Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour

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By Dr. Ellen Brown

Author’s website www.webofdebt.com/

When the smartest guys in the room designed their credit default swaps, they forgot to ask one thing - what if the parties on the other side of the bet don’t have the money to pay up? Credit default swaps (CDS) are insurance-like contracts that are sold as protection against default on loans, but CDS are not ordinary insurance.

Insurance companies are regulated by the government, with reserve requirements, statutory limits, and examiners routinely showing up to check the books to make sure the money is there to cover potential claims. CDS are private bets, and the Federal Reserve from the time of Alan Greenspan has insisted that regulators keep hands off.

The sacrosanct free market would supposedly regulate itself. The problem with that approach is that regulations are just rules. If there are no rules, the players can cheat; and cheat they have, with a gambler’s addiction. In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined. Somebody is obviously bluffing about the money being brought to the game, and that realization has made for some very jittery markets.

“Derivatives” are complex bank creations that are very hard to understand, but the basic idea is that you can insure an investment you want to go up by betting it will go down. The simplest form of derivative is a short sale: you can place a bet that some asset you own will go down, so that you are covered whichever way the asset moves.

Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default.

CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to speculate on market changes. In one blogger’s example, a hedge fund wanting to increase its profits could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money - free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy, but that hardly helps the “protection buyers” who thought they were covered.

To the extent that CDS are being sold as “insurance,” they are looking more like insurance fraud; and that fact has particularly hit home with the ratings downgrades of the “monoline” insurers and the recent collapse of Bear Stearns, a leading Wall Street investment brokerage. The monolines are so-called because they are allowed to insure only one industry, the bond industry. Monoline bond insurers are the biggest protection writers for CDS, and Bear Stearns was the twelfth largest counterparty to credit default swap trades in 2006.¹ These players have been major protection sellers in a massive web of credit default swaps, and when the “protection” goes, the whole fragile derivative pyramid will go with it. The collapse of the derivative monster thus appears to be both imminent and inevitable, but that fact need not be cause for despair. The $681 trillion derivatives trade is the last supersized bubble in a 300-year Ponzi scheme, one that has now taken over the entire monetary system. The nation’s wealth has been drained into private vaults, leaving scarcity in its wake. It is a corrupt system, and change is long overdue. Major crises are major opportunities for change.

The Wall Street Ponzi Scheme

The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.² The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years - ever since the founding of the Bank of England in 1694 - until the whole world has become mired in debt to the bankers’ private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.”

When the banks ran out of creditworthy borrowers, they had to turn to uncreditworthy “subprime” borrowers; and to avoid losses from default, they moved these risky mortgages off their books by bundling them into “securities” and selling them to investors. To induce investors to buy, these securities were then “insured” with credit default swaps. But the housing bubble itself was another Ponzi scheme, and eventually there were no more borrowers to be sucked in at the bottom who could afford the ever-inflating home prices. When the subprime borrowers quit paying, the investors quit buying mortgage-backed securities. The banks were then left holding their own suspect paper; and without triple-A ratings, there is little chance that buyers for this “junk” will be found. The crisis is not, however, in the economy itself, which is fundamentally sound - or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money.

The Derivatives Chernobyl

The latest jolt to the massive derivatives edifice came with the collapse of Bear Stearns on March 16, 2008. Bear Stearns helped fuel the explosive growth in the credit derivative market, where banks, hedge funds and other investors have engaged in $45 trillion worth of bets on the credit-worthiness of companies and countries. Before it collapsed, Bear was the counterparty to $13 trillion in derivative trades. On March 14, 2008, Bear’s ratings were downgraded by Moody’s, a major rating agency; and on March 16, the brokerage was bought by JPMorgan for pennies on the dollar, a token buyout designed to avoid the legal complications of bankruptcy. The deal was backed by a $29 billion “non-recourse” loan from the Federal Reserve. “Non-recourse” meant that the Fed got only Bear’s shaky paper assets as collateral. If those proved to be worthless, JPM was off the hook. It was an unprecedented move, of questionable legality; but it was said to be justified because, as one headline put it, “Fed’s Rescue of Bear Halted Derivatives Chernobyl.” The notion either that Bear was “rescued” or that the Chernobyl was halted, however, was grossly misleading. The CEOs managed to salvage their enormous bonuses, but it was a “bailout” only for JPM and Bear’s creditors. For the shareholders, it was a wipeout. Their stock initially dropped from $156 to $2, and 30 percent of it was held by the employees. Another big chunk was held by the pension funds of teachers and other public servants. The share price was later raised to $10 a share in response to shareholder outrage, but the shareholders were still essentially wiped out; and the fact that one Wall Street bank had to be fed to the lions to rescue the others hardly inspires a feeling of confidence. Neutron bombs are not so easily contained.

The Bear Stearns hit from the derivatives iceberg followed an earlier one in January, when global markets took their worst tumble since September 11, 2001. Commentators were asking if this was “the big one” - a 1929-style crash; and it probably would have been if deft market manipulations had not swiftly covered over the approaching catastrophe. The precipitous drop was blamed on the threat of downgrades in the ratings of two major monoline insurers, Ambac and MBIA, followed by a $7.2 billion loss in derivative trades by Societe Generale, France’s second-largest bank. Like Bear Stearns, the monolines serve as counterparties in a web of credit default swaps, and a downgrade in their ratings would jeopardize the whole shaky derivatives edifice. Without the monoline insurers’ traiple-A seal, billions of dollars worth of triple-A investments would revert to junk bonds. Many institutional investors (pension funds, municipal governments and the like) have a fiduciary duty to invest in only the “safest” triple-A bonds. Downgraded bonds therefore get dumped on the market, jeopardizing the banks that are still holding billions of dollars worth of these bonds. The downgrade of Ambac in January signaled a simultaneous downgrade of bonds from over 100,000 municipalities and institutions, totaling more than $500 billion.³

Institutional investors have lost a good deal of money in all this, but the real calamity is to the banks. The institutional investors that formerly bought mortgage-backed bonds stopped buying them in 2007, when the housing market slumped. But the big investment houses that were selling them have billions’ worth left on their books, and it is these banks that particularly stand to lose as the derivative Chernobyl implodes.⁴

A Parade of Bailout Schemes

Now that some highly leveraged banks and hedge funds have had to lay their cards on the table and expose their worthless hands, these avid free marketers are crying out for government intervention to save them from monumental losses, while preserving the monumental gains raked in when their bluff was still good. In response to their pleas, the men behind the curtain have scrambled to devise various bailout schemes; but the schemes have been bandaids at best. To bail out a $681 trillion derivative scheme with taxpayer money is obviously impossible. As Michael Panzer observed on SeekingAlpha.com:

As the slow-motion train wreck in our financial system continues to unfold, there are going to be plenty of ill-conceived rescue attempts and dubious turnaround plans, as well as propagandizing, dissembling and scheming by banks, regulators and politicians. This is all happening in an effort to try and buy time or to figure out how the losses can be dumped onto the lap of some patsy (e.g., the taxpayer).

The idea seems to be to keep the violins playing while the Big Money Boys slip into the mist and man the lifeboats. As was pointed out in a blog called “Jesse’s Café Americain” concerning the bailout of Ambac:

It seems that the real heart of the problem is that AMBAC was being used as a "cover" by the banks which originated these bundles of mortgages to get their mispriced ratings. Now that the mortgages are failing and the banks are stuck with them, AMBAC cannot possibly pay, they cannot cover the debt. And the banks don’t wish to mark these CDOs [collateralized debt obligations] to market [downgrade them to their real market value] because they are probably at best worth 60 cents on the dollar, but are being held by the banks on balance at roughly par. That’s a 40 percent haircut on enough debt to sink every bank involved in this situation . . . . Indeed for all intents and purposes if marked to market banks are now insolvent. So, the banks will provide capital to AMBAC . . . [but] it’s just a game of passing money around. . . . So why are the banks engaging in this charade? This looks like an attempt to extend the payouts on a vast Ponzi scheme gone bad that is starting to collapse . . . .⁵

The banks will therefore no doubt be looking for one bailout after another from the only pocket deeper than their own, the U.S. government’s. But if the federal government acquiesces, it too could be dragged into the voracious debt cyclone of the mortgage mess. The federal government’s triple A rating is already in jeopardy, due to its gargantuan $9 trillion debt. Before the government agrees to bail out the banks, it should insist on some adequate quid pro quo. In England, the government agreed to bail out bankrupt mortgage bank Northern Rock, but only in return for the bank’s stock. On March 31, 2008, The London Daily Telegraph reported that Federal Reserve strategists were eyeing the nationalizations that saved Norway, Sweden and Finland from a banking crisis from 1991 to 1993. In Norway, according to one Norwegian adviser, “The law was amended so that we could take 100 percent control of any bank where its equity had fallen below zero.”⁶ If their assets were “marked to market,” some major Wall Street banks could already be in that category.

