When Greed is Rewarded
By PAUL CRAIG ROBERTS | Counterpunch, Oct 17 / 20, 2008
Just as the Bush regime’s wars have been used to pour billions of dollars into the pockets of its military-security donor base, the Paulson bailout looks like a Bush regime scheme to incur $700 billion in new public debt in order to transfer the money into the coffers of its financial donor base. The US taxpayers will be left with the interest payments in perpetuity (or inflation if the Fed monetizes the debt), and the number of Wall Street billionaires will grow. As for the US and European governments’ purchases of bank shares, that is just a cover for funneling public money into private hands.
The explanations that have been given for the crisis and its bailout are opaque. The US Treasury estimates that as few as 7% of the mortgages are bad. Why then do the US, UK, Germany, and France need to pour more than $2.1 trillion of public money into private financial institutions?
If, as the government tells us, the crisis stems from subprime mortgage defaults reducing the interest payments to the holders of mortgage backed securities, thus driving down their values and threatening the solvency of the institutions that hold them, why isn’t the bailout money used to address the problem at its source? If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage backed securities would be made whole, and it would be unnecessary to pour huge sums of public money into banks. Instead, the bailout money is being used to inject capital into financial institutions and to purchase from them troubled financial instruments.
It is a strange solution that does not address the problem. As the US economy sinks deeper into recession, the mortgage defaults will rise. Thus, the problem will intensify, necessitating the purchase of yet more troubled instruments.
If credit card debt has also been securitized and sold as investments, as the economy worsens defaults on credit card debt will be a replay of the mortgage defaults. How much debt can the Treasury bail out before its own credit rating sinks?
The contribution of credit default swaps to the financial crisis has not been made clear. These swaps are bets that a designated financial instrument will fail. In exchange for “premium” payments, the seller of a swap protects the buyer of the swap from default by, for example, a company’s bond that the swap buyer might not even own. If these swaps are also securitized and sold as investments, more nebulous assets appear on balance sheets.
Normally, if you and I make a bet, and I welsh on the bet, it doesn’t threaten your solvency. If we place bets with a bookie and the odds go against the bookie, the bookie will fail, as apparently happened to AIG, necessitating an $85 billion bailout of the insurance company, and to Bear Stearns resulting in the demise of the investment bank.
Credit default swaps are a form of unregulated insurance. One danger of the swaps is that they allow speculators to purchase protection against a company defaulting on its bonds, without the speculators having to own the company’s bonds. Speculators can then short the company’s stock, driving down its price and raising questions about the viability of the company’s bonds. This raises the value of the speculators’ swaps which can be sold to holders of the company’s bonds. By ruining a company’s prospects, the speculators make money.
Another danger is that swaps encourage investors to purchase riskier, higher-yielding instruments in the belief that the instruments are insured, but the sellers of swaps have not reserved against them.
Double-counting of assets is also possible if a bank purchases a company’s bonds, for example, then purchases credit default swaps on the bonds, and lists both as assets on its balance sheet.
The $85 billion Treasury bailout of AIG is small compared to the $700 billion for the banks, and the emphasis has been on banks, not insurance companies. According to news reports, the sums associated with credit default swaps are far larger than the subprime mortgage derivatives. Have the swaps yet to become major players in the crisis?
The behavior of the stock market does not necessarily tell us anything about the bailout. The financial crisis disrupted lending and thus comprised a threat to non-financial firms. This threat would reflect in the stock market. However, the stock market is also predicting a recession and declining earnings. Thus, people sell stocks hoping to get out before share prices adjust to the new lower earnings.
The bailout package is a result of panic and threats, not of analysis and understanding. Neither Congress nor the public knows the full story. If the problem is the mortgages, why does the bailout leave the mortgages unaddressed and focus instead on pouring vast amount of public money into private financial institutions?
The purpose of regulation is to restrain greed and to prevent leveraged speculation from threatening the wider society. Congress needs to restore financial regulation, not reward those who caused the crisis.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com






U.S., Iraqi Officials Question Terms of Draft Security Deal
October 18, 2008At Issue: Legal Authority Over Troops
By Mary Beth Sheridan and Karen DeYoung
Washington Post Staff Writers, Saturday, October 18, 2008
BAGHDAD, Oct. 17 — A number of senior Iraqi and U.S. politicians expressed strong reservations Friday about the terms of a draft agreement that gives Iraq the “primary right” — subject to U.S. acquiescence — to try American soldiers accused of serious crimes committed during off-duty hours outside U.S. military bases here.
Some political leaders in Baghdad, who got their first look at the controversial agreement to extend the U.S. military presence in Iraq beyond 2008, said it did not go far enough in guaranteeing Iraqi sovereignty. The bilateral accord was presented Friday to the Political Council for National Security, an advisory body including political, legislative and judicial leaders, whose support is necessary before it can be submitted to Prime Minister Nouri al-Maliki‘s cabinet and then to parliament for final approval. After an initial review, the council said it would continue discussions next week.
In Washington, congressional Democrats questioned ceding any authority over U.S. troops to Iraq. “I am very concerned about reports that U.S. service personnel may not have full immunity under Iraqi law,” said Rep. Ike Skelton (D-Mo.), the House Armed Services Committee chairman. The Bush administration allowed a small group of senior congressional aides to read the document at a White House briefing this morning but did not allow copies to be made.
