Saturday, December 6, 2008

Colossal Financial Collapse: The Truth behind the Citigroup Bank "Nationalization"

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By F. William Engdahl

On Friday November 21, the world came within a hair’s breadth of the most colossal financial collapse in history according to bankers on the inside of events with whom we have contact. The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US Government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’

The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker’, whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.

‘Spitting into the wind’

A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.

That means half of the public’s money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.

Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.

It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.

Some Citigroup details

The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.

Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.

The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.

Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the Government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.

The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions. Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.

The madness over a Detroit GM rescue deal

The health of Citigroup is not the only gripping crisis that must be dealt with. At this point, political and ideological bickering in the US Congress has so far prevented a simple emergency $25 billion loan extension to General Motors and other of the US Big Three automakers—Ford and Chrysler. The absurd spectacle of US Congressmen attacking the chairmen of the Big Three for flying to the emergency Congressional hearings on a rescue loan in their private company jets while largely ignoring the issue of consequences to the economy of a GM failure underscores the utter lack of touch with reality that has overwhelmed Washington in recent years.

For GM to go into bankruptcy risks a disaster of colossal proportions. Although Lehman Bros., the biggest bankruptcy in US history, appears to have had an orderly settlement of its credit defaults swaps, the disruption occurred before-hand, as protection writers had to post additional collateral prior to settlement. That was a major factor in the dramatic global market selloff in October. GM is bigger by far, meaning bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman failed.

In addition, a second, and potentially far more damaging issue, has been largely ignored. The advocates of letting GM go bankrupt argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not happen however, and a Chapter 7 or liquidation of GM that would then result would be a tectonic event.

The problem is that under Chapter 11 US law, it takes time for the company to get the protection of a bankruptcy court. Until that time, which may be weeks or months, the company would need urgently ‘bridge financing’ to continue operating. This is known as ‘Debtor-in-Possession or DIP financing. DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the plan of reorganization approved by creditors and the courts. Most companies, like GM today, go to bankruptcy court when they are at the end of their liquidity.

DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk, as the amount spent is usually not large, relatively speaking. But DIP lending is being severely curtailed right now, just when it is most needed, as healthier banks drastically cut loans in the severe credit crunch situation.

Without access to DIP bridge financing, GM would be forced into a partial, or even a full liquidation. The ramifications are horrendous. Aside from loss of 100,000 jobs at GM itself, GM is critical to keep many US auto suppliers in business. If GM failed soon most, possibly even all of the US and even foreign auto suppliers will go under. Those parts suppliers are important to other auto makers. Many foreign car factories would be forced to close due to loss of suppliers. Some analysts put 2009 job losses from a GM failure as high as 2.5 million jobs due to the follow-on effects. If the impact of that 2.5 million job loss is seen in terms of the overall losses to the economy of non-auto jobs such as services, home foreclosures caused and such, some estimate total impact would be more than 15 million jobs.

So far in the face of this staggering prospect, the members of the US Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in his private company jet to Washington. The Congressional charade conjures up the image of Nero playing his fiddle as Rome goes up in flames. It should not be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials mooted the idea of trading between the EU and Asian nations such as China in Euro, Renminbi, Yen or other national currencies other than the dollar. The Citigroup bailout and GM debacle has confirmed the death of the post-1944 Bretton Woods Dollar System.

The real truth behind Citigroup bailout

What neither Paulson nor anyone in Washington is willing to reveal is the real truth behind the Citigroup bailout. By his and the Republican Bush Administration’s adamant earlier refusal to take an initial resolute action to immediately nationalize the nine or so largest troubled banks, he has created the present debacle. By refusing on ideological grounds to instead reorganize the banks’ assets into some form of ‘good bank’ and ‘bad bank,’ similar to what the Government of Sweden did with what it called Securum, during its banking crisis in the early 1990’s, Paulson and company have created a global financial structure on the brink.

A Securum or similar temporary nationalization would have allowed the healthy banks to continue lending to the real economy so the economy could continue operating, while the State merely sat on the undervalued real estate assets of the Swedish banks for some months until the recovering economy made the assets again marketable to the private sector. Instead, Paulson and his ‘crony capitalists’ in Washington have turned a bad situation into a globally catastrophic one.

His apparent realization of the error of his initial refusal to nationalize came too late. When Paulson reversed policy on September 19 and presented the nine largest banks with an ultimatum to accept partial Government equity ownership, abandoning his original bizarre plan to merely buy up the toxic waste asset-backed securities of the banks with his $700 billion TARP taxpayer money, he never revealed why.

Under the original Paulson Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the Jerome Levy Institute at Bard College in New York point out, Paulson sought to create a situation in which the US ‘Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by "healthy" ones.’

Paulson soon realized the scale of crisis, largely triggered by his inept handling of the Lehman Brothers case, had created an impossible situation. Were Paulson to use the $700 billion to buy up toxic waste ABS assets from the select banks at today’s market price, the $700 billion would be far too little to take an estimated $2 trillion ($2,000 billion) in Asset Backed Securities off the books of the banks.

The Levy Economics Institute economists state, ‘It is probable that many and perhaps most financial institutions are insolvent today -- with a black hole of negative net worth that would swallow Paulson’s entire $700 billion in one gulp.’

That reality is the real reason Paulson was forced to abandon his original ‘crony bailout’ TARP plan and opt to use some of his money to buy equity shares in the nine largest banks.

