U.S. Should Examine AIG's use of Tax Havens

by Lucy Komisar

Now that it controls AIG, the U.S. should investigate the extent to which this giant corporation, with subsidiaries in major tax havens, has been using the offshore system to cook its books and dodge U.S. taxes. Evidence shows AIG has done so in the past.

The U.S. takeover of the world's largest insurance conglomerate, AIG, puts it in a unique position to look into the inner dealings of a company that is a profligate user of tax havens. AIG has employed offshore shell companies to cook its books and dodge taxes. The new U.S. managers should investigate how they do it. AIG's favorite offshore jurisdictions are Bermuda, Barbados, Switzerland, and Luxembourg, places immune from even the lax enforcement of America's state insurance regulators and the Securities and Exchange Commission (SEC). AIG's offshore subsidiaries include American International Assurance Company Limited, Bermuda; American International Reinsurance Company, Ltd., Bermuda; AIG Life Insurance Company Ltd., Switzerland; and AIG Financial Advisor Services, S.A., Luxembourg. AIG in the past has used tax havens to evade regulations and hide insider connections in supposedly "arms-length" deals. This is especially significant as the company has moved into financial services and asset management. It has also used the offshore system to evade U.S. taxes. Here are two examples, the first reported exclusively by this writer. AIG helped Victor Posner, a notoriously crooked investor, set up an offshore reinsurance company so that Posner could evade U.S. taxes. The policy scam was discovered in the early 1990s, after the SEC prosecuted Posner for a fraudulent takeover scheme concocted with Wall Street thieves Michael Milken and Ivan Boesky, ordered him to pay $4 million to fraud victims and banned him from serving as officer or director of any publicly-held company. New managers took over Posner's NVF Corp., which ran a Delaware vulcanized rubber plant. An insurance agent charged with examining company policies discovered that NVF was paying AIG's National Union Fire of Pittsburgh substantially over market for workmen's compensation insurance. AIG reinsured the policy through Chesapeake Insurance, an offshore reinsurance company Posner owned in Bermuda. In essence, NVF, owned by Posner, was buying insurance from an AIG company which was buying reinsurance for the policy from an offshore company owned by Posner. Bermuda provided tax and corporate secrecy, so Chesapeake's books were safe from the eyes of American regulators and tax authorities. AIG and Posner made out like bandits. AIG got a higher commission from the inflated NVF premium before sending the rest to Chesapeake. Posner wrote off the entire amount as a business expense and enjoyed the extra cash in Bermuda, tax free, stiffing the U.S. government. Reduced profits also meant smaller dividends and share prices for investors. The insurance agent cancelled the NVF policy with AIG, but the Delaware Insurance Department did not make the scam public or take any action against AIG. A former insurance department regulator told me, "This was not an isolated case with Vulcan [NVF]. AIG did that a lot. AIG helped companies set up offshore captive reinsurance companies." A "captive" is owned by the company it insures. AIG, he alleged, "would then overcharge on insurance and pay reinsurance premiums to the captives, giving the captive owners tax-free offshore income." AIG says that it "pioneered the formation of captives" and offers management facilities to run them in offshore Barbados, Bermuda, Cayman Islands, Gibraltar, Guernsey, Isle of Man, and Luxembourg - all places where corporate and accounting records are secret and taxes minimal or nonexistent. Another scam helped AIG dodge taxes and U.S. regulations. Insurance companies normally insure themselves by laying off part of their risk to reinsurance companies, so if a claim comes in above a certain amount, the reinsurance company will pay it. State laws also require them to keep a certain amount of capital available to pay out claims. If they have reinsurance, that amount can drop. Companies have to show losses - amounts they have paid out - on their books. If they have enough good reinsurance, they get a credit for that against their losses. The reinsurer, of course, has to be an independent company; the risk isn't reduced if it's just moved to another division of the same company. In the mid-1980s, two of AIG's reinsurers failed. AIG would have had to curtail writing new business, since rules require a certain ratio of assets to risk. Finding new reinsurers was going to be difficult and expensive. CEO Maurice "Hank" Greenberg persuaded several of his business friends to set up a company into which he could "cede" AIG insurance. The company was launched with a private sale of shares organized by Goldman Sachs, then headed by Robert Rubin. Greenberg's front men were loaned the money to "buy" risk-free shares in the new Coral Re, an allegedly independent offshore reinsurance company, to allow it to illegally move debt off AIG's books and violate rules about maintaining minimum levels of reserves required to pay off claims. The company was registered in Barbados, where capital requirements and regulation are minimal, where American regulators couldn't readily discover AIG's involvement and where, as an added incentive, it could evade U.S. taxes. If Coral Re was an AIG affiliate, it would have to pay taxes on its income.