Benjamin Franklin’s Solution

Nationalization has traditionally had a bad name in the United States, but it could be an attractive alternative for the American people and our representative government as well. Turning bankrupt Wall Street banks into public institutions might allow the government to get out of the debt cyclone by undoing what got us into it. Instead of robbing Peter to pay Paul, flapping around in a sea of debt trying to stay afloat by creating more debt, the government could address the problem at its source: it could restore the right to create money to Congress, the public body to which that solemn duty was delegated under the Constitution.

The most brilliant banking model in our national history was established in the first half of the eighteenth century, in Benjamin Franklin’s home province of Pennsylvania. The local government created its own bank, which issued money and lent it to farmers at a modest interest. The provincial government created enough extra money to cover the interest not created in the original loans, spending it into the economy on public services. The bank was publicly owned, and the bankers it employed were public servants. The interest generated on its loans was sufficient to fund the government without taxes; and because the newly issued money came back to the government, the result was not inflationary.⁷ The Pennsylvania banking scheme was a sensible and highly workable system that was a product of American ingenuity but that never got a chance to prove itself after the colonies became a nation. It was an ironic twist, since according to Benjamin Franklin and others, restoring the power to create their own currency was a chief reason the colonists fought for independence. The bankers’ money-creating machine has had two centuries of empirical testing and has proven to be a failure. It is time the sovereign right to create money is taken from a private banking elite and restored to the American people to whom it properly belongs.

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies. Her websites are www.webofdebt.com and www.ellenbrown.com .

NOTES

¹ “Credit Swap Worries Go Mainstream,” nakedcapitalism.com (February 17, 2008); Aline van Duyn, “CDS Sector Weighs Bear Stearns Backlash,” Financial Times (London) (March 16, 2008).

² See Ellen Brown, “Dollar Deception: How Banks Secretly Create Money,” webofdebt.com/articles (July 3, 2008).

³ “Monoline Insurance,” Wikipedia.

⁴ Jane Wells, “Ambac and MBIA: Bonds, Jane’s Bonds,” CNBC (February 4, 2008).

⁵ “Saving AMBAC, the Homeowners, or the Banks?”, Jesse’s Café Americain (February 25, 2008).

⁶ Ambrose Evans-Pritchard, “Fed Eyes Nordic-style Nationalisation of US Banks,” International Business Editor (March 31, 2008).

⁷ See Ellen Brown, Web of Debt (Third Millennium Press, 2008), chapter 3.

Gas prices hit record high

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By Greg Wiles

Costlier than during 2005 shortage — and still spiraling upward

Hawai'i's average gasoline price jumped to a record high this week, surpassing a mark set 31 months ago and increasing the possibility the statewide price will break through the $4 level soon.

The price of a gallon of regular rose 2.3 cents to $3.697 on Thursday, and diesel fuel also reached a new high with a statewide average price of $4.261.

The new gasoline price eclipses the old mark of about $3.684 a gallon, set in September 2005 after refineries shut down in the wake of hurricanes Katrina and Rita, according to data from the AAA's Daily Fuel Gauge Web site. The new high also comes just after the average price for a gallon of regular reached $4 a gallon Wednesday in Wailuku, a new high for Maui.

"I hardly drive now," said Carson Neves, a 21-year-old Kane'ohe resident who limits his trips into Honolulu because of prices and tries to find the cheapest gasoline when he needs fuel. The $5 fuel-ups he puts into his 2001 Nissan Sentra don't give him much these days.

"I just put in $5 the other day and it didn't reach a quarter of a tank," said Neves, who is in between jobs and tries to save money by sharing rides with friends.

Prices are tracking the rise of crude oil, which cracked the $100 mark in mid-February and reached a high of $110.87 earlier this week. Nationally, gasoline prices are reaching record levels and all three local markets tracked by the AAA have been increasing. More and more people are talking about $4-a-gallon gasoline soon becoming a reality nationwide, just as it has for Maui residents.

The previous statewide record of $3.684 was set on Sept. 18, 2005, because of gasoline shortages in the wake of hurricanes Katrina and Rita. At the time, the state was under a gas-cap law that set maximum wholesale prices based on prices in Los Angeles, the Gulf Coast and New York.

over a barrel

The current situation is different because the state no longer has the gas cap law and because gasoline is plentiful compared to September 2005. But the market has changed and crude oil prices now have a greater influence over prices at the pump.

Whereas there were questions just two months ago if statewide gasoline prices would hit $4 a gallon, that's less the case now, said oil industry consultant David Hackett, head of Stillwater Associates in Irvine, Calif.

"It will get to $4 if crude oil keeps going up," said Hackett, noting it takes six weeks or so for crude oil price changes to ripple through to the gas pump.

A barrel of West Texas Intermediate crude oil traded in the $50 to $60 range on the New York Mercantile Exchange in the summer of 2005. Since mid-February it has traded in the $80 to $110 range, according to Bloomberg L.P. data.

It remains to be seen how much more prices will rise in Hawai'i as the higher crude prices work their way through to consumers. Hackett said prices generally rise more slowly in Hawai'i because of consumer resistance to price hikes, but also come down more slowly after crude oil prices recede.

Statewide gasoline prices for regular have risen by about 67 cents in the past year and Hawai'i's average gallon of diesel fuel has gone up 76 cents in the past 12 months to a record $4.261.

Wailuku has the highest price of the three markets tracked by the AAA, with a gallon costing $4.004 Thursday. It was the first city or county in the nation to hit $4 a gallon, according to the AAA.

On Lana'i, it's $4.71

But that's not the costliest gasoline in the state. Oil Price Information Service, the data provider used by AAA, doesn't track prices on Kaua'i, Moloka'i or Lana'i.

Yesterday, Lanai City Service reported selling regular for $4.71 a gallon, while Rawlins Chevron Service in Kaunakakai, Moloka'i, said its regular was going for $4.36.

The Kukui Grove Self Service station outside of Lihu'e reported regular at $3.799 a gallon.

In Honolulu, the average price for regular was nearing its record, having risen to just 0.002 cents beneath it. The AAA reported the average price was $3.592 for O'ahu drivers.

Hilo's price was higher, but not as close to a new high. Its $3.705 average was less than the $3.773 high reached in September 2005.

The automobile club's data shows Hawai'i's statewide average is still lower than California's, which leads the nation with an average regular price of $3.767.

That's little solace to Neves, who thinks twice about driving to Honolulu, given his limited gasoline budget.

"I don't leave (Kane'ohe) town unless I have more money."

The Next President's First Task [A Manifesto]

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By Robert F. Kennedy Jr.

Last November, Lord (David) Puttnam debated before Parliament an important bill to tackle global warming. Addressing industry and government warnings that we must proceed slowly to avoid economic ruin, Lord Puttnam recalled that precisely 200 years ago Parliament heard identical caveats during the debate over abolition of the slave trade. At that time slave commerce represented one-fourth of Britain's G.D.P. and provided its primary source of cheap, abundant energy. Vested interests warned that financial apocalypse would succeed its prohibition.

That debate lasted roughly a year, and Parliament, in the end, made the moral choice, abolishing the trade outright. Instead of collapsing, as slavery's proponents had predicted, Britain's economy accelerated. Slavery's abolition exposed the debilitating inefficiencies associated with zero-cost labor; slavery had been a ball and chain not only for the slaves but also for the British economy, hobbling productivity and stifling growth. Now creativity and productivity surged. Entrepreneurs seeking new sources of energy launched the Industrial Revolution and inaugurated the greatest era of wealth production in human history.

Today, we don't need to abolish carbon as an energy source in order to see its inefficiencies starkly, or to understand that this addiction is the principal drag on American capitalism. The evidence is before our eyes. The practice of borrowing a billion dollars each day to buy foreign oil has caused the American dollar to implode. More than a trillion dollars in annual subsidies to coal and oil producers have beggared a nation that four decades ago owned half the globe's wealth. Carbon dependence has eroded our economic power, destroyed our moral authority, diminished our international influence and prestige, endangered our national security, and damaged our health and landscapes. It is subverting everything we value.

We know that nations that "decarbonize" their economies reap immediate rewards. Sweden announced in 2006 the phaseout of all fossil fuels (and nuclear energy) by 2020. In 1991 the Swedes enacted a carbon tax - now up to $150 a ton - and as a result thousands of entrepreneurs rushed to develop new ways of generating energy from wind, the sun, and the tides, and from woodchips, agricultural waste, and garbage. Growth rates climbed to upwards of three times those of the U.S.

Iceland was 80 percent dependent on imported coal and oil in the 1970s and was among the poorest economies in Europe. Today, Iceland is 100 percent energy-independent, with 90 percent of the nation's homes heated by geothermal and its remaining electrical needs met by hydro. The International Monetary Fund now ranks Iceland the fourth most affluent nation on earth. The country, which previously had to beg for corporate investment, now has companies lined up to relocate there to take advantage of its low-cost clean energy.