That scheme as well is ‘dead on arrival’ as the latest Citigroup nationalization scheme underscores. The dilemma Paulson has created with his inept handling of the crisis is simple: If the US Government paid the true value for these nearly worthless assets, the banks would have to write down huge losses, and, as Levy economists put it, ‘announce to the world that they are insolvent.’ On the other hand, if Paulson raised the toxic waste purchase price high enough to protect the banks from losses, $700 billion ‘will buy only a tiny fraction of the ’troubled’ assets.’ That is what the latest nationalization of Citigroup is about.

It is only the beginning. The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System.

How destructive that process will be to the citizens of the United States who are the prime victims of Paulson’s crony capitalists, as well as to the rest of the world depends now on the urgency and resoluteness with which heads of national Governments in Germany, the EU, China, Russia and the rest of the non-US world react. It is no time for ideological sentimentality and nostalgia of the postwar old order. That collapsed this past September along with Lehman Brothers and the Republican Presidency. Waiting for a ‘miracle’ from an Obama Presidency is no longer an option for the rest of the world.

Democrats Set to Offer Loans for Carmakers

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Faced with staggering new unemployment figures, Democratic Congressional leaders said on Friday that they were ready to provide a short-term rescue plan for American automakers, and that they expected to hold a vote on the legislation in a special session next week.

Seeking to end a weeks-long stalemate between the Bush administration and House Speaker Nancy Pelosi, senior Congressional aides said that the money would most likely come from $25 billion in federally subsidized loans intended for developing fuel-efficient cars.

By breaking that impasse, the lawmakers could also clear the way for the Treasury secretary, Henry M. Paulson Jr., to request the remaining $350 billion of the financial industry bailout fund knowing he will not get bogged down in a fight over aiding Detroit.

Democrats are hoping Mr. Paulson will use some of that money to help individual homeowners avoid foreclosure.

"We have had constructive discussions with members of Congress from both houses, and both sides of the aisle," President Bush's spokeswoman, Dana Perino, said in a statement released Saturday. "We hope to continue to make progress toward assistance for the automakers based on important principles — that taxpayer assistance only be considered for companies willing to make the difficult decisions across the scope of their businesses to be viable and competitive in the future; that taxpayer assistance should come from funds already appropriated in the program specifically intended to assist automakers — the auto loan program; and that assistance is accompanied by very strong taxpayer protections. Taxpayers should not be asked to finance assistance for automakers without a strong likelihood that they will be paid back."

The short-term plan is intended to help the automakers survive until the new administration takes over in January and can craft a longer-term solution to the industry’s troubles.

President-elect Barack Obama and his transition team have been working with Congressional leaders on both counts. Ms. Pelosi spoke to Mr. Obama on Thursday, and to Rahm Emanuel, Mr. Obama’s chief of staff, twice on Friday.

Ms. Pelosi also spoke by phone on Friday with Joshua B. Bolten, President Bush’s chief of staff, and the White House, too, seemed ready to reach a deal.

“We’re continuing to talk to both parties and both houses of Congress, and we hope to make more progress this weekend,” said Tony Fratto, the White House deputy press secretary.

Details of the auto companies’ rescue package were not immediately available, but senior Congressional aides said that it would include billions of dollars in short-term loans to keep the automakers afloat at least until Mr. Obama takes office.

The auto companies will have to submit to strict government oversight to make sure that the bailout funds are used to carry out the reorganization plans they delivered to Congress this week. The auto company chiefs testified this week that they were willing to accept such regulation.

Ms. Pelosi had resisted using money from the fuel-efficiency program, which was approved as part of an energy bill last year, and Democrats had repeatedly called on the Bush administration or the Federal Reserve to act unilaterally, using existing authority, to aid the auto companies.

On Friday, Ms. Pelosi said she would allow that money to be used provided “there is a guarantee that those funds will be replenished in a matter of weeks” and there was no delay in working toward greater fuel efficiency.

Word of a breakthrough came as Congress wrapped up two days of hearings at which lawmakers grilled the chief executives of the companies — Chrysler, the Ford Motor Company and General Motors — and experts warned that G.M. could collapse by the end of this month.

The automakers seemed tentatively heartened by the progress at the Capitol. “We’re encouraged by Speaker Pelosi’s intent to move forward quickly to resolve a crisis that can only grow more serious without action,” said Greg Martin, a spokesman.

The proposed deal could still fall apart for several reasons.

It was unclear Friday how much support would come from Republicans, particularly in the Senate where procedural hurdles are high. Crucial details remain to be worked out, including how to restore the money to the fuel-efficiency program.

Under federal budget rules, those loan guarantees are now likely worth less than $25 billion because of the deteriorating condition of the auto companies. Congress appropriated $7 billion this fall to secure those loans. But now that the automakers’ finances have worsened, the default risk has increased substantially.

Congressional aides said that staff would work through the weekend to determine how much money would be available to aid the auto companies under the current conditions.

Under the financial system rescue law approved by Congress in October, the Treasury secretary must request the second $350 billion, and Congress then has 15 days to disapprove the disbursement. Congressional leaders, upset over Mr. Paulson’s management of the bailout program, have warned him that if he wants the money, he must ask for it by the end of next week.