A Delaware Insurance Department regulator's report in 1996 said that Coral Re "may be an affiliate" of AIG. It described how AIG played an integral role in the creation of Coral Re; that its purpose was to reinsure risks for AIG companies; that virtually all Coral Re's business originated from AIG units; and that Coral Re was managed by an AIG subsidiary. It concluded that the arrangement did not transfer risk and had to come off the books. The insurance departments of New York and Pennsylvania agreed. But delays and stonewalling allowed AIG to use Coral Re for more than eight years. By the time it had to shut it down, it didn't need it anymore. Cowed by AIG, none of the agencies levied a penalty.

It would be unthinkable for the U.S. to allow a business it controls to finesse regulations, evade taxes or help others to evade them. The turnover of AIG to the U.S. will involve extensive examinations by accountants. An analysis of the company's offshore strategies should be part of the audit. What accountants learn could stop illicit practices by AIG and lead to laws to prevent other insurance companies from doing the same.

Meet Sarah Palin's radical right-wing pals

Extremists Mark Chryson and Steve Stoll helped launch Palin's political career in Alaska, and in return had influence over policy. "Her door was open," says Chryson -- and still is.

by Max Blumenthal and David Neiwert
Salon.com

On the afternoon of Sept. 24 in downtown Palmer, Alaska, as the sun began to sink behind the snowcapped mountains that flank the picturesque Mat-Su Valley, 51-year-old Mark Chryson sat for an hour on a park bench, reveling in tales of his days as chairman of the Alaska Independence Party. The stocky, gray-haired computer technician waxed nostalgic about quixotic battles to eliminate taxes, support the "traditional family" and secede from the United States.

So long as Alaska remained under the boot of the federal government, said Chryson, the AIP had to stand on guard to stymie a New World Order. He invited a Salon reporter to see a few items inside his pickup truck that were intended for his personal protection. "This here is my attack dog," he said with a chuckle, handing the reporter an exuberant 8-pound papillon from his passenger seat. "Her name is Suzy." Then he pulled a 9-millimeter Makarov PM pistol -- once the standard-issue sidearm for Soviet cops -- out of his glove compartment. "I've got enough weaponry to raise a small army in my basement," he said, clutching the gun in his palm. "Then again, so do most Alaskans." But Chryson added a message of reassurance to residents of that faraway place some Alaskans call "the 48." "We want to go our separate ways," he said, "but we are not going to kill you."

Though Chryson belongs to a fringe political party, one that advocates the secession of Alaska from the Union, and that organizes with other like-minded secessionist movements from Canada to the Deep South, he is not without peculiar influence in state politics, especially the rise of Sarah Palin. An obscure figure outside of Alaska, Chryson has been a political fixture in the hometown of the Republican vice-presidential nominee for over a decade. During the 1990s, when Chryson directed the AIP, he and another radical right-winger, Steve Stoll, played a quiet but pivotal role in electing Palin as mayor of Wasilla and shaping her political agenda afterward. Both Stoll and Chryson not only contributed to Palin's campaign financially, they played major behind-the-scenes roles in the Palin camp before, during and after her victory.

Palin backed Chryson as he successfully advanced a host of anti-tax, pro-gun initiatives, including one that altered the state Constitution's language to better facilitate the formation of anti-government militias. She joined in their vendetta against several local officials they disliked, and listened to their advice about hiring. She attempted to name Stoll, a John Birch Society activist known in the Mat-Su Valley as "Black Helicopter Steve," to an empty Wasilla City Council seat. "Every time I showed up her door was open," said Chryson. "And that policy continued when she became governor."

When Chryson first met Sarah Palin, however, he didn't really trust her politically. It was the early 1990s, when he was a member of a local libertarian pressure group called SAGE, or Standing Against Government Excess. (SAGE's founder, Tammy McGraw, was Palin's birth coach.) Palin was a leader in a pro-sales-tax citizens group called WOW, or Watch Over Wasilla, earning a political credential before her 1992 campaign for City Council. Though he was impressed by her interpersonal skills, Chryson greeted Palin's election warily, thinking she was too close to the Democrats on the council and too pro-tax.

But soon, Palin and Chryson discovered they could be useful to each other. Palin would be running for mayor, while Chryson was about to take over the chairmanship of the Alaska Independence Party, which at its peak in 1990 had managed to elect a governor.

The AIP was born of the vision of "Old Joe" Vogler, a hard-bitten former gold miner who hated the government of the United States almost as much as he hated wolves and environmentalists. His resentment peaked during the early 1970s when the federal government began installing Alaska's oil and gas pipeline. Fueled by raw rage -- "The United States has made a colony of Alaska," he told author John McPhee in 1977 -- Vogler declared a maverick candidacy for the governorship in 1982. Though he lost, Old Joe became a force to be reckoned with, as well as a constant source of amusement for Alaska's political class. During a gubernatorial debate in 1982, Vogler proposed using nuclear weapons to obliterate the glaciers blocking roadways to Juneau. "There's gold under there!" he exclaimed.

