Hell in a Hand-Basket: Part 4

How Government Stoked the Mania

Housing prices would never have risen so high without multiple Washington mistakes.

By RUSSELL ROBERTS

Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.

David Klein

Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.

Hear No Evil

What some Congresspeople said about Fannie and Freddie.

Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.

Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence. But when they found out that following these policies could be profitable -- which they were as long as rising housing prices kept default rates unusually low -- their complaints disappeared. Maybe they could serve two masters. They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that budgetary dollars were on the line after all.

While Fannie and Freddie and the CRA were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

The Taxpayer Relief Act of 1997 and low interest rates -- along with the regulatory push for more low-income homeowners -- dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn't simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.

Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie's implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?

Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs -- from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.

Mr. Roberts is a professor of economics at George Mason University and a scholar at the Mercatus Center. His latest book is a novel on how markets work, "The Price of Everything: A Parable of Possibility and Prosperity" (Princeton University Press, 2008).

The Insane World of Barack Obama!

This guy is the most radical and the most liberal of the hard-left in the U.S. Senate. Do you really want him running the government --- and your life?

If Bailout Plan Is Too Socialistic, Just Wait For Obama Leviathan

By INVESTOR'S BUSINESS DAILY | Posted Tuesday, September 30, 2008 4:20 PM PT

Election '08: Have Americans been so lulled by Barack Obama's smooth talk that they don't realize his plans would expand government into a massive socialist behemoth? His is a soft-spoken, hard-left agenda.

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IBD Series: The Audacity Of Socialism

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During Friday night's debate in Mississippi, Obama disparaged what he called "this notion that the market can always solve everything and that the less regulation we have, the better off we're going to be."

But the subprime crisis Washington is dealing with is the result of three decades of the federal government pressuring banks — via the regulatory demands of the Democrats' 1977 Community Reinvestment Act, which was expanded by Bill Clinton — to make tens of billions of dollars in bad loans to poor people with lousy credit ratings.

It was Democrats' regulatory and litigious assaults upon the mortgage market in pursuit of "social justice" that left our economy in its precarious position of today; indeed as an attorney, Obama himself in 1994 represented a client suing Citibank, accusing it of systematically denying mortgages to blacks.

But if the taxpayer rescue of Wall Street and Uncle Sam's taking over the banking system scares you, the broader socialism planned by the Democratic presidential nominee should leave you petrified.

Here are a few examples, with price tags provided by the National Taxpayers Union Foundation:

• Politicized financial regulation: Obama would establish a Financial Market Regulation and Oversight Commission to "end our balkanized framework of overlapping and competing regulatory agencies" and "which would meet regularly and report to the president, the president's financial working group and Congress on the state of our financial markets and the systemic risks that face them."

Translation: more centralized and heavy-handed regulatory power over businesses for Washington.

• Government-managed medicine: Even left-leaning health care experts concede that Obama's expanded coverage plan will cost $100 billion; with no real cost containment, that will mean a second wave of reform that could impose full socialized medicine on our country.

Obama declares that "governments at all levels should lead the effort to develop a national and regional strategy for public health, and align funding mechanisms to support its implementation."

His plan also presumes racial discrimination, "requiring hospitals and health plans to collect, analyze and report health care quality for disparity populations and holding them accountable for any differences found."

• Community health centers: Your local doctor may become obsolete in Obama's brave new world in which $6.7 billion will be spent over five years building "community health centers" featuring "preventive, diagnostic and other primary care services."

• Antitrust enforcement: Promising this "is how we ensure that capitalism works for consumers," a President Obama would "stop or restructure those mergers that are likely to harm consumer welfare, while quickly clearing those that do not" and "working with foreign governments to change unsound competition laws."

Behind this harmless-sounding rhetoric is the misguided belief that the government must shield companies of its choosing from their competitors' lower prices and innovative practices. Courts and government bureaucrats under Obama could be expected to use antitrust to claim the existence of imaginary monopolies and squash mergers and other business transactions.

• Required IRAs: Under Obama, "employers who do not currently offer a retirement plan will be required to automatically enroll their employees in a direct deposit IRA account."

Costing $292 billion annually, according to the NTUF's latest analysis, Obama's plans are far more than just "change"; they would transfigure American society into full-blown socialism. With little more than a month to go before this most consequential election, voters seem not to appreciate the danger.

• Dictatorial energy policy: Obama would spend $150 billion over a decade "to advance the next generation of biofuels and fuel infrastructure, accelerate the commercialization of plug-in hybrids" and create other ways to force uneconomical forms of energy on the auto and oil industry.

A Clean Technologies Deployment Venture Capital Fund would artificially finance the environmentalist pet projects in which private investors have little faith.

Negating the global labor market, the Illinois senator also promises to "provide specific tax assistance and loan guarantees to the domestic auto industry to ensure that new fuel-efficient cars and trucks" are built within the U.S.

• Bullying utilities: The Chicago Democrat would require that 25% of electricity consumed in the U.S. be "derived from clean, sustainable energy sources, like solar, wind and geothermal by 2025." Unless those alternative sources get cheap fast, that likely means a big escalation in consumers' electric bills.

Obama also proposes "to 'flip' incentives to state and local utilities by ensuring companies get increased profits for improving energy efficiency, rather than higher energy consumption."

• Billions for teachers unions: Instead of school choice for parents, in which competition would improve public educations and give the poor access to private education, Obama proposes "an accountability system that supports schools to improve, rather than focuses on punishments."