Until the breakthrough Friday evening, it had appeared unlikely that Mr. Paulson would be able to persuade Congress to release the funds. Of the first $350 billion portion of the rescue fund, only $15 billion remains uncommitted.

It was the Labor Department’s report of 533,000 jobs lost in November that seemed to halt the hand-wringing on Capitol Hill over what to do about the auto companies, and prompted Democratic leaders to announce that they would draw up legislation for votes next week.

“Today’s announcement of major job losses and findings from Congressional hearings from the last two days make it clear that Congress must work on a bipartisan basis to provide short-term and limited assistance to the automobile industry while it undertakes major restructuring,” Ms. Pelosi said in a statement.

She added: “Congress will insist that any legislation include rigorous and ongoing oversight to guarantee that taxpayers are protected and that resources are directed to ensure the long-term viability and competitiveness of the American automobile industry.”

The Senate banking committee, led by Christopher J. Dodd, Democrat of Connecticut, began drafting legislation on Friday and staff were expected to work through the weekend. Mr. Dodd and other Democrats have proposed a strong oversight board or trustee to monitor any aid to the automakers.

“We aim to have votes next week on a responsible plan to help the millions of Americans who rely on a healthy auto industry for their livelihoods,” the Senate majority leader, Harry Reid of Nevada, said in a statement on Friday evening.

“We will need support and cooperation from Republicans to determine when that vote happens and whether it will succeed,” Mr. Reid said.

The Republican leader, Senator Mitch McConnell of Kentucky, said Friday he would have no comment on the Democratic proposal until after the details are released.

Some conservative House Republicans have called for allowing one or more of the auto companies to enter bankruptcy.

“It’s fair to say the jobs report, the disastrous jobs report, has heightened the interest to do something,” said Representative Barney Frank, Democrat of Massachusetts, after leading a hearing on Friday on the auto companies’ request for aid.

A compromise on how to help the troubled automakers had proved elusive since G.M., Ford and Chrysler came to Washington last month to plea for aid.

The hearings in mid-November were disastrous for the Big Three, as their chiefs were criticized for flying in on private jets and failing to bring plans to make their struggling companies viable for the long term.

The tone was noticeably different at this week’s hearings.

G.M. is seeking $18 billion in loans, but says it needs $4 billion immediately to survive past the year. Chrysler, which is also running out of cash, wants $7 billion. Ford, the healthiest of the three, is asking for a $9 billion line of credit.

Berlusconi plans to use G8 presidency to 'regulate the internet'

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By Chris Williams

Italian president and media baron Silvio Berlusconi said today that he would use his country’s imminent presidency of the G8 group to push for an international agreement to "regulate the internet".

Speaking to Italian postal workers, Reuters reports Berlusconi said: "The G8 has as its task the regulation of financial markets... I think the next G8 can bring to the table a proposal for a regulation of the internet."

Italy’s G8 presidency begins on January 1. The role is taken by each of the group’s members in rotation. The holder country is responsible for organising and hosting the G8’s meetings and setting the agenda. Italy’s last G8 presidency in 2001, also under Berlusconi, was marred by riots at the annual meeting in Genoa.

Berlusconi didn’t explain what he meant by "regulate the internet", but the mere mention of it has prompted dismay among Italian commentators. Berlusconi owns swathes of the Italian mass media.

The left-wing newspaper L’Unita wrote: "You can not say that it is not a disturbing proclamation, given that the only countries in the world where there are filters or restrictions against internet are countries ruled by dictatorial regimes: those between China, Iran, Cuba, Saudi Arabia."

La Stampa reports Italian bloggers are planning to protest against any move by the president to tighten government control over the web tomorrow. They plan to display anti-Berlusconi banners on their websites.

Any G8 move next year to "regulate the internet" led by Berlusconi is likely to attract criticism. He has often been accused of using his power to try to silence dissent. He lost a long-running libel battle against The Economist earlier this year after it said he was not "fit to run Italy" and was this week suing American critic Andrew Stille for defamation*.

However, the governments of industrialised nations have been ramping up their rhetoric against internet content they view as unacceptable. The UK has introduced new laws and revived arcane ones to clamp down on extremist websites and niche pornography. Australia is busy implementing filters.

Foreclosures soar 76% to record 1.35 million

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By Tami Luhby

Foreclosure rate hits nearly 3% in the third quarter, while another 7% of borrowers fell behind on their mortgages.

A record 1.35 million homes were in foreclosure in the third quarter, driving the foreclosure rate up to 2.97%, the Mortgage Bankers Association said Friday.

That's a 76% increase from a year ago, according to the group's National Delinquency Survey.

At the same time, the number of homeowners falling behind on their mortgages rose to a record 6.99%, up from 5.59% a year ago, the association said.

This means that one in 10 borrowers in America are either delinquent or in foreclosure.

Many of those troubled borrowers are in California and Florida, which have among the highest delinquency rates in the nation.

The weakened economy and mounting job losses are expected to push these numbers even higher. And that will likely affect homeowners with prime, fixed-rate mortgages, which make up the vast majority of loans and have so far held up fairly well. Until now, much of the housing market's problems were concentrated in the subprime, adjustable-rate market, where homeowners with weak financial backgrounds got loans they ultimately couldn't afford.

"We have not gone into past recessions with the housing market as weak as it is now, so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past," said Jay Brinkmann, MBA's chief economist.