It should come as no surprise that California, America's most energy-efficient state, also possesses its strongest economy.

The United States has far greater domestic energy resources than Iceland or Sweden does. We sit atop the second-largest geothermal resources in the world. The American Midwest is the Saudi Arabia of wind; indeed, North Dakota, Kansas, and Texas alone produce enough harnessable wind to meet all of the nation's electricity demand. As for solar, according to a study in Scientific American, photovoltaic and solar-thermal installations across just 19 percent of the most barren desert land in the Southwest could supply nearly all of our nation's electricity needs without any rooftop installation, even assuming every American owned a plug-in hybrid.

In America, several obstacles impede the kind of entrepreneurial revolution we need. To begin with, that trillion dollars in annual coal-and-oil subsidies gives the carbon industry a decisive market advantage. Meanwhile, an overstressed and inefficient national electrical grid can't accommodate new kinds of power. At the same time, a byzantine array of local rules impede access by innovators to national markets.

There are a number of things the new president should immediately do to hasten the approaching boom in energy innovation. A carbon cap-and-trade system designed to put downward pressure on carbon emissions is quite simply a no-brainer. Already endorsed by Senators McCain, Clinton, and Obama, such a system would measure national carbon emissions and create a market to auction emissions credits. The supply of credits is then reduced each year to meet pre-determined carbon-reduction targets. As supply tightens, credit value increases, providing rich monetary rewards for innovators who reduce carbon. Since it is precisely targeted, cap-and-trade is more effective than a carbon tax. It is also more palatable to politicians, who despise taxes and love markets. Industry likes the system's clear goals. This market-based approach has a proven track record.

There's a second thing the next president should do, and it would be a strategic masterstroke: push to revamp the nation's antiquated high-voltage power-transmission system so that it can deliver solar, wind, geothermal, and other renewable energy across the country. Right now, a Texas wind-farm manager who wants to get his electrons to market faces two huge impediments. First, our regional power grids are overstressed and misaligned. The biggest renewable-energy opportunities - for instance, Southwest solar and Midwest wind - are outside the grids' reach. Furthermore, traveling via alternating-current (AC) lines, too much of that wind farmer's energy would dissipate before it crossed the country. The nation urgently needs more investment in its backbone transmission grid, including new direct-current (DC) power lines for efficient long-haul transmission. Even more important, we need to build in "smart" features, including storage points and computerized management overlays, allowing the new grid to intelligently deploy the energy along the way. Construction of this new grid will create a marketplace where utilities, established businesses, and entrepreneurs can sell energy and efficiency.

The other obstacle is the web of arcane and conflicting state rules that currently restrict access to the grid. The federal government needs to work with state authorities to open up the grids, allowing clean-energy innovators to fairly compete for investment, space, and customers. We need open markets where hundreds of local and national power producers can scramble to deliver economic and environmental solutions at the lowest possible price. The energy sector, in other words, needs an initiative analogous to the 1996 Telecommunications Act, which required open access to all the nation's telephone lines. Marketplace competition among national and local phone companies instantly precipitated the historic explosion in telecom activity.

Construction of efficient and open-transmission marketplaces and green-power-plant infrastructure would require about a trillion dollars over the next 15 years. For roughly a third of the projected cost of the Iraq war we could wean the country from carbon. And the good news is that the government doesn't actually have to pay for all of this. If the president works with governors to lift constraints and encourage investment, utilities and private entrepreneurs will quickly step in to revitalize the grid and recover their investment through royalties collected for transporting green electrons. Businesses and homes will become power plants as individuals cash in by installing solar panels and wind turbines on their buildings, and by selling the stored energy in their plug-in hybrids back to the grid at peak hours.

Energy expert and former CIA director R. James Woolsey predicts: "With rational market incentives and a smart backbone, you'll see capital and entrepreneurs flooding this field with lightning speed." Ten percent of venture-capital dollars are already deployed in the clean-tech sector, and the world's biggest companies are crowding the space with capital and scrambling for position.

The president's final priority must be to connect a much smarter power grid to vastly more efficient buildings and machines. We have barely scratched the surface here. Washington is a decade behind its obligation, first set by Ronald Reagan, to set cost-minimizing efficiency standards for all major appliances. With the conspicuous exception of Arnold Schwarzenegger's California, the states aren't doing much better. And Congress keeps setting ludicrously tight expiration dates for its energy-efficiency tax credits, frustrating both planning and investment. The new president must take all of this in hand at once.

The benefits to America are beyond measure. We will cut annual trade and budget deficits by hundreds of billions, improve public health and farm production, diminish global warming, and create millions of good jobs. And for the first time in half a century we will live free from Middle Eastern wars and entanglements with petty tyrants who despise democracy and are hated by their own people.

More on Michael Mukasey's false 9/11 and FISA claims

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By Glenn Greenwald

The San Francisco Chronicle became one of the few media outlets to report on the multiple false claims about 9/11 and FISA in Michael Mukasey’s speech two weeks ago, as they adeptly summarized the key events in this article today. As the article, using the Lee Hamilton and other quotes reported here, put it: "It seemed like a sensational disclosure -- a phone call that, if traced and monitored, could have allowed authorities to thwart the attacks -- but it has proved difficult to verify."

Also, Mukasey appeared yesterday before a Senate Appropriations subcommittee and was questioned on this matter by Pat Leahy:

On his third question, Leahy asked Mukasey to clarify a recent comment he made in San Francisco where he implied that the failure to listen in on a phone call from Afghanistan to the United States prior to the Sept. 11, 2001 attacks had cost 3,000 lives.

"Nobody else seems to know about this. Can you tell me what the circumstances were and why?" Leahy said.

"The phone call I referenced relates to an incoming call that is referred to in a letter in February of this year to House Intelligence Committee Chairman [Silvestre] Reyes [(D-Texas)] from Director of National Intelligence Mike McConnell and I," Mukasey said.

"One thing I got wrong. It didn’t come from Afghanistan. I got the country wrong," Mukasey continued without specifying the country where the call originated.

So finally, Mukasey, only because he has been forced to do so, admits that he was wrong in the facts of this alleged call. If the Attorney General is going to go around tearfully claiming that there was a pre-9/11 call that the Government was prevented by surveillance laws from investigating and which would have prevented the 9/11 attacks, wouldn’t one think that he would actually know what he was talking about? He made a similar claim, though much more vaguely, in a letter he signed two weeks earlier to Congress. How does one just get something like that wrong -- a bombshell which the Chronicle described as "sensational" -- if it really happened?

More to the point, Mukasey’s claims still make no sense even if one changes the country of origin. There is still nothing about any episode of that sort -- a call from a foreign country into the U.S. that the administration was prohibited from investigating -- in either the 9/11 Report or the Joint Inquiry.

But whether this call actually occurred has always been the secondary level of deceit in what Mukasey said. Most significant is that even if there had been such a call, Mukasey’s claim -- that FISA’s warrant requirements somehow prevented investigation of that call -- is completely deceitful, as Leahy’s follow-up statement suggested:

Mukasey, who used the phone call as an example to highlight the intelligence shortcomings before 9/11, did not explain why he included the comment to argue for expanded surveillance powers in a question-and-answer session after his speech on March 27.

"No FISA [Foreign Intelligence Surveillance Act] application should have been necessary to monitor a foreign target in a foreign country," Leahy reminded Mukasey. "We didn’t need it then. And we didn’t need it today."

John Conyers ought to follow up on the questions he asked in the excellent letter sent by him and two Subcommittee Chairs to Mukasey last week. Even with this "modification," Mukasey still is plainly not telling the truth about what he said.

And this has been going on forever -- when the Bush administration wants more unchecked power or to evade accountability, they send out whoever the Trusted, Honorable, Non-partisan officials of the Month happen to be to make emotionally manipulative -- and outright false -- claims about the 9/11 attack in order to secure those powers. Here, Mukasey got caught red-handed making numerous false and misleading claims -- about both the facts of 9/11 and the law -- and he shouldn’t be allowed to get away with it simply because, under pressure, he has now "acknowledged" some minor error that does not, in any way, mitigate the core deceit here.

UPDATE: The commenter selise, one of the most reliable sources around, has posted a transcript of the Leahy-Mukasey exchange that is somewhat different (and even more damning) than the source quoted above. Mukasey claims that his only point was that no warrant should be required for foreign-to-foreign calls, but virtually nobody contests that. Indeed, that has always been the law under FISA -- certainly it was the law as of 9/11 -- and there was absolutely nothing preventing them from having intercepted and investigated that call (more details on that here, from Kevin Fenton).

