Monday, November 24, 2008

Another Crisis, Another Guarantee

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Guarantees that could not be honored thrust the world financial system into its worst crisis since the Great Depression. Will a guarantee by the United States government finally restore confidence in the American financial system?

Only a week after Treasury Secretary Henry M. Paulson Jr. said that the government bailouts had stabilized the most important financial institutions, plunging stock prices forced the government to step in again, both to make another direct investment and to guarantee that losses would be contained from $306 billion in possibly toxic assets on Citigroup’s balance sheet.

The move sent stock prices soaring Monday, with financial stocks leading the way. But those gains did not come close to erasing last week’s losses, and left open the possibility that a renewed sense of concern about the safety of other banks could force still more bailouts in coming weeks.

One lesson may be that it is perilous for the government to even hint that it thinks it is through bailing. That can renew fear about banks, driving down share prices and forcing the government to do the opposite of what it had intended. Since the government has a printing press, it need never be short of dollars. That fact makes this guarantee much more credible than the ones, from bond insurers and other companies, that helped persuade banks and others to take what turned out to be huge risks. Many of those guarantors, it turned out, could not honor their obligations. The government feared financial chaos if there was a string of collapses. Even if Citigroup is the last bailout, the Bush administration, whose rhetoric was perhaps more supportive of free, unhindered markets than was that of any of its predecessors, will leave a trail of socialized risk.

But that trail may not be at an end. The auto companies want billions in bailouts, and other industries are lining up.

And as the nation’s obligations rise into the trillions, at some point investors may begin to question whether a government running huge deficits can also credibly promise that the dollar will not lose its value. Such a worry conceivably could push up the very low interest rates the Treasury now pays to borrow from foreign investors to foot an ever-larger rescue bill.

But those are problems for another day. Now the priority is to keep the financial system from collapsing. The problems of recession, constricted lending markets and falling real estate prices will remain even if everyone concludes the big banks are safe.

In the latest bailout, the government injected an additional $20 billion into Citigroup, on top of the $25 billion it invested a few weeks ago. It also said that it would cover 90 percent of the losses on those $306 billion in securities after Citigroup absorbed the first $29 billion of losses.

The fact that it was necessary to guarantee so many assets — about a sixth of the $2 trillion in assets that Citigroup reported at the end of September — was another indication of both the complexity and the opacity of many of the securities that were created by financial engineers in the great wave of innovation.

The assets in question — described by the government as “loans and securities backed by residential real estate and commercial real estate, and their associated hedges” — must be valued at current market value before the guarantee kicks in, but the government and the bank have yet to agree on those values.

That phrase “associated hedges” captures the fact that Citigroup, like many others, had sought to insure itself against losses with a variety of transactions, including the purchase of insurance, only to learn that the losses were overwhelming those who had promised to pay.

The boom of the first half of this decade will be remembered as a time that financial innovations overwhelmed the capacity of both regulators and banks to assess risk.

The collapses of Bear Stearns and Lehman Brothers, both of which were primarily regulated by the Securities and Exchange Commission, served to focus attention on the agency, which was effectively forced out of that financial soundness regulation area after the Federal Reserve assumed oversight of several of the large companies for which it had been responsible.

But Citigroup had always been under Fed regulation, and the need for repeated bailouts there shows both that the regulation was ineffective and that even after the crisis began, the government underestimated its severity.

At first, the Fed hoped that just making more loans available to banks would reassure markets. Then, as losses mounted, the government tried capital injections. In both cases, investors first showed relief, then grew afraid again.

The newest bailout includes more than the guarantee and the capital injection. It enables Citigroup to treat the guaranteed assets as being relatively safe, thereby improving its apparent capital position.

It could need all the reported capital it can get. David Hendler, an analyst at CreditSights, pointed out that Citigroup’s other assets included $91 billion in credit card receivables, $272 billion in non-United States consumer loans, $163 billion in corporate loans and a net $104 billion in assorted derivatives. Those assets, he wrote, “are not immune to weakness in the overall economy.”

Citigroup was hardly alone in failing to understand the risks it was taking. As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the bond rating agencies and bank regulators accepted presumably sophisticated models, which showed the risks were small.

Insurance on the assets was issued both by the bond insurers and by others that wrote what were known as credit-default swaps, which amounted to insurance, but were not regulated in the same way. Those who wrote large amounts of such insurance are now in trouble, either negotiating to pay claims for less than promised or, in the case of the American International Group, still in business only because of a government bailout.

In retrospect, perhaps the fact there was a demand for such insurance should have served as a warning that the risks were greater than acknowledged. But at the time, the bond insurance companies thought they would pay few, if any claims, and the A.I.G. executives responsible for writing the swaps told investors they would never suffer any losses.

As Citigroup’s stock was plunging last week, there were also big declines in the shares of the other large banks, including Bank of America and JPMorgan Chase. It remains to be seen whether investors will now be reassured about them as well, or will show the same level of fear that forced the issuance of the latest guarantee.

Israel allows limited aid into Gaza

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Israel has briefly opened three border crossings with Hamas-controlled Gaza, allowing some essential food and fuel into the territory for the second time in three weeks.

However, the United Nations Relief and Works Agency (UNRWA) warned that temporarily lifting the blockade imposed by Israel on the Palestinian territory would not allow enough supplies into Gaza.

"It is just not enough," Christopher Gunness, a UNRWA spokesman said, estimating that Gazans need at least 15 lorries worth of UN supplies daily to get by.

Around 45 lorries of goods were allowed through the Kerem Shalom crossing on Monday, including 10 United Nations vehicles carrying food and medical supplies.

Around 15 truckloads of supplies were allowed through the Karni crossing with an unspecified number also passing via the Nahal Ouz crossing.

Sherine Tadros, Al Jazeera's correspondent in Gaza, said supplies of European Union-funded fuel destined for Gaza's only power plant would only last a few days - raising fears that hospitals and other key insitutions will continue to be hit by power cuts and blackouts.

Temporary respite

"This is, perhaps, a bit of respite for Palestinians but there is no security in the coming week ahead that they will have enough power to keep businesses going," she said.

"The cycle is continuing whereby Israel drips in supplies but a few days later [Gazans] are back at the same point where they are running out of supplies... there's no security because they have no idea of when the crossing will be open again."

Israel's decision to temporarily open the crossings comes just one day after doctors at Gaza's biggest hospital said they had been forced to rely on a faulty generator to operate life-saving equipment.

Hassan Khalaf, director of Shifa hospital, said lives were being put a risk and that the intensive care unit could be rendered useless.

Israel closed all of its crossings with Gaza on November 5 in response to rocket attacks launched by Palestinian fighters within the Strip.

The Israelis have repeatedly said that they will not lift the blockade on Gaza until the rocket attacks end.

A Palestinian official said the Israelis agreed to temporarily lift the blockade after Egyptian mediators intervened, asking Israel to let in essential humanitarian supplies while calling on Palestinian fighters to simultaneously stop rocket fire.

Both sides blame each other for breaching a fragile five-month old ceasefire, also brokered by the Egyptians.

However, both say they want the truce, that is due to expire in December, to hold.

Democrats' Stimulus Plan May Reach $700 Billion

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By Lori Montgomery

Spending Package Would Rival Financial System Bailout

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years.

That amount, more than the nation has spent over the past six years in Iraq, would rival the sum Congress committed last month to rescuing the country's financial system. It would also be one of the biggest public spending programs aimed at jolting the economy since President Franklin D. Roosevelt's New Deal.

Hints of a hefty new spending program began emerging last week. New Jersey Gov. Jon Corzine (D), an Obama adviser, and Harvard economist Lawrence H. Summers, whom Obama has chosen to lead his White House economic team, both raised the possibility of $700 billion in new spending. Yesterday, Obama adviser and former Clinton administration Labor secretary Robert Reich and Sen. Charles E. Schumer (D-N.Y.) also called for spending in the range of $500 billion to $700 billion.

Transition officials would not confirm that they are considering spending of that magnitude, but they made clear that economic conditions are dire, and suggested that Obama might be forced to delay his pledge to repeal President Bush's tax cuts for the wealthy.

Last week, Goldman Sachs said it expects the economy to shrink even faster by the end of the year, at a 5 percent annualized rate. Meanwhile, the Dow Jones industrial average dropped 5.3 percent for the week; and the nation's largest bank, Citigroup, sought government assistance to avoid collapse.

While Obama has set a goal of creating or preserving 2.5 million jobs by 2011, his economic team -- whose members are scheduled to be formally introduced at a news conference today in Chicago -- have yet to decide how that would be accomplished or how much it would cost.

Still, Austan Goolsbee, a spokesman for Obama on economic issues who is in line to serve on the White House Council of Economic Advisers, yesterday acknowledged that Obama's jobs plan will cost substantially more than the $175 billion stimulus program he proposed during the campaign.

