Wednesday, March 25, 2009

Forensic scientists who testify for criminal defendants are under fire. They ought to be praised

In Criminal Cases, Should Science Only Serve the State? By Radley Balko
Forensic scientists who testify for criminal defendants are under fire. They ought to be praised.
Reasons, March 25, 2009

Last month, the National Academy of Sciences (NAS) released a wide-ranging report expressing alarm at the way forensic science is used in the courtroom. Among the many problems the report addressed was the tendency of many states to see state-employed forensic experts not as independent scientists, but as part of the prosecution's "team."

The problem with that sort of arrangement is obvious: It introduces pressure—subtle or overt—on scientists to produce results that please police and prosecutors. The NAS report recommends that state-employed forensic experts be neutral. Today, far too many crime labs and medical examiners report to the attorney general of their states. Others report directly to the prosecutors in their jurisdictions. Ideally, government medical examiners would not only be independent of the state's law enforcement agencies, they would be free to testify against any state claims unsupported by scientific evidence.But that isn't the case in most of the country. In fact, it's almost universally accepted—among both prosecutors and medical examiners—that a government medical examiner should never testify against the district attorney who serves in the same jurisdiction, even if the medical examiner strongly disagrees with the prosecutor's conclusions. Lately, that already dubious notion seems to be expanding. Many law enforcement officials believe that government forensic experts should be barred from testifying for the defense in any case, even in other jurisdictions.

Earlier this month, the Minneapolis Star-Tribune reported that Minnesota District Attorney James Backstrom rebuked his county's medical examiner, Dr. Lindsey Thomas, because members of her staff had testified for defense attorneys in other counties, calling into question the conclusions of those counties' medical examiners. In one email to Thomas (you can read all of the emails here), Backstrom called the practice "a conflict of interest," and complained that the "added credibility attached to someone who is currently a coroner/medical examiner in another community who testifies as a defense expert makes any prosecution more difficult." In Backstrom's view, the actions of Thomas' staff were no different than if he were to testify that he disagreed with another prosecutor's strategy or conclusions. Backstrom ended one email by threatening to block Thomas's reappointment as the county's medical examiner if the practice continued.

Backstrom not only exhibited a fundamental ignorance of the purpose of forensic science in the courtroom, he also tellingly revealed a striking philosophical difference between the fields of science and law enforcement. Law enforcement officers—be they police officers or prosecutors—assume a sort of fraternity that precludes them from criticizing one another. Cops almost never testify against other cops—even when a fellow officer has broken the law—and prosecutors rarely criticize other prosecutors. Scientists, on the other hand, are not only willing to criticizing other scientists, but the process of peer review—a fundamental component of the scientific method—actually depends on such criticism. Backstrom's efforts to undermine peer review are alarming, particularly given that his efforts are aimed at the courtroom, where so much is frequently at stake.

Sadly, Backstrom's view is all too common. Last week, the local Fox affiliate in Atlanta ran two investigative pieces critical of Georgia's chief state medical examiner, Dr. Kris Sperry. The station's big scoop was that Sperry—who has an impeccable reputation among his peers—was regularly testifying for criminal defendants in other jurisdictions. The report quoted a sheriff and former county coroner in Harrison County, Mississippi, both still angry at Sperry for contradicting the state medical examiner's testimony in a murder case. The piece included quotes from both Mississippi officials stating that a medical examiner who gets a government paycheck should never contradict another government medical examiner in court. One Tennessee official said the practice was akin to a police officer testifying against another police officer.

Again, this is nonsense. We need more doctors willing to hold their rogue colleagues accountable, not less. For the last three years, I've been reporting on the severe inadequacies of Mississippi's criminal autopsy system. In particular, I've reported on Dr. Steven Hayne, who over the last 20 years has done 80 to 90 percent of the state's autopsies, carrying an impossible workload of some 1,500 to 1,800 autopsies per year (by his own account), despite the fact that he isn't board-certified in forensic pathology. Hayne's colleagues have known for years that he's little more than a rubber stamp for prosecutors. He has inflicted incalculable damage on the state's criminal justice system.

Kris Sperry, along with several current and former state medical examiners in Alabama, is one of the few doctors who has been trying to hold Hayne accountable. Over the years, Sperry has written letters to professional organizations asking for Hayne to be investigated. Yes, he has also testified against Hayne and other disreputable Mississippi medical examiners in court. He ought to be lauded for that, not condemned.

The other problem here, as the NAS study points out, is that there is currently a critical shortage of board-certified medical examiners. If every forensic pathologist with a government job or contract were barred from ever testifying for criminal defendants, there wouldn't be many doctors left to testify. The few who were left couldn't possibly testify in every case where they're needed—and in those cases they do take, they could easily be impeached by prosecutors as guns-for-hire.

But then, maybe that's the point.

You'd think that a forensic expert who tells the jury that he testifies for both defense attorneys and prosecutors would carry more weight on those occasions when he testifies for the state. That would show a doctor who testimony follows the science. But for prosecutors like Backstrom, the primary concern is not embarrassing his fellow district attorneys, and ensuring that credible doctors with state credentials don't screw up another prosecutor's case—even if that case is based on faulty science.

It takes an odd definition of justice to believe that state-paid scientists should only use their expertise to help win prosecutions. Unfortunately, that view seems to be the prevailing one.

Radley Balko is a senior editor at Reason magazine.

The 70s: Bad Music, Bad Hair and Bad Energy Policy (what Obama can learn from Carter)

The 70s: Bad Music, Bad Hair and Bad Energy Policy (what Obama can learn from Carter). By Donald Hertzmark
Master Resource, March 25, 2009

Many in the energy business, whether or not they support President Obama’s positions on energy and the environment, are likely to think, “Look, the US is a big ship. It cannot be turned around in a couple of years, and even if they tried, you can right the course at the ballot box.”

Actually, you can’t. The United States is still a nation of laws, and without strong political support, the acts of one administration cannot be easily reversed or undone by the next.

But there is more to the story than simple inertia and political head-counts. Each new administration enters with an agenda of positive goals. Spending time and political capital on your predecessor’s agenda can often find its way to the bottom of the to-do list. Moreover, a new president has only a limited circle of advisers. They cannot know everything about what the last guys did (Hayek’s revenge).

So it is that we find ourselves saddled with a whole series of outmoded, inappropriate, and just plain counterproductive energy laws and regulations. What is astonishing is the longevity of policies that prevent the United States from developing and implementing a constructive approach to energy, an approach that could use the totality of our resources to fashion a constructive, efficient and clean energy system.

The Bad Past

The U.S. political class in the 1970s was not one to let a good crisis go to waste. Indeed, this is what was done in the 1970s:

First, Nixon and Ford set the stage with price controls and product allocation rules, including:
  • Price controls on oil and gas at the wellhead and at the consumer level
  • Encouragement to build small, inefficient oil refineries (the Entitlements Program)
But the Carter Administration really got the ball rolling toward ill-conceived, disincentivizing, counterproductive policies. Some of the greatest hits of that era included:

Nuclear Non-Proliferation Act (1978) – under that benign banner lurked a prohibition on reprocessing the spent fuel from civilian nuclear power reactors (the other 95% of the energy in the fuel rods), leading to the waste storage “problem” that inhibits development of nuclear power to this day;

Natural Gas Policy Act (1978) – established 8 different pricing tiers for gas and set them on a path to converge with oil by the mid-1980s, preventing the emergence of a natural gas market until the 1990s; prohibited the use of natural gas for new electric power plants (except for cogeneration);

Solar Tax Credits (1979) – encouraged significant spending on immature and inefficient solar technologies;

Windfall Profits Tax (1980) – Intended to raise more than $100 billion by taxing the “excess” profits of oil producers in the United States, raised only $40 billion before it was repealed in the late 1980s, but reduced domestic oil and gas production by 6-10 percent over that period;

Energy Security Act (1980) – established the Synthetic Fuels Corporation, a public-private partnership intended to improve the technology of coal and shale liquefaction/extraction and eventual commercialization. This act was repealed in 1986, after spending just $1.2 billion on 3 projects. In one of the supreme ironies of the entire 1970s energy policy frenzy, this $1.2 billion was perhaps the most cost-effective technology funding by the U.S. Government in that period. Though it was not used to produce shale oil or coal-based liquids, the technology to convert heavy, dirty feedstocks to light refined products was used by U.S. refiners to produce a slate of valuable light products from less expensive, heavy crudes, saving U.S. consumers many billions of dollars in crude acquisition costs over the years.

