Sunday, October 12, 2008

Insider’s Projects Drained Missile-Defense Millions

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They huddled in a quiet corner at the US Airways lounge at Ronald Reagan National Airport, sipping bottomless cups of coffee as they plotted to turn America’s missile defense program into a personal cash machine.

Michael Cantrell, an engineer at the Army Space and Missile Defense Command headquarters in Huntsville, Ala., along with his deputy, Doug Ennis, had lined up millions of dollars from Congress for defense companies. Now, Mr. Cantrell decided, it was time to take a cut.

“The contractors are making a killing,” Mr. Cantrell recalled thinking at the meeting, in 2000. “The lobbyists are getting their fees, and the contractors and lobbyists are writing out campaign checks to the politicians. Everybody is making money here — except us.”

Within months, Mr. Cantrell began getting personal checks from contractors and later returned to the airport with Mr. Ennis to pick up a briefcase stuffed with $75,000. The two men eventually collected more than $1.6 million in kickbacks, through 2007, prompting them to plead guilty this year to corruption charges.

Mr. Cantrell readily acknowledges concocting the crime. But what has drawn little scrutiny are his activities leading up to it. Thanks to important allies in Congress, he extracted nearly $350 million for projects the Pentagon did not want, wasting taxpayer money on what would become dead-end ventures.

Recent scandals involving former Representative Randy Cunningham, Republican of California, and the lobbyist Jack Abramoff, both now in prison, provided a glimpse into how special interests manipulate the federal government.

Mr. Cantrell’s story, by contrast, pieced together from federal documents and dozens of interviews, is a remarkable account of how a little-known, midlevel Defense Department insider who spent his entire career in Alabama skillfully gamed the system.

Mr. Cantrell worked in a division that was a small part of the national missile defense program. Determined to save his job, he often bypassed his bosses and broke department rules to make his case on Capitol Hill. He enlisted contractors to pitch projects that would keep the dollars flowing and paid lobbyists to ease them through. He cultivated lawmakers, who were eager to send money back home or to favored contractors and did not ask many questions. And when he ran into trouble, he could count on his powerful friends for protection from Pentagon officials who provided little oversight and were afraid of alienating lawmakers.

Senator Ted Stevens, the Alaska Republican, for example, chewed out Pentagon officials who opposed a missile range Mr. Cantrell and his contractor allies were seeking to build in Alaska, prompting them to back off, while a staffer for former Senator Trent Lott, Republican of Mississippi, intervened when the Pentagon threatened to discipline Mr. Cantrell for lobbying, a banned activity for civil servants.

“I could go over to the Hill and put pressure on people above me and get something done,” Mr. Cantrell explained about his success in Washington. “With the Army, as long as the senator is not calling over and complaining, everything is O.K. And the senator will not call over and complain unless the contractor you’re working with does not get his money. So you just have to keep the players happy and it works.”

The national missile defense program has cost the United States more than $110 billion since President Ronald Reagan unveiled his Star Wars plan 25 years ago. Today, the missile defense effort is the Pentagon’s single biggest procurement program.

The Army declined to discuss the Cantrell case, other than to say it had taken steps to try to prevent similar crimes from happening again.

But some current and former Defense Department officials say the exploiting of the system that preceded Mr. Cantrell’s kickback scheme has had a damaging impact, slowing progress toward building a viable missile defense system by diverting money to unnecessary or wasteful endeavors. That pattern of larding up the defense budget with pet projects pushed by lawmakers and lobbyists is a familiar one.

“What they did may have been a scandal,” said Walter E. Braswell, Mr. Ennis’s lawyer, referring to the actions of his client and Mr. Cantrell. “But even more grotesque is the way defense procurement has disintegrated into an incestuous relationship between the military, politicians and contractors.”

Dr. J. Richard Fisher, one of Mr. Cantrell’s former bosses, said: “The system needs to change. But it is not likely to do that. There is just too much inertia — and too much self-interest.”

Getting Around the System

Towering over the highway near the entrance to Huntsville is a replica of the Saturn V rocket, the powerful missile that lifted the first man to the moon.

Created in Huntsville, it is a fitting icon for this once-sleepy cotton mill town, now so dominated by the aerospace industry that it is nicknamed Rocket City. An estimated 18,000 uniformed and civilian federal employees work in the aerospace industry in the Huntsville area today, augmented by about 40,000 others, who work for federal contractors.