His five-year, $90 billion education plan would dole out "a $200 million grant program for states and districts that want to provide additional learning time for students in need," double federal funding for afterschool programs, provide "professional development and coaching to school leaders, teachers and other school personnel," "develop multi-tiered credentialing systems that encourage principals to grow professionally," and cook up other ways to keep public school teachers on the clock longer.

Uncle Sam would also "collect evidence about how prospective teachers plan and teach in the classroom" in an Obama administration.

• Required public service: In return for the federal government paying the first $4,000 of college tuition through a tax credit — which would be tough for most American families to turn down — Obama would require recipients "to conduct 100 hours of public service a year."

• Required sick leave: Spending $1.5 billion over five years, Obama would "encourage" the states to adopt paid-leave systems that "guarantee workers seven days of paid sick leave per year."

• Thought police: In what sounds like the outdated and unconstitutional Fairness Doctrine on steroids, Obama would "encourage diversity in the ownership of broadcast media, promote the development of new media outlets for expression of diverse viewpoints, and clarify the public interest obligations of broadcasters who occupy the nation's spectrum."

What would the "public interest obligations" of liberal Democrats' opponents within the media end up being in an Obama administration?

• Green Corps: Barack Obama would spend $390 million over five years to fund "an energy-focused Green Jobs Corps to engage disconnected and disadvantaged youth . . . to improve the energy efficiency of homes and buildings in their communities, while also providing them with practical skills and experience in important career fields of expected high-growth employment."

It's a quasi-paramilitary organization dedicated to environmentalism that promises inductees that they would be getting practical employment training for future "green jobs."

• Teaching parents parenting: The senator would spend $300 million over five years establishing "Promise Neighborhoods in cities that have high levels of poverty and crime and low levels of student academic achievement." A key feature would be "parenting schools for parents."

• Housebuilding army: the Youthbuild program would be expanded from 8,000 to 50,000 over eight years at a cost of $257 million to "construct and rehabilitate affordable housing for low-income and homeless families."

• Patent reform: Obama's idea of "opening up the patent process to citizen review" would make it much tougher for businesses to challenge the government's judgment on the ownership rights of an invention, which will have a negative effect on the incentives to innovate.

• Private parklands regulation: Obama would "do more to encourage private citizens to protect the open spaces and forests they own and the endangered species that live there . . . and encourage communities to enhance local greenspace, wildlife and conservation areas."

The Obama campaign uses the word "encourage" over and over in numerous areas of policy. Expect it to be the form of encouragement practiced by Don Corleone — making you an offer you can't refuse.

• Autism czar: If you weren't convinced that the Democratic nominee intends to use the federal government's powers to solve every known problem, consider his promise to spend $2.5 billion over four years on appointment of an "Autism Czar" to "ensure that all federal funds are being spent in a manner that prioritizes results."

What To Do? Oh, What To Do?

Now that we are in this hand-basket, what should we do that makes the most sense? Here's one sensible view:

How The Plan Turns A Profit For Taxpayers

By LAWRENCE KUDLOW | Posted Monday, September 29, 2008 4:30 PM PT

The single biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction to unfreeze the banking system.

In other words, folks don't understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Here's the key point: Any loan package bought by the Treasury will be 100% taxpayer owned. Period.

Let's walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount — say $100 billion — of loans that banks will sell.

The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive.

In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (for example, an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers.

In the meantime, as the Treasury holds the loans, the government will get monthly cash flows coming in on the mortgages, or on any other loans that it owns. So it is a win-win for taxpayers:

First, taxpayers get the cash flow generated by the assets (something like a 10% interest rate.)

Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers.

I don't think a lot of folks understand this win-win scenario. Let me repeat:

The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it's a win-win-win-win.

Rallying Confidence

Think about this. The troubled assets purchased by the Treasury right now are likely to be very underpriced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

I have been in conversation with leading House Republicans. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson. But now the actual reality is sinking in.

Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable.

Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets.

Clean Plan

Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt — 100%.

Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary's request for $700 billion is regarded as way too high.

Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor's mortgage-bond insurance program. I think it's a good package that would be great news for stock and bond markets that are now ailing badly.

It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.

Copyright 2008 Creators Syndicate, Inc

Hell in a Hand-Basket: Part 3

Bringing Down Wall Street as Ratings Let Loose Subprime Scourge

By Elliot Blair Smith

Sept. 24 (Bloomberg) -- Frank Raiter says his former employer, Standard & Poor's, placed a ``For Sale'' sign on its reputation on March 20, 2001. That day, a member of an S&P executive committee ordered him, the company's top mortgage official, to grade a real estate investment he'd never reviewed.

S&P was competing for fees on a $484 million deal called Pinstripe I CDO Ltd., Raiter says. Pinstripe was one of the new structured-finance products driving Wall Street's growth. It would buy mortgage securities that only an S&P competitor had analyzed; piggybacking on the rating violated company policy, according to internal e-mails reviewed by Bloomberg.

``I refused to go along with some of this stuff, and how they got around it, I don't know,'' says Raiter, 61, a former S&P managing director whose business unit rated 85 percent of all residential mortgage deals at the time. ``They thought they had discovered a machine for making money that would spread the risks so far that nobody would ever get hurt.''

Relying on a competitor's analysis was one of a series of shortcuts that undermined credit grades issued by S&P and rival Moody's Corp., according to Raiter. Flawed AAA ratings on mortgage-backed securities that turned to junk now lie at the root of the world financial system's biggest crisis since the Great Depression, according to Raiter and more than 50 former ratings professionals, investment bankers, academics and consultants.