With the coming of the Reagan Administration in 1981 some of these measures were swept away, including price controls, entitlements, and some provisions of the Natural Gas Policy Act. For others, including the Synfuels Corporation, Solar Tax Credits, and Windfall Profits Taxes, legislative relief was required, which did not come until late in President Reagan’s second term.

For the domestic oil and gas industry the Malthusian gloom of the Carter years inhibited interest in readily available oil and gas reserves, hiding behind a belief that oil and gas were doomed to run out soon in any event. Jimmy Carter was a fan of Peak Oil Theory before the current decade’s bandwagon was ever conceived.

In the end, the energy policies of that past 30 years that had significant positive effects were mostly of the “first do no harm” variety. Most of those policies were enacted during the 1980s, so as to undo some of the most egregious acts of the 1970s. With the exception of the spectacular unintended consequences of the (relative) pittance in Synfuels Corporation funding, all of the careful mandatory allocations, use restrictions, production restrictions, punitive taxes, price controls and technology development showed either negative impacts on the supply of energy or no discernable effects on energy supply and use.

A number of the Carter era policies have remained part of the US Government’s official approach to energy: restrictions on offshore oil and gas production, “catch-22” type regulation of spent nuclear fuel, reliance on overall manufacturer fuel economy standards rather than prices to encourage conservation of gasoline, and last, but not least, the ethanol tax credit.

The price that we have paid for these interventions – less domestic energy production, more price volatility, aging network infrastructure – far exceeds any of the supposed benefits of such policies. Now we have a new president who wishes to make his name by even more massive intervention in energy markets – since it worked so well the last time. We face grandiose plans that start from the assumption that markets do not work and private firms cannot be trusted to make the “right” types of investments, when, in fact, most of our “remnant” problems result from ignoring rather than following market pricnciples. If the 1970s are any guide we will live with the consequences of our follies for many years.

It is much better to choose wisely than quickly.

PPIFs: Gaming the federal government

Open Letter To The FDIC Ombudsman. By Karl Denninger
The Market Ticker, Monday, March 23, 2009

Now that the Treasury Plan to "cleanse" the market of "toxic assets" has been put forward, I have noted that The FDIC is the entity that will both guarantee the debt issued and vet the bidder list.

I also note the following quote from The FDIC:

The FDIC will provide oversight for the formation, funding, and operation of new public-private investment funds (“PPIFs”) that will purchase loans and other assets from depository institutions. The Legacy Loans Program will attract private capital through an FDIC debt guarantee and Treasury equity co-investment. Private market equity investors (“Private Investors’) are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, and hedge funds. The participation of mutual funds, pension plans, insurance companies, and other long term investors is particularly encouraged.

There is a potential problem here.

Let's say that I am a bank ("financial institution") with $100 billion in "toxic assets". I have them on my balance sheet at 80 cents on the dollar. The market has them marked at 30 cents. We do not know what the held-to-maturity performance will be, since that requires knowing the future, although for the moment let's assume that they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them at 30 cents I take a monstrous loss - perhaps enough to force me under Tier Capital limits and thus render me subject to an FDIC enforcement action. I therefore will not sell for 30 cents so long as I have any belief whatsoever that the cash flow - or any government subsidy - will exceed that value.

If I, as a "financial institution" can participate as a bidder in these auctions I can foist off my loss onto the taxpayer. Here is how I can rig the game so as to avoid an otherwise-inevitable loss:
  • I become a "bidder" and "bid" on my own assets at 75 cents.
  • I am providing 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.
  • The loan, ex my contribution, is non-recourse. That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.
Now the "assets" (a passel of CDOs?) turn out to be worthless. I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that's all.

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these assets are allowed to bid either directly or indirectly as it provides a means for banks to intentionally dump bad assets at a certain loss that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or more in losses onto the taxpayer, not through the operation of "bad luck" but rather through what amounts to a bid rigging operation.

Be aware that I, along with many others, have figured this out. Also be aware that as taxpayers and your ultimate boss, we do not intend to sit still and allow the public treasury to be looted in such a fashion.

The FDIC's job is to prevent that sort of looting operation by prohibiting the sellers of these assets from having any financial interest in the bidding side of the equation, directly or indirectly, and I along with many others intend to hold you to that obligation.

I like the outline of this program if and only if it cannot be gamed in this or similar fashion. Provided that does not occur, this program has the potential to provide great benefit to both the banking system and our economy.

If, however, the financial institutions that created this mess in the first place are allowed by the FDIC and Treasury to use it as a looting operation to intentionally shift their bad assets onto the Taxpayer you can expect that we the people will hold our government to account.

The Guardian goes to Pallywood

The Guardian goes to Pallywood, by Melanie Phillips
The Spectator, Tuesday, March 24, 2009

Not to be outdone by the Ha’aretz blood libel, the Guardian today devotes a front page splash, two inside pages, three separate videos, a commentary by Seumas Milne and an editorial to what it claims is evidence from a special investigation by Clancy Chassay that Israel committed 'war crimes’ in Gaza in Operation Cast Lead by deliberately targeting civilians, using young boys as human shields and deliberately targeting ambulances and medical personnel and hospitals.

It presents these allegations as facts. It does so even though they are only allegations, unsupported by any evidence whatever. It does so even though the allegations are made by people with a proven track record of systematic lying to journalists and fabrication of stories and images. It does so even though such people either support Hamas or are controlled and schooled by Hamas to tell lies under pain of torture or death.

It does so without providing any verifiable information – full names, dates, specifics. It does so without making any mention of the extraordinary lengths to which the Israel Defence Force went in trying to avoid civilian casualties, by leafleting targeted houses to warn the inhabitants to get out and even calling them on their mobile phones to urge them to do so. It does so without acknowledging the fact that it was Hamas which used Gazan civilians as human shields – indeed, it dismisses this in a sentence by stating that Amnesty and Human Rights Watch found ‘no evidence’ that it had done so.

Hardly surprising since Amnesty and Human Rights Watch have repeatedly shown themselves to be wholly partisan in the Palestinian cause and viscerally prejudiced against Israel. But aren’t Guardian reporters supposed to be journalists rather than passive conduits of NGO propaganda? In his ‘month-long investigation’, didn’t investigative reporter Clancy Chassay himself come across any of the copious evidence that Hamas used Gazan civilians as human shields – indeed, effectively used the whole civilian population as either a collective hostage or missile fodder? Did special investigative reporter Chassay manage somehow not to see this, or this, or this, or this, or this evidence that Hamas was guilty prima facie of the war crime of repeatedly using civilians as a weapon of war?

Looking at this Hamas propaganda sicked up by the Guardian (and in a pale imitation, the similarly implausible tale in today’s Independent) it is blindingly obvious that, as so often before, Hamas has chosen to deflect attention from its own war crimes – the deliberate targeting of Israeli civilians and the use of Palestinian civilians as hostages, human shields and missile fodder – by claiming that it is instead Israel that is guilty of that very behaviour. And the evidence that the Guardian has presented as fact to support this claim turns out to be at best paper-thin and at worst demonstrably ridiculous.

