"End of Wall Street Boom" - Must-read history

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Postby nathan28 » Tue Dec 30, 2008 11:34 am

vigilant wrote:
freemason9 wrote:Does this also validate my growing impression that this catastrophe is borne of idiots? The more I see of it, the more convinced I am that Wall Street's rise was based on the ability to believe baseless lies.



I always enjoy your input and I have tried my best to see this from the perspective of "a system gone amock because of the idiots involved" but I just don't see it.

I think Smiths said it best in this thread when he alluded to the fact that its intricate design and counter intuitive nature contradicts a system run amock due to the incompetence of idiots.

Idiots didn't do this. Near genius did. Even though I agree that putting millions of people in pain is something an idiot would do.

If that makes sense....?


Pele's Daughter wrote:I prefer to define them as predators. It's much easier to understand their behavior that way and easier to avoid describing by emotionally charged terms like evil.


I tend to think of it as a parasitic enterprise. The wealthier a society gets, the bigger the parasite gets. Arguably the parasite got so big that it started to become the dominant organism... Any complicated society is going to need a finance system. For example the CMO isn't new (it dates to the '80s IIRC) and argueably made houses more affordable--but it also lends itself to severe abuse. But clearly the financial enterprise it can become a thing in itself, a house of cards. The article in the OP is good in that regards--the author points out that he really still can't believe anyone would pay someone an undergrad degree that much money just to play an elaborate record-keeping game and that even so it's not worth it unless you're truly cut out for nothing else.

Anyway your average bond trader or investment banker isn't a genius. he's a kid who went to the right school and got recruited and dropped in a $1500 suit. Our society likes to pretend that intelligence commands wealth and vice versa but it's not really the case. These people made plenty of really bad decisions and groupthink and institutional failures, etc., etc.--they just didn't care.

It's not the first time, though. All the dominant capitalist democracies in the modern era have gone through a pattern of industrial growth, then financial growth and pretensions to empire, and overextended themselves--on the positive (that sounds like "in the long run", another myth), though, if we look at the UK and the Netherlands, those societies both went through "painful adjustments" and came out with everyone broadly better-off after the decades or three of economic shitstorm.
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Postby JackRiddler » Mon Jan 05, 2009 12:02 am

.

Another 2-part piece from Lewis and a cohort now appears in the NYT. Good history of the year's events and some powerful, simple, undeniable insights about the workings of the system: It is designed to produce exactly these results.


http://www.nytimes.com/2009/01/04/opini ... wanted=all
(c) 2009 NYT quoted here under fair use for purposes of extended analysis.

Op-Ed Contributors
The End of the Financial World as We Know It

By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Continued at "How to Repair a Broken Financial World."


Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.
Last edited by JackRiddler on Mon Jan 05, 2009 12:40 am, edited 1 time in total.
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Postby JackRiddler » Mon Jan 05, 2009 12:37 am

Part 2: Hardly my idea of the revolution, but even this mild New Deal program, as he points out, comes off as totally commie in the present-day ideological atmosphere.

http://www.nytimes.com/2009/01/04/opini ... wanted=all

(c) 2007 NYT quoted here under fair use for purposes of extended analysis.

Op-Ed Contributors
How to Repair a Broken Financial World

By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009

Continued from "The End of the Financial World As We Know It" (January 4, 2009)

Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”

Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.

THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.

Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”

In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.

This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.

If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.

We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures. Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.

And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues. It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.

THIS could be fixed. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.

Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.


Yeah, like Markopolos is going to head the SEC any more than Stiglitz will run Treasury or even Gore become the Energy czar.

A revolution probably is likelier!
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Postby JackRiddler » Tue Jan 06, 2009 2:13 pm

.

Pam Martens on Congressional hearings on Madoff.

http://counterpunch.org/martens01062009.html

January 6, 2009
From Wall Street to Washington
It's All One Big Lie

By PAM MARTENS

Airing live on C-SPAN, the first of the House Financial Services Committee hearings on the Bernard Madoff fraud on Monday, January 5, 2009 felt like the Congressional equivalent of a Ponzi scheme. Big spans of empty Congressional seats commanded the camera’s lens at this historic hearing while empty-headed questions filled a torturous five hours with nothing to show for it at the end.

The hearing confirmed one of my nagging suspicions: whether it’s government oversight of market manipulations, timely investigations of politically connected crooks, or the best and the brightest serving the American people’s interests in the hallowed halls of our wobbly democracy, “it’s all just one big lie,” to quote Mr. Madoff on his business model.

While Allan Goldstein, a quiet gentleman of 76 from upstate New York, sat patiently in a back row waiting for his turn to speak, with time to ponder the potential foreclosure on his home after losing his entire life savings to Madoff’s fraud, Rep Spencer Bachus (R-Al) debated in the opening five minutes whether this was a formal hearing or not since committee members had not yet been officially sworn in. (I had a quick flashback to Marisa Tomei in the movie “My Cousin Vinny” and did a quick edit: “Your life is lying on the ground in little bloody pieces. Now I ask you, do you give a damn what kind of congressional hearing they’re holding after the fact for the s-o-b that robbed you?”)

This vacuous interlude would be eclipsed later in the hearing when there was an interminable back and forth to differentiate for some of the House Financial Services Committee members the difference between an Inspector General of the Securities and Exchange Commission (SEC) and the actual enforcement division of the SEC.

Adding to the surreal nature of the hearing was the fact that Mr. Madoff, the greatest financial criminal of all time in terms of money stolen and lives impacted, was sitting not in a jail cell but a luxury penthouse, likely watching the hearing while sipping Dom Perignon from a Limoges flute. Mr. Madoff did have an afternoon rendezvous with a bail hearing where prosecutors revealed he was recently mailing expensive jewelry to family members.

By the end of the first hour of the hearing, it was abundantly clear that our Congress is no match for the Wall Street sharks. By the end of the fifth hour, any citizen who loves their country could have been forgiven for wanting the same kind of pills that Mr. Goldstein said his wife is taking to control her emotional state over the prospect of losing her home, her life savings and moving in with their children.

