Friday, October 31, 2008

Somalia’s Pirates Flourish in a Lawless Nation

By JEFFREY GETTLEMAN

BOOSAASO, Somalia — This may be one of the most dangerous towns in Somalia, a place where you can get kidnapped faster than you can wipe the sweat off your brow. But it is also one of the most prosperous.

Money changers walk around with thick wads of hundred-dollar bills. Palatial new houses are rising up next to tin-roofed shanties. Men in jail reminisce, with a twinkle in their eyes, about their days living like kings.

This is the story of Somalia’s booming, not-so-underground pirate economy. The country is in chaos, countless children are starving and people are killing one another in the streets of Mogadishu, the capital, for a handful of grain.

But one particular line of work — piracy — seems to be benefiting quite openly from all this lawlessness and desperation. This year, Somali officials say, pirate profits are on track to reach a record $50 million, all of it tax free.

“These guys are making a killing,” said Mohamud Muse Hirsi, the top Somali official in Boosaaso, who himself is widely suspected of working with the pirates, though he vigorously denies it.

More than 75 vessels have been attacked this year, far more than any other year in recent memory. About a dozen have been set upon in the past month alone, including a Ukrainian freighter packed with tanks, antiaircraft guns and other heavy weaponry, which was brazenly seized in September.

The pirates use fast-moving skiffs to pull alongside their prey and scamper on board with ladders or sometimes even rusty grappling hooks. Once on deck, they hold the crew at gunpoint until a ransom is paid, usually $1 million to $2 million. Negotiations for the Ukrainian freighter are still going on, and it is likely that because of all the publicity, the price for the ship could top $5 million.

In Somalia, it seems, crime does pay. Actually, it is one of the few industries that does.

“All you need is three guys and a little boat, and the next day you’re millionaires,” said Abdullahi Omar Qawden, a former captain in Somalia’s long-defunct navy.

People in Garoowe, a town south of Boosaaso, describe a certain high-rolling pirate swagger. Flush with cash, the pirates drive the biggest cars, run many of the town’s businesses — like hotels — and throw the best parties, residents say. Fatuma Abdul Kadir said she went to a pirate wedding in July that lasted two days, with nonstop dancing and goat meat, and a band flown in from neighboring Djibouti.

“It was wonderful,” said Ms. Fatuma, 21. “I’m now dating a pirate.”

This is too much for many Somali men to resist, and criminals from all across this bullet-pocked land are now flocking to Boosaaso and other notorious pirate dens along the craggy Somali shore. They have turned these waters into the most dangerous shipping lanes in the world.

With the situation clearly out of control, warships from the United States, Russia, NATO, the European Union and India are steaming into Somalia’s waters as part of a reinvigorated, worldwide effort to crush the pirates.

But it will not be easy. The pirates are sea savvy. They are fearless. They are rich and getting richer, with the latest high-tech gadgetry like handheld GPS units. And they are united. The immutable clan lines that have pitted Somalis against one another for decades are not a problem here. Several captured pirates interviewed in Boosaaso’s main jail said that they had recently crossed clan lines to open new, lucrative, multiclan franchises.

“We work together,” said Jama Abdullahi, a jailed pirate. “Good for business, you know?”

The pirates are also sprinkled across thousands of square miles of water, from the Gulf of Aden, at the narrow doorway to the Red Sea, to the Kenyan border along the Indian Ocean. Even if the naval ships manage to catch pirates in the act, it is not clear what they can do. In September, a Danish warship captured 10 men suspected of being pirates cruising around the Gulf of Aden with rocket-propelled grenades and a long ladder. But after holding the suspects for nearly a week, the Danes concluded that they did not have jurisdiction to prosecute, so they dumped the pirates on a beach, minus their guns.

Nobody, it seems, has a clear plan for how to tame Somalia’s unruly seas. Several fishermen along the Gulf of Aden talked about seeing barrels of toxic waste bobbing in the middle of the ocean. They spoke of clouds of dead fish floating nearby and rogue fishing trawlers sucking up not just fish and lobsters but also the coral and the plants that sustain them. It was abuses like these, several men said, that turned them from fishermen into pirates.

