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By Binyamin Appelbaum and Ellen Nakashima
Agency Didn't Enforce Its Rules, Inquiry Finds
A senior federal banking regulator approved a plan by IndyMac Bank to exaggerate its financial health in a May federal filing, allowing the California company to avoid regulatory restrictions only two months before it collapsed, a federal inquiry has found.
The same regulatory agency, the Office of Thrift Supervision, allowed similar legerdemain by other banks, according to a letter sent yesterday to members of Congress by the Treasury Department's inspector general, Eric Thorson. The letter did not provide details about the other incidents.
The finding that OTS on several occasions "blessed a fiction," in the words of one congressional staffer, renews questions about the agency's relationship with the companies it regulates and about its complicity in the collapse this year of several of the nation's largest thrifts, including Washington Mutual and Countrywide Financial.
The Washington Post reported last month that OTS allowed thrifts to lend massively while reserves against future losses dwindled. Even as problems became apparent, the agency continued to prioritize deregulation. The latest findings underscore that OTS failed to enforce its own rules.
"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them," said Sen. Charles E. Grassley (R-Iowa). "It's good the inspector general has opened a full-blown audit as a result of this case. Everyone ought to be paying very close attention."
The regulator named in Thorson's letter, Darrel Dochow, was removed from his position yesterday as director of OTS's west division, which supervised Washington Mutual, Countrywide, IndyMac and Downey Savings and Loan, among other banks that have been seized or sold this year.
It is the second time Dochow has been removed from a position as a senior thrift regulator. He was demoted in the early 1990s after federal investigators found that he had delayed and impeded proper regulation of Charles Keating's failed Lincoln Savings and Loan.
Dochow did not return calls to his office and home. An OTS spokesman also did not return calls. In a letter to the inspector general, OTS director John M. Reich described Dochow's actions as a "relatively small factor in the events leading to the failure of IndyMac." Dochow has been reassigned to work in Washington on "special projects" and as head of human resources, pending completion of the inquiry, according to a memo sent to OTS staff yesterday.
Thorson's investigation has its roots in a standard review of IndyMac's failure. The review was triggered because OTS is an arm of the Treasury.
During that review, Thorson found the Dochow incident described in documents provided by IndyMac's accounting firm, Ernst & Young. Thorson presented those findings to Treasury Secretary Henry M. Paulson Jr., who urged him to investigate, according to a Treasury spokeswoman.
The core allegation is that Dochow allowed IndyMac to count money it got in May in describing its financial condition at the end of March.
Banks are required to file a report with regulators every three months detailing their financial condition, in addition to the reports filed by all publicly traded companies. IndyMac's initial filing for the first quarter showed that the amount of money it had on hand to cover potential losses was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac was told by Ernst & Young that some numbers needed to be adjusted. The changes would drop the company below the capital threshold. Instead of "well capitalized," IndyMac would be categorized as "adequately capitalized," according to Thorson's letter.
Such a downgrade would threaten IndyMac's survival. Thrifts classified as "adequately capitalized" need special permission from regulators to gather deposits through brokers who funnel money from investors around the country. The use of brokers is restricted to healthy institutions because the money is seen as "hot," meaning that investors are quick to move money around, which can destabilize a weak institution.
At the end of March, 36 percent of IndyMac's $18.7 billion deposit base came through brokers, according to the company's regulatory filings.
IndyMac executives, who learned about the problem in early May, wanted permission to inject $18 million into the company's capital cushion. But that would solve the problem only if the bank could pretend the money was injected at the end of March.
Thorson wrote that Dochow gave his permission during a May 9 conference call, and the company submitted the new numbers.
The company's first-quarter earnings report, filed on May 12, includes the same numbers sent to banking regulators, apparently repeating the overstatement of the company's actual capital cushion as of March 31. The filing goes on to describe the company as "well capitalized."
Securities experts said the filing could raise legal issues because it is a crime to knowingly make false statements in the financial records of a public company.
The new numbers also averted an intervention by the Federal Deposit Insurance Corp., which could have acted to limit the eventual cost of IndyMac's failure. The FDIC now estimates the cost at about $8.9 billion. The agency is funded by the banking industry.
"It is their job to be a cop," said Bart Dzivi, a lawyer who represents financial services institutions in Northern California. "But Darrel Dochow and senior management take the view, 'We're working with these institutions to help them with their problems.' They see themselves as consultants, not cops."
A spokesman for Thorson declined to expand on his statement that other banks were allowed to make similar revisions to financial statements. Asked at a briefing with members of Congress whether he would describe the problems as "systemic," Thorson responded, "Yes," according to a congressional aide who attended the briefing.
Dochow was appointed regional director in September 2007 after serving as the No. 2 in the western region. Dochow got the job shortly after playing a leading role in persuading Countrywide to move under OTS supervision, a major coup for the agency, which is funded by fees from the companies it oversees. He was paid $230,000 in 2007, according to government records.
Dochow's efforts to help IndyMac extended beyond his support for the bank's revised financial filings.
At another point last spring, Dochow limited the scope of a review by OTS regulators of IndyMac's portfolio of loans and other assets, overruling the advice of others in the agency, according to a source with knowledge of the incident.
The current episode echoes Dochow's involvement in the collapse of Lincoln Savings and Loan.
In September 1987 Dochow halted an examination of Lincoln, which was meant to determine whether the bank had an adequate capital cushion, at the request of his then-boss, Federal Home Loan Bank Board Chairman M. Danny Wall, according to a congressional investigation. Attorneys for Lincoln and its chief executive, Keating, had threatened to sue the bank board, OTS's predecessor, if the exam went ahead.
When the exam finally happened eight months later, it revealed that Lincoln was engaged in unsafe, unsound lending practices, booking inappropriate income and inappropriately sending money to its holding company. The company was placed in conservatorship soon thereafter and taxpayers eventually spent $2.7 billion bailing it out. Dochow was demoted and sent to a regional job.
Then-Rep. Charles E. Schumer (D-N.Y.) said at hearings in November 1990 that Dochow had been carrying out the will of his superiors. Schumer noted that Dochow said in a statement that he got the impression the bank board "would like to see the Lincoln matter resolved amicably."
"In a sense, it's difficult to blame Mr. Dochow, because he apparently was simply carrying out orders, the desires of his superior, to resolve this amicably," Schumer said. "Unfortunately, that desire cost us billions of dollars. And I think it's that attitude that's the real problem here."
Tuesday, December 23, 2008
Rep. Dennis Kucinich on His Battle With the Banks
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By Rep. Dennis Kucinich
By Rep. Dennis Kucinich
Once they were as gods, but the deities of the American banking system are now in ruins, plunged from their pedestals into the maw of taxpayer largesse. Congress voted to give the banks $700 billion, lifting them temporarily out of their sepulcher of debt, while revealing a deep truth about the condition of America’s financial powers:
They never had the money they said they had as they constructed their debt-based monetary system which now lies in ruins. Their decisions on behalf of depositors, shareholders and investors were lacking in basic integrity and common sense. Green gods bailing out with their golden parachutes.
There was a time when their power was real. Come with me to Cleveland 30 years ago today.
Dec. 15, 1978, Cleveland, Ohio
I awoke to find a curt payment demand that was dropped on my front step by a grandfatherly man who supplemented his Social Security delivering the morning newspaper. The headline plastered across the front page:
Cleveland Trust: Pay Up. Bank would relent if Muny Light were sold, Forbes believes.
One of America’s largest banks, Cleveland Trust, led local banks in demanding immediate payment from the city by midnight, Dec. 15, of $14.5 million in short-term loans.
I regarded the headline skeptically. Having lived in 21 different places by the time I was 17, including a couple of cars, I had come to an encyclopedic knowledge of dun letters, sent to my parents by battalions of bill collectors seeking immediate payment for televisions, cars and a variety of household appliances that never seemed to work. I first came to regard these credit alarms with trepidation, later with impassiveness, with the expectation that as our family grew to two adults and seven children it would soon be on the move again, incurring new delinquencies with each new address. Lack of access to money, housing and credit seemed to be a permanent condition.