Moreover, virtually everyone in Congress -- including even Russ Feingold and Rush Holt -- were willing to amend FISA to clarify further that no warrants are required to eavesdrop on such calls, but the President threatened to veto any such amendment unless it was accompanied by telecom amnesty. So it’s hard to believe -- to put it mildly -- that Mukasey’s only point was that foreign-to-foreign calls shouldn’t require warrants, since (a) nobody contests that and (b) no warrants were required for such calls as of 9/11. His point was that FISA’s warrant requirements prevented discovery of the 9/11 attack ("We’ve got three thousand people who went to work that day and didn’t come home to show for that") and that claim is every bit as false as Mukasey’s description of the call itself.

Why Costs Are Climbing

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By Eric Reguly

As food prices surge, starvation looms for millions. Experts call for emergency action but admit there's no quick fix.

Rome - Fatal food riots in Haiti. Violent food-price protests in Egypt and Ivory Coast. Rice so valuable it is transported in armoured convoys. Soldiers guarding fields and warehouses. Export bans to keep local populations from starving.

For the first time in decades, the spectre of widespread hunger for millions looms as food prices explode. Two words not in common currency in recent years - famine and starvation - are now being raised as distinct possibilities in the poorest, food-importing countries.

Unlike past food crises, solved largely by throwing aid at hungry stomachs and boosting agricultural productivity, this one won't go away quickly, experts say. Prices are soaring and stand every chance of staying high because this crisis is different.

A swelling global population, soaring energy prices, the clamouring for meat from the rising Asian middle class, competition from biofuels and hot money pouring into the commodity markets are all factors that make this crisis unique and potentially calamitous. Even with concerted global action, such as rushing more land into cultivation, it will take years to fix the problem.

The price increases and food shortages have been nothing short of shocking. In February, stockpiles of wheat hit a 60-year low in the United States as prices soared. Almost all other commodities, from rice and soybeans to sugar and corn, have posted triple-digit price increases in the past year or two.

Yesterday in Rome, Jacques Diouf, director-general of the United Nations Food and Agriculture Organization, said the cereal-import bill for the poorest countries is expected to rise 56 per cent this year, on top of the 37 per cent recorded last year. "There is certainly a risk of [people] dying of starvation" unless urgent action is taken, he said. "I am surprised I have not been summoned to the Security Council to discuss these issues."

The UN's donor countries, he said, need to come up with as much as $1.7-billion (U.S.) to implement quick-fix food programs, such as topping up the World Food Programme, whose emergency food-buying power has been clobbered by the rising prices. Its budget shortfall, the difference between the food it intended to buy and can now afford, is $500-million.

Other UN officials have been equally blunt. Sir John Holmes, the UN's top humanitarian official and emergency relief co-ordinator, said this week that soaring food prices threaten political stability. The UN and national governments are especially worried about potentially violent situations in Africa's increasingly crowded urban areas. Rioting triggered by absent or unaffordable food could cripple cities. "The security implications should not be underestimated as food riots are being reported across the globe," Mr. Holmes said.

Nigeria's Kanayo Nwanze, vice-president of the UN's International Fund for Agricultural Development, sees no short-term fix. "I wouldn't be surprised if there is an escalation of food riots in the next few months," he said. "It could lead to famine in certain parts of Africa if the international community and local governments do not put emergency actions into place."

And it's not just the UN that thinks so. Independent analysts, economists and agriculture consultants say the term most often used to describe the food prices and shortages - crisis - is not hyperbole.

How did it come to this? Surging food prices, now at 30-year highs, are actually a relatively new phenomenon. In the mid-1970s, prices began to fall as the green revolution around the world made farms dramatically more productive, thanks to improvements in irrigation and the widespread use of fertilizers, mechanized farm equipment and genetically engineered crops. If there was a crisis, it was food surpluses - too much food chasing too few stomachs - and dropping produce prices had often disastrous effects on farm incomes.

By 2001, the surpluses began to shrink and prices reversed. In the past year or so, the price curve has gone nearly vertical. The UN's food index rose 45 per cent in the past nine months alone, but some prices have climbed even faster. Wheat went up 108 per cent in the past 12 months; corn rose 66 per cent. Rice, the food that feeds half the world, went "from a staple to a delicacy," says Standard Chartered Bank food commodities analyst Abah Ofon.

The price of Thai medium-quality rice, a global benchmark, has more than doubled since the end of 2007. This week it reached a record $854 a tonne, which helps explain why World Food Programme trucks carrying rice in certain parts of Africa have come under attack.

Food prices in the first three months of 2008 reached their highest level in both nominal and real (inflation adjusted) terms in almost 30 years, the UN says. That's stoking double-digit inflation and prompting countries such as Egypt, Vietnam and India to eliminate or substantially reduce rice exports to keep a lid on prices and prevent rioting. But, by reducing global supply, this only increases prices for food-importing countries, many of them in West Africa.

Throughout history, the world has seen food shortages and famines triggered by drought, war, pestilence, crop failures and regional overpopulation. In the Chinese famine between 1958 and 1961, an estimated 30 million people died from malnutrition. In the late 1960s and early 1970s, severe food shortages hit India and parts of southeast Asia. Only the emergency shipment of hundreds of thousands of tonnes of grain from the U.S. prevented a humanitarian disaster. Drought, violent conflict, economic incompetence, misfortune and corruption created deadly famines in Ethiopia and Sudan in the first half of the 1980s.

In each case, the food shortages were alleviated through emergency aid or investment in farming and crop productivity. While no one so far is dying of hunger in this latest crisis, the UN and agriculture experts predict years of pain, at best, and severe shortages, possibly famine in the worst-hit countries. The reason: High prices are likely to persist for years.

Swelling population explains only part of the problem. The world's population, estimated at 6.6 billion, has doubled since 1965. But population growth rates are falling and, theoretically, there is enough food to feed everyone on the planet, said Peter Hazell, a British agriculture economist and a former World Bank principal economist.

Why millions may go hungry, he said, is because prices are so high, food is becoming unaffordable in some parts of the world.

The "rural poor" (to use the UN's term) in Burkina Faso, Niger, Somalia, Senegal, Cameroon and some other African countries exist on the equivalent of $1 a day or less. As much as 70 per cent of that meagre income goes to food purchases, compared with about 15 per cent in the U.S. and Canada. As prices, but not incomes, rise, the point may be reached where food portions shrink or meals are skipped. Malnutrition sets in.

The dramatic price rises have been driven by factors absent in previous food shortages.

They include turning food into fuel, climate change, high oil and natural gas prices (which boost trucking and fertilizer costs), greater consumption of meat and dairy products as incomes rise (which raises the demand for animal feedstuffs), and investment funds, whose billions of dollars of firepower can magnify price increases.

Driven by fears of global warming, biofuel has become big business in the U.S., Canada and the European Union. The incentive to produce the fuels is overwhelming because they are subsidized by taxpayers and, depending on the country or the region, come with content mandates.

Starting next week, Britain will require gasoline and diesel sold at the pumps be mixed with 2.5-per-cent biofuel, rising to 5.75 per cent by 2010 and 10 per cent by 2020, in line with European Union directives. Ontario's ethanol-content mandate is 5 per cent. As the content requirements rise, more and more land is devoted to growing crops for fuel, such as corn-based ethanol. In the EU alone, 15 per cent of the arable land is expected to be devoured by biofuel production by 2020.

That's raising alarm bells, especially given lingering doubts about the effectiveness of ethanol in combatting climate change. British Prime Minister Gordon Brown said this week he's worried that ethanol production is pushing up food prices everywhere, and he called for an urgent review of the issue. Economist Dr. Hazell has said that filling an SUV tank once with ethanol consumes more maize than the typical African eats in a year.

Rising ethanol demand is one of the main reasons why Wall Street securities firm Goldman Sachs predicts high food prices for a long time. "We believe the recent rise in agriculture prices is not a transient spike, but rather represents the beginning of a structural increase in prices, much as has occurred in the energy and metals markets," Jeffrey Currie, Goldman's chief commodities analyst, said in a research note last month.

Severe weather has clobbered crop production among some big exporting countries. Drought in Australia, the third largest wheat exporter after the U.S. and Canada, has pushed wheat production down by half since the 2005-06 crop year. Statistics Canada said Canadian wheat production fell 20.6 per last year. Exports, as a result, are expected to fall by six million tonnes in the 2007-08 year.

While Australia and Canada could bounce back in the next season or the season after, depending on temperatures and rainfall, rising global temperatures do not bode well for agriculture in many parts of the world.

The UN has predicted that climate change could reduce production in developing countries by 9 to 21 per cent by 2080 and that sub-Saharan Africa could lose more than 30 per cent of its main crop, maize. Southern Asia, it said, could see millet, maize and rice production fall by 10 per cent. The challenge is to offset the losses with higher crop yields on arable land less affected by climate change.

Mr. Ofon, of Standard Chartered Bank, said rising demand in the face of production shortfalls does not fully explain the dramatic price increases. Investors are the other driver. They have discovered they can make money from food commodities as easily as they can in oil, gold or nickel. "Fund money flowing into agriculture has boosted prices," he said. "It's fashionable. This is the year of agricultural commodities."