Vogler made another failed run for the governor's mansion in 1986. But the AIP's fortunes shifted suddenly four years later when Vogler convinced Richard Nixon's former interior secretary, Wally Hickel, to run for governor under his party's banner. Hickel coasted to victory, outflanking a moderate Republican and a centrist Democrat. An archconservative Republican running under the AIP candidate, Jack Coghill, was elected lieutenant governor.

Hickel's subsequent failure as governor to press for a vote on Alaskan independence rankled Old Joe. With sponsorship from the Islamic Republic of Iran, Vogler was scheduled to present his case for Alaskan secession before the United Nations General Assembly in the late spring of 1993. But before he could, Old Joe's long, strange political career ended tragically that May when he was murdered by a fellow secessionist.

Hickel rejoined the Republican Party the year after Vogler's death and didn't run for reelection. Lt. Gov. Coghill's campaign to succeed him as the AIP candidate for governor ended in disaster; he peeled away just enough votes from the Republican, Jim Campbell, to throw the gubernatorial election to Democrat Tony Knowles.

Despite the disaster, Coghill hung on as AIP chairman for three more years. When he was asked to resign in 1997, Mark Chryson replaced him. Chryson pursued a dual policy of cozying up to secessionist and right-wing groups in Alaska and elsewhere while also attempting to replicate the AIP's success with Hickel in infiltrating the mainstream.

Unlike some radical right-wingers, Chryson doesn't put forward his ideas freighted with anger or paranoia. And in a state where defense of gun and property rights often takes on a real religious fervor, Chryson was able to present himself as a typical Alaskan.

He rose through party ranks by reducing the AIP's platform to a single page that "90 percent of Alaskans could agree with." This meant scrubbing the old platform of what Chryson called "racist language" while accommodating the state's growing Christian right movement by emphasizing the AIP's commitment to the "traditional family."

"The AIP is very family-oriented," Chryson explained. "We're for the traditional family -- daddy, mommy, kids -- because we all know that it was Adam and Eve, not Adam and Steve. And we don't care if Heather has two mommies. That's not a traditional family."

Chryson further streamlined the AIP's platform by softening its secessionist language. Instead of calling for immediate separation from the United States, the platform now demands a vote on independence.

Yet Chryson maintains that his party remains committed to full independence. "The Alaskan Independence Party has got links to almost every independence-minded movement in the world," Chryson exclaimed. "And Alaska is not the only place that's about separation. There's at least 30 different states that are talking about some type of separation from the United States."

This has meant rubbing shoulders and forging alliances with outright white supremacists and far-right theocrats, particularly those who dominate the proceedings at such gatherings as the North American Secessionist conventions, which AIP delegates have attended in recent years. The AIP's affiliation with neo-Confederate organizations is motivated as much by ideological affinity as by organizational convenience. Indeed, Chryson makes no secret of his sympathy for the Lost Cause. "Should the Confederate states have been allowed to separate and go their peaceful ways?" Chryson asked rhetorically. "Yes. The War of Northern Aggression, or the Civil War, or the War Between the States -- however you want to refer to it -- was not about slavery, it was about states' rights."

Another far-right organization with whom the AIP has long been aligned is Howard Phillips' militia-minded Constitution Party. The AIP has been listed as the Constitution Party's state affiliate since the late 1990s, and it has endorsed the Constitution Party's presidential candidates (Michael Peroutka and Chuck Baldwin) in the past two elections.

The Constitution Party boasts an openly theocratic platform that reads, "It is our goal to limit the federal government to its delegated, enumerated, Constitutional functions and to restore American jurisprudence to its original Biblical common-law foundations." In its 1990s incarnation as the U.S. Taxpayers Party, it was on the front lines in promoting the "militia" movement, and a significant portion of its membership comprises former and current militia members.

At its 1992 convention, the AIP hosted both Phillips -- the USTP's presidential candidate -- and militia-movement leader Col. James "Bo" Gritz, who was campaigning for president under the banner of the far-right Populist Party. According to Chryson, AIP regulars heavily supported Gritz, but the party deferred to Phillips' presence and issued no official endorsements.

