Iranian Sanctions: Does Obama Plan to Jerk the Chinese Economic Chain?

Article: China: Crunch Time by By Peter Zeihan, Strategic Forecasting March 30, 2010

The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers. It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship.

Political Season Takeway: If Ziehan is accurate, China's economy is extremely vunerable to unilateral retalitation by the United States for China's currency manipulation by simply pinching off China's access to the US market.  China's holding of massive amounts of US debt and the threat of not purchasing more is not really a counter either because those debt purchases fuel US demand for China's exports, which they can't afford to have dramatically reduced.  The Obama administration's rhetoric on Chinese economic policy may mean a US-China economic showdown over the yuan is on a slow boil to either a confrontation or a caving accomodation of some sort by China, economically or on the foreign policy front, as in Iranian sanctions.

The Obama Administration: A Schizophrenic Client State of the Banking Industry

That's essentially the position of Yves Smith at the blog Naked Capitalism.  You've gotta love the cats at this blog, who routinely and with great vigor expose the ridiculous logic, misdirection and wrongheaded strategic ideas that has been the Obama administrations unfettered catering to the banking industry.

Yves makes the case:

"While I cannot fathom the logic, Team Obama clearly decided to throw in its hat with the industry from the beginning, supporting a whole raft of tricks to keep banks from recognizing losses (heavens, might expose that some were bankrupt and require that incumbents be given the heave ho!). It also assisted in the “talk up the bank stocks” effort, since goosing prices would allow some banks to sell shares and save the new Administration the unpleasant task of figuring out how to resolve and recapitalize the sickest bank. It never seemed to occur to them that the best time for a President to take unpopular but productive action is at the start of his tenure. Nor did they anticipate that the public was not as dumb and inattentive as they assumed, and has taken notice of how the Administration has hitched its wagon to that of the plutocrats."

Yves's makes the point that keeps going unmentioned in much of the mainstream media coverage of banks who repaid TARP funds and the reports of improved performance by the industry.

"The banks got massive subsidies during and after the crisis; they continue now with the Fed’s super low rates and continued intervention in the mortgage markets (theoretically ending in March, but most informed observers expect the central bank to blink)."

Yves' goes on to point out that now the Obama administration is caught between a crock and a hard farce, being completely sold out to the industry with a body public suffering mightily while they watched the architects of the financial crisis grow fat by socializing the losses the administration is desperately working to keep them from recognizing on their books:

 "The sketchy announcement du jour, that Obama will announce a $120 billion TARP fee this week (hhm, conveniently timed to distract attention from the start of the hearings into the crisis and Wall Street bonus announcements) illustrates the bizarre position the Administration is in. Alert readers may recall that Obama was touting the performance of the TARP at his Lehman anniversary speech in September. It repeated that palaver in December. As we noted then:

Both Obama and the Treasury Department keep talking up the TARP as if it is a money maker for taxpayers, when nothing could be further from the truth. Obama tried this stunt in his anniversary of Lehman speech, and the Treasury continues with the theme, of implying that results for the firms that paid back are representative of what the final results would be. If this logic were generally true, that would mean subprime bonds were a good investment too. After all, most borrowers did make good on their mortgages. A late September Moodys mortgage survey that a reader sent me estimated that total losses on subprime RMBS will be about 26%, which means that 74% were money good. The problem with the Treasury/Obama three card monte is that the strongest TARP are the ones that paid off first. Things can only go downhill from here. Do you expect AIG to repay the TARP in full? Or the auto companies?"

Yves's succinctly sums up "the PR corner that Team Obama has painted itself in. It isn’t willing to do the UK thing and decry banker bonuses as irresponsible and unwarranted. It had Kenneth Feinberg, the pay czar, take a few scalps, but it was clear the Adminsitration had no intention of challenging the financial industry’s right to loot and pillage. It isn’t even willing to say the profits are due almost entirely to subsidies, hence a windfall profits tax (presumably one focused on capital markets operations, that’s where the real juice is) is in order. Heavens, that might lead chump investors to question bank valuations and sell stocks! Horrors, can’t have prices that reflect fundamentals when the Administration has been pointing to the improvement in the financial markets as proof its policies are working.So the finesse is now to admit, in a reversal of its recent posturing, that yes Virginia, the TARP is losing money"
 
The Obama administration is selling fake economic recovery fumes as though they were the aroma of an energetically healing economy, talking up improved bank performance in some quarters.  Really? The Fed is selling banks money at effectively zero percent interest, which they are relending at 5% and up.  That's a little bit of arbitrage my 7 year old Noah could do. On top of that, the executive is using the Treasury, the Fed, the tax code and every tool at their disposal to prevent banks from recognizing losses and help them recapitalize (capital they then hoard or do acquisitions with, not lend).  When the government is actually forcing you to take money (TARP) and finding any way it can to subsidize your industry, its hard not to make a few bucks.  But Americans aren't stupid and the Obama administration is at some point going to run out of room to play both sides of the economic blame game.

Backdoor Bank Bailout: Obama's Capitalist Cronyism

The blog Naked Capitalism takes note that on Christmas Eve, the Treasury Department announced it had... considerably increased its Freddie and Fannie safety net, by removing all limits on the amounts on offer (an increase from a ceiling of $400 billion) and simultaneously allowing the two GSEs to increase their balance sheets near term. Previously, they had been required to shrink their portfolios by 10% per annum; now it is their ceiling which will be lowered by 10% a year, and that ceiling is much higher than their current exposures ($900 billion versus roughly $760 billion for Freddie and $770 billion for Fannie as of the end of November).