But Mr. Currie of Goldman Sachs dismisses the theory that funds are pushing prices higher than they would be otherwise, though the funds can make prices rise and fall quickly in the short term. "The simple truth is that the funds don't take delivery of the commodity," he said in an interview. "Therefore they cannot sit on them and put them in silos. Therefore they can't affect prices over the long term."

In other words, the rally in food prices is being caused by demand exceeding production, resulting in dwindling food stockpiles. UN's International Fund for Agricultural Development, for one, assumes prices will stay high for as long as 10 years.

Agriculture economists and the UN have not lost all hope. New irrigation systems are inevitable in Africa and have the potential to boost crop production dramatically. Ditto for the use of fertilizers. Only three to five kilos of fertilizer per hectare is used in Africa, compared with about 250 kilos in the U.S. The problem with using more fertilizer is cost. Fertilizers such as urea are derived from natural gas, and gas prices have climbed, too. The price of urea has almost tripled since 2003, to $400 a tonne.

Dr. Hazell said some big countries, notably the U.S., Canada and Ukraine, have the capacity to increase crop production substantially. Already world cereal production is on the rise, although not nearly fast enough to end the crisis. The Food and Agriculture Organization yesterday forecast a 2.6-per-cent rise in cereal production in 2008.

Cutting back on ethanol production alone would go some way to restoring supply-demand balance in the food markets. "If we decide to do something about it, we can just use less food for fuel," he said.

But everyone - analysts, economists, agriculture experts, the UN - thinks all bets are off in the next two or three years. It's almost impossible to boost production quickly, because of land and water shortages and competition from biofuels.

"I can say with some degree of confidence that if governments and international development agencies do not put in place a concerted effort quickly, then we are looking at a very serious problem," Mr. Nwanze said.

More FAA Whistle-Blowers Begin to Come Forward

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By Dave Montgomery

Washington - More Federal Aviation Administration whistle-blowers are beginning to step forward with fresh allegations of a "culture of complacency" between the FAA and the airlines industry, the head of the government agency charged with investigating whistle-blower complaints said Friday.

The complaints under investigation by the U.S. Office of Special Counsel may widen attacks on the besieged regulatory agency. But with the FAA under scrutiny by Congress and government investigators, while hundreds of thousands of passengers reel from massive flight cancellations, the big question remains: How could this have happened?

The FAA was created in 1958 as an independent watchdog over airline safety. But instead the 46,000-employee agency is falling down on the job through a cozy relationship with the industry that has led to a years-long pattern of benign enforcement, say a parade of critics.

Over the past week, much of the flying public found itself grounded as American Airlines and other carriers abruptly canceled nearly 3,000 flights to make inspections and repairs that the FAA mandated. The unprecedented cancellations generated assertions that the FAA was overcompensating for past enforcement lapses. FAA officials vigorously deny that perception.

"This is not something sudden that just came up," FAA spokeswoman Lynn Tierney said Friday in restating the agency's 50-year-old pledge to enforce safety in the skies. FAA officials says they're moving to correct internal problems and call this "the safest period in aviation history," with only two major U.S. air crashes over the past seven years.

Nevertheless, investigations by congressional oversight committees, the special counsel's office and the Department of Transportation's inspector general have produced a different picture, including disclosures that mid-level FAA officials in Texas allowed Southwest Airlines to continue flying potentially dangerous planes that should been inspected for cracks.

The allegations about Southwest surfaced after two FAA inspectors, seeking whistle-blower protections, took their story to U.S. Special Counsel Scott J. Bloch and later testified publicly before the House Committee on Transportation and Infrastructure.

Bloch, in a telephone interview Friday, said another FAA whistle-blower has approached his agency, and a second is also considering working with investigators. The complaints involve two and possibly three airlines, which Bloch declined to name. The agency, he said, has four or five active files "and are opening more now." The complaints, he said, "run the gamut" from maintenance issues to "airworthiness" and safety.

"We're going to see a great deal of emphasis on oversight of the FAA over the next couple of months," Bloch said. "I believe there are many whistle-blowers in the wings who would like to report problems because they feel a duty to do so, but are very afraid of what will happen to them. We will protect them if they do come to us."

Political fury at the agency, particularly among Democratic lawmakers, soared to white-hot intensity after the mass grounding of airline flights prompted a flood of calls to congressional offices and embarrassing television images of passengers stranded at airports.

David Stempler, president of the Air Travelers Association, said the cancellations were the most pervasive since the grounding of DC-10s in 1979 and have disrupted at least 300,000 travelers.

"That's just an unprecedented amount of people whose trips have been changed, altered or canceled," he said. "It's absolutely huge."

Amid the passenger angst, a fundamental debate over whether such draconian measures were necessary has yet to be settled.

American Airlines grounded the flights of its MD-80 fleet to inspect and repair wiring bundles in the wheel wells to comply with an FAA safety directive. American had complied with the directive when it was first issued in 2006, but the FAA, over the past two weeks, determined that it wasn't done properly.

Over the past several weeks, Southwest, United, Delta, US Airways and Alaska Airlines also have canceled flights to take planes out of service to meet FAA requirements.

The FAA stepped up its surveillance as part of a two-phased audit that began after the agency levied a proposed $10.2 million fine against Southwest for continuing to fly planes that should have been grounded.

American officials said they thought were in compliance with the directive. But the FAA, after reviewing inspection records, determined that the carrier was in violation of the requirements. The FAA's Tierney said the carrier made the decision to ground the aircraft to comply with the regulation, but American officials said they had no choice.

Some FAA critics contend that the penalty against Southwest, as well as the rigid enforcement that led to the mass groundings, were public relations moves aimed at recasting the FAA's image. But Rep. Jim Oberstar, D-Minn., chairman of the House Transportation and Infrastructure Committee investigating the FAA, said the agency was "correcting course" and belatedly rising to its responsibility.

"They're not overreacting," Oberstar said. "They're reacting and doing what they should be doing." The mass groundings, he said, reflected the airlines' failure to comply with FAA maintenance requirements.

Bloch, who testified before Oberstar's committee, has become a leading critic of the FAA. The agency, he said, "is far and above the worst we've encountered in the federal government for its contempt for oversight, its willingness to retaliate against whistle-blowers ... and their willingness to cover up violations."

In his more than four years as special counsel, Bloch said his office has substantiated at least 10 whistle-blower complaints about the FAA.

Calvin Scovel, inspector general for the Department of Transportation, which includes the FAA, said "fundamental breakdowns" in the FAA's oversight of Southwest Airlines have raised "legitimate concerns about the FAA's overall approach to safety oversight."

One area of criticism has focused on the FAA's "self-disclosure" policy, in which airlines can escape possible fines if they report violations of airworthiness directives before they're spotted by FAA inspectors. But investigators and congressional critics say the policy has led to abuses in which airlines are sometimes tipped off about potential investigations by sympathetic inspectors in the FAA, thus enabling them to escape penalties.

Tom Brantley, the head of the union that includes FAA safety inspectors, said he has been told of "numerous instances" in which FAA safety inspectors were prevented from moving forward with enforcement actions after identifying a violation of FAA regulations.

"It's gotten worse," Brantley, president of Professional Aviation Safety Specialists, told McClatchy. The inspectors, he said, approach him with their grievances but are often afraid to press the matter through official channels. "It's not a perpetual thing, but it is widespread."

The Torture Memo

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By Stephen Gillers

The Justice Department is investigating the lawyers whose memos gave the Bush Administration the legal support it needed for waterboarding and other brutal interrogation techniques. We are "examining whether the legal advice in these memoranda was consistent with the professional standards that apply to Department of Justice attorneys," H. Marshall Jarrett, counsel for the Justice Department's Office of Professional Responsibility, wrote to two Democratic senators in February.

The torture memos from 2002 were mainly the work of Jay Bybee, then head of the Office of Legal Counsel (OLC) and now a federal appellate judge in San Francisco, and Bybee's deputy, John Yoo, who has since returned to teaching law at the University of California, Berkeley. This month the Pentagon released a long-rumored torture memo from 2003 written solely by Yoo, which is even more adamant in its embrace of unfettered presidential power.

The memos are an abysmal piece of work, but they had great value to the President. Dismissing the Geneva Conventions and other law, they used the veneer of serious legal scholarship (abundant footnotes, many citations, long dense paragraphs) to create an aura of legitimacy for near-death interrogation tactics and unrestrained executive power. The memos had high credibility because they came from the OLC, the legal brain trust for the executive branch and (until then) the gold standard for legal acumen.

The press tends to overlook the lawyers when scandal breaks, focusing instead on their clients. That's understandable, but in public and commercial life no serious move is possible (no corporate maneuver, no new financial instrument, no war, no severe interrogation tactic) without legal approval. Even if the advice proves wrong, the client, if sued or indicted, can claim reliance on counsel.