In Wasilla, the AIP became powerful by proxy -- because of Chryson and Stoll's alliance with Sarah Palin. Chryson and Stoll had found themselves in constant opposition to policies of Wasilla's Democratic mayor, who started his three-term, nine-year tenure in 1987. By 1992, Chryson and Stoll had begun convening regular protests outside City Council. Their demonstrations invariably involved grievances against any and all forms of "socialist government," from city planning to public education. Stoll shared Chryson's conspiratorial views: "The rumor was that he had wrapped his guns in plastic and buried them in his yard so he could get them after the New World Order took over," Stein told a reporter.

Chryson did not trust Palin when she joined the City Council in 1992. He claimed that she was handpicked by Democratic City Council leaders and by Wasilla's Democratic mayor, John Stein, to rubber-stamp their tax hike proposals. "When I first met her," he said, "I thought she was extremely left. But I've watched her slowly as she's become more pronounced in her conservative ideology."

Palin was well aware of Chryson's views. "She knew my beliefs," Chryson said. "The entire state knew my beliefs. I wasn't afraid of being on the news, on camera speaking my views."

But Chryson believes she trusted his judgment because he accurately predicted what life on the City Council would be like. "We were telling her, 'This is probably what's going to happen,'" he said. "'The city is going to give this many people raises, they're going to pave everybody's roads, and they're going to pave the City Council members' roads.' We couldn't have scripted it better because everything we predicted came true."

After intense evangelizing by Chryson and his allies, they claimed Palin as a convert. "When she started taking her job seriously," Chryson said, "the people who put her in as the rubber stamp found out the hard way that she was not going to go their way." In 1994, Sarah Palin attended the AIP's statewide convention. In 1995, her husband, Todd, changed his voter registration to AIP. Except for an interruption of a few months, he would remain registered was an AIP member until 2002, when he changed his registration to undeclared.

In 1996, Palin decided to run against John Stein as the Republican candidate for mayor of Wasilla. While Palin pushed back against Stein's policies, particularly those related to funding public works, Chryson said he and Steve Stoll prepared the groundwork for her mayoral campaign.

Chryson and Stoll viewed Palin's ascendancy as a vehicle for their own political ambitions. "She got support from these guys," Stein remarked. "I think smart politicians never utter those kind of radical things, but they let other people do it for them. I never recall Sarah saying she supported the militia or taking a public stand like that. But these guys were definitely behind Sarah, thinking she was the more conservative choice."

"They worked behind the scenes," said Stein. "I think they had a lot of influence in terms of helping with the back-scatter negative campaigning."

Indeed, Chryson boasted that he and his allies urged Palin to focus her campaign on slashing character-based attacks. For instance, Chryson advised Palin to paint Stein as a sexist who had told her "to just sit there and look pretty" while she served on Wasilla's City Council. Though Palin never made this accusation, her 1996 campaign for mayor was the most negative Wasilla residents had ever witnessed.

While Palin played up her total opposition to the sales tax and gun control -- the two hobgoblins of the AIP -- mailers spread throughout the town portraying her as "the Christian candidate," a subtle suggestion that Stein, who is Lutheran, might be Jewish. "I watched that campaign unfold, bringing a level of slime our community hadn't seen until then," recalled Phil Munger, a local music teacher who counts himself as a close friend of Stein.

"This same group [Stoll and Chryson] also [publicly] challenged me on whether my wife and I were married because she had kept her maiden name," Stein bitterly recalled. "So we literally had to produce a marriage certificate. And as I recall, they said, 'Well, you could have forged that.'"

When Palin won the election, the men who had once shouted anti-government slogans outside City Hall now had a foothold inside the mayor's office. Palin attempted to pay back her newfound pals during her first City Council meeting as mayor. In that meeting, on Oct. 14, 1996, she appointed Stoll to one of the City Council's two newly vacant seats. But Palin was blocked by the single vote of then-Councilman Nick Carney, who had endured countless rancorous confrontations with Stoll and considered him a "violent" influence on local politics. Though Palin considered consulting attorneys about finding another means of placing Stoll on the council, she was ultimately forced to back down and accept a compromise candidate.

Emboldened by his nomination by Mayor Palin, Stoll later demanded she fire Wasilla's museum director, John Cooper, a personal enemy he longed to sabotage. Palin obliged, eliminating Cooper's position in short order. "Gotcha, Cooper!" Stoll told the deposed museum director after his termination, as Cooper told a reporter for the New York Times. "And it only cost me a campaign contribution." Stoll, who donated $1,000 to Palin's mayoral campaign, did not respond to numerous requests for an interview. Palin has blamed budget concerns for Cooper's departure.

The following year, when Carney proposed a local gun-control measure, Palin organized with Chryson to smother the nascent plan in its cradle. Carney's proposed ordinance would have prohibited residents from carrying guns into schools, bars, hospitals, government offices and playgrounds. Infuriated by the proposal that Carney viewed as a common-sense public-safety measure, Chryson and seven allies stormed a July 1997 council meeting.