Unemployment soared to 6.7% as payrolls shrunk 533,000 in November, the Bureau of Labor Statistics said Friday. It was the largest monthly job loss in 34 years, and brought the year's total job losses to 1.9 million.

The number of homes going into foreclosure in 2008 is on track to hit 2.2 million, Brinkmann said.

Modification efforts evident
The percentage of homes starting the foreclosure process in the third quarter actually inched down to 1.07% from 1.08% a year ago. But that's due at least in part to the fact that some states have instituted foreclosure moratoriums in order to give troubled borrowers a chance to get their loans modified.

But the moratoriums may just delay the inevitable for many, and could push up the foreclosure rate even more in coming quarters. For instance, Massachusetts, which instituted such a moratorium earlier this year, saw a large drop in foreclosures during its moratorium and then a big increase the following quarter, Brinkmann said.

Asked how recent government and servicer efforts to modify loans would affect the foreclosure rate in coming quarters, Brinkmann said it depends on how many of those borrowers are interested in workouts. Some reports say that 40% of homes with delinquent mortgages are already vacant.

At the same time, the foreclosure moratoriums and foreclosure prevention efforts have pushed up the number of loans that are 90 days or more late to its highest level ever. But this might not be as dire as it sounds, Brinkmann said. Many of the one million homeowners who fall into this category may never go into foreclosure if a more affordable mortgage can be arranged.

Another hint of good news in Friday's report is that the number of borrowers one month behind in payments remained fairly steady at 3.39%. This remains below levels seen during the last recession in 2001, Brinkmann said.

As for 2009, it all depends on whether the economy recovers, he said.

"Absent a recession, the 2009 number would likely have fallen by several hundred thousand, but the effects of job losses and general economic deterioration make the 2009 outlook worse, particularly if mortgage problems become more widespread," Brinkmann said.

The report is based on 45.5 million mortgages, about 85% of the total number of first mortgages nationwide.

California, Florida continue to suffer
California and Florida continue to have the country's highest rates of new foreclosures. These states have about 93,000 and 90,300 of the foreclosure starts in the quarter, respectively, according to the group. The next state, Illinois, is far behind with about 27,500 starts.

California and Florida also lead the nation in job losses, with the Golden State losing 101,300 positions over the past year and the Sunshine State shedding 156,200 jobs.

"Until those two markets turn around, they will continue to drive the national numbers," Brinkmann said.

Seven other states had rates of foreclosure starts that were above the national average for the quarter: Nevada, Arizona, Michigan, Rhode Island, Illinois, Indiana, and Ohio. But 20 states saw a decline in their foreclosure start rate, due to the moratoriums and modification efforts.

Subprime loans weaken
One in five subprime loans are now delinquent, crossing the 20% threshold for the first time, the group said. That level was up 3.72 percentage points from a year ago.

The number of prime loans past due also increased to 4.34%, up 1.22% from a year ago.

A growing number of prime borrowers are expected to fall behind on their mortgages as they lose their jobs. Until the economy turns around, the housing market will continue to suffer.

"It's clear the mortgage market is being driven by fundamental issues with jobs and the economy," Brinkmann said.

Suit claims Halliburton, KBR sickened base

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By Kelly Kennedy

A Georgia man has filed a lawsuit against contractor KBR and its former parent company, Halliburton, saying the companies exposed everyone at Joint Base Balad in Iraq to unsafe water, food and hazardous fumes from the burn pit there.

Joshua Eller, who worked as a civilian computer-aided drafting technician with the 332nd Air Expeditionary Wing, said military personnel, contractors and third-country nationals may have been sickened by contamination at the largest U.S. installation in Iraq, home to more than 30,000 service members, Defense Department civilians and contractors.

“Defendants promised the United States government that they would supply safe water for hygienic and recreational uses, safe food supplies and properly operate base incinerators to dispose of medical waste safely,” according to the lawsuit, filed Nov. 26 in U.S. District Court for the Southern District of Texas. “Defendants utterly failed to perform their promised duties.”

Eller and his attorneys are seeking to have the lawsuit declared a class action.

Diana Gabriel, a spokeswoman for Halliburton, said her company is “improperly named” in the lawsuit. “As such, we expect Halliburton to be dismissed from the action as Halliburton has no responsibility, legal or otherwise, for the actions alleged,” Gabriel said. “It would be inappropriate for Halliburton to comment on the merits of a matter affecting only the interest of KBR.”

Halliburton announced in April 2007 that it had dissolved its ties with KBR, which had been its contracting, engineering and construction unit since the 1960s.

Heather Browne, director of corporate communications for KBR, said her company “has not been formally served with this litigation, so we are not commenting at this time.”

Eller filed his claim after he deployed in February 2006 for 10 months. The lawsuit claims he developed skin lesions that subsequently spread, filled with fluid and burst. He said they went away, then reappeared, followed by blisters on his feet that made it painful for him to walk. He said they healed, but continue to return every three to four months.

Then, Eller said he experienced vomiting, cramping and diarrhea, and continues to suffer severe abdominal pain.

“Plaintiff witnessed the open air burn pit in operation at Balad Air Force Base,” the lawsuit states. “On one occasion, he witnessed a wild dog running around base with a human arm in its mouth. The human arm had been dumped on the open air burn pit by KBR.”

Eller said he still has nightmares and has been diagnosed with adjustment disorder.