"This is as big of an economic crisis as we've faced in 75 years. And we've got to do something that's up to the task of confronting that," Goolsbee said on CBS's "Face the Nation." "I don't know what the exact number is, but it's going to be a big number."

Republicans quickly criticized the idea of such a vast initiative, saying Congress should instead cut taxes to spur economic growth.

"Democrats can't seem to stop trying to outbid each other -- with the taxpayers' money," House Minority Leader John A. Boehner (R-Ohio) said in a statement. "We're in tough economic times. Folks are hurting. But the American people know that more Washington spending isn't the answer."

With financial markets fluctuating wildly and unemployment rising, Democrats want to push a stimulus package through Congress in January and have it ready for Obama's signature when he takes office Jan. 20. Over the weekend, the president-elect announced that he had instructed his advisers to assemble a massive jobs program that also would make a "down payment" on much of his domestic agenda.

The plan would include new funding for public-works projects to repair the nation's crumbling infrastructure, as well as a fresh infusion of cash to promote green technology and alternative-energy sources. It also would include targeted tax cuts for working families, students, the elderly and job-creating businesses that Obama touted on the campaign trail.

It may not, however, include one of Obama's central promises: to repeal Bush's tax cuts for families earning more than $250,000 a year. Speaking on ABC's "This Week," David Axelrod, Obama's chief political strategist, said the president-elect is weighing whether to let the cuts for the wealthy expire on Dec. 31, 2010, as provided in current law. Such a delay would permit Obama to avoid raising taxes during a recession.

"He's committed to getting middle-class tax relief in the pipeline quickly, and there's no doubt that we're going to have to make some hard decisions in order to pay for the things we need, whether it is through repeal of those tax cuts for the very wealthiest or whether we simply allow it to -- allow those cuts to expire in 2010," Axelrod said.

The projected cost of an economic stimulus package has been rising steadily as economic conditions have worsened. Economists who were calling a few months ago for $150 billion in government spending to offset flagging demand elsewhere in the economy are now pushing for $500 billion or more. Adding tax cuts to the package is expected to increase its cost to the Treasury by as much as $200 billion, Democrats said.

Even some conservative economists have endorsed the larger numbers.

Harvard economist Martin Feldstein, the former director of the National Bureau of Economic Research and an adviser to Sen. John McCain's (R-Ariz.) presidential campaign, said he thinks the government should spend "a minimum of $300 billion a year for at least the next two years."

"The cumulative multi-year deficit would have to be about $700 billion or even more," Feldstein said in an e-mail yesterday.

Reich, speaking on CNN's "Late Edition," said the middle class is being squeezed by mountains of personal debt, plummeting home values and a vast tightening in available credit. As a result, he said, "there's not enough buying power in the economy," forcing the government to step in as "the spender of last resort."

In an interview, Schumer said the nation is on the brink of the same kind of deflationary spiral that pushed down prices, closed businesses and obliterated jobs during the Great Depression.

"The economy is in worse shape than people think," Schumer said. "The safest thing is to do anything you can to avoid deflation."

Even House Speaker Nancy Pelosi (D-Calif.), whose aides have in recent weeks balked at suggestions that Democrats might spend as much as $300 billion, conceded yesterday on "Face the Nation" that the price of a stimulus package is likely to be "in the several hundred billion dollar category."

There are downsides to such a dramatic increase in government spending, especially at a time when the annual federal budget deficit already is spiraling toward $1 trillion -- about 7 percent of the gross domestic product -- a level not seen since the end of World War II. Increasing the deficit means increasing the national debt, which eventually will have to be repaid, with interest, to largely foreign creditors. It also means the nation will be even less prepared to cover the skyrocketing costs of Medicare and Social Security as the baby boomer generation retires.

Washington also could overshoot its target, sparking rampant inflation when the economy recovers. Or the money could be poorly directed and fail to efficiently stimulate the economy.

"The 1930s recession became the Great Depression because policymakers didn't take the necessary actions. Nobody wants to make that mistake this time around," said Jared Bernstein, a senior economist at the Economic Policy Institute who has been advising Democrats. "Is there a possibility that we could overshoot? Of course. But from what I've seen, the danger is not doing enough."

The slow death of Gaza

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By Andrea Becker

The collective punishment of Gaza's civilian population is illegal. But international law was tossed aside long ago

It has been two weeks since Israel imposed a complete closure of Gaza, after months when its crossings have been open only for the most minimal of humanitarian supplies. Now it is even worse: two weeks without United Nations food trucks for the 80% of the population entirely dependent on food aid, and no medical supplies or drugs for Gaza's ailing hospitals. No fuel (paid for by the EU) for Gaza's electricity plant, and no fuel for the generators during the long blackouts. Last Monday morning, 33 trucks of food for UN distribution were finally let in – a few days of few supplies for very few, but as the UN asks, then what?

Israel's official explanation for blocking even minimal humanitarian aid, according to IDF spokesperson Major Peter Lerner, was "continued rocket fire and security threats at the crossings". Israel's blockade, in force since Hamas seized control of Gaza in mid-2007, can be described as an intensification of policies designed to isolate the population of Gaza, cripple its economy, and incentivise the population against Hamas by harsh – and illegal – measures of collective punishment. However, these actions are not all new: the blockade is but the terminal end of Israel's closure policy, in place since 1991, which in turn builds on Israel's policies as occupier since 1967.

In practice, Israel's blockade means the denial of a broad range of items – food, industrial, educational, medical – deemed "non-essential" for a population largely unable to be self-sufficient at the end of decades of occupation. It means that industrial, cooking and diesel fuel, normally scarce, are virtually absent now. There are no queues at petrol stations; they are simply shut. The lack of fuel in turn means that sewage and treatment stations cannot function properly, resulting in decreased potable water and tens of millions of litres of untreated or partly treated sewage being dumped into the sea every day. Electricity cuts – previously around eight hours a day, now up to 16 hours a day in many areas – affect all homes and hospitals. Those lucky enough to have generators struggle to find the fuel to make them work, or spare parts to repair them when they break from overuse. Even candles are running out.

There can be no dispute that measures of collective punishment against the civilian population of Gaza are illegal under international humanitarian law. Fuel and food cannot be withheld or wielded as reward or punishment. But international law was tossed aside long ago. The blockade has been presented as punishment for the democratic election of Hamas, punishment for its subsequent takeover of Gaza, and punishment for militant attacks on Israeli civilians. The civilians of Gaza, from the maths teacher in a United Nations refugee camp to the premature baby in an incubator, properly punished for actions over which they have no control, will rise up and get rid of Hamas. Or so it goes.

And so what of these civilian agents of political change?

For all its complexities and tragedies, the over-arching effect of Israel's blockade has been to reduce the entire population to survival mode. Individuals are reduced to the daily detail of survival, and its exhaustions.

Consider Gaza's hospital staff. In hospitals, the blockade is as seemingly benign as doctors not having paper upon which to write diagnostic results or prescriptions, and as sinister as those seconds – between power cut and generator start – when a child on life support doesn't have the oxygen of a mechanical ventilator. A nurse on a neo-natal ward rushes between patients, battling the random schedule of power cuts. A hospital worker tries to keep a few kidney dialysis machines from breaking down, by farming spare parts from those that already have. The surgeon operates without a bulb in the surgery lamp, across from the anaesthetist who can no longer prevent patient pain. The hospital administrator updates lists of essential drugs and medical supplies that have run out, which vaccines from medical fridges are now unusable because they can't be kept cold, and which procedures must be cancelled altogether. The ambulance driver decides whether to respond to an emergency call, based on dwindling petrol in the tank.

By reducing the population to survival mode, the blockade robs people of the time and essence to do anything but negotiate the minutiae of what is and isn't possible in their personal and professional lives. Whether any flour will be available to make bread, where it might be found, how much it now costs. Rich or poor, taxi drivers, human rights defenders, and teachers alike spend hours speculating about where a canister of cooking gas might be found. Exhaustion is gripping hold of all in Gaza. Survival leaves little if no room for political engagement – and beyond exhaustion, anger and frustration are all that is left.

The Bear Is Cool: Overcoming Fears of Falling Stock Prices

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By Dean Baker

The stock market's historic plunge over the last year has pushed the news media into a state of near hysteria. News shows and headlines routinely roll out the scorecard on the market's new lows in the same way they might list the victims of a terrorist attack. Sad faced commentators do their best to assure us that better times lie ahead, even if they can find little reason for hope in the latest economic data.

The economic data are indeed grim, but the plunge in stock prices need not be a major cause of concern to the bulk of us who have little or no stock. The basic story is that the stock market is paper wealth, just like bonds, dollar bills or other financial assets. The strength of the economy depends on its ability to produce goods and services, not sheets of paper.

Even though the stock market has fallen by close to 50 percent, the economy still has the same capacity to produce computers and planes, to provide health care and education, and to develop new software and drugs. The economy is every bit as productive after the market collapse as it was before the collapse.