Michael Cantrell grew up on a dairy farm nearby, listening to the rumble of rocket test flights. As a young engineer, he became a civilian employee of the Army and quickly impressed his bosses. “Mike moved at the speed of sound,” said Lt. Gen. Jay Garner, who briefly headed the missile command.

By 1990, Mr. Cantrell, then 35, took over an experimental program to develop faster, cheaper and lighter missiles that could intercept and knock out enemy missiles flying within the atmosphere. Under the Reagan administration, money was plentiful for such research, but with the fall of the Soviet Union and the arrival of the Clinton administration, Pentagon bosses were forced to make budget cuts.

Like other Army employees, Mr. Cantrell was prohibited from lobbying or even visiting Capitol Hill unless he had permission from his agency’s Congressional liaison, a prohibition intended to block employees from promoting initiatives that Pentagon leaders did not see as a priority.

But General Garner said it was obvious to his managers what they had to do if they did not want their programs — and jobs — eliminated.

“If the money does not end up in the palm and you need it,” he said in an interview, “the only other place you can go to get it is the Congress.”

Soon enough, Army missile program managers started opening what amounted to their own lobbying shops in Washington, according to Mr. Cantrell and his former supervisors.

Mr. Cantrell became a regular on Capitol Hill, both in the halls of Congress and in the bars and restaurants where Hill staffers gather after hours. He set up a makeshift office in the US Airways lounge at Reagan National Airport, where he followed up on pitches for money to lawmakers and hid out from his Defense Department bosses. He identified lobbyists who could prove useful and contractors — many of them campaign donors — with projects that needed nurturing.

With the backing of the New York Congressional delegation, for example, he blocked cuts in financing for a sophisticated wind tunnel in Buffalo, where he promised to test his missile components. With help from then Representative Curt Weldon, Republican of Pennsylvania, who wanted Army assistance for a “technology corridor” in his district, Mr. Cantrell managed to get millions more for his program. Eventually, a dozen or so lawmakers helped him.

“It was like I was going hunting in Washington,” Mr. Cantrell said. “And I would always come up with money.” One colleague was so impressed with Mr. Cantrell’s record that she gave him a bobblehead doll carrying a briefcase marked with dollar signs.

The Pentagon had objected to Mr. Cantrell’s financing requests, but he was not discouraged. “He kept trying to kill our programs,” Mr. Cantrell said of one supervisor. But “we would go around” and get a lawmaker “to whack him.”

Inspired by his successes, Mr. Cantrell soon embarked on a more ambitious project that would all but guarantee sustained financing.

His proposal, which was based on the premise that Congress would significantly increase annual financing for his experimental missile defense work, involved not just five test launchings, but the construction of a new launching site on a remote Alaskan island and the lease of a mothballed Navy helicopter carrier, which would be used to send the simulated attack missile.

The Launching Project

It was easy to find willing partners.

The program’s main contractors, including the defense giant Lockheed Martin, prepared presentations for Congress making the case for an extra $25 million to $50 million a year for the project.

Officials in Alaska, who had been seeking money for a spaceport on Kodiak Island to launch commercial satellites, eagerly chimed in. And nearly a dozen lawmakers also did their part, Mr. Cantrell said, including Senator Stevens of Alaska; Senator Richard C. Shelby, Republican of Alabama; Senator Olympia J. Snowe, Republican of Maine; and Representative C. W. Bill Young, Republican of Florida, all members of the Appropriations or Armed Services committees with missile defense contractors in their districts.

But the military already had rocket launching sites around the globe, and Gen. Lester L. Lyles of the Air Force, who then ran the missile defense program, had no intention of spending money on another one.

General Lyles and his deputy, Rear Adm. Richard D. West of the Navy, were particularly incensed when they learned of the plans to lease the helicopter carrier, the Tripoli, and spend several million dollars renovating it.

Summoned to Washington in 1997 to explain the project, Mr. Cantrell offered little information. That only further infuriated his bosses.

“Who in the hell is in charge of this program?” Admiral West finally demanded in an exchange both men recall.

Mr. Cantrell was ordered to remove his experimental equipment from the planned launching. But the money kept coming. Mr. Stevens’s office had called to insist that the Kodiak project proceed, Admiral West and Lt. Gen. Edward G. Anderson, then the head of Army Space and Missile Defense Command, said in interviews.

“I got hammered pretty hard,” Admiral West recalled. The military men backed off, and the construction at Kodiak continued.

Mr. Cantrell said he knew that building a new launching facility was wasteful. “It doesn’t make sense,” he said. “The economics of it, they just don’t work.”