When lawyers in private practice mess up, they face serious jeopardy. They can be fired, sued for malpractice, disbarred or prosecuted. Yoo and Bybee face no such risks. The President won't protest. He got what he wanted. And while a state disciplinary body can investigate, that is unlikely without Justice Department help.

The Justice Department recognized the incompetence of the torture memorandums when Bybee's successor, Jack Goldsmith, retracted an August 2002 memo that had construed the Convention Against Torture and the federal statute forbidding torture to permit interrogation tactics just shy of homicide. And that memo was actually an improvement on the OLC's earlier work, which, in advising on "the effect of international treaties and federal laws on the treatment" of detainees from Afghanistan, entirely overlooked the torture convention and statute.

In his book The Terror Presidency, Goldsmith, now a Harvard law professor, writes that the torture memos had "o foundation" in any "source of law" and rested on "one-sided legal arguments." They were valuable to the Administration nonetheless, Goldsmith says, because the CIA saw one of them as a "golden shield" against criminal prosecution of agents who had used harsh interrogation techniques.

Well, anyone can make a mistake, right? And don't lawyers disagree all the time? Of course, but that's not the point. The present criticism cites the utter shoddiness of the work. Take another example. Although the OLC memos broadly construed presidential power in foreign affairs, they ignored the Supreme Court's landmark 1952 "steel seizure case," which greatly restricts that power and contradicts the OLC's expansive claims. It would be like advising a client on school desegregation law and ignoring Brown v. Board of Education. Yale law dean Harold Hongju Koh called this omission "a stunning failure of lawyerly craft" and "a stain upon our law and our national reputation."

How could two really smart guys authorize torture using "one-sided legal arguments" that have "o foundation" in law? How could they be guilty of a "stunning failure of lawyerly craft"? The sad answer seems to be that they knew what the President wanted and delivered: torture is OK if you call it something else. Detainees are outside the protection of due process and civilized law. The President's authority is close to absolute. Anyway, no court can review him. (On this last point, the Supreme Court disagreed.)

This incompetence is especially serious because of the conduct it enabled. If a private lawyer gave such a lopsided and wrongheaded analysis to a business client, he'd be history. Lawyers advising private clients about to make important decisions (a "bet the company" kind of decision) meticulously analyze all sides of a question so the clients can assess risk and choose wisely.

The client deserved better, and that raises another issue, the most troubling. Who was the client? The lawyers told the President what he wanted to hear, but the nation was their client, and its sole interest was in thorough and independent legal analysis. Neither the President's political agenda nor the authors' views of what the law should say can be allowed to slant the OLC's work. So maybe the best and brightest lawyers got it so wrong because they forgot whom they served. Maybe they acted politically, not professionally. If so, we are dealing with a perversion of law and legal duty, a betrayal of the client and professional norms, not mere incompetence, which would be bad enough. Whatever the reason, Jarrett should find that this work is not "consistent with the professional standards that apply to Department of Justice attorneys." Jarrett must hold the lawyers accountable if he means to restore OLC's reputation and vindicate the rule of law.

Lobbying fight is waged in Microsoft's bid for Yahoo

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By VERNE KOPYTOFF

Allies could help oppose any of the possible mergers

Microsoft Corp.'s takeover bid for Yahoo Inc. has yet to succeed, but that hasn't stopped preparations for what would be the next step -- the regulatory battle.

Both Microsoft and rival Google Inc. have started opposing campaigns to woo public interest groups in Washington, D.C., as part of a broader lobbying effort aimed at knifing each other in the back. The Center for Digital Democracy and Consumers Union, two organizations that often pressure antitrust regulators to block mergers, have held a number of discussions with both companies.

"They'll do anything to attempt to undermine each other," said Jeff Chester, executive director of the Center for Digital Democracy.

It's a window into how competition plays out in Washington, where gaining allies or muting criticism is an important part of corporate strategy. The gamesmanship can help sabotage a challenger's plans or limit them.

With its bid for Yahoo, Microsoft hopes to bolster its online business by creating an Internet colossus. But so far, Yahoo has rebuffed the overtures, calling the offer -- originally valued at $44.6 billion -- inadequate.

Yahoo directors met Friday to consider Microsoft's bid, a person familiar with the talks said. Yahoo spokeswoman Tracy Schmaler declined to comment, saying the company doesn't confirm when its board meets.

As an alternative, Yahoo is considering a three-way partnership with Google and Time Warner's AOL that would keep the Sunnyvale, Calif., Web portal independent. Word of the complex alliance emerged Wednesday, adding a layer of intrigue to the two-month merger drama.

Google fears that a combined colossus could limit user access to rival Internet products and give it too much control in e-mail and instant messaging, areas where it would hold dominant market share.

Left unsaid is that Google's position as the leader in online advertising could also face a serious challenge, particularly in what's known as display advertising, which is the equivalent of online billboards.

Chester said he has spoken with Microsoft's lobbyists by phone and in person a number of times, as they try to win his support for the merger or, at least, defuse any opposition. They explained, as they have publicly, that combining forces would create a more serious competitor to Google's juggernaut.

Google's pitch, Chester said, came at an event about privacy it hosted two weeks ago at its Washington office, after a filet mignon dinner with a few dozen other invitees. A Google political strategist pulled him aside and asked that he help to scuttle the deal, he said.

"I'm seen as somebody who can influence the press and as someone who has contacts in the Federal Trade Commission, and frankly as a troublemaker," Chester said.

In fact, Chester hasn't taken a position on the merger, given that there hasn't even been an agreement. In any case, he said that it's so complicated that it can't be simply described as good or bad.

"There are questions that have to be addressed," Chester said.

Google declined to comment. But it made its views known in a blog post in February by David Drummond, Google's chief legal officer, who raised several questions about a deal and called on policymakers to get involved.

Microsoft did not provide a spokesman for an interview. In a letter to members of Congress just after its bid for Yahoo, it cast the merger as "pro-competitive" and a boon to online advertisers and publishers.

The Justice Department and a handful of congressional committees have expressed interest in reviewing any merger. Lawyers have said that such a deal would be bound to receive intense scrutiny, particularly because of Microsoft and its past run-ins with regulators over its business practices.

"With Microsoft, there will be greater attention paid to antitrust than with other companies," said Steve Diamond, a law professor at Santa Clara University.

Any Yahoo partnership with Google for search advertising beyond a current two-week test and an alliance with AOL would also likely be reviewed. House Judiciary Committee Chairman John Conyers, D-Mich., said Thursday that that potential underscores the need for a hearing about competition on the Internet and online advertising.

Chris Murray, senior counsel for Consumers Union, said his discussions with both Microsoft and Google will help him decide what position to take on a merger or its parts. Although both sides seek his support or to limit his criticism, the talks also save a lot of time in terms of getting basic information about a proposed deal.

"Formal letters going back and forth between the parties move at the pace of months, versus discussions where I can come in with a straight-ahead question."

A Weekend to Start Fixing the World

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By Neil Irwin and Michael A. Fletcher

As Finance Ministers Convene Here, Multiple Crises Test Their Ability to Cope

Financial markets are tumbling. The world economy is starting to sputter. Food prices have shot up so far, so fast, that there are riots in the streets of many poor nations.

It's a hard time to be one of the masters of the global economy.

Those leaders -- finance ministers from all over the world -- are gathering in Washington this weekend to sort out their reactions to the most profound global economic crises in at least a decade. The situation could reveal the limitations that international economic institutions face in dealing with the risks inherent to global capitalism.

"There's got to be something coming out of the weekend, a way to visibly assume public responsibility for trying to limit the damage that financial markets can do to our society," said Colin Bradford, a senior fellow at the Brookings Institution. "The pressure is on politicians this weekend to come up with an answer. . . . What is the power structure going to do about this?"

The Group of Seven finance ministers of major industrialized countries meet today, and the governing boards of the International Monetary Fund and World Bank will meet tomorrow and Sunday. Their agendas: in the case of the G-7 and IMF, countering the breakdown in financial markets; in the case of the World Bank, food inflation that threatens to drive more of the world's poorest people into starvation.

But these problems don't have obvious solutions, and it may be hard to achieve consensus on even modest steps that might improve the situation.

For example, as the leaders of major industrial economies meet today, they will look at ways to strengthen the regulation of banks and other financial institutions to try to lessen risks to the global system. They have indicated they will embrace recommendations of the Financial Stability Forum, an international group of bank regulators and other government officials. The forum urges such steps as encouraging banks to be more open with their information and pushing government agencies to coordinate better and respond more aggressively to risks.

Actions like those may not do much in the short run to prevent the problems in financial markets from slowing the world economy.

"They are going to share a lot of information, but I don't think there is going to be a coordinated policy response," said Domenico Lombardi, president of the Oxford Institute for Economic Policy. That's partly because European and Asian economies are in better shape than that in the United States, and thus leaders of those nations might be reluctant to undertake bold action.