``I view the ratings agencies as one of the key culprits,'' says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. ``They were the party that performed that alchemy that converted the securities from F- rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.''

Gold Standard

Driven by competition for fees and market share, the New York-based companies stamped out top ratings on debt pools that included $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes between 2002 and 2007. As subprime borrowers defaulted, the companies have downgraded more than three-quarters of the structured investment pools known as collateralized debt obligations issued in the last two years and rated AAA.

Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn't have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.

McCain, Obama

``This is appalling,'' says Douglas Holtz-Eakin, the former director of the Congressional Budget Office from 2003 to 2005 who is now a senior policy adviser to the presidential campaign of Republican Senator John McCain. ``It is exactly the kind of behavior that has so badly hurt the financial markets.''

Senator Barack Obama, the Democratic nominee, said in a Sept. 15 interview, ``There's a lot of work that has to be done in examining the degree to which ratings agencies were involved in making some of this debt -- some of the leverage taken on -- look like it was much safer and less risky than it was.''

S&P, a unit of McGraw-Hill Cos., and Moody's substituted theoretical mathematic assumptions for the experience and judgment of their own analysts. Regulators found that Moody's and S&P also didn't have enough people and didn't adequately monitor the thousands of fixed-income securities they were grading AAA.

Raiter and his counterpart at Moody's, Mark Adelson, say they waged a losing fight for credit reviews that focused on a borrower's ability to pay and the value of the underlying collateral. That was the custom of community bankers who extended credit only as far as they could see from their front porch.

`Didn't Want to Know'

``The part that became the most aggravating -- personally irritating -- is that CDO guys everywhere didn't want to know fundamental credit analysis; they didn't want to know from being in touch with the underlying asset,'' says Adelson, 48, who quit Moody's in January 2001 after being reassigned out of the residential mortgage-backed securities business. ``There is no substitute for fundamental credit analysis.''

S&P hired him in May 2008 as chief credit officer, responsible for setting the company's ratings criteria as part of a broader management shakeup. Raiter served on the S&P structured-finance group's executive rating committee until 2000, when he says he was demoted for his clashes with his bosses. The former Marine and community banker retired in March 2005, when he became eligible for company-paid medical benefits.

Beating Exxon's Margin

The rating companies earned as much as three times more for grading complex structured finance products, such as CDOs, as they did from corporate bonds. Through 2007, they had record revenue, profits and share prices. Moody's operating margins exceeded 50 percent for the past six years, three to four times those of Exxon Mobil Corp., the world's biggest oil company.

By 2000, structured finance was the companies' leading source of revenue, their financial reports show. It accounted for just under half of Moody's total ratings revenue in 2007.

While prospectuses don't disclose fees, Moody's says it charged as much as 11 basis points for structured products, compared with 4.25 basis points for corporate debt. A basis point is a hundredth of a percent. S&P says its fees were comparable. A typical CDO paid 6 to 8 basis points, according to Richard Gugliada, 46, S&P's global ratings chief for CDOs until 2005. That would make rating the Pinstripe deal worth $300,000 or more.

Toughening Criteria

Now facing the threat of lawsuits and tighter regulation, Moody's and S&P say they are adopting tougher criteria to more accurately evaluate and monitor the debt. In January, S&P reassigned Joanne Rose, 51, its top structured-finance ratings executive since 1999, to a new position as executive managing director for risk and quality policy. In May, Brian Clarkson, 52, resigned as president of Moody's Investors Service. He was the company's top structured-finance executive for most of this decade.

``Independence, integrity and quality remain the cornerstones of everything we do and everything we stand for,'' S&P Vice President of Communications Chris Atkins said last week in a written response to Bloomberg questions. ``We have an important role to play in helping to restore confidence and increase transparency in the credit markets, and we are determined to play a leadership role.''

``We are certainly not going to respond to a disaffected ex-employee's statements,'' Atkins added in an e-mail, without specifying any individual.

Anthony Mirenda, a Moody's spokesman, declined to respond to questions submitted in writing and by phone.

Rise of the Quants

AAA ratings on subprime mortgage investments can be traced to the rise on Wall Street of quantitative analysts, or quants, with advanced degrees in math, physics and statistics. They developed computer-driven models that didn't rely on historical performance data, according to Raiter and others. If the old rating methods were like Rembrandt's portraiture, with details painted in, the new ones were Monet impressionism, with only a suggestion of the full picture.

S&P and Moody's built their reputations over generations, starting with Henry Varnum Poor's publication in 1860 of ``History of Railroads and Canals in the United States'' and John Moody's ``Moody's Manual of Industrial and Miscellaneous Securities'' in 1900. Since the Great Depression, U.S. agencies have relied on the companies to help evaluate the credit quality of investments owned by regulated institutions, gradually bestowing on them quasi-regulatory status. Yet as the 21st century began, much of that knowledge became obsolete.

Moody's Spinoff

Banks were combining thousands of fixed-income assets into custom blends of high-yield bonds, aircraft leases, franchise loans, mutual fund fees and mortgages. These structured investment pools didn't have the performance history that lay behind the corporate bonds.

The spinoff of Moody's by Dun & Bradstreet Corp. in September 2000 changed the service's focus from informing investors to responding to the demands of banking clients and shareholders, say several former Moody's analysts. They requested anonymity because they signed non-disclosure agreements when leaving or because they now do business with the company.