Take the first video, featuring the family of six who we are told were killed by an Israeli drone – whose pinpoint accuracy must have meant, says Chassay, that Israel deliberately targeted civilians in that house. But the evidence presented shows nothing of the kind. We are left with absolutely no idea why this house was targeted – whether it was actually a terrorist stronghold, whether terrorists were firing nearby, whether it was erroneous intelligence or even whether a drone was indeed responsible. There whole thing is only allegations. In addition Carl at Israelmatzav adds this intriguing observation:

By the way, the part of the video where the two girls were allegedly killed looked very familiar to me. To me, it looks remarkably like the neighborhood in which the Hilles clan lived. There are some shots of that neighborhood in the video here. Were the people in this video Fatah supporters who were set up to be killed by Hamas?

Now take the second video, in which we are told as a fact that three young brothers were used by the IDF as human shields. Again, all we have to go on is the brothers’ allegations. We see them posing self-consciously in positions replicating how the Israeli army had reportedly used them, including supposedly kneeling in front of Israeli tank positions to deter Hamas from firing.

But a moment’s thought suggests this is hardly plausible. The whole point of human shields is that they are a deterrent against attack because the other side will not want to kill civilians being used in such a way. That is undoubtedly true of the Israelis: there have been countless examples of their aborting attacks because Palestinian children were seen or suspected to be present.

But that’s the point: children and other civilians are present because Hamas use them as human shields. We know from Palestinians’ own testimony and other evidence (see above) that they deliberately kept families in houses which the IDF warned would be targeted – even putting them on the rooftops – in order that they should be killed as martyrs to the cause of destroying Israel. And as we know, they also turn their own children into human bombs for the same reason. So is it really likely that the Israelis would assume that if they used Palestinian children as human shields, Hamas would not fire at them?

Most ludicrously of all, the video shows what it solemnly states is an Israeli army magazine found in one of the destroyed houses showing a picture of one of the brothers bound and blindfolded before he said he was stripped to his underpants and used as a human shield.

Rub your eyes. Operation Cast Lead lasted from December 27 to January 18. Are we supposed to believe that the Israelis managed to publish during that time a magazine with a picture of a boy they had captured during that same operation? And then left it lying around in the rubble– miraculously without so much as a tear in its pages -- for him conveniently to find it?

The boys shown are healthy, well fed and bright-eyed. Their mother is consumed by grief as she describes what happened to them... hang on, let’s read that one again. Her children are healthy, well fed and bright-eyed. So why is she weeping as if they have all been killed? Looks suspiciously like another Hamas ‘Pallywood’ production to me.

Now let’s look at the third video which claims Israel targeted ambulances, hospitals and medical personnel. No mention that Hamas regularly hijacks ambulances, as reported here; nor that they and their NGO mouthpieces claimed medics were killed when they were in fact terrorists, as reported here:

Last week, the International Solidarity Movement, a pro-Palestinian NGO, quoted statistics obtained by the Palestinian Health Ministry according to which 15 Palestinian medics were killed during the three-week operation. But, said the CLA, some of those reportedly killed were not medics, while in other cases the reports of deaths turned out to be false. One of the ‘medics’ reported dead was Anas Naim, the nephew of Hamas Health Minister Bassem Naim, who was killed during clashes with the IDF on January 4 in the Ash Sheikh Ajlin neighborhood of Gaza City.

Following the clashes, the Palestinian press reported that Naim was killed and that he was a medic with the Palestinian Red Crescent. However, an investigation by the Gaza CLA discovered numerous pictures of Naim posing holding a RPG launcher and a Kalashnikov assault rifle posted on a Hamas website. Two days earlier, on January 2, a Hamas website reported that Israel had shelled the Dabash family home in the Sheikh Radwan neighborhood of Gaza City and that a medic, named Id Ramzan, was killed. But in a report posted on the same website several hours later, Ramzan, who was described as a member of Hamas's Civil Defense Unit, was reported to be alive and to have just conducted a live interview with Al-Aksa Television.

No mention of any of this. Instead the video presents as fact a claim by a man wearing an ambulance vest that his ambulance was struck by an Israeli tank shell containing 8000 ‘flechettes’, or small winged darts. He describes how his colleague was hit by hundreds of these flechettes -- whereupon he sank to his knees, raised his hands in the air and prayed. But my understanding is that flechette shells rip to pieces anyone they hit. So how could a man hit by a shell containing 8000 flechettes have been able to raise his hands and start praying?

What’s striking about these videos is how scrappy these claims are. So much so, in fact, that the second one seeks to shore up its case by footage from 2007, claiming to show the IDF using Palestinians as human shields on two previous occasions. But once again, these brief clips show no such thing. We see IDF soldiers going up a staircase into a building preceded by a Palestinian youth – we have no idea why, or what role the youth is playing. And we see a child sitting on the bonnet of an IDF jeep with his hand chained to the windshield – which is most likely to have been done to stop him from running away rather than using him as a human shield.

To pad out these preposterous and absurd claims, the Guardian cites the now infamous Ha’aretz allegations – which it manages to distort even further, saying that these included the admission by an Israeli soldier that an Israeli sniper had shot dead a Palestinian mother and her two children without saying a) that even Ha’aretz had said this was an accident and b) that the soldier subsequently admitted he hadn’t even been there and was merely recycling rumour and hearsay.

In his commentary, the Muslim Brotherhood/Hamas mouthpiece Seumas Milne misrepresents the Ha’aretz travesty yet further still by stating:

Last week, the Israeli newspaper Ha’aretz reported that a group of Israelis soldiers had admitted intentionally shooting dead an unarmed Palestinian mother and her two children, as well as an elderly Palestinian woman, in Gaza in January.

But the group of soldiers had ‘admitted’ doing no such thing. They had not ‘admitted’ doing anything themselves at all – merely reported what they had heard others say. Milne also sought to prop up the ‘human shield’ claims by dragging in other events:

Or take the case of Majdi Abed Rabbo – a Palestinian linked to Fatah and no friend of Hamas – who described to the Independent how he was repeatedly used as a human shield by Israeli soldiers confronting armed Hamas fighters in a burned-out building in Jabalya in the Gaza strip. The fact of Israeli forces’ use of human shields is hard to gainsay, not least since there are unambiguous photographs of several cases from the West Bank in 2007, as shown in Chassay’s film.

The ‘unambiguous photographs’ are of course, as discussed above, anything but unambiguous. And as far as Majdi Abed Rabbo is concerned, once again a moment’s thought suggest this is most implausible. Since Hamas has been killing large numbers of Fatah operatives who it considers to be its deadly enemies, is it really likely that ‘a Palestinian linked to Fatah and no friend of Hamas’ would be used by the Israelis as a human shield against Hamas?

Lazy, malicious use of partisan, uncorroborated, thin, ambiguous and on occasion demonstrably absurd allegations, with the purpose and effect of demonising and delegitimising the Israeli victims of terrorism by painting them as the terrorists and their Palestinian attackers as their victims.

In similar vein, no mention at all in the Guardian of the enormous bomb planted in a shopping mall in Haifa last Saturday evening – 100 kg of explosives packed with ball bearings -- which, had it not been defused, would most likely have killed hundreds of people.

Truly, the Guardian is an evil newspaper.

Jake DeSantis, American International Group, letter to Edward M. Liddy

Dear A.I.G., I Quit! By Jake DeSantis
TNYT, March 25, 2009

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

Dear Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.
At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”


Jake DeSantis

Toameh: The Pro-Palestinians' Real Agenda

The Pro-Palestinians' Real Agenda, by Khaled Abu Toameh
Hudson New York/Hudson Institute, March 24, 2009 6:45 AM

During a recent visit to several university campuses in the U.S., I discovered that there is more sympathy for Hamas there than there is in Ramallah.

