only people became convinced that prices weren’t rising. The collateral damage is likely to be orders of magnitude worse than anyone now considers.”

On May 19, 2005, Mike Burry did his first subprime-mortgage deals. He bought $60 million of credit-default swaps from Deutsche Bank—$10 million each on six different bonds. “The reference securities,” these were called. You didn’t buy insurance on the entire subprime-mortgage-bond market but on a particular bond, and Burry had devoted himself to finding exactly the right ones to bet against. He likely became the only investor to do the sort of old-fashioned bank credit analysis on the home loans that should have been done before they were made. He was the opposite of an old-fashioned banker, however. He was looking not for the best loans to make but the worst loans—so that he could bet against them. He analyzed the relative importance of the loan-to-value ratios of the home loans, of second liens on the homes, of the location of the homes, of the absence of loan documentation and proof of income of the borrower, and a dozen or so other factors to determine the likelihood that a home loan made in America circa 2005 would go bad. Then he went looking for the bonds backed by the worst of the loans.

It surprised him that Deutsche Bank didn’t seem to care which bonds he picked to bet against. From their point of view, so far as he could tell, all subprime-mortgage bonds were the same. The price of insurance was driven not by any independent analysis but by the ratings placed on the bond by Moody’s and Standard & Poor’s. If he wanted to buy insurance on the supposedly riskless triple-A-rated tranche, he might pay 20 basis points (0.20 percent); on the riskier, A-rated tranches, he might pay 50 basis points (0.50 percent); and on the even less safe, triple-B-rated tranches, 200 basis points—that is, 2 percent. (A basis point is one-hundredth of one percentage point.) The triple-B-rated tranches—the ones that would be worth zero if the underlying mortgage pool experienced a loss of just 7 percent—were what he was after. He felt this to be a very conservative bet, which he was able, through analysis, to turn into even more of a sure thing. Anyone who even glanced at the prospectuses could see that there were many critical differences between one triple-B bond and the next—the percentage of interest-only loans contained in their underlying pool of mortgages, for example. He set out to cherry-pick the absolute worst ones and was a bit worried that the investment banks would catch on to just how much he knew about specific mortgage bonds, and adjust their prices.

Once again they shocked and delighted him: Goldman Sachs e-mailed him a great long list of crappy mortgage bonds to choose from. “This was shocking to me, actually,” he says. “They were all priced according to the lowest rating from one of the big-three ratings agencies.” He could pick from the list without alerting them to the depth of his knowledge. It was as if you could buy flood insurance on the house in the valley for the same price as flood insurance on the house on the mountaintop.

The market made no sense, but that didn’t stop other Wall Street firms from jumping into it, in part because Mike Burry was pestering them. For weeks he hounded Bank of America until they agreed to sell him $5 million in credit-default swaps. Twenty minutes after they sent their e-mail confirming the trade, they received another back from Burry: “So can we do another?” In a few weeks Mike Burry bought several hundred million dollars in credit-default swaps from half a dozen banks, in chunks of $5 million. None of the sellers appeared to care very much which bonds they were insuring. He found one mortgage pool that was 100 percent floating-rate negative-amortizing mortgages—where the borrowers could choose the option of not paying any interest at all and simply accumulate a bigger and bigger debt until, presumably, they defaulted on it. Goldman Sachs not only sold him insurance on the pool but sent him a little note congratulating him on being the first person, on Wall Street or off, ever to buy insurance on that particular item. “I’m educating the experts here,” Burry crowed in an e-mail.

He wasn’t wasting a lot of time worrying about why these supposedly shrewd investment bankers were willing to sell him insurance so cheaply. He was worried that others would catch on and the opportunity would vanish. “I would play dumb quite a bit,” he said, “making it seem to them like I don’t really know what I’m doing. ‘How do you do this again?’ ‘Oh, where can I find that information?’ or ‘Really?’—when they tell me something really obvious.” It was one of the fringe benefits of living for so many years essentially alienated from the world around him: he could easily believe that he was right and the world was wrong.

The more Wall Street firms jumped into the new business, the easier it became for him to place his bets. For the first few months, he was able to short, at most, $10 million at a time. Then, in late June 2005, he had a call from someone at Goldman Sachs asking him if he’d like to increase his trade size to $100 million a pop. “What needs to be remembered here,” he wrote the next day, after he’d done it, “is that this is $100 million. That’s an insane amount of money. And it just gets thrown around like it’s three digits instead of nine.”

By the end of July he owned credit-default swaps on $750 million in subprime-mortgage bonds and was privately bragging about it. “I believe no other hedge fund on the planet has this sort of investment, nowhere near to this degree, relative to the size of the portfolio,” he wrote to one of his investors, who had caught wind that his hedge-fund manager had some newfangled strategy. Now he couldn’t help but wonder who exactly was on the other side of his trades—what madman would be selling him so much insurance on bonds he had handpicked to explode? The credit-default swap was a zero-sum game. If Mike Burry made $100 million when the subprime-mortgage bonds he had handpicked defaulted, someone else must have lost $100 million. Goldman Sachs made it clear that the ultimate seller wasn’t Goldman Sachs. Goldman Sachs was simply standing between insurance buyer and insurance seller and taking a cut.

The willingness of whoever this person was to sell him such vast amounts of cheap insurance gave Mike Burry another idea: to start a fund that did nothing but buy insurance on subprime-mortgage bonds. In a $600 million fund that was meant to be picking stocks, his bet was already gargantuan, but if he could raise the money explicitly for this new purpose, he could do many billions more. In August he wrote a proposal for a fund he called Milton’s Opus and sent it out to his investors. (“The first question was always ‘What’s Milton’s Opus?’” He’d say, “Paradise Lost,” but that usually just raised another question.) Most of them still had no idea that their champion stock picker had become so diverted by these esoteric insurance contracts called credit-default swaps. Many wanted nothing to do with it; a few wondered if this meant that he was already doing this sort of thing with their money.

Instead of raising more money to buy credit-default swaps on subprime-mortgage bonds, he wound up making it more difficult to keep the ones he already owned. His investors were happy to let him pick stocks on their behalf, but they almost universally doubted his ability to foresee big macro-economic trends. And they certainly didn’t see why he should have any special insight into the multi-trillion-dollar subprime-mortgage-bond market. Milton’s Opus died a quick death.

In October 2005, in his letter to investors, Burry finally came completely clean and let them know that they owned at least a billion dollars in credit-default swaps on subprime-mortgage bonds. “Sometimes markets err big time,” he wrote. “Markets erred when they gave America Online the currency to buy Time Warner. They erred when they bet against George Soros and for the British pound. And they are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist. Opportunities are rare, and large opportunities on which one can put nearly unlimited capital to work at tremendous potential returns are even more rare. Selectively shorting the most problematic mortgage-backed securities in history today amounts to just such an opportunity.”

In the second quarter of 2005, credit-card delinquencies hit an all-time high—even though house prices had boomed. That is, even with this asset to borrow against, Americans were struggling more than ever to meet their obligations. The Federal Reserve had raised interest rates, but mortgage rates were still effectively falling—because Wall Street was finding ever more clever ways to enable people to borrow money. Burry now had more than a billion-dollar bet on the table and couldn’t grow it much more unless he attracted a lot more money. So he just laid it out for his investors: the U.S. mortgage-bond market was huge, bigger than the market for U.S. Treasury notes and bonds. The entire economy was premised on its stability, and its stability in turn depended on house prices continuing to rise. “It is ludicrous to believe that asset bubbles can only be recognized in hindsight,” he wrote. “There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud.… The FBI reports mortgage-related fraud is up fivefold since 2000.” Bad behavior was no longer on the fringes of an otherwise sound economy; it was its central feature. “The salient point about the modern vintage of housing-related fraud is its integral place within our nation’s institutions,” he added.

When his investors learned that their money manager had actually put their money directly where his mouth had long been, they were not exactly pleased. As one investor put it, “Mike’s the best stock picker anyone knows. And he’s doing … what?” Some were upset that a guy they had hired to pick stocks had gone off to pick rotten mortgage bonds instead; some wondered, if credit-default swaps were such a great deal, why Goldman Sachs would be selling them; some questioned the wisdom of trying to call the top of a 70-year housing cycle; some didn’t really understand exactly what a credit-default swap was, or how it worked. “It has been my experience that apocalyptic forecasts on the U.S. financial markets are rarely realized within limited horizons,” one investor wrote to Burry. “There have been legitimate apocalyptic cases to be made on U.S. financial markets during most of my career. They usually have not been realized.” Burry replied that while it was true that he foresaw Armageddon, he wasn’t betting on it. That was the beauty of credit-default swaps: they enabled him to make a fortune if just a tiny fraction of these dubious pools of mortgages went bad.

Inadvertently, he’d opened up a debate with his own investors, which he counted among his least favorite activities. “I hated discussing ideas with investors,” he said, “because I then become a Defender of the Idea, and that influences your thought process.” Once you became an idea’s defender, you had a harder time changing your mind about it. He had no choice: among the people who gave him money there was pretty obviously a built-in skepticism of so-called macro thinking. “I have heard that White Mountain would rather I stick to my knitting,” he wrote, testily, to his original backer, “though it is not clear to me that White Mountain has historically understood what my knitting really is.” No one seemed able to see what was so plain to him: these credit-default swaps were all part of his global search for value. “I don’t take breaks in my search for value,” he wrote to White Mountain. “There is no golf or other hobby to distract me. Seeing value is what I do.”

When he’d started Scion, he told potential investors that, because he was in the business of making unfashionable bets, they should evaluate him over the long term—say, five years. Now he was being evaluated moment to moment. “Early on, people invested in me because of my letters,” he said. “And then, somehow, after they invested, they stopped reading them.” His fantastic success attracted lots of new investors, but they were less interested in the spirit of his enterprise than in how much money he could make them quickly. Every quarter, he told them how much he’d made or lost from his stock picks. Now he had to explain that they had to subtract from that number these & subprime-mortgage-bond insurance premiums. One of his New York investors called and said ominously, “You know, a lot of people are talking about withdrawing funds from you.” As their funds were contractually stuck inside Scion Capital for some time, the investors’ only recourse was to send him disturbed-sounding e-mails asking him to justify his new strategy. “People get hung up on the difference between +5% and -5% for a couple of years,” Burry replied to one investor who had protested the new strategy. “When the real issue is: over 10 years who does 10% or better annually? And I firmly believe that to achieve that advantage on an annual basis, I have to be able to look out past the next couple of years.… I have to be steadfast in the face of popular discontent if that’s what the fundamentals tell me.” In the five years since he had started, the S&P 500, against which he was measured, was down 6.84 percent. In the same period, he reminded his investors, Scion Capital was up 242 percent. He assumed he’d earned the rope to hang himself. He assumed wrong. “I’m building breathtaking sand castles,” he wrote, “but nothing stops the tide from coming and coming and coming.”

Oddly, as Mike Burry’s investors grew restive, his Wall Street counterparties took a new and envious interest in what he was up to. In late October 2005, a subprime trader at Goldman Sachs called to ask him why he was buying credit-default swaps on such very specific tranches of subprime-mortgage bonds. The trader let it slip that a number of hedge funds had been calling Goldman to ask “how to do the short housing trade that Scion is doing.” Among those asking about it were people Burry had solicited for Milton’s Opus—people who had initially expressed great interest. “These people by and large did not know anything about how to do the trade and expected Goldman to help them replicate it,” Burry wrote in an e-mail to his C.F.O. “My suspicion is Goldman helped them, though they deny it.” If nothing else, he now understood why he couldn’t raise money for Milton’s Opus. “If I describe it enough it sounds compelling, and people think they can do it for themselves,” he wrote to an e-mail confidant. “If I don’t describe it enough, it sounds scary and binary and I can’t raise the capital.” He had no talent for selling.

Now the subprime-mortgage-bond market appeared to be unraveling. Out of the blue, on November 4, Burry had an e-mail from the head subprime guy at Deutsche Bank, a fellow named Greg Lippmann. As it happened, Deutsche Bank had broken off relations with Mike Burry back in June, after Burry had been, in Deutsche Bank’s view, overly aggressive in his demands for collateral. Now this guy calls and says he’d like to buy back the original six credit-default swaps Scion had bought in May. As the $60 million represented a tiny slice of Burry’s portfolio, and as he didn’t want any more to do with Deutsche Bank than Deutsche Bank wanted to do with him, he sold them back, at a profit. Greg Lippmann wrote back hastily and ungrammatically, “Would you like to give us some other bonds that we can tell you what we will pay you.”

Greg Lippmann of Deutsche Bank wanted to buy his billion dollars in credit-default swaps! “Thank you for the look Greg,” Burry replied. “We’re good for now.” He signed off, thinking, How strange. I haven’t dealt with Deutsche Bank in five months. How does Greg Lippmann even know I own this giant pile of credit-default swaps?

Three days later he heard from Goldman Sachs. His saleswoman, Veronica Grinstein, called him on her cell phone instead of from the office phone. (Wall Street firms now recorded all calls made from their trading desks.) “I’d like a special favor,” she asked. She, too, wanted to buy some of his credit-default swaps. “Management is concerned,” she said. They thought the traders had sold all this insurance without having any place they could go to buy it back. Could Mike Burry sell them $25 million of the stuff, at really generous prices, on the subprime-mortgage bonds of his choosing? Just to placate Goldman management, you understand. Hanging up, he pinged Bank of America, on a hunch, to see if they would sell him more. They wouldn’t. They, too, were looking to buy. Next came Morgan Stanley—again out of the blue. He hadn’t done much business with Morgan Stanley, but evidently Morgan Stanley, too, wanted to buy whatever he had. He didn’t know exactly why all these banks were suddenly so keen to buy insurance on subprime-mortgage bonds, but there was one obvious reason: the loans suddenly were going bad at an alarming rate. Back in May, Mike Burry was betting on his theory of human behavior: the loans were structured to go bad. Now, in November, they were actually going bad.

The next morning, Burry opened The Wall Street Journal to find an article explaining how alarming numbers of adjustable-rate mortgage holders were falling behind on their payments, in their first nine months, at rates never before seen. Lower-middle-class America was tapped out. There was even a little chart to show readers who didn’t have time to read the article. He thought, The cat’s out of the bag. The world’s about to change. Lenders will raise their standards; rating agencies will take a closer look; and no dealers in their right mind will sell insurance on subprime-mortgage bonds at anything like the prices they’ve been selling it. “I’m thinking the lightbulb is going to pop on and some smart credit officer is going to say, ‘Get out of these trades,’” he said. Most Wall Street traders were about to lose a lot of money—with perhaps one exception. Mike Burry had just received another e-mail, from one of his own investors, that suggested that Deutsche Bank might have been influenced by his one-eyed view of the financial markets: “Greg Lippmann, the head [subprime-mortgage] trader at Deutsche Bank[,] was in here the other day,” it read. “He told us that he was short 1 billion dollars of this stuff and was going to make ‘oceans’ of money (or something to that effect.) His exuberance was a little scary.”

By February 2007, subprime loans were defaulting in record numbers, financial institutions were less steady every day, and no one but Mike Burry seemed to recall what he’d said and done. He had told his investors that they might need to be patient—that the bet might not pay off until the mortgages issued in 2005 reached the end of their teaser-rate period. They had not been patient. Many of his investors mistrusted him, and he in turn felt betrayed by them. At the beginning he had imagined the end, but none of the parts in between. “I guess I wanted to just go to sleep and wake up in 2007,” he said. To keep his bets against subprime-mortgage bonds, he’d been forced to fire half his small staff, and dump billions of dollars’ worth of bets he had made against the companies most closely associated with the subprime-mortgage market. He was now more isolated than he’d ever been. The only thing that had changed was his explanation for it.

Not long before, his wife had dragged him to the office of a Stanford psychologist. A pre-school teacher had noted certain worrying behaviors in their four-year-old son, Nicholas, and suggested he needed testing. Nicholas didn’t sleep when the other kids slept. He drifted off when the teacher talked at any length. His mind seemed “very active.” Michael Burry had to resist his urge to take offense. He was, after all, a doctor, and he suspected that the teacher was trying to tell them that he had failed to diagnose attention-deficit disorder in his own son. “I had worked in an A.D.H.D. clinic during my residency and had strong feelings that this was overdiagnosed,” he said. “That it was a ‘savior’ diagnosis for too many kids whose parents wanted a medical reason to drug their children, or to explain their kids’ bad behavior.” He suspected his son was a bit different from the other kids, but different in a good way. “He asked a ton of questions,” said Burry. “I had encouraged that, because I always had a ton of questions as a kid, and I was frustrated when I was told to be quiet.” Now he watched his son more carefully and noted that the little boy, while smart, had problems with other people. “When he did try to interact, even though he didn’t do anything mean to the other kids, he’d somehow tick them off.” He came home and told his wife, “Don’t worry about it! He’s fine!”

His wife stared at him and asked, “How would you know?”

To which Dr. Michael Burry replied, “Because he’s just like me! That’s how I was.”

Their son’s application to several kindergartens met with quick rejections, unaccompanied by explanations. Pressed, one of the schools told Burry that his son suffered from inadequate gross and fine motor skills. “He had apparently scored very low on tests involving art and scissor use,” said Burry. “Big deal, I thought. I still draw like a four-year-old, and I hate art.” To silence his wife, however, he agreed to have their son tested. “It would just prove he’s a smart kid, an ‘absentminded genius.’”

Instead, the tests administered by a child psychologist proved that their child had Asperger’s syndrome. A classic case, she said, and recommended that he be pulled from the mainstream and sent to a special school. And Dr. Michael Burry was dumbstruck: he recalled Asperger’s from med school, but vaguely. His wife now handed him the stack of books she had accumulated on autism and related disorders. On top were The Complete Guide to Asperger’s Syndrome, by a clinical psychologist named Tony Attwood, and Attwood’s Asperger’s Syndrome: A Guide for Parents and Professionals.

“Marked impairment in the use of multiple non-verbal behaviors such as eye-to-eye gaze … ” Check. “Failure to develop peer relationships … ” Check. “A lack of spontaneous seeking to share enjoyment, interests, or achievements with other people … ” Check. “Difficulty reading the social/emotional messages in someone’s eyes … ” Check. “A faulty emotion regulation or control mechanism for expressing anger … ” Check. “One of the reasons why computers are so appealing is not only that you do not have to talk or socialize with them, but that they are logical, consistent and not prone to moods. Thus they are an ideal interest for the person with Asperger’s Syndrome … ” Check. “Many people have a hobby.… The difference between the normal range and the eccentricity observed in Asperger’s Syndrome is that these pursuits are often solitary, idiosyncratic and dominate the person’s time and conversation.” Check … Check …Check.

After a few pages, Michael Burry realized that he was no longer reading about his son but about himself. “How many people can pick up a book and find an instruction manual for their life?” he said. “I hated reading a book telling me who I was. I thought I was different, but this was saying I was the same as other people. My wife and I were a typical Asperger’s couple, and we had an Asperger’s son.” His glass eye no longer explained anything; the wonder is that it ever had. How did a glass eye explain, in a competitive swimmer, a pathological fear of deep water—the terror of not knowing what lurked beneath him? How did it explain a childhood passion for washing money? He’d take dollar bills and wash them, dry them off with a towel, press them between the pages of books, and then stack books on top of those books—all so he might have money that looked “new.” “All of a sudden I’ve become this caricature,” said Burry. “I’ve always been able to study up on something and ace something really fast. I thought it was all something special about me. Now it’s like ‘Oh, a lot of Asperger’s people can do that.’ Now I was explained by a disorder.”

He resisted the news. He had a gift for finding and analyzing information on the subjects that interested him intensely. He always had been intensely interested in himself. Now, at the age of 35, he’d been handed this new piece of information about himself—and his first reaction to it was to wish he hadn’t been given it. “My first thought was that a lot of people must have this and don’t know it,” he said. “And I wondered, Is this really a good thing for me to know at this point? Why is it good for me to know this about myself?”

He went and found his own psychologist to help him sort out the effect of his syndrome on his wife and children. His work life, however, remained uninformed by the new information. He didn’t alter the way he made investment decisions, for instance, or the way he communicated with his investors. He didn’t let his investors know of his disorder. “I didn’t feel it was a material fact that had to be disclosed,” he said. “It wasn’t a change. I wasn’t diagnosed with something new. It’s something I’d always had.” On the other hand, it explained an awful lot about what he did for a living, and how he did it: his obsessive acquisition of hard facts, his insistence on logic, his ability to plow quickly through reams of tedious financial statements. People with Asperger’s couldn’t control what they were interested in. It was a stroke of luck that his special interest was financial markets and not, say, collecting lawn-mower catalogues. When he thought of it that way, he realized that complex modern financial markets were as good as designed to reward a person with Asperger’s who took an interest in them. “Only someone who has Asperger’s would read a subprime-mortgage-bond prospectus,” he said.

I the spring of 2007, something changed—though at first it was hard to see what it was. On June 14, the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent. Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”

“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”

On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged. But she did it from her cell phone, rather than the office line. (Grinstein didn’t respond to e-mail and phone requests for comment.)

They were caving. All of them. At the end of every month, for nearly two years, Burry had watched Wall Street traders mark his positions against him. That is, at the end of every month his bets against subprime bonds were mysteriously less valuable. The end of every month also happened to be when Wall Street traders sent their profit-and-loss statements to their managers and risk managers. On June 29, Burry received a note from his Morgan Stanley salesman, Art Ringness, saying that Morgan Stanley now wanted to make sure that “the marks are fair.” The next day, Goldman followed suit. It was the first time in two years that Goldman Sachs had not moved the trade against him at the end of the month. “That was the first time they moved our marks accurately,” he notes, “because they were getting in on the trade themselves.” The market was finally accepting the diagnosis of its own disorder.

It was precisely the moment he had told his investors, back in the summer of 2005, that they only needed to wait for. Crappy mortgages worth nearly $400 billion were resetting from their teaser rates to new, higher rates. By the end of July his marks were moving rapidly in his favor—and he was reading about the genius of people like John Paulson, who had come to the trade a year after he had. The Bloomberg News service ran an article about the few people who appeared to have seen the catastrophe coming. Only one worked as a bond trader inside a big Wall Street firm: a formerly obscure asset-backed-bond trader at Deutsche Bank named Greg Lippmann. The investor most conspicuously absent from the Bloomberg News article—one who had made $100 million for himself and $725 million for his investors—sat alone in his office, in Cupertino, California. By June 30, 2008, any investor who had stuck with Scion Capital from its beginning, on November 1, 2000, had a gain, after fees and expenses, of 489.34 percent. (The gross gain of the fund had been 726 percent.) Over the same period the S&P 500 returned just a bit more than 2 percent.

Michael Burry clipped the Bloomberg article and e-mailed it around the office with a note: “Lippmann is the guy that essentially took my idea and ran with it. To his credit.” His own investors, whose money he was doubling and more, said little. There came no apologies, and no gratitude. “Nobody came back and said, ‘Yeah, you were right,’” he said. “It was very quiet. It was extremely quiet.”

http://www.pbs.org/wgbh/pages/frontline/creditcards/interviews/feddis.html
Interview: Nessa Feddis

The people that we’ve talked to say that the industry — the banking industry, the financial services industry — is given a lot of credit for being able to control regulation by Congress. You’re almost batting 1,000 percent.

Seeing what’s just passed [Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009], I kind of find that to be a rather questionable conclusion.

Well, before this year, it seems like you’ve almost had a perfect batting average.

Back in 1988, [Congress] did pass a credit card disclosure bill [Fair Credit and Charge Card Disclosure Act]. The only bills that have come up since then, where there’s been much focus, has been one back in the early 1990s or something like that, an amendment that came up on the Senate floor to cap interest rates. Right after that, the market crashed, so they didn’t pursue it.

But other than that, there hasn’t been a lot of attention on credit cards. It’s a great product, and most people manage their credit card well. And it’s a reflection of that more than the fact that there needed to be any attention given to it.

I guess what I’m reflecting [on] are comments that the financial services industry is one of the biggest contributors to Congress and one of the biggest lobbyists, wealthiest lobbyists, and that that’s had a real effect over the years.

Members of Congress are driven by their constituents; they’re driven by voters. If voters are upset, Congress acts.

So maybe you could explain how this industry that’s been so successful over the years, how it works. It’s based on risk-based pricing. What is that?

Risk-based pricing is basically a way of adjusting interest based on the risk of whether somebody is going to pay the loan or not repay the loan. Just as riskier drivers pay more for car insurance, people who are at greater risk of not repaying their loan pay a higher interest rate.

What it really comes down to is the nature of lending. All borrowers, to some degree, pay for the loans that aren’t repaid by other borrowers in the form of interest. A lender who lends out $100 and only gets $90 back because somebody is not going to repay has to make up that difference through the interest they charge the other borrowers who do repay the loan.

So the greater the chance that somebody is not going to repay the loan, they’re going to be in a pool of a group who are in the same risky category, and their interest rates are going to be higher. It allows people to charge the interest rate that’s more suitable for that borrower, just as a driver who’s a riskier borrower will pay more on car insurance. …

Risk-based pricing — that sounds simple, but this industry has really gotten it down to an art.

What controls prices is really competition, because there’s so much competition in credit cards, and everybody knows that. Even now, people continue to get solicitations and applications filling their mailboxes. And if somebody is dissatisfied by their rate or they think that they deserve a lower rate, they have lots of options. You’re not married to your credit card. It’s very easy to move to another competitor, and that’s what keeps credit card companies charging the appropriate interest rate. …

How big is the credit card industry, and how profitable has it been?

Right now, the credit card companies are losing money. The first quarter of 2009, they lost about $1.7 billion. We expect for those losses to continue through 2009, probably into 2010.

The government did do a very intensive study of credit card companies, including their profits, a couple of years ago. Over a 20-year period, profits were remarkably stable at about 3 percent return on assets. And what does that mean? That means if they start out with $100 at the end of the year in December, they will get back $103.

So it’s been a steady, reasonable profit, but I don’t think it’s excessive. It’s certainly less than what the food and drug [companies] make, and even what the automobile industry has been making. …

… [Consumer credit expert] Robert McKinley told us that over the years, the credit card industry has been like the Wild West; that it basically became an industry that was out of control.

Most people manage their credit card well, and most people value their credit card. It’s something they use on a daily basis and something they value on a daily basis. There are some people who found their interest rates increase because over time, people’s credit profile, their finances change, and they may have found their interest rate go up because of that change in risk. But most people manage their credit well, and there’s a lot of competition. …

And from the ABA’s point of view, the current state of regulation of credit cards and consumer lending in general, with the Federal Reserve involved and sort of an alphabet soup of agencies like the OTS [Office of Thrift Supervision] and the FDIC [Federal Deposit Insurance Corp.] or the OCC [Office of the Comptroller of the Currency], that’s worked well? That’s considered to be a successful model?

As I said, most people manage their credit cards well, and that is a reflection on an industry that works.

But the federal regulators, the sort of potpourri of different alphabet soup of agencies, that’s worked really well?

The Federal Reserve has the primary jurisdiction for the rule making for credit cards. Several years ago, they began to update the disclosure, so there was a little bit of lag. The disclosures were dated, so the Federal Reserve … has updated the disclosures. …

But the OCC has the jurisdiction. The FDIC and the OTS don’t really have that much authority over credit card companies. It’s primarily the OCC. And a lot goes on behind the scenes with the OCC — you have to talk to them. But yes, they don’t necessarily go over it with a hammer; it’s a little bit more subtle than that. But there were many practices that they addressed. It wasn’t something that necessarily made it into the press.

But they have guidelines, which is sort of like your mother’s suggestion: You’d better do it or have a good reason not to. And things like zero percent balance transfers, they put rules around that. So it was regulated. It was more subtle than what people understood, and it wasn’t as public as people thought. …

Do you really understand that contract that comes in the mail with your credit card?

Well, that’s not really what people rely on. The teachable moment is the application. And since 1988, every application has had to include a summary box of the primary important terms. And that’s what people rely on when they make a decision on what credit card to select.

One thing I will add, though. Much of the information in the contracts relates to federally required information. For example, there are requirements to disclose important consumer protections: what to do when your card gets lost and stolen. That takes space. It’s important information. …

So you’re saying that, to you, the documents that are sent out with these credit cards over the years were quite clear and people could figure them out?

I think for the most part, the information on the application got dated, so in recent years it was —

Dated? What does “dated” mean?

Well, because the information on the application, the summary box was based on language that Congress put into place in 1988; we’re now 20 years later. The consumers evolved; credit cards evolved. Those disclosures are dated.

There are many different solicitations that come in the mail, and they say, “Zero percent,” and there’s an asterisk, and then if you look down below, it says, “Transfer fee,” you know? …

It’s funny you raise the idea of the zero percent transfer. That was one of the ones that the OCC adopted guidelines on to ensure that the zero percent balance transfer, for example, has to be in close proximity to what the rate will go to when it expires. So that’s an example of when the OCC did step in. …

Were you surprised this past spring when the Banking Committee reported out its legislation related to credit cards, that that got through committee? What was your reaction when that happened?

It was a little unusual sequence of events, because usually Congress passes laws, and then the regulators adopt rules. In this case, the regulators adopted rules, and then Congress acted, so in that sense, it was a bit surprising.

Do you remember your reaction when you heard that it got through committee? It only got through by one vote, as I understand it, through the Senate committee.

I don’t remember. Again, given the makeup of the committee, we weren’t surprised that it got over by one vote.

You weren’t? Why? If people valued their credit cards for so long and they were so useful, and the regulation has been effective, as you described, how do you explain this legislative loss, if you will?

Even though most cardholders manage their credit well and understand how their credit card works, you do have a vulnerable group who was confused. And that’s what Congress was addressing, and that’s what was getting all the attention. There were a lot of anecdotes out there, and it’s very tempting to use those anecdotes as though they’re representative. …

So you really weren’t surprised when this passed first out of the committee?

… Early in the following year, Congressman [Barney] Frank [D-Mass.] made it very clear he planned to pass a bill. And you just don’t disregard something that the chairman of the House Financial Services says he’s going to do.

And the president of the United States convened representatives of the credit card industry in the White House, right? That had never happened before.

That was toward the tail end of the process. I think by that time we knew there was going to be a bill. I mean, by that stage, everything was already sort of in order. …

What changed?

Obviously the election changed an awful lot. You had very big changes in the House and the Senate and a change in the White House.

And a change in the economy.

I don’t know whether that was so much the situation, because credit card companies and credit cardholders were doing fairly well in the early part of the economic turndown. It really wasn’t until the latter part of 2008 that the credit card companies began to suffer, and that was because of the unexpected double-digit unemployment. So I don’t know that it was so much the economy as it was so much the elections.

And double-digit unemployment, which is part of the economy, mirrors the default rate with credit cards, right?

Absolutely. They follow each other very closely. And that’s because [it’s after] the first bill — not even the first loan — that people stop paying.

You were saying that the way risk-based pricing works is it’s based upon the ability of people to pay back the loan. But there are many people who believe that the whole industry is based on the idea that you don’t want people ever to pay it back, because you make a lot more money if they keep paying. Let me tell you what [Self-Help Credit Union CEO] Martin Eakes — whose name I’m sure you know — said to us. He said what risk-based pricing and democratized credit really means “is that we want to provide debt to people who we know cannot pay it back. It’s a fraud. You’re therefore keeping people in debt forever because they can’t pay it off. …”

It makes no sense for a bank that wishes to stay in business to lend out money that its customers can’t repay. It doesn’t help their customer, and it doesn’t help them.

Doesn’t it help the bank’s bottom line for someone to pay back a lot more than what they originally borrowed?

If they’re going to struggle to repay that loan, it doesn’t help the bank.

Then how do you account for their profits over the years, if most of their profits came from the people who were paying the highest interest rates and the most fees?

Card companies rely on a variety of different cardholders in their portfolios. On one end of the spectrum there are people who are at high risk of not repaying their loan, and that means they’re in a group where the losses are going to be higher. For that reason, the interest is higher for the people in that category. If losses aren’t as high, the returns will be higher.

At the other end of the spectrum there are people who are at very low risk. They are very likely to repay their loan. They’re in a group where their losses are going to be low. And that means … their prices are going to be lower, and their returns may not be as high. They’re steady, but they may be more modest. And then you’ve got everything in between.

And cardholders will balance their portfolios much as anybody might balance their 401(k) with regard to risks. And depending on the strategy of each individual cardholder, they’ll have different percentages among the various categories of customers.

Before we get to the proposed agency, what are the consequences of the legislation that has been passed for the consumer?

Congress understood when they adopted the rule that credit cards would be more difficult to get, limits would be lower, and interest rates would be higher for everyone. But they made the decision that that result was an acceptable consequence, an acceptable trade-off, for the sake of the consumers. …

Even before Aug. 20, when some of the rules went into effect, interest rates were being raised. People were feeling the pinch in the wake of this legislation.

… You saw that in the press, but in fact the data didn’t support that. Interest rates for existing customers went up a bit, about a point, in the 12-month period ending in May — and that’s from the Federal Reserve — of what people actually pay.