The plunge in stock prices destroyed paper wealth (lots of it). This is bad news for the relatively small group of people who had considerable stock wealth. However, for the bulk of the population, who own little or no stock, even including mutual funds in retirement accounts, the decline need not be cause for concern, since it has little direct impact on the economy.

While there is a popular myth about firms selling stock to finance new investment, in reality the stock market has rarely been an important source of investment capital. Therefore, there is little reason to expect that the plunge in stock prices will have a substantial direct impact on investment or the economy.

There can be a substantial indirect impact of the plunge on the economy. People consume based in part on their stock wealth. Close to $10 trillion of stock wealth has been destroyed in the last year. This implies a falloff in annual consumption on the order of $300 to $400 billion. Unless this demand is replaced, it will amplify the drop in consumption resulting from the collapse of the housing bubble.

But, we would be telling a similar story if the FBI had discovered and destroyed 10 trillion dollars worth of counterfeit dollar bills. This would be very bad news for the people who held the counterfeit money. The destruction of these counterfeit bills would also lead to a sharp falloff in demand. The people who had their counterfeit bills seized would suddenly be much poorer, and therefore would cut back their spending.

But the destruction of counterfeit currency need not hurt the economy, nor does the loss of stock wealth. The key part of the story is that the government must act to sustain demand. The most obvious route to sustain demand at the moment is through a large stimulus package.

Unfortunately, the Bush administration refuses to take the economy's plight seriously, but a large stimulus package will be the first agenda item of the new administration when it takes office in January. If President Obama commits the government to spending another $500 billion a year, or more if necessary, it can offset the loss in demand created by the fall in stock prices and the collapse of the housing bubble.

Of course there will be other damage created by the loss of this stock wealth. Most importantly, the plunge in stock prices has left many public and private pension funds severely under-funded. The federal government can temporarily allow for somewhat more liberal accounting standards in the case of private funds and provide limited support for state and local governments trying to keep their funds solvent. We can ensure that retirees will receive the pensions they were promised.

There will be other people who will be hit by the loss of stock wealth, including tens of millions of workers with defined contribution retirement funds. This is unfortunate and points to the problem of the defined contribution pension system. Workers are forced to bear risk to an extent they probably did not recognize and almost certainly did not want.

One of the many items on the national agenda should be the repair of the private pension system so that all workers have access to a secure form of retirement savings. The plunge in value of retirement accounts should be a painful lesson to tens of millions of hard-working people that they should never trust Wall Street or the politicians it owns.

However, the most immediate story of the market crash is that it is a redistribution of wealth that goes overwhelmingly in the direction of the less wealthy. The plunge has destroyed claims to the nation's wealth by the very wealthy in the same way that destroying $10 trillion in counterfeit bills held by mostly by the wealthy would destroy their wealth.

The key point going forward is to use government spending to ensure that demand remains strong. That way, the rest of the country need not suffer along with the formerly wealthy.

Stop Paying Credit Card Debt

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By Richard C. Cook

Citizens’ Economic Stimulus Plan

Now to the Wall Street bailouts, the plan for the government to purchase preferred shares in banks, and the takeovers of Fannie Mae, Freddie Mac, and AIG, may be added the intention announced last night that the government will throw another $20 billion at Citibank, the nation’s largest financial institution.

The announcement came after Citibank’s stock fell 60 percent last week to $3.77 a share. Of course it won’t help the 50,000 people Citibank is laying off, but, what the hey, no plan is perfect.

Meanwhile, almost nothing has been done to help the consumers within the producing economy who have lost trillions of dollars in the stock market crash, seen the value of their homes fall in many cases below what they owe on their mortgages, and lost jobs or health benefits through the escalating recession. Fannie Mae, which over the weekend sponsored a Walk for the Homeless in Washington, D.C., an event that drew thousands of participants, had announced the previous day that it was placing a moratorium on further home foreclosures until after the Christmas and New Year’s holidays. Wow, thanks.

But what then? Everyone agrees that the recession will be long and deep, not only in the U.S. but in nations that export to us. The Federal Reserve can only go so far in cutting interest rates, because at a certain point nations such as China which have floated the Federal deficit will no longer lend.

Besides, what good are low interest rates if borrowers can’t even afford to repay the principle, which is the situation so many of us find ourselves in today? Japan found that out in the 1990s, leading to a recession that lasted a decade.

So what are ordinary people to do who have families to feed, rent or mortgages to pay that are still inflated from the collapsed housing bubble, unmet medical or insurance expenses, or may be trying to get their kids through college? Should we go deeper into debt when U.S. households, businesses, and government already owe in the neighborhood of $60 trillion (excluding federal unfunded debt liabilities), almost five times the GDP? Banks have cut back on lending anyway.

Then there are the jobs programs. The Senators who bowed down to Secretary of the Treasury Henry Paulson when he came to extort $700 billion for Wall Street scolded the Big Three automakers who came seeking help in salvaging an industry that still employees millions. But maybe by cutting worker wages and benefits the carmakers will be able to limp along a while longer.

Or maybe we should wait to see if president-elect Barack Obama gets his economic stimulus plan through Congress after he is inaugurated. Granted the plan may result in some new jobs a few years down the road once the additional federal borrowing to pay for it works its way through the economy. But will America still be alive by then?

Ladies and gentlemen, the financial system has destroyed America. And really and honestly, the folks in Washington, both those arriving and those departing, don’t know what to do.

I have argued in recent articles that the government should implement what I have modestly called the “Cook Plan,” whereby a dividend similar to the Alaska Permanent Fund would be paid to every U.S. citizen at the rate of $1,000 per month in vouchers for food, housing, and other necessities of life.

This dividend would be paid out of the U.S. Treasury, where I used to work, from an emergency self-financed account without recourse to taxes or government debt. The dividend would constitute each citizen’s fair share of the producing potential of the economy, as advocated by Social Credit reformers in the British Commonwealth nations for decades. The vouchers could then be deposited in a new network of community savings banks that would revitalize local economies through lending at zero-percent interest, charging only administrative fees and a small amount of lending insurance for access to capital.

Such a system would provide recompense for the vast amounts of money stolen from citizens’ pockets due to a lifetime of borrowing from financial institutions which are now looting our children’s and grandchildren’s heritage to pay for generations of abuse. This abuse has taken place under a debt-based monetary system by which banks create money out of thin air, then charge the rest of us interest to utilize it for survival. This system has operated for almost a century under the auspices of a Federal Reserve System accountable to no one.

The “Cook Plan” would bring real reform to a system that has collapsed. The plan would begin to correct the primary cause of the recession, which is the steep decline of consumer purchasing power.

Of course I am not so deluded as to believe Congress or the incoming Obama administration would implement it. Why would the politicians turn against a financial system which paid their way into office? As indicated by the announcement that Obama will appoint Timothy Geithner, president of the Federal Reserve Bank of New York, as his treasury secretary, it’s the banking system that will continue to oversee the government, not the other way around. Even so, I would be happy to explain the "Cook Plan" to Mr. Geithner - for free.

But the citizens must do something. How can we just sit and wait while the financial monopolists smother the economy to death in order to protect their wealth and privileges? The least they could do is declare a moratorium on debt payment until the economy is functioning again or cancel the most egregious types of debt-abuse, such as credit card or student debt.

But they are not likely to do this either. So citizens’ can be forgiven if they simply stop paying. Many home purchasers are already doing this—turning in the keys to their homes and driving away. Who can blame them?

But the worst of the debt may be credit card debt, where the controls on interest rates and penalty charges were lifted long ago and the government stopped providing a tax deduction for interest paid. In many cases, interest on credit cards is 28 percent or more, which means that even by making the minimum required payment, consumers see their balances grow each month. That the politicians could continue to allow such evil to exist is astounding but proves who their masters are.

So until real relief is forthcoming, citizens who are in distress should simply destroy their credit cards and stop paying the monthly bills. People are already doing this. Arrearages and defaults are climbing, and credit card debt is starting to be viewed as the next bubble to burst. But so what? If people have to use a credit card, that means they can’t really afford to buy whatever it is they think they want. If they can afford it, they should use a debit card instead.

Then tell the credit card company you cannot pay. Ask them to write off some or all of the debt, and if they want to take you to court, go on your own and defend yourself. You don’t need a lawyer, and you don’t need anyone’s permission. You also don’t need to go through the horrendous “reformed” bankruptcy system the credit card companies got Congress to pass in 2005. Failure to pay credit card debt is not, thank God, a crime in this country, and there are no debtors’ prisons—yet.

Besides, if people do not pay credit card debt, that money remains in circulation. So default is actually a form of patriotism in today’s trying circumstances. And the credit card companies really don’t lose anything, since the money didn’t exist before they lent it to people who are now broke.