The first panel to testify included H. David Kotz, the Inspector General of the SEC. Mr. Kotz has the youngish, fresh-scrubbed, optimistic face of someone who hasn’t been exposed to Wall Street for very long. He’s been at the SEC for 13 months. Before that he served as Inspector General at the Peace Corps. (Yes, Peace Corps.) Before that he worked at the U.S. Agency for International Development (USAID). He is a lawyer but apparently has no securities background to untangle the web at the SEC that permitted the largest and most complex securities fraud in the history of the world.

Several queries were directed at Mr. Kotz from the scant amount of chairs occupied to explain the well publicized strategy Mr. Madoff purported to use to sustain those outsized and consistent returns, dubbed the “split strike conversion.” Mr. Kotz said he didn’t know what this meant.

Because securities fraud is not Mr. Kotz’ area of expertise anymore than emergency management was Michael Brown’s area of expertise at FEMA, Mr. Kotz is unlikely to figure out the following in time to save Wall Street from drowning in its own hubris:

A split-strike conversion means simply the purchase of a group of stocks that correlate as closely as possible to those found in the Standard and Poor’s 100 (S&P 100); for example, buying some blue chip names in telecommunications, finance, energy, pharmaceutical, etc. To attempt to put a collar on how much you can lose, you buy some OEX (S&P 100) put options. To collect a little extra income to supplement stock dividends, you sell (collect premiums on) OEX call options. Could this generate the kind of consistent, positive returns Mr. Madoff was reporting? Highly unlikely because you are not fully protected on the downside and not a chance in hell if, as revealed in the hearing, the portfolio of stocks and options were sold at the end of every month with the funds dumped into U.S. Treasury securities (according to the fake statements given to clients). The transaction costs would eat up the profits and deliver a minuscule or negative return. And, that’s precisely why Mr. Madoff was not actually doing any trades with his clients’ money. (The month-end purchase of Treasury securities on paper was to provide an alibi for the shortfall in stock positions reported to the SEC, should they ever decide to actually do a thorough investigation.)

My problem with Mr. Kotz’ fresh face from the Peace Corp. is that he’s going into this complex web of deceit inadequately armed with the knowledge he’ll need to root out the SEC pitfalls that allowed this to happen and sniff out any potential Madoff co-conspirators. Maybe his fresh face will surprise us but I have this haunting feeling that I’m going to be hearing “nice job Kotzy” just moments before the next financial fraud explodes under the nose of the SEC.

Here’s another critical area that no congressional member or panel member jumped on. When Mr. Goldstein explained how his accountant had referred him to Mr. Madoff, no one spoke up and said, what a minute, you’re from New York aren’t you. Hey, isn’t New York one of those states that is allowing broker-dealers to pay fees to accountants for referrals of clients? (What kind of an accountant doesn’t see a red flag when a conservative client’s statement is showing a portfolio turning over 12 times a year?) No one in the hearing room said maybe we should look and see if our whole system of checks and balances has been corrupted. (Which is precisely what has happened. We’re just one big seamless pay-to-play nation going the way of ancient Rome at an astonishing clip.)

There was also nary a peep from anyone about the massive manpower and computer system required to generate fake trade confirmations, fake reporting of stock dividends, fake monthly statements, fake 1099s to thousands of clients.

I wish Jeff Quam-Wickham, a CounterPunch reader, had been in the hearing room to yell out the phrase he emailed me recently: “They're stealing our homes, land and securities...so where is Homeland Security?”

The best line of the day came from Rep Gary Ackerman (D-NY) who summed up the investigative prowess of the SEC as follows: “They suck at it.”

The scariest testimony of the day came from Stephen Harbeck, President and CEO of the Securities Investor Protection Corporation (SIPC), the congressionally chartered organization that backs accounts at bankrupt broker-dealers up to $500,000 for losses unrelated to market declines. Mr. Harbeck informed the congressional members that $830 to $850 million of assets had been located for Mr. Madoff’s firm. On top of that, SIPC has $1.6 billion in assets; a credit line of $1 billion from the U.S. Treasury and another $1 billion commercial credit line. Because Madoff’s firm was a broker dealer, SIPC’s reserves could be wiped out, forcing it to assess new fees on the Wall Street firms who fund it; the very firms who have lobbied against the regulatory measures that might have prevented the Madoff fraud; the very firms that have lobbied to allow kickbacks (referral fees and commissions) to be paid to accountants by broker dealers. This would be sweet justice were it not for the fact that taxpayer money is now propping up these firms.

Another area that found no light in the hearing was the recent report by Jason Graziadei of the Inquirer and Mirror newspaper out of Nantucket that Frank Avellino appears to have not actually stopped soliciting funds illegally. Mr. Avellino and his accounting partner, Michael Bienes, were charged by the SEC back in 1992 with selling unregistered securities that promised returns of 13.5 to 20 percent to the tune of $440 million. They then turned the money over to Mr. Madoff to manage. (Mr. Madoff’s name would have never surfaced in this matter had it not been for a story in the Wall Street Journal in 1992.) Under the SEC settlement, Madoff was not charged or even named, the money was reportedly returned to clients, Avellino and Bienes were fined $50,000 each and their firm $250,000. Both Avellino and Bienes, who run a firm called Mayfair Bookkeeping, are today ultra wealthy philanthropists enjoying the multiple mansions and lifestyle that are eerily similar to that of Bernard Madoff.

Nantucket attorney Michael Wilson has filed a lawsuit against Frank Avellino claiming that Nevena Ivanova, Mr. Avellino’s house cleaner and a Bulgarian immigrant, handed over $124,000 to Avellino to invest. The affidavit says Avellino invested her money in what she later discovered to be a fictitious entity called Kenn Jordan Associates. On December 1, 2008, just 10 days before Mr. Madoff was arrested, Avellino told Ivanova that all her money had been lost.

Mr. Wilson has successfully attached Mr. Avellino’s $10 million dollar Nantucket mansion, which he has just put on the market according to the report in the Inquirer and Mirror.

In one of his many cozy confabs posing as a model of self-regulation, Mr. Madoff testified as follows before the SEC on March 1, 2001: “…it’s been said here before, sunshine, daylight, is the best disinfectant.”

Thanks to Mr. Madoff and the co-opted self-regulators, there is only darkness now and Congress has left but a brief window of opportunity to shore up investor confidence before all of Wall Street dissolves into Madoffville.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
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Postby epi » Sun Jan 11, 2009 3:01 pm

Good articles.
JackRiddler wrote:.