``Up until that point, there was a significant emphasis on who's got the right criteria,'' says Gugliada, the former S&P global ratings chief for CDOs. He retired in 2006. ``Then Moody's went public. Everybody was looking to pick up every deal that they could.''

Clarkson became Moody's group managing director for structured finance in August 2000, a month before the spinoff. He replaced Adelson and other analysts to make the residential mortgage securities unit more responsive to clients, say several former Moody's professionals who requested anonymity because of confidentiality agreements.

`Less Collegial'

The executive visited Wall Street banking customers to pledge a closer, more cooperative relationship and asked whether any of his analysts were particularly difficult to work with, former Moody's managers say.

``Things were becoming a lot less collegial and a lot more bottom-line driven,'' says Greg Gupton, senior director of research in Moody's quant group at the time. He is now managing director of quantitative research at New York-based Fitch Solutions, a consulting unit of Fimalac SA, based in Paris. Fimalac also owns Fitch Ratings, the third-largest bond analysis company.

Clarkson didn't respond to requests for comment in messages on his home answering machine and in a note left on his door in Montclair, New Jersey.

The efforts initially produced results. Moody's share of rating mortgage-backed securities jumped to 78 percent in 2001 from 43 percent a year earlier, according to the industry publication Inside Mortgage Finance in Bethesda, Maryland.

Rating Pinstripe Deal

It was in this environment that the Pinstripe deal landed on Raiter's desk. The underwriters were units of what now are the investment banks Credit Suisse Group AG, based in Zurich, and RBS Greenwich Capital Markets Inc., in Greenwich, Connecticut.

The CDO packaged residential mortgage securities and real estate investment trusts, according to Fitch Ratings, which, unlike S&P, had reviewed the underlying loans, according to Raiter.

``We must produce a credit estimate,'' Gugliada, a member of the structured-finance rating group's executive committee, wrote to Raiter in a March 2001 e-mail. ``It is your responsibility to provide those credit estimates, and your responsibility to devise a method for doing so. Please provide the credit estimates requested!'' he wrote, signing off with his nickname ``Guido.''

``He was asking me to just guess, put anything down,'' says Raiter, interviewed at his home in rural Virginia, 69 miles (111 kilometers) west of Washington. ``I'm surprised that somebody didn't say, `Richard, don't ever put this crap in writing.'''

`Self-Delusion'

Gugliada, like Raiter, now says that he views as flawed many of the ratings S&P and Moody's assigned.

``There was the self-delusion, which hit not just rating agencies but everybody, in the fact that the mortgage market had never, ever, had any problems, and nobody thought it ever would,'' Gugliada says.

Drawing on a competitor's analysis, and assigning a slightly lower rating because of the uncertainty of the judgment, is called ``notching.'' Securities and Exchange Commission Chairman Christopher Cox proposed in June 2008 to prohibit a government-recognized rating service from issuing a grade unless it has information on the underlying asset.

``Because credit-rating agencies relied on others to verify the quality of the assets underlying the structured products they rated, it is very likely those ratings were often based on incorrect information,'' Cox said in a statement at the time.

Over Raiter's objections, S&P graded 73 percent of the Pinstripe bonds AAA. Managed by New York-based Alliance Capital Management, now AllianceBernstein Holding LP, the CDO paid off investors in November 2004. Other deals wouldn't fare as well.

Not `Straw to Gold'

S&P outlined the alchemy of structured finance in a March 2002 paper for clients entitled ``Global Cash Flow and Synthetic CDO Criteria.'' While arguing that the process wasn't ``turning straw into gold,'' the authors said ``the goal'' was to create a capital structure with a higher credit rating than the underlying assets would qualify for without financial engineering.

By estimating the percentage of a debt pool that would pay off, the raters could assign AAA grades to the safest portion of the investment and lower marks on the rest. About 85 percent of structured finance CDOs qualified for the top grade, according to Moody's.

The deal sponsors could bolster the structure by buying protection from the two largest bond insurers, New York-based Ambac Financial Group Inc. and MBIA Inc. of Armonk, New York.

Strategos Capital CDOs

This way, subprime mortgages with elevated default risks could be pooled into CDOs with top ratings. As lending standards fell, earlier deals performed better than later ones.

Strategos Capital Management LLC, an affiliate of Philadelphia-based Cohen & Co., which manages more than $30 billion in CDOs and other investments, packaged three Kleros Real Estate CDO Ltd. investments between June and November of 2006.

All three Kleros CDOs defaulted after credit downgrades last year. While Strategos liquidated Kleros III, the most recent of the investment pools, in June, it still manages the two earlier ones for investors.

The annual volume of mortgage securities sold to private investors tripled to $1.2 trillion between 2002 and 2005, according to Inside Mortgage Finance. The subprime portion of the CDOs rose fourfold, to $456.1 billion.

Low interest rates fueled the home-financing boom while investor demand for yields encouraged banks to structure subprime mortgages into higher-paying securities. Between 2001 and 2005, the annual value of asset-backed CDOs surged 11-fold to $104.5 billion, and then more than doubled to $226.3 billion in 2006, according to the industry newsletter Asset-Backed Alert in Hoboken, New Jersey.

Basic Conflict

Through it all, the rating companies had a basic conflict: They were paid by the businesses whose products they rated. Moody's told the Paris-based Committee of European Securities Regulators in November 2007 -- in the 49th footnote of a 35-page response to its questionnaire on structured-finance -- that it allowed managers who supervised analysts to ``provide expert input'' on fees ``in a limited range of circumstances.''