Listening to some students and professors on these campuses, for a moment I thought I was sitting opposite a Hamas spokesman or a would-be-suicide bomber.

I was told, for instance, that Israel has no right to exist, that Israel’s “apartheid system” is worse than the one that existed in South Africa and that Operation Cast Lead was launched only because Hamas was beginning to show signs that it was interested in making peace and not because of the rockets that the Islamic movement was launching at Israeli communities.

I was also told that top Fatah operative Marwan Barghouti, who is serving five life terms in prison for masterminding terror attacks against Israeli civilians, was thrown behind bars simply because he was trying to promote peace between Israelis and Palestinians.

Furthermore, I was told that all the talk about financial corruption in the Palestinian Authority was “Zionist propaganda” and that Yasser Arafat had done wonderful things for his people, including the establishment of schools, hospitals and universities.

The good news is that these remarks were made only by a minority of people on the campuses who describe themselves as “pro-Palestinian,” although the overwhelming majority of them are not Palestinians or even Arabs or Muslims.

The bad news is that these groups of hard-line activists/thugs are trying to intimidate anyone who dares to say something that they don’t like to hear.

When the self-designated “pro-Palestinian” lobbyists are unable to challenge the facts presented by a speaker, they resort to verbal abuse.

On one campus, for example, I was condemned as an “idiot” because I said that a majority of Palestinians voted for Hamas in the January 2006 election because they were fed up with financial corruption in the Palestinian Authority.

On another campus, I was dubbed as a “mouthpiece for the Zionists” because I said that Israel has a free media. There was another campus where someone told me that I was a ‘liar” because I said that Barghouti was sentenced to five life terms because of his role in terrorism.

And then there was the campus (in Chicago) where I was “greeted” with swastikas that were painted over posters promoting my talk. The perpetrators, of course, never showed up at my event because they would not be able to challenge someone who has been working in the field for nearly 30 years.

What struck me more than anything else was the fact that many of the people I met on the campuses supported Hamas and believed that it had the right to “resist the occupation” even if that meant blowing up children and women on a bus in downtown Jerusalem.

I never imagined that I would need police protection while speaking at a university in the U.S. I have been on many Palestinian campuses in the West Bank and Gaza Strip and I cannot recall one case where I felt intimidated or where someone shouted abuse at me.

Ironically, many of the Arabs and Muslims I met on the campuses were much more understanding and even welcomed my “even-handed analysis” of the Israeli-Arab conflict. After all, the views I voiced were not much different than those made by the leaderships both in Israel and the Palestinian Authority. These views include support for the two-state solution and the idea of coexistence between Jews and Arabs in this part of the world.

The so-called pro-Palestinian “junta” on the campuses has nothing to offer other than hatred and de-legitimization of Israel. If these folks really cared about the Palestinians, they would be campaigning for good government and for the promotion of values of democracy and freedom in the West Bank and Gaza Strip.

Their hatred for Israel and what it stands for has blinded them to a point where they no longer care about the real interests of the Palestinians, namely the need to end the anarchy and lawlessness, and to dismantle all the armed gangs that are responsible for the death of hundreds of innocent Palestinians over the past few years.

The majority of these activists openly admit that they have never visited Israel or the Palestinian territories. They don’t know -and don’t want to know - that Jews and Arabs here are still doing business together and studying together and meeting with each other on a daily basis because they are destined to live together in this part of the world. They don’t want to hear that despite all the problems life continues and that ordinary Arab and Jewish parents who wake up in the morning just want to send their children to school and go to work before returning home safely and happily.

What is happening on the U.S. campuses is not about supporting the Palestinians as much as it is about promoting hatred for the Jewish state. It is not really about ending the “occupation” as much as it is about ending the existence of Israel.

Many of the Palestinian Authority and Hamas officials I talk to in the context of my work as a journalist sound much more pragmatic than most of the anti-Israel, “pro-Palestinian” folks on the campuses.

Over the past 15 years, much has been written and said about the fact that Palestinian school textbooks don’t promote peace and coexistence and that the Palestinian media often publishes anti-Israel material.

While this may be true, there is no ignoring the fact that the anti-Israel campaign on U.S. campuses is not less dangerous. What is happening on these campuses is not in the frame of freedom of speech. Instead, it is the freedom to disseminate hatred and violence. As such, we should not be surprised if the next generation of jihadists comes not from the Gaza Strip or the mountains and mosques of Pakistan and Afghanistan, but from university campuses across the U.S.

Why Congress Will Kill the Bank Rescue

Why Congress Will Kill the Bank Rescue. By Vincent Reinhart
What happens when the hedge funds make profits?
WSJ, Mar 25, 2009

Americans can be forgiven for experiencing a sense of deja vu as they digest the details of Treasury Secretary Timothy Geithner's Public-Private Investment Program (PPIP) for troubled bank assets. What was rolled out on the pages of newspapers this week read like press releases on the various plans over the past year from Mr. Geithner's predecessor, Hank Paulson.

The two Treasury secretaries share a touching faith in public-private cooperation to lift the value of troubled assets. This assumes, of course, that those assets are troubled because their true values are obscured by irrational self-doubt and market illiquidity, and not by fundamental problems in the prospects of repayment. It also assumes that the solution to problems created by excessive leverage is for government to encourage more leverage.

Notably absent in the Geithner plan is any progress on the barrier at which Mr. Paulson stumbled last year: What are the right prices for troubled assets? To believe that the solution lies in harnessing the public and private sectors in tandem shows a misunderstanding of these sectors' incentives.

Public officials want this problem to go away without being stuck with the smoldering wreckage of large and complicated financial institutions. That requires buying assets quickly from problematic firms at the highest prices possible.

Private investors want to make a profit. That can best be achieved by delaying purchases, thereby lowering prices and sticking the government with as much of the loss as possible.

The possibility of outsized profit, made possible by government guarantees and matching capital contributions, is the carrot government can offer to those with private capital willing to commit to the enterprise. The problem is that Congress has been demonizing the financial sector and considering ex post expropriation of bonuses.

For the PPIP to work, the government will have to use the expertise of much-vilified financial professionals, create massive expected profit opportunities to entice capital, and tap places where there are deep pools of money -- including sovereign wealth funds. If the PPIP is successful, is there any chance that Congress would not be holding hearings complaining about the massive rewards to those who took on the risk? Unless members of Congress cool the heat of their rhetoric, the potential profits Mr. Geithner is putting on the table will simply be left there.

When the government's carrot does not work, next will come the stick. Remember, 19 of the largest financial firms have been asked to submit to stress tests detailing the adequacy of their capital.

Talk about irony. Financial markets are in disarray today because leading firms chose to bury complicated instruments in their books. The results were opaque balance sheets that hid the considerable use of leverage, and proved misleading both to investors and examiners. These same firms are now being required by regulators to use these misshapen accounts to make far-ahead predictions.

But the objective of the stress test is not to get useful forecasts. Rather, it will provide the excuse for regulators, outside the usual process of examination and resolution, to open a discussion with major firms about the adequacy of their capital.

A dialogue, once started, can then proceed to capital infusions, forced mergers and other forms of balance-sheet relief. This will all be with an eye to creating strong incentives for bank managers to attract private capital. If necessary, the stress tests can be used to force fire sales that will attract private capital through the PPIP.

So the government, once again, has opted for a circuitous route to the goal of sorting out financial firms. This will take longer than necessary and sacrifice clarity. But obfuscation was probably a design principle. As yet, the American public does not appear ready to admit that its government will have to absorb large losses to restart financial markets. Until that day comes, government action will continue to be indirect and probably insufficient.