Op-Ed Contributors
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.


Begs the question doesnt it?
Perhaps it's only me but it is as if the writer really wanted to say: 'It is not greed or lack of regulation, somebody deliberately opened the valves'. Even if greed isn't the cause, is it a national/human charachteristic? Came to think of an interview with this money insider who thinks it is a consequence of scarcity, an artifact created by the monetary system.
SARAH : Why do you put so much hope into the development of alternative currencies?

BERNARD : Money is like an iron ring we've put through our noses. We've forgotten that we designed it, and it's now leading us around. I think it's time to figure out where we want to go - in my opinion toward sustainability and community - and then design a money system that gets us there.

SARAH : So you would say that the design of money is actually at the root of much else that happens, or doesn't happen, in society?

BERNARD : That's right. While economic textbooks claim that people and corporations are competing for markets and resources, I claim that in reality they are competing for money - using markets and resources to do so. So designing new money systems really amounts to redesigning the target that orients much human effort.

Furthermore, I believe that greed and competition are not a result of immutable human temperament; I have come to the conclusion that greed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using.
For example, we can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive.

Money is created when banks lend it into existence (see article by Thomas Greco on page 19). When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn't create the second $100,000 - the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.

..<snip>..

SARAH : So you're suggesting that scarcity needn't be a guiding principle of our economic system. But isn't scarcity absolutely fundamental to economics, especially in a world of limited resources?

BERNARD : My analysis of this question is based on the work of Carl Gustav Jung because he is the only one with a theoretical framework for collective psychology, and money is fundamentally a phenomenon of collective psychology.

A key concept Jung uses is the archetype, which can be described as an emotional field that mobilizes people, individually or collectively, in a particular direction. Jung showed that whenever a particular archetype is repressed, two types of shadows emerge, which are polarities of each other.

For example, if my higher self - corresponding to the archetype of the King or the Queen - is repressed, I will behave either as a Tyrant or as a Weakling. These two shadows are connected to each other by fear. A Tyrant is tyrannical because he's afraid of appearing weak; a Weakling is afraid of being tyrannical. Only someone with no fear of either one of these shadows can embody the archetype of the King.

Now let's apply this framework to a well-documented phenomenon - the repression of the Great Mother archetype. The Great Mother archetype was very important in the Western world from the dawn of prehistory throughout the pre-Indo-European time periods, as it still is in many traditional cultures today. But this archetype has been violently repressed in the West for at least 5,000 years starting with the Indo-European invasions - reinforced by the anti-Goddess view of Judeo-Christianity, culminating with three centuries of witch hunts - all the way to the Victorian era.

If there is a repression of an archetype on this scale and for this length of time, the shadows manifest in a powerful way in society. After 5,000 years, people will consider the corresponding shadow behaviors as "normal."

The question I have been asking is very simple: What are the shadows of the Great Mother archetype? I'm proposing that these shadows are greed and fear of scarcity. So it should come as no surprise that in Victorian times - at the apex of the repression of the Great Mother - a Scottish schoolmaster named Adam Smith noticed a lot of greed and scarcity around him and assumed that was how all "civilized" societies worked. Smith, as you know, created modern economics, which can be defined as a way of allocating scarce resources through the mechanism of individual, personal greed.


Beyond ground zero of the current financial economy: A "Green" Convertible Currency
During the economic depression of the 1930s, Europe saw a number of practical monetary experiments with negative-interest alternative currency. The device worked splendidly. The alternative currency (typically issued by a small city or region) had many times the rapidity of circulation of the official currency, and the anticipated employment and environmental benefits were actualized. In Worgl, for example, people spontaneously started replanting forests just to dispose of their negative-interest currency in anticipation of future cash flow to be expected from the growing trees. In every case, however, the central bank halted the experiment after a few years. The experiments were blocked not because they were unsuccessful but because they were so remarkably successful that they were perceived as threatening to centralized decision-making and the central bank's monopoly on issuing currency.


Alternative currencies looks like excellent survival tools these days providing both economic independence and social support from a community. There are a few projects on Sourceforge implementing open source software for it. Didn't see one ready for prime time unfortunately, demand could soon be skyrocketing.

vigilant wrote:Idiots didn't do this. Near genius did. Even though I agree that putting millions of people in pain is something an idiot would do.

If that makes sense....?


When first reading the section on defense budget hikes in the notorious Rebuilding Americas Defenses many years ago I thought, this is first of all a plan for deliberate economic suicide. Have seen it going on rails in that direction ever since. If an answer to 'qui bono' looks abstract and diffuse today I just take a look at the roadmap given by an anonymous poster on the GLP forum four years ago.

Who is it that mandates the destruction of sovereign nation states and their replacement by economic zones of interest? The transnationals that make up a part of the military-industrial-corporate-complex. In order to make this possible, three things have to happen first. The U.S. Constitution and Bill of Rights must be weakened. The dollar has to lose its international trade and reserve standard position. The U.S. military personnel needs to be taken out of the picture as a national defense force and be eventually replaced by mercenary forces with utopian weaponry under the transnationals’ control. It is not clear to what extent President Bush is informed of the full picture, but he certainly must know enough in order to be able to play his part. Grinding up the U.S. military while stirring up conflict everywhere makes perfect sense in the context of that agenda.

Having these facts publicized ahead of time will make it difficult later to blow off the U.S.’s walking into an Iranian death trap as a tactical mistake. Gg and others say that it is deliberate, just as the destruction of the currency is deliberate. Both military and treasury are slated to be taken out from under congressional control and taken over by private entities. These are the recognizable objectives of the drive toward privatization and globalization.


Still... perhaps it's wrong, maybe they lost... :-)
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Postby JackRiddler » Sun Jan 11, 2009 5:27 pm

.

epi's quoted matter wrote:
BERNARD : That's right. While economic textbooks claim that people and corporations are competing for markets and resources, I claim that in reality they are competing for money - using markets and resources to do so. So designing new money systems really amounts to redesigning the target that orients much human effort.


Quite. When money is not just means of exchange but measure and store of value, the money itself seems to become the target of all labor, production and transaction. Seems to, because there are still geostrategically minded players in this who understand that the ability to seize and control territory and resources by military means, for example, can still trump money at least temporarily.