Now, having fought through a thicket of consequence to become America’s youngest mayor, elected on a promise to stop the privatization of the city’s electric system, I was faced with paying off loans taken out by the previous mayor, for the financing of municipal projects of dubious value.
The banks refused to extend terms of payment and connived with City Council members to block alternative payment plans, such as the sale of city land or tax revenues. The banks knew the city couldn’t otherwise pay. They demanded instead the sale of the city’s electric system, Muny Light, to an investor-owned electric company, the Cleveland Electric Illuminating Co. (CEI). The president of the Cleveland Council, George Forbes, had met with the head of Cleveland Trust bank, who insisted on the sale of Muny Light as a precondition for extending the city credit. This was a case of the bank blackmailing the city, pure and simple.
The alternative to accepting the bank’s blackmail was default. Cleveland could become the first city since the Depression to default on its financial obligations. Cities rely on credit for everyday operations and for meeting long-term financial obligations, such as infrastructure improvements. If banks called in their loans, the city would head toward dire straits. No one knew that better than the law firm of Squire Sanders and Dempsey, which had served as bond counsel for the city of Cleveland while the city entered fiscal peril and was simultaneously, though not coincidentally, the principal law firm for the Cleveland Electric Illuminating Co. Through Squire Sanders and Dempsey, CEI had access to the intricacies of the city of Cleveland’s financial records.
Under the previous administration, the city began using bond funds for general operating purposes. As mayor, I inherited $40 million worth of debt that had to be refinanced before the end of my first year in office. Under my predecessor, the city had illegally spent money it did not have, and yet it had the key to every bank in town and the confidence of the bond rating houses, at precisely the same time it was preparing for the sale of the municipal electric system to CEI.
Cleveland Trust and another bank demanding the sale of Muny Light, National City, were principal stock owners in CEI. Several members of CEI’s board sat on the boards of local banks as interlocking directorates. There was a myriad of bank-utility business relations. Cleveland Trust bank, which handled CEI’s demand deposits, pension funds and other assets, would directly profit from the sale of Muny Light. In a way, the banks were the private utility. With the sale, CEI would have an electricity monopoly in Cleveland and would be able to name its price for electricity and get it. Everyone in the Muny Light territory would receive at least a 20 percent rate increase as the rates would be raised to CEI’s levels.
The city was self-sufficient with Muny Light for many years. Muny provided power to 46,000 homes with low electric rates, which contributed to the economic growth of the city. That was until the late 1960s and early ’70s, when a series of suspicious mechanical failures and power outages diminished the system’s reliability. At that time, under heavy lobbying from CEI, the Cleveland City Council delayed the passage of legislation for $9.8 million in repairs to Muny Light’s generators, thereby forcing the city to purchase power at a premium from its competitor, CEI. The city became increasingly dependent on an interconnection between CEI and Muny Light, a high-voltage line over which power could be transferred from CEI to the city, to ensure reliability. The city’s power system began to experience more unexplained power failures. CEI began to make public overtures to purchase Muny Light. The sale of Muny Light to CEI was soon supported by most of Cleveland’s media, business, political and labor interests.
In November 1976, the City Council passed legislation authorizing the sale of Muny Light for a fraction of its value. I was clerk of Cleveland’s Municipal Court at the time and I objected to the sale. I was advised that there was no way to stop the sale, but I saw it differently. Cleveland had a long history of municipal power. I could sense a terrible injustice was being visited upon the people of the city by its leading institutions, which were conspiring to deprive the city of its public power system.
I organized a petition drive that attracted support from city neighborhoods served by Muny Light. A full civic campaign was born with an intense effort made under brutal weather conditions to gather the signatures necessary to put the issue on the ballot. There was much at stake besides the monetary value of the system: The people’s right to own an electric system. And the historic position of Muny Light, one of America’s first municipal electric utilities, founded 70 years earlier by Cleveland Mayor Tom Johnson. Muny Light provided electricity to about one-third of the homes and businesses in the city at a peak savings of 20-30 percent over the rates charged by CEI. Additionally, Muny Light provided millions of dollars annually in savings to taxpayers by serving 76 city facilities. It also provided Cleveland’s street lighting. High electric rates and higher taxes would follow if Muny were sold. The private sector was forcing the sale for its own profit at the expense of the community.
On Jan. 4, 1977, the Atomic Safety and Licensing Board (ASLB), in an antitrust review required of any company applying to operate a nuclear power plant, ruled that CEI had conspired to put Muny Light out of business. CEI tried to force Muny Light into price-fixing and blocked Muny expansion, stopped the installation of Muny Light pollution-abatement equipment and forced the city to buy power it didn’t need. In addition, the ASLB uncovered a CEI budget planning report for 1971 that spoke of a five-year plan “to reduce and ultimately eliminate” Muny Light.
The ASLB determined that CEI deliberately caused a Christmas-season blackout on the Muny Light system and sent salesmen into Muny Light territory offering “reliable CEI service.” The private utility illegally tripled the cost of purchased power, thereby driving up Muny Light’s operating costs. CEI illegally blocked Muny Light’s access to power from other companies, all in violation of federal antitrust law. As a condition of receiving its license to operate a nuclear power plant, CEI had to provide Muny Light with access to cheap power. Documents showed that CEI executives believed the purchase of Muny Light would increase CEI’s earnings by $2.732 a share, eliminate a competitive threat, and push the company’s growth rate to 10 percent, further enhancing investment.
Documents in the case also demonstrated CEI’s successful attempts to subvert media editorial policy through cunning use of the company’s large advertising budget. Over the years, several local reporters lost their jobs after writing reports unfavorable to CEI, and CEI bragged internally about placing verbatim company-written propaganda as general media editorial content.
Confronted with the federal finding that bolstered a previously filed $330 million antitrust damage suit, the Cleveland city administration’s response was incredible: “Now CEI has to buy Muny Light!”
At the same time the campaign to sell Muny Light accelerated, a high-powered rifle shot ripped through my house, just missing my head.
A cavalcade of media editorials commenced favoring the transfer of Muny Light to CEI.
During an ensuing legal battle over the validity of the referendum petitions, I became a candidate for mayor. I promised that if elected I would save the system. I won the election. My first act in office was to cancel the sale of Muny Light. I next had to pay off a $14 million CEI electricity bill that the previous administration owed and wanted to satisfy through the sale of the light system.
I had been in the mayor’s office barely a year, facing a municipal horror story of huge snow storms, massive water main breaks and a police strike. I had cut city spending by 10 percent through eliminating corrupt contracts, payroll padding and attritional cutbacks. Through the year, I struggled with a recall attempt for firing a police chief. The recall was backed by banks, utility and real estate interests with a last-minute appeal printed by the Plain Dealer to sell Muny Light. Credit rating agencies, which had looked the other way while CEI was attempting to gain Muny Light in the previous administration, downgraded the city’s finances.
Another Muny Light-related attempted assassination was averted when I was rushed to a hospital vomiting blood from a profusely bleeding ulcer. Some years later, a congressional investigation produced information from an undercover agent of the Maryland State Police that the assassination attempt was to occur while I was the grand marshal in a local parade. A local television investigative report claimed the assassin’s services were purchased because I refused to sell the electric system.
One month later, I was back at work trying to find a way to save Muny Light. The utility’s financial difficulties, though contrived largely through interference with the system by CEI, were depicted as so overwhelming that only the sale of the electric system itself would save the city from financial catastrophe. I held several meetings with bank officials. and it became clear we were heading for trouble on the question of refinancing. The banks were going to try to force me to sell the electric system. I went public with a plea for an income tax increase to protect the city’s solvency.