The proper interpretation of these events is succinctly laid out by Edward Harrison at the Credit Writedowns blog, to wit....Fannie Mae and Freddie Mac would be used as a nationalization of America’s mortgage problems via a back door bailout of banks. The evidence, therefore, tends to demonstrate that we have witnessed an orchestrated campaign by the Bush and Obama Administrations to recapitalize too big to fail institutions by hook or by crook, bypassing Congressional approval if necessary.

I'm open to a hearing of the argument that what the administration has done and is doing is justifiable, however Harrison further points out some really objectionable elements about this back door stealth bailout:
 
they do not eliminate the moral hazard that was complicit in creating the mess in the first place. His plan is also very political. It protects debt holders like China’s central bank, which holds $400 billion in GSE debt. It protects foreign central banks generally, as they hold $1 1/2 trillion in GSE debt. It protects the likes of Bill Gross, who took a calculated risk in feasting on GSE debt, betting that such a plan was likely to happen. The plan does not wipe out equity capital, nor does it wipe out preferred equity holders entirely. These capital classes should bear all of the initial risk to future capital losses, not U.S. taxpayers.
 
Obama talks a good game about not coming to Washington to enrich fat cat Wall Street bankers, but the Wall Street crowd is feasting, nay, absolutely gorging itself on taxpayer largesse dispensed by Bush and Obama underlings Paulson and now Geithner. 

Hypothesizing on the Iran-Russia-U.S. Triangle

By George Friedman ~ Honorary Political Season Contributor

A Net Assessment Re-examined

For the past several weeks, STRATFOR has focused on therelationship between Russia and Iran. As our readers will recall, a pro-Rafsanjani demonstration that saw chants of “Death to Russia,” uncommon in Iran since the 1979 revolution, triggered our discussion. It caused us to rethink Iranian President Mahmoud Ahmadinejad’s visit to Russia just four days after Iran’s disputed June 12 presidential election, with large-scale demonstrations occurring in Tehran. At the time, we ascribed Ahmadinejad’s trip as an attempt to signal his lack of concern at the postelection unrest. But why did a pro-Rafsanjani crowd chant “Death to Russia?” What had the Russians done to trigger the bitter reaction from the anti-Ahmadinejad faction? Was the Iranian president’s trip as innocent as it first looked?

At STRATFOR, we proceed with what we call a “net assessment,” a broad model intended to explain the behavior of all players in a game. Our net assessment of Iran had the following three components:

1. Despite the rhetoric, the Iranian nuclear program was far from producing adeliverable weapon, although a test explosion within a few years was a distinct possibility.
2. Iran essentially was isolated in the international community, with major powers’ feelings toward Tehran ranging from hostile to indifferent. Again, rhetoric aside, this led Iran to a cautious foreign policy designed to avoid triggering hostility.
3. Russia was the most likely supporter of Iran, but Moscow would avoid becoming overly involved out of fears of the U.S. reaction, of uniting a fractious Europe with the United States and of being drawn into a literally explosive situation. The Russians, we felt, would fish in troubled waters, but would not change the regional calculus.

This view — in short, that Iran was contained — remained our view for about three years. It served us well in predicting, for example, that neither the United States nor Israel would strike Iran, and that the Russians would not transfer strategically significant weapons to Iran.

A net assessment is a hypothesis that must be continually tested against intelligence, however. The “Death to Russia” chant could not be ignored, nor could Ahmadinejad’s trip to Moscow.

As we probed deeper, we found that Iran was swirling with rumors concerning Moscow’s relationship with both Ahmadinejad and Ayatollah Ali Khamenei. Little could be drawn from the rumors. Iran today is a hothouse for growing rumors, and all our searches ended in dead ends. But then, if Ahmadinejad and Khamenei were engaging the Russians in this atmosphere, we would expect rumors and dead ends.

Interestingly, the rumors were consistent that Ahmadinejad and Khamenei wanted a closer relationship to Russia, but diverged on the Russian response. Some said the Russians already had assisted the Iranians by providing intelligence ranging from Israeli networks in Lebanon to details of U.S. and British plans to destabilize Iran through a “Green Revolution” like the color revolutions that had ripped through the former Soviet Union (FSU).

Equally interesting were our Russian sources’ responses. Normally, they are happy to talk, if only to try to mislead us. (Our Russian sources are nothing if not voluble.) But when approached about Moscow’s thinking on Iran, they went silent; this silence stood out. Normally, our sources would happily speculate — but on this subject, there was no speculation. And the disciplined silence was universal. This indicated that those who didn’t know didn’t want to touch the subject, and that those who did know were keeping secrets. None of this proved anything, but taken together, it caused us to put our net assessment for Iran on hold. We could no longer take any theory for granted.

All of the foregoing must be considered in the context of the current geopolitical system. And that is a matter of understanding what is in plain sight.

Potential Russian Responses to Washington

The U.S.-Russian summit that took place after the Iranian elections did not go well.U.S. President Barack Obama’s attempt to divide Russian President Dmitri Medvedev and Russian Prime Minister Putin did not bear fruit. The Russians were far more interested in whether Obama would change the FSU policy of former U.S. President George W. Bush. At the very least, the Russians wanted the Americans to stop supporting Ukraine’s and Georgia’s pro-Western tendencies.