Leaving that aside and just accepting the truth in what Bernard says, still the competition for money may have different consequences than what Bernard proceeds to describe, depending on system and situation.

Furthermore, I believe that greed and competition are not a result of immutable human temperament; I have come to the conclusion that greed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using.


Not just the money system but the political economy, but: agreed!

For example, we can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive.


Here's where we will begin to disagree. The de facto job of central banks is to serve the banker class by any means necessary, and to maintain conditions that keep the relations of power in the political economy stable and amenable to the futher enrichment of that class. Maintaining currency scarcity (the monetarist philosophy) is only one strategy a central bank may pursue.

Money is created when banks lend it into existence (see article by Thomas Greco on page 19). When a bank provides you with a $100,000 mortgage, it creates only the principal, which you spend and which then circulates in the economy. The bank expects you to pay back $200,000 over the next 20 years, but it doesn't create the second $100,000 - the interest. Instead, the bank sends you out into the tough world to battle against everybody else to bring back the second $100,000.


Setting aside that "create" isn't the right word (the bank still has to have deposits equivalent to the loan and keep the required reserve of them, only central banks directly "create"), let's just accept that for a moment. The problem described here is true for you, the pawn in the game: the individual, the majority, the serf, the chump.

The story does not end there, because the $100,000 released through credit does create more credit thanks to redeposits and additional lending under a fractional system. Of course, this additional credit also bears interest and thus complicates the same problem described by "Bernard," but before there is a reckoning, the ability to create money first allows growth, then opens up enormous bubble and speculation potentials.

What Bernard also leaves out is that the "battle against everybody else to bring back the second $100,000" is also not forced on the players in the game. Players are here defined as entities granted the power to create money by lending it into existence, and to write other paper instruments of ostensible value including derivatives. There are now a variety of such financials, but we'll call them banks for short. When they borrow from each other, when they have debts, they like to find ways in which they don't need to battle for "the second $100,000," but instead also create that out of thin air through a variety of money-go-rounds, off-the-books manipulations, and, in the inevitable case of a crash, central bank intervention.

That's a simplified description of what's actually been happening, and it first produced an enormous surplus of dollars, which due to the inequality did not all go into consumer demand (there was plenty of that, and it had a huge impact in the manner in which the whole world developed, see China) but mainly into massive asset inflation a.k.a. the bubbles that have now popped. Because of the long and massive series of defaults now underway, the dollars thus created remain in circulation (or are offshored/hidden), if in ever fewer hands. And the central bank is responding to the ongoing crisis by pulling more dollars out its ass in bundles of trillions and pumping these into Friends of the Bank, also committing enormous future taxpayer funds (US debt) that will be paid in (printed) dollars since, hey, it's t-bills. They're printing now and promising to print later so, in the end, the players don't have to pay "the second $100,000." If they're big enough, they can have it covered in a pinch through extraordinary money creation. That's what we have learned in the last few months. In the end, this is likely to create a hyperfinflationary situation (sort of the opposite of what "Bernard" implies).



.
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Postby JackRiddler » Sun Jan 11, 2009 5:59 pm

.

Oops, following the link, which I missed before (that's why I like to just slap in the full link in the text), I see I've been arguing not with a character in a fictional Socratic dialogue, but an actual Bernard who was in the Belgian central bank and knows lots more shit than me.

http://www.yesmagazine.org/article.asp?ID=886

Date: 1997.

Nevertheless, I have to question him further. Here's a snip:

SARAH : You've also talked about the possibility of a crash in this system...

BERNARD : Yes, I see it now as about a 50/50 chance over the next five or 10 years. Many people say it's 100 percent, and with a much shorter time horizon. George Soros, who's made part of his living doing what I used to do - speculating in currencies - concluded, "Instability is cumulative, so that eventual breakdown of freely floating exchanges is virtually assured."

Joel Kurtzman, ex-editor at the Harvard Business Review, entitles his latest book: The Death of Moneyand forecasts an imminent collapse due to speculative frenzy.

Just to see how this could happen: all the OECD Central Banks' reserves together represent about $640 billion. So in a crisis situation, if all the Central Banks were to agree to work together (which they never do) and if they were to use all their reserves (which is another thing that never happens) they have the funds to control only half the volume of a normal day of trading. In a crisis day, that volume could easily double or triple, and the total Central Bank reserves would last two or three hours.

SARAH : And the outcome would be?

BERNARD : If that happens, we would suddenly be in a very different world. In 1929, the stock market crashed, but the gold standard held. The monetary system held. Here, we are dealing with something that's more fundamental. The only precedent I know of is the Roman Empire collapse, which ended Roman currency. That was, of course, at a time when it took about a century and a half for the breakdown to spread through the empire; now it would take a few hours.


Oops. First of all, such a crisis would see a shutdown of markets before the full depletion he describes. More importantly: The crisis came, the CBs did agree to work together (for now), and whether or not they had the reserves didn't matter: the CBs just went ahead and created the trillions to cover whatever the banks claimed they needed, on the fly. Which is hardly a solution, but again, shows that CBs are a lot more flexible and have more means at their disposal than Bernard thought in 1997.

All that being said, I send love to Bernard for stuff like this:

As a first step, that is correct. For example, in France, there are now 300 local exchange networks, called Grain de Sel, literally "Grain of Salt." These systems - which arose exactly when and where the unemployment levels reached about 12 percent - facilitate exchanges of everything from rent to organic produce, but they do something else as well. Every fortnight in the Ariege, in southwestern France, there is a big party. People come to trade not only cheeses, fruits, and cakes as in the normal market days, but also hours of plumbing, haircuts, sailing or English lessons. Only local currencies accepted!

Local currency creates work, and I make a distinction between work and jobs. A job is what you do for a living; work is what you do because you like to do it. I expect jobs to increasingly become obsolete, but there is still an almost infinite amount of fascinating work to be done.

For example, in France you find people offering guitar lessons and requesting lessons in German. Neither would pay in French francs. What's nice about local currency is that when people create their own money, they don't need to build in a scarcity factor. And they don't need to get currency from elsewhere in order to have a means of making an exchange with a neighbor.