Nor is it even clear whether Somali authorities universally want the piracy to stop. While many pirates have been arrested, several fishermen, Western researchers and more than a half-dozen pirates in jail spoke of nefarious relationships among fishing companies, private security contractors and Somali government officials, especially those working for the semiautonomous regional government of Puntland.

“Believe me, a lot of our money has gone straight into the government’s pockets,” said Farah Ismail Eid, a pirate who was captured in nearby Berbera and sentenced to 15 years in jail. His pirate team, he said, typically divided up the loot this way: 20 percent for their bosses, 20 percent for future missions (to cover essentials like guns, fuel and cigarettes), 30 percent for the gunmen on the ship and 30 percent for government officials.

Abdi Waheed Johar, the director general of the fisheries and ports ministry of Puntland, openly acknowledged in an interview this spring that “there are government people working with the pirates.”

But, he was quick to add, “It’s just not us.”

What is happening off Somalia’s shores is basically an extension of the corrupt, violent free-for-all that has raged on land for 17 years since the central government imploded in 1991. The vast majority of Somalis lose out. Young thugs who are willing to serve as muscle get a job, albeit a low-paying one, that significantly reduces their life expectancy. And a select few warlords, who have sat down and figured out how to profit off the anarchy, make a fortune.

Take Boosaaso, once a thriving port town on the Gulf of Aden. Piracy is killing off the remains of the local fishing industry because export companies are staying away. It has spawned a kidnapping business on shore, which in turn has scared away many humanitarian agencies and the food, medicine and other forms of desperately needed assistance they bring. Reporting in Boosaaso two weeks ago required no fewer than 10 hired gunmen provided by the Puntland government to discourage any would-be kidnappers.

Few large cargo ships come here anymore, depriving legitimate government operations of much-needed port taxes. Just about the only ships willing to risk the voyage are small, wooden, putt-putt freighters from India, essentially floating jalopies from another era.

“We can’t survive off this,” said Bile Qabowsade, a Puntland official.

The shipping problems have contributed to food shortages, skyrocketing inflation and less work for the sinewy stevedores who trudge out to Boosaaso’s beach every morning and stare in vain at the bright horizon, their bare feet planted in the hot sand, hoping a ship will materialize so they will be able to make a few pennies hauling 100-pound sacks of sugar on their backs.

And yet, suspiciously, there has been a lot of new construction in Boosaaso. There is an emerging section of town called New Boosaaso with huge homes rising above the bubble-shaped huts of refugees and the iron-sided shacks that many fishermen call home. These new houses cost several hundred thousand dollars. Many are painted in garish colors and protected by high walls.

Even so, Boosaaso is still a crumbling, broke, rough-and-tumble place, decaying after years of neglect like so much of war-ravaged Somalia. It is also dangerous in countless ways. On Wednesday, suicide bombers blew up two government offices, most likely the work of Islamist radicals trying to turn Somalia into an Islamist state.

Of course, no Somali government official would openly admit that New Boosaaso’s minicastles were built with pirate proceeds. But many people, including United Nations officials and Western diplomats, suspect that is the case.

Several jailed pirates have accused Mr. Muse, a former warlord who is now Puntland’s president, of being paid off. Officials in neighboring Somaliland, a breakaway region of northwestern Somalia, said they recently organized an antipiracy sting operation and arrested Mr. Muse’s nephew, who was carrying $22,000 in cash.

“Top Puntland officials benefit from piracy, even if they might not be instigating it,” said Roger Middleton, a researcher at the Royal Institute of International Affairs in London. Actually, he added, “all significant political actors in Somalia are likely benefiting from piracy.”

But Mr. Muse said he did not know anything about this. “We are the leaders of this country,” he said. “Everybody we suspect, we fire from work.”

He said that Puntland was taking aggressive action against the pirates. And Boosaaso’s main jail may be proof of that. The other day, a dozen pirates were hanging out in the yard under a basketball hoop. And that was just the beginning.