But not only did Obama stick with the Bush policy, he dispatched U.S. Vice President Joe Biden to visit Ukraine and Georgia to drive home the continuity. This was followed by Biden’s interview with The Wall Street Journal, in which he essentially said the United States does not have to worry about Russia in the long run because Russia’s economic and demographic problems will undermine its power. Biden’s statements were completely consistent with the decision to send him to Georgia and Ukraine, so the Obama administration’s attempts to back away from the statement were not convincing. Certainly, the Russians were not convinced. The only conclusion the Russians could draw was that the United States regards them as a geopolitical cripple of little consequence.

If the Russians allow the Americans to poach in what Moscow regards as its sphere of influence without responding, the Russian position throughout the FSU would begin to unravel — the precise outcome the Americans hope for. So Moscow took two steps. First, Moscow heated up the military situation near Georgia on the anniversary of the first war, shifting its posture and rhetoric and causing theGeorgians to warn of impending conflict. Second, Moscow increased its strategic assertiveness, escalating the tempo of Russian air operations near the United Kingdom and Alaska, and more important, deploying two Akula-class hunter-killer submarines along the East Coast of the United States. The latter is interesting, but ultimately unimportant. Increased tensions in Georgia are indeed significant, however, since the Russians have decisive power in that arena — and can act if they wish against the country, one Biden just visited to express American support.

But even a Russian move against Georgia would not be decisive. The Americans have stated that Russia is not a country to be taken seriously, and that Washington will therefore continue to disregard Russian interests in the FSU. In other words, the Americans were threatening fundamental Russian interests. The Russians must respond, or by default, they would be accepting the American analysis of the situation — and by extension, so would the rest of the world. Obama had backed the Russians into a corner.

When we look at the geopolitical chessboard, there are two places where the Russians could really hurt the Americans.

One is Germany. If Moscow could leverage Germany out of the Western alliance, this would be a geopolitical shift of the first order. Moscow has leverage with Berlin, as the Germans depend on Russian natural gas, and the two have recently been working on linking their economies even further. Moreover, the Germans are as uneasy with Obama as they were with Bush. German and American interests no longer mesh neatly. The Russians have been courting the Germans, but a strategic shift in Germany’s position is simply not likely in any time frame that matters to the Russians at this juncture — though the leaders of the two countries are meeting once again this week in Sochi, Russia, their second meeting in as many months.

The second point where the Russians could hurt the Americans is in Iran. An isolated Iran is not a concern. An Iran with a strong relationship to Russia is a very different matter. Not only would sanctions be rendered completely meaningless, but Iran could pose profound strategic problems for the United States, potentially closing off airstrike options on Iranian nuclear facilities.

The Strait of Hormuz: Iran’s Real Nuclear Option

The real nuclear option for Iran does not involve nuclear weapons. It would involve mining the Strait of Hormuz and the narrow navigational channels that make up the Persian Gulf. During the 1980s, when Iran and Iraq were at war, both sides attacked oil tankers in the Persian Gulf. This raised havoc on oil prices and insurance rates.

If the Iranians were to successfully mine these waters, the disruption to 40 percent of the world’s oil flow would be immediate and dramatic. The nastiest part of the equation would be that in mine warfare, it is very hard to know when all the mines have been cleared. It is the risk, not the explosions, which causes insurance companies to withdraw insurance on vastly expensive tankers and their loads. It is insurance that allows the oil to flow.

Just how many mines Iran might lay before being detected and bringing an American military response could vary by a great deal, but there is certainly the chance that Iran could lay a significant number of mines, including more modern influence mines that can take longer to clear. The estimates and calculations of minesweepers — much less of the insurers — would depend on a number of factors not available to us here. But there is the possibility that the strait could be effectively closed to supertankers for a considerable period. The effect on oil prices would be severe; it is not difficult to imagine this aborting the global recovery.

Iran would not want this outcome. Tehran, too, would be greatly affected by the economic fallout (while Iran is a net exporter of crude, it is a net importer of gasoline), and the mining would drive the Europeans and Americans together. The economic and military consequences of this would be severe. But it is this threat that has given pause to American and Israeli military planners gaming out scenarios to bomb Iranian nuclear facilities. There are thousands of small watercraft along Iran’s coast, and Iran’s response to such raids might well be to use these vessels to strew mines in the Persian Gulf — or for swarming and perhaps even suicide attacks.

Notably, any decision to attack Iran’s nuclear facilities would have to be preceded by (among other things) an attempt to neutralize Iran’s mine-laying capability — along with its many anti-ship missile batteries — in the Persian Gulf. The sequence is fixed, since the moment the nuclear sites are bombed, it would have to be assumed that the minelayers would go to work, and they would work as quickly as they could. Were anything else attacked first, taking out the Iranian mine capability would be difficult, as Iran’s naval assets would scatter and lay mines wherever and however they could — including by swarms of speedboats capable of carrying a mine or two apiece and almost impossible to engage with airpower. This, incidentally, is a leading reason why Israel cannot unilaterally attack Iran’s nuclear facilities. They would be held responsible for a potentially disastrous oil shortage. Only the Americans have the resources to even consider dealing with the potential Iranian response, because only the Americans have the possibility of keeping Persian Gulf shipping open once the shooting starts. It also indicates that an attack on Iran’s nuclear facilities would be much more complex than a sudden strike completed in one day.

The United States cannot permit the Iranians to lay the mines. The Iranians in turn cannot permit the United States to destroy their mine-laying capability. This is the balance of power that limits both sides. If Iran were to act, the U.S. response would be severe. If the United States moves to neutralize Iran, the Iranians would have to push the mines out fast. For both sides, the risks of threatening the fundamental interests of the other side are too high. Both Iran and the United States have worked to avoid this real “nuclear” option.