Where I used to live in the country in rural Virginia, the story was going around about a farmer who fell down in the pen where he was feeding his pigs, and the pigs ate him. That is what has been happening in this country. The financial industry which is now swilling at the public trough has been eating alive a nation that was once “the land of the free and the home of the brave.”

Housing is bad enough, but wait — it'll get worse

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By Kevin G. Hall

If you think the housing slump can't get much worse, Martin Feldstein thinks that both home prices and the broader economy can — and very likely will — get a whole lot worse.

The Harvard University professor and former chief economic adviser to Ronald Reagan isn't part of the crowd that continually forecasts doom. For two decades, he's headed the National Bureau of Economic Research, which officially determines when U.S. recessions begin and end.

So when he spoke on Monday night at the annual dinner of the National Economists Club, a gathering of like-minded wonks, Feldstein's grim calculations were noteworthy.

"There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That's one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages — mortgages with negative equity — the median loan-to-value ratio is 120 percent."

That means about 25 percent of all U.S. mortgages are exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that's now 20 percent higher than the value of the home.

That's bad — but it's likely to get worse.

A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.

Together, these two categories account for 23 percent of all properties with a mortgage. Nevada led all states with 48 percent of homes with negative equity. Florida and Arizona each had 29 percent of homes with underwater mortgages, while 27 percent of mortgages in California were upside-down, the group said.

If home prices fall another 10 to 15 percent, as measured by the Case/Shiller Home Price Index, then four out of every 10 mortgages in the U.S. could be underwater, Feldstein said.

"At those levels, it's hard to see how many people are going to be willing to keep up with their mortgages," Feldstein said.

The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.

That means that for homeowners who owe 35 percent more than their homes' value, it would take, at historical averages, about 15 years just to break even on their home investment. They won't build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.

Not all real estate experts buy Feldstein's stark numbers.

"That's the highest percentage I've heard from anybody, by quite a bit," said Rick Sharga, senior vice president for Realtytrac, an Irvine, Calif., company that publishes foreclosure data.

More conservative forecasts, though still dismal, point to a smaller drop in home prices of 5 percent to 7 percent, he said.

Added Jay Brinkmann, chief economist for the Mortgage Bankers Association in the nation's capital, "If you generalize the numbers too far, I think it leads to some incorrect conclusions."

The Case/Shiller Index is driven by home sales that have taken place. It doesn't reflect the stability in older, established neighborhoods, Brinkmann said. The vacant and for-sale rates nationwide for homes built before 2000 — that is, pre-boom — is just 2 percent. The delinquency and foreclosure problems are concentrated mostly in a handful of states, such as California, Florida, Arizona and Nevada, which had overbuilding and weak lending standards.

"Those states have about 25 percent of the mortgages and 50 percent of the foreclosure starts" in the latest association survey, Brinkmann said. Nationwide, 6.4 percent of all mortgages were delinquent through June, but the number of delinquencies and foreclosure starts are breaking records every quarter, the most recent MBA survey said.

Brinkmann's own rough guess is that somewhere between 6 million and 8 million mortgages are underwater, still a very high number. He doesn't see the national outlook getting better any time soon, framing his estimate of when that happens in the form of a question: "When does the influence of these massive declines in California and Florida go away?"

Realtytrac's forecast isn't any brighter.

"The best-case scenario in terms of the real estate market is we probably bottom out between mid-year and the end of 2009. And that's the best case from where we're sitting," Sharga said. "The only reason it could happen that soon is because of how rapidly and how severe the downturn has been in the housing market."

A lot would have to go right to reach that best-case scenario. Government and industry efforts would have to step up efforts to forgive or make up the difference between the value of the mortgage and the value of the home.

The final batch of subprime mortgages scheduled to reset to a higher interest rate will have done so by the end of the first quarter of 2009.

In a rare bit of relief for one segment of the housing market, the interest rates that determine the monthly payments for some adjustable-rate mortgages are falling.

Sharga said, however, that the next problem is the $60 billion of adjustable-rate Alt-A mortgages, which fall between subprime and prime loans. Millions of these loans are scheduled to reset next year to higher interest rates. That could bring monthly mortgage payment increases of $1,000 or more if the loans aren't modified or refinanced.

All this is happening amid what now clearly is a deepening recession, with the highest job losses and deepest drops in consumer spending in decades. The Labor Department reported on Thursday that weekly jobless claims jumped to 542,000, a 16-year high, last week. That suggests a fast-deepening recession.

The White House Thursday acknowledged for the first time that it now supports efforts in Congress to extend unemployment benefits for longer periods to the millions of Americans who can't find work in the downturn.

Consumer spending drives about two-thirds of U.S. economic activity, and as unemployment mounts and consumers retrench, that leads to even more unemployment, mortgage delinquencies and foreclosures.

"The problem now is what will be happening with jobs," Brinkmann said.

Citigroup Saw No Red Flags Even as It Made Bolder Bets

Go to Original

“Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working.”

Charles O. Prince III, Citigroup’s chief executive, in 2006

In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.

There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.

Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.

Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.

But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.

Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.

Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.

Burdened by the losses and a crisis of confidence, Citigroup’s future is so uncertain that regulators in New York and Washington held a series of emergency meetings late last week to discuss ways to help the bank right itself.

And as the credit crisis appears to be entering another treacherous phase despite a $700 billion federal bailout, Citigroup’s woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted.

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.

Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.

For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.

But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.

To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable.

“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”

Questions on Oversight

Though they carry less prestige and are paid less than Wall Street traders and bankers, risk managers can wield significant clout. Their job is to monitor trading floors and inquire about how a bank’s money is being invested, so they can head off potential problems before blow-ups occur. Though risk managers and traders work side by side, they can have an uncomfortable coexistence because the monitors can put a brake on trading.

That is the way it works in theory. But at Citigroup, many say, it was a bit different.

David C. Bushnell was the senior risk officer who, with help from his staff, was supposed to keep an eye on the bank’s bond trading business and its multibillion-dollar portfolio of mortgage-backed securities. Those activities were part of what the bank called its fixed-income business, which Mr. Maheras supervised.

One of Mr. Maheras’s trusted deputies, Randolph H. Barker, helped oversee the huge build-up in mortgage-related securities at Citigroup. But Mr. Bushnell, Mr. Maheras and Mr. Barker were all old friends, having climbed the bank’s corporate ladder together.

It was common in the bank to see Mr. Bushnell waiting patiently — sometimes as long as 45 minutes — outside Mr. Barker’s office so he could drive him home to Short Hills, N.J., where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas.

Because Mr. Bushnell had to monitor traders working for Mr. Barker’s bond desk, their friendship raised eyebrows inside the company among those concerned about its controls.

After all, traders’ livelihoods depended on finding new ways to make money, sometimes using methods that might not be in the bank’s long-term interests. But insufficient boundaries were established in the bank’s fixed-income unit to limit potential conflicts of interest involving Mr. Bushnell and Mr. Barker, people inside the bank say.

Indeed, some at Citigroup say that if traders or bankers wanted to complete a potentially profitable deal, they could sometimes rely on Mr. Barker to convince Mr. Bushnell that it was a risk worth taking.

Risk management “has to be independent, and it wasn’t independent at Citigroup, at least when it came to fixed income,” said one former executive in Mr. Barker’s group who, like many other people interviewed for this article, insisted on anonymity because of pending litigation against the bank or to retain close ties to their colleagues. “We used to say that if we wanted to get a deal done, we needed to convince Randy first because he could get it through.”

Others say that Mr. Bushnell’s friendship with Mr. Maheras may have presented a similar blind spot.

“Because he has such trust and faith in these guys he has worked with for years, he didn’t ask the right questions,” a former senior Citigroup executive said, referring to Mr. Bushnell.

Mr. Bushnell and Mr. Barker did not return repeated phone calls seeking comment. Mr. Maheras declined to comment.

For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.

According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations, or C.D.O.’s — securities that packaged mortgages and other forms of debt into bundles for resale to investors.

Because C.D.O.’s included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default.

“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ ”

It appeared to be a good time for building up Citigroup’s C.D.O. business. As the housing market around the country took flight, the C.D.O. market also grew apace as more and more mortgages were pooled together into newfangled securities.

From 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone.

Even as Citigroup’s C.D.O. stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.

When Mr. Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls.

“He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest,” said Meredith A. Whitney, a banking analyst who was one of the company’s early critics. “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.”

Problems with trading and banking oversight at Citigroup became so dire that the Federal Reserve took the unusual step of telling the bank it could make no more acquisitions until it put its house in order.

In 2005, stung by regulatory rebukes and unable to follow Mr. Weill’s penchant for expanding Citigroup’s holdings through rapid-fire takeovers, Mr. Prince and his board of directors decided to push even more aggressively into trading and other business that would allow Citigroup to continue expanding the bank internally.

One person who helped push Citigroup along this new path was Mr. Rubin.

Pushing Growth

Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.