But he did not care.

“I went up there to get the money,” Mr. Cantrell said of his dealings on Capitol Hill. “And we got what we needed.”

Mr. Cantrell and his deputy, Mr. Ennis, visited Kodiak Island on the afternoon of the inaugural test launching in November 1998. The Air Force had substituted other equipment for Mr. Cantrell’s payload.

The two men, armed with a cooler filled with Miller Lite beer, watched the launching from a trailer, emerging just in time to see the missile burn an orange streak into the sky. They had hidden out to avoid any local newspaper reporters who might discover that Mr. Cantrell’s missile parts — the justification for millions of dollars in spending — were not even being tested. “There is no way we can explain this,” Mr. Cantrell remembered telling Mr. Ennis.


The hand that grabbed Mr. Cantrell by the shoulder startled him.

It was General Lyles, who happened to be on Capitol Hill when he spotted Mr. Cantrell outside Mr. Lott’s office. It was February 1998, even before the dispute over the Alaska project had played out. But the general said he immediately suspected Mr. Cantrell was up to no good.

“Are you over here lobbying?” General Lyles asked in an exchange the two men recalled.

Mr. Cantrell had been working with Mr. Lott, then Senate majority leader, for several years. The lawmaker included several million dollars in the defense budget for an acoustics research center in his home state, and Mr. Cantrell made sure it went to the intended recipients: the University of Mississippi in Oxford and a Huntsville defense contractor that had a branch office in Oxford. In turn, Mr. Lott’s office helped get extra financing — $25 million or so every year — for Mr. Cantrell’s program.

It was an arrangement that Mr. Cantrell did not want to discuss with General Lyles. While he did not consider himself to have been lobbying that day, he readily acknowledges that he often did.

“I just mumbled a lot,” he recalled of his response to the general.

By then, Mr. Cantrell felt confident that he could find his way out of any trouble with the help of his many friends in Washington. Several were lobbyists or consultants working on his behalf; he had /placed them with friendly contractors, allowing them to bill the government for the costs, even though federal law prohibits paying any expenses associated with lobbying.

For example, Mr. Cantrell arranged for James Longley, a former Republican congressman from Maine who started his own consulting firm, to be hired as an employee by Computer Systems Technology, a missile defense contractor.

“The man could put ‘honorable’ in front of his name and go places with that,” Mr. Cantrell explained, saying that Mr. Longley introduced him to lawmakers and appealed to senior Pentagon officials to protect Mr. Cantrell’s program.

Mr. Longley, in an interview, insisted that he never sought money from Congress, but simply provided strategic advice to Mr. Cantrell.

But several people, including Dr. Fisher, one of Mr. Cantrell’s bosses, thought the arrangement improper.

“Here is an ex-congressman out there promoting Mike’s programs,” Dr. Fisher said. “He can call himself what he wants, but he is basically a lobbyist.”

The incident with General Lyles prompted a formal investigation into Mr. Cantrell’s activities that same year.

But Mr. Cantrell got Mr. Longley to call Army officials. Then Mr. Lott’s office requested that the case be closed, Mr. Cantrell said. Eric Womble, a former aide to Mr. Lott, said he could not remember taking such a step, but added that it would not have been surprising.

“Senator Lott’s staff protects people who are trying to help us and help the nation,” Mr. Womble said.

Soon, the investigation of Mr. Cantrell came to a close. He got only an oral warning from his boss.

That episode would embolden Mr. Cantrell. On several occasions, he would again be caught violating Pentagon rules and each time escape with nothing more than a reprimand.

“If you have the Senate majority leader’s office calling over to get you out of trouble, you can’t help but get a little cocky,” Mr. Cantrell said.

The Fallout

From the US Airways club, Mr. Cantrell could see the symphony of the arriving and departing planes, the Potomac River and off in the distance, the Capitol dome.

One day in 2000, Mr. Cantrell met in the airport lounge with Mr. Ennis, his deputy, and a Maine contractor to figure out how to pocket some of the government’s money.

There were easy ways to cheat. The prototype missile nose cone and heat shields that the Army had paid the Maine company to design for the Alaska tests. Why not hire the business to pretend to design them again? Mr. Cantrell asked.

The ballute — an odd cross between a balloon and a parachute — had been rejected by experts as a tool to strike an enemy missile. But why not pay the Maine company to develop them anyway? Mr. Cantrell suggested.