“Pirates, pirates, pirates,” said Gure Ahmed, a Canadian-Somali inmate of the jail, charged with murder. “This jail is full of pirates. This whole city is pirates.”

In other well-known pirate dens, like Garoowe, Eyl, Hobyo and Xarardheere, pirates have become local celebrities.

Said Farah, 32, a shopkeeper in Garoowe, said the pirates seemed to have money to burn.

“If they see a good car that a guy is driving,” he said, “they say, ‘How much? If it’s 30 grand, take 40 and give me the key.’ ”

Every time a seized ship tosses its anchor, it means a pirate shopping spree. Sheep, goats, water, fuel, rice, spaghetti, milk and cigarettes — the pirates buy all of this, in large quantities, from small towns up and down the Somali coast. Somalia’s seafaring thieves are not like the Barbary pirates, who terrorized European coastal towns hundreds of years ago and often turned their hostages into galley slaves chained to the oars. Somali pirates are known as relatively decent hosts, usually not beating their hostages and keeping them well-fed until payday comes.

“They are normal people,” said Mr. Said. “Just very, very rich.”

Mohammed Ibrahim contributed reporting from Mogadishu, Somalia.


WITNESS: Berliners' love affair with America grows cold

Erik Kirschbaum, a U.S. citizen, has lived in German-speaking Europe for most of the past 26 years, and for 16 of them has worked as a Reuters correspondent in Germany. In the following story, he reports on the changing attitudes of Berliners towards his home country.

By Erik Kirschbaum

BERLIN (Reuters) - There may be no better place in the world to witness the shift in sentiment toward the United States than Berlin.

It was hard to imagine a more pro-American city when I first moved here in 1993, yet the wind has changed and the love affair is over.

The infatuation with all things American has all but disappeared.

Perhaps it will change after the November 4 U.S. presidential election -- even though things will never be the same no matter who wins.

As in other countries, America's image has suffered. A June PEW survey found 31 percent of Germans had a favorable view of the United States, down from 78 percent in 2000.

Being an American in Berlin was once special. Not any more.

A city saved and protected by the Americans during the Cold War, Berlin was an island of overwhelming admiration for America, its presidents and above all the American way of life -- at least its altruistic, kind-hearted, justice-seeking side.

Avenues were named after U.S. generals, schools after U.S. leaders and squares named after U.S. cities. American disc jockeys speaking mangled German were radio stars.

The U.S. ambassador's Fourth of July gathering was once the most coveted ticket on the garden party calendar. Not any more.

Berlin mayors spoke American-accented English and everyone from children to the elderly had a twinkle in their eye when recalling the 1940s Berlin airlift, Checkpoint Charlie tank standoffs or John F. Kennedy's 1963 speech in the city proclaiming "Ich bin ein Berliner" ("I am a Berliner").

THUNDEROUS SEND-OFF

Probably the most moving assignment of my 18 years as a correspondent abroad was in 1994, when a district that hosted 6,000 U.S. soldiers who protected them from 90,000 Soviet forces stationed outside the Berlin Wall held a parade for the departing GIs.

Steglitz is a low-rise district with a small-town feel, and I had expected perhaps a few thousand to interrupt their Saturday shopping for a quick wave goodbye -- or good riddance.

Instead, more than 250,000 packed the streets on that sunny summer morning. As the soldiers marched, the Berliners cheered, and cheered, and cheered. They threw tons of confetti from windows and gave their departing heroes a thunderous send-off.  Continued...

Thursday, October 30, 2008

Paulson's Swindle Revealed

By William Greider

October 30, 2008 "The Nation" -- The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders?

Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities--preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did and his warrants have more favorable terms," Gerard pointed out.

"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal--50 percent invested and 50 percent as a gift--is quite consistent with the Republican version of spread-the-wealth-around philosophy."