The Russian Existential Counter

The Russians see themselves facing an existential threat from the Americans. Whether Washington agrees with Biden or not, this is the stated American view of Russia, and by itself it poses an existential threat to Russia. The Russians need an existential counterthreat — and for the United States, that threat relates to oil. If the Russians could seriously threaten the supply of oil through the Strait of Hormuz, the United States would lose its relatively risk-free position in the FSU.

It follows from this that strengthening Iran’s ability to threaten the flow of oil, while retaining a degree of Russian control over Iran’s ability to pull the trigger, would give Russia the counter it needs to American actions in the FSU. The transfer of more advanced mines and mining systems to Iran — such as mines that can be planted now and activated remotely (though most such mines can only lay, planted and unarmed, for a limited period) to more discriminating and difficult-to-sweep types of mines — would create a situation the Americans could neither suppress nor live with. As long as the Russians could maintain covert control of the trigger, Moscow could place the United States, and the West’s economies, in check.

Significantly, while this would wreak havoc on Persian Gulf producers and global oil consumers at a time when they are highly vulnerable to economic fluctuations, a spike in the price of oil would not hurt Russia. On the contrary, Russia is an energy exporter, making it one of the few winners under this scenario. That means the Russians can afford much greater risks in this game.

We do not know that the Russians have all this in mind. This is speculation, not a net assessment. We note that if Russo-Iranian contacts are real, they would have begun well before the Iranian elections and the summit. But the American view on Russia is not new and was no secret. Therefore, the Russians could have been preparing their counter for a while.

We also do not know that the Iranians support this Russian move. Iranian distrust of Russia runs deep, and so far only the faction supporting Ahmadinejad appears to be playing this game. But the more the United States endorses what it calls Iranian reformists, and supports Rafsanjani’s position, the more Ahmadinejad needs the Russian counter. And whatever hesitations the Russians might have had in moving closer to the Iranians, recent events have clearly created a sense in Moscow of being under attack. The Russians think politically. The Russians play chess, and the U.S. move to create pressure in the FSU must be countered somewhere.

In intelligence, you must take bits and pieces and analyze them in the context of the pressures and constraints the various actors face. You know what you don’t know, but you still must build a picture of the world based on incomplete data. At a certain point, you become confident in your intelligence and analysis and you lock it into what STRATFOR calls its net assessment. We have not arrived at a new net assessment by any means. Endless facts could overthrow our hypothesis. But at a certain point, on important matters we feel compelled to reveal our hypothesis not because we are convinced, but simply because it is sufficiently plausible to us — and the situation sufficiently important — that we feel we should share it with the appropriate caveats. In this case, the stakes are very high, and the hypothesis sufficiently plausible that it is worth sharing.

The geopolitical chessboard is shifting, though many of the pieces are invisible. The end may look very different than this, but if it winds up looking this way, it is certainly worth noting.

Obama's First Hundred Days and U.S. Presidential Realities

By George Friedman -~ Honorary Political Season contributor

U.S. presidential candidates run for office as if they would be free to act however they wish once elected. But upon election, they govern as they must. The freedom of the campaign trail contrasts sharply with the constraints of reality.

The test of a president is how effectively he bridges the gap between what he said he would do and what he finds he must do. Great presidents achieve this seamlessly, while mediocre presidents never recover from the transition. All presidents make the shift, including Obama, who spent his first hundred days on this task.

Obama won the presidency with a much smaller margin than his supporters seem to believe. Despite his wide margin in the Electoral College, more than 47 percent of voters cast ballots against him. Obama was acutely aware of this and focused on making certain not to create a massive split in the country from the outset of his term. He did this in foreign policy by keeping Robert Gates on as defense secretary, bringing in Hillary Clinton, Richard Holbrooke and George Mitchell in key roles and essentially extrapolating from the Bush foreign policy. So far, this has worked. Obama’s approval rating rests at 69 percent, which The Washington Post notes is average for presidents at the hundred-day mark.

Obama, of course, came into office in circumstances he did not anticipate when he began campaigning — namely, the financial and economic crisis that really began to bite in September 2008. Obama had no problem bridging the gap between campaign and governance with regard to this matter, as his campaign neither anticipated nor proposed strategies for the crisis — it just hit. The general pattern for dealing with the crisis was set during the Bush administration, when the Treasury Department and the Federal Reserve Board put in place a strategy of infusing money into failing institutions to prevent what they feared would be a calamitous economic chain reaction.

Obama continued the Bush policy, though he added a stimulus package. But such a package had been discussed in the Bush administration, and it is unlikely that Sen. John McCain would have avoided creating one had he been elected. Obviously, the particular projects funded and the particular interests favored would differ between McCain and Obama, but the essential principle would not. The financial crisis would have been handled the same way — just as everything from the Third World debt crisis to the Savings and Loan crisis would have been handled the same way no matter who was president. Under either man, the vast net worth of the United States (we estimate it at about $350 trillion) would have been tapped by printing money and raising taxes, and U.S. assets would have been used to underwrite bad investments, increase consumption and build political coalitions through pork. Obama had no plan for this. Instead, he expanded upon the Bush administration solution and followed tradition.

The Reality of International Affairs

The manner in which Obama was trapped by reality is most clear with regard to international affairs. At the heart of Obama’s campaign was the idea that one of the major failures of the Bush administration was alienating the European allies of the United States. Obama argued that a more forthcoming approach to the Europeans would yield a more forthcoming response. In fact, the Europeans were no more forthcoming with Obama than they were with Bush.