He could pull off such shenanigans because, by then, he had an extraordinary degree of independence. Mr. Cantrell’s experimental missile program, which had cost nearly $250 million, was about to be canceled. No working missile system had been built — and almost none of the components had ended up being tested in real launchings as planned. The effort had produced some benefits for the players involved: Congress sent an annual allotment of extra money to the Alaska launching site now totaling more than $40 million, and one of the contractors that had worked with Mr. Cantrell initially to pitch the space port, Aero Thermo Technology, had secured a no-bid federal contract to provide launching services.

Now Mr. Cantrell was on to another assignment overseeing missile defense research in Huntsville, and through his friends on the Hill, he was once again getting money for projects that the Pentagon did not want.

Mr. Cantrell, who by now was helping to oversee 160 or so contractors and managing a $120 million a year contracting budget, said he knew that if he only requested a few million dollars at a time for his scheme, there would be little scrutiny of his requests or demands that he prove that the work was actually done.

For example, the missile nose cones and other parts now made round trips from Huntsville to Maine with little or no change. Mr. Cantrell or his deputy simply marked off the work as complete, and that was the end of it.

For nearly six years, from 2001 to 2007, the men collected kickbacks from contractors. During one visit to the US Airways Club, Mr. Ennis picked up a briefcase stuffed with $75,000 in cash, according to federal court records. Mr. Cantrell also got checks, ranging from $5,000 to $60,000, once or twice a month, court records show.

The Maine contractor, Maurice H. Subilia, is under investigation; his lawyer, Toby Dilworth, a former federal prosecutor, declined to comment. Dennis A. Darling, a Florida contractor who got government research grants and then divvied them up with Mr. Cantrell, was indicted last month on a charge of paying Mr. Cantrell $400,000 in bribes from 2005 to 2007.

With his new wealth, Mr. Cantrell, now 52, built himself a $1.25 million home in an exclusive Huntsville neighborhood called the Ledges.

Mr. Cantrell, who received the bulk of the kickbacks, acknowledges his crime but he ticks off the failings of the system that he exploited: lawmakers who are eager to please contractors and campaign donors; unwillingness by the Army to push back against members of Congress whose agendas were at odds with those of the military; and little scrutiny.

“We just paid for meaningless work,” he said. “And there was so little oversight that no one noticed.”

Admiral West, the former deputy director of the Pentagon missile defense program, faults Mr. Cantrell for wrongdoing, but says there were multiple missed opportunities to investigate his activities.

“The blame needs to go around widely here,” he said. “Congress should know better; the contractors, too.”

Mr. Cantrell, who is awaiting sentencing on conspiracy and bribery charges, now spends his days sitting in the kitchen of his father-in-law’s house; his dream home was seized by the federal government.

On top of the kitchen table, next to a King James Version of the Bible and bottle of Extra Strength Excedrin, is a stack of books on how to master poker. Mr. Cantrell has reduced them to mathematical formulas pinned onto a bulletin board in front of a computer terminal, where he plays Internet poker for hours at a time. Even now, he is trying to beat the system.

White House Overhauling Rescue Plan

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As international leaders gathered here on Saturday to grapple with the global financial crisis, the Bush administration embarked on an overhaul of its own strategy for rescuing the foundering financial system.

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry.

As recently as Sept. 23, senior officials had publicly derided proposals by Democrats to have the government take ownership stakes in banks.

The Treasury Department’s surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance.

It has also raised questions about whether the administration’s deep philosophical aversion to government ownership in private companies hindered its ability to look at all options for stabilizing the markets.

Some experts also contend that Treasury’s decision last month to not use taxpayer money to save Lehman Brothers worsened the panic that quickly metastasized into an international crisis.

The administration’s new focus was announced late Friday as part of a rescue plan in coordination with six of the world’s richest nations. It came during a week when the Dow Jones industrial average plummeted 18 percent, one of the worst weeks in stock market history.

While the Treasury says it still plans to buy distressed assets, the scope of that plan is unclear. Treasury Secretary Henry M. Paulson Jr. has refused to say whether the capital infusion program for banks would be bigger than the original plan to buy troubled assets.

Still, Treasury has directed Fannie Mae and Freddie Mac, the government-controlled mortgage giants, to ramp up their purchases of hard-to-sell mortgage bonds, in what could be a speedier and less formal process than the auctions proposed by the Treasury.

Underscoring the gravity of the situation, President Bush convened an early morning meeting at the White House on Saturday with finance ministers from the Group of 7 industrialized countries.