On Dec. 15, I made a last-minute appeal to Cleveland Trust. It was 8 o’clock in the morning. I met with Brock Weir, the chairman of Cleveland Trust, Council President Forbes and our host, a local businessman. I had the intention of protecting Muny Light and avoiding a default.
“There’s just one thing you’ve got to do,” said the Council president, who strongly favored the sale.
Weir, the bank CEO with the stern visage: “If you sell Muny Light, we’ll roll over the notes. I can get you $50 million in new financing. We’d get other banks to participate.” It was a bribe.
My thoughts went to the street just outside the boardroom. Some 20 years earlier, a few blocks from where this meeting was taking place, I slept with my brothers and sister and parents in a car, homeless. I remembered an apartment where my parents sat underneath the pale yellow light of a kitchen wall lamp, counting their pennies on an old porcelain-topped table. The pennies dropped, click, click, click. Pennies to pay the utility bills.
It matters how much people pay for electricity. It matters if the public owns its own system and has political and financial control over rates. I could hear the pennies dropping, click, click, click, as Mr. Weir insisted on the sale of Muny Light. I remembered my family and the struggles of people like them. I couldn’t do it. I couldn’t sell. Not for $50 million, not for anything.
“I’m not going to sell, even if it means my career,” I said, as Council President Forbes looked on in surprise.
“Why do you want to end your career? Sell the system. Get rid of it!” he said.
“Is there some other way we can work this out?” I asked Brock Weir.
He shook his head “No.”
Throughout that day, every media outlet in Cleveland echoed the sentiment of Cleveland Trust’s chairman, including the morning newspaper headline, with such depth of coverage and intensity that it seemed the city itself would crumble unless I agreed to the sale, which also included a provision dropping the $330 million antitrust damage suit.
The objective condition of the city’s finances received no honest review. The sale of Muny Light was depicted as the only way the city could avoid fiscal disaster. The majority leader of the City Council held a news conference live on the 6 o’clock news. He declared that if I sold Muny Light, “the chairman of the Cleveland Trust bank has informed the council that his bank will purchase $50 million worth of city bonds. So, in effect, we have a plan sitting on the mayor’s desk that will absolutely end the city’s financial problems, if he will put his signature on it.”
The $50 million bribe had been brought out into the open in a manner that now suggested it was a legitimate offer, a fake solution to a fake crisis. I refused to sell.
As Cleveland television stations covered the event live, with a countdown clock that looked like a twisted version of New Year’s Eve, midnight struck. Television networks of several countries recorded the grim event: The city of Cleveland became the first American city to go into default since the Great Depression. The default was over just $14.5 million dollars in credit.
When I called for a congressional investigation a few days later, Cleveland Trust denied it wanted Muny Light, CEI denied it wanted Muny Light, the council president denied the chairman of Cleveland Trust wanted Muny Light, and the majority leader said he was mistaken when he said live on the 6 o’clock news that the bank chairman offered $50 million in credit for Muny Light. Muny Light was no longer the issue. It was the mayor and his obstinacy that caused the crisis. So went the waltz into a netherworld devoid of truth, justice, reality or morality.
Though the people of Cleveland supported keeping Muny Light by a margin of 2 to 1 in a referendum a few months later, and passed an income tax increase by the same margin in order for the city to pay off the defaulted bond anticipation notes, the state of Ohio intervened and put the city into fiscal receivership. I lost the mayor’s race in 1979. The banks renegotiated the defaulted notes, at a profit. The city lost its antitrust suit against CEI in 1981, in a hung jury. An appeal failed.
I was out of major public office for almost 15 years until, in 1993, Cleveland announced an expansion of Muny Light (now called Cleveland Public Power). At that time, the City Council and others decided that I had made the right decision in refusing to sell Muny Light. The city and its residents had saved hundreds of millions of dollars through Muny Light’s reduced electric rates and the savings the taxpayers enjoyed from Muny’s lower-cost power for street lighting and city buildings.
I attempted another political comeback and this time succeeded, getting elected to the state Senate with the motto: “Because he was right.” My campaign literature showed a radiant light bulb behind my name. Two years later, I was elected to Congress, with the slogan “Light up Congress.” Today I am the chairman of the House Government Oversight Domestic Policy Subcommittee, which has broad jurisdiction over most government departments and agencies, including the Nuclear Regulatory Commission, and electric utility matters generally.
The Cleveland Electric Illuminating Co. is now a subsidiary of First Energy Co., which was fined by the NRC for various safety violations and, a few years ago, was found to have primary responsibility for the 2003 blackout that left 50 million people throughout the northeastern United States without electricity.
Cleveland Trust no longer exists. No other bank involved in the default survives, except for National City, which next week faces extinction through shareholder approval of a takeover by PNC bank. I have spent much time trying to save National City.
One newspaper, the Cleveland Press, which advocated that CEI be Cleveland’s sole electricity provider, ceased publication. The other strong proponent of the sale of Muny Light, the Plain Dealer, struggles to survive.
The city’s electric system endures and this past year celebrated its 100th anniversary.
Schwarzenegger, Dems try to find budget compromise
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By JUDY LIN
With Republicans on the sidelines, Gov. Arnold Schwarzenegger and Democratic leaders met Tuesday to fashion a midyear fix for California's swelling budget deficit.
Senate President Pro Tem Darrell Steinberg emerged from the initial round of discussions and told reporters the talks had been positive. Less than a week ago, Schwarzenegger had threatened to veto the Democratic budget plan that is the basis for the current discussions.
"We're all very committed to making an $18 billion dent into this problem before the end of the year," said Steinberg, D-Sacramento. "That's our obligation."
He said a legislative vote on a compromise could come next week.
The Democratic plan would begin to address the deficit with $9.3 billion in tax and fee increases, $7.3 billion in cuts and another $1.5 billion in labor concessions, court rollbacks and other moves.
Republicans oppose it because of the tax increases. Last week, Schwarzenegger said he would veto it because it failed to include sufficient measures to stimulate the state's economy.
But California's ballooning deficit — projected to hit $42 billion over the next 18 months — is leading to severe consequences that have forced Schwarzenegger and Democrats to act quickly.
Last week, a state panel halted work on 2,000 public works projects because the state could no longer afford to pay for them and Schwarzenegger ordered two-day-a-month furloughs for state workers.
On Monday, the state controller warned that California will run out of cash within 70 days if lawmakers don't act quickly to bridge the growing divide between revenue and spending.
Steinberg said he and Assembly Speaker Karen Bass, D-Los Angeles, were willing to give Schwarzenegger more of what he wanted. That could include making concessions on labor rules and environmental regulations to accelerate work on infrastructure projects, agreeing to build more toll roads in the state and expanding help to homeowners facing foreclosure.
Republicans did not participate in Tuesday's budget negotiations.
Senate Minority Leader Dave Cogdill, R-Modesto, said Republicans would return to the Capitol if a deal were to be reached but said his caucus remained opposed to the package. He and other Republicans believe it is illegal because it contains tax increases yet was passed without a two-thirds vote in the Legislature.
"There's nothing for us to talk about today," said Cogdill, strolling through the Capitol in jeans and a leather jacket.
Anti-tax groups have vowed to sue if Schwarzenegger signs the plan, challenging its legality. Proposition 13, passed by voters 30 years ago, requires a two-thirds vote by lawmakers to raise taxes.
Democrats say they have found a way to get around the two-thirds requirement by claiming their $18 billion plan does not technically increase the amount of taxes on Californians.
Instead, they say it eliminates gas taxes and replaces them with a variety of other charges, including raising the state sales tax by three-quarters of a percentage point, boosting personal income taxes by 2.5 percent, taxing companies that extract oil from California and collecting taxes from independent contractors upfront.
It then replaces the gas taxes with what Democrats call a gasoline fee that would go solely to transportation projects. Because the fee is dedicated to a single purpose, it does not require a two-thirds vote, Democrats say.