The lawsuit states that KBR was required to comply with military standards for clean water, and monitor it. Eller accused KBR of not performing water quality tests and of not properly treating or chlorinating water, and said an audit by the Defense Department backs up his claim.

A report from Wil Granger, KBR’s water quality manager for Iraq, states that non-potable water used for showering was not disinfected. “This caused an unknown population to be exposed to potentially harmful water for an undetermined amount of time,” according to the report. The report also stated the problems occurred all across Iraq and were not confined to Balad.

The lawsuit states there was no formalized training for KBR employees in proper water operations, and the company maintained insufficient documentation about water safety. The suit notes that former KBR employees Ben Carter and Ken May testified at a congressional hearing in January 2006 that KBR used contaminated water from the Euphrates and Tigris rivers. Carter testified that he found the water polluted with sewage and that KBR did not chlorinate it.

The lawsuit states the swimming pools at Balad were also filled with unsafe water.

Eller also accused KBR of serving spoiled, expired and rotten food to the troops, as well as dishes that may have been contaminated with shrapnel

“Defendants knowingly and intentionally supplied and served food that was well past its expiration date, in some cases over a year past its expiration date,” the lawsuit states. “Even when it was called to the attention of the KBR food service managers that the food was expired, KBR still served the food to U.S. forces.”

The food included chicken, beef, fish, eggs and dairy products, which caused cases of salmonella poisoning, according to the lawsuit.

“KBR prevented their employees from speaking with government auditors and hid employees from auditors by moving them from bases when an audit was scheduled,” the lawsuit states. “Any employees that spoke with auditors were sent to more dangerous locations in Iraq as punishment.”

The lawsuit also accuses KBR of shipping ice in mortuary trucks that “still had traces of body fluids and putrefied remains in them when they were loaded with ice. This ice was served to U.S. forces.”

Eller also accuses KBR of failing to maintain a medical incinerator at Joint Base Balad, which has been confirmed by two surgeons in interviews with Military Times about the Balad burn pit. Instead, according to the lawsuit and the physicians, medical waste, such as needles, amputated body parts and bloody bandages were burned in the open-air pit.

“Wild dogs in the area raided the burn pit and carried off human remains,” the lawsuit states. “The wild dogs could be seen roaming the base with body parts in their mouths, to the great distress of the U.S. forces.”

According to military regulations, medical waste must be burned in an incinerator to prevent anyone from breathing hazardous fumes.

“On at least one occasion, defendants were attempting to improperly dispose of medical waste at an open-air burn pit by backing a truck full of medical waste up to the pit and emptying the contents onto the fire,” the lawsuit states. “The truck caught fire. Defendants’ fraudulent actions were thereby discovered by the military.”

The lawsuit also states that the contractors burned old lithium batteries in the pits, “causing noxious and unsafe blue smoke to drift over the base.”

Military Times has received more than 100 letters from troops saying they were sickened by fumes from the burn pits, which burned plastics, petroleum products, rubber, dining-facility waste and batteries.

The lawsuit asks that the plaintiffs receive monetary compensation for physical injuries, emotional distress, fear of future disease, and need for continued medical treatment and involvement, and that KBR and Halliburton be stripped of all revenue and profits earned “from their pattern of constant misconduct and callous disregard to the welfare of Americans serving and working in Iraq.”

5 Guards Face U.S. Charges in Iraq Deaths

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The Justice Department has obtained indictments against five guards for the security company Blackwater Worldwide for their involvement in a 2007 shooting in Baghdad that killed at least 17 Iraqi civilians and remains a thorn in Iraqi relations with the United States.

The indictments, obtained Thursday, remained sealed. But they could be made public in Washington as soon as Monday, according to people who have been briefed on the case and who spoke on condition of anonymity because the indictments had not been unsealed.

A sixth guard was negotiating a plea, those people said.

Peter A. Carr, a spokesman for the Justice Department, declined to comment on Friday. Anne E. Tyrrell, a spokeswoman for Blackwater, also declined to comment.

The six guards have been under investigation since the shootings occurred Sept. 16, 2007, as their convoy traveled through a traffic circle in Nisour Square that was filled with cars, pedestrians and police officers. The guards have told investigators that they fired after coming under attack. Blackwater has maintained that its guards did nothing wrong, and the company itself is not being charged in the case. Investigations by the Pentagon, the F.B.I. and the Iraqi government found no evidence to support the guards’ version of events.

Among those named in the indictment, according to the people briefed on the case, are Paul Slough, a 28-year-old who served in the Army Infantry and the Texas National Guard before joining Blackwater in 2006, and Dustin Heard of Tennessee, a former marine who joined Blackwater in 2004.

Those who have been briefed on the case said prosecutors could seek 30-year prison sentences under a Reagan-era antidrug law focusing on the use of machine guns in the commission of violent crimes. Drugs were not involved in the Blackwater case.

Mark Hulkower, Mr. Slough’s lawyer, would not confirm whether his client was one of those indicted. But if he is, Mr. Hulkower said, “We will contest the charges in court, and we are confident he will be vindicated.”

The Nisour Square shootings have had a profound impact in Iraq, both on the role of contractors in the war zone and on the Baghdad government’s relationship with the Bush administration. The episode was the bloodiest in a series of violent events involving Blackwater and other American security contractors that had stoked anger and resentment among Iraqis.