With the bill still in its formative stages, Carney was not even ready to present it to the council, let alone conduct public hearings on it. He and other council members objected to the ad-hoc hearing as "a waste of time." But Palin -- in plain violation of council rules and norms -- insisted that Chryson testify, stating, according to the minutes, that "she invites the public to speak on any issue at any time."

When Carney tried later in the meeting to have the ordinance discussed officially at the following regular council meeting, he couldn't even get a second. His proposal died that night, thanks to Palin and her extremist allies.

"A lot of it was the ultra-conservative far right that is against everything in government, including taxes," recalled Carney. "A lot of it was a personal attack on me as being anti-gun, and a personal attack on anybody who deigned to threaten their authority to carry a loaded firearm wherever they pleased. That was the tenor of it. And it was being choreographed by Steve Stoll and the mayor."

Asked if he thought it was Palin who had instigated the turnout, he replied: "I know it was."

By Chryson's account, he and Palin also worked hand-in-glove to slash property taxes and block a state proposal that would have taken money for public programs from the Permanent Fund Dividend, or the oil and gas fund that doles out annual payments to citizens of Alaska. Palin endorsed Chryson's unsuccessful initiative to move the state Legislature from Juneau to Wasilla. She also lent her support to Chryson's crusade to alter the Alaska Constitution's language on gun rights so cities and counties could not impose their own restrictions. "It took over 10 years to get that language written in," Chryson said. "But Sarah [Palin] was there supporting it."

"With Sarah as a mayor," said Chryson, "there were a number of times when I just showed up at City Hall and said, 'Hey, Sarah, we need help.' I think there was only one time when I wasn't able to talk to her and that was because she was in a meeting."

Chryson says the door remains open now that Palin is governor. (Palin's office did not respond to Salon's request for an interview.) While Palin has been more circumspect in her dealings with groups like the AIP as she has risen through the political ranks, she has stayed in touch.

When Palin ran for governor in 2006, marketing herself as a fresh-faced reformer determined to crush the GOP's ossified power structure, she made certain to appear at the AIP's state convention. To burnish her maverick image, she also tapped one-time AIP member and born-again Republican Walter Hickel as her campaign co-chair. Hickel barnstormed the state for Palin, hailing her support for an "all-Alaska" liquefied gas pipeline, a project first promoted in 2002 by an AIP gubernatorial candidate named Nels Anderson. When Palin delivered her victory speech on election night, Hickel stood beaming by her side. "I made her governor," he boasted afterward. Two years later, Hickel has endorsed Palin's bid for vice president.

Just months before Palin burst onto the national stage as McCain's vice-presidential nominee, she delivered a videotaped address to the AIP's annual convention. Her message was scrupulously free of secessionist rhetoric, but complementary nonetheless. "I share your party's vision of upholding the Constitution of our great state," Palin told the assembly of AIP delegates. "My administration remains focused on reining in government growth so individual liberty can expand. I know you agree with that ... Keep up the good work and God bless you."

When Palin became the Republican vice-presidential nominee, her attendance of the 1994 and 2006 AIP conventions and her husband's membership in the party (as well as Palin's videotaped welcome to the AIP's 2008 convention) generated a minor controversy. Chryson claimed, however, that Sarah and Todd Palin never even played a minor role in his party's internal affairs. "Sarah's never been a member of the Alaskan Independence Party," Chryson insisted. "Todd has, but most of rural Alaska has too. I never saw him at a meeting. They were at one meeting I was at. Sarah said hello, but I didn't pay attention because I was taking care of business."

But whether the Palins participated directly in shaping the AIP's program is less relevant than the extent to which they will implement that program. Chryson and his allies have demonstrated just as much interest in grooming major party candidates as they have in putting forward their own people. At a national convention of secessionist groups in 2007, AIP vice chairman Dexter Clark announced that his party would seek to "infiltrate" the Democratic and Republican parties with candidates sympathetic to its hard-right, secessionist agenda. "You should use that tactic. You should infiltrate," Clark told his audience of neo-Confederates, theocrats and libertarians. "Whichever party you think in that area you can get something done, get into that party. Even though that party has its problems, right now that is the only avenue."

Clark pointed to Palin's political career as the model of a successful infiltration. "There's a lot of talk of her moving up," Clark said of Palin. "She was a member [of the AIP] when she was mayor of a small town, that was a nonpartisan job. But to get along and to go along she switched to the Republican Party … She is pretty well sympathetic because of her membership."