This circuitous route can work, provided that the branches of the government pull in the same direction. Politicians are going to have to understand that the longer-term good of the nation involves cooperating with, not castigating, financial professionals. And the Obama administration will have to understand that its approval rating is to be used to convince the public of hard choices.

Mr. Reinhart is a resident scholar at the American Enterprise Institute and former director of the division of monetary affairs at the Federal Reserve.

WSJ Editorial Page: Diplomacy with Iran has no chance without tougher energy sanctions

Pain Iran Can Believe In. WSJ Editorial
Diplomacy has no chance without tougher energy sanctions.
WSJ, Mar 25, 2009

As a general rule, economic sanctions are a poor foreign policy instrument: hard to enforce (think Burma), prone to corruption (think Oil for Food), rarely effective (think Cuba). But in the case of Iran, let's make an exception.

We say this after five years of futile diplomatic efforts -- spearheaded by the Europeans and backed by the Bush Administration -- to persuade Iran to abandon its nuclear programs and comply with binding U.N. Security Council resolutions. Now the only thing standing between the mullahs and a bomb is either punitive sanctions or a military strike, probably Israeli, which could engulf the Middle East in a regional war. Which option do you prefer?

So here's a fact: Despite being a leading oil exporter, Iran imports roughly 40% of its gasoline because it lacks adequate domestic refining capacity. Any cut-off in supply would do immediate damage to the fragile Iranian economy and could bring about social unrest, as happened in 2007 after the regime imposed gasoline rations. Here's another fact: Iran is supplied with gasoline by a mere handful of foreign companies, all of which do substantial business in the United States.

Final fact: There is a growing bipartisan consensus in favor of gasoline sanctions. As candidate Barack Obama put it in the second Presidential debate last October, "If we can prevent [Iran] from importing the gasoline they need and the refined petroleum products, that starts changing their cost-benefit analysis [about the advantages of a nuclear arsenal], that starts putting the squeeze on them."

Well, amen to that. So it's too bad that as President, Mr. Obama is now putting tougher sanctions off indefinitely in favor of pushing the rock of diplomacy up the mountain once again. He's likely to be strung along like George W. Bush and the Europeans were, allowing the mullahs to get closer to a bomb. Diplomacy will have no chance without the threat of sticks, so Congress could help by passing two significant pieces of legislation affecting Iran's energy supply.

One of them, an amendment to the Senate omnibus appropriations bill from Arizona Republican Jon Kyl, would forbid federal funds from going to companies involved in Iran's energy industry. On the House side, Republican Mark Kirk and Democrat Rob Andrews sponsored complementary legislation in 2007 that would have expanded the Iran Sanctions Act to companies selling refined petroleum to Iran. The value of this latter legislation is partly symbolic, since no company has ever actually been sanctioned under the Iran Sanctions Act. But symbolism can also have its practical uses: The mere existence of the act has helped persuade a number of energy multinationals, such as France's Total, to stop investing in Iran.

As for the Kyl Amendment, it takes aim at companies like the Swiss-Dutch oil trading firm Vitol, currently Iran's largest supplier, which has a contract with the U.S. Department of Energy to help fill the Strategic Petroleum Reserve. Vitol, which in 2007 pleaded guilty to grand larceny charges in New York state court for its role in Oil for Food, is also building a $100 million fuel-storage facility in Florida. Just by the way.

The good news is that Iran's suppliers are starting to get the message. Until recently, Indian giant Reliance Industries provided Iran with as much as 25% of its gasoline imports, even as it was building a giant refinery in India with over $500 million in loan guarantees from the U.S. Export-Import Bank. In December the guarantees came to the attention of Mr. Kirk and Democrats Howard Berman and Brad Sherman, who wrote a letter of protest to Ex-Im Bank President James Lambright. The letter later leaked to the Indian press, and, last month, Reliance did not supply Iran, according to the International Oil Daily.

Reliance's departure will likely not affect Iran's gasoline imports, since other suppliers can pick up the slack. But the number of firms willing to incur legal or reputational risks to supply Iran is limited, especially given the relatively small size of its domestic market. Would-be suppliers could also work through proxies, but again this raises costs and risks both for them and Iran, where the economy is already under severe strain from the collapse of oil prices and Mahmoud Ahmadinejad's inflationary economic policies.

Critics of gasoline sanctions argue that they amount to a game of whack-a-mole, and to some extent that's true. But the goal of the sanctions isn't to create an airtight regime so much as to sharply raise the costs to Iran for pursuing its nuclear programs. "This is no silver bullet but it may be silver shrapnel," says Mark Dubowitz of the Foundation for Defense of Democracies, a Washington, D.C.-based think tank that has brought the idea of gasoline sanctions to political attention.

With Iran now fast approaching the nuclear threshold, an Administration that doesn't want bullets to fly needs more than diplomacy. The only way Iran's regime is going to stop its nuclear program is if it feels some pain it can believe in.

The 'Populists' Are Right About Wall Street. What's wrong with well-directed anger?

The 'Populists' Are Right About Wall Street. By Thomas Frank
What's wrong with well-directed anger?
WSJ, Mar 25, 2009

How has a popular Democratic president with a convincing electoral mandate failed to translate the opportunities of recent events into the "change" for which voters clamored? What kind of miscalculation allowed his administration to stir up such a wave of populist fury in such a short time?

The short answer, of course, is AIG. Why did the Treasury Department allow the payout of many millions in bonuses to executives of the unit that sank the company? Every answer the president's brain trust offered made them look more feckless, at the very moment they were rolling out a bank plan designed to spare stakeholders of our troubled financial institutions the haircut they so richly deserve.

This lapse of common sense arises from a deeper problem: the reflexive contempt for populism that is felt by the dominant faction of the Democratic Party -- the faction that regards itself as the responsible guardian of financial civilization, and that thinks of populism as crackpot economics and senseless proletarian rage.

I was reminded of the party's long-simmering debate over populism a little while ago when I read an essay by Al From, the founder of the centrist Democratic Leadership Council (DLC), announcing his retirement as that group's "CEO" and recounting his many successes over the years in building a "political brand." A short while later I read in Roll Call an account of Mr. From's career as "one of the 20th century's most successful political entrepreneurs," a man whose adventures in shifting the Democratic Party to the right formed a neat analogy to Mr. From's father's accomplishments in the suburban garage-building biz.

In Washington, where the need to treat government like a business is a no-brainer, thinking about politics in this way -- as though it were a matter of branding, entrepreneurship and CEOs -- is thought to be highly advanced stuff.

But I don't agree. Surely we have learned the hazards of turning business models loose on the state, after all our experiences with the "MBA president" and his "market-based" government, all the "K Street Projects" and "superlobbyists" of the last 20 years, all the regulatory agencies that understood the regulated as their "customers," all the bailouts engineered by friends of the bailed-out, all the faith placed in "voluntary compliance" on the grounds that business would naturally self-regulate.

Still, none can doubt the DLC's success at pushing "third way" humbug in elite Democratic circles. Many of the rhetorical gestures we associate with centrism -- for example, the habit of dismissing liberal policies as "industrial age" relics -- got their start in Mr. From's shop.

The theme that matters most these days, though, is the DLC's war with populism, a term that is supposed to summarize everything that is wrong with class-based discontent. Not only is populism mulishly wrong-headed, according to the DLC, but it is a sure-fire electoral loser -- a whiff of populism, the group once concluded, is what cost Al Gore the 2000 election.

The group's attacks on populism resonate in D.C., I suspect, because the commentariat has always thought "populism" to be faintly ridiculous, a thing of mobs and pitchforks and windbag leaders more demagogue than CEO. (For an illustration of what I mean, look at the cover of the latest issue of Newsweek.)