Founded in 1997 by Erik Prince, a former member of the Navy Seals and heir to a family fortune made in the auto parts industry, Blackwater had developed a reputation among Iraqis and American military personnel for flaunting an aggressive, quick-draw image and for security personnel who took excessively violent actions to protect the people they were paid to guard.

In December 2006, a Blackwater guard who was off duty and reportedly drinking heavily was reported to have shot a bodyguard for an Iraqi vice president in Baghdad. In 2007, the State Department acknowledged that Blackwater had been involved in many more shootings than the two other security contractors in other regions of Iraq.

But the Nisour Square episode prompted so much protest that Iraq’s prime minister, Nuri Kamal al-Maliki, demanded that the Bush administration pull Blackwater out of the country.

In a profile of Mr. Slough, The New York Times reported this year that he had used dry military language to explain to investigators that he fired his weapon only at targets who posed immediate threats to his life and to those of his colleagues.

He described fighting his way out of a terrifying ambush that began when the driver of a white, four-door sedan ignored numerous hand signals and drove directly at the Blackwater motorcade. And he described muzzle flashes from a shack about 160 feet behind the car, a man in a blue button-down shirt and black pants pointing an AK-47, small-arms fire from a red bus stopped in an intersection, and a red car backing up toward his convoy.

“I engaged the individuals,” Mr. Slough told investigators, “and stopped the threat.”

The F.B.I. concluded that at least 14 of the 17 fatal shootings in Nisour Square were unjustified, saying that Blackwater guards recklessly violated American rules for the use of lethal force. Military investigators went further, saying that all of the deaths were unjustified and potentially criminal. Iraqi authorities characterized the incident as “deliberate murder.”

Still, the guards could not be prosecuted under Iraqi law because of an immunity agreement signed by the Coalition Provision Authority, the governing authority installed by American troops after the invasion. And legal experts have long pointed out that the case faces significant legal hurdles in American courts, which have only vague powers to prosecute Americans for crimes committed abroad.

Immunity for security contractors became a central issue this year in the negotiations between Iraq and the United States over an agreement setting out the terms under which American troops could remain in Iraq. Iraqi officials repeatedly demanded an end to legal immunity for American contractors. The Bush administration eventually agreed, and tens of thousands of contractors will be held responsible for their actions under Iraqi law at the start of next year.

Obama Doesn't Plan to End the Occupation in Iraq

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By Jeremy Scahill

The New York Times is reporting an "apparent evolution" in president-elect Barack Obama's thinking on Iraq, citing recent statements about his plan to keep a "residual force" in the country and his pledge to "listen to the recommendations of my commanders" as Obama prepares to assume actual command of U.S. forces. "At the Pentagon and the military headquarters in Iraq, the response to the statements this week from Mr. Obama and his national security team has been akin to the senior officer corps' letting out its collective breath," the Times reported. "[T]the words sounded to them like the new president would take a measured approach on the question of troop levels."

The reality is there is no "evolution."

Anyone who took the time to cut past Barack Obama's campaign rhetoric of "change" and bringing an "end" to the Iraq war realized early on that his Iraq plan boiled down to a down-sizing and rebranding of the occupation. While he emphasized his pledge to withdraw U.S. "combat forces" from Iraq in 16 months (which may or may not happen), he has always said that he intends to keep "residual forces" in place for the foreseeable future.

It's an interesting choice of terms. "Residual" is defined as "the quantity left over at the end of a process." This means that the forces Obama plans to leave in Iraq will remain after he has completed his "withdrawal" plan. No matter how Obama chooses to label the forces he keeps in Iraq, the fact is, they will be occupation forces.

Announcing his national security team this week, Obama reasserted his position. "I said that I would remove our combat troops from Iraq in 16 months, with the understanding that it might be necessary -- likely to be necessary -- to maintain a residual force to provide potential training, logistical support, to protect our civilians in Iraq." While some have protrayed this as Obama going back on his campaign pledge, it is not. What is new is that some people seem to just now be waking up to the fact that Obama never had a comprehensive plan to fully end the occupation. Most recently, the Times:

"On the campaign trail, Senator Barack Obama offered a pledge that electrified and motivated his liberal base, vowing to 'end the war' in Iraq," wrote reporter Thom Shanker on Thursday. "But as he moves closer to the White House, President-elect Obama is making clearer than ever that tens of thousands of American troops will be left behind in Iraq, even if he can make good on his campaign promise to pull all combat forces out within 16 months."

For many months it's been abundantly clear that Obama's Iraq plan is at odds with his campaign rhetoric. Yet, Shanker writes, "to date, there has been no significant criticism from the antiwar left of the Democratic Party of the prospect that Mr. Obama will keep tens of thousands of troops in Iraq for at least several years to come." The Times is actually right about this, in a literal sense. There has seldom, if ever, been a public peep about Obama's residual force plans for Iraq from members of his own party, including from those who describe themselves as "anti-war."

But, for those who have scrutinized Obama's plans and the statements of his advisors from the beginning, this is old news. Obama never defined "ending the war" as removing all U.S. forces from Iraq. Besides the counsel of his closest advisors -- many of whom are pro-war hawks -- Obama's Iraq plan is based on two primary sources: the recommendations of the Baker-Hamilton "Iraq Study Group" and the 2007 Iraq supplemental spending bill, which, at the time was portrayed as the Democrats' withdrawal plan. Both envisioned a sustained presence of U.S. forces for an undefined period following a "withdrawal."