Mr. Weill, as Citigroup’s chief, wooed Mr. Rubin to join the bank after Mr. Rubin left Washington. Mr. Weill had been involved in the financial services industry’s lobbying to persuade Washington to loosen its regulatory hold on Wall Street.

As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.

“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” he said in an interview in April. Asked then whether he had made any mistakes during his tenure at Citigroup, he offered a tentative response.

“I’ve thought a lot about that,” he said. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”

Besides, he said, it was impossible to get a complete handle on Citigroup’s vulnerabilities unless you dealt with the trades daily.

“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he said. “We had highly experienced, highly qualified people running the operation.”

But while Mr. Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank’s strategy.

In 2005, as Citigroup began its effort to expand from within, Mr. Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business.

Former colleagues said Mr. Rubin also encouraged Mr. Prince to broaden the bank’s appetite for risk, provided that it also upgraded oversight — though the Federal Reserve later would conclude that the bank’s oversight remained inadequate.

Once the strategy was outlined, Mr. Rubin helped Mr. Prince gain the board’s confidence that it would work.

After that, the bank moved even more aggressively into C.D.O.’s. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for C.D.O. traders. Mr. Barker drew pay totaling $15 million to $20 million a year, according to former colleagues, and Mr. Maheras became one of Citigroup’s most highly compensated employees, earning as much as $30 million at the peak — far more than top executives like Mr. Bushnell in the risk-management department.

In December 2005, with Citigroup diving into the C.D.O. business, Mr. Prince assured analysts that all was well at his bank.

“Anything based on human endeavor and certainly any business that involves risk-taking, you’re going to have problems from time to time,” he said. “We will run our business in a way where our credibility and our reputation as an institution with the public and with our regulators will be an asset of the company and not a liability.”

Yet as the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell — setting up a potential conflict because that gave Mr. Maheras influence over employees who were supposed to keep an eye on his traders.

C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.

While the sheer size of Citigroup’s C.D.O. position caused concern among some around the trading desk, most say they kept their concerns to themselves.

“I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.

Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup’s top executives expressed few concerns about their bank’s exposure to mortgage-linked securities.

In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.

The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.

Around the same time, Mr. Maheras continued to assure his colleagues that the bank “would never lose a penny,” according to an executive who spoke to him.

In mid-September 2007, Mr. Prince convened the meeting in the small library outside his office to gauge Citigroup’s exposure.

Mr. Maheras assured the group, which included Mr. Rubin and Mr. Bushnell, that Citigroup’s C.D.O. position was safe. Mr. Prince had never questioned the ballooning portfolio before this because no one, including Mr. Maheras and Mr. Bushnell, had warned him.

But as the subprime market plunged further, Citigroup’s position became more dire — even though the firm held onto the belief that its C.D.O.’s were safe.

On Oct. 1, it warned investors that it would write off $1.3 billion in subprime mortgage-related assets. But of the $43 billion in C.D.O.’s it had on its books, it wrote off only about $95 million, according to a person briefed on the situation.

Soon, however, C.D.O. prices began to collapse. Credit-rating agencies downgraded C.D.O.’s, threatening Citigroup’s stockpile. A week later, Merrill Lynch aggressively marked down similar securities, forcing other banks to face reality.

By early November, Citigroup’s anticipated write-downs ballooned to $8 billion to $11 billion. Mr. Barker and Mr. Maheras lost their jobs, as Mr. Bushnell did later on. And on Nov. 4, Mr. Prince told the board that he, too, would resign.

Although Mr. Prince received no severance, he walked away with Citigroup stock valued then at $68 million — along with a cash bonus of about $12.5 million for 2007.

Putting Out Fires

Mr. Prince was replaced last December by Vikram S. Pandit, a former money manager and investment banker whom Mr. Rubin had earlier recruited in a senior role. Since becoming chief executive, Mr. Pandit has been scrambling to put out fires and repair Citigroup’s deficient risk-management systems.

Earlier this year, Federal Reserve examiners quietly presented the bank with a scathing review of its risk-management practices, according to people briefed on the situation.

Citigroup executives responded with a 25-page single-spaced memo outlining a sweeping overhaul of the bank’s risk management.

In May, Brian Leach, Citigroup’s new chief risk officer, told analysts that his bank had greatly improved oversight and installed several new risk managers. He said he wanted to ensure “that Citi takes the lessons learned from recent events and makes critical enhancements to its risk management frameworks. A change in culture is required at Citi.”

Meanwhile, regulators have criticized the banking industry as a whole for relying on outsiders — in particular the ratings agencies — to help them gauge the risk of their investments.

“There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk,” John C. Dugan, the head of the Office of the Comptroller of the Currency, the chief federal bank regulator, said in a speech earlier this year.

But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities — like C.D.O.’s — rather than selling them off to other investors.

“What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses,” he said.

Mr. Dugan did not mention any specific bank by name, but Citigroup is the largest player in the C.D.O. business of any bank the comptroller regulates.

For his part, Mr. Pandit faces the twin challenge of rebuilding investor confidence while trying to fix the company’s myriad problems.

Citigroup has suffered four consecutive quarters of multibillion-dollar losses as it has written down billions of dollars of the mortgage-related assets it held on its books.

But investors worry there is still more to come, and some board members have raised doubts about Mr. Pandit’s leadership, according to people briefed on the situation.

Citigroup still holds $20 billion of mortgage-linked securities on its books, the bulk of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential flood of losses on auto, mortgage and credit card loans as the global economy plunges into a recession.

Also, hundreds of billions of dollars in dubious assets that Citigroup held off its balance sheet is now starting to be moved back onto its books, setting off yet another potential problem.

The bank has already put more than $55 billion in assets back on its balance sheet. It now says an added $122 billion of assets related to credit cards and possibly billions of dollars of other assets will probably come back on the books.

Even though Citigroup executives insist that the bank can ride out its current difficulties, and that the repatriated assets pose no threat, investors have their doubts. Because analysts do not have a complete grip on the quality of those assets, they are warning that Citigroup may have to set aside billions of dollars to guard against losses.

In fact, some analysts say they believe that the $25 billion that the federal government invested in Citigroup this fall might not be enough to stabilize it.

Others say the fact that such huge amounts have yet to steady the bank is a reflection of the severe damage caused by Citigroup’s appetites.

“They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls,” said Roy Smith, a professor at the Stern School of Business at New York University. “Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys.”

Pakistanis fear U.S. collision with neighboring enemies

Go to Original
By Jane Perlez

A redrawn map of South Asia has been making the rounds among Pakistani elites. It shows their country truncated, reduced to an elongated sliver of land with the big bulk of India to the east, and an enlarged Afghanistan to the west.

That the map was first circulated as a theoretical exercise in some American neoconservative circles matters little here. It has fueled a belief among Pakistanis, including members of the armed forces, that what the United States really wants is the breakup of Pakistan, the only Muslim country with nuclear arms.

"One of the biggest fears of the Pakistani military planners is the collaboration between India and Afghanistan to destroy Pakistan," said a senior Pakistani government official involved in strategic planning, who insisted on anonymity as per diplomatic custom. "Some people feel the United States is colluding in this."

That notion may strike Americans as strange coming from an ally of 50 years. But as the incoming Obama administration tries to coax greater cooperation from Pakistan in the fight against militancy, it can hardly be ignored.

This is a country where years of weak governance have left ample room for conspiracy theories of every kind. But like much such thinking anywhere, what is said frequently reveals the tender spots of a nation's psyche. Educated Pakistanis sometimes say that they are paranoid, but add that they believe they have good reason.

Pakistan, a 61-year-old country marbled by ethnic fault lines, is a collection of just four provinces, which often seem to have little in common. Virtually every one of its borders, drawn almost arbitrarily in the last gasps of the British Empire, is disputed with its neighbors, not least Pakistan's bitter and much larger rival, India.

These facts and the insecurities that flow from them inform many of Pakistan's disagreements with the United States, including differences over the need to rein in militancy in the form of Al Qaeda and the Taliban.

The new democratically elected president, Asif Ali Zardari, has visited the United States twice since assuming power three months ago. He has been generous in his praise of the Bush administration. But that stance is criticized at home as fawning and wins him little popularity among a steadfastly anti-American public.

So how will the promise by President-elect Barack Obama for a new start between the United States and Pakistan be received here? How can it be begun?

One possibility could be some effort to ease Pakistani anxieties, even as the United States demands more from Pakistan. That will probably mean a regional approach to what, it is increasingly apparent, are regional problems. There, Pakistani and American interests may coincide.

American military commanders, including General David Petraeus, have started to argue forcefully that the solution to the conflict in Afghanistan, where the American war effort looks increasingly uncertain, must involve a wide array of neighbors.

Obama has said much the same. Several times in his campaign, he laid out the crux of his thinking. Reducing tensions between Pakistan and India would allow Pakistan to focus on the real threat — the Qaeda and Taliban militants who are tearing at the very fabric of the country.