Schwarzenegger has said it is necessary to raise taxes, but his opinion about the method contained in the Democratic plan is uncertain. Last week, he called the Democrats' proposal a "terrible budget" that would "punish the people of California." And in a meeting with local leaders in the Central Valley last week, he said their plan included "illegal taxes."
It was not clear Tuesday why the governor had decided to negotiate on a plan that only days ago he said contained provisions that were not legal. His spokesman, Aaron McLear, said Schwarzenegger would not sign anything that is illegal.
After meeting with the Democratic leaders, Schwarzenegger headed to a park near the Sacramento River for a news conference to denounce the halt in public works projects. He was asked whether he would sign a budget plan that contained tax increases but was passed only by a simple-majority vote.
"I prefer having my Republican friends at the table, and I prefer to get a two-thirds vote. But we do need revenue increases," he said. "To save California, I'm forced to negotiate just with the Democrats. This is the situation I am forced in because of lack of participation by the Republicans."
Schwarzenegger said he would let others debate the plan's legality, ultimately deciding "what is a fee and what is a tax?"
By JUDY LIN
With Republicans on the sidelines, Gov. Arnold Schwarzenegger and Democratic leaders met Tuesday to fashion a midyear fix for California's swelling budget deficit.
Senate President Pro Tem Darrell Steinberg emerged from the initial round of discussions and told reporters the talks had been positive. Less than a week ago, Schwarzenegger had threatened to veto the Democratic budget plan that is the basis for the current discussions.
"We're all very committed to making an $18 billion dent into this problem before the end of the year," said Steinberg, D-Sacramento. "That's our obligation."
He said a legislative vote on a compromise could come next week.
The Democratic plan would begin to address the deficit with $9.3 billion in tax and fee increases, $7.3 billion in cuts and another $1.5 billion in labor concessions, court rollbacks and other moves.
Republicans oppose it because of the tax increases. Last week, Schwarzenegger said he would veto it because it failed to include sufficient measures to stimulate the state's economy.
But California's ballooning deficit — projected to hit $42 billion over the next 18 months — is leading to severe consequences that have forced Schwarzenegger and Democrats to act quickly.
Last week, a state panel halted work on 2,000 public works projects because the state could no longer afford to pay for them and Schwarzenegger ordered two-day-a-month furloughs for state workers.
On Monday, the state controller warned that California will run out of cash within 70 days if lawmakers don't act quickly to bridge the growing divide between revenue and spending.
Steinberg said he and Assembly Speaker Karen Bass, D-Los Angeles, were willing to give Schwarzenegger more of what he wanted. That could include making concessions on labor rules and environmental regulations to accelerate work on infrastructure projects, agreeing to build more toll roads in the state and expanding help to homeowners facing foreclosure.
Republicans did not participate in Tuesday's budget negotiations.
Senate Minority Leader Dave Cogdill, R-Modesto, said Republicans would return to the Capitol if a deal were to be reached but said his caucus remained opposed to the package. He and other Republicans believe it is illegal because it contains tax increases yet was passed without a two-thirds vote in the Legislature.
"There's nothing for us to talk about today," said Cogdill, strolling through the Capitol in jeans and a leather jacket.
Anti-tax groups have vowed to sue if Schwarzenegger signs the plan, challenging its legality. Proposition 13, passed by voters 30 years ago, requires a two-thirds vote by lawmakers to raise taxes.
Democrats say they have found a way to get around the two-thirds requirement by claiming their $18 billion plan does not technically increase the amount of taxes on Californians.
Instead, they say it eliminates gas taxes and replaces them with a variety of other charges, including raising the state sales tax by three-quarters of a percentage point, boosting personal income taxes by 2.5 percent, taxing companies that extract oil from California and collecting taxes from independent contractors upfront.
It then replaces the gas taxes with what Democrats call a gasoline fee that would go solely to transportation projects. Because the fee is dedicated to a single purpose, it does not require a two-thirds vote, Democrats say.
Schwarzenegger has said it is necessary to raise taxes, but his opinion about the method contained in the Democratic plan is uncertain. Last week, he called the Democrats' proposal a "terrible budget" that would "punish the people of California." And in a meeting with local leaders in the Central Valley last week, he said their plan included "illegal taxes."
It was not clear Tuesday why the governor had decided to negotiate on a plan that only days ago he said contained provisions that were not legal. His spokesman, Aaron McLear, said Schwarzenegger would not sign anything that is illegal.
After meeting with the Democratic leaders, Schwarzenegger headed to a park near the Sacramento River for a news conference to denounce the halt in public works projects. He was asked whether he would sign a budget plan that contained tax increases but was passed only by a simple-majority vote.
"I prefer having my Republican friends at the table, and I prefer to get a two-thirds vote. But we do need revenue increases," he said. "To save California, I'm forced to negotiate just with the Democrats. This is the situation I am forced in because of lack of participation by the Republicans."
Schwarzenegger said he would let others debate the plan's legality, ultimately deciding "what is a fee and what is a tax?"
Cheney’s admissions to the CIA leak prosecutor and FBI
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By murrayw
By murrayw
Vice President Dick Cheney, according to a still-highly confidential FBI report, admitted to federal investigators that he rewrote talking points for the press in July 2003 that made it much more likely that the role of then-covert CIA-officer Valerie Plame in sending her husband on a CIA-sponsored mission to Africa would come to light.
Cheney conceded during his interview with federal investigators that in drawing attention to Plame’s role in arranging her husband’s Africa trip reporters might also unmask her role as CIA officer.
Cheney denied to the investigators, however, that he had done anything on purpose that would lead to the outing of Plame as a covert CIA operative. But the investigators came away from their interview with Cheney believing that he had not given them a plausible explanation as to how he could focus attention on Plame’s role in arranging her husband’s trip without her CIA status also possibly publicly exposed. At the time, Plame was a covert CIA officer involved in preventing Iran from obtaining weapons of mass destruction, and Cheney’s office played a central role in exposing her and nullifying much of her work.
Cheney revised the talking points on July 8, 2003– the very same day that his then-chief of staff, I. Lewis (Scooter) Libby, met with New York Times reporter Judith Miller and told Miller that Plame was a CIA officer and that Plame had also played a central role in sending her husband on his CIA sponsored trip to the African nation of Niger.
Both Cheney and Libby have acknowledged that Cheney directed him to meet with Miller, but claimed that the purpose of that meeting was to leak other sensitive intelligence to discredit allegations made by Plame’s husband, former ambassador Joseph C. Wilson IV, that the Bush administration misrepresented intelligence information to go to war with Iraq, rather than to leak Plame’s identity.
That Cheney, by his own admission, had revised the talking points in an effort to have the reporters examine who sent Wilson on the very same day that his chief of staff was disclosing to Miller Plame’s identity as a CIA officer may be the most compelling evidence to date that Cheney himself might have directed Libby to disclose Plame’s identity to Miller and other reporters.
This new information adds to a growing body of evidence that Cheney may have directed Libby to disclose Plame’s identity to reporters and that Libby acted to protect Cheney by lying to federal investigators and a federal grand jury about the matter.
Still, for those in search of the proverbial “smoking gun”, the question as to whether Cheney directed Libby to leak Plaime’s identity to the media at Cheney’s direction or Libby did so on his own by acting over zealously in carrying out a broader mandate from Cheney to discredit Wilson and his allegations about manipulation of intelligence information, will almost certainly remain an unresolved one.
Libby was convicted on March 6, 2007 of four felony counts of lying to federal investigators, perjury, and obstruction of justice, in attempting to conceal from authorities his own role, and that of other Bush administration officials, in leaking information to the media about Plame.
One of the jurors in the case, Dennis Collins, told the press shortly after the verdict that he and many other jurors believed that Libby was serving as a “fall guy” for Cheney, and had lied to conceal the role of his boss in directing information about Plame to be leaked to the press.