This way of thinking has not served the Obama administration well in recent weeks. Think of Larry Summers repeating, on program after program, his outrage with the AIG bonuses, but then immediately moving, as you would with a naughty child, into a discussion of the rule of law -- which I guess is what you call the years of de facto de-supervision that allowed this disaster.

One of these days it may dawn on our leaders that the public, in this case, is right; that this time the mountebanks and charlatans are not the populists but the responsible-looking CEOs who ran the country's financial institutions into the ground -- and who the administration apparently wants to leave in charge of many of those institutions. The public outrage about performance bonuses isn't just mindless resentment; it is directed at exactly the instruments that steered the economy into the ditch and the executives who built the system -- and who will demand to do business the old way as long as they have breath to bellow.

What's more, it is only thanks to populist members of Congress that we know our bailout of AIG sluiced billions to foreign banks, and it's only thanks to public outrage that the administration feels any pressure at all to exert a firmer hand on the institutions it has rescued from bankruptcy.

There are many, I am sure, who wish that this whole bailout business could be settled as an affair between political entrepreneurs and the interests that fund them, as in days of yore. But I hope President Obama has a better strategy than that planned for the time when his Treasury Department has to ask Congress for another helping of TARP.

Hernando de Soto on toxic assets: We can't afford to allow shadow economies to grow this big

Toxic Assets Were Hidden Assets. By Hernando de Soto
We can't afford to allow shadow economies to grow this big.
WSJ, Mar 25, 2009

The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.

Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.

If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.

Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.

The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives.

Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:

- All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.
- The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.
- Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant "underlying assets."
- Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.
- Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.
- Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.

Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.

Government's main duty now is to bring the whole toxic environment under the rule of law where it will be subject to enforcement. No economic activity based on the public trust should be allowed to operate outside the general principles of property law.

Financial institutions will have to serve society and fully report what they own and what they owe -- just like the rest of us -- so that we get the facts necessary to find our way out of the current maze. They must begin learning to put on paper statements about facts, instead of statements about statements.

Mr. de Soto, the author of "The Mystery of Capital" (Basic Books, 2000) and "The Other Path" (Harper and Row, 1989), co-chairs the Commission on Legal Empowerment of the Poor.

Holman W Jenkins: The Real AIG Disgrace

The Real AIG Disgrace, by Holman W Jenkins Jr
WSJ, Mar 25, 2009

The stock market was intoxicated with the Obama administration's toxic asset plan. Whatever its contempt for the upper middle class that acquires wealth through salaried work and bonuses, Team Obama still has eyes for the hedge fund class, which will be ladled out taxpayer dollars to make one-way bets on problematic bank assets.

Yet the AIG bonus episode, the administration's one true disgrace so far, will not soon be forgotten.

Tim Geithner is rightly on the hot seat for saying he didn't know about the bonuses until just weeks ago -- because he should have quelled this furor before it ever got started. Instead he played dumb and climbed aboard the outrage bandwagon -- and let Mr. Obama do the same.

There is not a shred of justice in the hysteria that followed. As AIG chief Ed Liddy explained on the Hill last week, the people receiving retention bonuses were not the same people who launched AIG's unhedged housing bets that brought the company down. Those people were gone. Their pay is already being clawed back.

Those who remained had been asked a year ago to stay and work themselves out of a job. In accepting the terms offered to them, they committed no offense (say, failing to pay taxes). Their only crime was possessing marketable knowledge -- all the more marketable because of the opportunity for hedge funds and other counterparties to profit from AIG's distress. Had the company submitted to Chapter 11 rather than a government takeover, a bankruptcy judge might well have authorized identical incentives to minimize losses and maximize recovery for legitimate stakeholders.

The Washington Post, which has consistently distinguished itself with its reporting about the real antecedents of this "scandal," yesterday followed up by detailing "months of assurances to Financial Products employees that the insurance giant would honor those contracts, according to numerous internal AIG e-mails and memos . . . ."

Whether Mr. Geithner knew the specifics is unimportant. The retention plan was known to his staff. The details had been disclosed over and over in public filings. As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."

The voluble Rep. Elijah Cummings had been railing about AIG retention bonuses almost continually, on air, in the print media, and in publicly released letters to Mr. Liddy, since Dec. 1.

On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.

It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job).

Barney Frank, who doesn't have the excuse of being stupid, was last seen bullying Mr. Liddy to do what on any other day Mr. Frank would flay Mr. Liddy for doing -- violating the privacy rights of his employees. Charles Grassley? His early bloviating about the duty of AIG executives to kill themselves almost begins to look like a grace note, since it alerted the public to the hyperbolic playacting about to come.

Paul Kanjorski, before running off to host a hearing, proclaimed on CNBC that AIG's Mr. Liddy would be responsible if Congress now failed to summon the political courage to take necessary steps to address the financial crisis.

Pause to let it sink in. Mr. Liddy, who is doing his job with grit and personal sacrifice, is blamed in advance if Congress proves too cowardly to do its own job.

But the biggest lesson here is the old one that the price of freedom is eternal vigilance -- beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so.

Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to.

Mr. Cuomo is a thug, but at least he reminds us: It can happen here.

Transnational Progressive Nominated as Legal Advisor for State - Harold Koh

Transnational Progressive Nominated as Legal Advisor for State. By John Fonte
The Corner/NRO, Tuesday, March 24, 2009

The Transnational Progressive assault on the sovereignty of the American liberal democratic nation-state has just kicked into high gear with the nomination by the Obama administration of Yale Law School Dean Harold Koh to be the Legal Advisor to the U.S. State Department. Dean Koh wants to “trigger a transnational legal process” that will “generate legal interpretations that in turn can be internalized into domestic law.” Put simply, he favors opening a transnational legal space beyond the Constitution and the democratic decision-making process of our liberal democracy. My comments on Koh’s theories below are excerpted from my Bradley Symposium essay of June 2008, “Global Governance vs. the Liberal Democratic Nation State: What is the Best Regime?

Harold Koh, the dean of Yale University Law School, served as assistant secretary of state for democracy, human rights, and labor during the Clinton Administration. In a detailed article in the Stanford Law Review responding to the Bush foreign policy, Koh articulates the central viewpoint of the American governing left.

Koh chastises the US for failing to “obey global norms.”America, Koh tells us, “promotes double standards” by refusing to ratify the International Criminal Court treaty; “claiming a Second Amendment exclusion from a proposed global ban on the illicit transfer of small arms and light weapons”; and “declining to implement the orders of the International Court of Justice with regard to the death penalty.”Indeed, Koh complains: “The World Court finally found that the United States had violated the Vienna Convention” (on the death penalty), but “American courts have essentially ignored” the ruling of the ICJ.

Koh’s proposed remedy to American exceptionalism is for “American lawyers, scholars and activists” to “trigger a transnational legal process,” of “transnational interactions” that will “generate legal interpretations that can in turn be internalized into the domestic law of even resistant nation-states.”For example, Koh suggests that, “human rights advocates” should litigate “not just in domestic courts, but simultaneously before foreign and international arenas.”Moreover, they should encourage foreign governments (such as Mexico) and transnational NGOs to challenge the US on the death penalty and other human rights issues.

Supporters of the International Criminal Court should, Koh recommends, “provoke interactions between the United States government and the ICC” that might lead to the US becoming enmeshed in the ICC process (by, for example, having the US provide evidence in ICC trials). These interactions with the ICC would show cooperation with the tribunal and therefore “could be used to undermine” the official US “unsigning” of the treaty because it might “constitute a de-facto repudiation” of the “act of unsignature.”