Edgar Cahn's Time Dollars are a classical example. As soon as you have an agreement between two people about a transaction using Time Dollars, they literally create the necessary "money" in the process; there's no scarcity of money. That does not mean there's an infinite amount of this currency, either; you cannot give me 500,000 hours - nobody has 500,000 hours to give. So there's a ceiling on it, yes, but there's no artificial scarcity. Instead of pitting people against each other, the system actually helps them cooperate.
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Postby cptmarginal » Sun Jan 11, 2009 6:26 pm

My thanks go out to everyone participating in this thread, it's a goldmine of info.
The new way of thinking is precisely delineated by what it is not.
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Postby JackRiddler » Sun Jan 11, 2009 6:36 pm

.

As for the anonymous poster:

Who is it that mandates the destruction of sovereign nation states and their replacement by economic zones of interest? The transnationals that make up a part of the military-industrial-corporate-complex.


If you're talking about destruction of Yugoslavia or post-Soviet-bloc states, or attempts to destroy Bolivia, hell yeah true: break'em up, eat the best pieces, just like raiders liquidating a company after a hostile takeover.

If you're talking about the EU, I submit that is the product of strong states reacting as an alliance to counter US power. And what about China, there the state has remained strong even as it sponsors mini economic zones.

In order to make this possible, three things have to happen first. (1) The U.S. Constitution and Bill of Rights must be weakened. (2) The dollar has to lose its international trade and reserve standard position. (3) The U.S. military personnel needs to be taken out of the picture as a national defense force and be eventually replaced by mercenary forces with utopian weaponry under the transnationals’ control.


Ah, the "NWO" supposition. In the quote I added numbers to the supposed steps: (1) is what elements of the state, military and the corporations with which they are in symbiosis have always desired and worked for. (2) is widely recognized as an ultimate inevitability even based on classical economics, and these transnationals your author's talking about cannot possibly want it; it's likely they understand it's going to happen and plan for the contingency. (3) is interesting. It is happening, but I dispute the implied story of why. It has been happening for decades, ultimately because of the US atrocity in Vietnam. As a result of that failure, the US was forced to end the draft, military recruitment ran into difficulties, and the Pentagon turned increasingly to mercenary forces. This gave rise to the new power of the transnational-owned mercenary forces, and of course they want to grow. But their supposed reach is massively overstated. They still want military grunts on the front line taking the casualties. (3) is absurd if the implication is that the PTB want to dismantle the US military and Pentagon system. What will they have as enforcement instead? Blackwater can afford to engage in and lose exactly one real large-scale battle; after which it will find it can no longer recruit anyone, short of prisoners assigned by the state.

It is not clear to what extent President Bush is informed of the full picture,


I usually feel little need to keep reading any time someone refers to him as "President" Bush, but seeing as I started...

but he certainly must know enough in order to be able to play his part. Grinding up the U.S. military while stirring up conflict everywhere makes perfect sense in the context of that agenda.


It also fits the idea of hubris and "apres moi, le deluge," which is where I think the neocon mindset really is. Again, my guess is, obvious as it was to us what would happen in Iraq, and as much as these guys plot and scrutinize and are basically evil, they really don't ever think there are limits to their power. They're not smarter than us. They didn't go into Iraq to lose, they went in to destroy and plunder whatever they could and call it victory no matter what the outcome.

Having these facts publicized ahead of time will make it difficult later to blow off the U.S.’s walking into an Iranian death trap as a tactical mistake. Gg and others say that it is deliberate, just as (1) the destruction of the currency is deliberate. Both military and treasury are (2) slated to be taken out from under congressional control and taken over by private entities. These are the recognizable objectives of the drive toward privatization and globalization.


Again, I added numbers: (1), covered above, I think is bullshit, confusing a recognized inevitability with a deliberate action, but hey, sometimes it's hard to tell the difference because, "if they give you lemons, make lemonade." Of course the PTB are working on the assumption of inevitability and thus speeding it along as they follow their individual interests.

As for (2), military-industrial complex long ago taken out from under Congressional control. Also presidential control, by Nov. 22, 1963 at the latest. They are under their own control, in uneasy alliance with the executive and in thorough contempt of Congress, which doesn't dare to cut military budgets for real and on the contrary, always goes wild for more military money. Long as we're speculating on the preferences of the MIC, I say these must be to maintain a veneer of remaining under Congressional control for legitimation purposes.

We certainly have seen a private group of bankers commandeer the Treasury in the last couple of months, but this is also function of the crisis -- they're grabbing everything they can.

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Postby epi » Sun Jan 11, 2009 9:15 pm

Great comments and explanations JR!

Agree, it is deeper and more pervasive than what he says, thought the sotftspoken tone was appropriate after reading the articles. His focus is on better working currencies and the interview 10 yrs old, hence the outdated references. The guy used to work at the central bank of Belgium helping them to join the euro and is quoted in Zeitgeist addendum, in my mind a good reference to a more detailed mechanics of money.

JackRiddler wrote:.
Seems to, because there are still geostrategically minded players in this who understand that the ability to seize and control territory and resources by military means, for example, can still trump money at least temporarily.


That is the scary perspective. If we are talking collapse, Sovjet didn't.
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Postby epi » Mon Jan 12, 2009 6:52 pm

JackRiddler wrote:.

As for the anonymous poster:

Who is it that mandates the destruction of sovereign nation states and their replacement by economic zones of interest? The transnationals that make up a part of the military-industrial-corporate-complex.


If you're talking about destruction of Yugoslavia or post-Soviet-bloc states, or attempts to destroy Bolivia, hell yeah true: break'em up, eat the best pieces, just like raiders liquidating a company after a hostile takeover.

If you're talking about the EU, I submit that is the product of strong states reacting as an alliance to counter US power. And what about China, there the state has remained strong even as it sponsors mini economic zones.


I believe it means every country.

http://www.informationclearinghouse.inf ... e18926.htm

The NSS is an unambiguous declaration of war against any nation that claims the right to to control its own resources or defend its own sovereignty against US interests.

The texts perspective comes from a German with a slightly sceptical outlook on the EU (now supplying member states with around 85% of all new laws). I don't think the EU is a particularly malign entity at the present, in some ways better than my own country which is compromised, always walking in lock step with the UK and originating many of the bad surveillance laws in the EU. Any large power structure can be usurped once it is learned how to manipulate checks and balances. We are now at its mercy because we quietly gave up our sovereignty. As for the reaction against US power I think they decided Europe can not go to war with Russia, in other matters the US is practically a part of the EU, epitomized by the 'transatlantic link'.