So interest rates on existing customers didn’t really go up in anticipation of the Aug. 20 new regulation. What we are seeing is that new accounts will be more expensive. And again, Congress understood that that would be the result.

So we can expect tighter and tighter lending?

Between the new rules and the economy, we expect that it will be harder for people to get credit cards. …

One of the people we interviewed said that, in fact, it is the economy that’s affecting all of this and that the legislation is really just piling on.

It’s both, and it’s hard to tease exactly what proportion, but there’s no question that the new rules make it more difficult to adjust to changes in the economy, to changes in customers’ financial situations and their credit profile. That means those risks, which are really costs, have to be spread across to everyone.

It also means that the inability to be able to make those adjustments means that people will find it harder to get credit cards, but also that they will lower the limits, because they have to manage the risk.

There’s a reaction that we got from a number of people that here’s the credit card industry, the banking industry, which is in part in business because of taxpayers. For instance, the taxpayers are buying the securities that this money is lent out from, right? The securitization is being financed by the Treasury. And here you are, still lobbying Congress and squeezing the consumers all at the same time.

Well, at this point the money from the government was something the banks did not want. They were “encouraged” to take the money for the sake of the economy. They have repaid it.

The current Treasury program to buy lending instruments, securities, to help finance the credit card industry is something the banking industry doesn’t want?

I don’t know that I can talk about the difference between CPP [Capital Purchase Program] and TARP [Troubled Asset Relief Program]. But we do know that the banks have repaid much of that money with a return of about 16 percent, and that’s a pretty good return in this day and age.

What’s the American Bankers Association’s position on the Consumer Financial Protection Agency [CFPA]?

Quite simply, it’s unnecessary; it’s going to delay needed improvements; it’s going to limit people’s choices; and it’s going to be very costly. We think that you can accomplish the improvements needed by fixing what needs to be fixed. It’s not necessary to create one more duplicative, costly bureaucracy, because at the end of the day, one way or the other, consumers pay. …

What the proponents of the Consumer Financial Protection Agency say is that this will be a taxpayer-financed consumer agency taking care of the needs of consumers. That hasn’t happened yet to this date, because the agencies that are primarily responsible are really concerned about the safety and soundness of the banks, not what’s going on with their customers.

I guess what you’re saying is that then customers and consumers are going to pay for this very costly duplicative agency. That’s what it sounds like you’re saying.

Well, taxpayers are going to pay for it.

One way or the other, customers are going to pay. Consumers are going to pay either directly or indirectly.

And if their rights are protected, if they’re not gouged, if they feel that it’s a fair agency that actually takes care of their problems, what’s the matter with that?

All the issues that this agency is intended to address can easily be addressed by improving the effectiveness of the existing agencies. It’s not necessary to reinvent the wheel. Fix what needs to be fixed.

So the position is that the agencies have actually done a good job over the last 20 years regulating the credit card industry, and we don’t need a new agency to take care of what’s happened?

In fact, we’ve seen that Congress and the regulators have addressed the credit card issue, and so arguably, no, an agency is not needed; it’s already been done. All the issues have been addressed on the credit cards. The mortgage issues are being addressed, and so mortgage and credit card will have already been addressed.

Let me read to you what one observer said: “Congress had the chance to do much more meaningful credit card legislation, and Congress focused on a few really egregious practices. The problem is that just saying you can’t do bad practices A, B and C doesn’t stop the card industry from coming up with new practices D, E and F.”

Or, as he put it, “It’s like Whack-A-Mole; that your industry is smart enough to figure out ways to make money off consumers unless there’s some overall agency that’s watching out for the consumers.”

First of all, the Federal Reserve had already reacted and addressed the primary concerns raised, and then Congress acted. So the Federal Reserve, at the signal of Congress, did respond. So it was the agency acting first and then Congress responding. …

What’s wrong with limits on interest rates? Credit unions live with an 18 percent interest rate.

History has shown that government controls, interest rate caps, don’t work. It means that a lot of people who need to have loans don’t get them, and it means that there are distortions in the price, and it becomes inefficient, so at the end of the day, customers pay more.

Customers pay more for belonging to a credit union?

No, they pay more if you restrict interest rates, and the interest rates don’t cover the expenses. And then it pushes out someplace else, so they’ll charge another fee, a transaction fee or an annual fee.

But when we looked at credit unions, for example, one in North Carolina that we looked at carefully, not only do they have an 18 percent interest rate cap, but for something like the equivalent of a payday loan, they charge only 12 percent.

… I don’t know about that particular credit union, but they’re probably more restrictive on who can have a credit card. And also, there may be other accounts that that person has a relationship with. By definition, a credit union is going to have other accounts with that customer, a checking account that may be subsidizing that.

That’s what happened back in the years when there were state usury laws. Arkansas was one where the interest rate has historically been very low, and what they found is that very few people could get [a] credit card. But also, they tended to have to have another relationship with that institution, a checking account or a mortgage. So it subsidizes it one way or the other. You can’t push down one place and not have it pop out someplace else.

You’re saying that there’s no logical limit to how much interest should be paid.

As I said, history has shown that when you cap interest rates, fewer people and [fewer] small businesses have access to loans, and the prices get distorted, and at the end of the day, customers pay more. …

The ABA sees no problem with, for example, the setting of overdraft fees by banks, in terms of their ranging from $12 to $39, depending upon the bank.

Overdraft fees are intended as a penalty to encourage people to manage their checking accounts. And a nominal fee doesn’t work.

A nominal fee doesn’t work? … Does a $40 cup of coffee work? …

If the penalty for parking in a fire lane were $5, I think you’d find a lot of fire trucks not able to get through. The purpose of the overdraft fee is to encourage people to manage their accounts, to keep track of their spending.

And your members who will organize, for instance, debits that come in on a particular day so that the biggest debit goes first, as opposed to the number on the check or the time that it comes in, and therefore drives the rest of the debits that come in into the overdraft area, you find that to be an acceptable practice?

Customers have said that they want their important payments made. The important payments tend to be the large payments — the mortgage, the rent — and so —

Do you really think that they would do that if they knew they were going to then incur five overdraft fees for all kinds of other minor things?

In fact they do, because the banks have been sued for paying low to high. One of the large institutions a number of years ago got sued because it paid the low dollars first, and some high payment wasn’t paid. So the payment order is something that people’s preferences vary depending on the individual. And their individual preference on an individual transaction will vary depending on the nature of that transaction.

Haven’t overdraft fees, particularly debit card fees, become a profit center for the banks, particularly in these hard times?

Banks make income from overdraft fees, just like they make income from any fee, and on checking accounts there are practically no fees left. The Government Accountability Office [GAO] found a couple years ago that the vast majority of banks offer free accounts. There are no fees left other than overdrafts [and] the occasional stop-payment fee.

But you know what I’m talking about. I could give you the anecdotal evidence that’s all out there, you know? We found one person who was charged seven different overdraft fees in a day because he was using his debit card to pay into a parking meter.

The vast majority of people avoid overdraft fees because they’re very simple to avoid.

The vast majority? Again, as we understand it statistically, about 10 percent of the people pay for 70 percent of the so-called free checking in America. Is that correct?

No. The greatest income from checking accounts is from the interest that banks make on the balances. So they make more money on the checking accounts with the higher balances than they do [on] the accounts with the low balances. The primary source of income for checking accounts is the interest they make.

Is it true that they make tens, maybe $20 billion in overdraft fees a year?

I don’t know. We don’t have that number.

According to the FDIC, they tell us that they make $20 billion a year.

I did see [this]. I don’t remember the number. That may be. …

When we go to talk to payday lenders, they say: “Look at our operation. We have the APR [annual percentage rate] posted right here. Everyone can see it.” Go to the bank, and when somebody does an overdraft, which is in some ways a bank version of a payday lending operation, there’s nothing posted. It’s not covered by Truth in Lending. Why is that?

Well, because you’d end up with a ridiculous result, because if you applied an APR to an overdraft, the APR would be higher the sooner the customer paid it off. That would be a very confusing message.

Well, it would be in the thousands of percent.

No. … I don’t know if you understood what I said. If you apply an APR to an overdraft, … the sooner the customer repays that overdraft, the higher the APR. If they don’t pay it back immediately, the APR goes down. So they’re getting the message that it’s cheaper for them not to repay the overdraft as quickly. That’s a very confusing message.

You mean it’s impossible for the banks to tell the customer how much it would cost?

They do. They tell them: “This is the fee. If you overdraw, it’s X dollars.” You cannot know in advance how long the person is going to take before they repay their loan. You cannot know in advance what the amount is going to be. So you can’t do a calculation up front. That’s impossible.

It sounds to me [like] one of the confusing parts of all this is when it’s a credit card, we get this agreement, a contract that’s almost impossible to decipher. We’ve had law professors say they don’t understand it. On the other hand, when we went to find out about debit card fees, we’re told: “Well, this is not a contract. In fact, it’s a noncontractual discretionary privilege.” …

The fees are disclosed. People understand it. It’s been something that’s been around since the beginning of checking accounts.

I actually went to the bank myself, because I didn’t know if I had check overdraft or not. I had never read the disclosures. And I was told that I did. But when I asked, “Would you cover my overdraft at the ATM machine?” if I went and asked for more money than I had in my account, I was told they can’t tell me because that’s part of the agreement.

And then I asked: “How much would you cover? How high? How far over could I go?” And they said they couldn’t tell me that either. So it sounds like a game with cards. On the one hand, it’s a contract that I can’t understand, and on the other hand there is no contract, and they can’t tell me how much money is involved.

Banks have been paying overdrafts on checking accounts since the beginning of checking accounts. It’s been a discretionary basis, an accommodation to their customers on the basis that they want transactions paid. All this is a modern version of it based on an automated system so that it is more uniform; it’s more fair. It’s not that you have to know somebody at the bank for them to ensure that your payments are made even though you don’t have money in the account.

My understanding is that five years ago, 80 percent of your members [were] denied transactions with debit cards when there weren’t sufficient funds in the account. And now it’s reversed: Eighty percent now do cover the withdrawal and/or the debit, but then they charge the fee.

Debit cards have somewhat replaced checks. People want their transactions paid. If they’ve just finished a meal at a restaurant, they want the transaction to go through, and that’s what the banks are responding to.

Without asking them. You’re not asked; they just do it.

It has to be disclosed in the original agreement that we may reserve the right to go ahead and pay transactions that you’ve authorized. …

Or not. “It’s up to us.”

Or not. But traditionally, all banks have paid overdrafts. Most banks have paid overdrafts on a discretionary basis. That’s been around since checking accounts have been around.

So it’s a privilege; it’s [at the] discretion of the bank.

It’s an accommodation. …

The complaint that led to this legislation is that the credit card industry was abusing its customers. …

The vast majority of cardholders manage their credit well, but there was a group that was confused, and that’s what Congress and the press were reacting to. …

And those people — how many of them are there, millions, the confused? Are those the people going bankrupt?

Most of the people who end up in bankruptcy or who end up with credit card problems, the underlying problem isn’t the credit card; the underlying problem is some sort of life crisis — a medical expense, a divorce, a job loss. And the credit card helps them bridge that gap. It gets them through the crisis. In most cases, they do make it through the crisis, but some of them don’t. But the underlying problem was another life crisis, not the credit card. …

A number of bankers complained to us about the non-banks, and one of them is the payday lenders. So we went to interview the payday lenders, and they told us check overdraft, debit card overdraft, is much more expensive than the service they offer.

Well, payday loans — if it’s just a single payday loan — probably isn’t the problem. The big problem with payday loans is people get into a cycle of debt. They start out with one loan, but then they don’t repay it. They get hit with a fee. They take out another loan, and that cycle continues, and it’s a downward cycle.

With overdrafts, the overdraft has to be paid immediately. And additional overdrafts over the limit are not permitted. It stops. If that overdraft isn’t paid within 60 days, the account is closed. So it stops. There’s no cycle. And that’s really the egregious part of the payday lending. It’s a cycle of debt.

But aren’t the overdraft fees also a cycle? Don’t most people who get one overdraft a year get two or three or four? They can get as many as they want as long as they stay in that cycle.

They don’t end up having debt that they can’t repay. The fact that they repay, that means it’s not a cycle of debt. They have to come positive. That means the debt is paid. With payday loans, they never pay it off. It’s an unending debt. That’s not true with overdrafts. …

Payday lenders say in most states they are forced to have one loan at a time. Now, they can’t stop somebody from going to another payday lender, but one payday lender can only give one person one loan until that’s paid off.

Right. But then they come in, and they have to get another loan, and all the other fees are added on, and they come in the next month, and they do the same thing. And pretty soon you’ve got a pretty big debt that the customer can’t pay it off.

And that’s not true for overdrafts. Once the customer has an overdraft, they’re required to bring that balance into a positive status immediately. If they don’t do it within 60 days, the account is closed. There are no more loans. There’s no cycle of debt. The debt is gone.

I believe Bank of America, at least, will give you seven overdraft fees in one day before you pay anything off.

But you have to pay it off, and if you don’t, then the account is closed. You don’t get more overdrafts. The account is closed. Within 60 days it stops. It’s not a cycle of debt. …

Sen. [Chris] Dodd [D-Conn.] and others have said to us, “The industry got arrogant.” You started using all these practices that created this problem. …

Well, once Congress and the regulators identified the problems, they’ve addressed it, and the industry is moving on. End of story.

One of the things that surprised me … is so many of the people that we’ve interviewed — consumer lending advocates, bank officials, many government officials — have said to us, “Disclosure doesn’t work.”

I think people are smarter than that. That’s interesting you bring that up, because if there’s a vulnerable segment that needs extra protection, there are two ways you can address that. You can limit everybody to the kind of product that the least sophisticated customer can manage and select, or you can try to identify that vulnerable group and protect them and then allow everyone else to continue to have the flexibility and choice of what they want in their financial product.

But the products in this case are really not substantially different. They provide you with cash. They’re convenient. It’s a piece of plastic; you don’t need to carry around a lot of cash with you.

That’s huge value.

There are all kinds of great utility value, but it’s sold on the basis of what kind of picture is on the card, what kind of points you get, what kind of rewards you might get, a zero percent come-on, all kinds of different things. And you don’t think that’s confusing to people, that that’s why this is happening?

No-frills basic credit cards are provided by large institutions and small institutions. They’re widely available, and many customers are perfectly happy with them. Other people want the perks. They want the rewards. They like the car rental insurance, and they have that choice. If there is a group that is more vulnerable and needs extra protection, then let’s provide them that protection, but allow other people who like the perks to have that option.

But nobody in any of the things that we’ve read about this Consumer Financial Protection Agency or otherwise is saying: “Don’t offer that. Just make sure everyone has a chance to get what they call a ‘plain vanilla’ product.”

… Under this agency, it’s not just that people will have fewer choices; they will practically have no choice.

The cornerstone of the proposal is to require this agency to design a government product based on what the least sophisticated customer might be able to handle. And everybody will get the same cookie-cutter, one-size-fits-all checking account, credit card account or mortgage loan.

And the agency may require not just that the entity offer the product, but they promote it as a superior product. And any entity who wants to offer something else takes a great risk of substantial penalty that down the road, with 20/20 hindsight, somebody is going to say, “That wasn’t suitable; that was too confusing.” So there’s not going to be a lot of incentive to offer something other than the government-designed product.

Are you against safety rules?

No. But if this agency had been in effect 30 years ago, 40 years ago, we wouldn’t have ATMs, we wouldn’t have debit cards and online banking, because the basic program, the basic checking account that everybody could have, would be one that’s accessible only by checks. And offering something beyond that, like a debit card, which would have been unfamiliar initially, would have been too risky.

There are ATM cards, there are ATM machines, there are checking accounts and all of these financial conveniences in plastic in countries that never had a credit card system like ours.

I’m talking about the agency, the power of this agency to basically get us stuck in 2009. Like your consumer products now, because they’re not going to get better. There’s not going to be anything new.

President Dubya, speaking on June 18, 2002, 10:30 A.M. EDT:
We are here in Washington, D.C. to address problems. So I””ve set this goal for the country. We want 5.5 million more homeowners by 2010 — million more minority homeowners by 2010. (Applause.)

And so I””ve asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)

It is essential that we make it easier for people to buy a home, not harder.

Finally, we want to make sure the Section 8 homeownership program is fully implemented. This is a program that provides vouchers for first-time home buyers which they can use for down payments and/or mortgage payments. (Applause.)

And I””m proud to report that Fannie Mae has heard the call and, as I understand, it””s about $440 billion over a period of time. They””ve used their influence to create that much capital available for the type of home buyer we””re talking about here. It””s in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.

http://modeledbehavior.com/2010/08/27/fannie-freddie-acquitted/

Fannie / Freddie Acquitted

Friday ~ August 27th, 2010 in Economics | by Karl Smith

The Conservator’s Report on Fannie and Freddie is out.

Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.

As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.

However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.

The proper question is not: What story is consistent with my general philosophy or worldview?

The proper questions is: What story is consistent with the facts?

Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble. Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.

This was a phenomenon of private-label non-conventional loan securitization.

1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
mortgages originated

[ . . .]

1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.

image

Fact Two: Fannie and Freddie lost market volume during the boom. That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.

There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.

image

Fact Three: The major losses to Fannie and Freddie came through their expansion into guaranteeing non-traditional loans, not through their portfolio. That is, yes like every other financial entity Fannie and Freddie were buying subprime packages in the secondary market. However, these losses were relatively mild.

The Investments and Capital Markets segment accounts for $21 billion, or 9 percent, of capital reduction from the end of 2007 through the second quarter of 2010. Losses in the Investments and Capital Markets segment stemmed from impairments of private-label securities, fair-value losses on securities, and fair-value losses on derivatives (used for hedging interest rate risk).

Fact Four: The key change in the Fannie / Freddie business model was their expansion in the types of loans they willing to guarantee. In particular moving into the Alt-A and Interest-Only categories.

As we can see these loans began to seriously underperform as the economy deteriorated. These loans were not a part of the original “crap hidden by structure” subprime business. Fannie / Freddie borrowers on had on average credit scores above 710 and equity (or down payment) of above 25%.

image

Also notice how loans with low credit scores and high loan-to-value had the largest delinquency rates in the beginning but then were eclipsed by Alt-A and Interest-Only loan categories as the economy deteriorated.

image

Fact Five: The higher number of Alt-A and Interest Only loans combined with ultimately higher delinquency rates have meant that a plurality of losses have come from these two categories. These loans were vulnerable not because the borrowers were poor low-credit individuals that the government was taking pity upon but because the loan concepts were predicated on rising or at least stable housing prices.

image

Fact Six: Areas with the largest collapse in home prices have accounted for most of Fannie and Freddie losses. Refer to the same graph above.

This is further evidence that it was the collapse of the bubble and not betting on people who were poor credit risks that induced major losses at Fannie and Freddie.

My Conclusion

The wave of housing price increases was kicked off by changes in private label securitization. These changes left Fannie and Freddie with a smaller market share and lower absolute level of securitizations. Fannie and Freddie attempted to adjust their basic business practices to stay competitive in bubble markets and among aggressive borrowers.

These adjustment left Fannie and Freddie exposed to a large decline in housing prices. This is exactly what happened and Fannie and Freddie reaped enormous losses because of their exposure.

Had Fannie and Freddie stuck to their traditional role of guaranteeing low value traditional loans rather than trying to stay competitive in bubble areas their losses would have been substantially less.

In short, attempting to subsidize the American dream for low and moderate income families may be a fundamentally bad policy. However, it does not appear to be either the origin of the housing bubble or the source of Fannie and Freddie’s trouble.