“All of us recognize that this is a serious global crisis, and therefore requires a serious global response, for the good of our people,” Mr. Bush said afterward in the Rose Garden, flanked by the ministers, who are in Washington for the annual meetings of the International Monetary Fund and the World Bank.

Mr. Bush said the countries had agreed to general principles to respond to the crisis, including working to prevent the collapse of important financial institutions and protecting the deposits of savers. But he offered no details on other measures, suggesting that there were still differences among countries about which steps to take to shore up their respective financial systems.

To some extent, the effort to agree on a coordinated plan is being driven less by the hope that such measures will carry more punch than by the fear that nations acting alone could destabilize the system.

Those worries grew in recent days when Iceland seized its three major banks, which were failing, and appeared to guarantee the deposits of Icelanders over those of foreigners. That provoked a fierce reaction from Britain, which is now in talks with Iceland to get back the deposits of British citizens.

With the United States and Europe working together on ways to secure their banking systems, economists are concerned that money may flow out of other countries, particularly emerging markets, to Western countries if investors decide that those markets are not as safe.

The United States sought to reassure these countries in a meeting on Saturday evening of the Group of 20, which includes countries with large emerging markets, like China and Russia.

“We want to reaffirm, reinforce our commitment that we’re going to take these actions in a way that doesn’t undermine the economies of other countries,” said David H. McCormick, the under secretary of the Treasury for international affairs.

Like the United States, Britain plans to provide capital directly to banks. But the United States and other countries have not adopted Britain’s proposal to guarantee lending between banks as a way to unlock the credit market.

Germany has been reluctant to put state capital directly into banks, though officials said there were signs of movement in that position on Saturday. Europeans leaders were scheduled to meet in Paris on Sunday, amid reports that Germany may announce a large rescue plan of its own.

Some experts said the delay in carrying out the Bush administration’s $700 billion bailout plan had only hurt its prospects for success.

“Even if it was adequate before, it’s not adequate now,” said Frederic Mishkin, a professor of economics at Columbia University’s business school who stepped down as a Federal Reserve governor at the end of August. “If you delay and create uncertainty, the amount of money you have to put up goes up.”

As recently as late September, the idea of letting the government buy part of the banking system had been unthinkable in the Bush administration. To many officials, such intervention seemed like a European-style government intrusion in the markets.

“Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure,” Mr. Paulson told the Senate Banking Committee on Sept. 23. “This is about success.”

Mr. Paulson told lawmakers it made more sense to jumpstart the frozen credit markets with “market measures,” by which he meant buying up assets rather than institutions. He staunchly resisted Democratic proposals to require that the government receive an equity stake in the companies it was helping.

But on Friday, Mr. Paulson not only confirmed his intention to buy stakes in banks but gave the idea central billing. “We can use the taxpayer’s money more effectively and efficiently, get more for the taxpayer’s dollar, if we develop a standardized program to buy equity in financial institutions,” Mr. Paulson said.

Treasury officials said they hoped to make the first capital investments within the next two weeks. That would be earlier than any government purchases of unwanted mortgage-backed securities. One reason for Mr. Paulson’s rapid reconsideration was that global financial markets have been going downhill faster than anyone had seen before.

Credit markets seized up and all but stopped functioning, making it impossible for most companies to borrow money on more than an overnight basis. Bank stocks plummeted, making it much more difficult to shore up their balance sheets by raising more capital from investors.

Investors panicked as the House initially rejected the bailout bill on Sept. 29. They panicked even more after Congress passed a bill on Oct. 3 that was packed with sweeteners that added $110 billion to the price tag.

By the closing bell last Friday, the Standard & Poor’s 500-stock index had suffered its worst week since 1933. A growing number of analysts argue that Mr. Paulson’s original plan, called the Troubled Assets Relief Program, would have been unhelpful and possibly unworkable. Some noted that Mr. Paulson presented Congress a proposal that was only three pages long and that Treasury officials have yet to provide details how the auctions will work.

As envisioned, the Treasury or its agents would hold so-called “reverse auctions” in which financial institutions are invited to compete against each other in offering to sell their mortgage-backed securities at a low price.

Though auctions are common for all sorts of products, including electricity that utilities sell one another, experts said that mortgage-backed securities would pose difficult headaches because they are extraordinarily complex, difficult to value and come in almost limitless varieties.