The Steelworkers' close analysis was done by Ron W. Bloom, director of the union's corporate research and a Wall Street veteran himself who worked at Larzard Freres, the investment house. Bloom applied standard valuation techniques to establish the market price Buffett paid per share compared to Treasury's price. "The analysis is based on the assumption that Warren Buffett is an intelligent third party investor who paid no more for his investment than he had to," Bloom's report explained. "It also assumes that Gold Sachs' job is to protect its existing shareholders so that it extracted from Mr. Buffett the most that it could.... Further, it is assumed that Henry Paulson is likewise an intelligent man and that if he paid any more than Mr. Buffett--if he paid $1 for something for which Mr. Buffett would have paid 50 cents--that the difference is a gift from the taxpayers of the United States to the shareholders of Goldman Sachs."

The implications are staggering. Leo Gerard told Paulson: "If the result of our analysis is applied to the deals that you made at the other eight institutions--which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return--you paid a$125 billion for securities for which a disinterested party would have paid $62.5 billion. That means you gifted the other $62.5 billion to the shareholders of these nine institutions."

If the same rule of thumb is applied to Paulson's grand $700 billion bailout fund, Gerard said this will constitute a gift of $350 billion from the American taxpayers "to reward the institutions that have driven our nation and it now appears the whole world into its most serious economic crisis in 75 years."

Is anyone angry? Will anyone look into these very serious accusations? Congress is off campaigning. The financiers at Treasury probably assume any public outrage will be lost in the election returns. I hope they are mistaken.

About William Greider
National affairs correspondent William Greider has been a political journalist for more than thirty-five years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and--due out in February from Rodale--Come Home, America. 

Europe in deep trouble having made bad loans to many countries

It all started with sub-prime loans in the United States. Or did it? As the IMF is called in to bail out failing economies, the scale of European exposure to toxic debt is becoming clear

It was Europe’s dark secret. While American banks were lending irresponsibly to homeowners who couldn’t pay, European banks were lending to emerging countries who couldn’t pay. Europe’s sub-prime crisis has now come home as heavily-indebted nations of the eastern bloc – Hungary, Ukraine, Belarus, Bulgaria, the Baltic states – are collapsing one by one into the arms of the IMF. “Icelandisation” is the new spectre stalking Europe.

And, as with sub-prime in urban America, this latest crisis was shockingly predictable. I visited Latvia at the height of the credit bubble 18 months ago, and it was clearly an accident waiting to happen. Riga, the capital, was bristling with upmarket shopping malls and classy bars that were all quite empty. Stalin-era flats were being sold for $200,000 in a country where the average wage was less than $400 a month. Latvia has hardly any industry, no energy and few natural resources apart from trees. But such was the irrational exuberance of foreign banks like Swedbank, it was awash with credit.

According to the Bank for International Settlements, western European banks have lent more than $1.5trn to eastern Europe. Austria has loans equivalent to 80 per cent of GDP and stands to make huge losses as Hungary and Ukraine collapse.

This week, the Austrian government had to cancel an auction of government bonds because it could not be sure that investors would buy them. It is not inconceivable that Austria itself could end up needing to be rescued.

Other European countries implicated in global sub-prime include Spain, which has loaned immense sums ($316bn) to Latin American countries such as Argentina. Britain has $329bn tied up in Asia - or did until values collapsed in the Asian stock market rout. Japan's Nikkei index fell to a 26-year low this week, wiping out tens of billions of yen. The losses are now winging their way home to British pension funds and banks such as the Royal Bank of Scotland and HSBC.

Banks behaving badly, then, but what's new there? Well, the Bank of England told us this week that global losses so far from the financial crisis amount to $2.8trn. But this includes only a fraction of the likely losses from global sub- prime, which have yet to land on balance sheets.

Until last week's rout in the Asian bourses, there were still economists who believed that emerging markets would not be greatly affected by the credit crunch. But the theory that developing countries, led by China and India, have "decoupled" from the west, no longer holds water. It is clear that they have been dependent on consumer spending in America and Europe all along - and now that western consumers are staying away from the shops, no one is buying their goods. The Baltic Dry Shipping Index, which tracks the cost of hiring ships for international trade, has fallen by 79 per cent this year, itself a signal of a severe global recession.