SEC Chief Cox said in June that the rating companies engaged in the ``lucrative business of consulting with issuers on exactly how to go about getting'' top ratings.

In a July report that examined the credit rating companies' practices, the SEC said they ``appeared to struggle'' in hiring adequate staff to handle the growth of their business, particularly for evaluating CDOs.

`Spread Very Thin'

The government agency didn't quantify the problem. Moody's annual financial statements show that the company's global employment more than doubled to 3,600 between 2001 and 2007. Its structured-finance revenue more than tripled during that time, peaking at $885.9 million last year.

``It was very difficult to get people in, train them up sufficiently to really understand this stuff -- from structure to quantitative issues -- and then to keep them, because investment banks were very keen to get good people to help them optimize their trade ideas,'' says Kai Gilkes, 40, a former S&P quantitative analyst in London who left in April 2006.

``Analysts were getting spread very thin,'' Gilkes says. ``I remember analysts who would keep their phones on voice mail 24 hours a day. They would only check messages and decide who to get back to. It was crazy.''

Some investors became nervous that the rating companies' mathematical models and AAA grades were out of touch with reality.

`Train Wreck Waiting'

``There was no model -- there was nothing -- that could work for modeling interest-only, adjustable, non-payment liar's loans,'' says Stephen Berger, 69, chairman of Odyssey Investment Partners LLC, a New York-based private equity firm.

In California, fixed-income investor Julian Mann feared the worst as subprime lending fanned out across the country.

``We said this is a train wreck waiting to happen,'' says Mann, 49, a vice president of the Los Angeles-based investment management firm First Pacific Advisors LLC.

The 90-day delinquency rate on subprime mortgages rose from 5.14 percent in 2003 to 6.37 percent in 2004 and 8.63 percent in 2005, according to First American Core Logic Inc., a San Francisco-based data provider.

S&P's Raiter says he was urging management to develop more sophisticated financial models and buy more detailed loan data for monitoring securities the company graded.

``We knew the delinquencies were bad,'' he says. ``The fact was, if we could have hired a supreme being to tell us exactly what the loss was on a loan, they wouldn't have hired him because the Street wasn't going to pay us extra money to know that.''

Subprime Tour Fails

In late 2005, First Pacific's Mann says, he invited East Coast investors to take a subprime mortgage tour up California's main interstate artery, to see the problem for themselves. The I-5 runs from San Diego to Sacramento, passing through Orange County, Bakersfield and Stockton.

``Nobody wanted to do it,'' he says. ``Unfortunately, most of the models were constructed by people who hadn't seen most of America and certainly weren't familiar with the areas they were rating.''

That September, Mann's boss, Thomas Atteberry, acted while others hesitated. He told investors in a monthly letter that he was liquidating the highest-risk real estate securities in First Pacific's New Income fund, which held $1.85 billion in bonds.

Atteberry, 55, wrote that he was ``very concerned about the subprime sector'' and ``that these trends may be a very early sign of the emergence of credit quality deterioration in general.'' It was 22 months before S&P and Moody's started downgrading mortgage securities and CDOs that held similar loans.

He had no idea how right he would be.

(Failing Grades on Wall Street: Part 1 of 2. Tomorrow: S&P, Moody's engage in ``race to the bottom'' by easing ratings criteria.)

To contact the reporter on this story: Elliot Blair Smith in Washington at esmith29@bloomberg.net.

Last Updated: September 24, 2008 00:00 EDT

Hell in a Hand-Basket: Part 2

Optimism Says Rescue Will Shield General Economy From Problems

By THOMAS SOWELL | Posted Tuesday, September 23, 2008 4:30 PM PT

Who was it who said "crack-brained meddling by the authorities" can "aggravate an existing crisis"? Ronald Reagan? Milton Friedman? Adam Smith? Not even close. It was Karl Marx. Unlike most leftists today, Marx studied economics.

Is the current financial crisis going to lead to crack-brained meddling or to some rational actions? Predicting what politicians are going to do is risky business. We will have to wait and see.

Saints are no more common on Capitol Hill than they are on Wall Street. We can only hope that the political "solution" does not turn out to be worse than the problem.

There are times when government intervention can make things better. But that is no guarantee that it won't make things worse.

As they say, "the devil is in the details"— and we don't know the details yet.

Probably most members of Congress don't know the details yet — and many may still not know the details when the time comes for them to vote on this bailout.

Taking an optimistic view, this biggest bailout of all time may stop the problems in financial markets from spreading into the general economy — which is currently nothing like the disaster area that the media portray it to be.

Ninety percent of the people on this planet would exchange their economic situation for ours in a minute. The media love hype and have been dying to use the word "recession" all year, but nothing has happened that meets the definition of a recession.

The American economy is growing, not declining. Our unemployment rate is up to 6%, but there are countries that would be delighted to get their unemployment rate down to 6%. Our inflation rate is up a little, but many countries would love to get their inflation rate down to where ours is.

Why then is there such a mess in the financial markets? Much of that mess is due to the very people we are now turning to for solutions — members of Congress.

Past Congresses created the hybrid financial institutions known as Fannie Mae and Freddie Mac, private institutions with government backing and political influence. About half of the mortgages in this country are backed by these two institutions.

Such institutions — exempt from laws that apply to other financial institutions and backed by the implicit promise of government support with the taxpayers' money — are an open invitation to risky behavior. When these risks blew up in their faces, Fannie Mae and Freddie Mac were taken over by the government, costing the taxpayers billions of dollars.