A provision in the draft would give the United States “primary” jurisdiction over military personnel and Defense Department employees who are on bases or engaged in authorized military operations.
Iraq, it says, would have the “primary right to exercise judicial jurisdiction” over “premeditated and gross felonies . . . committed outside the agreed facilities and areas and when not on a mission.” Foreign Minister Hoshyar Zebari said Friday that any disagreement would be resolved by a joint committee. “If the crime is very grave or serious, the U.S. may waive its jurisdiction,” he said.
U.S. Defense Secretary Robert M. Gates told reporters at a Pentagon briefing that “there is not a reason to be concerned.” He said top U.S. military officials “are all satisfied that our men and women in uniform serving in Iraq are well protected.” U.S. officials have emphasized that off-duty American troops in Iraq rarely, if ever, venture outside their bases, and said that they consider language in the document vague enough to ensure absolute U.S. control in all circumstances.
Administration officials also said they are confident that withdrawal dates in the document — June 30, 2009, for U.S. forces in Iraqi cities and Dec. 31, 2011, from all of Iraq — contain sufficient caveats to address any future downturn in the security situation. Before the final deadline, the draft says, “on the basis of Iraq’s assessment of conditions on the ground,” the Iraqi government could ask for U.S. troops to remain for “training purposes” or to “support Iraqi security forces.”
The accord also would prohibit U.S. forces from detaining any Iraqi citizen without an Iraqi warrant, and says any detainee would have to be handed over to government custody within 24 hours. All Iraqis in U.S. custody as of Jan. 1 — when the agreement would go into effect upon expiration of the current U.N. mandate authorizing foreign troops here — would have to be turned over to the Iraqi government. Home and property searches also would require an Iraqi warrant, except during certain combat situations.
U.S. and Iraqi officials confirmed the wording of the document, portions of which were widely circulated in both capitals Friday.
The sensitivity of the draft agreement, which has been under negotiation since March, was illustrated when Maliki lashed out at the top American commander here for saying that U.S. intelligence indicated Iran was trying to bribe Iraqi lawmakers to reject the pact.
“The American commander has risked his position when he spoke in this tone and has complicated relations in a deplorable way,” Maliki told a group of Kuwaiti journalists in an interview broadcast by Iraqi state television Friday. Maliki expressed astonishment at the remarks from U.S. Gen. Ray Odierno, whom he described as a “kind and good man.” Iraqi members of parliament, he said, had not accepted any bribes.
Maliki was reacting to a Monday article in The Washington Post in which Odierno said Iran was conducting a “full-court press” with its Iraqi contacts to sabotage the pact, including “coming in to pay off people to vote against it.” A U.S. military spokesman later said there was no confirmation that bribes had been accepted by lawmakers.
A number of Iraq’s leading political leaders spent years in exile in Iran during the presidency of Saddam Hussein and maintain warm relations with the Tehran government. Several expressed sharp offense at Odierno’s comments.
Jalal al-Deen al-Saghir, a top lawmaker from the Islamic Supreme Council of Iraq, Maliki’s main political partner, said in an interview that he saw “serious problems” in the proposed accord, “especially after Odierno’s statements.”
Pentagon spokesman Geoff Morrell said Friday that there was a misunderstanding about Odierno’s comments. “I don’t think General Odierno was implying that there are crooked Iraqi politicians, but rather that there are Iranian agents who, in their attempt to derail the [agreement], are trying to bribe Iraqi politicians,” he said.
In Najaf, the religious capital of Iraq’s Shiite majority, a leading cleric blasted the idea of giving U.S. forces any immunity from Iraqi law. “We consider this a basic point because it represents sovereignty,” Sadir Addin al-Qobanchi said in a sermon at the city’s grand mosque. “If someone commits a hostile act against your house and family, and you say it is fine and don’t hold him responsible, it means that you don’t have dignity or sovereignty.”
U.S. military and political officials have expressed concern that the agreement may not make it through Iraq’s slow-moving political process by year’s end. An extension of the U.N. mandate, the most likely option if a final agreement is not reached, poses political and legal complications for both sides.
Mahmoud Othman, a Kurdish lawmaker, said the agreement could gain the approval of the political council and the cabinet. But in parliament, supporters of the agreement “will face opposition,” he said. The accord, which must win a majority in the 275-seat parliament, is strongly supported by the Kurdish bloc, the second-biggest with 54 seats. Various Sunni and independent parties representing scores of seats have also indicated their approval.
But Othman said the backing of some politicians was not solid.
“They tell the Americans, ‘We are okay, we’ll sign it.’ Then they tell their people in parliament not to vote for it,” he said.
The U.S. Congress does not have similar veto power over the agreement, which requires only a presidential signature. But senior Democrats, and a number of Republicans, have questioned its terms. Senate Armed Services Committee Chairman Carl M. Levin (D-Mich.) said in a statement Friday that complete American jurisdiction over U.S. service members was “critical” and that they could not be “subject to criminal prosecution in an Iraqi judicial system that does not meet due process standards.” Levin said he would “reserve judgment” on the draft until he was given an opportunity for a “complete review” of its terms.
DeYoung reported from Washington. Staff writer Ann Scott Tyson in Washington and special correspondent Qais Mizher in Baghdad contributed to this report.
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Tags: American soldiers and serious crimes, Democrats, Iraq, Iraqi political leaders, Islamic Supreme Council of Iraq, PM Nuri al-Maliki, proposed security deal, United States, US Congress, Washington Post
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