Gordon Brown's hints that Britain might be able to spend its way out of this recession has to be considered in this light. There is no guarantee, in such a climate, that the British government would be able to borrow sufficient to pay for further bank rescues (they are sure to come), along with the cost of three million unemployed plus a programme of Keynesian infrastructure spending, however desirable that may be.

Investors are already shunning the pound because of anticipated losses from the UK property crash. Sterling has fallen 28 per cent this year, further than in the Exchange Rate Mechanism crisis of 1992, when interest rates rose to 15 per cent. We could be heading for a classic 1960s run on the pound.

The government had hoped that a devalued pound would stimulate exports and pull Britain out of recession, as happened after Black Wednesday 16 years ago, but the economic climate is different. We make few things to export now and the world is not in a buying mood anyway. And it has had quite enough of our "innovative" financial services. Thus Britain's current account deficit of 6 per cent - what used to be called loosely the balance of payments - has suddenly re-emerged as a major economic issue. Borrowing may be a good thing in a recession, but international financiers, sovereign wealth funds, hedge funds and banks may not agree.

The UK has the honour of having been the last G7 country to call in the IMF - during the 1976 sterling crisis - and while the government is not yet filling in the application forms, Britain's finances would not impress the Fund's economists. Standard IMF lending conditions are: privatisation, cuts in government spending and increased interest rates.

We are going in precisely the opposite direction, slashing interest rates, borrowing to spend and nationalising the banks.

Seen another way, this is only an indication of the extent to which the IMF is no longer fit for purpose in the Great Deleveraging. In recent years, the Fund has been an engine of Wall Street neoliberalism and financial deregulation, which leaves it ill-equipped to deal with the new international environment of deflation and banking crashes. In addition, there is a fiscal crisis facing the IMF. It has only about $250bn in reserves to throw at a rolling financial crisis that has now engulfed half the planet, from Iceland to Pakistan. Gordon Brown has called on energy-exporting nations to stump up more cash for the Fund, but there is a strong case, too, for reviewing how the IMF operates. Set up as part of the Bretton Woods financial system in 1944, the Fund was designed to cope with episodic currency crises. It is now having to deal with potential insolvencies in countries the size of Argentina as well as bailing out entire regions such as eastern Europe.

It will have to be very much better capitalised if it is going to perform this role, and it will have to abandon much of its free-market ideology.

We need a new set of interventionist institutions capable of managing financial rescues on an international scale.

Ultimately, what is needed is an international central bank with the resources to provide liquidity guarantees, recapitalise banks and regulate international financial flows. This is an immense task, and the world may not yet be ready for it. But it is not a new idea: John Maynard Keynes argued for precisely this during the Bretton Woods negotiations in 1944. He even suggested a world reserve currency "bancor". This is the kind of thinking we need today.

The alternative, if nothing is done, is international tension, even war. Consider failing Ukraine with its large Russian population and its dependency on Russia for energy supplies, right at the moment when Russian dreams of becoming an energy superpower have been dashed by the collapse of the oil price bubble. Or look at nuclear Pakistan, where the entire country is disintegrating in financial chaos. And what about China? Will all those unemployed workers - where half the toy manufacturers have gone bust - go peacefully back to the paddy fields?

When heads of the "G20" group of nations meet in Washington on 15 November for what is being called "Bretton Woods II" they will not just be dealing with a banking crisis. They will be deciding the future of civilisation.


AIG used billions from Fed but hasn't said for what

International Herald Tribune
By Mary Williams Walsh
Thursday, October 30, 2008

The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

"You don't just suddenly lose $120 billion overnight," said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Arizona.

Vickrey says he believes AIG must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

But losses on that scale do not show up in the company's financial filings. Instead, AIG replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.

Vickery and other analysts are examining the company's disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.

Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company's outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.

These accounting questions are of interest not only because U.S. taxpayers are footing the bill at AIG but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

Edward Liddy, the insurance executive brought in by the government to restructure AIG, has already said that although he does not want to seek more money from the Fed, he may have to do so.

Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.

"When investors don't have full and honest information, they tend to sell everything, both the good and bad assets," said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. "It's really bad for the markets. Things don't heal until you take care of that."

AIG has declined to provide a detailed account of how it has used the Fed's money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

AIG has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by AIG's many derivatives contracts.

No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring AIG together with all its derivatives counterparties and put a moratorium on the collateral calls. "We did that with ACA," she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.

Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.

For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock's price will fall. They typically give AIG cash or cashlike instruments in return. Then, while AIG waits for the borrowers to bring back the securities, it invests the money.

In the last few months, borrowers came back for their money, and AIG did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.

A spokesman for the insurer, Nicholas Ashooh, said AIG did not anticipate having to use the entire $38 billion facility. At midyear, AIG had a shortfall of $15.6 billion in that program, which it says has grown to $18 billion. Another spokesman, Joe Norton, said the company was getting out of this business. Of the government's original $85 billion line of credit, the company has drawn down about $72 billion. It must pay 8.5 percent interest on those funds.

An estimated $13 billion of the money was needed to make good on investment accounts that AIG typically offered to municipalities, called guaranteed investment contracts, or GIC's.

When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.

After the insurer's credit rating was downgraded in September, its GIC customers had the right to pull out their proceeds immediately. Regulators say that AIG had to come up with $13 billion, more than half of its total GIC business. Rather than liquidate some investments at losses, it used that much of the Fed loan.

For $59 billion of the $72 billion AIG has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.

The biggest portion of the Fed loan is apparently being used as collateral for AIG's derivatives contracts, including credit-default swaps.

The swap contracts are of great interest because they are at the heart of the insurer's near collapse and even AIG does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. AIG wrote this insurance on hundreds of billions of dollars' worth of debt, much of it linked to mortgages.

Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio "is well structured" and is subjected to "monitoring, modeling and analysis," Martin Sullivan, AIG's chief executive at the time, told securities analysts in the summer of 2007.

By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how AIG was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.

But AIG executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.

AIG had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company's accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company's financial products division, according to a letter read by Waxman at the recent congressional hearing.

When the expert tried to revise AIG's method for measuring its swaps, he said that Cassano told him, "I have deliberately excluded you from the valuation because I was concerned that you would pollute the process."

Cassano did not attend the hearing and was unavailable for comment. The company's independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. It briefed Sullivan late in November, warning that it had found a "material weakness" because the unit that valued the swaps lacked sufficient oversight.

About a week after the auditor's briefing, Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a "best estimate" and concluded that its swaps had lost about $1.6 billion in value by the end of November.

Still, PricewaterhouseCoopers appears to have pressed for more. In February, AIG said in a regulatory filing that it needed to "clarify and expand" its disclosures about its credit-default swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, AIG said. PricewaterhouseCoopers subsequently signed off on the company's accounting while making reference to the material weakness.

Investors shuddered over the revision, driving AIG's stock down 12 percent. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an F. Sullivan, his credibility waning, was forced out months later.

Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

"If these aren't cash losses, why are you having to put up collateral to the counterparties?" Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought AIG's swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More U.S. government assistance would then essentially flow through AIG to counterparties.

"We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss," said Bill Bergman, senior equity analyst at the market research company Morningstar.

Premiums Paid for 100 Ounce Silver Bars

here has been much recent coverage of the rising premiums being paid to purchase physical gold and silver bullion. This has been cited as a consequence of the extreme demand for precious metals and evidence of the growing disconnect between market prices and physical prices.

I decided to look at some data to calculate exactly what kind of premiums are being paid and see if any trend or patterns in the data could be determined.

Specifically, I looked at selling prices for 100 ounce silver bars on eBay (EBAY). I decided to use this as a source of data since 100 ounce silver bars have historically been a low premium method to acquire silver.  Also, bars of silver are relatively undifferentiated. Bullion coins from different countries or with different dates often carry premiums based on those differences.