For China, Russia, Iran and other Asian countries there is SCO and Gazprom connecting it with pipelines. India is prevented from joining by US/NATO in Central Asia but I think it will eventually.

Then there is the NAU. I beleive South America also see this trend.

JackRiddler wrote:.
In order to make this possible, three things have to happen first. (1) The U.S. Constitution and Bill of Rights must be weakened. (2) The dollar has to lose its international trade and reserve standard position. (3) The U.S. military personnel needs to be taken out of the picture as a national defense force and be eventually replaced by mercenary forces with utopian weaponry under the transnationals’ control.


Ah, the "NWO" supposition. In the quote I added numbers to the supposed steps: (1) is what elements of the state, military and the corporations with which they are in symbiosis have always desired and worked for. (2) is widely recognized as an ultimate inevitability even based on classical economics, and these transnationals your author's talking about cannot possibly want it; it's likely they understand it's going to happen and plan for the contingency. (3) is interesting. It is happening, but I dispute the implied story of why. It has been happening for decades, ultimately because of the US atrocity in Vietnam. As a result of that failure, the US was forced to end the draft, military recruitment ran into difficulties, and the Pentagon turned increasingly to mercenary forces. This gave rise to the new power of the transnational-owned mercenary forces, and of course they want to grow. But their supposed reach is massively overstated. They still want military grunts on the front line taking the casualties. (3) is absurd if the implication is that the PTB want to dismantle the US military and Pentagon system. What will they have as enforcement instead? Blackwater can afford to engage in and lose exactly one real large-scale battle; after which it will find it can no longer recruit anyone, short of prisoners assigned by the state.


I think the keywords are 'national defense force' and 'utopian weaponry' but don't know what the author had in mind. It is only referenced once so instead I offer a fictional example where I imagine a satellite equipped with a suitable death ray and an ability to locate my cellphone, an idea inspired by the coverpage of a presentation from US space command showing a satellite with a beam of light directed towards earth. Such a thing wouldn't need more than five people to operate a 24/7 service, costs are low and does not involve much work, perhaps only pressing return once in a while to make sure that the feed of suspects are processed with the approved rate of deaths per second.

Apart from killing, it can also be used to force people to live in fear or conduct business on a lower technological level. Such weapons also seems logical in terms of US power projection as far as it depends on naval resources. My belief is that these can only operate well in relative peace time. At a certain point in an escalating conflict, carriers and battlegroups will become targets for cruise missiles designed to stop them and the ships has to be taken home or sacrificed. Logistical problems would follow and the air-force has to pick up the tab, forward deployment now becomes a liability and the fight continues uphill with a proverbial 'quagmire' on the horizon. One of several possible scenarios of course. But wait a minute! When the US needs to 'control' territory, it is not so much 'having it', as it is 'denying access to others', right? For this armies and forward bases aren't really neccessary, instead air and space superiority together with 'utopian weaponry' like the death star will save the day.

The same goes for the nuclear option where strategy has shifted from deterrence to 'compellence' and threats of a first strike. Under deterrence, parties compete over being the last one to strike, under 'compellence', enabled by the missile defense, it is about who will strike first. This situation will be put on a hair trigger alert 2012 when the Polish/Czech ABM installation is operational and Russia slowly loses its second strike capability. A time when peace will become an intolerable threat to security. The game-theoretical questions the computers will mull over are as follows:
Russia:
1. If we dont do anything, we will be subdued or face a massive nuclear attack with a limited capability to retaliate.
2. If we attack first with a massive nuclear strike, we can overwhelm the ABM and fight the war with our weapons nearly intact.

US:
1. If we dont do anything, the Russians will attack first to overwhelm the ABM and fight the war with their weapons nearly intact.
2. If we attack first with a massive nuclear strike, we will overcome the risk of a preemptive Russian strike.

Use them or lose them. As you can see timing is everything in this game and very few people are involved. It only requires a single person to tell the idiot to push the button and maybe not even that, if the idiot is asleep, drunk or choking from a pretzel it may be safer to have a prerecorded firing order handy when the computer bleeps. I have read up on the Minot AFB thing and would expect anything.

Sources:
http://www.foreignaffairs.org/20060301f ... imacy.html

The current and future U.S. nuclear force, in other words, seems designed to carry out a preemptive disarming strike against Russia or China.

<snip>

…the sort of missile defenses that the United States might plausibly deploy would be valuable primarily in an offensive context, not a defensive one — as an adjunct to a U.S. first-strike capability


Diplomatic response, former PM Yegor Gaidar:
http://www.ft.com/cms/s/2/5beab630-be83 ... e2340.html

In an article in the latest issue of Foreign Affairs, the US-based journal, Keir Lieber of the University of Notre Dame and Daryl Press of the University of Pennsylvania lay out results of calculations according to a model they have developed. They show that the US has developed nuclear capacity sufficient to launch a strike guaranteed to wipe out Russia and China, without the risk of suffering a return strike.

<snip>

They also provide a detailed explanation for Russian and Chinese leaders of the purpose of America’s anti-missile defence system. The system is not about preventing the threat of attack from “rogue” nations, they argue, but rather, about enabling the US dramatically to reduce the risk of a nuclear counter-strike by Russia and China after a nuclear attack by the US.


Thats the timestamp for the beginning of cold war2. While things evolve on diplomatic, political and military levels where all sorts of snafus and mishaps can invalidate any well meaning intention not to blow the earth to smittereens the parapoliticial may raise an eyebrow to ask about the meaning of Foreign Affairs as a conduit for this message. Why tell Russia in no uncertain terms about the intention to preemptively attack them instead of just doing it? Has there been a secret letter from Ceasar to Wu Tui (Putin) to prepare proper context? That would have a regionalizing effect on everybody, teaming up on either side of the east/west divide. Or did they simply feel lost in a new world and for reasons of comfort and reassurance just resorted to their usual communication mode of exchanging mutual threats of annihilation because it is the only thing they know?

I dont know these things. It may be a cynical game but the cynicism doesn't appears small enough to prevent a real nuclear war from being part of the game and I live in the neighbourhood.


JackRiddler wrote:.