Clark's assertion that Palin was once a card-carrying AIP member was swiftly discredited by the McCain campaign, which produced records showing she had been a registered Republican since 1988. But then why would Clark make such a statement? Why did he seem confident that Palin was a true-blue AIP activist burrowing within the Republican Party? The most salient answer is that Palin was once so thoroughly embedded with AIP figures like Chryson and Stoll and seemed so enthusiastic about their agenda, Clark may have simply assumed she belonged to his party.

Now, Palin is a household name and her every move is scrutinized by the Washington press corps. She can no longer afford to kibitz with secessionists, however instrumental they may have been to her meteoric ascendancy. This does not trouble her old AIP allies. Indeed, Chryson is hopeful that Palin's inauguration will also represent the start of a new infiltration.

"I've had my issues but she's still staying true to her core values," Chryson concluded. "Sarah's friends don't all agree with her, but do they respect her? Do they respect her ideology and her values? Definitely."

The Palins' un-American activities

Imagine if the Obamas had hooked up with a violently anti-American group in league with the government of Iran.

By David Talbot
Salon.com

"My government is my worst enemy. I'm going to fight them with any means at hand."

This was former revolutionary terrorist Bill Ayers back in his old Weather Underground days, right? Imagine what Sarah Palin is going to do with this incendiary quote as she tears into Barack Obama this week.

Only one problem. The quote is from Joe Vogler, the raging anti-American who founded the Alaska Independence Party. Inconveniently for Palin, that's the very same secessionist party that her husband, Todd, belonged to for seven years and that she sent a shout-out to as Alaska governor earlier this year. ("Keep up the good work," Palin told AIP members. "And God bless you.")

AIP chairwoman Lynette Clark told me recently that Sarah Palin is her kind of gal. "She's Alaskan to the bone ... she sounds just like Joe Vogler."

So who are these America-haters that the Palins are pallin' around with?

Before his strange murder in 1993, party founder Vogler preached armed insurrection against the United States of America. Vogler, who always carried a Magnum with him, was fond of saying, "When the [federal] bureaucrats come after me, I suggest they wear red coats. They make better targets. In the federal government are the biggest liars in the United States, and I hate them with a passion. They think they own [Alaska]. There comes a time when people will choose to die with honor rather than live with dishonor. That time may be coming here. Our goal is ultimate independence by peaceful means under a minimal government fully responsive to the people. I hope we don't have to take human life, but if they go on tramping on our property rights, look out, we're ready to die."

This quote is from "Coming Into the Country," by John McPhee, who traipsed around Alaska's remote gold mining country with Vogler for his 1991 book. The violent-tempered secessionist vowed to McPhee that if any federal official tried to stop him from polluting Alaska's rivers with his earth-moving equipment, he would "run over him with a Cat and turn mosquitoes loose on him while he dies."

Vogler wasn't just a blowhard either. He put his secessionist ideas into action, working to build AIP membership to 20,000 -- an impressive figure by Alaska standards -- and to elect party member Walter Hickel as governor in 1990.

Vogler's greatest moment of glory was to be his 1993 appearance before the United Nations to denounce United States "tyranny" before the entire world and to demand Alaska's freedom. The Alaska secessionist had persuaded the government of Iran to sponsor his anti-American harangue.

That's right ... Iran. The Islamic dictatorship. The taker of American hostages. The rogue nation that McCain and Palin have excoriated Obama for suggesting we diplomatically engage. That Iran.

AIP leaders allege that Vogler, who was murdered that year by a fellow secessionist, was taken out by powerful forces in the U.S. before he could reach his U.N. platform. "The United States government would have been deeply embarrassed," by Vogler's U.N. speech, darkly suggests Clark. "And we can't have that, can we?"

The Republican ticket is working hard this week to make Barack Obama's tenuous connection to graying, '60s revolutionary Bill Ayers a major campaign issue. But the Palins' connection to anti-American extremism is much more central to their political biographies.

Imagine the uproar if Michelle Obama was revealed to have joined a black nationalist party whose founder preached armed secession from the United States and who enlisted the government of Iran in his cause? The Obama campaign would probably not have survived such an explosive revelation. Particularly if Barack Obama himself was videotaped giving the anti-American secessionists his wholehearted support just months ago.

Where's the outrage, Sarah Palin has been asking this week, in her attacks on Obama's fuzzy ties to Ayers? The question is more appropriate when applied to her own disturbing associations.

How AIG's Collapse Began a Global Run on the Banks

by Porter Stansberry
DailyWealth.com

Something very strange is happening in the financial markets. And I can show you what it is and what it means...

If September didn't give you enough to worry about, consider what will happen to real estate prices as unemployment grows steadily over the next several months. As bad as things are now, they'll get much worse.

They'll get worse for the obvious reason: because more people will default on their mortgages. But they'll also remain depressed for far longer than anyone expects, for a reason most people will never understand.