For years, the Wall Street Journal has been warning that Fannie Mae and Freddie Mac were taking reckless chances, but liberal Democrats especially have pooh-poohed the dangers.

Back in 2002, the Wall Street Journal said: "The time for the political system to focus on Fannie and Fred isn't when we have a housing crisis; by then it will be too late." The hybrid public-and-private nature of these financial giants amounts to "privatizing profit and socializing risk," since taxpayers get stuck with the tab when high-risk finances don't work out.

Similar concerns were expressed in 2003 by Gregory Mankiw, then chairman of the Council of Economic Advisers to President Bush. But liberal Democratic Rep. Barney Frank criticized Mankiw, citing "concern for housing" as his reason for supporting Fannie Mae. Barney Frank said that fears about the riskiness of Fannie Mae were "overblown."

Maxine Waters and other members of the Congressional Black Caucus have also been among the liberal Democrats defending Fannie Mae. Just last year, Sen. Charles Schumer advocated legislation to allow Fannie Mae and Freddie Mac to increase their already huge role in the mortgage market. Republican Rep. Mike Oxley has also defended these hybrid financial giants.

Both Fannie Mae and Freddie Mac have been generous in their contributions to politicians' political campaigns, so it is perhaps not surprising that politicians have been generous to them.

This is certainly part of "the mess in Washington" that Barack Obama talks about. But don't expect him to clean it up. Franklin Raines, who made mega-millions for himself while mismanaging Fannie Mae into a financial disaster, is one of Obama's advisers.

Estimates of how much money a government program will cost are notoriously unreliable. Estimates of the cost of the current bailout in the financial markets run into the hundreds of billions of dollars, and some say it may reach or exceed a trillion.

Many people have trouble even forming some notion of what such numbers as billion and trillion mean. One way to get some idea of the magnitude of a trillion is to ask: How long ago was a trillion seconds?

A trillion seconds ago, no one on this planet could read and write. Neither the Roman Empire nor the ancient Chinese dynasties had yet come into existence. None of the founders of the world's great religions today had yet been born.

That's what a trillion means. Put a dollar sign in front of it and that's what the current bailout may cost.

Will that money be spent wisely? It is theoretically possible. But don't bet the rent money on it or you could end up among the homeless.

Whenever there is a lot of the taxpayers' money around, politicians are going to find ways to spend it that will increase their chances of getting re-elected by giving goodies to voters.

The longer it takes Congress to pass the bailout bill, the more of those goodies are going to find their way into the legislation. Speed is important, not just to protect the financial markets but to protect the taxpayers from having more of their hard-earned money squandered by politicians.

Regardless of what Barack Obama or John McCain may say they are going to do as president, after a trillion dollars has been taken off the top there is going to be a lot less left in the federal Treasury for them to do anything with.

Already Sen. Christopher Dodd is talking about extending the bailout from the financial firms to homeowners facing mortgage foreclosures — as if the point of all this is to play Santa Claus.

The huge federal debts that we already have are the ghosts of Christmas past.

Financial institutions are not being bailed out as a favor to them or their stockholders. In fact, stockholders have come out worse off after some bailouts.

The real point is to avoid a major contraction of credit that could cause major downturns in output and employment, ruining millions of people, far beyond the financial institutions involved. If it was just a question of the financial institutions themselves, they could be left to sink or swim. But it is not.

We do not need a replay of the Great Depression of the 1930s, when the failure of thousands of banks meant a drastic reduction of credit — and therefore a drastic reduction of the demand needed to keep production going and millions of people employed.

But bailing out people who made ill-advised mortgages makes no more sense than bailing out people who lost their life savings in Las Vegas casinos. It makes political sense only to people like Sen. Dodd, people who are among the reasons for the financial mess in the first place.

People usually stop making ill-advised decisions when they are forced to face the consequences of those decisions, not when politicians come to their rescue and make the taxpayers pay for decisions that the taxpayers had nothing to do with.

The Wall Street Journal, which has for years been sounding the alarm about the riskiness of Fannie Mae and Freddie Mac, recently cited Sen. Dodd along with Sen. Schumer and Rep. Frank among those on Capitol Hill who have been "shilling" for these financial institutions, downplaying the risks and opposing attempts to restrict their freewheeling role in the mortgage market.

As recently as July of this year, Dodd declared Fannie Mae and Freddie "fundamentally strong" and said there is no need for "panicking" about them. But now that the chickens have come home to roost, Dodd wants to be sure to get some goodies from the rescue legislation to pass out to people likely to vote for him.

Don't make any bets on how this situation is going to turn out — except that we can predict that politicians will blame the "greed" of other people. You can bet the rent money on that.

Copyright 2008 Creators Syndicate, Inc

Hell in a Hand-Basket: Part 1

If you have ever wondered where you are going --- or how you ended up in that hand-basket in which you are currently sitting --- see the following:

'Crony' Capitalism Is Root Cause Of Fannie And Freddie Troubles

By TERRY JONES
INVESTOR'S BUSINESS DAILY | September 22, 2008

In the past couple of weeks, as the financial crisis has intensified, a new talking point has emerged from the Democrats in Congress: This is all a "crisis of capitalism," in socialist financier George Soros' phrase, and a failure to regulate our markets sufficiently.

Well, those critics may be right — it is a crisis of capitalism. A crisis of politically driven crony capitalism, to be precise.

Indeed, Democrats have so effectively mastered crony capitalism as a governing strategy that they've convinced many in the media and the public that they had nothing whatsoever to do with our current financial woes.

Barack Obama has repeatedly blasted "Bush-McCain" economic policies as the cause, as if the two were joined at the hip.