http://www.fhfa.gov/webfiles/16591/ConservatorsRpt82610.pdf
FEDERAL HOUSING FINANCE AGENCY
NEWS RELEASE
For Immediate Release Contact: Corinne Russell (202) 414-6921
August 26, 2010 Stefanie Mullin (202) 414-6376
FHFA Releases First Conservator’s Report on the
Enterprises’ Financial Condition
Washington, DC – The Federal Housing Finance Agency (FHFA) today released its first
Conservator’s Report on the Enterprises’ Financial Condition. The Conservator’s Report
provides an overview of key aspects of the financial condition of Fannie Mae and Freddie Mac
(the Enterprises) during conservatorship. The report will be released on a quarterly basis
following the filing of the Enterprises’ financial results with the Securities and Exchange
Commission (SEC).
“FHFA initiated the Conservator’s Report to enhance public understanding of Fannie Mae’s and
Freddie Mac’s financial performance and condition leading up to and during conservatorship,”
said FHFA Acting Director Edward J. DeMarco.
The report includes information on Enterprise presence in the mortgage market; credit quality
of Enterprise mortgage purchases; sources of Enterprise losses and capital reductions; and
Enterprise loss mitigation activity. Information presented in the report includes:
• The key driver in the decline of the Enterprises’ capital from the end of 2007 through the
second quarter of 2010 was the Single-Family Credit Guarantee business segment, which
accounted for 73 percent of the capital reduction over that period. The bulk of this capital
reduction was associated with losses from mortgages originated in 2006 and 2007.
• The Investments and Capital Markets business segment (which includes the retained
portfolio and credit losses associated with private-label mortgage-backed securities)
accounted for 9 percent of the capital reduction over the same period.
• Since the establishment of the conservatorships, the credit quality of the Enterprises’ new
mortgage acquisitions has improved substantially. Single-family mortgages acquired by the
Enterprises during conservatorship have, on average, higher credit scores and lower loanto-
value ratios, resulting in lower early cumulative default rates.
###
The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
These government-sponsored enterprises provide more than $5.9 trillion in funding for the U.S. mortgage markets
and financial institutions.
Federal Housing Finance Agency
Conservator’s Report
on the Enterprises’ Financial Performance
Second Quarter 2010
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
2
Contents
Executive Summary………………………………………..….………….…… 3
1. Mortgage Markets and the Enterprises’ Market Presence….……………… 4
2. Credit Quality of New Single-Family Business……………………….……… 6
3. Capital………..…………………………….…………………………………….. 9
4. Single-Family Credit Guarantee Segment Results………..……………….. 10
5. Investments and Capital Markets Segment Results……………….……….. 13
6. Loss Mitigation Activity..………………………………………………..……….. 15
The purpose of this report is to provide an overview of key aspects of the financial condition of Fannie Mae and Freddie Mac during conservatorship. The
data in this report are derived primarily from the Enterprises’ SEC filings and other publicly available sources. In some cases, FHFA adjusted the
classification of certain data to provide comparability between the Enterprises. In other cases, the Enterprises’ reporting methodologies changed over time.
Therefore, the data in this report may not match exactly published figures.
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
3
Executive Summary
Mortgage Markets and the Enterprises’ Market Presence
Originations of nontraditional and higher-risk mortgages grew dramatically between 2004 and 2007. Private-label issuers played a large
role in securitizing these mortgages. While the Enterprises acquired primarily traditional mortgages, they also acquired an increased
amount of nontraditional and higher-risk mortgages such as Alt-A, subprime, and interest-only loans, and invested in senior tranches of
private-label mortgage-backed securities. The Enterprises lost market share of mortgage-backed securities issuance between 2004 and
2007. After private-label issuers exited the secondary mortgage market in 2007, the Enterprises’ market presence increased, and they
have constituted the majority of secondary market issuance since.
Credit Quality of New Single-Family Business
Starting in 2008, the Enterprises tightened credit underwriting standards for new mortgage acquisitions and largely ceased acquiring
nontraditional and higher-risk mortgages. Mortgages acquired since 2008 have, on average, higher credit scores and lower loan-to-value
ratios and include few higher-risk products.
Capital
At the end of 2007, the Enterprises had $71 billion of combined capital. From the end of 2007 through the second quarter of 2010,
capital was reduced by $226 billion. Of the three business segments (Investments and Capital Markets, Single-Family Credit Guarantee
and Multifamily) the largest contributor to capital reduction to date has been the Single-Family Credit Guarantee segment, accounting for
$166 billion, or 73 percent, of combined capital reduction over that period.
Single-Family Credit Guarantee Segment Results
Credit-related expenses have been the primary driver of losses in the Single-Family Credit Guarantee segment. Nontraditional and
higher-risk mortgages concentrated in the 2006 and 2007 vintages account for a disproportionate share of credit losses. However, house
price declines and prolonged economic weakness have taken a toll on the credit performance of traditional mortgages.
Investments and Capital Markets Segment Results
The Investments and Capital Markets segment accounts for $21 billion, or 9 percent, of capital reduction from the end of 2007 through
the second quarter of 2010. Losses in the Investments and Capital Markets segment stemmed from impairments of private-label
securities, fair-value losses on securities, and fair-value losses on derivatives (used for hedging interest rate risk).
Loss Mitigation Activity
Since 2008, the Enterprises have enhanced their standard loss mitigation programs to address the needs of delinquent borrowers in this
credit cycle. Implementation of the Making Home Affordable program in 2009, together with the Enterprises’ enhanced loss mitigation
programs, expanded the options available to delinquent borrowers to retain or give up their homes while avoiding foreclosure.
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
4
Mortgage Markets and the Enterprises’ Market Presence
1.1. Primary Mortgage Market Trends—Mortgage Originations
• Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
mortgages originated.
Total
Originations $3,945 $2,920 $3,120 $2,980 $2,430 $1,500 $1,815 $320
$ in Billions
Source:
Inside Mortgage Finance, second quarter 2010 data not available.
Figure 1.1. Mortgage Originations by Product Type
62%
41% 35% 33%
47%
62% 65% 63%
8%
18%
20% 20%
8%
7% 12% 13% 11%
11% 12% 14% 14% 6% 8% 4% 3%
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008 2009 1Q10
Home Equity
Alt-A
Subprime
Jumbo
FHA/VA
Conv/Conf
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
5
1.2. Secondary Mortgage Market Trends—Mortgage-Backed Securities Issued
• Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages. Consequently, the Enterprises lost market share of mortgage-backed
securities (MBS) issuance. After private-label issuers exited the secondary mortgage market in 2007, the Enterprises’ market
share increased. Their combined market share of MBS issued in the first half of 2010 was 66 percent.
2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD
Enterprises 67% 68% 70% 47% 41% 40% 58% 73% 72% 66%
Ginnie Mae 13% 9% 8% 7% 4% 4% 5% 22% 25% 29%
Total Agency 80% 77% 78% 54% 45% 44% 63% 95% 97% 95%
Sources:
Inside Mortgage Finance, Enterprise Monthly Volume Summaries.
Issuance figures exclude MBS issued backed by assets previously held in the Enterprises’ portfolios.
MBS Issuance Volume ($ in billions)
$0
$50
$100
$150
$200
$250
$300 Fannie Mae Freddie Mac Ginnie Mae Private-Label
Figure 1.2. Enterprises’ Market Share
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
6
2. Credit Quality of New Single-Family Business
2.1 Credit Characteristics of the Enterprises’ New Single-Family Business
• Pre-conservatorship: As the mix of mortgage originations in the primary market shifted toward higher-risk mortgages, the
Enterprises guaranteed and purchased an increased amount of nontraditional and higher-risk mortgages. However, during this
period, the Enterprises continued to guarantee primarily traditional mortgages.
• Post-conservatorship: Purchases of nontraditional and higher-risk mortgages are down dramatically and the average FICO credit
score and loan-to-value ratio (LTV) of new single-family business has improved. While the percentage of new business with
LTVs greater than 90 percent increased in 2010, the bulk of this relates to the Home Affordable Refinance Program.
Percent of New Single-Family Business1
(Categories overlap and are not additive)
Fannie Mae YTD Freddie Mac YTD
2006 2007 2008 2009 Jun ’10 2006 2007 2008 2009 Jun ’10
Alt-A2 22% 17% 3% 0% 0% 18% 22% 7% 0% 1%
Interest-Only 15% 15% 6% 1% 2% 17% 21% 6% 0% 0%
Credit Score 90 Percent 10% 16% 10% 4% 8% 6% 11% 9% 4% 9%
Average LTV 73% 75% 72% 67% 69% 73% 74% 71% 67% 70%
Average Credit Score 716 716 738 761 758 720 718 734 756 750
Notes:
1 New business is defined as issuance of MBS plus purchases of whole loans and does not include purchases of
mortgage-related securities.
2 Refer to sources for Alt-A definitions. Freddie Mac’s year-to-date figures include Alt-A purchases of $1.5 billion due to a
long-term standby commitment termination and a subsequent PC issuance. There was no change to the Alt-A
exposure on these mortgages as a result of these transactions.
Sources:
Enterprises’ Forms 10-K, credit supplements to SEC disclosures, and management reports.
Figure 2.1. Characteristics of Single-Family Mortgage Acquisitions
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
7
2.2 Performance of Nontraditional and Higher-Risk Mortgages (mostly purchased pre-conservatorship)
• Declines in house prices and weakness in the broader economy over the past few years have contributed to deteriorating credit
performance of mortgages in general and of nontraditional and higher-risk mortgages in particular.
Fannie Mae Freddie Mac
4Q07 4Q08 4Q09 2Q10 4Q07 4Q08 4Q09 2Q10
Product Type1
Alt-A 2.2% 7.0% 15.6% 15.2% 1.9% 5.6% 12.3% 12.4%
Interest-Only 2.0% 8.4% 20.2% 19.4% 2.0% 7.6% 17.6% 18.4%
Credit Score
90 Percent 3.0% 6.3% 13.1% 11.6% 1.9% 4.8% 9.1% 8.5%
Risk-Layering
Credit score 90 Percent
Total Single-Family 1.0% 2.4% 5.4% 5.0% 0.7% 1.8% 4.0% 4.0%
Notes
1 Loans with multiple product features may be in more than one category. Refer to sources for Alt-A definition.
Sources:
Enterprises’ Form 10-Ks, Credit supplements to SEC disclosures, and management reports.
Figure 2.2. Single-Family Serious Delinquency Rates
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
8
2.3 Performance of Post-Conservatorship Business
• While not necessarily indicative of the ultimate performance, the improved credit characteristics of new post-conservatorship
business is reflected in substantially lower cumulative default rates for the 2009 vintage compared to the years leading up to
conservatorship.
Fannie Mae (data in basis points)
0
5
10
15
20
25
30
Yr1-Q1 Yr1-Q2 Yr1-Q3 Yr1-Q4 Yr2-Q1 Yr2-Q2
Yr2007
Yr2008
Yr2009
Freddie Mac (data in basis points)
0
5
10
15
20
25
30
Yr1-Q1 Yr1-Q2 Yr1-Q3 Yr1-Q4 Yr2-Q1 Yr2-Q2
Yr2007
Yr2008
Yr2009
Figure 2.3. Cumulative Default Rate by Origination Year
Cumulative Default Rate by Origination Year (data in basis points)
Time Since Beginning of Origination Year Time Since Origination
Fannie Mae1 Freddie Mac2
Vintage Yr1Q4 Yr2Q2 Vintage Yr1Q4 Yr2Q2
2002 0.35 3.09 2002 0.31 2.65
2003 0.36 2.52 2003 0.16 1.22
2004 0.70 4.56 2004 0.35 2.04
2005 0.66 4.81 2005 0.21 1.82
2006 1.28 11.58 2006 0.57 5.97
2007 3.01 28.68 2007 2.30 22.29
2008 2.17 12.61 2008 2.12 13.65
2009 0.09 1.21 2009 0.12 1.07
Notes:
1 Defaults include loan liquidations other than through voluntary pay-off or repurchase by lenders and include loan foreclosures, preforeclosure sales, sales to third parties
and deeds-in-lieu of foreclosure. Cumulative Default Rate is the total number of single-family conventional loans in the guarantee book of business originated in the identified
year that have defaulted, divided by the total number of single-family conventional loans in Fannie Mae’s guarantee book of business originated in the identified year.
2 Rates are calculated for each year of origination as the number of loans that have proceeded to foreclosure transfer or short sale, divided by the number of loans in
Freddie Mac’s single-family credit guarantee portfolio relative to origination.
Source:
Enterprise quarterly credit supplement.
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
9
3. Capital
• At the end of 2007, the Enterprises had $71 billion of combined capital. From the end of 2007 through the second quarter of 2010,
the Enterprises’ combined capital reductions have totaled $226 billion, requiring Treasury support of $148 billion through draws
under the Preferred Stock Purchase Agreements. The Single-Family Credit Guarantee segment has been the largest contributor to
capital reduction, accounting for $166 billion, or 73 percent, of capital reduction to date.
Figure 3. Capital Changes: January 1, 2008 – June 30, 2010
$ in billions Fannie Mae Freddie Mac Combined
Beginning Capital1 $44 $27 $71
Equity Issuance2 7 0 7
Available Capital $51 $27 $78
Capital Erosion
Single-Family Guarantee Earnings ($109) ($58) ($166) 73%
Multifamily Earnings (11) (0) (11) 5%
Investments Contribution3 (11) (11) (21) 9%
Consolidation Accounting Adjustment 3 (12) (8) 4%
Other (3) (3) (6) 3%
Senior Preferred dividends (6) (7) (13) 6%
Total Capital Erosion4 ($136) ($90) ($226) 100%
Capital deficit ($85) ($63) ($148)
Treasury Senior Preferred draw5 $85 $63 $148
Notes
Totals may not sum due to rounding.
1 Capital is defined as stockholders’ equity.
2 Fannie Mae’s figure includes common and preferred stock issuance pre-conservatorship.
3 Investments contribution equals the sum of investments segment earnings, the change in the accumulated other comprehensive income (AOCI) component of stockholders’ equity (excluding the
consolidation adjustment related to AOCI), and the impact of accounting changes for securities impairments.
4 Included in total capital erosion for both Enterprises are losses attributable to the writedown of low income housing tax credits (LIHTC) investments to zero in the fourth quarter of 2009.
$5 billion of these LIHTC losses for Fannie Mae are included in Multifamily Earnings and $3 billion of losses for Freddie Mac are included in Other.
Also included in total capital erosion but spread among the business segments is the establishment of a deferred tax asset valuation allowance which reduced capital by $21 billion for Fannie Mae and $14 billion
for Freddie Mac in 2008.
5 Total draws include amounts relating to the second quarter of 2010.
Sources
Fannie Mae segment earnings per Fannie Mae SEC disclosures for the relevant time periods.
Freddie Mac’s 2008 and 2009 segment earnings revised to reflect methodology effective in the first quarter of 2010 SEC disclosure.
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
10
4. Single-Family Credit Guarantee Segment Results
4.1 Single-Family Credit Guarantee Segment Results
• Losses from the Single-Family segment have been driven by substantial provisions for credit losses as rising delinquencies
caused the Enterprises to build their loan loss reserves.
$ in billions Fannie Mae Freddie Mac Combined
YTD YTD 2008 –
2008 2009 Jun ’10 Total 2008 2009 Jun ’10 Total YTD Jun ’10
Revenue1 $9 $9 $0 $19 $5 $4 $2 $12 $30
Provision for credit losses2 ( 26) ( 50) ( 16) (92) ( 16) ( 29) ( 11) (57) (149)
Foreclosed Property Expenses (2) (1) (0) (3) (1) (0) (0) (1) (5)
Credit-related expenses (28) (51) ( 17) (95) (17) ( 29) ( 11) (58) (154)
SOP 03-3 Losses3 (2) (20) (0) (23) (2) (5) (0) (6) (29)
Other expenses4 (2) (3) (1) (6) (1) (1) (1) (3) (9)
Pre-tax income (loss) (22) (65) ( 18) (105) (15) ( 31) ( 10) (56) (161)
Provision (benefit) for taxes (5) 1 0 (3) (5) 4 0 (1) (5)
Net income (loss) ($27) ($64) ($18) ($109) ($20) ($27) ($10) ($58) ($166)
Notes
Totals may not sum due to rounding.
1 Consists of guarantee fee income, trust management income, net interest income, and other income. Guarantee fee revenue of $3.6 billion for
Fannie Mae year-to-date was offset by net interest expense of $3.3 billion related to forgone interest on nonperforming loans.
2 The provision for credit losses is the recognition of estimated incurred losses and increases the loan loss reserve. Fannie Mae’s figures have been
adjusted to exclude losses on credit-impaired loans acquired from MBS trusts.
Effective January 1, 2010, Freddie Mac’s provision for credit losses for segment earnings includes nonaccrual expense that is part of net interest
income for GAAP-basis earnings.
3 Losses on credit-impaired loans acquired from MBS/PC Trusts.
4 Consists of investment gains (losses), administrative expenses, and other expenses.
Sources
Fannie Mae segment earnings per Fannie Mae SEC disclosures for the relevant time periods. Effective in the first quarter 2010, Fannie Mae
changed the presentation of segment financial information; prior periods were not revised.
Freddie Mac segment earnings for 2008 and 2009 revised to reflect business segment reporting methodology effective in the first quarter of 2010
SEC disclosure.
2010 segment results for both Enterprises are not comparable with prior periods due to the adoption of new accounting standards for consolidations.
Figure 4.1. Single-Family Credit Guarantee Segment Results
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
11
4.2 Loan Loss Reserves
• The Enterprises have increased loan loss reserves substantially since the end of 2007, with the bulk of the increase attributed to
the single-family book. Charge-offs have been low compared to provisions for credit losses, but their relative magnitude
continues to increase.
$ in billions Fannie Mae YTD Freddie Mac
Single-Family Loss Reserve 2008 2009 Jun ’10 2008 2009 Jun ’10
Beginning balance1 $3 $24 $62 $3 $15 33
Provision for credit losses2,3 26 50 16 92 16 29 11 57
Charge-offs, net3 (5) (13) (12) (29) (2) (7) (6) (16)
Adoption of New Accounting Standards1 – – (11) – – (0)
Other – – 3 (1) (4) (0)
Ending balance1 $24 $62 $59 $15 $33 $37
Credit Losses – Single-Family
Charge-offs3 $5 $13 $12 $29 $2 $7 $6 16
Other4 – – – – 0 0 0 1
Foreclosed Property Expense 2 1 0 3 1 0 – 1
Total3 $6 $13 $12 $32 $4 $8 $7 $18
Notes
Totals may not sum due to rounding.
1 Fannie Mae’s loan loss reserve excludes amounts related to the allowance for accrued interest receivable and allowance for preforeclosure
property taxes and insurance. Freddie Mac’s loan loss reserve excludes amounts related to the allowance for accrued interest receivable.
2 Freddie Mac’s figures include nonaccrual expense for segment reporting purposes.
3
4 Freddie Mac’s figures include charge-offs related to certain loans purchased under financial guarantees.
Sources
SEC disclosures for the relevant time periods.
Total
Jan ’08 –
YTD Jun
’10
Total
Jan ’08 –
YTD Jun
’10
YTD
Fannie Mae’s provision for credit losses have been adjusted to exclude losses on credit-impaired loans acquired from MBS trusts. Additionally,
the effect of losses from credit-impaired loans acquired from MBS trusts on charge-offs and foreclosed property expense has been reflected as
an adjustment to total credit losses and charge-offs, net.
Figure 4.2. Loan Loss Reserves
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
12
4.3 Credit Losses
• Nontraditional and higher-risk mortgages concentrated in the 2006 and 2007 vintages account for a disproportionate share of
credit losses (charge-offs and foreclosed property expenses). However, house price declines and prolonged economic weakness
have taken a toll on the credit performance of conventional mortgages.
• Mortgages originated in California, Florida, Arizona and Nevada also account for a disproportionate share of credit losses. Those
states had some of the highest increases in house prices through 2006 and 2007 followed by the steepest declines to date.
(Percent of Total Credit Losses) Fannie Mae Freddie Mac
% of UPB
as of Dec
31, 20081 2008 2009
YTD
Jun
’10
% of UPB
as of Dec
31, 20081 2008 2009
YTD
Jun
’10
by State
California 16% 25% 24% 23% 14% 30% 32% 26%
Florida 7% 11% 16% 19% 7% 10% 15% 19%
Arizona 3% 8% 11% 10% 3% 9% 11% 11%
Nevada 1% 5% 7% 5% 1% 4% 6% 5%
by Product2
Alt-A 11% 46% 40% 36% 10% 50% 44% 40%
Interest-Only 8% 34% 33% 30% 9% 50% 47% 39%
by Vintage
2006 14% 35% 31% 30% 15% 41% 35% 30%
2007 20% 28% 36% 37% 19% 25% 36% 34%
2008 16% 1% 5% 7% 15% 0% 5% 6%
2009 n/a n/a 0% 0% n/a n/a 0% 0%
Notes
1 Represents each category’s share of the respective Enterprise’s single-family book of business, which is based on the unpaid principal balance
of all single-family mortgages held by the Enterprises and those underlying MBS/PCs as of December 31, 2008. Freddie Mac’s figures include
loans held by the company underlying structured securities less structured securities backed by Ginnie Mae certificates.
2 Product categories overlap.
Sources
Enterprises’ Forms 10-K, credit supplements to SEC disclosures, and management reports.
Figure 4.3. Credit Losses
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
13
5. Investments and Capital Markets Segment Results
5.1 Investments and Capital Markets Segment Results
• Losses in the Investments and Capital Markets segment stemmed from impairments of private-label securities and fair-value
losses on securities. Fair-value losses on derivatives used to hedge interest rate risk contributed to investment segment losses,
however certain offsetting changes in the fair value of hedged assets and liabilities are not reflected in earnings or equity.
$ in billions Fannie Mae Freddie Mac Combined
YTD YTD 2008-YTD
2008 2009 Jun ’10 Total 2008 2009 Jun ’10 Total Jun ’10
Revenue1 $8 $13 $6 $27 $3 $8 $3 $14 $41
Derivatives gains (losses) (15) (6) (3) (25) (13) 5 (5) (13) (38)
Trading gains (losses) (7) 4 3 ( 1) 1 5 (1) 5 4
Other gains (losses)2 2 1 1 4 2 ( 0) 1 3 7
Other-than-temporary impairments ( 7) (10) (0) (17) (17) (10) (1) (28) (45)
Other expenses3 (1) (1) (0) (1) (2) (1) 1 (2) (3)
Pre-tax income (loss) (21) 1 7 (13) (26) 7 (2) (21) (34)
Provision (benefit) for taxes4 (9) (0) 0 (9) (2) (1) 0 (2) (11)
Net income (loss) ($29) $1 $7 ($22) ($28) $6 ($2) ($23) ($45)
Unrealized gains (losses) on AFS5 (6) 11 3 8 (20) 19 9 7 16
Accounting change for Impairments 0 3 0 3 0 5 0 5 8
Investments Contribution ($36) $15 $10 ($11) ($48) $30 $7 ($11) ($21)
Notes
Totals may not sum due to rounding.
1 Consists of guarantee fee expense, trust management income, net interest income, and other income.
2 Figures consist of debt extinguishment losses, debt foreign exchange gains (losses), debt fair-value losses, investment gains (losses),
and hedged mortgage assets gains, net.
3 Consists of administrative expenses and other expenses.
4 Includes extraordinary losses/noncontrolling interest.
5 Includes unrealized gains (losses) on available for sale securities and adjustments for other-than-temporary impairments included in
accumulated other comprehensive income.
Sources
Fannie Mae segment earnings per Fannie Mae SEC disclosures for the relevant time periods. Effective in the first quarter 2010, Fannie Mae
changed the presentation of segment financial information; prior periods were not revised.
Freddie Mac segment earnings for 2008 and 2009 revised to reflect business segment reporting methodology effective in the first quarter of
2010 SEC disclosure.
Figure 5.1. Investments and Capital Markets Segment Results
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
14
5.2 Security Impairments
• Alt-A and subprime securities acquired in 2006 and 2007 account for the bulk of security impairments.
$ in billions
Fannie Mae 2008 2009
Vintage1 2006 &
2007
Other
vintages Total
2006 &
2007
Other
vintages Total
2006 &
2007
Other
vintages Total
Total
2008-2Q10
Alt-A/Option ARM Alt-A $3.0 $1.8 $4.8 $1.7 $2.3 $4.0 $0.1 $0.0 $0.2 $9.0
Subprime 1 .9 – 1.9 5.6 0 .1 5.7 0.2 – 0.2 7.7
Other – 0.2 0.2 0.0 0.2 0.2 – – 0.0 0.5
Total2 $4.9 $2.0 $7.0 $7.3 $2.6 $9.9 $0.3 $0.0 $0.4 $17.2
Freddie Mac 2008 2009
Vintage1 2006 &
2007
Other
vintages Total
2006 &
2007
Other
vintages Total
2006 &
2007
Other
vintages Total
Total
2008-2Q10
Alt-A $2.1 $1.8 $4.0 $0.9 $0.8 $1.7 $0.0 $0.0 $0.0 $5.7
Subprime 3 .4 0 .2 3.6 6.4 0 .1 6.5 0 .3 0 .0 0.3 10.4
CMBS – – – 0.1 0.0 0.1 0.1 0.0 0.1 0.2
Option ARM 6 .0 1 .6 7.6 1.4 0 .4 1.7 0 .1 0 .0 0.1 9.4
Other 1.1 0.4 1.4 0.8 0.1 0.9 0.3 0.0 0.3 2.7
Total2 $12.6 $4.0 $16.6 $9.6 $1.5 $11.0 $0.8 $0.1 $0.9 $28.5
Notes
Totals may not sum due to rounding.
1 Vintage of private-label securities is based on security issue date.
2 The adoption of FSP FAS 115-2 in April of 2009 required the Enterprises to begin recognizing only the credit portion of impairments in their statement
of operations. This new accounting standard did not require the Enterprises to revise previously recorded amounts in their statements of operations
but did result in an equity increase of $5 billion and $3 billion for Freddie Mac and Fannie Mae, respectively, which is not reflected in Figure 5.2.
Sources
Fannie Mae and Freddie Mac management reports.
YTD Jun ’10
YTD Jun ’10
Figure 5.2. Security Impairments
Federal Housing Finance Agency Conservator’s Report on the
Enterprises’ Financial Performance
Second Quarter 2010
15
6. Loss Mitigation Activity
• The Enterprises have traditionally worked with delinquent borrowers to mitigate credit losses in situations where the borrower
demonstrates the willingness and ability to cure the delinquency. Loss mitigation actions include loan modifications, repayment
plans, forbearance plans, short sales and deeds-in-lieu.
• As the volume of delinquencies increased in 2008 and 2009, the Enterprises enhanced their standard loss mitigation programs to
address the needs of delinquent borrowers in this credit cycle.
• Implementation of the Making Home Affordable program announced by the Administration in early 2009, together with the
Enterprises’ enhanced loss mitigation programs, expanded the options available to delinquent borrowers to retain or give up their
homes while avoiding foreclosure.
• At the end of the first quarter of 2010 approximately 448,000 of the Enterprises’ loans were in the trial period of the Home
Affordable Modification Program (HAMP). (Note, this is not reflected in Figure 6.)
• More information on the Enterprises’ loss mitigation activities can be found in FHFA First Quarter 2010 Foreclosure Prevention &
Refinance Report.
* Consists of HomeSaver Advance (Fannie Mae), charge-offs in lieu and deeds-in-lieu.
** Include loans that were 30-plus days delinquent at initiation of the plan. Completed forbearance plans exclude Home Affordable Modification Program Loans.
Enterprises’ Foreclosure Prevention Actions
16 15 13 24 37 32 37
58
138
18 16 15
13
32
25
39
46
56
5
5
6
10
18
5
7
9
13
17
20
24
17 27
26
21
12
5
3
3
0
50
100
150
200
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
Short Sales &
Deeds-in-lieu
Loan
Modifications
Other *
Repayment
Plans**
Forbearance
Plans**
Home
Retention
Actions
Home
Forfeiture
Actions
Number of loans in thousands
Figure 6. Loss Mitigation Activity

http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis

by Jake Bernstein and Jesse Eisinger
ProPublica, Aug. 26, 2010, 9:09 p.m.

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Oct. 20: This text has been corrected [1].

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged.

The products they were buying and selling were at the heart of the 2008 meltdown — collections of mortgage bonds known as collateralized debt obligations, or CDOs.

As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain [2] that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.

Individual instances of these questionable trades have been reported before, but ProPublica’s investigation, done in partnership with NPR’s Planet Money [3], shows that by late 2006 they became a common industry practice.
Click to see how frequently the banks turned to their best customers — their own CDOs. [4]

Click to see how frequently the banks turned to their best customers — their own CDOs.

An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs [4].

ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers. Often the CDOs that swapped purchases closed within days of each other, the analysis shows.

There were supposed to be protections against this sort of abuse. While banks provided the blueprint for the CDOs and marketed them, they typically selected independent managers who chose the specific bonds to go inside them. The managers had a legal obligation to do what was best for the CDO. They were paid by the CDO, not the bank, and were supposed to serve as a bulwark against self-dealing by the banks, which had the fullest understanding of the complex and lightly regulated mortgage bonds.

It rarely worked out that way. The managers were beholden to the banks that sent them the business. On a billion-dollar deal, managers could earn a million dollars in fees, with little risk. Some small firms did several billion dollars of CDOs in a matter of months.

“All these banks for years were spawning trading partners,” says a former executive from Financial Guaranty Insurance Company, a major insurer of the CDO market. “You don’t have a trading partner? Create one.”
Get ProPublica’s latest headlines and major investigations delivered to your inbox. [5]

The executive, like most of the dozens of people ProPublica spoke with about the inner workings of the market at the time, asked not to be named out of fear of being sucked into ongoing investigations or because they are involved in civil litigation.

Keeping the assembly line going had a wealth of short-term advantages for the banks. Fees rolled in. A typical CDO could net the bank that created it between $5 million and $10 million — about half of which usually ended up as employee bonuses. Indeed, Wall Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business.

The self-dealing super-charged the market for CDOs, enticing some less-savvy investors to try their luck. Crucially, such deals maintained the value of mortgage bonds at a time when the lack of buyers should have driven their prices down.

But the strategy of speeding up the assembly line had devastating consequences for homeowners, the banks themselves and, ultimately, the global economy. Because of Wall Street’s machinations, more mortgages had been granted to ever-shakier borrowers. The results can now be seen in foreclosed houses across America.

The incestuous trading also made the CDOs more intertwined and thus fragile, accelerating their decline in value that began in the fall of 2007 and deepened over the next year. Most are now worth pennies on the dollar. Nearly half of the nearly trillion dollars in losses to the global banking system came from CDOs, losses ultimately absorbed by taxpayers and investors around the world. The banks’ troubles sent the world’s economies into a tailspin from which they have yet to recover.

It remains unclear whether any of this violated laws. The SEC has said [6] that it is actively looking at as many as 50 CDO managers as part of its broad examination of the CDO business’ role in the financial crisis. In particular, the agency is focusing on the relationship between the banks and the managers. The SEC is exploring how deals were structured, if any quid pro quo arrangements existed, and whether banks pressured managers to take bad assets.

The banks declined to directly address ProPublica’s questions. Asked about its relationship with managers and the cross-ownership among its CDOs, Citibank responded with a one-sentence statement:

“It has been widely reported that there are ongoing industry-wide investigations into CDO-related matters and we do not comment on pending investigations.”

None of ProPublica’s questions had mentioned the SEC or pending investigations.

Posed a similar list of questions, Bank of America, which now owns Merrill Lynch, said:

“These are very specific questions regarding individuals who left Merrill Lynch several years ago and a CDO origination business that, due to market conditions, was discontinued by Merrill before Bank of America acquired the company.”

This is the second installment of a ProPublica series about the largely hidden history of the CDO boom and bust. Our first story [7] looked at how one hedge fund helped create at least $40 billion in CDOs as part of a strategy to bet against the market. This story turns the focus on the banks.

Merrill Lynch Pioneers Pervert the Market

By 2004, the housing market was in full swing, and Wall Street bankers flocked to the CDO frenzy. It seemed to be the perfect money machine, and for a time everyone was happy.

Homeowners got easy mortgages. Banks and mortgage companies felt secure lending the money because they could sell the mortgages almost immediately to Wall Street and get back all their cash plus a little extra for their trouble. The investment banks charged massive fees for repackaging the mortgages into fancy financial products. Investors all around the world got to play in the then-phenomenal American housing market.
Click to see how the CDO daisy chain worked. [2]

Click to see how the CDO daisy chain worked.

The mortgages were bundled into bonds, which were in turn combined into CDOs offering varying interest rates and levels of risk.

Investors holding the top tier of a CDO were first in line to get money coming from mortgages. By 2006, some banks often kept this layer, which credit agencies blessed with their highest rating of Triple A.

Buyers of the lower tiers took on more risk and got higher returns. They would be the first to take the hit if homeowners funding the CDO stopped paying their mortgages. (Here’s a video explaining how CDOs worked [8].)

Over time, these risky slices became increasingly hard to sell, posing a problem for the banks. If they remained unsold, the sketchy assets stayed on their books, like rotting inventory. That would require the banks to set aside money to cover any losses. Banks hate doing that because it means the money can’t be loaned out or put to other uses.

Being stuck with the risky portions of CDOs would ultimately lower profits and endanger the whole assembly line.

The banks, notably Merrill and Citibank, solved this problem by greatly expanding what had been a common and accepted practice: CDOs buying small pieces of other CDOs.

Architects of CDOs typically included what they called a “bucket” — which held bits of other CDOs paying higher rates of interest. The idea was to boost overall returns of deals primarily composed of safer assets. In the early days, the bucket was a small portion of an overall CDO.

One pioneer of pushing CDOs to buy CDOs was Merrill Lynch’s Chris Ricciardi, who had been brought to the firm in 2003 to take Merrill to the top of the CDO business. According to former colleagues, Ricciardi’s team cultivated managers, especially smaller firms.

Merrill exercised its leverage over the managers. A strong relationship with Merrill could be the difference between a business that thrived and one that didn’t. The more deals the banks gave a manager, the more money the manager got paid.

As the head of Merrill’s CDO business, Ricciardi also wooed managers with golf outings and dinners. One Merrill executive summed up the overall arrangement: “I’m going to make you rich. You just have to be my bitch.”

But not all managers went for it.

An executive from Trainer Wortham, a CDO manager, recalls a 2005 conversation with Ricciardi. “I wasn’t going to buy other CDOs. Chris said: ‘You don’t get it. You have got to buy other guys’ CDOs to get your deal done. That’s how it works.'” When the manager refused, Ricciardi told him, “‘That’s it. You are not going to get another deal done.'” Trainer Wortham largely withdrew from the market, concerned about the practice and the overheated prices for CDOs.

Ricciardi declined multiple requests to comment.

Merrill CDOs often bought slices of other Merrill deals. This seems to have happened more in the second half of any given year, according to ProPublica’s analysis, though the purchases were still a small portion compared to what would come later. Annual bonuses are based on the deals bankers completed by yearend.

Ricciardi left Merrill Lynch in February 2006. But the machine he put into place not only survived his departure, it became a model for competitors.

As Housing Market Wanes, Self-Dealing Takes Off

By mid-2006, the housing market was on the wane. This was particularly true for subprime mortgages, which were given to borrowers with spotty credit at higher interest rates. Subprime lenders began to fold, in what would become a mass extinction. In the first half of the year, the percentage of subprime borrowers who didn’t even make the first month’s mortgage payment tripled from the previous year.

That made CDO investors like pension funds and insurance companies increasingly nervous. If homeowners couldn’t make their mortgage payments, then the stream of cash to CDOs would dry up. Real “buyers began to shrivel and shrivel,” says Fiachra O’Driscoll, who co-ran Credit Suisse’s CDO business from 2003 to 2008.

Faced with disappearing investor demand, bankers could have wound down the lucrative business and moved on. That’s the way a market is supposed to work. Demand disappears; supply follows. But bankers were making lots of money. And they had amassed warehouses full of CDOs and other mortgage-based assets whose value was going down.

Rather than stop, bankers at Merrill, Citi, UBS and elsewhere kept making CDOs.

The question was: Who would buy them?

The top 80 percent, the less risky layers or so-called “super senior,” were held by the banks themselves. The beauty of owning that supposedly safe top portion was that it required hardly any money be held in reserve.

That left 20 percent, which the banks did not want to keep because it was riskier and required them to set aside reserves to cover any losses. Banks often sold the bottom, riskiest part to hedge funds [7]. That left the middle layer, known on Wall Street as the “mezzanine,” which was sold to new CDOs whose top 80 percent was ultimately owned by … the banks.

“As we got further into 2006, the mezzanine was going into other CDOs,” says Credit Suisse’s O’Driscoll.
Get ProPublica’s latest headlines and major investigations delivered to your inbox. [5]

This was the daisy chain [2]. On paper, the risky stuff was gone, held by new independent CDOs. In reality, however, the banks were buying their own otherwise unsellable assets.

How could something so seemingly short-sighted have happened?

It’s one of the great mysteries of the crash. Banks have fleets of risk managers to defend against just such reckless behavior. Top executives have maintained that while they suspected that the housing market was cooling, they never imagined the crash. For those doing the deals, the payoff was immediate. The dangers seemed abstract and remote.

The CDO managers played a crucial role. CDOs were so complex that even buyers had a hard time seeing exactly what was in them — making a neutral third party that much more essential.

“When you’re investing in a CDO you are very much putting your faith in the manager,” says Peter Nowell, a former London-based investor for the Royal Bank of Scotland. “The manager is choosing all the bonds that go into the CDO.” (RBS suffered mightily in the global financial meltdown, posting the largest loss in United Kingdom history, and was de facto nationalized by the British government.)
Source: Asset-Backed Alert

Source: Asset-Backed Alert

By persuading managers to pick the unsold slices of CDOs, the banks helped keep the market going. “It guaranteed distribution when, quite frankly, there was not a huge market for them,” says Nowell.

The counterintuitive result was that even as investors began to vanish, the mortgage CDO market more than doubled from 2005 to 2006, reaching $226 billion, according to the trade publication Asset-Backed Alert.

Citi and Merrill Hand Out Sweetheart Deals

As the CDO market grew, so did the number of CDO management firms, including many small shops that relied on a single bank for most of their business. According to Fitch, the number of CDO managers it rated rose from 89 in July 2006 to 140 in September 2007.

One CDO manager epitomized the devolution of the business, according to numerous industry insiders: a Wall Street veteran named Wing Chau.

Earlier in the decade, Chau had run the CDO department for Maxim Group, a boutique investment firm in New York. Chau had built a profitable business for Maxim based largely on his relationship with Merrill Lynch. In just a few years, Maxim had corralled more than $4 billion worth of assets under management just from Merrill CDOs.

In August 2006, Chau bolted from Maxim to start his own CDO management business, taking several colleagues with him. Chau’s departure gave Merrill, the biggest CDO producer, one more avenue for unsold inventory.

Chau named the firm Harding, after the town in New Jersey where he lived. The CDO market was starting its most profitable stretch ever, and Harding would play a big part. In an eleven-month period, ending in August 2007, Harding managed $13 billion of CDOs, including more than $5 billion from Merrill, and another nearly $5 billion from Citigroup. (Chau would later earn a measure of notoriety for a cameo appearance in Michael Lewis’ bestseller “The Big Short [9],” where he is depicted as a cheerfully feckless “go-to buyer” for Merrill Lynch’s CDO machine.)

Chau had a long-standing friendship with Ken Margolis, who was Merrill’s top CDO salesman under Ricciardi. When Ricciardi left Merrill in 2006, Margolis became a co-head of Merrill’s CDO group. He carried a genial, let’s-just-get-the-deal-done demeanor into his new position. An avid poker player, Margolis told a friend that in a previous job he had stood down a casino owner during a foreclosure negotiation after the owner had threatened to put a fork through his eye.

Chau’s close relationship with Merrill continued. In late 2006, Merrill sublet office space to Chau’s startup in the Merrill tower in Lower Manhattan’s financial district. A Merrill banker, David Moffitt, scheduled visits to Harding for prospective investors in the bank’s CDOs. “It was a nice office,” overlooking New York Harbor, recalls a CDO buyer. “But it did feel a little weird that it was Merrill’s building,” he said.

Moffitt did not respond to requests for comment.

Under Margolis, other small managers with meager track records were also suddenly handling CDOs valued at as much as $2 billion. Margolis declined to answer any questions about his own involvement in these matters.

A Wall Street Journal article [10] ($) from late 2007, one of the first of its kind, described how Margolis worked with one inexperienced CDO manager called NIR on a CDO named Norma, in the spring of that year. The Long Island-based NIR made about $1.5 million a year for managing Norma, a CDO that imploded.

“NIR’s collateral management business had arisen from efforts by Merrill Lynch to assemble a stable of captive small firms to manage its CDOs that would be beholden to Merrill Lynch on account of the business it funneled to them,” alleged a lawsuit filed in New York state court against Merrill over Norma that was settled quietly after the plaintiffs received internal Merrill documents.

NIR declined to comment.

Banks had a variety of ways to influence managers’ behavior.

Some of the few outside investors remaining in the market believed that the manager would do a better job if he owned a small slice of the CDO he was managing. That way, the manager would have more incentive to manage the investment well, since he, too, was an investor. But small management firms rarely had money to invest. Some banks solved this problem by advancing money to managers such as Harding.

Chau’s group managed two Citigroup CDOs — 888 Tactical Fund and Jupiter High-Grade VII — in which the bank loaned Harding money to buy risky pieces of the deal. The loans would be paid back out of the fees the managers took from the CDO and its investors. The loans were disclosed to investors in a few sentences among the hundreds of pages of legalese accompanying the deals.

In response to ProPublica’s questions, Chau’s lawyer said, “Harding Advisory’s dealings with investment banks were proper and fully disclosed.”

Citigroup made similar deals with other managers. The bank lent money to a manager called Vanderbilt Capital Advisors for its Armitage CDO, completed in March 2007.

Vanderbilt declined to comment. It couldn’t be learned how much money Citigroup loaned or whether it was ever repaid.

Yet again banks had masked their true stakes in CDO. Banks were lending money to CDO managers so they could buy the banks’ dodgy assets. If the managers couldn’t pay the loans back — and most were thinly capitalized — the banks were on the hook for even more losses when the CDO business collapsed.

Goldman, Merrill and Others Get Tough

When the housing market deteriorated, banks took advantage of a little-used power they had over managers.
Source: Thetica Systems

Source: Thetica Systems

The way CDOs are put together, there is a brief period when the bonds picked by managers sit on the banks’ balance sheets. Because the value of such assets can fall, banks reserved the right to overrule managers’ selections.

According to numerous bankers, managers and investors, banks rarely wielded that veto until late 2006, after which it became common. Merrill was in the lead.

“I would go to Merrill and tell them that I wanted to buy, say, a Citi bond,” recalls a CDO manager. “They would say ‘no.’ I would suggest a UBS bond, they would say ‘no.’ Eventually, you got the joke.” Managers could choose assets to put into their CDOs but they had to come from Merrill CDOs. One rival investment banker says Merrill treated CDO managers the way Henry Ford treated his Model T customers: You can have any color you want, as long as it’s black.

Once, Merrill’s Ken Margolis pushed a manager to buy a CDO slice for a Merrill-produced CDO called Port Jackson that was completed in the beginning of 2007: “‘You don’t have to buy the deal but you are crazy if you don’t because of your business,'” an executive at the management firm recalls Margolis telling him. “‘We have a big pipeline and only so many more mandates to give you.’ You got the message.” In other words: Take our stuff and we’ll send you more business. If not, forget it.

Margolis declined to comment on the incident.

“All the managers complained about it,” recalls O’Driscoll, the former Credit Suisse banker who competed with other investment banks to put deals together and market them. But “they were indentured slaves.” O’Driscoll recalls managers grumbling that Merrill in particular told them “what to buy and when to buy it.”

Other big CDO-producing banks quickly adopted the practice.

A little-noticed document released this year during a congressional investigation into Goldman Sachs’ CDO business reveals that bank’s thinking. The firm wrote a November 2006 internal memorandum [11] about a CDO called Timberwolf, managed by Greywolf, a small manager headed by ex-Goldman bankers. In a section headed “Reasons To Pursue,” the authors touted that “Goldman is approving every asset” that will end up in the CDO. What the bank intended to do with that approval power is clear from the memo: “We expect that a significant portion of the portfolio by closing will come from Goldman’s offerings.”

When asked to comment whether Goldman’s memo demonstrates that it had effective control over the asset selection process and that Greywolf was not in fact an independent manager, the bank responded: “Greywolf was an experienced, independent manager and made its own decisions about what reference assets to include. The securities included in Timberwolf were fully disclosed to the professional investors who invested in the transaction.”

Greywolf declined to comment. One of the investors, Basis Capital of Australia, filed a civil lawsuit in federal court in Manhattan against Goldman over the deal. The bank maintains the lawsuit is without merit.

By March 2007, the housing market’s signals were flashing red. Existing home sales plunged at the fastest rate in almost 20 years. Foreclosures were on the rise. And yet, to CDO buyer Peter Nowell’s surprise, banks continued to churn out CDOs.

“We were pulling back. We couldn’t find anything safe enough,” says Nowell. “We were amazed that April through June they were still printing deals. We thought things were over.”

Instead, the CDO machine was in overdrive. Wall Street produced $70 billion in mortgage CDOs in the first quarter of the year.

Many shareholder lawsuits battling their way through the court system today focus on this period of the CDO market. They allege that the banks were using the sales of CDOs to other CDOs to prop up prices and hide their losses.

“Citi’s CDO operations during late 2006 and 2007 functioned largely to sell CDOs to yet newer CDOs created by Citi to house them,” charges a pending shareholder lawsuit against the bank that was filed in federal court in Manhattan in February 2009. “Citigroup concocted a scheme whereby it repackaged many of these investments into other freshly-baked vehicles to avoid incurring a loss.”

Citigroup described the allegations as “irrational,” saying the bank’s executives would never knowingly take actions that would lead to “catastrophic losses.”