In supporting the 2007 supplemental, Obama said it would put the U.S. "one signature away from ending the Iraq War." The bill would have redeployed U.S. forces from Iraq within 180 days. But that legislation, vetoed by President Bush, would also have provided for 20,000 to 60,000 troops to remain in Iraq as "trainers," "counter-terrorist forces," or for "protection for embassy/diplomats," according to an analysis by the Institute for Policy Studies. The bill contained no language about how many "private contractors" could remain in Iraq. This helped shed light on what Obama actually meant by "ending the Iraq War."

Other glaring clues to the actual nature of Obama's Iraq plan to anyone paying attention could be found in the public comments of his advisors, particularly on the size of the force Obama may leave in Iraq after his withdrawal is complete. Obama has refused to talk numbers, saying in October, "I have tried not to put a number on it." That has been the position of many of his loyal aides. "We have not put a number on that. It depends on the circumstances on the ground," said Susan Rice, Obama's nominee for UN ambassador, during the campaign. "It would be worse than folly, it would be dangerous, to put a hard number on the residual forces."

But, Richard Danzig, President Clinton's former Navy Secretary who may soon follow Robert Gates as Obama's Defense Secretary, said during the campaign that the "residual force" could number as many as 55,000 troops. That doesn't include Blackwater and other mercenaries and private forces, which the Obama camp has declared the president-elect "can't rule out [and] won't rule out" using. At present there are more "contractors" in Iraq than soldiers, which is all the more ominous when considering Obama's Iraq plan.

In April, it was revealed that the coordinator of Obama's Iraq working group, Colin Kahl, had authored a paper, titled "Stay on Success: A Policy of Conditional Engagement," which recommended, "the U.S. should aim to transition to a sustainable over-watch posture (of perhaps 60,000-80,000 forces) by the end of 2010 (although the specific timelines should be the byproduct of negotiations and conditions on the ground)." Kahl tried to distance the views expressed in the paper from Obama's official campaign position, but they were and are consistent.

In March, Obama advisor Samantha Power let the cat out of the bag for some people when she described her candidate's 16-month timetable for withdrawing U.S. "combat" forces as a "best case scenario." Power said, "He will, of course, not rely on some plan that he's crafted as a presidential candidate or a U.S. Senator." (After that remark and referring to Sen. Hillary Clinton as a "monster," Power resigned from the campaign. Now that Obama is president-elect, Power's name has once again resurfaced as a member of his transitional team.)

The New York Times also raised the prospect that Obama could play semantics when defining his 16-month withdrawal plan, observing, "Pentagon planners say that it is possible that Mr. Obama's goal could be accomplished at least in part by relabeling some units, so that those currently counted as combat troops could be 're-missioned,' their efforts redefined as training and support for the Iraqis."

Compare all of the above with a statement Obama made in July: "I intend to end this war. My first day in office I will bring the Joint Chiefs of Staff in, and I will give them a new mission, and that is to end this war -- responsibly, deliberately, but decisively."

Some may now accuse Obama of flip-flopping. The reality is that we need to understand what the words "end" "war" "residual" and "decisively" mean when we hear Obama say them.

The Radicalization Of An American Prisoner

Go to Original
By George Peter Jr.

During a hearing before the Senate Intelligence Committee in 2006, high- ranking F.B.I. officials testified that the Bureau considered U.S. prisons to be "fertile grounds for extremists", and that they were in the process of developing "threat assessments" for those individuals who may have become "radicalized" during their incarceration.

Listening to those officials postulate a variety of theories as to the perceived radicalization of American prisoners since 9/11, ranging from a misguided identification with terrorist leaders such as Osama bin Laden, to the radical preachings of jailhouse religious leaders, it became readily apparent that today's F.B.I. is as out of touch with reality as the one headed by J. Edgar Hoover, which for decades denied the existence of the mafia.

As one who has been confined in the Illinois Department of Corrections since 1967, I myself have observed a change in the attitudes and political philosophy of the average American prisoner, shaped not because of an external event occurring in some distant land, or the importation of some radical religion; but instead, due to the unrelenting assault upon prisoners by state houses around the nation, the unwillingness and/or inability of states to protect those who are imprisoned in their penal systems, the dual-standard of justice imposed upon prison guards who commit criminal acts against prisoners, and the daily vilification and demonization of those caught up in the criminal justice system, best exemplified in such television shows as "Cops", "Nancy Grace", and MSNBC's "Lockup" the ultimate in reality programming.

To help one get a clearer understanding of this issue, let us utilize the eyes of a hypothetical prisoner we'll call him "Tony" returning to the Menard Correctional Center, after living in the outside world for the last decade; what would he observe? Probably the first thing he would sense is a feeling of abandonment, due to the near complete abolishment of any meaningful rehabilitative programming. Thanks to the efforts of William Jefferson Clinton, the college classrooms have been long shuttered, as have the vocational schools, due to the elimination of prisoner access to the federal government's Pell Grants.

Tony would further note that the prison has abolished every organizational recreational activity previously used to release tension and help maintain control of the facility. Now he would find himself confined in a space 4' 3" by 10', with another prisoner, for a minimum of 159 hours a week, with little but a television set to help while away the hours. His cell is so small that it contains no table or chair, and the space between the bunks is so small 26" that he must sit on the toilet if he wishes to write a letter. Other than that, his only options are to lie down, or stand up.