Funny, because over the past 8 years, those who tried to fix Fannie Mae and Freddie Mac — the trigger for today's widespread global financial meltdown — were stymied repeatedly by congressional Democrats.

This wasn't an accident. Though some key Republicans deserve blame as well, it was a concerted Democratic effort that made reform of Fannie and Freddie impossible.

The reason for this is simple: Fannie and Freddie became massive providers both of reliable votes among grateful low-income homeowners, and of massive giving to the Democratic Party by grateful investment bankers, both at the two government-sponsored enterprises and on Wall Street.

The result: A huge taxpayer rescue that at last estimate is approaching $700 billion but may go even higher.

It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.

Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.

Subprime's Mentors

Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.

With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.

This created the problem we are having today.

As we noted a week ago, subprime lending surged from around $35 billion in 1994 to nearly $1 trillion last year — for total growth of 2,757% as of last year.

No real market grows that fast for that long without being fixed.

And that's just what Fannie and Freddie were — fixed. They became a government-run, privately owned home finance monopoly.

Fannie and Freddie became huge contributors to Congress, spending millions to influence votes. As we've noted here before, the bulk of the money went to Democrats.

Dollars To Dems

Meanwhile, Fannie and Freddie also became a kind of jobs program for out-of-work Democrats.

Franklin Raines and Jim Johnson, the CEOs under whom the worst excesses took place in the late 1990s to mid-2000s, were both high-placed Democratic operatives and advisers to presidential candidate Barack Obama.

Clinton administration official Jamie Gorelick also got taken care of by the Fannie-Freddie circle. So did top Clinton aide Rahm Emanuel, among others.

On the surface, this sounds innocent. Someone has to head the highly political Fannie and Freddie, right?

But this is why crony capitalism is so dangerous. Those in power at Fannie and Freddie, as the sirens began to wail about some of their more egregious practices, began to bully those who opposed them.

That included journalists, like the Wall Street Journal's Paul Gigot, and GOP congressmen, like Wisconsin Rep. Paul Ryan, whom Fannie and Freddie actively lobbied against in his own district. Rep. Cliff Stearns, R-Fla., who tried to hold hearings on Fannie's and Freddie's questionable accounting practices in 2004, found himself stripped of responsibility for their oversight by House Speaker Dennis Hastert — a Republican.

Where, you ask, were the regulators?

Congress created a weak regulator to oversee Freddie and Fannie — the Office of Federal Housing Enterprise Oversight — which had to go hat in hand each year to Capitol Hill for its budget, unlike other major regulators.

With lax oversight, Fannie and Freddie had a green light to expand their operations at breakneck speed.

Fannie and Freddie had a reliable coterie of supporters in the Senate, especially among Democrats.

"We now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years," wrote economist Kevin Hassett on Bloomberg.com this week.

Buying Friends In High Places

Over the span of his career, Obama ranks No. 2 in campaign donations from Fannie and Freddie, taking over $125,000. Dodd, head of the Senate Banking panel, is tops at $165,000. Clinton, ranked 12th, has collected $75,000.

Meanwhile, Freddie and Fannie opened what were euphemistically called "Partnership Offices" in the districts of key members of Congress to channel millions of dollars in funding and patronage to their supporters.

In the space of a little more than a decade, Fannie and Freddie spent close to $150 million on lobbying efforts. So pervasive were their efforts, they seemed unassailable, even during a Republican administration.

Yet, by 2004, the crony capitalism had gone too far. Even OFHEO issued a report essentially criticizing Fannie and Freddie for Enron-style accounting that let them boost profits in order to pay their politically well-connected executives hefty bonuses.

It emerged that Clinton aide Raines, who took Fannie Mae's helm as CEO in 1999, took in nearly $100 million by the time he left in 2005. Others, including former Clinton Justice Department official Gorelick, took $75 million from the Fannie-Freddie piggy bank.

Even so, Fannie and Freddie were forced to restate their earnings by some $3.5 billion, due to the accounting shenanigans.

As we noted, those who tried to halt this frenzy of activity found themselves hit by a political buzz saw.

President Bush, reviled and criticized by Democrats, tried no fewer than 17 times, by White House count, to raise the issue of Fannie-Freddie reform. A bill cleared the Senate Banking panel in 2005, but stalled due to implacable opposition from Democrats and a critical core of GOP abettors. Rep. Barney Frank, who now runs the powerful House Financial Services Committee, helped spearhead that fight.

Now, with the taxpayer tab approaching $1 trillion or more, we're learning the costs of crony capitalism.

In the coming days, an IBD series will look into this phenomenon in greater detail — how we got here, who's responsible, and why nothing was done.

Open Memo to Ambassador John Bolton

Dear Ambassador Bolton:

I recently read your Wall Street Journal opinion article (August 5) titled:"While Diplomats Dither, Iran Builds Nukes" and found it as deeply disturbing as I found disturbing your book "Surrender Is Not an Option: Defending America at the United Nations". It is absolutely inscrutable to me why so few in Washington are so oblivious to (or worse, totally ignorant of) the gathering threat to this country currently being mounted, on so many varied and sinister fronts, by multiple enemy nations around the world. As a recently retired 30-year civil servant in the U.S. Department of Commerce (National Weather Service/NOAA), I am painfully aware of the major and chronic bureaucratic incompetencies that afflict all levels of the federal government. But it is hugely disturbing to see just "how the international, diplomatic sausage is made" in the State Department, the Administration, and at the UN as you clearly and brilliantly elucidate in your book. It is my deepest regret that you are not currently a candidate for President of the United States. You, unlike any others on the scene today, unquestionably have the most clear grasp of the greatest issues and the greatest threats confronting our country today that, left unchecked, could well be this country's undoing. The solutions and approaches that you have taken during your entire federal career and that you have detailed in your recent publications seem so obvious and clear! It is unbelievable to me that there is even any issue. Chamberlain was wrong; Churchill was right! Just how tough can it be for Washington politicians (including Administration clones) with their myopic, near-term, and self-serving agendas to recognize that fact! Again, many thanks for your service and for all that you do --- your observations and clarifications benefit hugely this country! I will continue to look forward to your prescient and telling commentary with hope.