The special prosecutor in the CIA leak case, Patrick Fitzgerald, said in both opening and closing arguments that because Libby did not testify truthfully during the course of his investigation, federal authorities were stymied from determining what role Vice President Cheney possibly played in directing the leaking of information regarding Plame that led to the end of her career as a covert CIA officer, and jeopardized other sensitive intelligence information.
Speaking of the consequences of Libby’s deceit to the FBI and a federal grand jury, Fitzgerald, who is also the U.S. attorney for Chicago, said in his Feb. 20, 2007 closing argument: “There is talk about a cloud over the Vice President. There is a cloud over the White House as to what happened. Do you think the FBI, the Grand Jury, the American people are entitled to a straight answer?”
The implication from that and other comments made by Fitzgerald while trying the case was that Libby had lied and placed himself in criminal jeopardy to protect Cheney and to perhaps conceal the fact that Cheney had directed him to leak information to the media about Plame.
Although it has been widely reported in the media that Cheney and Libby have denied that Cheney directed Libby ever to speak to reporters about Plame, those reports have been erroneous. As Washington Post.com columnist Dan Froomkin wrote in this largely overlooked column, Libby instead had told both the FBI and a federal grand jury that he was uncertain as to whether or not Cheney had directed him to talk to reporters about Plame.
An FBI agent testified at Libby’s trial, as Froomkin pointed out, that Libby had told the FBI that during a July 12, 2003 conversation that Libby had with Cheney, the two men possibly discussed “whether to report to the press that Wilson’s wife worked for the CIA.”
That conversation occurred exactly four days after Cheney ordered the revision of the talking points and Libby had his conversation with Judith Miller about Plame.
And immediately after that July 12, 2003 conversation between Cheney and Libby, Libby spoke by phone with Matthew Cooper, then a correspondent for Time magazine, and confirmed for Cooper that Plame worked for the CIA and that she had played a role in sending her husband to Niger.
A contemporaneous FBI report recounting the agents’ interview with Libby also asserts that Libby had refused to categorically deny to them that Cheney had directed him to leak information to the press about Plame. A heavily redacted copy of Libby’s interviews with FBI agents was turned over this summer to the House Committee on Oversight and Government Reform.
The committee’s chairman, Rep. Henry Waxman (D-Ca.) wrote Attorney General Michael Mukasey on June 3, 2008, reiterating an earlier request that Mukasey turn over to the committee the FBI report of its interview of Vice President Cheney in regards to the Plame matter:
“In his interview with the FBI, Mr. Libby states that it was `possible’ that Vice President Cheney instructed [Libby] to disseminate information about Ambassador Wilson’s wife to the press. This is a significant revelation and, if true, a serious matter. It cannot be responsibly investigated without access to the Vice President’s interview.”
Mukasey declined to release the Cheney report to Waxman in particular, and Congress in general.
But a person with access to notes of Cheney’s interview with federal investigators described to me what Cheney said during those interviews. Later the same person read to me verbatim portions of the interview notes directly relevant to this story.
***
At the time of the leak of Plame’s identity, Cheney, Libby and other Bush administration officials were attempting to discredit Wilson because of the charges that he was making that the White House had manipulated intelligence information to take the nation to war with Iraq. Wilson, a retired career diplomat and former ambassador, had traveled to Niger in February 2002 on a CIA- sponsored mission to investigate allegations that Saddam Hussein’s regime had attempted to procure uranium from the African nation. Wilson reported back to the CIA that the allegations were most certainly untrue.
Despite numerous warnings from the CIA and elsewhere in government that the Niger allegations were most likely false or even contrived, President Bush cited them in his 2002 State of the Union address as a rationale to go to war with Iraq.
On July 6, 2003, Wilson published an op-ed in The New York Times charging that the Bush administration had “twisted” intelligence when it cited the alleged Niger-Iraq connection in the president’s State of Union earlier that year. At the time, U.N. weapons inspectors in Iraq could not find out weapons of mass destruction. Wilson’s allegations were among the first from an authoritative source that the administration might have misled the nation to go to war.
A central part of the effort to counter Wilson’s allegations entailed discrediting him by suggesting that his slection for the trip had been a case of nepotism. Cheney, Libby, then-White House political adviser Karl Rove, and other White House officials told reporters that Wilson’s wife, who worked at the CIA, had been primarily responsible for selecting him to go to Niger.
The day after Wilson’s op-ed, on July 7, 2003, Cheney personally dictated talking points for then-presidential secretary Ari Fleischer and other White House officials to use to counter Wilson’s charges and discredit him.
A central purpose for writing the talking points was to demonstrate that the Vice President’s office had played little if any role in Wilson being sent to Niger and that Cheney was not told of Wilson’s mission prior to the war with Iraq.
In talking points Cheney dictated on July 7, Cheney wrote as his first one: “The Vice President’s office did not request the mission to Niger.” The three other talking points asserted that the “Vice President’s office was not informed of Joe Wilson’s mission”; that Cheney’s office was not briefed about the trip until long after it occurred, and that Cheney and his aides only learned about the trip when they received press inquiries about it a full year later.
***
About a month prior to Wilson having written his own op-ed for the Times, he had told his story of his mission to Niger to New York Times columnist Nicholas Kristof, who wrote a detailed account of Wilson’s trip and his allegations.
In reaction to that column, Cheney personally made inquiries about the matter to both then-CIA director George Tenet and then-CIA deputy director John McLaughlin, apparently on either June 11 or June 12, 2003, according to evidence made public at Libby’s federal criminal trial. Both Tenet and McLaughlin told Cheney of Plame’s role (in reality, a tenuous one) to the selection of her husband for the Niger mission.
On June 12, Cheney and Libby spoke, and Cheney told Libby about Plame’s supposed role.
In notes that Libby took of the conversation, Libby wrote that Cheney said he been told by the CIA officials that Wilson’s mission to Niger “took place at our behest”-in reference to the CIA. More specifically, the notes indicted the mission was undertaken at the request of the CIA’s covert Counterproliferation Division. The notes said that Cheney told Libby that he had been informed that Wilson’s “wife works in that division.”
Cheney then instructed Libby, according to the notes, to ask the CIA to set the record straight by saying that the Vice President’s office “didn’t known about [the] mission” and “didn’t get the report back”, in reference to the fact that Cheney’s office never received a copy of a CIA debriefing report of Wilson after he returned from Niger.
Surprisingly, despite the prominence of Kristof in particular, and the Times in general, the column was largely ignored– at least for a while.
But Wilson’s own July 6, 2003 Times op-ed column by rekindled the issue. Stoking the flames, Wilson appeared on Meet the Press that same morning to discuss his column.
Wilson’s column, prosecutor Fitzgerald asserted at Libby’s trial, ignited a “firestorm.”
Wilson’s charges, Fitzgerald went on to say, “came in the fourth month of the war in Iraq, the fourth month when weapons of mass destruction were not found. Coming as they did, they ignited a media firestorm… the White House was stunned.”
In a handwritten notation at the bottom of the July 6 op-ed, Cheney wrote out several rhetorical questions regarding Wilson and Plame: “Have they [the CIA] done this before? Send an Amb. to answer a question? Do we ordinarily send people out pro-bono to work for us? Or did his wife send him on a junket?”
The next day, July 7, Cheney crafted talking points to be distributed to the media which emphasized that his office had not requested that Wilson go to Niger, that the CIA had not told him about Wilson’s findings, and that he personally only learned of the matter long after the U.S. invaded Iraq– from press reports.
The four talking points dictated by Cheney to his press aide, Catharine Martin, stated:
*The Vice President’s office did not request the mission to Niger.
* The Vice President’s office was not informed of Joe Wilson’s mission.
*The Vice President’s office did not receive a briefing about Mr. Wilson’s mission after he returned.
*The Vice President’s office was not aware of Mr. Wilson’s mission until recent press reports accounted for it.
Martin, in turn, sent those talking points on to, among others, Ari Fleischer, the-then White House press secretary, who utilized them in his briefing or “gaggle” for the press that morning.