It is not clear to what extent President Bush is informed of the full picture,


I usually feel little need to keep reading any time someone refers to him as "President" Bush, but seeing as I started...

but he certainly must know enough in order to be able to play his part. Grinding up the U.S. military while stirring up conflict everywhere makes perfect sense in the context of that agenda.


It also fits the idea of hubris and "apres moi, le deluge," which is where I think the neocon mindset really is. Again, my guess is, obvious as it was to us what would happen in Iraq, and as much as these guys plot and scrutinize and are basically evil, they really don't ever think there are limits to their power. They're not smarter than us. They didn't go into Iraq to lose, they went in to destroy and plunder whatever they could and call it victory no matter what the outcome.

Having these facts publicized ahead of time will make it difficult later to blow off the U.S.’s walking into an Iranian death trap as a tactical mistake. Gg and others say that it is deliberate, just as (1) the destruction of the currency is deliberate. Both military and treasury are (2) slated to be taken out from under congressional control and taken over by private entities. These are the recognizable objectives of the drive toward privatization and globalization.


Again, I added numbers: (1), covered above, I think is bullshit, confusing a recognized inevitability with a deliberate action, but hey, sometimes it's hard to tell the difference because, "if they give you lemons, make lemonade." Of course the PTB are working on the assumption of inevitability and thus speeding it along as they follow their individual interests.

As for (2), military-industrial complex long ago taken out from under Congressional control. Also presidential control, by Nov. 22, 1963 at the latest. They are under their own control, in uneasy alliance with the executive and in thorough contempt of Congress, which doesn't dare to cut military budgets for real and on the contrary, always goes wild for more military money. Long as we're speculating on the preferences of the MIC, I say these must be to maintain a veneer of remaining under Congressional control for legitimation purposes.

We certainly have seen a private group of bankers commandeer the Treasury in the last couple of months, but this is also function of the crisis -- they're grabbing everything they can.

.


The sale of pentagon is the only thing we have yet to see begin. Think you are right, it's in their interest to appear to be under congressional control but often when companies change owners there are signs reflecting a changed set of objectives, like massive lay-offs of people.

Most people would probably welcome that and think that down-sizing the military means peace and the end of costly wars. But it may also mean that the perceived objective to defend the country has been dropped resulting in leaner command and control, less logistical problems and fewer humans with insights [sentence edited]. The economic meltdown with budget cuts and rapid fire sales can easily mask such a transformation.

To reconnect a potential nuclear standoff with the thread, Putin said:
http://www.globalresearch.ca/index.php? ... &aid=10694

Trust in the United States as the leader of the free world and the free economy and confidence in Wall Street, has been damaged I believe forever. There will be no return to the previous position.


There was another thread here on RI about the google chatbot
http://douweosinga.com/projects/googlechatbot

I typed the first word.
putin won


What do you think are the drivers behind the events leading up to the current situation?

Edit: The sentence "In reality it only means that the perceived objective to defend the country has been dropped.." was replaced with "But it may also mean that the perceived objective ..".
why?
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Postby JackRiddler » Fri Jan 16, 2009 1:16 am

.

Neat bit of sleuthing by Pam Martens places Madoff together in a scam implicating four biggest investment banks, Nasdaq, SEC and the spy masters.

http://counterpunch.org/martens01152009.html

January 15, 2009
Primex Trading's Dark Pool Operations
Wall Street Powerhouses Invested Alongside Madoff

By PAM MARTENS

There has been much debate among Wall Street veterans as to why major European investment banks suffered serious damage from the Bernard Madoff Ponzi scheme while our biggest U.S. investment banks escaped unscathed.

For the past two decades, Wall Street watchers could count on four U.S. firms to land in the middle of every securities scandal. From Nasdaq price fixing to fake research to rigging the IPO markets to peddling toxic subprime assets, one could rest assured that Citigroup’s Smith Barney, Morgan Stanley, Merrill Lynch and Goldman Sachs would be heading the lineup. Their complete absence from the greatest Ponzi scheme in history raises the question: what did they know and when did they know it?

The answer may reside in a pentagonal structure created in 1999 to serve the interests of a Wall Street cartel.

On September 14, 1999, it was officially announced that Citigroup’s Smith Barney, Morgan Stanley, Merrill Lynch and Goldman Sachs had partnered with Bernard Madoff to compete head on with the New York Stock Exchange in a venture called Primex Trading.

Madoff had bought the rights to a new technology called Financial Auction Network (FAN) created by Christopher Keith, a 17-year veteran of technology creation at the New York Stock Exchange (NYSE). Mr. Keith had retired from the NYSE and started a technology think tank in lower Manhattan in the early 1990s called Exchange Lab. FAN was one of the early technology offerings and the rights to develop it were bought by Madoff. The firm that emerged was Primex Trading, a division of Primex Holdings. (Primex Holdings holds two patents and may be part of those secret Madoff assets the court won’t release to the public.)

In addition to harnessing the brains of Mr. Keith from the New York Stock Exchange, Primex hired Glen Shipway, the Executive Vice President of the over the counter stock market, Nasdaq, whose duties had included market surveillance of broker dealers like this gang of five.

The partners made a big splash in the press at the time, extolling altruistic intentions of getting better prices for their customers in an electronic version of the New York Stock Exchange. Here’s an excerpt from the New York Times on September 19, 1999:

“Primex is aiming to be an electronic version of the New York Stock Exchange. Participants will not only be able to buy and sell stocks at prevailing market prices, as they now do through many traditional and electronic exchanges, but also interact openly with one another -- in effect, bargain -- to find the best prices possible. ‘I think the fact four of the world's largest securities firms have backed this system suggests that it brings something new and unique to our ability to obtain the best execution for our customers,’ said Bill Hart, a managing director in equity trading at Salomon Smith Barney.”

In reality, a very different motive was at work. One of the best kept secrets from the public is a benign sounding process on Wall Street called internalization. That’s where broker dealers like Madoff’s Primex partners match their customers’ buy and sell orders in-house rather than sending them off to the New York Stock Exchange or some other transparent stock exchange. The entities that engage in this trading process are called dark pools. (Recall that “pools” were the same secretive creatures that rigged the stock market leading up to the crash of 1929.)

While the investing public was being served up visions of Primex creating a more transparent and fairer pricing market mechanism, the goal for Madoff’s partners was to legitimize the highly questionable trading practice of internalization.