In the Hall of Mirrors, Myopic Rating Agencies

The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs (remember the “bucket”) now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called CDO squareds [12].)

The ever-expanding bucket provided new opportunities for incestuous trades.

It worked like this: A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.
Source: Thetica Systems

Source: Thetica Systems

ProPublica’s analysis shows that in the final two years of the business, CDOs with cross-ownership amounted to about one-fifth of the market, about $107 billion.

Here’s an example from early May 2007:

* A CDO called Jupiter VI bought a piece of a CDO called Tazlina II.
* Tazlina II bought a piece of Jupiter VI.

Both Jupiter VI and Tazlina II were created by Merrill and were completed within a week of each other. Both were managed by small firms that did significant business with Merrill: Jupiter by Wing Chau’s Harding, and Tazlina by Terwin Advisors. Chau did not respond to questions about this deal. Terwin Advisors could not reached.

Just a few weeks earlier, CDO managers completed a comparable swap between Jupiter VI and another Merrill CDO called Forge 1.

Forge has its own intriguing history. It was the only deal done by a tiny manager of the same name based in Tampa, Fla. The firm was started less than a year earlier by several former Wall Street executives with mortgage experience. It received seed money from Bryan Zwan, who in 2001 settled an SEC civil lawsuit over his company’s accounting problems in a federal court in Florida. Zwan and Forge executives didn’t respond to requests for comment.

After seemingly coming out of nowhere, Forge won the right to manage a $1.5 billion Merrill CDO. That earned Forge a visit from the rating agency Moody’s.

“We just wanted to make sure that they actually existed,” says a former Moody’s executive. The rating agency saw that the group had an office near the airport and expertise to do the job.

Rating agencies regularly did such research on managers, but failed to ask more fundamental questions. The credit ratings agencies “did heavy, heavy due diligence on managers but they were looking for the wrong things: how you processed a ticket or how your surveillance systems worked,” says an executive at a CDO manager. “They didn’t check whether you were buying good bonds.”

One Forge employee recalled in a recent interview that he was amazed Merrill had been able to find buyers so quickly. “They were able to sell all the tranches” — slices of the CDO — “in a fairly rapid period of time,” said Rod Jensen, a former research analyst for Forge.

Forge achieved this feat because Merrill sold the slices to other CDOs, many linked to Merrill.

The ProPublica analysis shows that two Merrill CDOs, Maxim II and West Trade III, each bought pieces of Forge. Small managers oversaw both deals.

Forge, in turn, was filled with detritus from Merrill. Eighty-two percent of the CDO bonds owned by Forge came from other Merrill deals.

Citigroup did its own version of the shuffle, as these three CDOs demonstrate:

* A CDO called Octonion bought some of Adams Square Funding II.
* Adams Square II bought a piece of Octonion.
* A third CDO, Class V Funding III, also bought some of Octonion.
* Octonion, in turn, bought a piece of Class V Funding III.

All of these Citi deals were completed within days of each other. Wing Chau was once again a central player. His firm managed Octonion. The other two were managed by a unit of Credit Suisse. Credit Suisse declined to comment.

Not all cross-ownership deals were consummated.

In spring 2007, Deutsche Bank was creating a CDO and found a manager that wanted to take a piece of it. The manager was overseeing a CDO that Merrill was assembling. Merrill blocked the manager from putting the Deutsche bonds into the Merrill CDO. A former Deutsche Bank banker says that when Deutsche Bank complained to Andy Phelps, a Merrill CDO executive, Phelps offered a quid pro quo: If Deutsche was willing to have the manager of its CDO buy some Merrill bonds, Merrill would stop blocking the purchase. Phelps declined to comment.

The Deutsche banker, who says its managers were independent, recalls being shocked: “We said we don’t control what people buy in their deals.” The swap didn’t happen.

The Missing Regulators and the Aftermath

In September 2007, as the market finally started to catch up with Merrill Lynch, Ken Margolis left the firm to join Wing Chau at Harding.

Chau and Margolis circulated a marketing plan for a new hedge fund to prospective investors touting their expertise in how CDOs were made and what was in them. The fund proposed to buy failed CDOs — at bargain basement prices. In the end, Margolis and Chau couldn’t make the business work and dropped the idea.

Why didn’t regulators intervene during the boom to stop the self-dealing that had permeated the CDO market?

No one agency had authority over the whole business. Since the business came and went in just a few years, it may have been too much to expect even assertive regulators to comprehend what was happening in time to stop it.

While the financial regulatory bill passed by Congress in July creates more oversight powers, it’s unclear whether regulators have sufficient tools to prevent a replay of the debacle.

In just two years, the CDO market had cut a swath of destruction. Partly because CDOs had bought so many pieces of each other, they collapsed in unison. Merrill Lynch and Citigroup, the biggest perpetrators of the self-dealing, were among the biggest losers. Merrill lost about $26 billion on mortgage CDOs and Citigroup about $34 billion.

Additional reporting by Kitty Bennett, Krista Kjellman Schmidt, Lisa Schwartz and Karen Weise.

Correction: This story previously reported that there were 85 instances during 2006 and 2007 in which two complex securities known as collateralized debt obligations bought pieces of each others’ “unsold” inventory. In fact, there were some instances when this cross-exposure occurred through later transactions. The banks sometimes used such transactions to minimize their own exposure to CDOs they had created.

An interactive graphic we published includes at least one example of cross-exposure that did not involve “unsold” inventory. A CDO called Tourmaline III made a sidebet in 2007 that mirrored the performance of a piece of a CDO called Zais Investment Grade 8; that same year Zais 8 bought a piece of Tourmaline III. Both CDOs were underwritten by Deutsche Bank.

http://www.youtube.com/watch?v=6uB1eWJz9j
Capital structure
In stories about the auto companies and the banks, we’ve been hearing a
lot about debt-to-equity swaps, and exchanging preferred shares for
common stock. To get how those swaps work, you first need to understand
a company’s capital structure.

http://www.youtube.com/watch?v=m3im-iJdhv4
Credit default swaps? Theyre complicated — and scary! The receipt you get when you pre-order your Thanksgiving turkey? Not so much. But they have a lot in common: Theyre both derivatives. Senior Editor Paddy Hirsch explains

http://www.youtube.com/watch?v=xDqn4wpnI3w
Fannie, Freddie and the Fed
The Federal Reserve said this week it will no longer buy mortgage backed securities from Fannie Mae and Freddie Mac. Some people worry mortgage rates could rise as a result.

http://www.youtube.com/watch?v=hq9waP7goSc
Dark pools are exchanges where people trade stocks anonymously. Senior Editor Paddy Hirsch explains how they work, and why the SEC is considering regulating them.

http://www.cftc.gov/educationcenter/futuresmarketbasics.html

What is a Futures Contract?
A futures contract is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price. Most futures contracts contemplate actual delivery of the commodity can take place to fulfill the contract. However, some futures contracts require cash settlement in lieu of delivery, and most contracts are liquidated before the delivery date. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract. Futures and options must be executed on the floor of a commodity exchange—with very limited exceptions—and through persons and firms who are registered with the CFTC.

Who Uses Futures and Options Markets?
Most of the participants in the futures and option markets are commercial or institutional users of the commodities they trade. These users, most of whom are called “hedgers,” want the value of their assets to increase and want to limit, if possible, any loss in value. Hedgers may use the commodity markets to take a position that will reduce the risk of financial loss in their assets due to a change in price. Other participants are “speculators” who hope to profit from changes in the price of the futures or option contract.

http://www.danielstrading.com/education/lessons/futures-contract.php

A futures contract is an agreement to buy or sell a commodity at a date in the future. Everything about a futures contract is standardized except its price. All of the terms under which the commodity, service or financial instrument is to be transferred are established before active trading begins, so neither side is hampered by ambiguity. The price for a futures contract is what’s determined in the trading pit or on the electronic trading system of a futures exchange.

http://www.danielstrading.com/education/lessons/hedgers-and-speculators.php

Speculators are people who analyze and forecast futures price movement, trading contracts with the hope of making a profit. Speculators put their money at risk and must be prepared to accept outright losses in the futures market. Speculators earn a profit when they offset futures contracts to their benefit. To do this, a speculator buys contracts then sells them back at a higher (contract) price than that at which they purchased them. Conversely, they sell contracts and buy them back at a lower (contract) price than they sold them. In either case, if successful, a profit is made.

Speculators enter the futures market when they anticipate prices are going to change. While they put their money at risk, they won’t do so without first trying to determine to the best of their ability whether prices are moving up or down. Speculators analyze the market and forecast futures price movement as best they can. They may engage in the study of the external events that affect price movement or apply historical price movement patterns to the current market. In any case, the smart speculator doesn’t operate blind.

People who buy and sell the actual commodities can use the futures markets to protect themselves from commodity prices that move against them. They’re called hedgers. Speculators assume risk for hedgers. Speculators accept risk in the futures markets, trying to profit from price changes. Hedgers use the futures markets to avoid risk, protecting themselves against price changes.

There’s a futures contract for a commodity or financial product because there are people who conduct an active business in that commodity. For example, there’s a Lumber futures contract because there are lumber producers who sell lumber and companies that buy lumber. The hedger plans to buy (sell) a commodity, such as lumber or live cattle, and buys (sells) a futures contract to lock in a price and protect against rising (falling) prices. The need for risk management that futures can meet holds true for all markets, including financial markets.

The producers and users of commodities who use the futures market are called hedgers. Buying and selling futures as a risk management tool is called hedging. Suppose a meat packer needs to buy cattle in October. Today’s cash price is okay, but what if prices rise? The meat packer can lock in a price on the cattle today, just in case the cash prices do go up between now and October. Protecting an October purchase price can be done by buying October Live Cattle futures contracts. This is called a long hedge.

What’s Already Determined?
commodity
quantity
quality
delivery date
delivery point or cash settlement

Here’s an interesting point to remember. Most people who buy and sell Random Length Lumber futures don’t deliver or pick up a load of lumber when the contract matures. They usually offset the trade and get out of the market before that point. They don’t really want the lumber. They’ve traded the futures contracts for other reasons, such as protection against rising or falling lumber prices or simply to earn a profit on the trade.

http://www.cftc.gov/marketreports/financialdataforfcms/fcmreport_archive.html
Historical Futures Commission Merchants Financial Reports

Excess Net Capital: This is the amount by which the adjusted net capital exceeds the net capital requirement.

Customers’ 4d(a)(2) Seg Required: This is the sum of all accounts that contain a net liquidating equity.

http://www.cftc.gov/files/tm/fcm/tmfcmdata0203.pdf
2002 45,660,057,887 52,244,295,812

http://www.cftc.gov/files/tm/fcm/tmfcmdata0301.pdf
2003 50,114,476,356 56,243,176,059

http://www.cftc.gov/files/tm/fcm/tmfcmdata0401.pdf
2004 49,628,459,814 70,820,967,650

http://www.cftc.gov/files/tm/fcm/tmfcmdata0501.pdf
2005 55,322,525,530 80,368,083,706

http://www.cftc.gov/files/tm/fcm/tmfcmdata0601.pdf
2006 99,647,125,233

http://www.cftc.gov/files/tm/fcm/tmfcmdata0701.pdf
2007 110,540,901,561

http://www.cftc.gov/stellent/groups/public/@financialdataforfcms/documents/file/fcmdata0208.pdf
2008 157,701,103,068

http://www.wsws.org/articles/2007/nov2007/forb-n27.shtml
The filthy rich: Forbes lists America’s top 400 for 2007
By Hiram Lee
27 November 2007

World Billianoiars
2007 900B -> 4.4T

American Billioniars

2007 300B -> 1.54T
2006 120B -> 1.25T
2005 125B -> 1.13T
2004 45B -> 1T
2003 B -> 955T

Federal Reserve Bank

In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money under a fractional-reserve banking system.[1] Most often, it measures the maximum amount of commercial bank money that can be created by a given unit of central bank money. That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is a multiple of reserves; this multiple is the reciprocal of the reserve ratio, and it is an economic multiplier.[2]

If banks lend out close to the maximum allowed by their reserves, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier. If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the multiplier.

In the United States since 1959, banks lent out close to the maximum allowed for the 49-year period from 1959 until August 2008, maintaining a low level of excess reserves, then accumulated significant excess reserves over the period September 2008 through the present (November 2009). Thus, in the first period, commercial bank money was almost exactly central bank money times the multiplier, but this relationship broke down from September 2008.

In equations, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio, the reserve ratio requirement is that R/M \geq RR; the fraction of reserves must be at least the reserve ratio. Taking the reciprocal, M/R \leq 1/RR, which yields M \leq R \times (1/RR), meaning that commercial bank money is at most reserves times (1 / RR), the latter being the multiplier.

As a formula and legal quantity, the money multiplier is not controversial – it is simply the maximum that commercial banks are allowed to lend out. The mechanism of money creation in a fractional-reserve banking system, and the implication for monetary policy differ between different schools of economics, however.
Contents

The money multiplier is defined in various ways.[1] Most simply, it can be defined either as the statistic of “commercial bank money”/”central bank money”, based on the actual observed quantities of various empirical measures of money supply,[3] such as M2 (broad money) over M0 (base money), or it can be the theoretical “maximum commercial bank money/central bank money” ratio, defined as the reciprocal of the reserve ratio, 1 / RR.[2] The multiplier in the first (statistic) sense fluctuates continuously based on changes in commercial bank money and central bank money (though it is at most the theoretical multiplier), while the multiplier in the second (legal) sense depends only on the reserve ratio, and thus does not change unless the law changes.

For purposes of monetary policy, what is of most interest is the predicted impact of changes in central bank money on commercial bank money, and in various models of monetary creation, the associated multiple (the ratio of these two changes) is called the money multiplier (associated to that model).[4] For example, if one assumes that people hold a constant fraction of deposits as cash, one may add a “currency drain” variable (currency–deposit ratio), and obtain a multiplier of (1 + CD) / (RR + CD).

These concepts are not generally distinguished by different names; if one wishes to distinguish them, one may gloss them by names such as empirical (or observed) multiplier, legal (or theoretical) multiplier, or model multiplier, but these are not standard usages.[3]

Similarly, one may distinguish the observed reserve–deposit ratio from the legal (minimum) reserve ratio, and the observed currency–deposit ratio from an assumed model one. Note that in this case the reserve–deposit ratio and currency–deposit ratio are outputs of observations, and fluctuate over time. If one then uses these observed ratios as model parameters (inputs) for the predictions of effects of monetary policy and assumes that they remain constant, computing a constant multiplier, the resulting predictions are valid only if these ratios do not in fact change. Sometimes this holds, and sometimes it does not; for example, increases in central bank money may result in increases in commercial bank money – and will, if these ratios (and thus multiplier) stay constant – or may result in increases in excess reserves but little or no change in commercial bank money, in which case the reserve–deposit ratio will grow and the multiplier will fall.

*********** Fractional-reserve banking

is the banking practice in which a bank lends out most of the funds deposited and keeps the remaining fraction in reserve (as cash and other highly liquid assets), while simultaneously maintaining the obligation to redeem all deposits upon demand.[1][2] Fractional reserve banking necessarily occurs when banks lend out funds received from deposit accounts, and is practiced by all modern commercial banks.

The practice of fractional reserve banking expands the money supply (cash and demand deposits) beyond what it would otherwise be. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country’s central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.

Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate these problems, central banks (or other government institutions) generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks’ customers.

History

Prior to the 1800s, savers looking to keep their valuables in safekeeping depositories deposited gold coins and silver coins at goldsmiths, receiving in turn a note for their deposit (see Bank of Amsterdam). Once these notes became a trusted medium of exchange an early form of paper money was born, in the form of the goldsmiths’ notes.[3]

As the notes were used directly in trade, the goldsmiths observed that people would not usually redeem all their notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing loans and bills. This generated income for the goldsmiths but left them with more notes on issue than reserves with which to pay them. A process was started that altered the role of the goldsmiths from passive guardians of bullion, charging fees for safe storage, to interest-paying and interest-earning banks. Thus fractional-reserve banking was born.

However, if creditors (note holders of gold originally deposited) lost faith in the ability of a bank to redeem (pay) their notes, many would try to redeem their notes at the same time. If in response a bank could not raise enough funds by calling in loans or selling bills, it either went into insolvency or defaulted on its notes. Such a situation is called a bank run and caused the demise of many early banks.[3]

Repeated bank failures and financial crises led to the creation of central banks – public (government) or privately owned institutions that with the authority of enacted national/federal statutes oversee and regulate commercial banks, impose reserve requirements, and act as lender-of-last-resort if a bank is low on liquidity. The emergence of central banks mitigated the dangers associated with fractional reserve banking.

Reason for existence

According to the United States’ Federal Reserve, fractional reserve banking provides benefits to the economy and the banking system:[6]

The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to create money.

Thus, fractional reserve banking is a consequence of bank lending, as a bank necessarily has cash reserves that are only a fraction of deposits when it lends some of those deposits out. The fractional reserve system allows banks to act as financial intermediaries — facilitating the movement of funds from savers to investors in a society.[5][7]

Small savers often cannot lend or invest their meager savings, for want of knowledge and sufficient capital to make a loan. Likewise, without financial intermediaries, borrowers must seek out someone who can loan them the exact amount they need, instead of being able to draw on several loans from different small savers. Savers also face significant risk as individual investors, since if they lend to a single firm or individual, that entity can collapse, leaving the saver penniless. Furthermore, if they act as individual lenders, savers must wait for their loans to mature before recouping their money; a bank can make their deposits available at any time. Banks have the advantage of significant economies of scale when making investment and lending decisions, as they have access to knowledge and expertise which individual investors or lenders generally do not. Without fractional-reserve banking, a great deal of money would sit idle, as savers stored up their money, while entrepreneurs went without the capital they seek.[8]

According to mainstream economic theory, regulated fractional-reserve banking also benefits the economy by providing regulators with powerful tools for manipulating the money supply and interest rates, which many see as essential to a healthy economy.[9] Moreover, the existence of fractional-reserve banking allows either the central bank or individual banks (under a free banking regime) to create money virtually at will, allowing the supply of money to adjust to changing demand for money. A full-reserve banking system with a fixed money supply would result in deflation as the economy grows. However, this deflation is likely to have deleterious consequences if some prices are stickier than others; in particular, wages are often significantly stickier than other prices. Most economists believe that given wage stickiness, the adjustment costs of deflation are significantly higher than an equivalent inflation. As such, mainstream economic thinking prefers the inflation brought about by fractional-reserve banking to the necessary deflation of a full-reserve banking policy regime.[10]

Member banks which fall under the umbrella of the main central bank have different bankruptcy regulation than a typical business. For this reason the demand deposits of most banks will retain their value in spite of circumstances which would otherwise jeopardize their credit-worthiness.

How it works

The nature of modern banking is such that the cash reserves at the bank available to repay demand deposits need only be a fraction of the demand deposits owed to depositors. In most legal systems, a demand deposit at a bank (e.g. a checking or savings account) is considered a loan to the bank (instead of a bailment) repayable on demand, that the bank can use to finance its investments in loans and interest bearing securities. Banks make a profit based on the difference between the interest they charge on the loans they make, and the interest they pay to their depositors. Since a bank lends out most of the money deposited, keeping only a fraction of the total as reserves, it necessarily has less money than the account balances of its depositors.

The main reason customers deposit funds at a bank is to store savings in the form of a demand claim on the bank. Depositors still have a claim to full repayment of their funds on demand even though most of the funds have already been invested by the bank in interest bearing loans and securities.[11] Holders of demand deposits can withdraw all of their deposits at any time. If all the depositors of a bank did so at the same time a bank run would occur, and the bank would likely collapse. Due to the practice of central banking, this is a rare event today, as central banks usually guarantee the deposits at commercial banks, and act as lender of last resort when there is a run on a bank. However, there have been some recent bank runs: the Northern Rock crisis of 2007 in the United Kingdom is an example. The collapse of Washington Mutual bank in September 2008, the largest bank failure in history, was preceded by a “silent run” on the bank, where depositors removed vast sums of money from the bank through electronic transfer.[citation needed] However, in these cases, the banks proved to have been insolvent at the time of the run. Thus, these bank runs merely precipitated failures that were inevitable in any case.

In the absence of crises that trigger bank runs, fractional-reserve banking usually functions smoothly because at any one time relatively few depositors will make cash withdrawals simultaneously compared to the total amount on deposit, and a cash reserve can be maintained as a buffer to deal with the normal cash demands from depositors seeking withdrawals. In addition, in a normal economic environment, cash is steadily being introduced into the economy by the central bank, and new funds are steadily being deposited into the commercial banks.

However, if a bank is experiencing a financial crisis, and net redemption demands are unusually large over a period of time, the bank will run low on cash reserves and will be forced to raise additional funds to avoid running out of reserves and defaulting on its obligations. A bank can raise funds from additional borrowings (e.g. by borrowing from the money market or using lines of credit held with other banks), or by selling assets, or by calling in short-term loans. If creditors are afraid that the bank is running out of cash or is insolvent, they have an incentive to redeem their deposits as soon as possible before other depositors access the remaining cash reserves before they do, triggering a cascading crisis that can result in a full-scale bank run.

Modern central banking allows multiple banks to practice fractional reserve banking with inter-bank business transactions without risking bankruptcy. The process of fractional-reserve banking has a cumulative effect of money creation by banks, essentially expanding the money supply of the economy.[6]

There are two types of money in a fractional-reserve banking system operating with a central bank:[12][13][14]

1. central bank money (money created or adopted by the central bank regardless of its form (precious metals, commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the central bank chooses as its form of money)
2. commercial bank money (demand deposits in the commercial banking system) – sometimes referred to as chequebook money[15]

When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks’ reserves (it is no longer counted as part of m1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank’s reserves, the m1 money supply expands by the size of the loan.[5] This process is called deposit multiplication.
[edit] Example of deposit multiplication

The table below displays how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money. Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.

The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank’s accounts as a liability (specifically, an IOU to the depositor). From a depositor’s perspective, commercial money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs (at which time everyone wants central bank money).[5]

At this point, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.

Table Sources:[16][17][18][12] Individual Bank Amount Deposited Lent Out Reserves
A 100 80 20
B 80 64 16
C 64 51.20 12.80
D 51.20 40.96 10.24
E 40.96 32.77 8.19
F 32.77 26.21 6.55
G 26.21 20.97 5.24
H 20.97 16.78 4.19
I 16.78 13.42 3.36
J 13.42 10.74 2.68
K 10.74

Total Reserves:

89.26

Total Amount of Deposits: Total Amount Lent Out: Total Reserves + Last Amount Deposited:

457.05 357.05 100
The expansion of $100 of central bank money through fractional-reserve lending with a 20% reserve rate. $400 of commercial bank money is created virtually through loans.

Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans. The 2 boxes marked in red show the location of the original $100 deposit throughout the entire process. The total reserves plus the last deposit (or last loan, whichever is last) will always equal the original amount, which in this case is $100. As this process continues, more commercial bank money is created. The amounts in each step decrease towards a limit. If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400.

For an individual bank, the deposit is considered a liability whereas the loan it gives out and the reserves are considered assets. Deposits will always be equal to loans plus a bank’s reserves, since loans and reserves are created from deposits. This is the basis for a bank’s balance sheet.

The expansion and contraction of the money supply occurs through this money creation process. When loans are given out, the process moves from the top down and the money supply expands. When currency is withdrawn from the commercial banks, causing loans to be called back, the process moves from the bottom to the top and the money supply contracts.

This table gives an outline of the makeup of money supplies worldwide. Most of the money in any given money supply consists of commercial bank money.[12] The value of commercial bank money is based on the fact that it can be exchanged freely at a bank for central bank money.[12][13]

The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some members of the public may choose to hold cash, and there also may be delays or frictions in the lending process.[19] Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled.

Exacerbation of the business cycle
Main article: Austrian Business Cycle Theory

Some Austrian School economists claim that fractional-reserve banking, by expanding the money supply, will lower the interest rates compared to a hypothetical full-reserve banking system. They argue that this will affect the role of the interest rate as the price of investment capital, guiding investment decisions. One of the proponents of aspects of the business cycle theory, Friedrich von Hayek, shared in the Nobel Memorial Prize in Economic Sciences for 1974.[29] Hayek accepted that bank credit and fractional reserve banking — even if they contributed to business cycles — were necessary as “the price we pay for a speed of development exceeding” that which would otherwise be possible, and that “financial institutions have never been prohibited from holding fractional reserves.”[30]

A few Austrian School economists, such as Pascal Salin, also suggest that a full-reserve banking system should not be enforced legally, and dispute Murray Rothbard’s characterization of fractional-reserve banking as a simple form of recursive embezzlement, and rather advocate the abolition of central banking, and suggest that free banking replace the current system. Austrian monetary theorist George Selgin has argued: “Those self-styled Austrian economists, mostly followers of Murray Rothbard, who insist on fractional-reserve banking’s fraudulent nature or inherent instability are, frankly, making poor arguments. I don’t think the evidence supports their view, and that they overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment.”[31]

But many Austrians, such as Jeffrey Herbener, believe Selgin’s view of fractional-reserve banking is at odds with that of Ludwig Von Mises: “George Selgin and Lawrence White have sought to tie their modern free banking school to the views of Ludwig von Mises… Whatever the validity of their own views on the gold standard and fractional-reserve free banking, their assessments of Mises’s positions on these issues are dubious.”[32]
[edit] Effects of an increased money supply

Fractional reserve banking involves the creation of money by commercial banks, increasing the money supply of a country. According to the quantity theory of money, this larger money supply leads to more money ‘chasing’ the same amount of goods, which leads to a higher price level.[33] Austrian economists state that this expansion of the broad money supply (demand deposits and notes) caused by fractional reserve banking is a cause of inflation.[34] The Credit Theory of Money, as espoused by Southampton University economist Richard Werner, says that credit creation by banks does not necessarily result in inflation.[35] This depends on the use of newly created credit. Disaggregating credit into credit used for GDP and non-GDP transactions, Werner further distinguishes between ‘productive’ and ‘unproductive’ credit creation. The latter always results in inflation (in the case of GDP transactions, consumer price inflation; in the case of non-GDP transactions, asset price inflation or unsustainable asset bubbles which will result in a banking crisis). The former will always increase real growth, even when all resources are fully employed, provided that there is new technology that has not yet been implemented (as productive credit creation serves to implement it).

http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm

Remarks by Governor Ben S. Bernanke
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia
March 2, 2004

Money, Gold, and the Great Depression

I am pleased to be able to present the H. Parker Willis Lecture in Economic Policy here at Washington and Lee University. As you may know, Willis was an important figure in the early history of my current employer, the Federal Reserve System. While he was a professor at Washington and Lee, Willis advised Senator Carter Glass of Virginia, one of the key legislators involved in the founding of the Federal Reserve. Willis also served on the National Monetary Commission, which recommended the creation of the Federal Reserve, and he went on to become the research director at the Federal Reserve from 1918 to 1922. At the Federal Reserve, Willis pushed for the development of new and better economic statistics, facing the resistance of those who took the view that too many facts only confuse the issue. Willis was also the first editor of the Federal Reserve Bulletin, the official publication of the Fed, which in Willis’s time as well as today provides a wealth of economic statistics. As an illustration of the intellectual atmosphere in Washington at the time he served, Willis reported that when the first copy of the Bulletin was presented to the Secretary of the Treasury, the esteemed Secretary replied, “This Government ain’t going into the newspaper business.”

Like Parker Willis, I was a professor myself before coming to the Federal Reserve Board. One topic of particular interest to me as a researcher was the performance of the Federal Reserve in its early days, particularly the part played by the young U.S. central bank in the Great Depression of the 1930s.1 In honor of Willis’s important contribution to the design and creation of the Federal Reserve, I will speak today about the role of the Federal Reserve and of monetary factors more generally in the origin and propagation of the Great Depression. Let me offer two caveats before I begin: First, as I mentioned, H. Parker Willis resigned from the Fed in 1922, to take a post at Columbia University; thus, he is not implicated in any of the mistakes that the Federal Reserve made in the late 1920s and early 1930s. Second, the views I will express today are my own and are not necessarily those of my colleagues in the Federal Reserve System.

The number of people with personal memory of the Great Depression is fast shrinking with the years, and to most of us the Depression is conveyed by grainy, black-and-white images of men in hats and long coats standing in bread lines. However, although the Depression was long ago–October this year will mark the seventy-fifth anniversary of the famous 1929 stock market crash–its influence is still very much with us. In particular, the experience of the Depression helped forge a consensus that the government bears the important responsibility of trying to stabilize the economy and the financial system, as well as of assisting people affected by economic downturns. Dozens of our most important government agencies and programs, ranging from social security (to assist the elderly and disabled) to federal deposit insurance (to eliminate banking panics) to the Securities and Exchange Commission (to regulate financial activities) were created in the 1930s, each a legacy of the Depression.

The impact that the experience of the Depression has had on views about the role of the government in the economy is easily understood when we recall the sheer magnitude of that economic downturn. During the major contraction phase of the Depression, between 1929 and 1933, real output in the United States fell nearly 30 percent. During the same period, according to retrospective studies, the unemployment rate rose from about 3 percent to nearly 25 percent, and many of those lucky enough to have a job were able to work only part-time. For comparison, between 1973 and 1975, in what was perhaps the most severe U.S. recession of the World War II era, real output fell 3.4 percent and the unemployment rate rose from about 4 percent to about 9 percent. Other features of the 1929-33 decline included a sharp deflation–prices fell at a rate of nearly 10 percent per year during the early 1930s–as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households. The economy improved after Franklin D. Roosevelt’s inauguration in March 1933, but unemployment remained in the double digits for the rest of the decade, full recovery arriving only with the advent of World War II. Moreover, as I will discuss later, the Depression was international in scope, affecting most countries around the world not only the United States.

What caused the Depression? This question is a difficult one, but answering it is important if we are to draw the right lessons from the experience for economic policy. Solving the puzzle of the Depression is also crucial to the field of economics itself because of the light the solution would shed on our basic understanding of how the economy works.

During the Depression years and for many decades afterward, economists disagreed sharply on the sources of the economic and financial collapse of the 1930s. In contrast, during the past twenty years or so economic historians have come to a broad consensus about the causes of the Depression. A widening of the geographic focus of Depression research deserves much of the credit for this breakthrough. Before the 1980s, research on the causes of the Depression had considered primarily the experience of the United States. This attention to the U.S. case was appropriate to some degree, as the U.S. economy was then, as it is today, the world’s largest; the decline in output and employment in the United States during the 1930s was especially severe; and many economists have argued that, to an important extent, the worldwide Depression began in the United States, spreading from here to other countries (Romer, 1993). However, in much the same way that a medical researcher cannot reliably infer the causes of an illness by studying one patient, diagnosing the causes of the Depression is easier when we have more patients (in this case, more national economies) to study. To explain the current consensus on the causes of the Depression, I will first describe the debate as it existed before 1980, and then discuss how the recent focus on international aspects of the Depression and the comparative analysis of the experiences of different countries have helped to resolve that debate.

I have already mentioned the sharp deflation of the price level that occurred during the contraction phase of the Depression, by far the most severe episode of deflation experienced in the United States before or since. Deflation, like inflation, tends to be closely linked to changes in the national money supply, defined as the sum of currency and bank deposits outstanding, and such was the case in the Depression. Like real output and prices, the U.S. money supply fell about one-third between 1929 and 1933, rising in subsequent years as output and prices rose.

While the fact that money, prices, and output all declined rapidly in the early years of the Depression is undeniable, the interpretation of that fact has been the subject of much controversy. Indeed, historically, much of the debate on the causes of the Great Depression has centered on the role of monetary factors, including both monetary policy and other influences on the national money supply, such as the condition of the banking system. Views have changed over time. During the Depression itself, and in several decades following, most economists argued that monetary factors were not an important cause of the Depression. For example, many observers pointed to the fact that nominal interest rates were close to zero during much of the Depression, concluding that monetary policy had been about as easy as possible yet had produced no tangible benefits to the economy. The attempt to use monetary policy to extricate an economy from a deep depression was often compared to “pushing on a string.”

During the first decades after the Depression, most economists looked to developments on the real side of the economy for explanations, rather than to monetary factors. Some argued, for example, that overinvestment and overbuilding had taken place during the ebullient 1920s, leading to a crash when the returns on those investments proved to be less than expected. Another once-popular theory was that a chronic problem of “under-consumption”–the inability of households to purchase enough goods and services to utilize the economy’s productive capacity–had precipitated the slump.

However, in 1963, Milton Friedman and Anna J. Schwartz transformed the debate about the Great Depression. That year saw the publication of their now-classic book, A Monetary History of the United States, 1867-1960. The Monetary History, the name by which the book is instantly recognized by any macroeconomist, examined in great detail the relationship between changes in the national money stock–whether determined by conscious policy or by more impersonal forces such as changes in the banking system–and changes in national income and prices. The broader objective of the book was to understand how monetary forces had influenced the U.S. economy over a nearly a century. In the process of pursuing this general objective, however, Friedman and Schwartz offered important new evidence and arguments about the role of monetary factors in the Great Depression. In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that “the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces” (Friedman and Schwartz, 1963, p. 300).