"If Pakistan can look towards the east with confidence, it will be less likely to believe its interests are best advanced through cooperation with the Taliban," Obama wrote in Foreign Affairs magazine last year.

But such an approach faces sizable obstacles, the biggest being the conflict over Kashmir. The Himalayan border area has been disputed since the partition of India and Pakistan in 1947, and remains divided between them.

Pakistan's army and intelligence agencies have long fought a proxy war with India by sponsoring militant groups to terrorize the Indian-administered part of the territory.

After the 9/11 attacks, Pakistan reined in those militants for a time, but this year the militants have renewed their incursions. Talks between the sides made some progress in recent years but have petered out.

Pakistanis warn that the United States should not appear too eager to mediate. First, they caution, India has always regarded Kashmir as a bilateral question. India, they note, also faces a general election early next year, an inappropriate moment to push such an explosive issue.

Second, some Pakistanis are concerned about the reliability of the United States as a fair mediator. "Given the United States' record on the Palestinian issue, where the Palestinians had to move 10 times backwards and the Israelis moved the goal posts, the same could happen here," said Zubair Khan, a former commerce minister who has watched Kashmir closely.

It was discouraging, Khan said, that the United States ignored the importance of the huge nonviolent protests by Muslims in Kashmir against Indian rule this summer. "Anywhere else, and they would have been hailed as an Orange Revolution," he said, referring to the wave of protests that led to a change in the Ukrainian government in 2004.

Such distrust has been exacerbated by what Pakistanis see as the Bush administration's tilt toward India.

Exhibit A for the Pakistanis is India's nuclear deal with the United States, which allows India to engage in nuclear trade even though it never joined the global Nuclear Nonproliferation Treaty. Pakistan, with its recent history of spreading nuclear technology, received no comparable bargain.

The nuclear deal was devised in Washington to position India as a strategic counterbalance to China. That is how it is seen in Pakistan, too, but with no enthusiasm.

"The United States has changed the whole nuclear order by this deal, and in doing so is containing China, the only friend Pakistan has in the region," said Talat Masood, a retired Pakistani army general.

Further, Pakistan is upset about the advances India is making in Afghanistan, with no checks from the United States, Masood said.

India has recently made big investments in Afghanistan, where Pakistan has been competing for influence. These include a road to the Iranian border that will eventually give India access to the Iranian port of Chabahar, circumventing Pakistan.

India has offered training for Afghanistan's military, given assistance for a new Parliament building in Kabul and has re-opened consulates along the border with Pakistan.

The consulates, the Pakistanis charge, are used by India as cover to lend support to a long-running separatist movement in Baluchistan Province. (Baluchistan was even made an independent state on the theoretical map, which accompanied an article by Ralph Peters titled "Blood Borders: How a Better Middle East Would Look," originally published in Armed Forces Journal.)

Both India and Pakistan in fact have a long and destructive history of, gently or not, putting in the knife. Exhibit A for the Indians is the bombing in July of its embassy in Afghanistan, which American and Indian officials say can be traced to groups linked to Pakistan's spy agency.

If the Obama administration is indeed to convince Pakistanis that militancy, not the Indian Army, presents the gravest threat, it will not be easy.

The commander of American forces in Afghanistan, General David McKiernan, got a taste of the challenge this month, when he visited Islamabad and sat down with a group of about 70 members of Pakistan's Parliament at the residence of the United States ambassador, Anne Patterson. Their attitude showed an almost total incomprehension of the reasons for American behavior in the region after Sept. 11, 2001.

"A couple of the questions I got were, 'Why did you Americans come to Afghanistan when it was so peaceful, before you got there?' " McKiernan recalled during an appearance at the Atlantic Council in Washington last week.

"Another one," he said, "was, 'We understand that you've invited a thousand Indian soldiers to serve in Afghanistan by Christmas.' "

There was no truth to the claim, he told the Pakistanis. "We have a lot of work to do," he told his audience in Washington.

Indeed, among ordinary Pakistanis, many still regard Al Qaeda more positively than the United States, polls find. Talk shows here often include arguments that the suicide bombings in Pakistan are payback for the Pakistani fighting an American war.

Some commentators suggest that the United States is actually financing the Taliban. The point is to tie down the Pakistani Army, they say, leaving the way open for the Americans to grab Pakistan's nuclear weapons.

Recently, in the officer's mess in Bajaur, the northern tribal region where the Pakistani Army is tied down fighting the militants, one officer offered his own theory: Osama bin Laden did not exist, he told a visiting journalist.

Rather, he was a creation of the Americans, who needed an excuse to invade Afghanistan and encroach on Pakistan.

Robert Gates Wants to Keep His Pentagon Gig, so He's Pandering to Obama's Bad Ideas for Afghanistan

Go to Original
By Ray McGovern

It may become a biennial ritual. Every two years, if the commander-in-chief (or the commander-in-chief-elect) says he wants to throw more troops into an unwinnable war for no clear reason other than his political advantage, panderer-in-chief Robert Gates will shout "Outstanding!"

Never mind what the commanders in the field are saying -- much less the troops who do the dying.

After meeting in Canada on Friday with counterparts from countries with troops in Afghanistan, Defense Secretary Gates emphasized to reporters there is a shared interest in "surging as many forces as we can" into Afghanistan before the elections there in late September 2009.

At the concluding news conference, Gates again drove home the point: "It’s important that we have a surge of forces."

Basking in the alleged success of the Iraq "surge," Gates knows a winning word when he hears one -- whether the facts are with him or not. Although the conventional wisdom in Washington credits the "surge" with reducing violence in Iraq, military analysts point to other reasons -- including Sunni tribes repudiating al-Qaeda extremists before the "surge" and the de facto ethnic cleansing of Sunni and Shiite neighborhoods.

In Washington political circles, there’s also little concern about the 1,000 additional U.S. soldiers who have died in Iraq since President George W. Bush started the "surge" early in 2007. The Americans killed during the "surge" represent roughly one-quarter of the total war dead whose numbers passed the 4,200 mark last week.

Nor is there much Washington commentary about what Bush’s grotesque expenditure in blood and treasure will mean in the long term, even as the Iraqis put the finishing touches on a security pact that sets a firm deadline for a complete U.S. military withdrawal by the end of 2011, wording that may be Arabic for "thanks, but no thanks."

And most Americans do not know from reading the reports from their Fawning Corporate Media that the "surge" was such a "success" that the United States now has about 8,000 more troops in Iraq than were there before the "surge" rose and fell.

The real "success" of the Iraq "surge" is proving to be that it will let President Bush and Vice President Dick Cheney leave office on Jan. 20, 2009, without having to admit that they were responsible for a strategic disaster. They can lay the blame for failure on their successors.

Gates a Winner?

Gates stands to be another beneficiary of the Iraq "surge."

Already, he has the defense secretary job. In November 2006, he was plucked from the relative obscurity of his Texas A&M presidency and put back into the international spotlight that he has always craved, because he was willing to front for the "surge" when even Donald Rumsfeld was urging Bush to start a troop drawdown.

Now, the perceived "success" of the "surge" is giving hawkish Washington Democrats an excuse to rally around Gates and urge President-elect Barack Obama to keep him on.

Ever an accomplished bureaucrat, Gates is doing what he can to strengthen his case.

On Friday, Gates seemed at pains to demonstrate that his approach to Afghanistan is identical to the one publicly espoused by his prospective new employer who is currently reviewing Gates’ job renewal application. And, as he did with the Iraq "surge" over the past two years, Gates now is talking up the prospects for an Afghan "surge."

"The notion that things are out of control in Afghanistan or that we’re sliding toward a disaster, I think, is far too pessimistic," Gates said. Yet the argument that Gates used to support his relative optimism makes us veteran intelligence officers gag -- at least those who remember the U.S. in Vietnam in the 1960s, the Soviets in Afghanistan in the 1980s, and other failed counterinsurgencies.

"The Taliban holds no land in Afghanistan and loses every time it comes into contact with coalition forces," Gates explained.

Our secretary of defense is insisting that U.S. troops have not lost one pitched battle with the Taliban or al-Qaeda. Engagements like the one on July 13, 2008, in which "insurgents" attacked an outpost in Konar province, killing nine U.S. soldiers and wounding 15 others, apparently do not qualify as "contact," but are merely "incidents."

Gates ought to read up on Vietnam, for his words evoke a similarly benighted comment by U.S. Army Col. Harry Summers after that war had been lost. In 1974, Summers was sent to Hanoi to try to resolve the status of Americans still listed as missing. To his North Vietnamese counterpart, Col. Tu, Summers made the mistake of bragging, "You know, you never beat us on the battlefield." Colonel Tu responded, "That may be so, but it is also irrelevant."

As Vietnamese Communist forces converged on Saigon in April 1975, the U.S. withdrew all remaining personnel. Summers was on the last Marine helicopter to fly off the roof of the American Embassy at 5:30 a.m. on April 30. As he later recalled, "I was the second-to-the-last Army guy out of Vietnam -- quite a searing experience."