What follows is one of the real secrets to September's stock market collapse. Once you understand what really happened last month, the events to come will be much clearer to you...

Every great bull market has similar characteristics. The speculation must – at the beginning – start with a reasonably good idea. Using long-term mortgages to pay for homes is a good idea, with a few important caveats.

Some of these limitations are obvious to any intelligent observer... like the need for a substantial down payment, the verification of income, an independent appraisal, etc. But human nature dictates that, given enough time and the right incentives, any endeavor will be corrupted. This is one of the two critical elements of a bubble. What was once a good idea becomes a farce. You already know all the stories of how this happened in the housing market, where loans were eventually given without fixed rates, without income verification, without down payments, and without legitimate appraisals.

As bad as these practices were, they would not have created a global financial panic without the second, more critical element. For things to get really out of control, the farce must evolve further... into fraud.

And this is where AIG comes into the story.

Around the world, banks must comply with what are known as Basel II regulations. These regulations determine how much capital a bank must maintain in reserve. The rules are based on the quality of the bank's loan book. The riskier the loans a bank owns, the more capital it must keep in reserve. Bank managers naturally seek to employ as much leverage as they can, especially when interest rates are low, to maximize profits. AIG appeared to offer banks a way to get around the Basel rules, via unregulated insurance contracts, known as credit default swaps.

Here's how it worked: Say you're a major European bank... You have a surplus of deposits, because in Europe people actually still bother to save money. You're looking for something to maximize the spread between what you must pay for deposits and what you're able to earn lending. You want it to be safe and reliable, but also pay the highest possible annual interest. You know you could buy a portfolio of high-yielding subprime mortgages. But doing so will limit the amount of leverage you can employ, which will limit returns.

So rather than rule out having any high-yielding securities in your portfolio, you simply call up the friendly AIG broker you met at a conference in London last year.

"What would it cost me to insure this subprime security?" you inquire. The broker, who is selling a five-year policy (but who will be paid a bonus annually), says, "Not too much." After all, the historical loss rates on American mortgages is close to zilch.

Using incredibly sophisticated computer models, he agrees to guarantee the subprime security you're buying against default for five years for say, 2% of face value.

Although AIG's credit default swaps were really insurance contracts, they weren't regulated. That meant AIG didn't have to put up any capital as collateral on its swaps, as long as it maintained a triple-A credit rating. There was no real capital cost to selling these swaps; there was no limit. And thanks to what's called "mark-to-market" accounting, AIG could book the profit from a five-year credit default swap as soon as the contract was sold, based on the expected default rate.

Whatever the computer said AIG was likely to make on the deal, the accountants would write down as actual profit. The broker who sold the swap would be paid a bonus at the end of the first year – long before the actual profit on the contract was made.

With this structure in place, the European bank was able to assure its regulators it was holding only triple-A credits, instead of a bunch of subprime "toxic waste." The bank could leverage itself to the full extent allowable under Basel II. AIG could book hundreds of millions in "profit" each year, without having to pony up billions in collateral.

It was a fraud. AIG never any capital to back up the insurance it sold. And the profits it booked never materialized. The default rate on mortgage securities underwritten in 2005, 2006, and 2007 turned out to be multiples higher than expected. And they continue to increase. In some cases, the securities the banks claimed were triple A have ended up being worth less than $0.15 on the dollar.

Even so, it all worked for years. Banks leveraged deposits to the hilt. Wall Street packaged and sold dumb mortgages as securities. And AIG sold credit default swaps without bothering to collateralize the risk. An enormous amount of capital was created out of thin air and tossed into global real estate markets.

On September 15, all of the major credit-rating agencies downgraded AIG – the world's largest insurance company. At issue were the soaring losses in its credit default swaps. The first big writeoff came in the fourth quarter of 2007, when AIG reported an $11 billion charge. It was able to raise capital once, to repair the damage. But the losses kept growing. The moment the downgrade came, AIG was forced to come up with tens of billions of additional collateral, immediately. This was on top of the billions it owed to its trading partners. It didn't have the money. The world's largest insurance company was bankrupt.

The dominoes fell over immediately. Lehman Brothers failed on the same day. Merrill was sold to Bank of America. The Fed stepped in and agreed to lend AIG $85 billion to facilitate an orderly sell off of its assets in exchange for essentially all the company's equity.

Most people never understood how AIG was the linchpin to the entire system. And there's one more secret yet to come out...

AIG's largest trading partner wasn't a nameless European bank. It was Goldman Sachs.