U.S. officials have played down the possibility of action by governments to buy up mortgage securities or take other big steps. Addressing the idea of "an injection of public money in a very significant way," David McCormick, a Treasury Department undersecretary, said in a briefing Wednesday, "We're not at all certain that that would make sense or would even have the desired public policy outcome."

The IMF has taken a stronger stance in urging central banks and governments to consider unusual action. Many analysts would like the IMF to take the lead in trying to prevent future disruptions in financial markets.

"The IMF should orchestrate a worldwide response to this," Bradford said. "They can provide a table around which you bring the various national officials, and you bang heads. You say to people, look, we've got to come up with some codes and practices that will keep this from happening again."

But the IMF could face big limitations on its ability to play that role.

For one thing, the fund is in the middle of dealing with financial problems of its own. In the strong global economy of the past decade, few nations turned to the IMF to borrow money. The organization funds itself with interest payments on those loans, and as a result has had far less revenue.

So, much of its agenda this weekend will dwell on internal matters of balancing the IMF budget and selling off gold to raise cash.

Moreover, many developing nations, especially in Asia, are distrustful of an organization that is controlled almost entirely by the United States and Europe.

"The IMF can at best make suggestions as to what people should do," said Desmond Lachman, a resident fellow at the American Enterprise Institute. "They've got no leverage over any of the major shareholders. The most they can do is provide a technical case as to what kind of action should be taken."

On a different front, the World Bank will be dealing with the impact of rapidly rising food prices on poor nations, which already has spawned unrest in 33 countries, including Haiti, Egypt, Uzbekistan, Indonesia, Cameroon and Mozambique.

The rising prices -- up 83 percent in the three years preceding February, according to the World Bank -- are projected to continue for the next several years, threatening to undermine progress that has been made in battling extreme poverty and malnutrition.

"While many worry about filling their gas tanks, many others around the world are struggling to fill their stomachs," World Bank President Robert B. Zoellick told reporters yesterday. "And it's getting more and more difficult every day."

In meetings this weekend, Zoellick said, he hopes to rally the world's developed nations around what he calls "a new deal" for global food policy. To deal with the immediate food crisis, he has called on the world community to make up the $500 million shortfall in the United Nations World Food Program, while expanding other food aid for the poor around the world.

Longer term, he said, agricultural development should be made a greater priority, particularly in places such as Africa, which have vastly underutilized potential for food production.

The bank has already said it would nearly double its agricultural lending to sub-Saharan Africa to $800 million next year.

Zoellick said that the bank's food goals are about more than charity. They also present an opportunity for future economic growth -- a point he is pressing with the managers of sovereign wealth funds around the world. A 1 percent investment from those funds, he said, would amount to $30 billion in new investment in African development.

"Meetings such as this one are usually about talk. Words can focus attention. They can build momentum. But we can't be satisfied with studies, papers and talk," Zoellick said.

Murky CIA Activity at Military Outposts

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By Sean Gonsalves

With California weather in my blood, Cape Cod spring feels like an extension of winter.

What keeps me warm until summer comes is baseball -- and fantasies about vacationing on a tropical island like Guam, where my 6th- and 7th-grade best friend, David Reed, and his Navy dad were transferred to from the now defunct Oakland Navy Base.

"Where’s Guam?" I asked.

"It’s some tropical island in the North Pacific Ocean. Kinda like Hawaii, but no tourists," Dave said. Then, already honing my gift of asking conversation-changing questions, I said: "Why do we have a base in Guam?"

It wasn’t until years later I learned that Guam is a key FOB. That’s military jargon for "forward operating base," just one of a million or so military acronyms.

In a world where America is the self-appointed global cop, a FOB is like a police precinct -- a strategically located substation from which hardware and personnel can be quickly dispatched to keep the neighborhood rabble in line.

Diego Garcia is the other key FOB that people who consider themselves well-informed about the Busheviks "war on terror" ought to know about.

David Vine, assistant professor of anthropology at American University and author of the forthcoming book Island of Shame: The Secret History of Exile and Empire on Diego Garcia, details the post 9/11 significance of these FOB’s, especially Diego Garcia -- the coveted military outpost in the Indian Ocean’s Chagos Archipelago, where the beaches look like one of those Corona beer commercials.

In the 1950s, U.S. war planners were worried about local populations catching the decolonization bug sweeping the Third World. So the U.S. Navy came up with the "Strategic Island Concept," which, in part, identified the British colony of Diego Garcia as a good place to build an isolated base, helping to ensure that former colonial subjects in the Middle East and Africa understood that freedom means whatever the hell the Washington consensus says it means.

But, there was one small problem. Actually, 2,000 small problems -- the Chagossians, with ties to the island since the Portuguese first shipped in slaves and indentured laborers from Africa and India in the late 18th century to work the coconut plantations run by French Mauritians.

When British officials were secretly negotiating a 50-year lease with the U.S. in the 1960s, British diplomats were cutting a deal to give Mauritius its independence -- minus Diego Garcia, which just so happens to be in violation of the U.N. Charter, if you’re into that kind of namby-pamby stuff like me.

The Brit playbook called for the Palestine play -- relocate much, if not all, of the indigenous population into a neighboring country to make way for new settlers. For the Palestinians, GB had Jordan in mind. For the Chagossians, it was Mauritius that was to absorb the dispossessed.

Of course, the Chagossian problem would be a lot easier to handle because there were only a couple thousand refugees and not several hundred thousand with milennia-old roots in "holy land." And like Golda Meier famously described Palestinians, the Chagossians have been said not to exist, which explains why most mainstream news accounts of the tiny atoll include some line about it being "an uninhabited island" -- a remnant of British government propaganda intended to "as one official put it, ’maintaining the fiction’ that the Chagossians were transient contract workers rather than people with roots in Chagos for five generations or more," Vine observes.

Vine goes on to point out the growing military importance of DG ever since the Chagossians took their coconuts to Mauritius. Fast forward to forward operating base Diego Garcia during Gulf War I. It served as the prepositioned weapons-and-supply cache for Marines sent to Saudi Arabia in 1991. The island, named after a ship, later became a launch pad for lobbing long-range bombs on Iraq.

After the ’91 war, "the dream for many in the military became the ability to strike any location on the planet from Barksdale Air Base in Louisiana, Guam in the Pacific, or Diego Garcia," Vine reports.

After the 9/11 attacks, DG became even more strategically significant. The Air Force sent 2,000 of its personnel to a new 30-acre housing facility there called "Camp Justice."

(Seriously, who the hell comes up with these ridiculous names)?

When the U.S. invasion of Afghanistan began, B-1, B-2, and B-52 bomber sorties were flown out of "Camp Justice" and the island’s blue lagoons were used to store prepositioned weapons and supplies for the 2003 invasion of Iraq.

In 2006, with the publication of Stephen Grey’s Ghost Plane documenting the presence of a CIA-chartered plane used for rendition flights at DG, reports of "Camp Justice" being a CIA "black site" for detainee interrogation started to eke out. Official rumors were followed by a Council of Europe report identifying Diego Garcia as a secret CIA prison location, along with "black sites" in Poland and Romania.

This past February, British Foreign Secretary David Miliband told Parliament he learned of two instances when the Bush administration, in violation of the base lease with Britain, used Diego Garcia like a Guantanamo University satellite campus.

"The State Department’s chief legal adviser said CIA officials were ’as confident as they can be’ that no other detainees had been held on the island ... Within days, U.N. special investigator Manfred Novak announced new evidence that others had been imprisoned on the island. Many suspect the United States may hold detainees on secret prison ships in Diego Garcia’s lagoon or elsewhere in the waters of Chagos."

With the legal dye having already been cast for secret "renditions" of murkily-defined "enemy-combatants," kept in secret prisons without recourse to Habeas corpus, consider yourself warned. If some guy in a suit approaches you on the street and says you’ve won a free dream trip to the exclusive tropical paradise of Diego Garcia -- RUN!

Photos I’ve seen of the island are gorgeous but it would be hard to appreciate the beauty while getting waterboarded.

In the meantime, you might ask your Congressman: why there hasn’t been hearings on where -- and what -- in the world is Diego Garcia and those other FOB’s?

American Airlines cancels hundreds more flights

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By Naomi Spencer

On Friday American Airlines, the largest commercial air carrier in the US, canceled some 600 flights as wiring inspections continue on the company’s fleet of decades-old MD-80 planes. So far this week over 3,000 flights have been canceled, stranding well over a quarter of a million people at airports. The inspections are expected to continue through at least Saturday night.

The chaos is the result of a hastily issued directive by the Federal Aviation Administration to enforce compliance with long-standing airworthiness standards. The directive came in the midst of a scandal over collusion between the FAA and Southwest Airlines to evade vital safety inspections.

American Airlines grounded its fleet of 300 MD-80s last month to conduct overdue inspections of wiring. However, a subsequent FAA review of the company-inspected planes turned up problems with wiring and shielding in 15 of 19 crafts.