More Vietnams?

Why is this relevant? Because if Obama repeats the mistakes of Lyndon Johnson, Richard Nixon, and Gerald Ford, U.S. Marine choppers may be plucking folks not only off the U.S. embassy roof in Baghdad, but also from the mountains and valleys of Afghanistan. No ignoramus, Gates knows that his comments about the Taliban losing "every time" that there is contact with coalition forces is as irrelevant as those of Col. Summers 34 years ago.

Yet, it would be folly to expect Gates to give advice to a superior that challenges the policies that Gates thinks his superior favors. Gates has been the consummate career careerist, going back to his days as head of analysis at CIA in the 1980s when he fashioned intelligence reports that gave the policymakers what they wanted to hear. Instead of the old-fashioned "bark-on" intelligence, the Gates variety was "apple-polished" intelligence.

Time running out for Gates

He wants to stay on as Defense Secretary and apparently thinks that his lifelong strategy of telling his superiors what they want to hear will now work with Barack Obama. Gates is nearing the end of a highly sophisticated campaign to convince Obama and his advisers that the current defense secretary is just who they need at the Pentagon to execute Obama’s policies -- and look really bipartisan to boot.

The president-elect’s position has long been that we need to send "at least two additional brigades" (about 7,000 troops) to Afghanistan. So the defense secretary would have us believe, as he said Friday, that "surging as many forces as we can" is an outstanding idea. And with troops having to leave Iraqi cities by next June, in the first stage of the U.S. withdrawal demanded by the draft status-of-forces agreement, there will be more soldiers available to send into the mountains of Afghanistan. Don’t you love it when a plan comes together?

Ironically, this resembles closely the proposed policy of Sen. John McCain, who argued during the debate with Obama on Sept. 26 that "the same [surge] strategy" that Gen. David Petraeus implemented in Iraq is "going to have to be employed in Afghanistan." For good measure, Gov. Sarah Palin told Katie Couric "a surge in Afghanistan also will lead us to victory there, as it has proven to have done in Iraq."

Reality bites

Oops! Within a week, Gen. David McKiernan, the top U.S. commander in Afghanistan, undercut McCain and Palin, insisting emphatically that no Iraq-style "surge" of forces will end the conflict in Afghanistan. Speaking in Washington on Oct. 1, McKiernan employed unusual candor in describing Afghanistan as "a far more complex environment than I ever found in Iraq." The country’s mountainous terrain, rural population, poverty, illiteracy, 400 major tribal networks, and history of civil war make it a unique challenge, he said.

"The word I don’t use for Afghanistan is ’surge,’" McKiernan continued, adding that what is required is a "sustained commitment" to a counterinsurgency effort that could last many years and would ultimately require a political, not military, solution. McKiernan added that he doubts that "another facet of the Iraq strategy" -- the U.S. military’s programs to recruit tribes to oppose insurgents -- can be duplicated in Afghanistan. "I don’t want the military to be engaging the tribes," said McKiernan.

Recently, President-elect Obama has been relatively quiet on Afghanistan, and one lives in hope that, before he actually commits to sending more brigades to Afghanistan, he will assemble a group of people who know something about that country, the forces at play in the region, and insurgency. If he gathers the right people, and if he listens, it seems a good bet that his campaign rhetoric about Afghanistan being the good war will remain just that, rhetoric.

In any event, press reports suggest that Gates has only another week or so left to pretend to the president-elect that he thinks the ideas reflected in Obama’s rhetoric are outstanding. And, as Gates’ predecessor Rumsfeld might have put it, you have to go with the rhetoric you’ve got. Right now, the word "surge" brings nods of approval at influential dinner parties in Washington.

What does Gen. McKiernan know, anyway? Gates’ Pentagon says that McKiernan now has requested three additional brigade combat teams and additional aviation assets. And yet, he says he’s allergic to a "surge"?

If past is precedent, Gen. McKiernan already realizes he has little choice but to salute smartly, do what he is told, and not diverge from what inexperienced civilians like Gates are promoting. After all, didn’t McNamara know best in the early days of Vietnam and didn’t Rumsfeld know best at the start of the Iraq war?

As the saying goes, if you are a hammer, everything looks like a nail. If you are a general assigned a mission -- though it appear to be Mission Impossible -- you salute smartly and use those troops entrusted to you to do what armies do. At least that has been the tradition since Vietnam. Such behavior is a disgrace when generals know better.

Ambitious but empty suits

I’m all for civilian control of the military. But I see much more harm than good in political generals -- like the anointed David Petraeus -- who give ample evidence of being interested, first and foremost, in their own advancement. Why do I say that? Because Petraeus, like McKiernan, knows Afghanistan is another quagmire. But he won’t say it.

Rather than do the right thing and brief his superiors on the realities of Afghanistan, Petraeus and the generals he has promoted seem likely to follow the time-honored practice of going along to get along. After all, none of them get killed or wounded. Rather the vast majority get promoted, so long as they keep any dissenting thoughts to themselves.

It is the same pattern we witnessed regarding Vietnam. Although the most senior military brass knew, as the French learned before them, that the war/occupation could not be successful, no senior officer had the integrity and courage to speak out and try to halt the lunacy.

Are there Army generals with guts?

It will be interesting to see what McKiernan actually does if and when more troops are surged down his throat. If he has the courage of his convictions, maybe he’ll quit and perhaps even say something.

As a former Army officer, I would love to see an Army general display the courage that one saw in Admiral William Fallon, former commander of CENTCOM, who openly refused to "do Iran" on his watch, and got cashiered for it. Two years ago, Army Generals John Abizaid and George Casey, speaking on behalf of their senior commanders in the field, pushed back strongly against the idea of adding more U.S. troops to those already in Iraq. They finally succeeded in persuading former Defense Secretary Rumsfeld of the merits of their argument.

It was when Rumsfeld himself started to challenge the advice Bush was getting (to "surge" and thus not "lose" Iraq on his watch) that Robert Gates was brought in to replace Rumsfeld, relieve Abizaid and Casey from command, and help anoint Gen. Petraeus as surge-savior. (For details on Rumsfeld’s break with Bush, see’s "Robert Gates: As Bad as Rumsfeld?")

But rather than speak out, Abizaid folded his tent like an Arab and silently stole away. Casey accepted the sinecure of Army chief of staff as hush money. And a thousand more U.S. troops died. The temporary respite provided by the 29,000 troops who survived the surge helped achieve the administration’s main purpose -- deferring the inevitable U.S. troop withdrawal (not in "victory" as Bush liked to say, but by demand of the Iraqi government) until Bush and Cheney were safely out of office.

As for Gates, what he does not know about Afghanistan and insurgency could fill a medium-sized library. So could what Gates does know about how to ingratiate himself with the next level up.

If it is true that serious consideration is being given to keeping Gates on past January, it will be interesting to see if the pandering padding of his resume eventually wins the day with the president-elect.

"We killed her… that will be with me the rest of my life"

Go to Original
By Nick Turse

Lawrence Wilkerson's Lessons of War and Truth

Nations in flux are nations in need. A new president will soon take office, facing hard choices not only about two long-running wars and an ever-deepening economic crisis, but about a government that has long been morally adrift. Torture-as-policy, kidnappings, ghost prisons, domestic surveillance, creeping militarism, illegal war-making, and official lies have been the order of the day. Moments like this call for truth-tellers. For Truth and Reconciliation Commissions. For witnesses willing to come forward. For brave souls ready to expose hidden and forbidden realities to the light of day.

Lawrence B. Wilkerson is such a man. He came to national prominence in October 2005 when -- having left his post as chief of staff to Secretary of State Colin Powell earlier in the year -- he laid bare some of the secrets of the Bush White House as he had experienced them. He had been inside the halls of power as the invasion and occupation of Iraq took shape. In Bush’s second term, on the outside, he found that he had had enough. The American people, he thought, had a right to know just how their government was really working, and so he offered them this vision of the Bush administration in action: "[S]ome of the most important decisions about U.S. national security -- including vital decisions about postwar Iraq -- were made by a secretive, little-known cabal. It was made up of a very small group of people led by Vice President Dick Cheney and Defense Secretary Donald Rumsfeld."

In the years since, Wilkerson, a retired Army colonel, has not been reticent, especially when it came to "the militarization of America’s foreign policy" and the practice of extraordinary rendition (the kidnapping of terror suspects and their deliverance into the hands of regimes ready and willing to torture them).

Nor, earlier this year, did he shy away from testifying before the House Judiciary Subcommittee on the Constitution, Civil Rights, and Civil Liberties about how, in 2004, while still at the State Department, he had compiled "a dossier of classified, sensitive, and open source information" on American interrogation and imprisonment practices at Abu Ghraib prison in Iraq that yielded, he said, "overwhelming evidence that my own government had sanctioned abuse and torture."