Obama’s latest trip to Europe focused on two American demands and one European — primarily German — demand. Obama wanted the Germans to increase their economic stimulus plan because Germany is the largest exporter in the world. With the United States stimulating its economy, the Germans could solve their economic problem simply by increasing exports into the United States. This would limit job creation in the United States, particularly because German exports involve automobiles as well as other things, and Obama has struggled to build domestic demand for U.S. autos. Thus, he wanted the Germans to build domestic demand and not just rely on the United States to pull Germany out of recession. But the Germans refused, arguing that they could not afford a major stimulus now (when in fact they have no reason to be flexible, because the U.S. stimulus is going to help them no matter what Germany does).

Germany’s and France’s unwillingness to provide substantially more support in Afghanistan gave Obama a second disappointment. Some European troops were sent, but their numbers were few and their mission was limited to a very short period. (In some cases, the European force contribution will focus on training indigenous police officers, which will take a year or more to really have an impact.) The French and Germans essentially were as unwilling to deal with Obama as they were with Bush on this matter.

The Europeans, on the other hand, wanted a major effort by the International Monetary Fund (IMF). The Central European banking system, largely owned by banks from more established European countries, has reached a crisis state because of aggressive lending policies. The Germans in particular don’t want to bail out these banks; they want the IMF to do so. Put differently, they want the United States, China and Japan to help underwrite the European banking system. Obama did agree to contribute to this effort, but not nearly on the scale the Europeans wanted.

On the whole, the Europeans gave two big nos, while the Americans gave a mild yes. In substantive terms, the U.S.-European relationship is no better than it was under Bush. In terms of perception, however, the Obama administration managed a brilliant coup, shifting the focus to the changed atmosphere that prevailed at the meeting. Indeed, all parties wanted to emphasize the atmospherics, and judging from media coverage, they succeeded. The trip accordingly was perceived as a triumph.

Campaign Promises and Public Perception

This is not a trivial achievement. There are campaign promises, there is reality and there is public perception. All presidents must move from campaigning to governing; extremely skilled presidents manage the shift without appearing duplicitous. At least in the European case, Obama has managed the shift without suffering political damage. His core supporters appear prepared to support him independent of results. And that is an important foundation for effective governance.

We can see the same continuity in his treatment of Russia. When he ran for president, Obama pledged to abandon the U.S. ballistic missile defense (BMD) deployment in Poland amid a great show made about resetting U.S. Russia policy. On taking office, however, he encountered the reality of the Russian position, which is that Russia wants to be the pre-eminent power in the former Soviet Union. The Bush administration took the position that the United States must be free to maintain bilateral relations with any country, to include the ability to extend NATO membership to interested countries. Obama has reaffirmed this core U.S. position.

The United States has asked for Russian help in two areas. First, Washington asked for a second supply line into Afghanistan. Moscow agreed so long as no military equipment was shipped in. Second, Washington offered to withdraw its BMD system from Poland in return for help from Moscow in blocking Iran’s development of nuclear weapons and missiles. The Russians refused, understanding that the offer on BMD was not worth removing a massive thorn (i.e., Iran) from the Americans’ side.

In other words, U.S.-Russian relations are about where they were in the Bush administration, and Obama’s substantive position is not materially different from the Bush administration’s position. The BMD deal remains in place, the United States is not depending on Russian help on logistics in Afghanistan, and Washington has not backed off on the principle of NATO expansion (even if expansion is most unlikely).

In Iraq, Obama has essentially followed the reality created under the Bush administration, shifting withdrawal dates somewhat but following the Petraeus strategy there and extending it — or trying to extend it — to Afghanistan. The Pakistani problem, of course, presents the greatest challenge (as it would have for any president), and Obama is coping with it to the extent possible.

Obama’s managing of perceptions as opposed to actually making policy changes shows up most clearly in regard to Iran. Obama tried to open the door to Tehran by indicating that he was prepared to talk to the Iranians without preconditions — that is, without any prior commitment on the part of the Iranians regarding nuclear development. The Iranians reacted by rejecting the opening, essentially saying Obama’s overture was merely a gesture, not a substantial shift in American policy. The Iranians are, of course, quite correct in this. Obama fully understands that he cannot shift policy on Iran without a host of regional complications. For example, the Saudis would be enormously upset by such an opening, while the Syrians would have to re-evaluate their entire position on openings to Israel and the United States. Changing U.S. Iranian policy is hard to do. There is a reason Washington has the policy it does, and that reason extends beyond presidents and policymakers.

When we look at Obama’s substantive foreign policy, we see continuity rather than changes. Certainly, the rhetoric has changed, and that is not insignificant; atmospherics do play a role in foreign affairs. Nevertheless, when we look across the globe, we see the same configuration of relationships, the same partners, the same enemies and the same ambiguity that dominates most global relations.

Turkey and the Substantial U.S. Shift

One substantial shift has taken place, however, and that one is with Turkey. The Obama administration has made major overtures to Turkey in multiple forms, from a presidential visit to putting U.S. anti-piracy vessels under Turkish command. These are not symbolic moves. The United States needs Turkey to counterbalance Iran, protect U.S. interests in the Caucasus, help stabilize Iraq, serve as a bridge to Syria and help in Afghanistan. Obama has clearly shifted strategy here in response to changing conditions in the region.

Intriguingly, the change in U.S.-Turkish relations never surfaced as even a minor issue during the U.S. presidential campaign. It emerged after the election because of changes in the configuration of the international system. Shifts in Russian policy, the U.S. withdrawal from Iraq and shifts within Turkey that allowed the country to begin its return to the international arena all came together to make this necessary, and Obama responded.