Of course, the “transnational legal process,” advocated by Koh (and others in the governing center-left) is a process outside of American constitutional democracy. The American people have a Constitution, judicial institutions, and a democratic political system. Transnational “interactions” (such as appealing to foreign courts) are not part of the institutional authority and accountability inherent in the meaning of the phrase: “We the People of the United States.” Koh’s “interactions” are something “outside” of the “People of the United States” and “beyond” the Constitution and our democratic process. Therefore, they could be characterized as extra-constitutional, post-constitutional, or post-democratic. In effect, they seek to achieve results that could not necessarily be achieved through the regular process of American democracy. This clearly raises the core “regime” questions of what constitutes legitimate political authority and who is responsible to whom in a democratic state.

— John Fonte is a senior fellow at the Hudson Institute.

Erecting Trade Barriers: The Return of Smoot-Hawley

Erecting Trade Barriers: The Return of Smoot-Hawley
IER, March 24, 2009

Free trade is one of the greatest forces for positive change the world has ever seen. It opens new economic frontiers for American good and services, allows America access to the best the world has to offer, and promotes peace between nations. But free trade is coming under increasing assault as some in Washington, including the Obama administration, promote restricting free trade in the name of limiting carbon dioxide emissions. Secretary of Energy Steven Chu recently advocated using tariff duties as a “weapon” to restrict free trade, and some policymakers have also advocated increasing tariffs to “protect” some politically connected U.S. businesses.

These attacks are a serious threat to free trade and, if enacted, would deepen the recession. At the start of the Great Depression, Herbert Hoover made some bad economic decisions, and it appears President Obama is now considering following Hoover’s example.

In the early 1930s, in an effort to stem the economic downturn, President Hoover implemented massive deficit spending and tax hikes. This wrecked an already crippled economy. One of the worst episodes occurred when Hoover signed the infamous Smoot-Hawley tariff bill in 1930, which crippled international trade in the midst of the Depression. The Obama administration is considering a similar mistake in the form of “carbon tariffs” to prevent U.S. businesses from outsourcing to other countries after a cap-and-trade regulation makes it too economically difficult to do business in the United States. Just as in the 1930s, this Smoot-Hawley redux would punish American consumers at the worst possible time.

The Original Smoot-Hawley

Contrary to popular belief, Herbert Hoover was no fan of the free market or small government. After the stock market crashed in 1929, Hoover engaged in unprecedented peacetime deficit spending and other measures that increased the role of the federal government in the economy. Arguably, the most detrimental of his actions was the Smoot-Hawley Tariff Act of 1930, which sharply hiked taxes on thousands of imports.

Even conventional American history textbooks assign partial blame for the severity of the Depression to Hoover’s blow against international trade. In response to the legislation, European countries levied their own retaliatory tariffs and even repudiated their debts from World War I because (they claimed) the U.S. government was making it impossible for them to export goods to earn the dollars to pay back Uncle Sam’s loans.

Even without retaliation, a unilateral tariff increase makes Americans poorer. The gains to the workers in the “protected” domestic industry are more than offset by the loss to consumers who have to pay higher prices. A tariff is a tax on American consumers; the government says to its own citizens, “If you want to buy a product from a foreign producer, you have to make a side payment to the U.S. Treasury.” You don’t make a country richer by jacking up taxes on its own consumers.

International trade allows countries to specialize in their “comparative advantage,” or their areas of relative expertise. It would be catastrophic if everyone had to grow his own food, sew his own clothes, and drill his own cavities. We all benefit tremendously from the ability to specialize in occupations at which we are better than our peers, and then trade with each other.

The same principle applies to entire countries, which are simply aggregates of the individuals living in them. Because of differences in resource endowments, industrial infrastructure, weather, and the skills of the workforce, it is much more efficient for certain regions of the world to concentrate on a few key items and export them to other regions. When the government raises tax barriers, it interferes with this process and makes everyone poorer on average.

Ironically, when Herbert Hoover raised U.S. tariffs, he didn’t simply hurt American consumers, but he also crippled American exporters. Ultimately, other nations pay for their imports through their own exports. If Uncle Sam makes it more difficult for foreigners to sell their goods to Americans, then those same foreigners will not have the ability to buy goods produced by Americans. Indeed, total U.S. exports dropped from $7.2 billion in 1929 to $2.5 billion in 1932,[i] although some of this fall was no doubt due to the general price decline and the sharp drop in economic activity.

Smoot-Hawley II

True to form, the Obama administration—under the guise of fighting climate change—is testing the waters with new restrictions on imports. Specifically, lawmakers on the House Energy and Commerce Committee are considering imposing “carbon tariffs” to prevent foreign nations from gaining a competitive advantage vis-à-vis U.S. producers who are burdened with a forthcoming cap-and-trade regime. The idea is that the U.S. government would slap a huge “compensatory” tax on imports that were produced in foreign nations that do not impose carbon legislation on their manufacturers.

This is a very disturbing trend. Regardless of whether the World Trade Organization deems such “carbon tariffs” to be an acceptable infringement on trade, U.S. and European carbon tariffs will spawn another destructive trade war, just as the world suffered in the early 1930s. (If the WTO rules against the carbon tariffs, then the besieged countries will have the right to levy their own retaliatory tariffs, and if the WTO signs off on them, other countries will then find some excuse for levying tariffs to compensate themselves for the “overconsumption” of the Western nations or some such sin against the environment.)

Even if the threat from man-made climate change is as serious as some scientists claim, this fact would not overturn the centuries of work done by economic scientists. We know from both theory and history that raising trade barriers in the middle of a severe worldwide recession is a terrible policy. We also know from theory and history that government central planning does not work. When the technocrats reorder the economy, deciding which firms will survive and which prices are too high or too low, the results are disastrous. It doesn’t matter whether the justification is “fighting the Depression” (as in the 1930s) or “fighting climate change” (as in today’s discussions). Either way, central planning will wreck the economy, and it won’t even achieve its ostensible goals.


It is encouraging that the politicians are finally taking seriously the effects that cap-and-trade would have on U.S. manufacturers. The fact that lawmakers are finally admitting that the new burden would force many American firms to lay off domestic workers and relocate abroad is a positive development in the highly emotional debate about carbon dioxide regulations. But instead of abandoning their plans for cap-and-trade, the proposed solution of levying a fresh round of new taxes on American consumers who are merely trying to buy the best products at the lowest prices just adds insult to injury.


[i] Burton Folsom, Jr., New Deal or Raw Deal? How FDR’s Legacy Has Damaged America (New York: Threshold Editions, 2008), p. 31.

State Sec Clinton on US programs against tuberculosis

World Tuberculosis Day 2009, by Hillary Rodham Clinton, Secretary of State
Washington, DC, March 24, 2009

Today marks World Tuberculosis Day, and I join others around the world in saying “I am stopping TB.”

Tuberculosis (TB) kills almost 5000 people each day, and is the leading cause of death for people living with HIV/AIDS. According to the World Health Organization, almost 40% of TB cases are not properly detected and treated. While treatment for TB exists, more and more individuals are being diagnosed with multidrug-resistant (MDR) TB or extensively drug-resistant (XDR) TB, which are difficult and expensive to treat.

Our government is taking steps to address the global burden of TB. The U.S. Government is the largest contributor to the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which has detected and treated over 4 million cases of TB. The President's Emergency Plan for AIDS Relief (PEPFAR) is working to improve the diagnosis and treatment of TB for co-infected persons, and is engaged in infection control efforts to prevent new cases of TB. In addition, the United States Agency for International Development (USAID) has tuberculosis programs in more than 35 countries and is working to strengthen the capacity of health systems to identify, detect and control TB, particularly MDR and XDR TB.