The bonds for a single pool of mortgages are divided into more than a dozen “tranches,” or slices, which have different seniority, different credit ratings and different rules for being paid off. The performance of the underlying mortgages varies greatly from one pool to another, even if both pools are made up of seemingly similar loans.

“I am not aware that the Treasury Department presented any evidence on auctions that have been successful when they are used for assets that are so heterogeneous,” said William Poole, who retired in August as president of the Federal Reserve Bank of St. Louis.

Because Fannie Mae and Freddie Mac, the mortgage giants, buy and sell mortgage securities every day, they could absorb some of the hard-to-sell securities without going through the untested auction process.

The Federal Housing Finance Agency, which last month seized the companies and placed them into a conservatorship, lifted capital restrictions on them last week and effectively gave them a green light to buy more mortgage securities of all types, including those backed by subprime loans, given to borrowers with weak credit.

The companies have a lot of money; Congress authorized Treasury to lend them as much as $100 billion each as part of the rescue plan created for them. That could free up money in the separate $700 billion bailout plan for injecting capital directly into the banks. People familiar with the early planning efforts for a systemic bailout said the chairman of the Federal Reserve, Ben S. Bernanke, argued that it would be easier and more efficient to inject capital directly into banks. But Treasury officials balked, in part because they were ideologically opposed to direct government involvement in business.

But as the financial markets spiraled further downward during the last 10 days, a growing number of top-tier institutions, including Goldman Sachs and Morgan Stanley, became worried about their survival.

“The crisis in confidence goes way beyond the actual losses that will be incurred from debt securities,” Mickey Levy, chief economist for Bank of America, said in an interview on Friday. “It’s truly incumbent on policy makers to address that crisis.”

Treasury officials began canvassing banks and investment firms about the possibility of having the government buy stakes in them. The new bailout law gave the Treasury the authority to buy up almost any kind of asset it wanted, including stock or preferred shares in banks.

Industry executives quickly told Mr. Paulson that they liked the idea, though they warned that the Treasury should not try to squeeze out existing shareholders. They also begged Mr. Paulson not to impose tough restrictions on executive pay and golden-parachute deals for executives who are fired.

Mr. Paulson heeded those pleas. In his remarks on Friday, he carefully noted that the government would acquire only “nonvoting” shares in companies. And officials said the law lets the Treasury write most of its own restrictions on executive pay, and those restrictions can be lenient if they are applied to a set of fairly healthy companies.

Who is Behind the Financial Meltdown?

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By Michel Chossudovsky

Market Manipulation and the Institutional Speculator

The market is heavily manipulated. The driving force behind the meltdown is speculative trade. The system of "private regulation" serves the interests of the speculators.

While most individual investors loose when the market falls, the institutional speculator makes money when there is a financial collapse.

In fact, triggering market collapse can be a very profitable undertaking.

There are indications that the Security Exchange Commission (SEC) regulators have created an environment which supports speculative transactions.

There are several instruments including futures, options, index funds, derivative securities, etc. used to make money when the stock market crumbles.

The more it falls, the greater the gains.

Those who make it fall are also speculating on its decline.

With foreknowledge and inside information, a collapse in market values constitutes a lucrative and money-spinning opportunity, for a select category of powerful speculators who have the ability to manipulate the market in the appropriate direction at the appropriate time.

Short Selling

One important instrument used by speculators to make money out of a financial meltdown is "short selling".

"Short selling" consists in selling large amounts of stocks which you do not possess and then buying them in the spot market once the price has collapsed, with a view to completing the transaction and cashing in on the profits.

The role of short selling in bringing down companies is well documented. The collapse of Lehman, Merrill Lynch and Bear Stearns was in part due to short selling.

Short selling has also been used extensively in currency markets. It was one of the main instruments used by speculators during the 1997 Asian Crisis to bring down the Thai baht, the Korean won and Indonesian rupiah.

Speculation in major currency markets also characterizes the ongoing financial crisis. There have been major swings in currency values with the Canadian dollar, for instance, loosing 10% of its value in the course of a few trading days.

Temporary Ban on Short Selling

Following the stock market meltdown on Black Monday September 15, the Security Exchange Commission (SEC) introduced a temporary ban on short selling. In a bitter irony, the SEC listed a number of companies which were "protected by regulators from short sellers". The SEC September 18 ban on short selling pertained largely to banks, insurance companies and other financial services companies.