On October 29, 2002, the Securities and Exchange Commission (SEC) held a Market Structure Hearing to look at internalization, among other market issues. Here are relevant excerpts that cut to the chase of what Madoff’s partners were really up to:

“[Edward] Kwalwasser, [Group Executive Vice President at the NYSE in charge of regulation at the time]: I think we have to look at, from a market perspective, and when we talk about payment for order flow and internalization. The last panel -- first panel agreed that one of the characteristics of a National Market System that we all said -- who were sitting here said was really good, was that customer orders should be able to interact without the benefit of a dealer. Both internalization and payment for order flow are distortions of that public good that we all agree was there. And, to the extent that those orders aren't in the marketplace, they're not helping create the best price for all orders in the marketplace…I never thought Bernie [Madoff] was a bad guy. I started out, however, out of law school representing people in the record industry and in the rock-and-roll part of the business. And to think that the securities industry has a lower code of conduct than the record industry is really, I think, something that I -- I never wanted to believe would be part of an industry that I was working at…

“[Bernard] Madoff: …Now, we came up with a -- with a system, and joined in partnership with -- with four of the largest firms that exist today in -- in the United States and NASDAQ, to build a system that -- that achieves that. I won't mention the name of the system because this is not to be a marketing effort.

“[Robert] COLBY [SEC]: Primex System.

“[Bernard] Madoff: But -- but, basically, the concern that all of these firms had was that they wanted to internalize their order flow, but they all very fully realized that the danger of having these various pockets of liquidity not visible to everybody and not allowing orders to interact, this was a problem unto itself. And even though that may be what a lot of people would like to do, if you -- if you degrade the market in such a way that you really don't do what you're supposed to do for the investor, then you really have no marketplace, anyhow. So we went about building this type of system that would allow firms to internalize their order flow, allow orders to interact with limit orders, and to do it anonymously…”

Now, it’s easy to see what Citigroup’s Smith Barney, Morgan Stanley, Merrill Lynch and Goldman Sachs hoped to get out of Primex. But why was Madoff cannibalizing his own business? Madoff already owned Bernard L. Madoff Investment Securities, a third market firm that engaged in the unseemly practice of paying broker dealers a penny or two a share to send their trades to him instead of a regulated and transparent stock exchange. If clients started moving their trades to Primex, wouldn’t that put him out of business?

There are a number of possibilities that might explain Madoff’s motives: he could have made a huge gamble that Primex really would be the next New York Stock Exchange and his cut of the fee revenue would eclipse his other firm’s revenue stream. He could have already lost so much market share from the onslaught of competitive electronic trading platforms that he had little to lose if Primex failed. And, very likely, he needed to add the imprimatur of the big four firms to burnish his tainted image from his payment for order flow practices.

In the end, the gamble failed. Nasdaq licensed the Primex Auction System and ran it for two years before abruptly shutting it down on January 16, 2004. Madoff was left with just his Ponzi scheme and a third market operation faced with mounting competition.

The firms that Madoff went into business with could easily be confused with a spy agency. John Deutch, the former CIA Director, has sat on the Board of Citigroup for over a decade; each of the firms regularly taps the top investigation firms in the country and has legions of the largest law firms sleuthing around on their behalf, not to mention their revolving door with SEC enforcement staff.

Did they get wind of the Madoff Ponzi scheme somewhere along the way in their Primex relationship. If so, did they report it? If not, why not?

Since the Inspector General of the SEC has promised a broad look at how Madoff escaped detection for decades, I’d like to suggest he interview the former Primex partners. When not one of the four got scammed by Madoff but their major counterparts in Europe did, we need to find out why. To help out the SEC and save taxpayers a little dough, I’ve reconstructed the time line below.

September 14, 1999: Mainstream media report that Citigroup’s Salomon Smith Barney, Morgan Stanley, Goldman Sachs, and Merrill Lynch are investing alongside Bernard L. Madoff Investment Securities as partners in Primex Trading.

March 31, 2000: Primex announces that the NASD, parent of Nasdaq, has approved moving forward with its agreement to license the Primex Auction System for U.S. equities.

December 17, 2001: Nasdaq begins operation of the Primex Auction System with trading limited to the 30 stocks of the Dow Jones Industrial Average.

January 7, 2002: Nasdaq adds the stocks in the S&P 100 to the Primex Auction System.

January 22, 2002: the Nasdaq 100 stocks are added to the Primex Auction System.

March 3, 2003: Nasdaq announces that the SEC has given permanent approval to the Primex Auction System.

December 31, 2003: Nasdaq announces that it will cease offering the Primex Auction System, effective January 16, 2004.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
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Postby vigilant » Fri Jan 16, 2009 2:45 am

Good thread. Lots of good stuff to read.


This martens lady though....i'm not catching her drift. I don't understand why she says half of what she says. I"m thinking either she is being coy and misleading or does not understand how the game works. I'm betting on the first option since she is a veteran.

Maybe I need to read that one again before I go further here......
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Postby JackRiddler » Fri Jan 16, 2009 11:49 am

.

Martens is presenting a circumstantial case for questioning the four big houses about Madoff. Clearly the implication is she knows something more and is being coy, which effectively puts her reputation at stake.

Central to the Madoff story is that while running a Ponzi scheme this guy also ran the Nasdaq and withstood several supposed SEC probes, indicating he's got serious collusion in his favor among the authorities. He's not a peripheral player. Martens recalls how M. was in the Primex venture with the big four houses - itself inherently suspicious, since the function of Primex was to hide trading from public knowledge - and points out that while these houses were willing to partner with Madoff there, they semi-magically averted being sucked into his Ponzi scheme at all, although all of their European counterparts and hundreds of other institutions did fall for Madoff's scheme. So she's raising a prima facie suspicion that they knew enough about Madoff (as Citi and JPM knew about Enron, to take one example) to back off, but her bringing it up in an article with an initial timeline suggests she's got better information and knows an investigation will turn something up. Otherwise she discredits herself for idle speculation.

.
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Postby vigilant » Fri Jan 16, 2009 3:10 pm

I can go with that. I got the distinct feeling she knew more, but decided that she wanted to keep breathing air on a daily basis, so she had to hedge around it.
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