I'd wondered for years how Goldman avoided the kind of huge mortgage-related writedowns that plagued all the other investment banks. And now we know: Goldman hedged its exposure via credit default swaps with AIG. Sources inside Goldman say the company's exposure to AIG exceeded $20 billion, meaning the moment AIG was downgraded, Goldman had to begin marking down the value of its assets. And the moment AIG went bankrupt, Goldman lost $20 billion. Goldman immediately sought out Warren Buffett to raise $5 billion of additional capital, which also helped it raise another $5 billion via a public offering.

The collapse of the credit default swap market also meant the investment banks – all of them – had no way to borrow money, because no one would insure their obligations.

To fund their daily operations, they've become totally reliant on the Federal Reserve, which has allowed them to formally become commercial banks. To date, banks, insurance firms, and investment banks have borrowed $348 billion from the Federal Reserve – nearly all of this lending took place following AIG's failure. Things are so bad at the investment banks, the Fed had to change the rules to allow Merrill, Morgan Stanley, and Goldman the ability to use equities as collateral for these loans, an unprecedented step.

The mainstream press hasn't reported this either: A provision in the $700 billion bailout bill permits the Fed to pay interest on the collateral it's holding, which is simply a way to funnel taxpayer dollars directly into the investment banks.

Why do you need to know all of these details? First, you must understand that without the government's actions, the collapse of AIG could have caused every major bank in the world to fail.

Second, without the credit default swap market, there's no way banks can report the true state of their assets – they'd all be in default of Basel II. That's why the government will push through a measure that requires the suspension of mark-to-market accounting. Essentially, banks will be allowed to pretend they have far higher-quality loans than they actually do. AIG can't cover for them anymore.

And third, and most importantly, without the huge fraud perpetrated by AIG, the mortgage bubble could have never grown as large as it did. Yes, other factors contributed, like the role of Fannie and Freddie in particular. But the key to enabling the huge global growth in credit during the last decade can be tied directly to AIG's sale of credit default swaps without collateral. That was the barn door. And it was left open for nearly a decade.

There's no way to replace this massive credit-building machine, which makes me very skeptical of the government's bailout plan. Quite simply, we can't replace the credit that existed in the world before September 15 because it didn't deserve to be there in the first place. While the government can, and certainly will, paper over the gaping holes left by this enormous credit collapse, it can't actually replace the trust and credit that existed... because it was a fraud.

And that leads me to believe the coming economic contraction will be longer and deeper than most people understand.

You might find this strange... but this is great news for those who understand what's going on. Knowing why the economy is shrinking and knowing it's not going to rebound quickly gives you a huge advantage over most investors, who don't understand what's happening and can't plan to take advantage of it.

How can you take advantage? First, make sure you have at least 10% of your net worth in precious metals. I prefer gold bullion. World governments' gigantic liabilities will vastly decrease the value of paper currencies.

Second, I can tell you we're either at or approaching a moment of maximum pessimism in the markets. These kinds of panics give you the chance to buy world-class businesses incredibly cheaply. A few worth mentioning are ExxonMobil, Intel, and Microsoft. I have several stocks like these in the portfolio of my Investment Advisory.
Third, if you're comfortable short selling stocks (betting they'll fall in price), now is the time to be doing it... simply as a hedge against further declines.

Keep the fraud of AIG in mind when you form your investment plan for the coming years. By following these three strategies, you'll survive and prosper while most investors sit back and wonder what the hell is going on.

Good investing,

Porter Stansberry

US court orders deportation of Hafiz Saeed’s brother

by Khalid Hasan
Daily Times (Pakistan)

WASHINGTON: Imam Muhammad Masood, brother of Hafiz Muhammad Saeed, founder of the banned Lashkar-e-Tayyaba, was ordered deported by a Boston, Massachusetts court on Thursday on an immigration violation charge.

Under an agreement with federal immigration authorities, the former imam of the 1,500-member Islamic Centre of New England agreed to voluntarily leave the United States on Friday night and return to Pakistan rather than be deported by the authorities which would have taken months, a period he would have spent in jail. He was accused of having lied to immigration authorities from 2002 to 2006 in a bid to obtain a Green Card. He pleaded guilty in February to five federal crimes stemming from his actions, which led to his deportation order. He will leave behind his wife and eight children.

Imam Masood came to the US in 1987 under a special visa for exchange students. He enrolled at Vanderbilt University and transferred to Boston University a year later to study economics. He became the imam of the Sharon mosque in 1998. In December 2002, Masood admitted that he had falsely told authorities in an application for permanent legal residency that he returned to Pakistan from 1991 to 1993 after completing his studies. Immigrants with the kind of visa Masood had are required by law to return to their country of origin for two years before they can apply for a Green Card. Masood said he never left Boston. He also admitted falsely denying to immigration authorities that he had been arrested for any crimes. He was arrested for alleged shoplifting in Norwood in 2000. The charge was dismissed.