The effect of being on a "protected list" was to no avail. It was tantamount to putting those listed companies on a "hit list". If the SEC had implemented a complete and permanent ban on short selling coupled with a freeze on all forms of speculative trade, including index funds and options, this would have contributed to reducing market volatility and dampening the meltdown.

The ban on short selling was applied with a view to establishing the protected list. It expired on Wednesday October 8 at midnight.

The following morning, Thursday 9th of October, when the market opened up, those companies on the "protected list" became "unprotected" and were the first target of the speculative onslaught, leading to a dramatic collapse on of the Dow Jones on Thursday 9th and Friday 10th.

The course of events was entirely predictable. The lifting of the ban on short selling contributed to accentuating the downfall in stock market values. The companies which were on the hit list were the first victims of the speculative onslaught.

The shares of Morgan Stanley dropped 26 percent on October 9th, upon the expiry of the short-selling ban and a further 25 percent the following day.

Financial warfare

There are indications that the downfall of Morgan Stanley was engineered by financial rivals. A day prior to the September 18th ban on short selling, Morgan Stanley was the object of rival speculative attacks:

John Mack, chief executive of Morgan Stanley, told employees in an internal memo Wednesday [September 17]: “What’s happening out there? It’s very clear to me – we’re in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down.”’ (Financial Times, September 17, 2008)

Morgan Stanley was also the object of doubts expressed by the ratings agency Moody’s, which contributed to investors dumping Morgan Stanley stock.

Moody’s cited an expectation that "an expected downturn in global capital market activity will reduce Morgan Stanley’s revenue and profit potential in 2009, and perhaps beyond this period".

In contrast JP Morgan Chase, controlled by the Rockefeller family climbed by almost 12%.

The winners of financial warfare are JP Morgan Chase and Bank America. Both banking institutions have consolidated their control over the US banking landscape. They have used the financial crisis to displace and/or take over rival financial institutions.

The concentration of wealth and the centralization of financial power resulting from market manipulation is unprecedented.

Regulators Serve the Interests of Speculators

The SEC was fully aware that the ban on short selling would serve to exacerbate the downfall.

Why did they carry it out? How did they justify their decision?

In a twisted logic, the SEC, which largely serves the interests of institutional speculators, contends, quoting the results of an academic research paper, that short selling contributes to reducing market instability, thereby justifying the repeal of the September 18 short selling ban.

Berlusconi Says Leaders May Close World's Markets

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By Steve Scherer

Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''

The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.

Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisis ``in coming days,'' he said.

Berlusconi didn't give any details about what kind of rules leaders were looking to change, except to say that leaders are ``talking about a new Bretton Woods.''

The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II in a hotel in Bretton Woods, New Hampshire. The aim of the agreements was to establish a monetary management system, initially by pegging currencies to gold. The IMF was set up later to help manage the international financial system.

Anti-Democratic Nature of US Capitalism is Being Exposed

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By Noam Chomsky

Bretton Woods was the system of global financial management set up at the end of the second World War to ensure the interests of capital did not smother wider social concerns in post-war democracies. It was hated by the US neoliberals - the very people who created the banking crisis writes Noam Chomsky

THE SIMULTANEOUS unfolding of the US presidential campaign and unraveling of the financial markets presents one of those occasions where the political and economic systems starkly reveal their nature.

Passion about the campaign may not be universally shared but almost everybody can feel the anxiety from the foreclosure of a million homes, and concerns about jobs, savings and healthcare at risk.

The initial Bush proposals to deal with the crisis so reeked of totalitarianism that they were quickly modified. Under intense lobbyist pressure, they were reshaped as "a clear win for the largest institutions in the system . . . a way of dumping assets without having to fail or close", as described by James Rickards, who negotiated the federal bailout for the hedge fund Long Term Capital Management in 1998, reminding us that we are treading familiar turf. The immediate origins of the current meltdown lie in the collapse of the housing bubble supervised by Federal Reserve chairman Alan Greenspan, which sustained the struggling economy through the Bush years by debt-based consumer spending along with borrowing from abroad. But the roots are deeper. In part they lie in the triumph of financial liberalisation in the past 30 years - that is, freeing the markets as much as possible from government regulation.

These steps predictably increased the frequency and depth of severe reversals, which now threaten to bring about the worst crisis since the Great Depression.

Also predictably, the narrow sectors that reaped enormous profits from liberalisation are calling for massive state intervention to rescue collapsing financial institutions.