I used eBay data because it was accessible. Completed auction records can be obtained for the prior two weeks or more. Also, I believe that eBay represents a real time, liquid market of buyers and sellers who discover prices through a bidding process. Quoted dealer prices may be for delivery at a later date and may not represent actual available supplies.

There are some possible flaws with this method. It does not take into account potential premiums for different manufacturers. I don’t know if people pay more for different makes of bars. Also, shipping costs are not included in the price data used. Some auctions may carry higher shipping charges which would impact the final selling prices. And lastly, some auctions were “true auctions” which start at a minimal opening bid while others were fixed price listings.

Data was available from October 13 to yesterday’s date. I did not include data for yesterday or October 13, since it may represent partial data. I determined the average price for each day’s auctions which closed with a sale. I compared this to the closing market price of silver for each day.

Here is a summary of the data:

Average Price for 100 Ounce Silver Bars on eBay Compared to Market Price of Silver


Some charts based on this data appear below. The data is only for a limited time frame, but it does spur some interesting observations (click to enlarge images).

The premium paid for a 100 ounce silver bar has ranged from 39.62% to 56.45%. The premium represents the amount paid in excess of the so-called “market price” of silver. People are clearly paying astounding premiums to acquire physical silver.

On October 15 and 22, the market price of silver dropped. In each instance this caused the percentage premium to rise. This lends some evidence to the anecdotal observation that a decline in market price only spurs greater demand for the physical metal.

Two distinct prices for silver seem to exist. The paper price for the contractual right to acquire future silver, and the physical price to acquire real silver, in hand. How and when will this situation resolve itself?

There have been several recent reports of bullion buyers seeking to take physical delivery of silver and gold from the COMEX. This would allow buyers to purchase real silver at the heretofore “fictional” paper price. If these deliveries take place and become a dependable source of purchasing physical silver, premiums for 100 ounce bars and other physical silver would likely begin to subside.

On the other hand, some are voicing the possibility that since the COMEX only has small coverage of physical metal for outstanding contacts, if enough contact holders demand delivery they will be forced to default and settle in cash. If this occurs, the likely result would be soaring market prices for silver and potentially greater premiums as the argument for physical scarcity gains another leg of support.

New York Attorney General Demands Bonus Pay Data From Citigroup, Wells

By Karen Freifeld

Oct. 29 (Bloomberg) -- New York Attorney General Andrew Cuomo sent letters to JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and six other banks that received taxpayer bailout funds, demanding bonus information for top management.

Cuomo said he wanted a ``detailed accounting'' of expected payments to top executives in the ``upcoming bonus season,'' including information on the expected bonus pool for this year, according to a copy of the letters sent today. He requested information on bonuses from before and after the banks knew they would receive funds from the Troubled Asset Relief Program.

Cuomo told the boards of directors he thought they were in the best position to respond to the requests because top management has a ``significant interest in the size of the bonus pools.'' He said he would have ``grave concerns'' if the expected bonus pool increased in any way as a result of the receipt of taxpayer funds.

``In this new era of corporate responsibility we are entering, boards of directors must step up to the plate and prevent wasteful expenditures of corporate funds on outsized executive bonuses and other unjustified compensation,'' Cuomo wrote in the letter.

The other banks are Goldman Sachs Group Inc., Bank of New York Mellon Corp., Merrill Lynch and Co., Morgan Stanley, State Street Corp. and Bank of America Corp. Representatives of the nine firms declined to comment or couldn't immediately be reached for comment.

More...

Indonesia's Former Central Bank Chief Gets Jail Term

By Aloysius Unditu and Naila Firdausi

Oct. 29 (Bloomberg) -- Indonesia's anti-corruption court sentencedBurhanuddin Abdullah, a former central bank governor, to five years in prison and ordered him to pay a 250 million rupiah ($22,500) fine for his role in the misuse of state funds.

Abdullah, 60, was accused of illegally transferring funds to Indonesian lawmakers, Judge Gusrizal said today in a ruling in Jakarta. Abdullah had denied any wrongdoing and said today that he will appeal the court's decision.