To support their view that monetary forces caused the Great Depression, Friedman and Schwartz revisited the historical record and identified a series of errors–errors of both commission and omission–made by the Federal Reserve in the late 1920s and early 1930s. According to Friedman and Schwartz, each of these policy mistakes led to an undesirable tightening of monetary policy, as reflected in sharp declines in the money supply. Drawing on their historical evidence about the effects of money on the economy, Friedman and Schwartz argued that the declines in the money stock generated by Fed actions–or inactions–could account for the drops in prices and output that subsequently occurred.2

Friedman and Schwartz emphasized at least four major errors by U.S. monetary policymakers. The Fed’s first grave mistake, in their view, was the tightening of monetary policy that began in the spring of 1928 and continued until the stock market crash of October 1929 (see Hamilton, 1987, or Bernanke, 2002a, for further discussion). This tightening of monetary policy in 1928 did not seem particularly justified by the macroeconomic environment: The economy was only just emerging from a recession, commodity prices were declining sharply, and there was little hint of inflation. Why then did the Federal Reserve raise interest rates in 1928? The principal reason was the Fed’s ongoing concern about speculation on Wall Street. Fed policymakers drew a sharp distinction between “productive” (that is, good) and “speculative” (bad) uses of credit, and they were concerned that bank lending to brokers and investors was fueling a speculative wave in the stock market. When the Fed’s attempts to persuade banks not to lend for speculative purposes proved ineffective, Fed officials decided to dissuade lending directly by raising the policy interest rate.

The market crash of October 1929 showed, if anyone doubted it, that a concerted effort by the Fed can bring down stock prices. But the cost of this “victory” was very high. According to Friedman and Schwartz, the Fed’s tight-money policies led to the onset of a recession in August 1929, according to the official dating by the National Bureau of Economic Research. The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October. In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it. Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930.

The second monetary policy action identified by Friedman and Schwartz occurred in September and October of 1931. At the time, as I will discuss in more detail later, the United States and the great majority of other nations were on the gold standard, a system in which the value of each currency is expressed in terms of ounces of gold. Under the gold standard, central banks stood ready to maintain the fixed values of their currencies by offering to trade gold for money at the legally determined rate of exchange.

The fact that, under the gold standard, the value of each currency was fixed in terms of gold implied that the rate of exchange between any two currencies within the gold standard system was likewise fixed. As with any system of fixed exchange rates, the gold standard was subject to speculative attack if investors doubted the ability of a country to maintain the value of its currency at the legally specified parity. In September 1931, following a period of financial upheaval in Europe that created concerns about British investments on the Continent, speculators attacked the British pound, presenting pounds to the Bank of England and demanding gold in return. Faced with the heavy demands of speculators for gold and a widespread loss of confidence in the pound, the Bank of England quickly depleted its gold reserves. Unable to continue supporting the pound at its official value, Great Britain was forced to leave the gold standard, allowing the pound to float freely, its value determined by market forces.

With the collapse of the pound, speculators turned their attention to the U.S. dollar, which (given the economic difficulties the United States was experiencing in the fall of 1931) looked to many to be the next currency in line for devaluation. Central banks as well as private investors converted a substantial quantity of dollar assets to gold in September and October of 1931, reducing the Federal Reserve’s gold reserves. The speculative attack on the dollar also helped to create a panic in the U.S. banking system. Fearing imminent devaluation of the dollar, many foreign and domestic depositors withdrew their funds from U.S. banks in order to convert them into gold or other assets. The worsening economic situation also made depositors increasingly distrustful of banks as a place to keep their savings. During this period, deposit insurance was virtually nonexistent, so that the failure of a bank might cause depositors to lose all or most of their savings. Thus, depositors who feared that a bank might fail rushed to withdraw their funds. Banking panics, if severe enough, could become self-confirming prophecies. During the 1930s, thousands of U.S. banks experienced runs by depositors and subsequently failed.

Long-established central banking practice required that the Fed respond both to the speculative attack on the dollar and to the domestic banking panics. However, the Fed decided to ignore the plight of the banking system and to focus only on stopping the loss of gold reserves to protect the dollar. To stabilize the dollar, the Fed once again raised interest rates sharply, on the view that currency speculators would be less willing to liquidate dollar assets if they could earn a higher rate of return on them. The Fed’s strategy worked, in that the attack on the dollar subsided and the U.S. commitment to the gold standard was successfully defended, at least for the moment. However, once again the Fed had chosen to tighten monetary policy despite the fact that macroeconomic conditions–including an accelerating decline in output, prices, and the money supply–seemed to demand policy ease.

The third policy action highlighted by Friedman and Schwartz occurred in 1932. By the spring of that year, the Depression was well advanced, and Congress began to place considerable pressure on the Federal Reserve to ease monetary policy. The Board was quite reluctant to comply, but in response to the ongoing pressure the Board conducted open-market operations between April and June of 1932 designed to increase the national money supply and thus ease policy. These policy actions reduced interest rates on government bonds and corporate debt and appeared to arrest the decline in prices and economic activity. However, Fed officials remained ambivalent about their policy of monetary expansion. Some viewed the Depression as the necessary purging of financial excesses built up during the 1920s; in this view, slowing the economic collapse by easing monetary policy only delayed the inevitable adjustment. Other officials, noting among other indicators the very low level of nominal interest rates, concluded that monetary policy was in fact already quite easy and that no more should be done. These policymakers did not appear to appreciate that, even though nominal interest rates were very low, the ongoing deflation meant that the real cost of borrowing was very high because any loans would have to be repaid in dollars of much greater value (Meltzer, 2003). Thus monetary policy was not in fact easy at all, despite the very low level of nominal interest rates. In any event, Fed officials convinced themselves that the policy ease advocated by the Congress was not appropriate, and so when the Congress adjourned in July 1932, the Fed reversed the policy. By the latter part of the year, the economy had relapsed dramatically.

The fourth and final policy mistake emphasized by Friedman and Schwartz was the Fed’s ongoing neglect of problems in the U.S. banking sector. As I have already described, the banking sector faced enormous pressure during the early 1930s. As depositor fears about the health of banks grew, runs on banks became increasingly common. A series of banking panics spread across the country, often affecting all the banks in a major city or even an entire region of the country. Between December 1930 and March 1933, when President Roosevelt declared a “banking holiday” that shut down the entire U.S. banking system, about half of U.S. banks either closed or merged with other banks. Surviving banks, rather than expanding their deposits and loans to replace those of the banks lost to panics, retrenched sharply.

The banking crisis had highly detrimental effects on the broader economy. Friedman and Schwartz emphasized the effects of bank failures on the money supply. Because bank deposits are a form of money, the closing of many banks greatly exacerbated the decline in the money supply. Moreover, afraid to leave their funds in banks, people hoarded cash, for example by burying their savings in coffee cans in the back yard. Hoarding effectively removed money from circulation, adding further to the deflationary pressures. Moreover, as I emphasized in early research of my own (Bernanke, 1983), the virtual shutting down of the U.S. banking system also deprived the economy of an important source of credit and other services normally provided by banks.

The Federal Reserve had the power at least to ameliorate the problems of the banks. For example, the Fed could have been more aggressive in lending cash to banks (taking their loans and other investments as collateral), or it could have simply put more cash in circulation. Either action would have made it easier for banks to obtain the cash necessary to pay off depositors, which might have stopped bank runs before they resulted in bank closings and failures. Indeed, a central element of the Federal Reserve’s original mission had been to provide just this type of assistance to the banking system. The Fed’s failure to fulfill its mission was, again, largely the result of the economic theories held by the Federal Reserve leadership. Many Fed officials appeared to subscribe to the infamous “liquidationist” thesis of Treasury Secretary Andrew Mellon, who argued that weeding out “weak” banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were relatively small and not members of the Federal Reserve System, making their fate of less interest to the policymakers. In the end, Fed officials decided not to intervene in the banking crisis, contributing once again to the precipitous fall in the money supply.

Friedman and Schwartz discuss other episodes and policy actions as well, such as the Federal Reserve’s misguided tightening of policy in 1937-38 which contributed to a new recession in those years. However, the four episodes I have described capture the gist of the Friedman and Schwartz argument that, for a variety of reasons, monetary policy was unnecessarily tight, both before the Depression began and during its most dramatic downward phase. As I have mentioned, Friedman and Schwartz had produced evidence from other historical periods that suggested that contractionary monetary policies can lead to declining prices and output. Friedman and Schwartz concluded therefore that they had found the smoking gun, evidence that much of the severity of the Great Depression could be attributed to monetary forces.

Friedman and Schwartz’s arguments were highly influential but not universally accepted. For several decades after the Monetary History was published, a debate raged about the importance of monetary factors in the Depression. Opponents made several objections to the Friedman and Schwartz thesis that are worth highlighting here.

First, critics wondered whether the tightening of monetary policy during 1928 and 1929, though perhaps ill advised, was large enough to have led to such calamitous consequences.3 If the tightening of monetary policy before the stock market crash was not sufficient to account for the violence of the economic downturn, then other, possibly nonmonetary, factors may need to be considered as well.

A second question is whether the large decline in the money supply seen during the 1930s was primarily a cause or an effect of falling output and prices. As we have seen, Friedman and Schwartz argued that the decline in the money supply was causal. Suppose, though, for the sake of argument, that the Depression was the result primarily of nonmonetary factors, such as overspending and overinvestment during the 1920s. As incomes and spending decline, people need less money to carry out daily transactions. In this scenario, critics pointed out, the Fed would be justified in allowing the money supply to fall, because it would only be accommodating a decline in the amount of money that people want to hold. The decline in the money supply in this case would be a response to, not a cause of, the decline in output and prices. To put the question simply, we know that both the economy and the money stock contracted rapidly during the early 1930s, but was the monetary dog wagging the economic tail, or vice versa?

The focus of Friedman and Schwartz on the U.S. experience (by design, of course) raised other questions about their monetary explanation of the Depression. As I have mentioned, the Great Depression was a worldwide phenomenon, not confined to the United States. Indeed, some economies, such as that of Germany, began to decline before 1929. Although few countries escaped the Depression entirely, the severity of the episode varied widely across countries. The timing of recovery also varied considerably, with some countries beginning their recovery as early as 1931 or 1932, whereas others remained in the depths of depression as late as 1935 or 1936. How does Friedman and Schwartz’s monetary thesis explain the worldwide nature of the onset of the Depression, and the differences in severity and timing observed in different countries?

That is where the debate stood around 1980. About that time, however, economic historians began to broaden their focus, shifting from a heavy emphasis on events in the United States during the 1930s to an increased attention to developments around the world. Moreover, rather than studying countries individually, this new scholarship took a comparative approach, asking specifically why some countries fared better than others in the 1930s. As I will explain, this research uncovered an important role for international monetary forces, as well as domestic monetary policies, in explaining the Depression. Specifically, the new research found that a complete understanding of the Depression requires attention to the operation of the international gold standard, the international monetary system of the time.4

As I have already mentioned, the gold standard is a monetary system in which each participating country defines its monetary unit in terms of a certain amount of gold. The setting of each currency’s value in terms of gold defines a system of fixed exchange rates, in which the relative value of (say) the U.S. dollar and the British pound are fixed at a rate determined by the relative gold content of each currency. To maintain the gold standard, central banks had to promise to exchange actual gold for their paper currencies at the legal rate.

The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called “classical” gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value. The gold standard was suspended during World War I, however, because of disruptions to trade and international capital flows and because countries needed more financial flexibility to finance their war efforts. (The United States remained technically on the gold standard throughout the war, but with many restrictions.)

After 1918, when the war ended, nations around the world made extensive efforts to reconstitute the gold standard, believing that it would be a key element in the return to normal functioning of the international economic system. Great Britain was among the first of the major countries to return to the gold standard, in 1925, and by 1929 the great majority of the world’s nations had done so.

Unlike the gold standard before World War I, however, the gold standard as reconstituted in the 1920s proved to be both unstable and destabilizing. Economic historians have identified a number of reasons why the reconstituted gold standard was so much less successful than its prewar counterpart. First, the war had left behind enormous economic destruction and dislocation. Major financial problems also remained, including both large government debts from the war and banking systems whose solvency had been deeply compromised by the war and by the periods of hyperinflation that followed in a number of countries. These underlying problems created stresses for the gold standard that had not existed to the same degree before the war.

Second, the new system lacked effective international leadership. During the classical period, the Bank of England, in operation since 1694, provided sophisticated management of the international system, with the cooperation of other major central banks. This leadership helped the system adjust to imbalances and strains; for example, a consortium of central banks might lend gold to one of their number that was experiencing a shortage of reserves. After the war, with Great Britain economically and financially depleted and the United States in ascendance, leadership of the international system shifted by default to the Federal Reserve. Unfortunately, the fledgling Federal Reserve, with its decentralized structure and its inexperienced and domestically focused leadership, did not prove up to the task of managing the international gold standard, a task that lingering hatreds and disputes from the war would have made difficult for even the most-sophisticated institution. With the lack of effective international leadership, most central banks of the 1920s and 1930s devoted little effort to supporting the overall stability of the international system and focused instead on conditions within their own countries.

Finally, the reconstituted gold standard lacked the credibility of its prewar counterpart. Before the war, the ideology of the gold standard was dominant, to the point that financial investors had no doubt that central banks would find a way to maintain the gold values of their currencies no matter what the circumstances. Because this conviction was so firm, speculators had little incentive to attack a major currency. After the war, in contrast, both economic views and the political balance of power had shifted in ways that reduced the influence of the gold standard ideology. For example, new labor-dominated political parties were skeptical about the utility of maintaining the gold standard if doing so increased unemployment. Ironically, reduced political and ideological support for the gold standard made it more difficult for central banks to maintain the gold values of their currencies, as speculators understood that the underlying commitment to adhere to the gold standard at all costs had been weakened significantly. Thus, speculative attacks became much more likely to succeed and hence more likely to occur.

With an international focus, and with particular attention to the role of the gold standard in the world economy, scholars have now been able to answer the questions regarding the monetary interpretation of the Depression that I raised earlier.

First, the existence of the gold standard helps to explain why the world economic decline was both deep and broadly international. Under the gold standard, the need to maintain a fixed exchange rate among currencies forces countries to adopt similar monetary policies. In particular, a central bank with limited gold reserves has no option but to raise its own interest rates when interest rates are being raised abroad; if it did not do so, it would quickly lose gold reserves as financial investors transferred their funds to countries where returns were higher. Hence, when the Federal Reserve raised interest rates in 1928 to fight stock market speculation, it inadvertently forced tightening of monetary policy in many other countries as well. This tightening abroad weakened the global economy, with effects that fed back to the U.S. economy and financial system.

Other countries’ policies also contributed to a global monetary tightening during 1928 and 1929. For example, after France returned to the gold standard in 1928, it built up its gold reserves significantly, at the expense of other countries. The outflows of gold to France forced other countries to reduce their money supplies and to raise interest rates. Speculative attacks on currencies also became frequent as the Depression worsened, leading central banks to raise interest rates, much like the Federal Reserve did in 1931. Leadership from the Federal Reserve might possibly have produced better international cooperation and a more appropriate set of monetary policies. However, in the absence of that leadership, the worldwide monetary contraction proceeded apace. The result was a global economic decline that reinforced the effects of tight monetary policies in individual countries.

The transmission of monetary tightening through the gold standard also addresses the question of whether changes in the money supply helped cause the Depression or were simply a passive response to the declines in income and prices. Countries on the gold standard were often forced to contract their money supplies because of policy developments in other countries, not because of domestic events. The fact that these contractions in money supplies were invariably followed by declines in output and prices suggests that money was more a cause than an effect of the economic collapse in those countries.

Perhaps the most fascinating discovery arising from researchers’ broader international focus is that the extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery (Choudhri and Kochin, 1980; Eichengreen and Sachs, 1985).

The willingness or ability of countries to remain on the gold standard despite the adverse developments of the 1930s varied quite a bit. A few countries did not join the gold standard system at all; these included Spain (which was embroiled in domestic political upheaval, eventually leading to civil war) and China (which used a silver monetary standard rather than a gold standard). A number of countries adopted the gold standard in the 1920s but left or were forced off gold relatively early, typically in 1931. Countries in this category included Great Britain, Japan, and several Scandinavian countries. Some countries, such as Italy and the United States, remained on the gold standard into 1932 or 1933. And a few diehards, notably the so-called gold bloc, led by France and including Poland, Belgium, and Switzerland, remained on gold into 1935 or 1936.

If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China–which used a silver standard rather than a gold standard–avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.

The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level. The new President also addressed another major source of monetary contraction, the ongoing banking crisis. Within days of his inauguration, Roosevelt declared a “bank holiday,” shutting down all the banks in the country. Banks were allowed to reopen only when certified to be in sound financial condition. Roosevelt pursued other measures to stabilize the banking system as well, such as the creation of a deposit insurance program. With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt’s coming to power in 1933 and the recession of 1937-38, the economy grew strongly.

I have only scratched the surface of the fascinating literature on the causes of the Great Depression, but it is time that I conclude. Economists have made a great deal of progress in understanding the Great Depression. Milton Friedman and Anna Schwartz deserve enormous credit for bringing the role of monetary factors to the fore in their Monetary History. However, expanding the research focus to include the experiences of a wide range of countries has both provided additional support for the role of monetary factors (including the international gold standard) and enriched our understanding of the causes of the Depression.

Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.
REFERENCES

Bernanke, Ben (1983). “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, 73, (June) pp. 257-76.

Bernanke, Ben (2000). Essays on the Great Depression. Princeton, N. J.: Princeton University Press.

Bernanke, Ben (2002a). “Asset-Price ‘Bubbles’ and Monetary Policy,” before the New York chapter of the National Association for Business Economics, New York, New York, October 15. Available at http://www.federalreserve.gov.

Bernanke, Ben (2002b). “On Milton Friedman’s Ninetieth Birthday,” at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8. Available at http://www.federalreserve.gov.

Choudhri, Ehsan, and Levis Kochin (1980). “The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression,” Journal of Money, Credit, and Banking, 12, pp. 565-74.

Eichengreen, Barry (1992). Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. Oxford: Oxford University Press.

Eichengreen, Barry (2002). “Still Fettered after All These Years,” National Bureau of Economic Research working paper no. 9276 (October).

Eichengreen, Barry, and Jeffrey Sachs (1985). “Exchange Rates and Economic Recovery in the 1930s,” Journal of Economic History, 45, pp. 925-46.

Friedman, Milton, and Anna J. Schwartz (1963). A Monetary History of the United States, 1867-1960. Princeton, N.J.: Princeton University Press for NBER.

Hamilton, James (1987). “Monetary Factors in the Great Depression,” Journal of Monetary Economics, 34, pp. 145-69.

Meltzer, Allan (2003). A History of the Federal Reserve, Volume I: 1913-1951. Chicago: The University of Chicago Press.

Romer, Christina (1993). “The Nation in Depression,” Journal of Economic Perspectives, 7 (Spring), pp. 19-40.

Temin, Peter (1989). Lessons from the Great Depression. Cambridge, Mass.: MIT Press.

Footnotes

1. My professional articles on the Depression are collected in Bernanke (2000). Return to text

2. Bernanke (2002b) gives a more detailed discussion of the evidence presented by Friedman and Schwartz. Return to text

3. There was less debate about the period 1931-33, the most precipitous downward phase of the Depression, for which most economists were inclined to ascribe an important role to monetary factors. Return to text

4. Critical early research included Choudhri and Kochin (1980) and Eichengreen and Sachs (1985). Eichengreen (1992, 2002) provides the most extensive analysis of the role of the gold standard in causing and propagating the Great Depression. Temin (1989) provides a readable account with a slightly different perspective. Return to text

The FED is considered a quasi government institution. The short version: All commercial banks own stock in the FED. Bigger banks more stock than small banks. These stocks do not work like regular stocks though, but more like bonds, because they pay out a set dividend and does not confer any power over monetary policy. The monetary policy is handled by the board of governors appointed by the president, and any surplus accumulated by the FED is returned to the US Treasury. For most purposes this would translate into the FED being owned by the US Government.

Money creation is not that hard to understand, but it is taught in economy classes, which are not mandatory unless you are a business, economy or public administration etc. major. Most likely people do not care enough to know. The information is readily available.

The value of the US Treasury Bonds are tied to the market’s faith in the US taxpayers ability to repay them for their investment in the bonds. It is basically a loan with future taxes as collateral.

The problem is that the FED does not hold all the debt, most of the debt is sold off to government trusts, private investors or other national banks. The creditors and debtors are not the same people.

If John, Jill and Jane all wanted to withdraw their money at once you would have a “run on the bank”, which used to happen as a result of rumors of imminent bank collapse. This situation tends not to happen any longer because the money is insured, so people do not have to fear losing their savings in bank collapses. But if a bank does run low on money and cannot satisfy the reserve requirements set by the FED they usually borrow the money from other banks. They pay the lending bank the rate set by the FED for this type of loan. This is the Federal Funds Rate which was recently reduced to 0-0.25%. If it is not possible to borrow from other banks a bank can approach the FED directly for a loan. Loans by the FED are given at the Discount Rate, currently 0.5%.

“What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed. Now the question is what happens the economy starts to grow quickly and it’s time to pull back the monetary policy accommodation. There are several tools that we have”

The Fed will make deposit accounts for banks and other companies, in exchange for those companies’ Treasury bonds. As the central bank substitutes deposit accounts for Treasury bonds, it gives banks the ability to use their cash sooner than they otherwise could have.

http://www.winterspeak.com/2009/09/loans-create-deposits-how-banks.html

Monday, September 14, 2009
Loans Create Deposits — how banks actually work
I used to believe that banks lent out deposits. So, you deposit money in a bank, and the bank turns around and loans that money out to someone. “Fractional reserve accounting” meant that the bank could lend out more money than it had on deposit, which seemed fishy. As the bank usually made long term loans funded by short term deposits (mismatched maturity) they were always at risk of a bank run, which is where FDIC insurance came in.

I was wrong.

At a macro level, banks create deposits by extending loans. At an individual level they do the same thing, but also need to manage reserve accounts. This is how it works:

Loans create deposits

Banks do not loan out deposits. When you deposit money in a bank, you are not putting it “hard at work” in any way. It is not funding factories, houses, or anything else. Saving money in a bank is the same as putting it under the mattress.

When an individual bank (bank A) makes a loan, it creates (credits) an asset (receivable). To make its books balance, it debits its reserve account at the Fed (also an asset) by the same amount. The loan creates a deposit, say in a different bank (bank B). That bank credits the deposit on the liability side, and credits its reserve account at the Fed. The reserve account debit made by bank A is exactly matched by the reserve account credit made by bank B. While the total amount of reserves in the system is unchanged, bank A is now short reserves, and bank B is long (assuming they had the correct amount of reserves in the first place).

Bank lending is not reserve constrained

So, what will bank A now do, since it is short reserves? It can try to win over bank B customers and get them to move their deposits over, this transferring the reserve account assets bank B has to itself. If bank A fails to do this, then it simply borrows the reserves it needs overnight from… bank B. The overnight lending market is designed to do exactly this. Bank B, in this case, happens to have exactly the quantity of reserves bank a needs, and since reserves earn no interest, is happy to lend to bank A at the federal funds rate, which is the overnight interbank lending rate.

Suppose the system as a whole is short of reserves? In this case, the banks who are short on reserves borrow directly from the Fed’s discount window.

Suppose the system as a whole has excess reserves? In this case, the Fed sells treasury securities, which enable banks to transfer assets from their reserve accounts (at the Fed) to their treasury accounts (also at the Fed). The Fed sells treasuries not to “finance” the deficit, but to drain the system of excess reserves, so there will be overnight lending, and thus, a non-zero interest rate. If the Fed did not drain extra reserves from the system, banks would not lend, and the overnight lending rate would be zero.

Again, loans create deposits

So, at an individual bank level, banks make loans as they like, and then either borrow the reserves they need at the discount window or overnight market, OR the grow their deposit base to meet their reserve requirements. But the banks make the loans first, and then do whatever to hit their reserve target at the end of the day.

At a macro level, the banking system makes loans, which in turn create deposits.

Note to Austrians: the problem is not maturity mismatching, the problem is private sector credit extension

You’ll note that individuals cannot make loans the way banks can. We do not have the facilities they have at the Fed. Austrians think that it is maturity mismatching that enables banks to lend money, but they are wrong (although maturity mismatching has it’s own problems), the issue is private sector credit extension. Private sector credit extension expands private sector balance sheets, can it can do this to whatever level it can get away with.

Capital requirements constrain bank lending

So, if reserve requirements don’t limit bank lending, what does? Answer: capital requirements. Bank balance sheets must rest on a certain core of paid-in equity, but unfortunately, regulators frequently fudge, ignore, or otherwise enable banks to ignore those rules and leverage themselves to calamitous levels, getting paid obscenely in the process.

I leave you with one of the most remarkably ignorant posts I’ve seen on this topic, notable only because the individual actually works within the banking system! On a comment forum in Econlog, he stated

The point here is that a particular bank cannot be sure where any disbursed loan funds may end up and can only count on a small proportion returning. This means that they cannot simply inflate their balance sheet by making loans and counting on the funds to come back as deposits. Additionally, if they did this their liquidity ratios (one of the key measures of any bank’s soundness) would steadily deteriorate, restricting their ability to make further loans. Their capital ratios would also steadily deteriorate, reducing their ability to raise funds.

Ozrisk does not seem to realize that making loans reduces a bank’s ability to make further loans, which is exactly how capital requirements are supposed to work, and their whole point.

http://pragcap.com/mechanics-qe-transaction

UNDERSTANDING THE MECHANICS OF A QE TRANSACTION
9 November 2010 by TPC 249 Comments

Some people want you to believe that the Fed just injected the economy and stock market full of money that will now result in an economic boom and much higher prices in most assets. That’s simply not true. Here’s the actual mechanics behind QE.

Before we begin, it’s important that investors understand exactly what “cash” is. “Cash” is simply a very liquid liability of the U.S. government. You can call it “cash”, Federal Reserve notes, whatever. But it is a liability of the U.S. government. Just like a 13 week treasury bill. What is the major distinction between “cash” and bills? Just the duration and amount of interest the two pay. Think of one like a checking account and the other like a savings account.

This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash” is its own unique asset class. But that’s not really true. “Cash” as it sits in your bank account is really just a very very liquid government liability. What is the difference between your checking and savings account? Do you classify them both as “cash”? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?

What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note? What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration. You can’t use your 13 week bill to pay your taxes tomorrow, but that doesn’t mean it isn’t a slightly less liquid form of the exact same thing that we all refer to as “cash”. They are both govt liabilities and assets of yours.

When you own a t note you really just traded your “cash” for a slightly less liquid form of the same exact thing. If the Fed buys those t notes from you they give you back your cash minus the interest rate. That’s all there is to it. No change in the money supply. No change in anything except the rate of interest you were earning. If the government removes t notes then all they’re doing is altering the term structure of their liabilities. They’re not changing the AMOUNT of liabilities.

The other day, Ben Bernanke explained that he is not adding any new cash to the system via QE:

“Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.”

This is very important because millions of investors are betting on the inflationary impact of QE. But again, as Mr. Bernanke said there is no reason to believe that QE is inflationary. Why? Because they are not adding net new financial assets to the private sector. The assets already existed! They are merely swapping reserves for bonds. They are giving the banks a checking account instead of a savings account. What does this mean? If Bank A owned a 1.2% 5 year note and they sell that note to the Fed they receive reserves earnings 0.25%. Their savings account was changed to a checking account. What changed? Nothing. Just the duration and rate of the paper. The number of assets in the system is the exact same. You can see this description in the following diagram (via Alea):

As you can see the net financial assets are UNCHANGED. They are merely changing the composition of the bank balance sheet. The logical question that most people ask is: “where did the Fed get the money to buy the bonds?” They didn’t get it from anywhere. It truly is ex nihilo. But it is not new money being injected into the private sector. It is merely being swapped with something that was already spent into existence. Therefore, you’ll often hear that banks have new money to put to work. That’s not true. They had a 0.2% piece of paper that was already put to work and can be exchanged in markets for whatever they please. There is not “more firepower” in the market following QE. All that the Fed altered was the duration of the U.S. government’s liabilities. The Fed took on an asset (treasurys) and also accounted for a new liability (the reserves). But this transaction did not change the net financial assets in the system.

The point here is that from an operational perspective the Fed is not really altering the money supply. There might be some slight market change in the bonds the Fed purchases, but this is offset by the fact that the private sector is losing interest income they would have otherwise earned. For instance, in QE1 the Fed removed $1.2T in assets from the private sector. Much of this was high yield paper. We know the Fed turned over ~$50B to the U.S. treasury (its “profits”) from QE1. What did the banks get in return? They got a checking account at the Fed earning 0.25% or roughly $2.5B over the course of QE1. So the private sector LOST ~$47.5B in interest income it would have otherwise earned.

So, now you must be asking yourself why the heck they’re even doing this to begin with. Well, QE supposedly changes the term structure of the bond market. Fewer 5 year notes should lower interest rates and entice borrowing, generate lending, make other assets more attractive, etc. If you sell your bonds to the Fed and receive low interest bearing cash you might want to rebalance your portfolio. Mr. Bernanke is hoping you will reach out on the risk curve and buy equities or corporate debt. But the price you purchase those securities at will depend entirely on their fundamentals and the price that you and the seller agree upon. If you run out and bid up risk assets just because you think the Fed is “printing money” then you’re making a mistake. If you run out and buy stocks even though their fundamentals have not changed you are making a mistake.

This is probably best seen in the price of commodities presently where investors are hyperventilating over the “printed money” and buying up hard assets. For instance, coffee prices are up 70% since QE started yet Howard Schultz, the CEO of Starbucks says the fundamentals have not changed at all in the last two months. He claims the speculators are to blame (thank you for that Ben Bernanke!). Inefficient market at work in real-time? Sure looks that way and we can thank the Fed for causing the bubbly situation in commodities. They’re advocating undue speculation, causing severe market distortions, driving down the dollar and rewarding speculators for further financializing this economy.

The Fed has caused this mass hysteria over a minor interest rate decline. In short, there is not more cash in the system following QE. There is not more “firepower” with which to purchase equities. Hopefully, the above description makes that very clear. This was most obvious in Japan where QE caused a brief 17% rally in equities as speculators leveraged up, jammed prices and then later realized that the slightly lower yields hadn’t really changed anything. What happened next? Their equity market fell 40%+ over the next two years. QE was a great big “non-event”. All it did was manipulate markets temporarily and cause a huge amount of confusion.

http://www.thoughtofferings.com/2010/10/how-loanbond-choice-helps-private.html?showComment=1289420251094#c2441998055165999148

QE works one way or another via the commercial banking system. The central bank can buy bonds from either banks or non-banks and issue reserves in settlement with banks, who act either as principals or as agents for non-bank depositing customers.

But it’s largely unrecognized that most QE volume will consist of bonds ultimately sourced from non-bank portfolios, since that’s where most of the bonds are. And many of the bonds sold to the central bank by bank dealer operations will represent pass-through transactions (perhaps with dealer positioning lags) from non-banks to the central bank. QE affects bank reserves directly if bonds are bought from banks. But to the degree that bonds are sold ultimately by non-banks, QE affects both reserves and bank deposit liabilities. Since I’m suggesting the latter is the norm, we can see that most of QE volume will increase money holdings of non-banks. If most QE is hitting the balance sheets of non-banks, that means that non-banks are replacing bonds with money.

So the question becomes, what are the non-banks going to do with that money? To answer this, we must first answer the question about why the bonds were there in the first place. The answer I think is they were likely there as part of liquidity management operations or investment operations, broadly speaking, as I described. So the non-banks end up with money instead of bonds. That improves the quality of the non-bank’s liquidity position since money is technically more “liquid” than bonds – although bonds are not much less liquid, given their repo potential.

So how does this affect non-bank lending? Treasury bonds are held by all types of financial institutions and others. They’re generally held for liquidity or investment purposes. I’m not sure that a non-bank’s lending strategy is going to be changed all that much by selling treasury bonds for cash. Does the fact that such a liquidity insurance or investment function fund switches from bonds to cash automatically trigger new lending? I’d say it’s nowhere near that direct an effect. The considerations relating to borrower demand, credit risk analysis, and capital adequacy all remain for both banks and non-banks. The main effect of QE is on yields, and even that is limited. The yield effect percolates throughout the credit spectrum, as portfolio managers react to them and look at new opportunities to buy and sell all sorts of financial assets. No doubt this will have some favourable effect on lending conditions, but the question is how much.