Fleischer told reporters that same day, according to a transcript of the briefing: “The Vice President’s office did not request the mission to Niger. The Vice president’s office was not informed of his mission and he was not aware of Mr. Wilson’s mission until recent press accounts… accounted for it. So this was something that the CIA undertook… They sent him on their own volition.”
Also hat same day, Fleischer, who was planning to leave his position as White House press secretary, had lunch with Libby, during which, according to Fleisher’s testimony at Libby’s trial, Libby spoke extensively about the role of Plame in sending her husband on the Niger mission.
At the lunch, Fleischer would testify, Libby told him: “Ambassador Wilson was sent by his wife. His wife works for the CIA.” Fleischer testified that Libby even referred to Wilson’s wife by her maiden name, Valerie Plame.
“He added it was `hush-hush’, and on the QT,’ and that most people didn’t know it,” Fleisher testified.
The very next morning, on July 8, Libby met with reporter Judith Miller of the New York Times for two hours for breakfast at the St. Regis Hotel in downtown Washington in an effort to staunch the damage done by Wilson’s column.
Miller testified at Libby’s trial during the breakfast Libby told her that Wilson’s wife worked at the CIA and that Plame had played a role in selecting him for his Niger mission.
In testimony before the federal grand jury in the CIA leak case, Libby testified that Cheney had instructed him before the breakfast to “get everything out.” Regarding the allegations that he leaked information to Miller about Plame, Libby told federal investigators that he had never done so.
During the same breakfast, Libby also disclosed to Miller portions of a then-still classified National Intelligence Estimate which Cheney believed demonstrated that the CIA was to blame for robustly endorsing the Niger information as accurate.
President Bush had personally and secretly declassified portions of the NIE for the specific purpose of leaking them to Miller. In disclosing selective portions of the NIE to Miller, only the President, the Vice President, and Libby knew about the secret declassification.
“So far as you know, the only three people who knew about this would be the President, the Vice President, and yourself,” Libby was asked by Fitzgerald during one session by Libby before the federal grand jury hearing evidence in the CIA leak case,
“Correct, sir,” Libby answered.
Also that same day, July 8, 2003, Cheney met again Cathy Martin– this time on Cheney’s office on Capitol Hill. During the meeting, according to an account Martin gave federal investigators, Cheney told Martin that he wanted some changes and additions made to the talking points devised the previous day that had already been disseminated to Fleischer and other White House communications aides.
Martin told investigators that Cheney dictated the changes to her, and in each case, she took down word for word what the Vice President said. (Martin later repeated this same account under oath during Libby’s trial.)
Cheney told Martin that he wanted the very first of the talking points to now read: “It is not clear who authorized Joe Wilson’s trip to Niger.”
Cheney, of course, knew that the CIA had authorized Wilson’s trip and had sent Wilson to Niger. Both Cheney and Libby had been told by a large number of CIA and State Department officials by then that such was the case, according to the sworn testimony of those officials at Libby’s trial. And the day before, Fleisher had told the press that Wilson’s mission to Niger was “something that the CIA undertook” and that they had also “sent him on their own volition.”
Why would Cheney change the talking points from the day before if he knew that the CIA had sent Wilson and he and his staff had encouraged Fleischer to say that the day before? Obviously, saying it was unclear who had authorized Wilson’s trip to Niger was not only untrue, it also pointed reporters in the direction of asking about Plame?
Asked about this during his FBI interview, Cheney was at a loss to explain how the change of the talking points focusing attention on who specifically sent Wilson to Niger would not lead reporters might lead to exposure of Plame’s role as a CIA officer.
There was a matter, as well, as to why Cheney changed the talking points to say it was unclear who sent Wilson when in fact he had admitted earlier during the same interview with investigators that he clearly knew it was the CIA.
Finally, of course, there was the fact that on the very same day that Cheney changed the talking points that Libby was meeting with Miller and telling Miller that Plame worked for the CIA and had sent her husband to Niger.
In his closing argument during the Libby trial, however, Fitzgerald did mention the issue briefly. None of the media covering the trial, however (with the sole exception once again being Dan Froomkin), appeared to understand its significance or broader context, and did not report it.
Noting the change of Cheney’s July 7 and July 8, 2003 talking points, Patrick Fitzgerald said: “The question of who authorized became number one. That’s a question that would lead to the answer: Valerie Wilson.”
***
Four days later, on July 12, 2003 Cheney and Libby strategized again as to how to beat back Wilson’s allegations. They had traveled together, and with thief families, to the Norfolk Naval Station for the commissioning of the nuclear-powered Nimitz-class aircraft carrier, the U.S.S. Ronald Reagan.
On the flight home, Cheney pressed Libby to talk to reporters to once again, hoping to beat back Wilson’s allegations and discredit the former diplomat. Immediately after landing, Libby spoke to then-Time magazine correspondent Matthew Cooper and confirmed for him that Plame worked for the CIA and had played a role in sending her husband to Niger. It was regarding that conversation that Libby told the FBI it was “possible” that Cheney might have told him to discuss Plame.
On July 2, 2007, President Bush commuted Libby’s thirty month prison sentence, saying he was doing so out of compassion for Libby’s family and because he believed that he believed that the sentence was excessive. The White House declined to say whether Bush might consider a full pardon for Libby.
In the next few days, it will become known whether Libby will in fact be pardoned by President Bush in his final days in office.
In the meantime, what the Vice President and the President told the FBI during their own FBI interviews during the Plame investigation will not be officially disclosed by the White House. Despite the fact that prosecutor Fitzgerald has said told Congress that he has no objections to the provision of the reports to Congress, the Bush administration has refused to follow through.
Housing Starts Fall Through the Floor
Go to Original
By Dean Baker
The Census Bureau reported a sharp drop in housing starts in November from a downwardly-revised October rate. The 625,000 annual rate of construction reported for November is 24.8 percent below the September rate. It is 47.0 percent below the November 2007 rate and it is 70.9 percent below the rate in November of 2005 at the peak of the building boom. In fact, the start reported for November is lower than any rate reported for the last fifty years.
The November drop hit all regions of the country, but the Northeast saw the sharpest downturn. Starts fell by 34.6 percent in the region and are now down by 60.2 percent from year ago levels. This seems to be a case where the Northeast is catching up with the rest of the country, since starts had previously fallen somewhat less in the region. It is worth noting that the absolute levels of starts in the Northeast were far lower than in the other three regions, so this drop has much impact on the national economy.
This plunge in starts is a necessary part of the adjustment process in the housing market. There is no way to eliminate the vast inventory of unsold new and existing homes without a sharp slowing in construction. However, the drop in the last two months suggests that the housing market is in a qualitatively different state than it had been even three months ago.
Presumably, builders are cutting back in large part because credit conditions have tightened to the point that they have no choice. This would be consistent with the tightening of credit that took hold in September.
It is important to recognize that this is not necessarily a case of a “credit crunch” inhibiting economic activity. Given the vast oversupply of homes on the market, building new homes in many areas is not a good business proposition right now. Newly built homes can be expected to sit on the market for more than a year in many areas and may eventually sell for prices that are far below recent levels. Banks would be wise not to make loans to builders under such circumstances even if the banks were fully solvent and solidly capitalized.
It will be interesting to see how this plunge in starts is reflected in prices. There is a considerable lag in the data in the key price indices. The indices reflect contracted prices, but only get reported after sales are closed. The sales that are contracted in November will mostly be closed in January, which means that we will not get price data for the month until February.
However, if the plunge in starts reflects the inability of builders to continue to get credit from banks, then it likely indicates that they are also having difficulty obtaining the credit needed to sustain large inventories of unsold homes. This would imply a large sell-off of inventory, presumably at sharply lower prices. If this is the case, we should expect to see a big upturn in new home sales in the November report that will come out next week, with substantial price declines. (The new home sales data show contract prices, so they are more current than other indices.)