None of this is designed to denigrate Obama in the least. While many of his followers may be dismayed, and while many of his critics might be unwilling to notice, the fact is that a single concept dominated Obama’s first hundred days: continuity. In the face of the realities of his domestic political position and the U.S. strategic position, as well as the economic crisis, Obama did what he had to do, and what he had to do very much followed from what Bush did. It is fascinating that both Obama’s supporters and his critics think he has made far more changes than he really has.

Of course, this is only the first hundred days. Presidents look for room to maneuver after they do what they need to do in the short run. Some presidents use that room to pursue policies that weaken, and even destroy, their presidencies. Others find ways to enhance their position. But normally, the hardest thing a president faces is finding the space to do the things he wants to do rather than what he must do. Obama came through the first hundred days following the path laid out for him. It is only in Turkey where he made a move that he wasn’t compelled to make just now, but that had to happen at some point. It will be interesting to see how many more such moves he makes.

Banks Reporting Profits: Are You Kidding Me?

If you pumped into my bank account the tens of billions of dollars the Bush and now the Obama administration have pumped into the banks, I'd show a profit too. How can these so-called "profits" be taken seriously?

Update: Oh yeah, I forgot to mention that banks are also borrowing from the Fed at 0% and selling at 4-7%. Again, give me some of that action and I'll turn a profit too.

Obama's Strategy and the Summits

By George Friedman ~ Honorary Political Season Contributor

The weeklong extravaganza of G-20, NATO, EU, U.S. and Turkey meetings has almost ended. The spin emerging from the meetings, echoed in most of the media, sought to portray the meetings as a success and as reflecting a re-emergence of trans-Atlantic unity.

The reality, however, is that the meetings ended in apparent unity because the United States accepted European unwillingness to compromise on key issues. U.S. President Barack Obama wanted the week to appear successful, and therefore backed off on key issues; the Europeans did the same. Moreover, Obama appears to have set a process in motion that bypasses Europe to focus on his last stop: Turkey.

Berlin, Washington and the G-20

Let’s begin with the G-20 meeting, which focused on the global financial crisis. As we said last year, there were many European positions, but the United States was reacting to Germany’s. Not only is Germany the largest economy in Europe, it is the largest exporter in the world. Any agreement that did not include Germany would be useless, whereas an agreement excluding the rest of Europe but including Germany would still be useful.

Two fundamental issues divided the United States and Germany. The first was whether Germany would match or come close to the U.S. stimulus package. The United States wanted Germany to stimulate its own domestic demand. Obama feared that if the United States put a stimulus plan into place, Germany would use increased demand in the U.S. market to expand its exports. The United States would wind up with massive deficits while the Germans took advantage of U.S. spending, thus letting Berlin enjoy the best of both worlds. Washington felt it had to stimulate its economy, and that this would inevitably benefit the rest of the world. But Washington wanted burden sharing. Berlin, quite rationally, did not. Even before the meetings, the United States dropped the demand — Germany was not going to cooperate.

The second issue was the financing of the bailout of the Central European banking system, heavily controlled by eurozone banks and part of the EU financial system. The Germans did not want an EU effort to bail out the banks. They wanted the International Monetary Fund (IMF) to bail out a substantial part of the EU financial system instead. The reason was simple: The IMF receives loans from the United States, as well as China and Japan, meaning the Europeans would be joined by others in underwriting the bailout. The United States has signaled it would be willing to contribute $100 billion to the IMF, of which a substantial portion would go to Central Europe. (Of the current loans given by the IMF, roughly 80 percent have gone to the struggling economies in Central Europe.) The United States therefore essentially has agreed to the German position.

Later at the NATO meeting, the Europeans — including Germany — declined to send substantial forces to Afghanistan. Instead, they designated a token force of 5,000, most of whom are scheduled to be in Afghanistan only until the August elections there, and few of whom actually would be engaged in combat operations. This is far below what Obama had been hoping for when he began his presidency.

Agreement was reached on collaboration in detecting international tax fraud and on further collaboration in managing the international crisis, however. But what that means remains extremely vague — as it was meant to be, since there was no consensus on what was to be done. In fact, the actual guidelines will still have to be hashed out at the G-20 finance ministers’ meeting in Scotland in November. Intriguingly, after insisting on the creation of a global regulatory regime — and with the vague U.S. assent — the European Union failed to agree on European regulations. In a meeting in Prague on April 4, the United Kingdom rejected the regulatory regime being proposed by Germany and France, saying it would leave the British banking system at a disadvantage.

Overall, the G-20 and the NATO meetings did not produce significant breakthroughs. Rather than pushing hard on issues or trading concessions — such as accepting Germany’s unwillingness to increase its stimulus package in return for more troops in Afghanistan — the United States failed to press or bargain. It preferred to appear as part of a consensus rather than appear isolated. The United States systematically avoided any appearance of disagreement.

The reason there was no bargaining was fairly simple: The Germans were not prepared to bargain. They came to the meetings with prepared positions, and the United States had no levers with which to move them. The only option was to withhold funding for the IMF, and that would have been a political disaster (not to mention economically rather unwise). The United States would have been seen as unwilling to participate in multilateral solutions rather than Germany being seen as trying to foist its economic problems on others. Obama has positioned himself as a multilateralist and can’t afford the political consequences of deviating from this perception. Contributing to the IMF, in these days of trillion-dollar bailouts, was the lower-cost alternative. Thus, the Germans have the U.S. boxed in.