Although lockdowns occurred during Tony's previous incarceration, they were primarily used in response to large-scale confrontations between various factions of the prison community, and to conduct periodic searches for contraband. He will now see that they are routinely scheduled to facilitate employee absences over the Thanksgiving and Christmas holidays, as well as the annual deer-hunting season.

When he walks into the dining room, he will discover he is now allotted only ten minutes to eat a barely palatable meal, but due to the miniscule portions, that will be more than a sufficient amount of time. Surprisingly, he will learn that the prison guard's union has publicly described the food served as "barely edible1."

If he believes that the conditions he is confined under are unconstitutional, this is probably at least partially attributable to the fact that the federal enforcement of civil rights laws has dropped precipitously since 1999. According to the Transactional Records Access Clearinghouse at Syracuse University, the Justice Department has seen the prosecution of civil rights cases fall by one-third through 2005. Additionally, the state statute that allowed clergy and attorneys to monitor the constitutional rights of prisoners was repealed.

Borrowing some reading material from a neighbor, Tony reads multiple examples of the duplicitous nature of the criminal justice system, how it inflicted Draconian penalties upon those who committed trivial offences during incarceration, while those employed by the government would receive, at worst, a mere slap on the wrist, when discovered abusing those under their control. The penalty imposed upon Colorado prisoner Douglas Wilson for passing out an extra cheese sandwich to fellow convicts was three additional years in prison; while in May 23, 2006 Illinois prison guard Clarence Howard was sentenced to two years probation for smuggling drugs into the facility where he worked.2 When Pennsylvania prisoner Darren Miller threw urine on a guard, he had 15 more years tacked onto his sentence, whereas Hawaiian prison guard Brian Freitas was placed on one year's probation for his rôle in the murder of prisoner Antonio Revera.3

However, what Tony found the most appalling were the direct assaults upon the minimal rights of those confined all around the country. When inmates had the audacity to actually seek the protection of laws enacted by state legislatures, they discovered the courts unwilling to ensure the safeguarding of these basic rights. When the mother of a Connecticut prisoner sued the state for the failure to treat her son in accordance with the state's "Patient's Bill of Rights", the prison system did not deny the allegations; rather they claimed in court that the Bill of Rights did not apply to prisoners. The state's supreme court agreed.

After receiving numerous complaints of employee misconduct against youths confined in Oklahoma's maximum security prison for youthful offenders, the state's attorney general's office declined to investigate, citing budgetary woes. This is the same state that chose to expend millions of dollars to secure additional life sentences against Timothy McVie's co-defendant, Terry Nichols, after he had already received a life sentence in federal court.

Closer to home, Tony gained a degree of understanding as to why Illinois' prisons appeared to be in a state of mismanagement. This came to light as he read about the investigation of the March 2, 2006 murder of an inmate at the Muddy River Correctional Center, where it was discovered that assistant warden Julie Wilkerson's only apparent qualifications for her job were the campaign contributions she made to Governor Rod Blagojevich. Ms. Wilkerson is a former music teacher, with no prior prison experience.

Tiring of this self-flagellation, Tony turns on the television, where he discovers that law and order shows appear to be the flavor of the day. As he looks in on "The Nancy Grace Show", he quickly discerns that Miss Grace routinely projects an attitude of unbridled anger and animosity towards anyone who disagrees with her prosecutorial mindset. Most frightening in her telecasts are the incessant and one-sided diatribes spewed forth against whichever criminal defendant she is focusing on in that particular episode. While her viewers may not be cognizant of her ability to appreciate the finer points of due process, the Georgia Supreme Court has, as it rebuked her on multiple occasions for her "unethical behavior" in securing criminal convictions. In comparison to this bubble-headed bleach blonde, Ann Coulter is a flaming liberal.

Flipping the dial, in search of something less intense, Tony tunes into "Cops", a program devoted almost entirely to showing slow-footed African and Appalachian Americans attempting to out-run the police unsuccessfully, I might add and then being body slammed to the ground when they get caught. While not a serious show, it still serves to humiliate and dehumanize those appearing on it.

Lastly, he tunes into MSNBC's "Lockdown", undoubtedly the most insightful of the crime programs he has seen, as the camera takes the viewer into prisons across the nation mostly maximum and super-maximum security for an up-close and personal view. Unfortunately, what it so clearly displays is the rampant brutality and stifling isolation these human beings are exposed to, year after year. Little mention is made to explain how these prisoners could possibly be expected to successfully re-enter society after surviving this man-made hellhole.

As this story comes full circle, Tony wishes that for just one day, those high-ranking F.B.I. officials could experience what prisoners around the nation have to live with on a daily basis. Only then could they begin to conceptualize the mis-treatment being inflicted upon those incarcerated in America's prisons, and the anger it breeds. Perhaps at this juncture they would realize that while there is a definite undercurrent of alienation and animosity within the country's prison population, it is not a radicalization born from the exposure to the vitriolic venom spewing from the mouths of psychotic mass murderers such as Osama bin Laden, an individual I would happily speed on the way to his reward of 72 virgins.

No, my "radicalization" as you describe it, has been incubated and nurtured by this cesspool you call a penal system, and every day your brutality adds yet another name on the rolls. At what point will you sit up and take note?