If builders are cutting prices to dump inventory, it does not appear that homeowners have yet followed the same path. The Mortgage Bankers Association's purchase applications index continues to show very low levels, even as mortgage interest rates are approaching 5.0 percent. The low measure on this index is the most glaring refutation of the claim that people are unable to get credit. If creditworthy applicants were being denied loans by banks unable or unwilling to lend, then the ratio of mortgage applications to home sales should be soaring. Since there is no notable increase in this ratio, access to credit is obviously not an issue.
The drop in housing starts indicates that housing will again be a sharp negative in GDP this quarter. With sharp downturns in consumption and a weakening trade picture, 4th quarter GDP is certain to show an extraordinary decline.
By Dean Baker
The Census Bureau reported a sharp drop in housing starts in November from a downwardly-revised October rate. The 625,000 annual rate of construction reported for November is 24.8 percent below the September rate. It is 47.0 percent below the November 2007 rate and it is 70.9 percent below the rate in November of 2005 at the peak of the building boom. In fact, the start reported for November is lower than any rate reported for the last fifty years.
The November drop hit all regions of the country, but the Northeast saw the sharpest downturn. Starts fell by 34.6 percent in the region and are now down by 60.2 percent from year ago levels. This seems to be a case where the Northeast is catching up with the rest of the country, since starts had previously fallen somewhat less in the region. It is worth noting that the absolute levels of starts in the Northeast were far lower than in the other three regions, so this drop has much impact on the national economy.
This plunge in starts is a necessary part of the adjustment process in the housing market. There is no way to eliminate the vast inventory of unsold new and existing homes without a sharp slowing in construction. However, the drop in the last two months suggests that the housing market is in a qualitatively different state than it had been even three months ago.
Presumably, builders are cutting back in large part because credit conditions have tightened to the point that they have no choice. This would be consistent with the tightening of credit that took hold in September.
It is important to recognize that this is not necessarily a case of a “credit crunch” inhibiting economic activity. Given the vast oversupply of homes on the market, building new homes in many areas is not a good business proposition right now. Newly built homes can be expected to sit on the market for more than a year in many areas and may eventually sell for prices that are far below recent levels. Banks would be wise not to make loans to builders under such circumstances even if the banks were fully solvent and solidly capitalized.
It will be interesting to see how this plunge in starts is reflected in prices. There is a considerable lag in the data in the key price indices. The indices reflect contracted prices, but only get reported after sales are closed. The sales that are contracted in November will mostly be closed in January, which means that we will not get price data for the month until February.
However, if the plunge in starts reflects the inability of builders to continue to get credit from banks, then it likely indicates that they are also having difficulty obtaining the credit needed to sustain large inventories of unsold homes. This would imply a large sell-off of inventory, presumably at sharply lower prices. If this is the case, we should expect to see a big upturn in new home sales in the November report that will come out next week, with substantial price declines. (The new home sales data show contract prices, so they are more current than other indices.)
If builders are cutting prices to dump inventory, it does not appear that homeowners have yet followed the same path. The Mortgage Bankers Association's purchase applications index continues to show very low levels, even as mortgage interest rates are approaching 5.0 percent. The low measure on this index is the most glaring refutation of the claim that people are unable to get credit. If creditworthy applicants were being denied loans by banks unable or unwilling to lend, then the ratio of mortgage applications to home sales should be soaring. Since there is no notable increase in this ratio, access to credit is obviously not an issue.
The drop in housing starts indicates that housing will again be a sharp negative in GDP this quarter. With sharp downturns in consumption and a weakening trade picture, 4th quarter GDP is certain to show an extraordinary decline.
It's Official: We're Just a Few Years from Peak Oil
Go to Original
By George Monbiot
Can you think of a major threat for which the British government does not prepare? It employs an army of civil servants, spooks and consultants to assess the chances of terrorist attacks, financial collapse, floods, epidemics, even asteroid strikes, and to work out what it should do if they happen. But there is one hazard about which it appears intensely relaxed. It has never conducted its own assessment of the state of global oil supplies and the possibility that one day they might peak and then go into decline.
If you ask, it always produces the same response: "global oil resources are adequate for the foreseeable future." It knows this, it says, because of the assessments made by the International Energy Agency (IEA) in its World Energy Outlook reports. In the 2007 report, the IEA does appear to support the government's view. "World oil resources," it states, "are judged to be sufficient to meet the projected growth in demand to 2030;" though it says nothing about what happens at that point, or whether they will continue to be sufficient after 2030. But this, as far as Whitehall is concerned, is the end of the matter. Like most of the rich world's governments, the United Kingdom treats the IEA's projections as gospel. Earlier this year, I submitted a Freedom of Information request to the UK's Department for Business, asking what contingency plans the government has made for global supplies of oil peaking by 2020. The answer was as follows: "the Government does not feel the need to hold contingency plans specifically for the eventuality of crude oil supplies peaking between now and 2020."
So the IEA had better bloody well be right. In the report on peak oil commissioned by the US Department of Energy, the oil analyst Robert L.Hirsch concluded that "without timely mitigation, the economic, social and political costs" of world oil supplies peaking "will be unprecedented." He went on to explain what "timely mitigation" meant. Even a worldwide emergency response "10 years before world oil peaking", he wrote, would leave "a liquid fuels shortfall roughly a decade after the time that oil would have peaked." To avoid global economic collapse, we need to begin "a mitigation crash program 20 years before peaking." If Hirsch is right and if oil supplies peak before 2028, we're in deep doodah.
So burn this into your mind: between 2007 and 2008 the IEA radically changed its assessment. Until this year's report, the agency mocked people who said that oil supplies might peak. In the foreword to a book it published in 2005, its executive director, Claude Mandil, dismissed those who warned of this event as "doomsayers". "The IEA has long maintained that none of this is a cause for concern," he wrote. "Hydrocarbon resources around the world are abundant and will easily fuel the world through its transition to a sustainable energy future." In its 2007 World Energy Outlook, the IEA predicted a rate of decline in output from the world's existing oilfields of 3.7 percent a year. This, it said, presented a short-term challenge, with the possibility of a temporary supply crunch in 2015, but with sufficient investment any shortfall could be covered. But the new report, published last month, carried a very different message: a projected rate of decline of 6.7 percent, which means a much greater gap to fill.
More importantly, in the 2008 report the IEA suggests for the first time that world petroleum supplies might hit the buffers. "Although global oil production in total is not expected to peak before 2030, production of conventional oil … is projected to level off towards the end of the projection period." These bland words reveal a major shift. Never before has one of the IEA's energy outlooks forecast the peaking or plateauing of the world's conventional oil production (which is what we mean when we talk about peak oil).
But that is as specific as the report gets. Does it or doesn't it mean that we have time to prepare? What does "towards the end of the projection period" mean? The agency has never produced a more precise forecast -- until now. For the first time, in the interview I conducted with its chief economist Fatih Birol, it has given us a date. And it should scare the pants off anyone who understands the implications.
Fatih Birol, the lead author of the new energy outlook, is a small, shrewd, unflustered man with thick grey hair and Alistair Darling eyebrows. He explained to me that the agency's new projections were based on a major study it had undertaken into decline rates in the world's 800 largest oil fields. So what were its previous figures based on? "It was mainly an assumption, a global assumption about the world's oil fields. This year, we looked at it country by country, field by field and we looked at it also onshore and offshore. It was very very detailed. Last year it was an assumption, and this year it's a finding of our study." I told him that it seemed extraordinary to me that the IEA hadn't done this work before, but had based its assessment on educated guesswork. "In fact nobody had done this research," he told me. "This is the first publicly available data".
So was it not irresponsible to publish a decline rate of 3.7 percent in 2007, when there was no proper research supporting it? "No, our previous decline assumptions have always mentioned that these are assumptions to the best of our knowledge -- and we also said that the declines [could be] higher than what we have assumed."