The political aspect of this should not be underestimated. George W. Bush had extremely bad relations with the Europeans (in large part because he was prepared to confront them). This was Obama’s first major international foray, and he could not let it end in acrimony or wind up being seen as unable to move the Europeans after running a campaign based on his ability to manage the Western coalition. It was important that he come home having reached consensus with the Europeans. Backing off on key economic and military demands gave him that “consensus.”

Turkey and Obama’s Deeper Game

But it was not simply a matter of domestic politics. It is becoming clear that Obama is playing a deeper game. A couple of weeks before the meetings, when it had become obvious that the Europeans were not going to bend on the issues that concerned the United States, Obama scheduled a trip to Turkey. During the EU meetings in Prague, Obama vigorously supported the Turkish application for EU membership, which several members are blocking on grounds of concerns over human rights and the role of the military in Turkey. But the real reason is that full membership would open European borders to Turkish migration, and the Europeans do not want free Turkish migration. The United States directly confronted the Europeans on this matter.

During the NATO meeting, a key item on the agenda was the selection of a new alliance secretary-general. The favorite was former Danish Prime Minister Anders Fogh Rasmussen. Turkey opposed his candidacy because of his defense on grounds of free speech of cartoons depicting the Prophet Mohammed published in a Danish magazine. NATO operates on consensus, so any one member can block just about anything. The Turks backed off the veto, but won two key positions in NATO, including that of deputy secretary-general.

So while the Germans won their way at the meetings, it was the Turks who came back with the most. Not only did they boost their standing in NATO, they got Obama to come to a vigorous defense of the Turkish application for membership in the European Union, which of course the United States does not belong to. Obama then flew to Turkey for meetings and to attend a key international meeting that will allow him to further position the United States in relation to Islam.

The Russian Dimension

Let’s diverge to another dimension of these talks, which still concerns Turkey, but also concerns the Russians. While atmospherics after the last week’s meetings might have improved, there was certainly no fundamental shift in U.S.-Russian relations. The Russians have rejected the idea of pressuring Iran over its nuclear program in return for the United States abandoning its planned ballistic missile defense system in Poland and the Czech Republic. The United States simultaneously downplayed the importance of a Russian route to Afghanistan. Washington said there were sufficient supplies in Afghanistan and enough security on the Pakistani route such that the Russians weren’t essential for supplying Western operations in Afghanistan. At the same time, the United States reached an agreement with Ukraine for the transshipment of supplies — a mostly symbolic gesture, but one guaranteed to infuriate the Russians at both the United States and Ukraine. Moreover, the NATO communique did not abandon the idea of Ukraine and Georgia being admitted to NATO, although the German position on unspecified delays to such membership was there as well. When Obama looks at the chessboard, the key emerging challenge remains Russia.

The Germans are not going to be joining the United States in blocking Russia. Between dependence on Russia for energy supplies and little appetite for confronting a Russia that Berlin sees as no real immediate threat to Germany, the Germans are not going to address the Russian question. At the same time, the United States does not want to push the Germans toward Russia, particularly in confrontations ultimately of secondary importance and on which Germany has no give anyway. Obama is aware that the German left is viscerally anti-American, while Merkel is only pragmatically anti-American — a small distinction, but significant enough for Washington not to press Berlin.

At the same time, an extremely important event between Turkey and Armenia looks to be on the horizon. Armenians had long held Turkey responsible for the mass murder of Armenians during and after World War I, a charge the Turks have denied. The U.S. Congress for several years has threatened to pass a resolution condemning Turkish genocide against Armenians. The Turks are extraordinarily sensitive to this charge, and passage would have meant a break with the United States. Last week, they publicly began to discuss an agreement with the Armenians, including diplomatic recognition, which essentially disarms the danger from any U.S. resolution on genocide. Although an actual agreement hasn’t been signed just yet, anticipation is building on all sides.

The Turkish opening to Armenia has potentially significant implications for the balance of power in the Caucasus. The August 2008 Russo-Georgian war created an unstable situation in an area of vital importance to Russia. Russian troops remain deployed, and NATO has called for their withdrawal from the breakaway Georgian regions of South Ossetia and Abkhazia. There are Russian troops in Armenia, meaning Russia has Georgia surrounded. In addition, there is talk of an alternative natural gas pipeline network from Azerbaijan to Europe.

Turkey is the key to all of this. If Ankara collaborates with Russia, Georgia’s position is precarious and Azerbaijan’s route to Europe is blocked. If it cooperates with the United States and also manages to reach a stable treaty with Armenia under U.S. auspices, the Russian position in the Caucasus is weakened and an alternative route for natural gas to Europe opens up, decreasing Russian leverage against Europe.

From the American point of view, Europe is a lost cause since internally it cannot find a common position and its heavyweights are bound by their relationship with Russia. It cannot agree on economic policy, nor do its economic interests coincide with those of the United States, at least insofar as Germany is concerned. As far as Russia is concerned, Germany and Europe are locked in by their dependence on Russian natural gas. The U.S.-European relationship thus is torn apart not by personalities, but by fundamental economic and military realities. No amount of talking will solve that problem.

The key to sustaining the U.S.-German alliance is reducing Germany’s dependence on Russian natural gas and putting Russia on the defensive rather than the offensive. The key to that now is Turkey, since it is one of the only routes energy from new sources can cross to get to Europe from the Middle East, Central Asia or the Caucasus. If Turkey — which has deep influence in the Caucasus, Central Asia, Ukraine, the Middle East and the Balkans — is prepared to ally with the United States, Russia is on the defensive and a long-term solution to Germany’s energy problem can be found. On the other hand, if Turkey decides to take a defensive position and moves to cooperate with Russia instead, Russia retains the initiative and Germany is locked into Russian-controlled energy for a generation.