Finally, QE is a response to a liquidity trap that includes deleveraging. Deleveraging in the case of bank borrowers means that loans are repaid with money, which means the destruction of money. So QE is responding in part to a money destruction process by creating replacement money. QE is responding in that sense to an out of equilibrium situation, attempting to move back toward equilibrium. This description differs somewhat from your own, in which QE creates a disequilibrium in which non-banks subsequently start making adjustments to reverse the creation of money associated with QE. You gauge the QE effect as “disturbing” ideal equilibrium in the direction of an oversupply of money, with subsequent adjustment back in the other direction. But consider that the current liquidity trap position is already “out of equilibrium”. So the injection of money may be more corrective overall than disturbing.

Those are my thoughts. I think your theory has to do with a sort of equilibrium between bank lending and non-bank lending, and between bank created money and non-bank created non-money liabilities. I agree with the general intuition of it, but would adjust the approach as indicated. As to whatever conceptual “equilibrium” may be, it is no doubt illusive in practice, and chasing it is always a matter of risk, capital, and pricing for both banks and non-banks.

http://www.thoughtofferings.com/2010/10/how-loanbond-choice-helps-private.html

Wednesday, October 27, 2010
How the Loan/Bond Choice Helps the Private Sector Self-Determine the Money Supply — AND Yet Another Reason QE is a Non-Event for the Economy
NOTE: Just to be clear, this post does not describe any established theory. It was intended as a thought exercise to elicit feedback (with no results so far). What it describes may or may not be accurate — it does seem logical to me, but I am not an expert on the banking system.

UPDATE 11/11/2010: Thanks to commenter Ramanan for pointing out that the concepts in this post overlap to some degree with existing Post Keynesian / Circuitist work, such as by Marc Lavoie.

Two fundamental types of lending enable the private sector to borrow money. The first type is bank loans, which “create money”. The second type is other lending in all its forms, in which a lender (typically not a bank) lends existing money to a borrower. Sometimes loans of existing money are directly between two entities, for example a household buying a bond issued by a corporation. Other times they go through a lending intermediary that pools together loans, for example securitized loan pools sold to investors, or Fannie Mae and Freddie Mac with their mortgage assets and “agency debt” liabilities. There is even a fledgling peer-to-peer lending industry that can involve either direct person-to-person loans or intermediary loan pools.

This post will explain how an economy with both forms of lending on offer allows the private sector to partially self-determine the broad money supply (i.e., according to its preference for holding liquid short-duration assets), semi-independently of the amount of private borrowing it desires. I have never seen this idea explained elsewhere before, so please comment below if you have seen it addressed elsewhere, or if you think my logic is incorrect.

One important conclusion of this is observation is that if the government attempts to force the private sector on aggregate to hold a larger quantity of money (short duration assets) than the private sector wants, then the private sector, given enough time, will counter the government’s action by shifting from bank loans to non-bank loans (e.g., bonds), thus eliminating the increase in the money supply. Conversely, if the government offers insufficient short duration assets, the private sector will tend to favor bank loans (with their associated money creation) over non-bank loans, until the money supply increases enough to satisfy the private sector’s liquidity desires.

However, this conclusion only holds to the extent that bank loans and other debt such as bonds can be used interchangeably to fulfill the needs of prospective borrowers. Clearly this is not entirely true, and substitutability between the two types may be limited by regulations, refinance cost frictions, or other factors. For example, investors may take some time to trust securitized loan pools again, and households can only borrow from banks, they can’t issue bonds! (Though if peer-to-peer lending were to grow sufficiently, this limitation might be overcome…)

This conclusion also has implications for what to expect from quantitative easing. QE is nothing more than an asset swap that replaces long duration assets held by the private sector with new short duration assets (issued by the central bank). Modern Monetary Theory (MMT) authors have been saying this for years, and Paul Krugman has finally figured it out too. So, given enough time after quantitative easing and small enough frictions and impediments between the two types of lending, we should expect to see a relative reduction in bank lending (via money creation), and relative increase in other forms of lending (without money creation) as the private sector tries to eliminate its excess short duration assets (“money”) by shifting into longer duration assets (e.g., newly issued bonds).
Thus yet another reason QE is a non-event for the real economy! Other authors have already shown that it will not cause any increase in bank lending (the money multiplier is a myth for today’s currency systems!) But will QE even reduce long term interest rates? There is little evidence that it will. Long term rates rose during the Bank of England’s recent QE program. James Hamilton, a frequently linked to traditional economics professor, summarizes estimates of the effects of Fed’s QE at less than a 20 basis point reduction in long term yields, a trivially small amount that may also represent coincidence.

In fact, an implication of the theory explained above is that QE could actually accelerate the shrinking of banks’ loan books, and aside from fee income from banks facilitating other types of bond-like lending, banks could actually be hurt by QE via the loss of expected loan income as loans are packaged into securities for yield-hungry investors or refinanced into bonds.

Japan’s Experience

Does history show any evidence of this effect? Japan first experimented with a form of quantitative easing from 2001-2006. Here is a graph showing two types of liabilities summed up for Japan’s private sector — loans and “securities other than shares” (which I am assuming are largely longer-duration liabilities such as bonds, but I am no expert on Japan’s national accounts data and could be wrong on this).

(click on graph for a larger version)
Funding via “securities other than shares” (bonds, etc?) (red line) jumped to positive growth during the QE period, even amidst ongoing contraction in bank loans (blue line). If deleveraging was ongoing, absent other factors, shouldn’t it have been ongoing in both categories? It seems this data might lend some support for the idea that a forced increase in money might be counteracted by the private sector favoring bond-like lending over bank loans to reduce the balance of unwanted money in the system.

Technical Explanation of the Trade-off Between Bank Loans And Non-Bank Lending

First let’s look at the difference between a bank loan and other forms of lending, then at how interest rates are determined. The following images are snapshots from a slightly edited (for demonstration purposes) copy of my Macroeconomic Balance Sheet Visualizer. You can try the “Bank Loan” and “Private Bond Issued” operations there yourself, as well as the “Bank Loan Is Securitized” operation (not shown here).

Bank Loan — Balance Sheets Before Lending Occurs:
(the “Households” balance sheet below represents the borrower)

Bank Loan — Balance Sheets After Lending Occurs:

Private Bond — Balance Sheets Before Lending Occurs:

Private Bond — Balance Sheets After Lending Occurs:

Discussion of Balance Sheet Change Details:

As you can see, loans create deposits (this is widely misunderstood, as people assume that banks lend out reserves, which is not true). Because of the way the central bank ensures sufficient reserves in the system to satisfy reserve ratios (though these ratios don’t even exist in many countries), the only limitation to bank lending is finding enough credit-worthy borrowers and meeting capital ratio requirements. The capital requirements dictate how much balance sheet equity a bank must have relative to its loan assets, since such equity is a “cushion” for absorbing losses. Banks can generally raise more capital as needed if there are worthy borrowers, so this is no limitation either beyond the very short term.

Comparing bank loans versus other bond-like lending:

* In both cases, the borrower’s balance sheet adds a new short duration asset (money) and a new long term liability (loan or bond).
* In both cases, the lender’s balance sheet adds a new long duration asset (loan or bond).
* For a non-bank lender, adding the long duration asset requires giving up a short duration asset (money).
* For a bank lender, adding the long duration asset requires adding a short duration liability (bank deposits, which are money for the depositor).
* In both cases, total private sector debt is increased.
* Only in the case of bank lending is the broad money supply increased.

So the KEY difference from a lender perspective is that bank lending requires accepting a new short duration liability, while non-bank lending requires giving up a short duration asset.

What interest rates would banks offer on loans compared to rates offered by non-bank lenders? In both cases, interest rates have to be sufficient to cover credit risks (i.e., the risk of borrowers defaulting on their debt) and inflation and interest rate risks. On top of this, a bank lender has to price in the ongoing cost of the new liability (paying interest to the depositor), while the non-bank lender has to price in the opportunity cost of the foregone short duration asset (money). At any given point in time, both these costs will be the same, since both the liability and the foregone asset pay interest at the current deposit rate on offer by banks. So, based on these factors alone, bank lenders and non-lenders should offer comparable interest rates to borrowers at any given point in time.

So which would “win” in lending to prospective borrowers? At times when there is a surplus of short duration assets (bank deposits) in the system (i.e., “too much money”), some non-bank lenders will be more eager to trade short duration assets for longer duration assets, and will likely bid down the lending rate and out-compete the banks. This will limit the increase in the money supply as non-bank lending doesn’t create money. Conversely, at times when there is a deficient amount of short duration assets in the system, non-bank lenders will want to hold onto the deposits they have, so they will not match the lower lending rates offered by banks, and will thus let banks extend the loans to borrowers, thereby increasing the money supply. Loans would keep beating out bonds until the money supply had increased to a point of equilibrium (i.e., the amount of money desired by depositors on aggregate to meet their liquidity preferences). In this way, the ability of banks to “create money” when they lend provides an interest rate anchor for the economy (a sort of private sector “lender of last resort”). And because of this, the private sector has some control over the broad money supply, independent from the amount of debt it issues.

And if the suggestion just above is correct (i.e., that bank loans help anchor long term interest rates independently from the supply of long and short term assets), it may help in explaining why even a post-QE reduction in private sector long duration assets may not have any meaningful impact on bond prices and yields. (Generally it is argued that reducing the supply of something increases its price.)

Of course the whole dynamic posited here would probably be a “medium term” thing, not instant, as it would take time for shifts between types of lending to occur, so in the short term, none of this may apply.

What do you think? Is this (A) logical (B) flawed, or (C) an amateurish summary of some existing theory in finance or economics?

UPDATE: I had intended to also mention the theory that QE will drive up asset prices (stocks, housing, etc). This post does not address that directly, but to the extent that a shift away from bank loans occurs and counteracts the increased “unwanted” money supply, some of the driver for such an effect on asset prices might disappear (in the medium term).

http://pragcap.com/mmt-101
UNDERSTANDING MODERN MONETARY SYSTEMS
23 September 2010 by TPC 2 Comments

I believe Functional Finance and Modern Monetary Theory best describe the monetary system in which the USA exists. Modern Monetary Theory (MMT) is based on the following principles:

* The Federal government is the monopoly supplier of currency.

* The modern floating exchange rate system helps to maintain equilibrium and flexibility in the global economy.

* The currency unit created by the state via deficit spending can only be extinguished by payment of taxes. Therefore, a modern monetary system can best be thought of as a system of debits and credits where government deficit spending credits the private sector and payment of taxes debits the private sector.

Functional Finance is an economic theory based on the following principles:

* The government exists to further the prosperity of the private sector – NOT to benefit at its expense.

* Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary.

* Money is always created by the state and must therefore be regulated by the state, however, ultimately the private sector must accept this money as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces.

* Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity.

MMT is a description of the way in which a modern government creates, destroys and utilizes its monetary unit. The name MMT is a bit of a misnomer as it is really just a way of describing how modern monetary systems work and not necessarily a theory. The theory is all in its application. Some believe government should be highly involved in the economy and others believe it should be involved to a lesser extent. Learning MMT can take some significant time as it turns most of modern economics on its head, but I think that understanding MMT is vital in comprehending how the modern monetary system works and is particularly important at this juncture as many of its most controversial elements have been proven correct during the most recent recession.

MMT is based on a horizontal and vertical view of money. This is important in differentiating between the public and private sector and how each impacts the money supply. The following comes courtesy of Warren Mosler:

When the government “spends,” the Treasury disburses the funds by crediting bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system. This creation is called “vertical,” or exogenous to the banking system. Since there is no corresponding liability in the banking system, this results in an increase of non-government net financial assets.

When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero.

Thus vertical money created by the government affects net financial assets and horizontal money created by banks does not, although its use in the economy as productive capital can increase real assets.

The mistake that is usually made is comparing what happens in the horizontal system with what happens at the level of government accounting. At the horizontal level, debt is the basis for horizontal money creation. Therefore, it is often assumed that debt must be the basis for the creation of money by government currency issuance. This is not the case.

Reserve accounting uses the standard accounting identities, but the meaning of “liability” is not “debt.” The husband-wife analogy for Central Bank-Treasury accounting relationships is apt. Since a husband and wife are responsible for each others debts, neither can be indebted to the other. That is to say, reserve accounting is a fiction that does not represent real relationships, such as exist between a creditor and debtor in the horizontal system.

Moreover, government debt is not true debt either. At the macro level, the reserves that are transferred to banks through government disbursement are used to buy Treasury’s. That is, when a Treasury is bought, this involves a transfer of reserves from the buyer’s bank’s reserve account at the Fed to the government’s account (consolidating Central Bank and Treasury as “government”).

When the Treasury’s are sold or redeemed, the reserves that were “stored” at interest are simply switched back, creating a deposit again. It’s pretty much the same as buying and redeeming a CD. It’s just a switch from demand to time back to demand in a bank account, and a switch between reserves and securities at the government level. That is to say, the government doesn’t have to draw on revenue, borrow, or sell assets to cover its “debt,” as households and firms do. It’s just a matter of crediting and debiting accounts on the (consolidated) government books, even though it may appear that there is a financial relationship occurring between the CB and Treasury due to the accounting. However, it’s just a fiction.

Therefore, the key to understanding Modern Monetary Theory is this vertical-horizontal relationship. When one understands this, then Abba Lerner’s principles of functional finance become obvious. (1) Currency issuance through government disbursement is used to increase non-government net financial assets, and taxation withdraws net financial assets from non-government. (2) Debt issuance by the Treasury is a monetary operation for draining reserves to permit the Central Bank to hit its target rate.

These principles are then applied to Y+C+I+G+NX to balance nominal aggregate demand with real output capacity in order to achieve full capacity utilization, hence, full employment, along with price stability. This is based not on theory requiring assumptions but on operational reality that can be represented using data, standard accounting identities, and stock-flow consistent macro models.

The govt is not a household or a state. It does not finance spending via revenues or debt issuance. The US govt, as a monopoly supplier of currency in a floating exchange rate system simply spends. Think of the US govt as an alchemist. The alchemist can create as much gold as she pleases (from nothing) in order to buy up productivity and satisfy the growing monetary demands of the people she supplies currency to, but she has to be very careful not to debase her gold (you’ll notice that our trusty alchemist is female in this example as males have proven throughout history that they are not trustworthy overseers of government money). Most importantly, there is no solvency risk for the alchemist – only a pseudo form of default via currency collapse (hyperinflation). The alchemist only debases her gold when she issues an amount of gold that is in excess of productive capacity (inflation).

The USA does not finance spending via the bond markets. The USA issues bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation that is designed to help control the money supply in the banking system. It is not a fiscal financing operation. The USA issues bonds to maintain the money supply by controlling the overnight rate and control excess reserves. People think this is government debt because Congress mandates the issuance of bonds. Much of this confusion is derived from the gold standard in which government’s were revenue constrained. The Euro system, which is also a single currency system (like the gold standard) adds significant confusion to the current environment and is often confused as a flaw in fiat money. In reality, the Euro proves why single currency systems are inherently flawed. The ideas of the gold standard and the Euro are not applicable to the monetary system in which the USA exists.

Why has this thinking never changed in the USA? Despite the dramatic changes in the monetary system after the Nixon shock neo-liberalism came to dominate economic theory in the 70’s and 80’s. After the economic successes of the Reagan and Clinton eras there was little doubt that such thinking was accurate. Of course, we all know what happened next and now many of these neo-liberal beliefs have been pointed to as causes of the recent crisis. I believe most people in power do not understand exactly how our monetary system works due to this fundamental flaw in our educational system – in fact, I believe 99% of the lawyers in Congress know far less than anyone thinks in terms of economics . The same can be said for many of the officials in Fed and Treasury.

If we review the past actions of Alan Greenspan (who has admitted to using a “flawed” model) and the actions of Ben Bernanke in response to the crisis we can see that they have substantially misinterpreted how a modern monetary system functions (if Mr. Bernanke actually understood how the system worked he would never have made all the policy mistakes I have been pointing out over the last few years). See here, here and here for more.

Why don’t more people know how the system works? And more importantly, why don’t high ranking officials understand it? First of all, this is all highly complex. But also, this system in its current format is not very old and most of the people in power currently were educated by a generation in which this system was not largely applicable. Therefore, the theories of old run rampant in modern economic circles.

Getting back on track though – let’s understand a few things first:

1. We tax in order to create demand for the currency. In addition, it controls aggregate demand or effectively, the money supply

2. The bond market is a monetary tool. NOT a fiscal financing tool.

3. Foreigners do not fund our spending.

4. Money must be created before government bond auctions can occur and before taxes can be enforced. Otherwise, there is no currency in the system to tax and no money to raise via auctions. This is just basic logic in terms of the way the current system works. It can be no other way.

5. Households, states, Europe and the gold standard are not remotely similar to the modern monetary system in which the Federal government of the USA functions.

The following example should help clarify some of the concepts mentioned above. Please excuse the simplicity, but this can be a mind bending concept if you are textbook taught (trust me, I know the feeling) so I will keep it simple:

I start a new country where there is a productive economy and I invite everyone to become citizens (disregard the benefits of joining my economy, that is for another discussion). Rather than forcing all of us to trade with heavy gold I issue TPC notes. Now, in order to create real demand for these notes I create a tax. This makes you beholden to me via the TPC notes. You MUST have them in your account on April 15th of every year. I’ve created instant demand. This is what the US government does. In return, they spend money on public works, create jobs, supposedly spend money on furthering our nations prosperity (in theory at least) and protection of the nation (a military). This is important to understand because I must issue notes BEFORE I can tax. Therefore, you can see that I am not funding my spending by taxing. What gives the notes their value? Ultimately, the goods and services we produce represent their value and the enforcement of taxation ultimately maintains demand for these notes.

How do I enforce your use of the TPC notes? I create jobs via a military and a police force and pay them well (notice that when government spends money they are simply buying up private sector productivity). Don’t want to pay your taxes? Say hello to officer Joe. A group doesn’t want to pay their taxes? You can protest, but if you get out of control I will introduce you to 500 men wearing body armor holding M4 carbines. In other words, don’t question the currency or else….As long as an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you.

I do not borrow from governments or tax to spend as I would if my currency were backed by gold. Interestingly, I can’t TAX you until I’ve credited your accounts with TPC notes. There is no money to be taxed otherwise. So, in effect, I have to SPEND in order to TAX (counter-intuitive to what you have been taught). Taxing debits your accounts (saps liquidity) and crediting is government spending. On my island, I am never revenue constrained. If you don’t pay your taxes I will throw you in jail and confiscate your money. But that doesn’t mean I can spend more when I tax. What do I care if you send me your TPC notes? I can just press a button and credit my “spending” account right after I shred your tattered looking cash. This is what the government actually does. Taxation is essentially a form of maintaining control of private sector spending. Pay your taxes in cold hard cash. The IRS will shred those dollars. They don’t put them in a bag and mail them to the Treasury so they can’t go “spend” it. The only reason they might keep the dollars is if they are pretty and in good condition so they can go back out into circulation.

So what’s the bogey here? What’s the catch? Because surely you must be asking yourself why this sounds like a free lunch. We can just spend to our hearts content, right? Absolutely not. The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, etc. Thus, govt cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. It’s important to understand that govt cannot just spend recklessly. This is important so I’ll say it again. This does not give the govt the ability to spend and spend and spend. If they spend too much and tax too little they can create mal-investment and inflation. Likewise, if the government taxes too much and spends too little they create a government surplus and private sector deficit (by accounting identity). This can result in deflation and/or excess private sector debt levels.

In terms of the bond market, the issuance of bonds does not serve the same purpose it did under the gold standard. We actually issued bonds because we were revenue constrained (not enough gold reserves at all times to fund spending without creating massive inflation). Today, we effectively control the value of money in the banking system via bond issuance (a pure monetary operation to control the Fed Funds Target Rate). It can also be thought of as another form of government spending because a treasury bond is basically a savings account. Contrary to popular opinion, Quantitative Easing is actually a deflationary event because it takes an interest bearing instrument out of the private sector’s hands and replaces it with a non-interest bearing deposit. QE is a term that is used by people who want to scare you into thinking that the govt is being reckless with their money. The reality is that QE is just an asset swap. Nothing more. Debt monetization is another tool of the fear mongerers who don’t understand that debt monetization is actually impossible so long as the Fed has a target rate. Anyone who uses such terms to invoke inflationary fears simply does not understand how a modern monetary system works.

The US government is never revenue constrained. They are not like a household or state government. We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services. They can either hold that money in a checking account at the Fed OR they can do what they wisely do and invest those pieces of paper in what is actually a savings account at the Fed. We also don’t need taxes to spend. The budget deficit is in direct inverse correlation to private sector savings. To be more precise: net household financial income = current account surplus + government deficit + ?business non-financial assets.

This by no means says that the government can just recklessly spend. But it’s imperative that the government spend SOME money otherwise they are simply debiting the system each year via taxation without ever crediting accounts. Just ask yourself what would happen if the government imposed a one time 100% asset tax? The private sector would instantaneously be without money. How would they spend? How would they invest? The economy would collapse and the government would be “rich”. Not a plan for economic prosperity.

Many financial theorists actually believe the Great Recession (and the Great Depression) was caused in part by account SURPLUS. You’ll notice that both events were preceded by great periods of “fiscal competence”, ie, budget surpluses. In reality, the govt had debited too many accounts and forced the private sector into deficit. This results in the private sector borrowing what it can’t actually get its hands on. The risk is full blown debt deflation due to excessive debt levels (because you borrow what you can’t actually get your hands on). I think the cause is a bit more complex than that but the fact that we are grossly overtaxed and the govt spends very inefficiently is a large contributing factor.

http://www.ny.frb.org/aboutthefed/fedpoint/fed01.html
How Currency Gets into Circulation

Printer verions Printer version

* There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States.

* The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.

* Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand.

As of December 2007, currency in circulation—that is, U.S. coins and paper currency in the hands of the public—totaled about $829 billion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States.

Meeting the Variable Demand for Cash
The public typically obtains its cash from banks by withdrawing cash from automated teller machines (ATMs) or by cashing checks. The amount of cash that the public holds varies seasonally, by the day of the month, and even by the day of the week. For example, people demand a large amount of cash for shopping and vacations during the year-end holiday season. Also, people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.

To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited. Some smaller banks maintain their required reserves at larger, “correspondent,” banks. The smaller banks get cash through the correspondent banks, which charge a fee for the service. The larger banks get currency from the Fed and pass it on to the smaller banks.

When the public’s demand for cash declines—after the holiday season, for example—banks find they have more cash than they need and they deposit the excess at the Fed. Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation’s banking system drops when the public’s demand for cash rises; similarly, the level rises again when the public’s demand for cash subsides and banks ship cash back to the Fed. The Fed offsets variations in the public’s demand for cash that could introduce volatility into credit markets by implementing open market operations.

The popularization of the ATM in recent years has increased the public’s demand for currency and, in turn, the amount of currency that banks order from the Fed. Interestingly, the advent of the ATM has led some banks to request used, fit bills, rather than new bills, because the used bills often work better in the ATMs.

Maintaining a Cash Inventory
Each of the 12 Federal Reserve Banks keeps an inventory of cash on hand to meet the needs of the depository institutions in its District. Extended custodial inventory sites in several continents promote the use of U.S. currency internationally, improve the collection of information on currency flows, and help local banks meet the public’s demand for U.S. currency. Additions to that supply come directly from the two divisions of the Treasury Department that produce the cash: the Bureau of Engraving and Printing, which prints currency, and the United States Mint, which makes coins. Most of the inventory consists of deposits by banks that had more cash than they needed to serve their customers and deposited the excess at the Fed to help meet their reserve requirements.

When a Federal Reserve Bank receives a cash deposit from a bank, it checks the individual notes to determine whether they are fit for future circulation. About one-third of the notes that the Fed receives are not fit, and the Fed destroys them. As shown in the table below, the life of a note varies according to its denomination. For example, a $1 bill, which gets the greatest use, remains in circulation an average of 21 months; a $100 bill lasts about 7.4 years.

Denomination
of Bill

Life
Expectancy
(Years)
$1 1.8
$5 1.3
$10 1.5
$20 2
$50 4.6
$100 7.4

The Federal Reserve orders new currency from the Bureau of Engraving and Printing, which produces the appropriate denominations and ships them directly to the Reserve Banks. Each note costs about four cents to produce, though the cost varies slightly by denomination.

Virtually all of currency notes in use are Federal Reserve notes. Each Federal Reserve Bank is required by law to pledge collateral at least equal to the amount of currency it has issued into circulation. The bulk of the collateral pledged is in the form of U.S. Government securities and gold certificates owned by the Federal Reserve Banks.

Making U.S. Currency More Secure
In late 1996, the Treasury began issuing a series of Federal Reserve notes containing new features that make the notes harder to counterfeit. The Treasury introduced the modified notes in order of decreasing denomination—the $100 bill appeared in March 1996, the $50 bill in October 1997, the $20 bill in September 1998, and the $10 and $5 bills in May 2000. The most noticeable modification was a larger, slightly off-center portrait that incorporates more detail, thereby making the bill harder to counterfeit. For the benefit of persons with impaired vision, the back of the modified $50, $20, $10 and $5 bills features numerals larger than those on older currency.

In October 2003, the United States issued a newly redesigned $20 note with enhanced security features and subtle background colors of blue, peach and green. A new $50 note was issued on September 28, 2004. On March 2, 2006, the new $10 note entered circulation. On March 13, 2008, the new $5 note entered circulation. The $100 note is also slated to be redesigned, but a timetable for its introduction is not yet set.

Putting Coins into Circulation
The procedures for putting coins into circulation are similar to those for currency. The U.S. Mint produces coins in Philadelphia, Denver, and San Francisco, and ships them to the Federal Reserve Banks and to authorized armored carriers, which supply banks that need coins to meet the public’s demand.

The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins. Second, large banks in some Federal Reserve Districts participate in a Direct Mint Shipment Program, and receive coins directly from the Mint. In the New York area, there also is an arrangement under which banks that need coins buy them from banks that have a surplus. To promote the arrangement, the New York Fed stands ready to match banks that have excess coins with those that need coins.
June 2008

http://online.wsj.com/public/resources/documents/bernankecharts20101119.pdf
EME Net International Financial Flows excluding Changes in Reserve Assets

http://www.monetary.org/federalreserveprivate.htm

AMERICAN MONETARY INSTITUTE
PO BOX 601, VALATIE, NY 12184
Tel. 518-392-5387, email ami@taconic.net
Stephen Zarlenga, Director
(c) 2006

Dedicated to the independent study of monetary history, theory, and reform

Saturday, July 8, 2006

Is the Federal Reserve System a Governmental or a Privately controlled organization?

Students of our monetary system quickly encounter this important question, normally phrased as whether the Federal Reserve System is part of the U.S. Government or is a private organization. The importance people are placing on the answer is indicated by the over 36,000 web sites the question raises on internet search engines.

We’ll examine evidence in the Federal Reserve legislation; in how the Fed operates; from Congressional testimony; from statements from the Federal Reserve’s publications; in statements by former Chairmen of the House Banking Committee; and in official rulings by US courts, to show why we conclude that although there are some elements of ambiguity, the Federal Reserve system is essentially dominated and controlled by private financiers, not our government; and to the extent that there is ownership of it, it is entirely private. Therefore despite the ambiguity – and confusion – the Fed is more accurately seen as a private, not a governmental institution, though with substantial governmental ties.

The ambiguity arises from a combination of misleading appearances; the fact that our President appoints (with consent of the Senate) the Chairman of the Fed to four year terms, and the 5 member Board in Washington to 14 year terms; the fact that the Fed is supposed to promote governmental fiscal policy; and the fact that the system was originally set up in law by Congress in 1913 and can be altered, nationalized or even dismantled by Congress.

Most Americans understand that the Fed controls our money system, but they believe its part of our government, as would be expected of any organization holding that much power over the destiny of our country. Americans also erroneously believe the banking business consists of accepting deposits from clients and then re-loaning them to borrowers at a higher rate of interest. Though the number is definitely growing, most Americans have no idea that money (or more accurately interest bearing bank credits – purchasing media which serves as money) is created by the banking system when loans are made, through the fractional reserve provisions. This is understood by few novices, and often economists and even bankers fail to comprehend that they function as part of a money creation system, when they issue credits, and deposit them into their client’s accounts when loans are extended.

Therefore most Americans would be surprised to learn that almost all of what we use for money is not issued by our government, but by private banks. They have been “allowed” to form erroneous assumptions about our money and banking system that are far from reality and that serves to shield from closer scrutiny, whether the Fed is truly operating in the public interest or advancing more private agendas, either on purpose or by default.

Organization And Ownership:

The Federal Reserve consists of 12 regional Federal Reserve banks, with boards of Directors, under an umbrella direction of the 7 member Federal Reserve Board in Washington, with the power to determine major aspects of banking activity, such as setting interest rates, and the reserve and other operational requirements. There are no shares of the Washington Fed Board organization; the only “ownership” of the Fed is in shares of each of the 12 regional banks which are entirely owned by the private member banks within their respective districts, according to a formula based on their size (they must subscribe to the shares with 3% of their capital plus surplus). The ownership is highly restricted in that such ownership is mandatory; the shares can’t be sold; and they pay a guaranteed 6% annual dividend..

Thus the stories that the Federal Reserve is “owned” by foreign bankers (the Rothschild’s and other prominent banker names usually come up) are not accurate and these types of rumors have mainly served to discredit wholesome criticism of the banking system. While it is true that our first central bank, the First Bank of the United States, upon dissolution in 1811 was found to be three quarters owned by British and Dutch interests, that bank was structured simply as a private share company on the Bank of England model.* The control of the Federal Reserve System is more difficult to untangle and is not just a matter of counting shareholder votes. While foreign bankers might indirectly own shares of the regional Federal Reserve Banks through ownership of American banking companies, such ownership would be reported to the SEC if any entity held more than 5% of the American corporation. This however does not exclude strong, potentially undue foreign influence, for example through the Bank for International Settlements (BIS).

A “Non-Profit” Organization?

The Federal Reserve System puts itself forward as a non-profit organization that turns over its operating profits to the U.S. Treasury, after all expenses, including the 6% dividend to member banks. However this misses the point on several scores. First, the banking profits coming through the privileged money creation process mainly occurs at the member bank level of operation, and those profits are not turned over to the Treasury. That is, the net earnings from the member banks seigniorage privilege are not turned over to our government but kept by the private member banks. For England this amount has been estimated at 41 Billion Pounds per year. For the US we think it’s between $100-200 billion per year; but we need to know the amount more precisely from the Fed itself.

This money creation which is put into the system when the banks extend loans, eventually becomes a source of funding when our government’s bonds are sold to the public. Here is how Wright Patman, former House Banking and Currency Committee Chairman for 16 years criticized that process:

“I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money….I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue.”

We think the time has come.

Secondly, how extravagant are the FED’s operating expenses? Reputedly quite high, but in order to determine that for sure a proper audit would be necessary. Just where did the extensive real assets of the Fed come from if all the earnings are turned over to the Treasury? (Fed capital as of June 28, 2006 was $29.462 billion) Perhaps some part of it comes from member bank subscriptions to the regional Fed shares. Another question for the audit to address. (If memory serves correctly, the Fed used to turn over 90% not all, of its earnings over to the Treasury; but now its 100%.

Control:

Private ownership does not guarantee private control – they can be two different things. Although ownership of the fed is admittedly private in a restricted way, it is control which is the more important factor in regarding the Fed as private, not governmental. Remember the question is whether the control rests more in private or governmental hands, not whether it rests directly in shareholders hands.

It will be clear from the following points that the Fed is definitely not part of the US Government:

* The Fed is not organized within the Executive, Legislative or Judicial branches of our government.

* Who pays the Fed’s bills and determines its budget? Not any part of our government. The Fed gets its funding from its own specially privileged operations. The Fed Board determines Fed budgets.

* Who monitors and oversees Fed activities? Again the Fed itself. While some important elements of proper auditing have taken place, there has not yet been a comprehensive independent audit, by the Government Accountability Office as proposed in a recent letter from Ralph Nader to new Fed Chairman Ben Bernanke, calling for greater monetary transparency.

* Federal Reserve Employees are not part of the US Civil Service System and are not covered by government employees’ health insurance or pension programs. Who does the hiring and firing? Except for the highly publicized Chairman and 7 member Washington Board, this is in private, unelected hands.

* Federal Reserve Banks are not listed as government organizations by the telephone companies, a small but telling fact.

Here is how the Fed describes the Control situation, in the FAQ’s on its website:

“As the nation’s central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as “independent within the government.”

We’d suggest the phrase “independent within the government” is much too ambiguous and has the effect of conveying great power while avoiding responsibility.

The Fed’s FAQ’s continue regarding control:

“The Federal Reserve’s ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act. Legislation requires that the Fed report annually on its activities to the Speaker of the House of Representatives, and twice annually on its plans for monetary policy to the banking committees of Congress. Fed officials also testify before Congress when requested.

“To ensure financial accountability, the financial statements of the Federal Reserve Banks and the Board of Governors are audited annually by an independent outside auditor. In addition, the General Accounting Office, as well as the Board’s Office of Inspector General, can audit Federal Reserve activities.”

