Too Much Money Is Beyond Legal Reach

New York-based funds are abusing 'secrecy jurisdictions.'

by Robert M. Morgenthau
Wall Street Journal

A major factor in the current financial crisis is the lack of transparency in the activities of the principal players in the financial markets. This opaqueness is compounded by vast sums of money that lie outside the jurisdiction of U.S. regulators and other supervisory authorities.

The $700 billion in Treasury Secretary Henry Paulson's current proposed rescue plan pales in comparison to the volume of dollars that now escape the watchful eye, not only of U.S. regulators, but from the media and the general public as well.

There is $1.9 trillion, almost all of it run out of the New York metropolitan area, that sits in the Cayman Islands, a secrecy jurisdiction. Another $1.5 trillion is lodged in four other secrecy jurisdictions.

Following the Great Depression, we bragged about a newly installed safety net that was suppose to save us from such a hard economic fall in the future. However, the Securities and Exchange Commission, the Federal Reserve System, the Comptroller of the Currency and others have ignored trillions of dollars that have migrated to offshore jurisdictions that are secretive in nature and outside the safety net -- beyond the reach of U.S. regulators.

We should have learned a long time ago that totally unsupervised markets, whether trading in tulips or subprime mortgages, will sooner rather than later get into trouble. We don't have to look back very far in history to understand this.

Long Term Capital Management, a hedge fund "based" in Greenwich, Conn., but composed of eight partnerships chartered in the Caymans, was supposed to be the wunderkind of the financial world. At its peak in the late 1990s, its gross holdings were valued at $1.8 trillion. But, regrettably, its liabilities exceeded its assets and the Federal Reserve Bank of New York had to step in and rescue it when the value of its assets plummeted.

Most recently, two Bear Stearns hedge funds, based in the Cayman Islands, but run out of New York, collapsed without any warning to its investors. Because of the location of these financial institutions -- in a secrecy jurisdiction, outside the U.S. safety net of appropriate supervision -- their desperate financial condition went undetected until it was too late.

Of course, BCCI Overseas, which was part of the then largest bankruptcy in history, was also "chartered" in the Caymans.

We have to learn from our mistakes. Any significant infusion to the financial system must carry assurances that it will not add to the pool of money beyond the safety net and supervisory authority of the United States. Moreover, the trillions of dollars currently offshore and invested in funds that could impact the American economy must be brought under appropriate supervision.

If Congress and Treasury fail to bring under U.S. supervisory authority the financial institutions and transactions in secrecy jurisdictions, there will be no transparency with the inevitable consequences of the lack of transparency -- namely, a repeat of the unbridled greed and recklessness that we now face. Because of the monolithic character of world financial markets, a default crisis anywhere becomes a default crisis everywhere.

Bailout tests how much the American public will tolerate theft

by Sean Olender
San Francisco Chronicle

Treasury Secretary Paulson's edict to create a $700 billion fund to buy worthless mortgage securities from agitated wealthy bond investors is nothing short of a final step on the path to the end of the republic. The secretary claims he can only be effective if his decisions are beyond judicial review.

Our government and its owners appear to be testing how much the American public will tolerate. A few years ago, no one could have imagined that the silent majority would quietly accept thefts of this magnitude from a government that stopped tiny payments to single mothers with poor children in the name of welfare reform because the program's $10 billion cost was breaking the federal budget.

This isn't socialism, it's fascism.

If the public allows this theft, then it will signal to powerful forces that they can essentially do anything, because the American public has become so mushy-headed that it will stand up for nothing. When power discovers that those from whom it would exact payment are powerless, its viciousness increases infinitely.

Our politicians appear on television and say, this is an emergency, so we have to do this now and talk about it later. And then later is too late.

It is not just a $700 billion bailout, it is a $700 billion fund that can have no more than $700 billion in liabilities at any one time. Maybe Goldman Sachs can sell mortgage-backed securities to the fund at 80 cents on the dollar and then the fund will liquidate the securities by selling them back to Goldman for 50 cents on the dollar. Then Goldman can sell them back to the fund for 85 cents on the dollar. That would be a good business, especially if no court can review it.

Our enemy has revealed itself, and it is our own government. The concentration of such outrageous power in government - the power to take the equivalent of half our annual federal budget and give it to anonymous investors - is nearly reaching the point at which it may not be revoked.

It is only natural that we, dreaming of the possibility of our own riches, acquiesced in some of these financial schemes. Of that, we should not be ashamed. Many Americans may now be thinking, "But suppose someday I am a wealthy bond investor worth $50 million?" But you are not a wealthy bond investor and the value of your house and stock investments is going to drop, regardless of how much tax money the government gives to wealthy bond investors. This bailout is essentially the federal government saying to creditors, "Because the American consumer appears to be refusing to pay his debts, we will buy your claims on the consumer, and exchange them for money created by issuing Treasury bills, which is our promise to extract that money from American consumers using our taxation authority."

Some day our children will call on us to explain how our republic was lost. I cannot imagine the shame of facing a grown child to explain, "Foolishly, I thought I would get some of the money, too."

Because the American public has not been introduced to methods for controlling its government for generations for generations, I will suggest one called a general strike. This fundamental democratic power is where everyone decides to send a message to the government by not going to work, to school, shopping, nowhere.

At this point in our history, very bad things are going to happen regardless of what we do. There is no government action that can alleviate the discomfort we must endure because of the wild speculation and reckless borrowing that ensued. What's coming is inescapable. This is the critical time when charlatans among us will promise they can save us from the inevitable if we only allow them the power they need to save us. They are lying. It is time to earn our freedom. It is time to remind the government that we are Americans and we have a history of subjecting tyrannical governments to unpleasant consequences.

Palin's Source

by Ben Smith
Politico.com
Thomas Frank noticed in the Journal today that Sarah Palin used an odd source for a quote in her announcement speech attributed only to a "writer."

"We grow good people in our small towns, with honesty and sincerity and dignity," she said, drawing from a once-powerful, now forgotten mid-century conservative columnist named Westbrook Pegler.

It's an odd source because Pegler, who moved further right as his career went on, ended up very, very far out. Frank notes that he talked hopefully of the assassination of Franklin Roosevelt.

He was also known for what Philip Roth described as his "casual distaste for Jews," which had become so evident by the end that he was bounced from the journal of the John Birch Society in 1964 for alleged anti-semitism. According to his obituary, he'd advanced the theory that American Jews of Eastern European descent were "instinctively sympathetic to Communism, however outwardly respectable they appeared."

It's unlikely that Palin wrote the speech or dug up the quote, though it's possible. The line does come from a strand of conservative populism that isn't particularly native to McCain or his usual rhetoric: The only other source for that Pegler easily available online is a 1990 book by Patrick Buchanan.

In any case, it won't calm Ed Koch any.