Then I asked him a question for which I didn't expect a straight answer: could he give me a precise date by which he expects conventional oil supplies to stop growing?
"In terms of non-OPEC [countries outside the big oil producers' cartel]", he replied, "we are expecting that in three, four years' time the production of conventional oil will come to a plateau, and start to decline. … In terms of the global picture, assuming that OPEC will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well, which is of course not good news from a global oil supply point of view."
Around 2020. That casts the issue in quite a different light. Mr Birol's date, if correct, gives us about 11 years to prepare. If the Hirsch report is right, we have already missed the boat. Birol says we need a "global energy revolution" to avoid an oil crunch, including (disastrously for the environment) a massive global drive to exploit unconventional oils, such as the Canadian tar sands. But nothing on this scale has yet happened, and Hirsch suggests that even if it began today, the necessary investments and infrastructure changes could not be made in time. Fatih Birol told me "I think time is not on our side here."
When I pressed him on the shift in the agency's position, he argued that the IEA has been saying something like this all along. "We said in the past that one day we will run out of oil. We never said that we will have hundreds of years of oil … but what we have said is that this year, compared to past years, we have seen that the decline rates are significantly higher than what we have seen before. But our line that we are on an unsustainable energy path has not changed."
This of course is face-saving nonsense. There is a vast difference between a decline rate of 3.7 percent and a rate of 6.7 percent. There is an even bigger difference between suggesting that the world is following an unsustainable energy path -- a statement almost everyone can subscribe to -- and revealing that conventional oil supplies are likely to plateau around 2020. If this is what the IEA meant in the past, it wasn't expressing itself very clearly.
So what do we do? We could take to the hills, or we could hope and pray that Hirsch is wrong about the 20-year lead time, and begin a global crash programme today of fuel efficiency and electrification. In either case, the British government had better start drawing up some contingency plans.
By George Monbiot
Can you think of a major threat for which the British government does not prepare? It employs an army of civil servants, spooks and consultants to assess the chances of terrorist attacks, financial collapse, floods, epidemics, even asteroid strikes, and to work out what it should do if they happen. But there is one hazard about which it appears intensely relaxed. It has never conducted its own assessment of the state of global oil supplies and the possibility that one day they might peak and then go into decline.
If you ask, it always produces the same response: "global oil resources are adequate for the foreseeable future." It knows this, it says, because of the assessments made by the International Energy Agency (IEA) in its World Energy Outlook reports. In the 2007 report, the IEA does appear to support the government's view. "World oil resources," it states, "are judged to be sufficient to meet the projected growth in demand to 2030;" though it says nothing about what happens at that point, or whether they will continue to be sufficient after 2030. But this, as far as Whitehall is concerned, is the end of the matter. Like most of the rich world's governments, the United Kingdom treats the IEA's projections as gospel. Earlier this year, I submitted a Freedom of Information request to the UK's Department for Business, asking what contingency plans the government has made for global supplies of oil peaking by 2020. The answer was as follows: "the Government does not feel the need to hold contingency plans specifically for the eventuality of crude oil supplies peaking between now and 2020."
So the IEA had better bloody well be right. In the report on peak oil commissioned by the US Department of Energy, the oil analyst Robert L.Hirsch concluded that "without timely mitigation, the economic, social and political costs" of world oil supplies peaking "will be unprecedented." He went on to explain what "timely mitigation" meant. Even a worldwide emergency response "10 years before world oil peaking", he wrote, would leave "a liquid fuels shortfall roughly a decade after the time that oil would have peaked." To avoid global economic collapse, we need to begin "a mitigation crash program 20 years before peaking." If Hirsch is right and if oil supplies peak before 2028, we're in deep doodah.
So burn this into your mind: between 2007 and 2008 the IEA radically changed its assessment. Until this year's report, the agency mocked people who said that oil supplies might peak. In the foreword to a book it published in 2005, its executive director, Claude Mandil, dismissed those who warned of this event as "doomsayers". "The IEA has long maintained that none of this is a cause for concern," he wrote. "Hydrocarbon resources around the world are abundant and will easily fuel the world through its transition to a sustainable energy future." In its 2007 World Energy Outlook, the IEA predicted a rate of decline in output from the world's existing oilfields of 3.7 percent a year. This, it said, presented a short-term challenge, with the possibility of a temporary supply crunch in 2015, but with sufficient investment any shortfall could be covered. But the new report, published last month, carried a very different message: a projected rate of decline of 6.7 percent, which means a much greater gap to fill.
More importantly, in the 2008 report the IEA suggests for the first time that world petroleum supplies might hit the buffers. "Although global oil production in total is not expected to peak before 2030, production of conventional oil … is projected to level off towards the end of the projection period." These bland words reveal a major shift. Never before has one of the IEA's energy outlooks forecast the peaking or plateauing of the world's conventional oil production (which is what we mean when we talk about peak oil).
But that is as specific as the report gets. Does it or doesn't it mean that we have time to prepare? What does "towards the end of the projection period" mean? The agency has never produced a more precise forecast -- until now. For the first time, in the interview I conducted with its chief economist Fatih Birol, it has given us a date. And it should scare the pants off anyone who understands the implications.
Fatih Birol, the lead author of the new energy outlook, is a small, shrewd, unflustered man with thick grey hair and Alistair Darling eyebrows. He explained to me that the agency's new projections were based on a major study it had undertaken into decline rates in the world's 800 largest oil fields. So what were its previous figures based on? "It was mainly an assumption, a global assumption about the world's oil fields. This year, we looked at it country by country, field by field and we looked at it also onshore and offshore. It was very very detailed. Last year it was an assumption, and this year it's a finding of our study." I told him that it seemed extraordinary to me that the IEA hadn't done this work before, but had based its assessment on educated guesswork. "In fact nobody had done this research," he told me. "This is the first publicly available data".
So was it not irresponsible to publish a decline rate of 3.7 percent in 2007, when there was no proper research supporting it? "No, our previous decline assumptions have always mentioned that these are assumptions to the best of our knowledge -- and we also said that the declines [could be] higher than what we have assumed."
Then I asked him a question for which I didn't expect a straight answer: could he give me a precise date by which he expects conventional oil supplies to stop growing?
"In terms of non-OPEC [countries outside the big oil producers' cartel]", he replied, "we are expecting that in three, four years' time the production of conventional oil will come to a plateau, and start to decline. … In terms of the global picture, assuming that OPEC will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well, which is of course not good news from a global oil supply point of view."
Around 2020. That casts the issue in quite a different light. Mr Birol's date, if correct, gives us about 11 years to prepare. If the Hirsch report is right, we have already missed the boat. Birol says we need a "global energy revolution" to avoid an oil crunch, including (disastrously for the environment) a massive global drive to exploit unconventional oils, such as the Canadian tar sands. But nothing on this scale has yet happened, and Hirsch suggests that even if it began today, the necessary investments and infrastructure changes could not be made in time. Fatih Birol told me "I think time is not on our side here."
When I pressed him on the shift in the agency's position, he argued that the IEA has been saying something like this all along. "We said in the past that one day we will run out of oil. We never said that we will have hundreds of years of oil … but what we have said is that this year, compared to past years, we have seen that the decline rates are significantly higher than what we have seen before. But our line that we are on an unsustainable energy path has not changed."
This of course is face-saving nonsense. There is a vast difference between a decline rate of 3.7 percent and a rate of 6.7 percent. There is an even bigger difference between suggesting that the world is following an unsustainable energy path -- a statement almost everyone can subscribe to -- and revealing that conventional oil supplies are likely to plateau around 2020. If this is what the IEA meant in the past, it wasn't expressing itself very clearly.
So what do we do? We could take to the hills, or we could hope and pray that Hirsch is wrong about the 20-year lead time, and begin a global crash programme today of fuel efficiency and electrification. In either case, the British government had better start drawing up some contingency plans.
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