While much has been accomplished in the fight against this disease, there is still much more to be done if we are to meet the Millennium Development Goal of halting and reversing the spread of TB by 2015. I strongly believe the State Department should continue and expand its commitment to reducing the global burden of TB, and I look forward to working to improve the global response to this and other leading causes of death for the world's poorest communities.

PRN: 2009/252

US State Dept Calls for Release of Political Prisoners in Burma

UN Working Group on Arbitrary Detention Calls for Release of Political Prisoners in Burma. By Robert Wood, Acting Department Spokesman, Office of the Spokesman
US State Dept, Washington, DC, March 24, 2009

The United Nations Working Group on Arbitrary Detention issued opinions today affirming that the continued detentions of Aung San Suu Kyi, Aung Myin, Ko Jimmy, Paw Oo Tun, and Mtay Win Aung are arbitrary and unjustified and that the detention of Aung San Suu Kyi is in contravention of Burma’s own law. The U.N. working group urged the Burmese government to release these individuals immediately.

We are disappointed that the regime continues to ignore the calls of the international community, including the UN Security Council, to release the more than 2,100 political prisoners immediately and unconditionally. We once again urge the Burmese authorities to release all political prisoners and initiate a genuine dialogue that can help move the country forward.
# # #

PRN: 2009/254

USAID Collaborates with Iraqis to Reopen Vocational Training School

USAID Collaborates with Iraqis to Reopen Vocational Training School
USAID, March 24, 2009

BAGHDAD, IRAQ-The U.S. Agency for International Development (USAID), in collaboration with the Mada'in District Council, reopened Salman Pak Industrial School today. The school's mission is to improve Iraqis' skills that will enable them to find a better life through further employment and improved businesses in their communities.

The Iraqi Ministry of Education (MoE) offers technical and vocational training in the last three years of secondary education. There are about 154 industrial vocational education schools in Iraq, according to the ministry. The renovated Salman Pak school has the capacity to train up to 700 students in eight courses: sewing, generator maintenance; welding; automotive repair; plumbing; electrical installation; masonry; and carpentry.

In his remarks at the opening, USAID's country director Christopher D. Crowley said, "The reopening of the school will provide Iraqis with useful skills in a competitive job market and local employers with a qualified labor force that increases their productivity." He also said that he hoped the Iraqis who receive training at the school will contribute to an expanding and diversified private sector and help the Iraqi government in its reconstruction efforts.

Local Iraqi officials identified the renovation of Salman Pak Industrial School as an important community priority, after insurgent-led attacks had destroyed much of the building. The MoE and the Mada'in District Council worked in partnership with the embedded Provincial Reconstruction Team, the U.S. military, and the local security officials to complete the project, which created short-term jobs for unemployed laborers and long-term jobs for the staff.

USAID invested $600,000 in the project, as a part of its country-wide efforts to help create an environment for stability and establish the conditions for long-term development to take hold in violence-affected areas. The Government of Iraq contributed approximately $58,000 in labor to remove and dispose of trash and debris from the grounds, and drain the standing water that had accumulated in the garden. Moving forward, the MoE will maintain the building grounds, provide a full-time guard and hire and retain qualified teachers for the school.

Since 2003, USAID has partnered with Iraq in more than $6 billion of programs; all designed to stabilize communities; foster economic and agricultural growth; and build the capacity of the national, local, and provincial governments to respond to the needs of the Iraqi people.

USAID Announces Newly Approved FC2 Female Condom® to Protect Sexual Health of Women in Developing Countries

USAID Announces Newly Approved FC2 Female Condom® to Protect Sexual Health of Women in Developing Countries
US State Dept, March 24, 2009

WASHINGTON, D.C. - MARCH 24, 2009 - The U.S. Agency for International Development (USAID) has announced that the U.S. Food and Drug Administration (FDA) has approved use of the FC2 Female Condom® (FC2) made by the Female Health Company (FHC). FC2 is a woman-initiated barrier method that helps protect against sexually transmitted infections, HIV/AIDS, and unintended pregnancy. Its design and method of use is similar to its predecessor - FC1 - and studies have shown that FC2 performs in a comparable manner to FC1 in terms of safety, failure rates and acceptability.

The second generation female condom FC2 is made of a synthetic latex. It consists of a soft, loose fitting sheath, a rolled outer ring made of nitrile polymer and one flexible inner ring made of polyurethane and other materials. The nitrile polymer allows FC2 to be produced more economically than FC1. FC2 will also cost distributors about 33 percent less than FC1, depending on the volume of purchases. Like the FC1, the approved label for the FC2 is not reusable.

The FDA approval of FC2 will allow USAID to procure the second-generation female condom at a lower unit cost for U.S.-supported HIV/AIDS prevention and family planning programs around the world.

FC2 is currently available in 77 countries, and is produced at FHC's facilities in Malaysia and India.

The USAID DELIVER PROJECT is preparing a new contract to purchase this product on behalf of USAID. All pending orders in the system for FC1 will be filled until the new FC2 contract is in place. All new orders will be filled with FC2 once the contract is awarded with FHC and registration/importation requirements in the countries where USAID works have been secured.

USAID has long recognized the importance of the female condom and the role it plays in sexual and reproductive health programs worldwide. The Agency has been a committed purchaser of the female condom, and its missions have worked to introduce and integrate the female condom at the country level.

Does Red Meat Increase Risk of Early Death?

Does Red Meat Increase Risk of Early Death? By Ruth Kava, Ph.D., R.D.
American Council on Science and Health, March 24, 2009

Should we be wary of eating red meat? Taken at face value, a new study suggests that might be a good idea -- but a more careful consideration does not.

A report in the March 23 issue of the Archives of Internal Medicine describes a very large study -- over half a million people initially aged fifty-one to seventy-one years -- who reported their diets at the study's outset and were then followed for ten years. Over 300,000 men and over 200,000 women participated in the study. During the follow-up period approximately 48,000 men and 23,000 women died.

The researchers tabulated the numbers who died from cancer, cardiovascular disease, injuries and sudden deaths, and from all other causes. When they divided the subjects according to how much red, processed, and white meat they reported eating at baseline, the researchers found some increases in the risk of death in those reporting the highest intake of red and processed meats compared to those reporting the lowest intake. Conversely, the highest intake of white meat -- chicken, turkey, and fish in various forms -- was associated with a reduced risk of dying of cancer and other causes of death.While the sheer size of the study means it should not be taken lightly, there are reasons to look askance at some of the scary stories now making the rounds that are not really supported by the science.

•First, participants in the study didn't actually measure the amount of foods they ate. While this may not be very important for foods and beverages that are purchased in discrete quantities (e.g., a fast food hamburger or a bottle of soft drink), meat can be purchased and consumed in a wide variety of forms and sizes. Thus, the accuracy of the data depends on how well participants can estimate the quantities of the various foods they consumed, as well as how accurate they are when they recall how often they ate or drank particular items. Neither of these estimates is the most reliable indicator of actual consumption.
•Second, intake of various food items was ascertained only once -- at the start of the study. There is no information about whether or not people changed their diets over the course of the follow-up period -- this may well have had an impact on any disease-diet relationships.
•Third, the increases in risk did not reach the levels that would make most epidemiologists sit up and take notice -- a relative risk of 2 (a 100% increase) or greater. In fact, the increased risk of all deaths in the men in the highest group of red meat intake was 31% and for cancer was 22%. For women, the corresponding increases were 36 and 20%.As the authors concluded, the highest intakes of red and processed meats were associated with "a modest increase in risk of total mortality, cancer, and CVD mortality in both men and women."

At best, this study supports the oft-repeated advice that a healthful diet should be based on moderation, variety, and balance. What's so new about that?

Ruth Kava, Ph.D., R.D., is Director of Nutrition at the American Council on Science and Health (,