"We have damaged our reputation in the world and thus reduced our power," he told the panel in closing. "We were once seen as the paragon of law; we are now in many corners of the globe the laughing stock of the law."

Wilkerson has spent most of his adult life in the service of the United States government as a soldier for 31 years, including military service in Vietnam; as a special assistant to the Chairman of the Joint Chiefs of Staff; as the Deputy Director of the U.S. Marine Corps War College; and finally, from 2002 to 2005, as chief of staff to Powell at the State Department. His most vital service to his country, however, has arguably been in the years since.

Wilkerson has become a blunt truth-teller, and of all the truths he has told, there is one that’s especially personal and painful; one that, after so many years, he could have kept to himself, but decided not to. It’s a story, now decades old, of truth, consequences, and a dead little girl. It is no less timely for that, offering essential lessons, especially to U.S. troops engaged in seemingly interminable wars that have left countless civilians, little girls included, dead.

"I fault myself for it to this day"

Testifying before that congressional subcommittee in June, Wilkerson stated:

"In Vietnam, as a first lieutenant and a captain of Infantry, on several occasions I had to restrain my soldiers, even one or two of my officers. When higher authorities took such actions as declaring free fire zones -- meaning that anything that moved in that zone could be killed -- and you came upon a 12-year old girl on a jungle path in that zone, it was clear you were not going to follow orders. But some situations were not so black and white and you had to be always on guard against your soldiers slipping over the edge.

"As their leader, it was incumbent upon me to set the example -- and that meant sometimes reprimanding or punishing a soldier who broke the rules. In all cases, it meant that I personally followed the rules and not just by ’breaking’ the so-called rules of engagement, as in the designated free fire zone, but by following the rules that had been ingrained in me by my parents, by my schools, by my church, and by the U.S. Army in classes about the Geneva Conventions and what we called the law of land warfare. I had been taught and I firmly believed when I took the oath of an officer and swore to support and defend the Constitution, that American soldiers were different and that much of their fighting strength and spirit came from that difference and that much of that difference was wrapped up in our humaneness and our respect for the rights of all."

Almost two years earlier, fellow reporter Deborah Nelson and I met with Wilkerson at a Starbucks outside of Washington, D.C. We hunkered down in the back of the coffeehouse, while, amid the din of barista-speak and the whir of coffee machines, Wilkerson told us about his service in Vietnam: How he flew low and slow -- often under the tree-tops -- as a scout pilot for the infantry, in a OH-6A "Loach" Light Observation Helicopter, operating in the III Corps region well north of Saigon. During his 13 months in Vietnam, Wilkerson logged more than 1,000 combat hours, without ever being wounded or getting shot down. His troops -- he oversaw 300 men by the end of his tour -- used to call him "the Teflon guy" for good reason.

But two moments during his time in Vietnam did, by his own account, stick with him. They are, in fact, indelibly ingrained in his memory.

One occurred when, as a young lieutenant, he got into verbal battle with an infantry battalion commander -- a lieutenant colonel -- on the ground in Tay Ninh Province. He was in the air leading his platoon when the ground commander came in over the radio, declaring the area his helicopter was over a free fire zone.

Ubiquitous during the war, free fire zones gave American troops the authorization to unleash unrestrained firepower, no matter who was still living in an area, in contravention of the laws of war. The policy allowed artillery barrages, for example, to be directed at populated rural areas, Cobra helicopter gunships to open fire on Vietnamese peasants just because they were running in fear below, or grunts on the ground to take pot shots at children out fishing and farmers working in their fields. "Cobra pilots and some of my colleagues in the Loach platoon treated that as a license to shoot anything that moved: wild boar, tigers, elephants, people. It didn’t matter," Wilkerson told us.

On this occasion, the battalion commander ordered Wilkerson and his unit to engage in "recon by fire" -- basically firing from their helicopters into brushy areas, tree lines, hootches (as Vietnamese peasant homes were known) or other structures, in an attempt to draw enemy fire and initiate contact. Knowing that, too many times, this led to innocent civilians being wounded or killed, Wilkerson told the ground commander that his troops would only fire on armed combatants. "To hell with your free fire zone," he said.

A "trigger-happy" Cobra pilot under his command then entered the verbal fray on the radio, siding with the battalion commander. With that, as Wilkerson described it that day, he maneuvered his own helicopter between the Cobra gunship and the free fire zone below. "You shoot, you’re gonna hit me," he said over his radio. "And if you hit me, buddy, I’m gonna turn my guns up and shoot you."

The verbal battle continued until, as Wilkerson recounted it, he caught sight of movement below. "There was nothing there but a hootch with a man, probably about seventy [years old], an old lady, probably about the same age, and two young children." When he informed the battalion commander and the Cobra pilot, Wilkerson recalled, "that calmed everybody down, ’cause they realized that, had they shot rockets into that house, they probably would have killed all those people."

A similar situation played itself out with much grimmer consequences in a "semi-jungle, rice paddy area" in Binh Duong province. Once again, a ground commander declared the area a free fire zone, and this time Wilkerson didn’t immediately tell his crew to disregard the order. "I fault myself for this to this day," he told us.

About 15 minutes later, as his helicopter broke from the jungle over a road, an ox cart they had spotted earlier came into view. "Before I said anything, my crew chief let off a burst of machine gun ammunition. And he was a very good shot. It went right into the wagon." By the time Wilkerson ordered him to cease fire, it was too late. "The long and short of it was there was a little girl in the wagon and we killed her. And that will be with me the rest of my life."

Even without direct clearance from Wilkerson, the helicopter crew chief was just carrying out U.S. policy as it was laid down at the command level -- a point Wilkerson emphasized as he discussed his Vietnam War experience with the congressional subcommittee in June. In doing so, he also offered one of the essential truths of the Vietnam War: that following the U.S. military’s "rules of engagement" could mean violating the laws of war and the basic tenets of humanity.

"Where the skeletons are buried…"

In a recent follow-up interview by email, Wilkerson reflected on the quality of moral outrage and on the value of the willingness to confront authority -- in Vietnam and, decades later, in Washington.

"I was always sort of a maverick in that sense, bucking authority when I thought that authority was mistaken, particularly if it were an ethical mistake," he wrote. "I believe that one of the reasons Powell kept me around for 11 years of directly working for him was that unlike most people around him I would tell him what I thought in a nano-second -- even if it went counter to what I believed he thought."

While Vietnam may have contributed to Wilkerson’s urge to speak out, the primary impetus for his public comments and writings since 2005 has been the Bush administration itself. "I felt the incompetence, the deceit, and certain actions of the administration were actually hurting the nation, diminishing our real power in the world at a time when we needed all we could get."

Wilkerson acknowledges that those who spoke out against the Bush administration did so at their peril. "People have families to consider, positions, salaries, livelihoods. So these are not easy matters -- particularly when increasingly in our republic we have stacked the deck ever higher in favor of those in power." As a kind of whistleblower (even out of power and out of the government), Wilkerson certainly exposed himself to potential retaliation. Unlike former CIA official Valerie Plame, among others, however, he sees no evidence that he was targeted.

Wilkerson self-deprecatingly suggests that he was spared because "I’m a small potato in the greater scheme of things and therefore few people listen to or heed my ramblings." But he notes another possible reason as well. "Those in power likely believe that I’m still close to Powell -- and they very much do fear him as he knows where many of the skeletons are buried."


Since Wilkerson came forward in 2005, whistleblowers of all stripes have surfaced -- from veterans who testified on Capitol Hill in May about violence perpetrated against Iraqi civilians, to high-level insiders willing, in the closing days of a lame-duck term, to go on record about internal battles over domestic spying.

Wilkerson doesn’t consider his recent disclosure of his role in the death of a Vietnamese girl analogous to his later acts as a Bush administration truth-teller, but he acknowledges the value of making her killing public.

"It wasn’t truth-telling in the sense that it wasn’t known before. The battalion commander on the ground knew it, the troops knew it, my crew knew it -- indeed, it went into intel [intelligence] reports as far as I know. But in the larger sense, yes, it adds to the wealth of literature and information that is in the public [realm] now… In short, there is ample evidence available to the public of the hell that war is, of the carnage, destruction, ruined souls, and devastation."

Revealing such experiences, Wilkerson hopes, will be especially useful for today’s troops. "I believe young GIs should read as much as possible about what others have done in previous wars, particularly ’to keep our honor clean,’ as the Marine hymn goes."

In speaking out about his Vietnam experience, Wilkerson has, indeed, added to the long record of civilian suffering as a result of America’s wars abroad -- offering a stark lesson for U.S. troops yet to be deployed overseas. And for troops who have already served in America’s wars in Iraq and Afghanistan, he has set an example of the ways in which they can continue to serve the United States by speaking out about all aspects of their service, even the dark portions that Americans often don’t want to hear.

The only question is: Will they have the courage to follow in his footsteps?