Therefore, having sat through fruitless meetings with the Europeans, Obama chose not to cause a pointless confrontation with a Europe that is out of options. Instead, Obama completed his trip by going to Turkey to discuss what the treaty with Armenia means and to try to convince the Turks to play for high stakes by challenging Russia in the Caucasus, rather than playing Russia’s junior partner.

This is why Obama’s most important speech in Europe was his last one, following Turkey’s emergence as a major player in NATO’s political structure. In that speech, he sided with the Turks against Europe, and extracted some minor concessions from the Europeans on the process for considering Turkey’s accession to the European Union. Why Turkey wants to be an EU member is not always obvious to us, but they do want membership. Obama is trying to show the Turks that he can deliver for them. He reiterated — if not laid it on even more heavily — all of this in his speech in Ankara. Obama laid out the U.S. position as one that recognized the tough geopolitical position Turkey is in and the leader that Turkey is becoming, and also recognized the commonalities between Washington and Ankara. This was exactly what Turkey wanted to hear.

The Caucasus is far from the only area to discuss. Talks will be held about blocking Iran in Iraq, U.S. relations with Syria and Syrian talks with Israel, and Central Asia, where both countries have interests. But the most important message to the Europeans will be that Europe is where you go for photo opportunities, but Turkey is where you go to do the business of geopolitics. It is unlikely that the Germans and French will get it. Their sense of what is happening in the world is utterly Eurocentric. But the Central Europeans, on the frontier with Russia and feeling quite put out by the German position on their banks, certainly do get it.

Obama gave the Europeans a pass for political reasons, and because arguing with the Europeans simply won’t yield benefits. But the key to the trip is what he gets out of Turkey — and whether in his speech to the civilizations, he can draw some of the venom out of the Islamic world by showing alignment with the largest economy among Muslim states, Turkey.

The Obama Adminstration Is Covering Up The Truth

Bill Moyers sat down with William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout. See the video here. I am convinced at this point that the Obama administration is going completely wrong on this financial crisis. Republicans, rather than engaging in unconstructive snark, should be fighting hard to expose the fraud thats going on here. However, GOP lawmakers are complicit too in the perpetuation of this fraud thats going on. We may be screwed.

I supported Obama and I think for all of us who did, its necessary to push back on him very, very hard now. This thing is not unsalvalgeable.

April 3, 2009

BILL MOYERS: Welcome to the Journal.

For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.

WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.

BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.

The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." Metaphorically, of course. Of course.

Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."

Bill Black, welcome to the Journal.

WILLIAM K. BLACK: Thank you.

BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?

WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.

BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: How did they do it? What do you mean?

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.

BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?

WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.

BILL MOYERS: Yeah. Liars' loans--

WILLIAM K. BLACK: Liars' loans.

BILL MOYERS: Why did they call them liars' loans?

WILLIAM K. BLACK: Because they were liars' loans.

BILL MOYERS: And they knew it?

WILLIAM K. BLACK: They knew it. They knew that they were frauds.

WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.

BILL MOYERS: You think they really said that to borrowers?

WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.

BILL MOYERS: Ninja?

WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.

BILL MOYERS: You're talking about significant American companies.

WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.

BILL MOYERS: Which company?

WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.

BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.

WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...

BILL MOYERS: But you're saying our system became a Ponzi scheme.

WILLIAM K. BLACK: Our system...

BILL MOYERS: Our financial system...

WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."

BILL MOYERS: Is there a law against liars' loans?

WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.

BILL MOYERS: Because...

WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?

WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...

BILL MOYERS: Who did?

WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?

WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...

BILL MOYERS: That's right.

WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?

WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.

BILL MOYERS: What did AIG contribute? What did they do wrong?

WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

BILL MOYERS: And why...

WILLIAM K. BLACK: How mad is this?

BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?

WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

BILL MOYERS: The cover up?

WILLIAM K. BLACK: Sure. The cover up.

BILL MOYERS: That's a serious charge.

WILLIAM K. BLACK: Of course.

BILL MOYERS: Who's covering up?

WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.

BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.

TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.

WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.

BILL MOYERS: As?

WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.

BILL MOYERS: How is this happening? I mean why is it happening?

WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.

BILL MOYERS: What facts?

WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?

BILL MOYERS: You--

WILLIAM K. BLACK: Taking away people's bonuses?

BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.

WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that's a law?

WILLIAM K. BLACK: That's the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated--

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.

BILL MOYERS: This law, you're talking about.

WILLIAM K. BLACK: Yes.

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

BILL MOYERS: Well, where's Congress? Where's the press? Where--

WILLIAM K. BLACK: Well, where's the Pecora investigation?

BILL MOYERS: The what?

WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?

What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: You are.

WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.

BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?

WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.

BILL MOYERS: A.I.G. did?

WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

BILL MOYERS: Even though Goldman Sachs had a big vested stake.

WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.

BILL MOYERS: Yeah, like a conflict of interest, it seems.

WILLIAM K. BLACK: Massive conflict of interests.

BILL MOYERS: So, how did he get away with it?

WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

BILL MOYERS: Who's going to get the facts?

WILLIAM K. BLACK: We need some chairmen or chairwomen--

BILL MOYERS: In Congress.

WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.

BILL MOYERS: And we have to know that, in order to know what?

WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."

BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

WILLIAM K. BLACK: Yes.

BILL MOYERS: Why?

WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.

BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?

WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."

Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.

So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

BILL MOYERS: William Black, thank you very much for being with me on the Journal.

WILLIAM K. BLACK: Thank you so much.