Abdullah is the second successive central bank governor to be convicted of corruption as President Susilo Bambang Yudhoyono tries to weed out graft. Indonesia ranks 126th in Transparency International's latest corruption-perception index.

Four more former central bankers, including Aulia Pohan, a relative of President Yudhoyono, will be questioned as suspects in the same case as Abdullah's, said Antasari Azhar, the chairman of the Komisi Pemberantasan Korupsi, or KPK, as Indonesia's anti-graft agency is known. Pohan, the father-in-law of Yudhoyono's son, didn't respond to a text message sent to his mobile phone through a central bank spokeswoman.

``I am saddened hearing the news,'' Yudhoyono told reporters in Jakarta. ``In my personal capacity, I have to calm my extended family, but as head of the nation, I have repeatedly said that law and justice must be upheld.''

Abdullah, Indonesia's central bank governor from May 2003 until May 2008, was detained by the KPK in April.

``The judges said I was involved in a corruption case, but not a single cent or rupiah has gone into my pocket,'' Abdullah told reporters after the presiding judge announced the ruling.

Abdullah, the top economics minister for a few months in 2001 under former President Abdurrahman Wahid, was also a central bank deputy governor between August 2000 and June 2001. He completed his master's degree in economics at Michigan State University in 1984.

Abdullah's predecessor, Sjahril Sabirin, in 2002 successfully appealed a conviction related to an alleged misuse of state funds, a year before his term ended.

To contact the reporters on this story: Aloysius Unditu in Jakarta ataunditu@bloomberg.netNaila Firdausi in Jakarta atnfirdausi@bloomberg.net.

Gulf Bank head steps down after losses on derivatives

By Robin Wigglesworth in Abu Dhabi
Published: October 29 2008 02:00 | Last updated: October 29 2008 02:00

The crisis in Kuwait's banking sector deepened yesterday when the chairman of Gulf Bank resigned over derivatives losses and Fitch Ratings downgraded the bank, the country's second biggest lender.

Kutayba Al Ghanim replaced his brother, Bassam Al Ghanim, as chairman of Gulf Bank after depositors started to withdraw deposits from the stricken lender on Sunday - the first known bank-run in the region during the crisis - even though the Kuwaiti central bank pledged to support the bank and guarantee all deposits in the country.

Fitch Ratings downgraded Gulf Bank's individual rating to D from B/C. While affirming the long-term issuer default rating of A+, the agency placed the bank under review for individual downgrades for a "serious lapse" in risk management and possible capital base erosion from "potentially large losses".

Adding to the bank's woes, Moody's Investors Service yesterday placed Gulf Bank's Aa3 long-term local and foreign-currency deposit ratings, and C bank financial-strength rating on review for possible downgrade. The Prime 1 short-term ratings were not affected, according to the credit rating agency.

"It is completely understandable. I wouldn't trust them [the ratings agencies] if they hadn't done this," said a Gulf Bank spokesman.

More...

French police hold derivatives trader

Caisse d'Epargne trader is held

French police have detained a trader for questioning over the loss of 751m euros (£601m) at savings bank Caisse d'Epargne, judicial officials say.

He was taken into custody as part of an inquiry into whether anyone was criminally liable for the loss, made as a result of complex derivative trades.

The bank initially put the loss at 600m euros, but has since revised it upward.

The bank's top three executives have all resigned since the loss came to light earlier this month.

Chief executive Charles Milhaud stood down after saying he accepted full responsibility for the lost cash and is expected to leave without a pay-off.

More...

The “Dirty Little Secret” Of the US Bank Bailout

By Barry Grey

27 October 2008 "
WSWS" --- In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the [government bailout] money to make new loans."

As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.

Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.

Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."

Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way, and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."

As Nocera notes: "Read that answer as many times as you want--you are not going to find a single word in there about making loans to help the American economy."

Later in the conference call the same executive states, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side."

"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation."

Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.

Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.

Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.

What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.

All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.

In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."

One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.

While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.

As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.

The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.

While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.

Barry Grey