On April 9, American Airlines vice president Dan Garton told reporters during a press conference that the planes had failed FAA review because the company’s mechanics “took what I would call certain latitudes in accomplishing [the directive].”

The airline has also strenuously sought to portray the wiring matter as one of technical compliance rather than safety. Yet FAA spokesperson Les Dorr explained to reporters Thursday, “The safety issue is that if the wires in the bundle were to rub against each other, or against the aircraft, they could be worn to the point where a spark could occur,” Dorr said. “That could cause a fire, and in a worst-case scenario, it could cause a fuel explosion.”

The wiring concern was first raised by Boeing, the manufacturer of the MD-80s, in 2003, and the relevant airworthiness directive was issued shortly afterward. Companies were expected to comply within 18 months of the directive’s issuance.

The re-inspections and repairs—undertaken by American on an emergency, last-minute basis, a full five years after the directive was issued—underscore the breakdown of federal oversight. In particular, even while striking a more stringent pose toward airline safety, the FAA continues to rely on company inspections. Moreover, no penalties have been proposed against American Airlines for its violation of airworthiness directives.

On April 10, the Senate Commerce, Science, and Transportation Committee heard testimony from officials at the FAA and the Department of Transportation on the relations between the regulatory agency and the airline industry. The Senate hearing follows last week’s House investigative hearings into the safety lapses at Southwest that allowed dozens of uninspected planes, many with dangerous structural damage, to fly for years.

DOT Inspector General Calvin Scovel delivered some of the more critical testimony Thursday, stating that the FAA “relies too heavily on self-disclosures and promotes a pattern of excessive leniency at the expense of effective oversight and appropriate enforcement.”

Scovel said that the FAA’s Irving, Texas field office, which oversees Southwest, had “an overly collaborative relationship with the air carrier that allowed repeated self-disclosures of AD [airworthiness directives] violations through FAA’s partnership program.” This arrangement allowed the airline to “repeatedly self-disclose AD violations without ensuring that SWA had developed a comprehensive solution for reported safety problems,” while at the same time avoiding any penalties whatsoever.

Scovel also noted that Southwest had been allowed to evade FAA planned inspections for several years, but an industry-wide review of inspection lapses was not undertaken until after agency whistle-blower complaints were made public. The FAA had not reviewed Southwest’s compliance record since 1999, Scovel testified.

In March 2007, Scovel said, “21 key inspections had not been completed in at least five years. As of March 25, 2008, FAA still had not completed five of these required inspections; in some cases inspections had not been completed in nearly eight years.” In 2005, the inspector general’s office found that FAA inspectors did not complete 26 percent of planned inspections.

His criticisms notwithstanding, the inspector general made no recommendations that would substantially strengthen the authority of the FAA, let alone alter the present “collaborative” relationship of the agency to airlines, which the FAA refers to as its “customers.”

Instead, Scovel essentially recommended programs the FAA has already pledged to implement. Above all, he stressed “implementing a process for second level supervisory review of self-disclosures before they are accepted and closed—acceptance should not rest solely with one inspector.”

Scovel also recommended “periodically rotating supervisory inspectors,” requiring a “cooling-off” period between working for the FAA and accepting a position with an air carrier, and establishing a review team to track field office inspections.

As with testimony from agency officials in previous congressional appearances, the FAA’s associate administrator for safety, Nicholas Sabatini, maintained that the problems at Southwest were a fluke, and pointed to the recent string of audits including those affecting American Airlines as proof that the airline industry was safer than ever. Sabatini insisted to the Senate that the FAA’s recent directives found “99 percent compliance” in the industry. He added, “but it’s the other 1 percent that keeps me up at night.”

Iran Fighting Proxy War in Iraq, U.S. Envoy Says

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By HELENE COOPER

WASHINGTON — Iran is engaging in a proxy war with the United States in Iraq, adopting tactics similar to those it has used to back fighters in Lebanon, the United States ambassador to Iraq said Friday.

The remarks by the ambassador, Ryan C. Crocker, reflected the sharper criticism of Iran by President Bush and his top deputies over the past week, as administration officials have sought to trace many of their troubles in Iraq to Iran.

Mr. Crocker said in an interview that there had been no substantive change in Iranian behavior in Iraq, despite more than a year of talks between the Bush administration and Iran over how to calm Shiite-Sunni tensions in Iraq. He said that the paramilitary branch of the Iranian Revolutionary Guards Corps was continuing to direct attacks by Shiite militias against American and Iraqi targets, although he offered no direct evidence.

Asked if the United States and Iran were engaged in a proxy war in Iraq, Mr. Crocker said, “I don’t think a proxy war is being waged from an American point of view.” But, he added, “When you look at what the Iranians are doing and how they’re doing it, it could well be that.”

While Bush administration officials have long denounced what they have described as Iran’s meddling in Iraq, Mr. Crocker’s language was unusually strong, reflecting fresh concern about what he described in Congressional testimony this week as Iran’s role in supplying militias with training and weapons, including rockets used in recent attacks on the Green Zone, in Baghdad.

The Bush administration is trying to exploit any crack it can find between the largely Shiite, pro-Iranian government of the Iraqi prime minister, Nuri Kamal al-Maliki, and Iran’s Shiite government. On Friday, Defense Secretary Robert M. Gates said that Iran’s role in supporting radical Shiite militias in recent clashes with Iraqi security forces had been an “eye-opener” for the central government in Baghdad.

“I think that there is some sense of an increased level of supply of weapons and support to these groups,” Mr. Gates said. “I would say one of the salutary effects of what Prime Minister Maliki did in Basra is that I think the Iraqi government now has a clearer view of the malign impact of Iran’s activities inside Iraq.”

From Mr. Bush down, administration officials this week have been turning up the volume on Iran. Administration officials said that Iranian support for Shiite militias became increasingly evident late last month during the indecisive Iraqi operation to wrest control of Basra from Shiite militias, in addition to the rocket attacks on the Green Zone.

Administration officials have long accused Iran of supporting Shiite militias in attacks on American forces in Iraq. The difference now is that administration officials are trying to convince the Iraqi government that Iran may not be the ally it thought, and is behind attacks against Iraqi government forces. That is a harder sell, given that Iran has supported Iraq’s government.

Mr. Bush this week accused Iran of arming, financing and training what he called “illegal militant groups.” He said that Iran had a choice, and hinted that the United States would try to sow distrust between the governments of Iran and Iraq, if Iran did not stop backing the attacks.

“If Iran makes the right choice, America will encourage a peaceful relationship between Iran and Iraq,” he said Thursday. “If Iran makes the wrong choice, America will act to protect our interests and our troops and our Iraqi partners.”

Mr. Gates, speaking to reporters at the Pentagon, said that Iraqi officials were starting to pay heed. “They have had what I would call a growing understanding of that negative Iranian role, but I think what they encountered in Basra was a real eye-opener for them.”

Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, echoed the assessment that Basra offered evidence to counter statements that Iran was decreasing its efforts in Iraq. “As far as I’m concerned, this action in Basra was very convincing that indeed they haven’t,” the admiral said.

In addition, Gen. David H. Petraeus, the top commander in Iraq, told reporters on Friday that while the Iraqi police and army troops had established security through most of Basra, “several significant neighborhoods are not under control of the Iraqi security forces.” Combating the Shiite militias in those enclaves of Basra, Iraq’s second-largest city, will be “a months-long operation,” he said.

Iran remains one of the Bush administration’s stickiest foreign policy issues, and Washington is battling Iran on multiple fronts, as administration officials struggle to find a carrot-and-stick approach for influencing Iranian behavior. Secretary of State Condoleezza Rice said Friday that the United States would consider new incentives or sanctions as part of its battle to get Iran to rein in its nuclear ambitions.

She said she did not anticipate a new push just yet, but said that “we will always continue to consider refreshing both tracks,” referring to the administration’s two-track approach of sanctions if Iran continues to enrich uranium and incentives if it stops.

Russia and China have been urging major powers to sweeten the incentives package, but thus far the United States has balked.

During the interview, Mr. Crocker accused Iran of meddling in Afghanistan, Lebanon and Gaza, in addition to Iraq. He also faulted Iraq’s Arab neighbors for refusing to help, noting that a promised Saudi Arabian Embassy had yet to materialize.

“The Arabs are basically missing in action,” Mr. Crocker said. He said that while Saudi Arabia had helped in American attempts to rein in the flow of foreign fighters into Iraq, Sunni governments in the Middle East needed to establish more of a diplomatic presence in Iraq, which Bush officials believe would further legitimize the American-backed Iraqi government.

“It’s one of those things that have been in process for a long time,” Mr. Crocker said of the promised Saudi Embassy. “They’ve sent a delegation to scout out property. But somehow it never quite gets done.”

Suicide by Soda: The Dangers of Aspartame

William Mac interviews Dr. Betty Martini about the dangers of aspartame in food products.