Such interventionism is a regular feature of state capitalism, though the scale today is unusual. A study by international economists Winfried Ruigrok and Rob van Tulder 15 years ago found that at least 20 companies in the Fortune 100 would not have survived if they had not been saved by their respective governments, and that many of the rest gained substantially by demanding that governments "socialise their losses," as in today's taxpayer-financed bailout. Such government intervention "has been the rule rather than the exception over the past two centuries", they conclude.

In a functioning democratic society, a political campaign would address such fundamental issues, looking into root causes and cures, and proposing the means by which people suffering the consequences can take effective control.

The financial market "underprices risk" and is "systematically inefficient", as economists John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalisation and reviewing the substantial costs already incurred - and proposing solutions, which have been ignored. One factor is failure to calculate the costs to those who do not participate in transactions. These "externalities" can be huge. Ignoring systemic risk leads to more risk-taking than would take place in an efficient economy, even by the narrowest measures.

The task of financial institutions is to take risks and, if well-managed, to ensure that potential losses to themselves will be covered. The emphasis is on "to themselves". Under state capitalist rules, it is not their business to consider the cost to others - the "externalities" of decent survival - if their practices lead to financial crisis, as they regularly do.

Financial liberalisation has effects well beyond the economy. It has long been understood that it is a powerful weapon against democracy. Free capital movement creates what some have called a "virtual parliament" of investors and lenders, who closely monitor government programmes and "vote" against them if they are considered irrational: for the benefit of people, rather than concentrated private power.

Investors and lenders can "vote" by capital flight, attacks on currencies and other devices offered by financial liberalisation. That is one reason why the Bretton Woods system established by the United States and Britain after the second World War instituted capital controls and regulated currencies.*

The Great Depression and the war had aroused powerful radical democratic currents, ranging from the anti-fascist resistance to working class organisation. These pressures made it necessary to permit social democratic policies. The Bretton Woods system was designed in part to create a space for government action responding to public will - for some measure of democracy.

John Maynard Keynes, the British negotiator, considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement.

In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the US treasury now regards free capital mobility as a "fundamental right", unlike such alleged "rights" as those guaranteed by the Universal Declaration of Human Rights: health, education, decent employment, security and other rights that the Reagan and Bush administrations have dismissed as "letters to Santa Claus", "preposterous", mere "myths".

In earlier years, the public had not been much of a problem. The reasons are reviewed by Barry Eichengreen in his standard scholarly history of the international monetary system. He explains that in the 19th century, governments had not yet been "politicised by universal male suffrage and the rise of trade unionism and parliamentary labour parties". Therefore, the severe costs imposed by the virtual parliament could be transferred to the general population.

But with the radicalisation of the general public during the Great Depression and the anti-fascist war, that luxury was no longer available to private power and wealth. Hence in the Bretton Woods system, "limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures".

The obvious corollary is that after the dismantling of the postwar system, democracy is restricted. It has therefore become necessary to control and marginalise the public in some fashion, processes particularly evident in the more business-run societies like the United States. The management of electoral extravaganzas by the public relations industry is one illustration.

"Politics is the shadow cast on society by big business," concluded America's leading 20th century social philosopher John Dewey, and will remain so as long as power resides in "business for private profit through private control of banking, land, industry, reinforced by command of the press, press agents and other means of publicity and propaganda".

The United States effectively has a one-party system, the business party, with two factions, Republicans and Democrats. There are differences between them. In his study Unequal Democracy: The Political Economy of the New Gilded Age, Larry Bartels shows that during the past six decades "real incomes of middle-class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working-poor families have grown six times as fast under Democrats as they have under Republicans".

Differences can be detected in the current election as well. Voters should consider them, but without illusions about the political parties, and with the recognition that consistently over the centuries, progressive legislation and social welfare have been won by popular struggles, not gifts from above.

Those struggles follow a cycle of success and setback. They must be waged every day, not just once every four years, always with the goal of creating a genuinely responsive democratic society, from the voting booth to the workplace.

* The Bretton Woods system of global financial management was created by 730 delegates from all 44 Allied second World War nations who attended a UN-hosted Monetary and Financial Conference at the Mount Washington Hotel in Bretton Woods in New Hampshire in 1944.

Bretton Woods, which collapsed in 1971, was the system of rules, institutions, and procedures that regulated the international monetary system, under which were set up the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF), which came into effect in 1945.

The chief feature of Bretton Woods was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value.

The system collapsed when the US suspended convertibility from dollars to gold. This created the unique situation whereby the US dollar became the "reserve currency" for the other countries within Bretton Woods.