We agree with Mr. Nader that it is time for the General Accountability Office to carry out this full audit of the Federal Reserve System. We take at face value the Fed’s statement that the only way for our government to exert necessary societal controls on the Fed is through legislation altering the Federal Reserve Act.

The Federal Reserve Act

Reading the Act with the question of control in mind, what one finds are primarily an enumeration and description of vast powers over our monetary system being ceded to the non – governmental Federal Reserve. Primary among these are the powers necessary to administer a fractional reserve banking system in which the creation of money – what we use for purchasing media – is in private hands.

One is struck by the general absence of governmental controls over Fed activity, and lack of requirements toward our elected representatives.

One is struck by the lack of accountability of the Fed to our governmental officials or bodies.

One is struck by the lack of any specified penalties should the system be found to not be promoting governmental public policy at all.

One is struck by the lack of formal oversight procedures to determine whether that is happening or not.

The Act requires the Chairman to appear before Congress and Congressional committees four times a year, and requires the Board to submit two written reports to Congress annually. To understand that this is not sufficient oversight, one need only read Congressman Bernie Sanders questioning of Chairman Greenspan, from the Congressman’s website. When tough questions were put to the Chairman, as Congressman Sanders did, forms of stalling non-answers came back until the announcement, “Your time is up Mr. Congressman.”

While the act specifies that the Comptroller of the Currency has the power to directly examine any member bank in the system, he is not empowered to examine Federal Reserve Regional banks – that is in the hands of the Washington Board. 14 year appointments – a one time event for them – places them outside the influence of our elected officials, in other words outside the democratic process.

Probably this “independence” was sold as a good thing! From the time of Adam Smith, there has been a growing attack against government, as being incapable of managing the monetary system. Despite the evidence that government has a far better record controlling money than private bankers have*; despite the fact that government is the only organizational form with ability to stand between the people and the “Enrons” of the world. It is time to rethink this “independence” question and examine the actual evidence, rather than to continue relying on free market ideology – really a form of elitist propaganda. It would be smarter to examine mankind’s actual experience with government controlled money systems – especially in America. For what reason did the Federal Reserve Act envision that it would be saints serving on the Fed Board?

Some Conclusions from Court Cases

Several legal proceedings further illuminate the private aspects of the Fed. This case refers to several of those cases.

1) JOHN L. LEWIS, Plaintiff/Appellant, vs. UNITED STATES OF AMERICA, Defendant/Appellee.

(No. 80-5905, UNITED STATES COURT OF APPEALS, NINTH CIRCUIT

680 F.2d 1239; 1982 U.S. App. LEXIS 20002; March 2, 1982, Submitted; April 19, 1982, Decided)

[Lewis had been injured by a car owned by the San Francisco Fed and sued the US Government for damages. Note that this ruling particularly applies to the regional Federal Reserve Banks, not necessarily the Federal Reserve Board. Thus even more ambiguity!]

Excerpts from the ruling:

The district court dismissed, holding that the Federal Reserve Bank is not a federal agency within the meaning of the Federal Reserve Act and that the court therefore lacked subject matter jurisdiction….

“Federal agency” is defined as: the executive departments, the military departments, independent establishments of the United States, and corporations acting primarily as instrumentalities of the United States, but does not include any contractors with the United States.

There are no sharp criteria for determining whether an entity is a federal agency within the meaning of the Act (28 U.S.C. § 2671), but the critical factor is the existence of federal government control over the “detailed physical performance” and “day to day operation” of that entity…. Other factors courts have considered include whether the entity is an independent corporation…, whether the government is involved in the entity’s finances…. and whether the mission of the entity furthers the policy of the United States… Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations.

Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank’s nine member board of directors. The remaining three directors are appointed by the Federal Reserve Board. The Federal Reserve Board regulates the Reserve Banks, but direct supervision and control of each Bank is exercised by its board of directors. 12 U.S.C. § 301. The directors enact by-laws regulating the manner of conducting general Bank business, 12 U.S.C. § 341, and appoint officers to implement and supervise daily Bank activities. These activities include collecting and clearing checks, making advances to private and commercial entities, holding reserves for member banks, discounting the notes of member banks, and buying and selling securities on the open market. See 12 U.S.C. §§ 341 [**5] 361….

It is evident from the legislative history of the Federal Reserve Act that Congress did not intend to give the federal government direction over the daily operation of the Reserve Banks: It is proposed that the Government shall retain sufficient power over the reserve banks to enable it to exercise a direct authority when necessary to do so…. In other words, the reserve-bank plan retains to the Government power over the exercise of the broader banking functions, while it leaves to individuals and privately owned institutions the actual direction of routine…[Note: neither the Act, nor this court explained how that is done] the Federal Reserve Banks, though heavily regulated, are locally controlled by their member banks. Unlike typical federal agencies, each bank is empowered to hire and fire employees at will. Bank employees do not participate in the Civil Service Retirement System. They are covered by worker’s compensation insurance, purchased by the Bank, rather than the Federal Employees Compensation Act. Employees traveling on Bank business are not subject to federal travel regulations and do not receive government [**7] employee discounts on lodging and services.

The Banks are listed neither as “wholly owned” government corporations under 31 U.S.C. § 846 nor as “mixed ownership” corporations under 31 U.S.C. § 856, … a factor considered in Pearl v. United States, 230 F.2d 243 (10th Cir. 1956), which held that the Civil Air Patrol is not a federal agency under the Act. … Additionally, Reserve Banks, as privately owned entities, receive no appropriated funds from Congress. …The Reserve Banks have properly been held to be federal instrumentalities for some purposes….The Reserve Banks are deemed to [**10] be federal instrumentalities for purposes of immunity from state taxation…. The Reserve Banks, which further the nation’s fiscal policy, clearly perform an important governmental function….Performance of an important governmental function, however, [**11] is but a single factor and not determinative in tort claims actions…. Brink’s Inc. v. Board of Governors of the Federal Reserve System, 466 F. Supp. 116 (D.D.C.1979), held that a Federal Reserve Bank is a federal [**12] instrumentality for purposes of the Service Contract Act, 41 U.S.C. § 351. … For these reasons we hold that the Reserve Banks are not federal agencies for purposes of the Federal Tort Claims Act and we affirm the judgment of the district court. [end of excerpts]

Is the Fed Operating in the Public Interest and Promoting Governmental Policy?

Short answer: No.

Some Details:

Macroeconomic policy goals are generally agreed to include: full employment, stable prices, satisfactory balance of payments; and sustainable economic growth.

A) The Full Employment Laws

Last April at a Levi Institute April conference (Bard College), Fed Governor Donald L. Kohn gave his luncheon talk, and nobody had a question for him (economists seem afraid of Fed officials) so I stood up and asked “Whatever happened to the Fed’s full employment directive?” (Well that got a rise out of Jamie Galbraith, who was sitting at the next table!) Gov. Kohn’s answer (paraphrasing) was “Yes we consider that, but we also consider price stability.”

Price stability is the economists mantra for tight money policies, that put a special strain on the barely employed. The important employment question especially indicates how the Fed does not implement Governmental policy. Two laws were passed by Congress on this and both are being effectively ignored by the Fed:

The 1946 Employment Act directed policy makers to pursue policies promoting full employment. This apparently was not enough. The Humphrey-Hawkins Act had to be passed in 1978 requiring monetary policymakers to pursue full employment and non-inflationary economic growth.

And what has been the result? Games are played with the unemployment statistics. Unemployment is grossly underestimated by ignoring those whose unemployment benefits have run out; by not counting those who have given up looking, or who have accepted jobs requiring only a small part of their qualifications at low wages, or who have accepted part time work in desperation. The Fed has done little or nothing to gain and publicize an accurate estimate of unemployment in America.

A case could probably be made that the Fed Board is flaunting the Humphrey-Hawkins Law.

There have been unsuccessful attempts through former Senator Mack of Florida and Congressman Saxton of New Jersey to promote legislation which would render the employment question moot, by making “price stability” the Fed’s priority. That the “full employment” language is considered an annoyance is indicative of the Fed’s political bias against middle class Americans.

Several additional societal/governmental problems with direct connection to monetary policy follow below. Taken individually, they might leave room for question, or even be characterized as “anecdotal,” Greenspan’s favorite description for inconvenient facts; but when seen in their entirety they demonstrate to reasonable minds that the Fed has not been operating in the public interest, except incidentally. The Fed has been promoting, or at least supporting plutocracy – the rule by wealth. (The connection between the Fed’s monetary policy, and governments funding abilities should be fairly clear, but just in case, we are writing a longer explanation that does connect those dots.)

When a long string of events and factors evinces a particular design or motivation behind them, we should draw the proper inference, just as the American Declaration of Independence did. In the Fed’s case we infer that a form of class warfare has been an inextricable part of its make up from its beginning. It’s not really hidden now. Billionaire speculator Warren Buffet recently remarked “If there is a class war, my class has won.” Buffet was being facetious. He would not characterize the destruction of the most vulnerable among us and their children, as “winning.” He would probably join with me in calling it cannibalism, and predicting that indigestion is sure to follow.

This warfare is not all the Fed’s fault, a large part of the warfare is inherent in the present day make up, definitions and assumptions of economics itself. But the single most decisive factor in that wealth concentrating “victory” has been the privately controlled monetary system.

http://www.richmondfed.org/publications/research/region_focus/2009/winter/full_interview.cfm

Interview

George Selgin
By Stephen Slivinski
RF: Describe free banking. How does it differ from the sort of system we have in the United States today?

Selgin: I use the term to mean laissez-faire banking — banking without any special government regulations or restrictions. Like free trade, it’s an ideal concept. It doesn’t refer to any specific or actual banking system, although some, like Scotland’s in the early 19th century, came close.

My own ideal version of free banking would have no special requirements for note issuance. Private banks would be able to issue their own notes on the same basis as they create demand deposits. They would also be free to open branches and invest in all kinds of securities. Finally, there wouldn’t be any sort of implicit or explicit government guarantees, like deposit insurance.
RF: Is a commodity standard necessary in your hypothesized free banking environment? Or, to put it another way, is “fiat money” incompatible with free banking?

Selgin: I think a distinction needs to be made between the banking regime on the one hand and the monetary base regime on the other. The way I envision free banking, it does not rely on a particular base regime. It’s true, as a matter of history, that if you had free banking from the get-go, you wouldn’t have central banks and you would almost certainly have a commodity money standard, probably gold. But one can conceive of free banking in a modern fiat money setting. What would make it free is that the central bank would not have a monopoly on issuing paper currency the way central banks do today almost everywhere.

A modern proposal for free banking that doesn’t radically alter the monetary base regime is one that freezes the monetary base, lets banks issue any sort of liabilities — including currency — and gets rid of deposit insurance. The central bank would still maintain the monetary base but, in principle, it would just be a question of making sure it mopped up old central bank notes and otherwise maintained a fixed stock of reserve credit for banks to settle with. In that case, you’d have free banking with a fiat money standard.

The fiat money we currently have is purely the product of central banks. I think it’s pretty clear that if we never had central banks, we wouldn’t have fiat money. Instead, we’d still have commodity money. I don’t think there were any evolutionary forces at work that would have weaned monetary systems off of established commodity standards, particularly gold and silver. What would have happened instead, and what was tending to happen while we still had those standards, was that the actual need for gold and silver as money would have fallen, thanks to financial innovations, to very trivial amounts.

In the Scottish free banking system, for example, actual gold coin reserve ratios had already fallen to as low as 1 percent to 2 percent of the banks’ outstanding demand liabilities by the 1820s. Most of the liabilities were banknotes back then — deposits weren’t so important. At any rate, the Scottish banks didn’t need a lot of gold, and the system was always finding new ways to economize on it. But the ultimate standard was still gold, and I think it would have remained so in the absence of government interference.
RF: Do you consider fractional reserve banking inherently problematic? Does free banking require a commodity standard so private banks don’t issue too much currency?

Selgin: The advantages of free banking are distinct from those of the gold standard or any commodity standard. That doesn’t mean that I think there is no advantage to a gold standard. As a matter of history, I think it’s a shame that the gold standard was dismantled. That dismantling really began in earnest during World War I, and the gold standard that was restored afterward was a jury-rigged and, ultimately, very unstable standard. But one can have a better banking system under free banking whether there is a gold standard or not. Fiat money would also work better with free banking than without it.

As for fractional reserve banking, I think it’s a wonderful institution and that it’s crazy to argue that we need to get rid of it to have a stable monetary regime. Those self-styled Austrian economists, mostly followers of Murray Rothbard, who insist on its fraudulent nature or inherent instability are, frankly, making poor arguments. I don’t think the evidence supports their view, and that they overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment.

The main thing to keep in mind is that a competitive bank of issue is one that can issue circulating currency but has no monopoly on doing so. So it isn’t in a position to print up its own reserves or to print anything that other banks can be counted on to treat as reserves. Free banks compete, as it were, on an even playing field in issuing paper IOUs, which are basically what banknotes are. They have to redeem those IOUs on a regular basis: The competition among different issuers means that their notes will be treated the same way that checks are treated by banks today. They will be accumulated for a day or so and then sent through the clearing system for collection. It’s this competition among issuers that assures that none of them has the power to lead the system into a general overexpansion.

That’s quite unlike the situation you have when you have a monopoly bank of issue. Even in the presence of a gold standard, when the privileged banks’ IOUs are themselves claims to gold, a monopoly bank of issue can expect other banks to treat its paper notes and its deposit credits, which are close substitutes, as reserve assets — that is, to treat them as if they were gold themselves. As a result of that tendency, which exists only because the recipient banks are deprived of the right to issue their own paper currency, the less privileged banks become dependent on the monopoly currency provider and, therefore treat its notes as reserve money. Now that monopoly bank has the power to generate more reserves for the whole system and it, in turn, is free of the discipline of the clearing mechanism. That’s where central banks’ power comes from. This is what allows central banks to promote a general overexpansion of credit and inflation.

What I just described is exactly the sort of thing that triggered many of the financial crises of the 19th century. The irony is that people now see these periodic crises, especially in England, as proving the need for a central bank and a lender of last resort. Walter Bagehot, on the other hand, recognized that the boom-and-bust cycles were a product of a monopoly in currency issuance.

Today, poor Bagehot must be spinning in his grave, because your average central bank apologist likes to cite him as having argued that every country should have its own central bank. That is a calumny. Bagehot in fact wrote very explicitly that he thought it would have been best had there never been a Bank of England, and if England instead had a competitive banking system like Scotland’s. In that case there would have been no need for any lender of last resort. In recommending that the Bank of England serve as such a lender, Bagehot wasn’t recommending a solution to problems inherent in unregulated banking. He was just trying to get an inherently flawed Bank of England to behave itself.
RF: You’ve already mentioned the Scottish banking system of the early 19th century as the best historical example of a functional free banking system. How did the Scottish system emerge?

Selgin: The Scottish system was unique, and that’s because of politics. After the 1707 Treaty of Union, English authorities did not want Scotland to end up with an institution with the same power and prestige as the Bank of England. They more or less insisted that Scotland allow open entry into the note-issuing business. So the Bank of Scotland, chartered in 1695, was followed by the Royal Bank of Scotland, and then by other note-issuing banks, until Scotland had a couple of dozen banks of issue — some big, some small — all competing. In this way the English quite unintentionally gave Scotland the world’s most stable, most envied banking system, and one far superior to its own. For one thing, Scotland was relatively free of crises while England was buffeted by one crisis after another.

By the way, the same comparison can be made between the U.S. banking system and the Canadian banking system in the last half of the 19th century. Neither was a free banking system, but the Canadian system was freer in crucial respects, like allowing banks to issue notes without special collateral requirements and allowing nationwide branch banking. This greater freedom made the Canadian banking system the envy of U.S. commentators at the time.
Web-exclusive:
RF: Tell me a bit more about that. The pre-Civil War period in the United States is commonly referred to as the “free banking” era. Is that a misnomer?

Selgin: Banks were free in the late antebellum United States in one sense only. Originally, you could only start a bank with a special charter passed by a state legislature, so entry was restricted. In some cases, it was very severely restricted. There were some states and territories, especially in the West, that banned banking altogether and others that chartered only a single, privileged bank.

Starting in the late 1830s, in reaction to the corruption of the previous system, states – beginning with Michigan and New York – created so-called “free banking” laws that allowed banks to be established through something like a general act of incorporation. So, banking under these laws was free in the sense that there was greater freedom of entry.

But the banks weren’t free in the sense that they were free from special regulations. In every case, their notes had to be backed by specified bond collateral, and this requirement often had very bad consequences. In many states, banks were forced to buy assets that turned out to be junk, and this was a major cause of failure in these supposedly “free banking” systems. None of the banks could have branches, either. As is evident to everybody today, the lack of branch banking was a very important source of U.S. banking system weakness and fragility.
Web-exclusive:
RF: Is there any role for legal rules in your preferred free banking scenario, particularly unlimited liability of bank owners?

Selgin: Unlimited liability gives banks subject to it a greater effective capital cushion, with correspondingly greater guarantees to the holders of their notes. In that case, those note holders would be subject to losses only after the banks’ owners had been deprived, not only of their equity interest in the banks, but also of their personal property. So unlimited liability constituted a really effective as well as incentive-compatible kind of insurance — much better than government deposit insurance. But it’s important not to exaggerate the role of unlimited liability. In the Scottish system, for example, only some banks had unlimited liability — the older “chartered” banks didn’t. The evidence doesn’t by any means suggest that free banking can only work with unlimited liability. I don’t think free banking theorists have taken any particular stand on how much liability is ideal. Rather, I think their view is that the choice is best left to the market.
Web-exclusive:
RF: Supporters of central banking claim it is superior to free banking because the central bank can serve as a lender of last resort in a crisis or a contagion. Are there characteristics of a free banking environment that would obviate the need for a lender of last resort?

Selgin: The standard view is that banking systems are inherently fragile and that they’ll be subject to frequent bank runs, which with fractional reserve banking will have very serious consequences. But there’s no good evidence for this view.

Two things need to be said. First, truly irrational and random runs on banks, out of pure ill-informed panic, are the exception. In most cases the runs turn out to be based on relatively accurate information about which banks are insolvent and which ones aren’t. In other words, so-called bank “contagions” tend to be very limited.

People point to the nationwide U.S. panic in late February 1933 as an exception. Yet that major run was triggered by two things. The first was the spread of bank holidays, which were foolish and unnecessary alternatives to partial suspensions. The other was a run on the dollar caused by the fear that FDR would devalue it upon taking office. Roosevelt’s failure to unequivocally deny any intent to devalue helped fuel the run. So a rush to convert paper dollars into gold caused the Federal Reserve Bank of New York, which felt the brunt of that rush, to call for a New York state bank holiday, which precipitated the national bank holiday. Of course if there’s fear of devaluation under a gold standard, people are going to run on the banks to get their hands on paper money, so as to convert the paper into gold. But that doesn’t imply distrust of the banking system.

Secondly, the tendency for banking systems to suffer failures, especially big clusters of failures, depends on the regulatory environment. Had we had nationwide branch banking all along in the United States, that alone would have allowed us to avoid many of the bank failures and problems we’ve experienced. So, the question that has to be asked is not whether heavily regulated and structurally weak banking systems in the past could have benefitted from a lender of last resort. Perhaps they could have. It’s whether the first-best solution is to get rid of the regulations that rendered these systems so artificially fragile in the first place. I don’t think that laissez-faire or free banking systems, or the closest approximations we have been able to study, have demonstrated the sort of fragility that suggests the need for a lender of last resort at all. In my opinion, a lender of last resort is a second-best solution to problems caused by misguided regulation of banking systems.

Freedom to issue notes is important too. When banks can’t issue their own notes, well, they need a lender of last resort to supply them with notes. If we told companies that manufacture shoes that henceforth they could only make shoes for left feet, lo and behold, there would be a need for an “emergency” source of shoes for right feet, which could be created by establishing a new government agency for the purpose. Eventually people would say, “Thank goodness for the Government Shoe Agency. How would anyone be able to walk otherwise?”
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RF: Are there institutional arrangements that might arise in a free banking environment that protect banks in the case of a panic?

Selgin: There are. For example, banknotes can include so-called “option clauses.” Scottish banknotes bore such clauses before 1765, although the banks didn’t actually use them to preclude panics, as I’ll explain in a moment. With an option clause, a bank in effect reserves the right to stop redeeming its notes on demand, on the condition that it must pay interest on the notes during any period of suspension. So long as the interest rate is sufficiently high, option clauses are incentive compatible: They’ll only be invoked when so doing is in the noteholders’ own best interest. For example, if you had a completely irrational run on a solvent bank, the clause could kick in and prevent the panicking note holders from wrecking the bank. The very fact of the bank’s invoking the clause tells panicking customers that it’s solvent, because if it weren’t, it would make more sense for its owners to go ahead and wind it up.

But Scottish banks didn’t actually use option clause notes to prevent runs. Instead they had them to protect against note raids, where rival banks would pile up notes and then stage a raid to exhaust a bank’s reserves and put it out of business. Such raids occurred in the early days of Scottish banking. The option clause might have been used to protect against random panics, except that there weren’t any random panics. So in theory at least there is a contractual solution to such panics that could work very well.

Also, when you ban competitive note issue, you eliminate the one bank-issued demand liability for which there can be an active secondary market. Suppose you have a bank that’s insolvent, then expert market participants would discount its notes. Conversely, if the notes aren’t discounted, nobody has to worry. “Naive” bank customers could just check the market price of their notes to know whether they’d better run on their banks or not. So information from the secondary note market can prevent runs and panics from spreading randomly. If you shut down that market, as you do when you prohibit competition in note issue, you create a basis for bank-run contagions that wouldn’t exist otherwise.
RF: What is the “big problem of small change?”

Selgin: The big problem of small change — which is the title of a very good book by Thomas Sargent and François Velde — refers to the problem of trying to keep smaller denomination coins circulating alongside larger denomination coins. Say you have a gold standard. If the mint strikes only full-bodied gold coins, the smaller denominations will end up being too tiny. You actually have historical examples of very tiny coins being issued. But people lost them, and they were otherwise very inconvenient. So, what else can you do? You can switch to silver or copper, but then your large denomination coins would be huge. In practice, no one metal can be convenient for the full range of denominations people need.

Instead, you can have two kinds of metal circulating as coins — that’s called “bimetallism.” But bimetallism has its own problem. So long as the mint sticks to a single unit of account, its coining rates will imply a fixed relative price for the two metals. But that price is bound eventually to differ from the world relative price. When it does, the metal that’s relatively undervalued at the Mint will no longer be offered to it, and already-existing coins made from it will disappear from circulation unless they’re badly worn.

The other solution, and the one that was adopted everywhere, is to use “fiduciary” or “token” coins. Here, the metal isn’t the source of the coins’ value, which instead rests on a contrived scarcity or their convertibility into nonfiduciary money. The trouble with respect to such coins is that they can be a tempting object for counterfeiters.

This brings us to the British case. By the 1780s, it was estimated that more than 90 percent of the token copper coins in circulation in Great Britain were fake. And the real ones were in terrible condition. Merchants and factory owners could not get hold of enough decent coins for making change and paying workers. Of course, these problems were interrelated. The lack of decent official coins just made it easier for forgers to market counterfeit coins, while the extent of the counterfeiting discouraged the Royal Mint from producing more legitimate coins. At last, for several decades starting in 1775, the Mint decided not to produce any copper coins at all.

Great Britain also used silver coins as not-so-small small change, but because Great Britain’s official bimetallic ration caused silver to be undervalued at the Royal Mint throughout the 18th century, no silver was being brought to the Mint to be coined. In other words, from 1775 onward, the Royal Mint produced hardly any small change of any kind.

Now, this was no small matter. Britons needed small silver and copper coins for all payments under a guinea. Banknotes didn’t help, because the smallest until 1797 were for five pounds sterling. This was at a time when the average British worker was lucky to get 10 shillings, or half of one pound sterling, per week. So, retail exchange, wage payments — any transactions among the poor — there was no decent, official money for any of it. At the same time, the Industrial Revolution was gearing up. But that revolution depended crucially on the growth of retail exchange and the expansion of the factory system. It depended, in other words, on precisely the sort of exchange media that the government was no longer supplying. So the small-change shortage threatened to slow down the process of British industrialization.

Yet the British government, instead of trying to fix the problem, threw its hands up at it, leaving it to private merchants and industrialists to figure out a solution, which they did, ultimately, by minting and issuing their own coins.
RF: Tell me about your research into this historical episode.

Selgin: This private coinage episode, which is the subject of my book, was not a small thing. It was not a sideshow. In the course of 10 years, from 1787 to 1797, private coiners issued half again as many copper coins — in tons as well as in value terms — as the Royal Mint had issued throughout the previous half century. Later, the private coiners would issue silver coins too. So, for a big chunk of the early Industrial Revolution, the greatest part of the exchange medium used to sustain that revolution came from the private sector.

Very few people know this story. What’s more, it was only thanks to lessons learned from Great Britain’s private coiners, both concerning how to make coins and how to administer the coining system, that the British government and other governments were finally able to get their official coinage arrangements in sufficient order to allow them to provide for the coinage needs of industrial economies. Yet governments still aren’t very good at doing this. To this day there continue to be serious coin shortages around the world. Argentina has been in the grips of one for years. As long as we insist on letting government monopolize coinage, we can expect such shortages to occur.

That’s where Sargent and Velde go wrong in their book. They insist on treating the small-change problem as being due either to government authorities not having the right theory about how small change should be supplied or to their not having the right equipment with which to implement the theory. They never really consider what one might call the “public choice” problems behind change shortages, including the perverse incentives involved in a bureaucratic and centralized mechanism for supplying coins. If you look carefully at the British story, the problem there was very clearly not a lack of sound theory or a lack of adequate equipment. Most of Great Britain’s private or “commercial” coins were made using ordinary screw presses and were designed, issued, and administered by people who never lost a moment’s thought to any theory, new or otherwise.
Web-exclusive:
RF: As you describe in the book, the British government simply didn’t try solving the problem of counterfeiting. During the period you write about, there were several competing private coin producers. Would you say that this system was preferable because the firms that would produce the best coins – those that were harder to counterfeit, for instance – would gain a competitive advantage through that sort of reputation?

Selgin: The private mints weren’t all equally reputable, in fact. Some catered to what we might call the “high end” of the market, supplying coins of the highest quality to very reputable issuers. Others, though, specialized in so-called ‘anonymous” tokens, or in spurious tokens aimed at fooling gullible collectors. Caveat emptor was the rule. But there is no question that the mass of circulating tokens was of a quality decidedly superior to that of the Royal Mint’s copper coins. The proof is that, by the mid-1790s, familiar commercial coins circulated at their face values, while their official counterparts were routinely refused, or were accepted only at a 50 percent discount. This was the case, moreover, even though official copper coins were legal tender for transactions up to six pence, whereas commercial coins weren’t, strictly speaking, legal at all.

Yes, part of it was reputation, and there was also an advertising component to the quality. You had both private mints and private coin issuers, so there was a division of labor. Ultimately, you had 20 different private mints that were serving hundreds of private issuers who would order custom-made coins from them. What caused them to care about how well their coins were made? Well, these coins were IOUs. If you were an issuer, the last thing you needed was for somebody to make perfect copies that would expose you to uncontrollable liabilities. So issuers had a powerful incentive to insist that the mints they used hired excellent engravers and used quality dyes. If one mint wouldn’t do it, an issuer could simply take his business down the street.

But there was another incentive at play also. The coins’ engravings, which were diverse and often quite beautiful, served to advertise the issuing firms at a time when print advertising wasn’t very important. So good PR was another reason for using nice dyes.
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RF: How is your book relevant today to monetary policy?

Selgin: The real lesson I want to get across with the book is that we should take private production and issuance of circulating money more seriously than we do. There is a great deal of misunderstanding about the historical record and particularly a great deal of myth that has grown out of the ancient and medieval dogma that kings and princes alone should be trusted to coin money. That dogma, which somehow managed to survive episode after episode of royal debasement, lies at the foundation of the entire modern superstructure of state control of money. Through their unthinking failure to question governments’ coinage “prerogative,” economists set a precedent that made it all too easy for them to excuse governments’ subsequent monopolization of paper currency, which in turn paved the way to fiat money, unlimited government guarantees, and the prevailing international monetary chaos.

I wrote Good Money to challenge the oldest and most fundamental belief behind modern governments’ control of money, by looking at a rare case where government didn’t issue coins, but the private sector did. Contrary to what people assume, the episode it suggests that the private sector alone is fit to coin money.
RF: Do you see reforms such as currency boards in developing countries as a step toward your ideal of free banking?

Selgin: I think the view that currency boards represent a step toward free banking, perhaps even a big step, is partly due to the tendency to equate free banking with the lack of a central bank. I’m not saying that tendency is wrong, but it’s a little bit misleading. There are ways of getting rid of central banks that may still leave commercial banks far from free, and currency boards are an example.

My perspective on currency boards is somewhat different. I agree that currency boards and dollarization can help us move toward free banking, but they do so by eliminating vested interests that tend to be among the most powerful opponents of granting greater freedom to banks. Once you dollarize, for example, whose concern is it domestically to prevent local banks from issuing their own currency? The currency profits — the seigniorage — are all going to another country. Allowing private institutions to supply currency would convert at least some of it to domestic consumers’ surplus. There’s no central bank to capture the seigniorage itself, and the treasury, which might otherwise look to a central bank to buy its debt, is now more likely to gain by encouraging than by standing in the way of currency privatization. So what dollarization and currency boards do is to get rid of at least some of the bureaucratic support for restrictions on commercial banks. In that sense, they represent a movement toward free banking.
RF: Do you see recent approaches to monetary policies and Fed actions as contributors to the current economic tumult?

Selgin: I agree entirely with those who blame the Fed for fueling the subprime housing boom by holding interest rates at such low levels for the early part of this decade. I think that was a very irresponsible policy. It was so even according to a conventional sort of Taylor rule, which, in my opinion, would itself have been too easy. Elsewhere I’ve defended the view that, in periods of growing productivity, central banks ought to allow some deflation — that is, monetary policy ought to be tighter than a standard Taylor rule would have it be. If you view the Fed’s actual policy in light of this argument, then the policy was very expansionary. Taylor’s own simulations suggest that if his rule had been followed, the housing boom would have been something like two-thirds as big. If the “productivity norm” I favor had been followed instead, the boom would have been much smaller still.

Still, it’s a mistake to blame the Fed alone for the crisis. And, to some extent, one wants to pity the Fed because the truth is that central banks cannot get the money supply right. They are trying to centrally plan it and they do not have adequate information to go by. They could do better than they have done, I think, by adopting the right rules. But they are fundamentally flawed institutions.

In any event, the Fed provided fuel for the fire, but the fuel was being directed into the mortgage market, and specifically into the subprime market, by an array of other government policies all aimed at increasing homeownership, especially among less creditworthy persons, and at helping the construction industry. The story is more complicated than that, of course, but these are the essential points.
RF: What do you think are the prospects for achieving something resembling free banking in the United States?

Selgin: Financial innovations tend to take us in the direction of free banking. Such innovations have already privatized the greater part of national money stocks, and will keep doing so in the absence of a wholesale nationalization of banks. It’s only currency and coin that private firms have long been prevented from supplying.

So long as private currency remains illegal, and even if it doesn’t, further financial innovation will tend to make us less and less dependent on any sort of paper currency or coins. Smart cards, debit cards, that sort of thing, have already made some inroads. And global pressures tend to favor the loosening of other kinds of bank regulations. There is, however, one kind of regulation that is growing instead of retreating and that market forces can’t or won’t resist, namely, government guarantees. Here things have been going the wrong way for a long time. The spread of deposit insurance and other explicit guarantees has been obvious enough. Everyone thinks you can’t possibly have a stable banking system without deposit insurance, as if it weren’t the case that only one country had deposit insurance nationally before 1967 and only two countries for a while after that. I think the spread of deposit insurance has been very unfortunate, and that the spread of implicit government guarantees has been still more unfortunate, because implicit guarantees really have no limits.

Thanks to government guarantees, moral hazard is the big problem in banking today. We’ve got branch banking in the United States, finally. We’ve got many good private substitutes for government currency. We’ve gotten rid of other restrictive regulations like Glass-Steagall. Banks have a lot of freedom now that they didn’t have in the 1940s and that, so far as I’m concerned, is a good thing. But, tragically, back in the 1930s, when the government was busy saddling banks with regulations that would prove counterproductive, which it justified using false claims about banks’ excessive risk-taking, it also saddled banks with deposit insurance, thereby encouraging them to take excessive risks.

I don’t know how we’re going to get away from deposit insurance and guarantees, but as long as we have them and expand them, we can look forward to bigger and bigger crises. So to me, the biggest banking reform we need — bigger than allowing banks to issue their own notes, bigger than allowing private mints to spring up — is to roll back federal guarantees to the banking industry. Unfortunately, doing that may prove to be an even bigger challenge politically than trying to privatize all the world’s paper money and coin.
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http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/02/just_follow_the_money.html

Just follow the money

Post categories: Bank of England, QE, UK economy

Stephanie Flanders | 13:01 UK time, Friday, 6 February 2009

A lot of economic policy is easier said than done. But quantitative easing is one that’s easier done than said.

It’s such an ugly phrase – you can see why news editors would do everything they can to avoid it. But the governors of the British and American central banks hate it as well.

Both have tied themselves in knots over the last few weeks trying to show how their policies differ from quantitative easing – or (because I can’t bear to repeat it again) QE.

king_bernanke203.jpgIn his speech last month at the LSE (13 January), Ben Bernanke said that the Fed was doing “credit easing”, and that it was “conceptually distinct” from QE. A week later, Mervyn King said [63Kb PDF] that the Bank purchases of assets under the new Asset Purchase Facility would be “unconventional unconventional policies”, as distinct from the more “conventional” QE. [See update below for more on the Asset Purchase Facility.]

I get it. Things are complicated – especially monetary policy things. Central bankers, of all people, have to be precise.

But it’s odd that two former teachers, previously known for their crystal clarity, should decide now is the time to be wilfully complex.

I suspect that the real reason they want to distance themselves from QE is that from there, it’s only a small leap for commentators to a phrase that people understand only too well: printing money.

But here’s the funny thing: they may not be doing QE. But they are very definitely printing money.

Here’s the simplest way of looking at all of this. (I’m afraid it’s not the shortest.)

In normal times, monetary policy is about indirectly controlling the supply of credit in the economy by controlling its price. Cheap money means more lending by banks; having higher interest rates encourages less.

There is no direct targeting of the amount of money banks have in their accounts, or lend out to customers. You simply set the base rate at what you think is an appropriate level and see what happens.

But when interest rates are at or close to zero, everything changes. You can’t make money cheaper any more, so you have to target the amount of cash more directly: in classic “QE”, by targeting the amount of cash the commercial banks have in their accounts with the central bank.

That’s (mainly) what the Japanese central bank did from 2001 onwards. Instead of targeting the interest rate, they adopted a target for the banks’ balances with the Bank of Japan, which they attempted to meet by purchasing government securities from the banks, paid for with freshly-minted cash.

The more bonds the banks bought, the more cash they built up in their accounts with the BoJ. That, in turn, expanded the monetary base, also known as “high-powered money” (or M0).

By itself, that didn’t do much to help the economy. As I pointed out yesterday, banks have to do something with it to increase “broad money” and get it out into the economy. In Japan’s case, a lot of the money just sat in the banks’ accounts and didn’t achieve much at all.

Right. So that’s QE. What about “credit easing”? That is what the Fed is now doing. It involves buying a mixture of bonds and securities in different markets with the direct goal of increasing liquidity in those markets, pushing up prices and cutting yields (the price being inversely proportionate to the yield).

Now that expands the Fed’s balance sheet – just as with QE. To the extent that bank balances with the Fed go up, it also increases the monetary base. But, says Bernanke, it’s not QE – because the rise in the monetary base is a side effect of the policy, not the goal.

If you think that sounds like a distinction without a difference, you’re not alone.

Mervyn King is on slightly stronger ground when he says that purchases by the Asset Purchase Facility are not QE, at least under current arrangements. That’s because they’ll be bankrolled by the government.

Every pound spent by the Bank on corporate assets will be matched by the sale of an equivalent amount of Treasury bills. So, theoretically, M0 will not change and there’ll be no quantitative ease.

But, as my colleague Robert Peston has pointed out, the T-bills that are supposedly offsetting the cash created by buying assets are pretty cash-like themselves.

Banks, in particular, are likely to treat them like cash. Which would suggest that even the initial non-monetary use of the facility would in practice have monetary implications.

The gnomes of Threadneedle Street will protest that it’s the formal expansion of the monetary base that matters for QE. But if that’s the way they want to play it, you could argue that all their many efforts to provide liquidity to banks have effectively been a form of QE.

As a result of those policies, the monetary base grew by 35% in the second half of 2008 alone. And the Bank’s balance sheet expanded by around 160%.

The Special Liquidity Scheme and the decision to provide cash against a wider range of collateral have explicitly encouraged banks to build up more central bank reserves. The Fed’s special operations have done likewise.

As I mentioned last week, one result of all these liquidity operations has been to push overnight rates below the official interest rate – in fact, not just in the US but also in the UK. Even though keeping that overnight rate close to the Bank rate is supposed to be their number one goal.

In other words, they have been concerned about the quantity of money sloshing round, not just the price. That sounds awfully like QE.

By now, the three people still reading this will be asking: “and the point is…?” The point is: forget about QE or not QE. Just follow the money.

Both the Fed and the Bank of England have been pushing money at the banks for the past 18 months – and for good reason. In the process they have massively expanded their balance sheets. And that, in the words of Ben Bernanke, is “effectively printing money”.

Printing money may or may not be the same as QE. It may or may not be “unconventional”. What matters is whether it works.

Update 1620: The Bank of England now has a news release and a Market Notice [76Kb pdf] about the Asset Purchase Facility.

http://www.richmondfed.org/publications/research/region_focus/2010/q4/pdf/federal_reserve.pdf

For more than 30 years, the Fed
and the other bank regulators
have been responsible for
evaluating the extent to which banks
meet the lending needs of their
communities. The Community Reinvestment
Act, or CRA, sets this
obligation, and regulators can hold up
the expansion plans of banks that fail
to perform well, so there is strong
incentive for them to comply. Since
the CRA may push banks into what
are perceived to be riskier lending
areas, onlookers ranging from thinktank
analysts to policymakers have
wondered whether it played a large
role in fueling the subprime lending
boom and bust. Some critics even say
the crisis is proof that the CRA
should be abolished, while others
argue it played at most a small part in
the housing boom and bust of the
past decade.
The CRA was originally designed
to attack the urban decay that took off
after World War II. Policymakers
viewed the deterioration of urban
cores as partly the result of
constrained credit to resident homeowners
and businesses. Sometimes
this was the result of explicit discrimination
through “redlining,” which
most CRA historians trace back to a
1930s effort by the federal Home
Owners’ Loan Corporation (HOLC), a
New Deal-era organization created to
prop the real estate industry.
The HOLC was asked to assess real
estate lending risks of 239 U.S. cities.
Officials drew color-coded maps
based on perceived risks and assigned
the color red to the riskiest areas,
defined in part as having a high
concentration of African-Americans.
Although the government retreated
from explicitly racial policies after a
Supreme Court decision in the late
1940s striking down racial deed
covenants, banks mimicked the
practice and continued to profile
neighborhoods into the 1970s. They
applied stricter lending terms to the
(typically) minority borrowers within
those neighborhoods, or refused to
lend at all.
Discrimination wasn’t the only
cause of constrained credit; market
frictions also existed. Borrower risk
was harder to assess in the late 1970s
when the Act was created, particularly
in unpioneered markets. Relatively
fewer home sales in underserved areas
made real estate appraisals difficult.
By the same token, borrowers in
lower-income markets tend to have
sparser credit history from which to
assess risk. The first bank to enter an
underserved market had significant
work to do to investigate the risks and
prospects of borrowers, but once the
inroads were made, information
proved difficult to keep proprietary.
This led to the “first mover” problem
in which no bank had sufficient incentive
to extend loans or even establish a
branch in underserved areas.
FEDERALRESERVE
BY R E N E E CO U RT O I S H A LTOM
The CRA and the Subprime Crisis
HOME OWNERS’ LOAN CORPORATION MAP FROM THE RECORDS OF THE FHLBB/NATIONAL ARCHIVES
The Community
Reinvestment Act
didn’t cause it,
but there are still
opportunities
for improvement
The Community Reinvestment Act was created to prohibit redlining, shown in
this Philadelphia area map. Banks literally drew a line around certain
low-income, often ethnic, neighborhoods and placed limits on lending to them.
6 R e g i o n F o c u s | F o u r t h Q u a r t e r | 2 0 1 0
Thus the CRA was created to induce banks to extend
loans that they presumably would not have otherwise. This
was rationalized by the government support banks receive
through deposit insurance and access to the Fed’s discount
window. Government and ultimately taxpayer support
seemed to imply an obligation to meet the credit needs of
entire communities, not just the safest lending risks.
The CRA also fit the spirit of the day. Lawmakers passed
the CRA in 1977 amidst a chain of similar laws aimed toward
strengthening access to credit services for poorer populations
and minorities. Those included the Fair Housing Act of
1968 and the Equal Credit Opportunity Act of 1974, both of
which focused explicitly on racial discrimination. The CRA’s
main provisions omit mention of race, instead focusing
more broadly on low-to-moderate (LMI) income communities.
The Act states that financial institutions have an
“affirmative obligation” to meet the credit needs of the local
communities in which they are chartered. In practice, banks
are rated on three categories of activity — lending to borrowers
in LMI communities, investment in community
development, and financial services, ranging from the availability
of ATMs to financial education — and how that
activity is distributed across neighborhoods and borrowers
of different income thresholds. The weights applied to each
of those categories vary by bank asset size, but lending —
consumer, homeowner, small-business loans, among other
types of credit — is weighted highest.
There are no explicit lending quotas under the CRA, but
regulators can hold up the merger or expansion plans of a
bank that fails to achieve a passing rating of “Satisfactory” or
“Outstanding.” CRA ratings began to be published in 1989,
and advocacy groups began to use the newly available data to
protest the plans of banks that did not perform well on CRA
exams through the public comment process and merger
hearings. This intensified the imperative to perform well on
CRA exams, especially after restrictions on interstate
branching were lifted in the mid-1990s and bank merger
applications surged. Banks responded by ramping up their
CRA programs.
The CRA’s passage in 1977 was not without controversy.
Opponents voiced arguments that aren’t much different
from those of the CRA’s critics today: It would distort markets,
unduly burden financial institutions, and encourage,
if not mandate, unsound lending. The latter argument has
escalated following the subprime mortgage lending boom
and bust. Many economists, both supporters and opponents
of the CRA, argue that it did not play a large role in the
crisis. At the same time, most regulators and community
development practitioners agree that its current form is
somewhat outdated in the modern financial system.
Does the CRA Lead to Unsound Lending?
The role of the banking system is to allocate credit to its
most productive uses. The modern banking system is generally
based on the premise that banks can accomplish this
goal most efficiently if they are able to make loans which are
most profitable to them within the bounds of safety and
soundness regulations. Accordingly, the 1977 CRA language
emphasized that all CRA-related loans should comply with
normal safety and soundness standards. Rather than inducing
banks to extend unduly risky loans, the CRA was
couched as a way to force banks to look harder to identify
profitable lending opportunities in LMI areas that they otherwise
might have avoided. If constrained credit was the
result of discrimination and market frictions — as opposed
to heightened credit risk in LMI areas — then in theory the
CRA could increase LMI lending without sacrificing safety
or profitability.
Most studies have found that the CRA had a net positive
effect on lending to LMI communities, though some mixed
results have stemmed from the difficulty of controlling for
the myriad other factors that affect lending. For instance,
lending to LMI populations has certainly increased faster
than higher income lending, but this could also reflect coincident
factors such as fair lending laws and a stronger
cultural norm against discrimination.
A 2003 study by economists Robert Avery, Paul Calem,
and Glenn Canner of the Federal Reserve Board looked at
census tracts, or geographic areas, just above and just below
the LMI threshold of 80 percent of median family income.
At the 1990 census, tracts just below the threshold had lower
homeownership and higher vacancy rates than households
just above the threshold. By 2000 there was very little difference
between them. The CRA would have focused on
households just below the threshold, so the authors conclude
that at least part of the improvement in LMI
households most likely resulted from the CRA.
It is also likely that the CRA resulted in loosened lending
standards in some cases. Critics point to at least one significant
change that may have had this effect. The original CRA
framework consisted of 12 criteria that granted banks credit
for attempts to locate LMI lending opportunities. Critics
and advocacy groups argued that banks could skirt the
CRA’s intent by showing they had investigated loan opportunities
without actually making loans. In general,
practitioners also thought CRA procedures were too vague
to be applied consistently. In 1995, CRA regulations were
revised with a focus on measurable lending outcomes, and
part of the current assessment criteria includes the extent to
which banks use “innovative or flexible” lending practices to
extend loans. This specificity made CRA examination and
compliance much less costly, and, as the Avery, Calem and
Canner study shows, LMI lending increased in the same
time period.
But the change came with an unintended side effect,
according to former Fed governor Lawrence Lindsey, who
oversaw CRA regulation during his tenure. Eventually LMI
markets became better served, but the new “soft quotas” did
not change. “In fact, it would be a real CRA black eye for a
bank to reduce the number of loans it was making in a particular
area,” Lindsey wrote in a 2009 manuscript on the
CRA published jointly by the Boston and San Francisco
R e g i o n F o c u s | F o u r t h Q u a r t e r | 2 0 1 0 7
Feds. “[G]iven that the most creditworthy borrowers had
already received loans, a somewhat less creditworthy group
had to take their place. As time went on, lending standards
had to be relaxed to avoid any ‘backsliding’ on an institution’s
CRA obligations.”
But the 1995 changes came more than a decade before
most of the financial crisis seeds were sown. There have
been no substantive changes to CRA regulations since the
mid-1990s to cause a major change in LMI lending trends,
yet the subprime crisis is rooted mainly in mortgages
extended between 2004 and 2007. That implies other
factors caused the more recent boom in subprime lending
and deterioration of lending standards. One probable factor
is that it became increasingly profitable for all types of mortgage
lenders, even those not subject to the CRA, to sell
mortgages on the secondary market during the recent boom.
After good credit risks were met, it appears lenders may
have lowered lending standards in order to continue participating
in this booming and profitable market.
Data, too, suggest institutions covered by the CRA were
not a large enough part of the subprime market to contribute
significantly to the crisis. A 2008 Federal Reserve
Board of Governors study analyzed 2006 data made public
through the Home Mortgage Disclosure Act (HMDA).
During the 2005-2006 peak in subprime lending, half the
volume of higher-priced mortgages, which researchers often
interpret to reflect subprime borrowers, was originated by
nonbank mortgage companies not covered by the CRA.
Only 6 percent of all higher-priced loans in 2006 were made
by CRA-covered institutions or affiliates to LMI borrowers
or neighborhoods in their CRA assessment areas, the
researchers found.
Those loans performed better than loans made by nonbanks,
research suggests. A study of California data during
the boom by San Francisco Fed researchers Elizabeth
Laderman and Carolina Reid found that mortgages extended
in a lender’s CRA assessment area were significantly
less likely to be in foreclosure than those extended by independent
mortgage companies not subject to
the CRA, after controlling for borrower,
loan, and neighborhood characteristics.
Interestingly, the performance of loans
made by CRA lenders relative to non-CRA
lenders — a statistical output called an odds
ratio — is actually better within banks’
assessment areas than outside of them. This
may reflect that loans in CRA assessment
areas face an additional level of scrutiny by
regulators through CRA exams’ on-site
reviews and file checks, the authors suggest.
Slicing the data in a number of ways
suggests that the CRA does not bear large
responsibility for the subprime crisis, even
if it encourages lower lending standards in
some cases. “There are undoubtedly some
legitimate criticisms of the CRA regulations
in this regard, but responsibility for the credit cycle is
much wider and includes the behavior of borrowers and
lenders, regulatory breakdown, and political machinations
of both parties,” Lindsey writes.
Perhaps more important is that the spirit of the CRA is
reflective of America’s long-standing policy stance in favor
of homeownership. Such policies have spanned decades and
political parties (see chart). The government has insured
mortgages through the Federal Housing Administration,
created a vibrant secondary market for mortgages through
Government Sponsored Enterprises (GSEs) Fannie Mae and
Freddie Mac — in the early 1990s committing those
agencies to an affordable housing mandate — and offered a
variety of tax benefits reducing the cost of homeownership.
Most recently, U.S. homeownership took an upward leap
after 1995 when President Clinton adopted the National
Homeownership Strategy, the first comprehensive national
initiative explicitly designed to push homeownership to
record levels. One of the Strategy’s many features was an
explicit commitment to reducing lending standards for
borrowers who would otherwise not qualify for mortgages.
Homeownership went from around 64 percent, where it
had more or less hovered for decades, to a peak of about
69 percent in 2004 and 2005.
As Lindsey notes, many factors affect homeownership
rather than any one initiative. However, taken together
these policies may have conveyed ongoing government support
of the housing market and reduced the propensity of
lenders, markets, and regulators to question loosened lending
standards and investment in housing. As a result of the
recent fallout, many policymakers, though certainly not all,
now say that the “American Dream” of homeownership is not
the right choice for everyone despite its benefits to many.
Re-asking the Question
There are better-founded criticisms of the CRA than its role
in the subprime lending crisis. It has become clear that
the CRA in its current form has not kept up with the fast-
8 R e g i o n F o c u s | F o u r t h Q u a r t e r | 2 0 1 0
U.S. Homeownership and Housing Policy
Many policies historically have explicitly or implicitly supported homeownership.
U.S. HOMEOWNERSHIP RATE
SOURCE: U.S. Census Bureau
40
45
50
55
60
65
70
1900 1910 1920 1930 1940 1950 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Creation of Federal Housing Administration
Creation of Fannie Mae
Creation of Freddie Mac
Passage of Community Reinvestment Act
Changes to mortgage interest tax deduction
Passage of affordable housing mandate of GSEs
Announcement of National Homeownership Strategy/
Creation of “soft quotas’’ under CRA
Homeownership data from Decennial Census
(decade frequency)
Homeownership data from Current Population Survey
(annual frequency, starting in 1965)
changing financial system. Many argue that the CRA’s
geographic focus is misplaced in an increasingly boundaryless
electronic banking system. The share of consumer loans
outstanding, for example, that are held by CRA-regulated
commercial banks has declined by 40 percent in the last
three decades (until the financial crisis, when it recovered
some), so the CRA misses a lot of the action. And should
lending continue to receive the majority of the weight on
CRA exams? The subprime crisis proved that more lending
is not always better. Other financial services such as tailored
savings vehicles and consumer education could be a better
way to support LMI communities.
As academics and regulators consider how to reposition
the CRA to fit today’s financial landscape, many are also asking
again what problem the CRA is intended to solve. Is it
meant to correct market frictions? To supplement antidiscrimination
laws by altering banks’ incentives? To help solve
a social problem? The answers to these questions matter for
whether and how CRA regulations are updated, broadened,
or eliminated.
There is little doubt that the market frictions that appear
to have constrained LMI lending are lower today than even
15 years ago. That may partially be a testament to the CRA
itself. Banks have become much more skilled at mining profitable
lending opportunities in LMI areas. Technological
progress and credit-scoring innovations have made it cheaper
for banks to assess risks and tailor safe lending products to
borrowers who may otherwise be perceived as too risky to
consider. Many experts believe the CRA initially helped
push banks into lending areas they may have otherwise
ignored, eroding some of the information barriers that previously
existed. More recently, banks have formed creative
partnerships with community organizations in order to
identify profitable development and lending opportunities.
These inroads have helped dispel the notion that LMI
lending cannot be profitable. A 2000 Board of Governors
study commissioned by Congress surveyed large banks about
their CRA activity. The 143 responding banks — representing
about half the assets of the banking industry at the time
— reported that 77 percent of CRA-related mortgages were
at least marginally profitable, compared to 94 percent of the
portfolio as a whole (including CRA-related mortgages).
To the extent that market barriers are lower today, the
CRA in effect acts as a tool for redistribution. Banks pay an
implicit tax for that redistribution equal to the considerable
compliance costs and any foregone profits from induced
lending. Historically, this has been justified, at least for CRA
supporters, as a quid pro quo in exchange for government and
ultimately taxpayer support of the banking system. (This
argument also is one reason why nonbank lenders are
currently excluded from the CRA.) The stability that government
support buys for the financial system is intended as
a public good, but banks undoubtedly benefit. Economists
asked whether banks adequately pay for this benefit in the
late 1990s when lawmakers were considering the repeal of
the Glass-Steagall Act, says economist Lawrence J. White
of New York University’s Stern School of Business.
Government support amounts to a subsidy, argued one side,
while the other pointed out the considerable regulatory
burden associated with being a bank.
“Banks are subject to extensive regulation at least partly
because they are special, because they have deposit insurance,
because they have access to the Fed,” White says. “Do banks
benefit from being generally the only provider of financial
services who get to offer this insurance to their customers?
Yes, of course. But there are lots of other costs that are
involved in being a depository institution that sop up much,
if not all, of the gain,” he says.
Even if banks still aren’t judged to be adequately repaying
taxpayers for that service, White says, why not make the
tax explicit and therefore more efficient? “If that’s the
desire, levy a tax that would go into a CRA fund. Let’s be
clear and transparent, rather than levy the tax through this
vague, opaque process” — that is, latent redistribution
through the CRA.
One positive outcome of the subprime crisis is that the
discussions casting undue blame on the CRA seem also to
have led policymakers to revisit the law and its possible
flaws, bringing immediacy to the resolution of these
important issues. RF
R e g i o n F o c u s | F o u r t h Q u a r t e r | 2 0 1 0 9
Avery, Robert, Raphael Bostic, and Glenn Canner.
“CRA Special Lending Programs,” Federal Reserve Bulletin,
November 2000, vol. 86, pp. 711-731.
Avery, Robert, Paul Calem, and Glenn Canner. “The Effects of
the Community Reinvestment Act on Local Communities,”
paper presented at “Sustainable Community Development:
What Works, What Doesn’t and Why,” conference sponsored
by the Board of Governors of the Federal Reserve System,
March 27-28, 2003.
Chakrabarti, Pabral, David Erickson, Ren S. Essene, et al. eds.
Revisiting the CRA: Perspectives on the Future of the Community
Reinvestment Act, Federal Reserve Banks of Boston and
San Francisco, February 2009.
Laderman, Elizabeth, and Carolina Reid. “Lending in Low- and
Moderate-Income Neighborhoods in California: The
Performance of CRA Lending During the Subprime
Meltdown.” Federal Reserve Bank of San Francisco
Community Development Working Paper No. 2008-05,
November 2008.
Lindsey, Lawrence B. “The CRA as a Means to Provide Public
Goods.” In Revisiting the CRA: Perspectives on the Future of the
Community Reinvestment Act, pp. 160-166.
RE A D I N G S

Somehow people have to come to understand management of a medium of exchange. Exchange media is just a substitute for “promises to complete trades”. It acts in a intermediary way to facilitate complex trades. “promises” are created out of thin air so why shouldn’t it be acceptable to create the substitute for the promise out of thin air. It’s all about discipline and understanding the relation governing all mediums of exchange:

DEFAULT = INTEREST + INFLATION

Just as when someone breaks a promise (DEFAULTS), or when someone fails to repay a loan (DEFAULTS), someone needs to pay. Logically the penalty should go to the DEFAULTer … and it does in the form of INTEREST collections made against his class of risk. The object and responsibility of the exchange medium manager is to back all promises (i.e. issue exchange media) and maintain the integrity of that media (i.e. collect INTEREST equal to DEFAULT experience such that INFLATION is maintained at zero). In this way, all media issued is ultimately recovered. In this way, media is always in free supply and equal to traders’ desire to make trades … and complete them without DEFAULT. And be aware, the worst offenders are governments. They don’t complete their trades (i.e. they don’t collect taxes equal to their expenditures and they don’t pay INTEREST equal to their DEFAULTS).

The use of a commodity to back the trades is fraught with difficulty. In the case of gold, the main difficulty is there isn’t enough of the stuff … just 1oz per world trader (i.e. backing for just $1,200 in trades per trader). Further, there is no way to keep the supply of the commodity in sync with the traders’ desire to make trades.

http://www.globalresearch.ca/index.php?context=va&aid=10489

The Federal Reserve (or Fed) has assumed sweeping new powers in the last year. In an unprecedented move in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar. The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations.1 In September 2008, the Federal Reserve did something even more unprecedented, when it bought the world’s largest insurance company. The Fed announced on September 16 that it was giving an $85 billion loan to American International Group (AIG) for a nearly 80% stake in the mega-insurer. The Associated Press called it a “government takeover,” but this was no ordinary nationalization. Unlike the U.S. Treasury, which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported:

“The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.”2

This is extraordinary. Why is the Treasury issuing U.S. government bonds (or debt) to fund the Fed, which is itself supposedly “the lender of last resort” created to fund the banks and the federal government? Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Normally, the Fed swaps green pieces of paper called Federal Reserve Notes for pink pieces of paper called U.S. bonds (the federal government’s I.O.U.s), in order to provide Congress with the dollars it cannot raise through taxes. Now, it seems, the government is issuing bonds, not for its own use, but for the use of the Fed! Perhaps the plan is to swap them with the banks’ dodgy derivatives collateral directly, without actually putting them up for sale to outside buyers. According to Wikipedia (which translates Fedspeak into somewhat clearer terms than the Fed’s own website):

“The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. . . . The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable.”

“To switch debt that is less liquid for U.S. government securities that are easily tradable” means that the government gets the banks’ toxic derivative debt, and the banks get the government’s triple-A securities. Unlike the risky derivative debt, federal securities are considered “risk-free” for purposes of determining capital requirements, allowing the banks to improve their capital position so they can make new loans. (See E. Brown, “Bailout Bedlam,” webofdebt.com/articles, October 2, 2008.)

In its latest power play, on October 3, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. Reuters reported on October 3:

“The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets. Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank.”3

If the Fed’s money comes ultimately from the taxpayers, that means we the taxpayers are paying interest to the banks on the banks’ own reserves – reserves maintained for their own private profit. These increasingly controversial encroachments on the public purse warrant a closer look at the central banking scheme itself. Who owns the Federal Reserve, who actually controls it, where does it get its money, and whose interests is it serving?

Not Private and Not for Profit?

The Fed’s website insists that it is not a private corporation, is not operated for profit, and is not funded by Congress. But is that true? The Federal Reserve was set up in 1913 as a “lender of last resort” to backstop bank runs, following a particularly bad bank panic in 1907. The Fed’s mandate was then and continues to be to keep the private banking system intact; and that means keeping intact the system’s most valuable asset, a monopoly on creating the national money supply. Except for coins, every dollar in circulation is now created privately as a debt to the Federal Reserve or the banking system it heads.4 The Fed’s website attempts to gloss over its role as chief defender and protector of this private banking club, but let’s take a closer look. The website states:

* “The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations – possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”

* “[The Federal Reserve] is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”

* “The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. . . . After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.”5

So let’s review:

1. The Fed is privately owned.

Its shareholders are private banks. In fact, 100% of its shareholders are private banks. None of its stock is owned by the government.

2. The fact that the Fed does not get “appropriations” from Congress basically means that it gets its money from Congress without congressional approval, by engaging in “open market operations.”

Here is how it works: When the government is short of funds, the Treasury issues bonds and delivers them to bond dealers, which auction them off. When the Fed wants to “expand the money supply” (create money), it steps in and buys bonds from these dealers with newly-issued dollars acquired by the Fed for the cost of writing them into an account on a computer screen. These maneuvers are called “open market operations” because the Fed buys the bonds on the “open market” from the bond dealers. The bonds then become the “reserves” that the banking establishment uses to back its loans. In another bit of sleight of hand known as “fractional reserve” lending, the same reserves are lent many times over, further expanding the money supply, generating interest for the banks with each loan. It was this money-creating process that prompted Wright Patman, Chairman of the House Banking and Currency Committee in the 1960s, to call the Federal Reserve “a total money-making machine.” He wrote:

“When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check.”

3. The Fed generates profits for its shareholders.

The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered “for profit” corporations.

In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their “reserves.” The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in “reserve” can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total “loans and leases in bank credit” as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.

The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ — for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.

Time to Change the Statute?

According to the Fed’s website, the control Congress has over the Federal Reserve is limited to this:

“[T]he Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.”

As we know from watching the business news, “oversight” basically means that Congress gets to see the results when it’s over. The Fed periodically reports to Congress, but the Fed doesn’t ask; it tells. The only real leverage Congress has over the Fed is that it “can alter its responsibilities by statute.” It is time for Congress to exercise that leverage and make the Federal Reserve a truly federal agency, acting by and for the people through their elected representatives. If the Fed can demand AIG’s stock in return for an $85 billion loan to the mega-insurer, we can demand the Fed’s stock in return for the trillion-or-so dollars we’ll be advancing to bail out the private banking system from its follies.

If the Fed were actually a federal agency, the government could issue U.S. legal tender directly, avoiding an unnecessary interest-bearing debt to private middlemen who create the money out of thin air themselves. Among other benefits to the taxpayers. a truly “federal” Federal Reserve could lend the full faith and credit of the United States to state and local governments interest-free, cutting the cost of infrastructure in half, restoring the thriving local economies of earlier decades.

Economy

Consciousness

http://www.davidchess.com/words/poc/input.html
The Problems of Consciousness
How are we conscious of the physical world?

We are quite good at explaining macroscopic events in the external world. We can explain some events by reference to other events, and to laws that describe regular causal relations between events. Why did the vase fall off the table? Because the kids were running around, and the floor was shaking, and the vase was close to the edge, and we know things about gravity, and friction, and the transmission of forces, that can explain the vase falling in terms of the kids running around. We know these facts and these laws as the result of generations of study of the multifarous events that happen in the world.

There seems, also, to be a correlation between events in the external world and changes in the content of my subjective experience. Bright light falling on my open eyes causes an experience like this. When honey passes over my tongue, it causes an experience like this. But, unlike the case of causation in the external world, I have no general laws, no chains of explanation, that tell me how those external events cause these subjective feelings.

In the case of gravity, though, I can imagine what an explanatory theory might be like, what sort of components it might have, how it might be testable, and so on. The same is not true of theories of consciousness; I cannot imagine what a theory would look like that adequately explained how causation crosses the barrier (so to speak) between the external world and inner experience.

http://www.huffingtonpost.com/richard-restak/empathic-civilization-our_b_460845.html
In our culture we’re taught to think of ourselves as independent and self-actualizing. In reality, our brain is uniquely constructed for experiencing other people’s thoughts, emotions and actions as if they were our own.

When we watch another person move, our observations of their movement activates in our own brain the same areas that are involved when we make that movement. This innate tendency for imitation was first observed in macaque monkeys where “mirror neurons” in the monkey’s prefrontal cortex respond both when the monkey grasps a peanut and when it watches another monkey grasp it. Mirror neurons are also active in our brains.

If you observe my hand reaching for a cup of tea the motor cortex in your brain will become slightly active in the same areas you would use if you reached for the cup of tea yourself. Further, if you observe my lips as I savor the tea, the area of your brain corresponding to lip movements will fire as well. Of course that doesn’t mean you can taste my tea but it does mean that I am directly affecting your brain as you watch me drinking it. And the process is reciprocal. If you pour yourself a cup of tea, a similar pattern occurs in my brain. In both situations the artificial distinction between you and me breaks down; we form a unit influencing each other’s actions: I alter your brain as a result of your observations of me, and vice versa.

A similar process takes place in regard to emotions. We relate to other people’s emotions by unconsciously simulating in our own brain the same activity that takes place when we experience those same emotions.

Edgar Allan Poe described this empathic process long before neuroscience established it. In “The Purloined Letter” Poe writes of a method for intuiting the thoughts of another:

I fashion the expression of my face, as accurately as possible, in accordance with the expression of his, and then wait to see what thoughts or sentiments arise in my mind or heart, as if to match or correspond with the expression.

Unfortunately the brain’s empathic powers aren’t evenly distributed. While some of us are highly empathic and experience empathy for everyone we encounter, others restrict their empathy to the people they can identify with. They have little empathy towards the stranger or the foreigner, the practitioners of other faiths, the holders of different political persuasions or sexual orientations. Fortunately such empathic limitations can be overcome by the steady application of ones own effort.

Brain imaging studies of meditation practitioners show an increase in activity during meditation in those areas associated with positive emotions. For those not attracted to meditation, one can increase one’s empathic powers by recognizing that, in general, the emotions that we bring to an encounter with another person will be the same emotions that that person will reflect back to us. A similar rule holds in our inner world. If we try to think in a compassionate manner about the other person–no matter how difficult that may be– we then become capable of empathizing with him or her. Via such freely chosen acts of empathy we become at once homo sapiens and homo empathicus.

Developing and maintaining our empathic powers is a lifetime task with a simple goal: experiencing what is happening to another person as if we were experiencing it ourselves. But learning to do this isn’t easy especially in our current society where we are encouraged to look upon others as competitors for increasingly scarce resources, or even as enemies we have reason to hate.

Our challenge is to enhance, fine-tune, and act upon our capacity for empathy. It’s especially important to include people with whom we seem to share more differences than commonalities. I’m referring here to the level of empathy spoken about by religious leaders and prophets throughout history (“Do unto others as you would have them do unto you.”) If we can live up to this challenge of extending our empathy beyond our immediate circumstances and self-interest we have a chance of achieving the so far elusive goal of creating an “Empathic Civilization”.