Regards,

Tom Carroll
Bloomington, Minnesota
tomcarroll77@gmail.com
2008 August 9

Open Email to Trevor Carroll on the Climate Change Hoax

Trevor ---

Hope you are having a good summer. While you are laying around the house drinking your dad's beer, I've got a job for you --- you need to read:

The Deniers: The World Renowned Scientists Who Stood Up Against Global Warming Hysteria, Political Persecution, and Fraud**And those who are too fearful to do so (Hardcover) by Lawrence Solomon (Author)_­

I have heard Solomon talk and he knows of what he speaks.

When you're done with that book, you need to read:

Climate Confusion: How Global Warming Hysteria Leads to Bad Science, Pandering Politicians and Misguided Policies that Hurt the Poor (Hardcover)
by Roy Spencer (Author)

I know Roy Spencer; I have been on several committees with him and we both were involved with analyzing satellite image data. I was extracting information on nation's snowpack; Spencer used the same satellite imagery to assess sea-surface temperatures and global temperatures over time.

These two books should go a long way to correct much of the misinformation, willful deceit, and government/academic propaganda that is camouflaged as education and public policy these days.

--

Tom Carroll

None Dare Call It Treason!

Court's Ruling Gives Support To Our Enemy

By HORACE COOPER

June 16, 2008

The Supreme Court's decision to strike down the so-called military tribunals law not only runs contrary to precedent and the U.S. Constitution. It is yet another dangerous example of the judiciary usurping the constitutional authority of the political branches of government and stands sharply at odds with the national security reality that Americans face.

We are in a global war with terrorists who seek to destroy our country and our way of life. This threat is real and actualized: They've attacked us at sea and on land, away and abroad.

While we didn't initially recognize what they were doing, the body count revealed the truth: nearly 3,500 dead in the 21st century.

Unfortunately, this ruling, by denying the seriousness of the threat, will hinder our efforts to keep this number from rising.

While the errors in the case are numerous, several obvious ones must be addressed.

First, this decision marks the first-ever application of a constitutional right of habeas corpus in the entirety of American history for alien combatants held abroad in the course of an ongoing war.

The opinion completely ignores the reality that the "writ of habeas corpus" was always understood constitutionally and in common law as a matter exclusively for dealing with domestic detention — that is, detention inside the U.S. Other than the results of a major power grab by a judicial majority, there is no reason for discarding nearly 200 years of precedence in this regard.

Second, the court engages in a radical manifestation of judicial supremacy when it claims that the Detainee Act of 2005 was some kind of a means for Congress and the president to "govern without legal constraint" outside the U.S.

To ensure that it gets the final say, the court leaps past a basic and time-tested constitutional question of whether the litigants in question even have standing to raise a complaint in U.S. federal courts. As a result, there is no logical reason why the court couldn't use this same argument as a justification for interfering and overseeing detentions in Iraq, Afghanistan or anywhere the U.S. is at war.

Third, this activist decision strikes down perhaps the most generous set of procedural safeguards ever afforded military detainees. Congress and the president worked carefully to craft a set of rules — having access to specialists and after careful review and debate.

The court sets aside these findings and doesn't even list a set of replacements, observing instead that lower courts will develop them subject to their review. This time-consuming process of discovering and navel-gazing is precisely what the framers did not intend, especially with regard to national security matters.

Finally, the liberal majority takes great pleasure in noting that there is no recorded case in American history of denying jurisdiction outside the U.S. This logic is exactly backwards.

It has been so overwhelmingly accepted that the "writ of habeas corpus" applies only inside the U.S., should we be surprised that no one but the attorneys for desperate and dangerous terrorists and their liberal activists on the Supreme Court would make such an argument?

This decision also puts the servicemen and women who actually captured these rogue warriors on the battlefield on an equal playing field in our courts of law. Not unlike America's failed "catch and release" immigration policy, the court's actions envision a world where our men and women in uniform risk their lives capturing and detaining some of the most deadly terrorists on the globe only to find them eligible for release after a hearing before some liberal activist judge.

This is unconscionable, and it will mean more Americans are at risk of dying. This is not what our framers intended.

While reported as a loss for the Bush administration, the court's ruling represents a major setback for our country's national security. Emboldened terrorists will be less likely to surrender and end their plans for another attack. They will in some sense feel justified.

This ruling not only shackles America's efforts to prevail in this worldwide clash of civilizations. It also gives energy and succor to an evil and restless enemy at a time when they should be given no sanctuary or encouragement.

Boumediene v. Bush makes it all too clear that courts simply are not the appropriate agents for directing the sophisticated and complicated policy prescriptions of statecraft and national security.

They are ill-equipped to assess the risks and benefits and they are immune from the accountability instrumental in ensuring that policymakers act in a manner consistent with the interests and needs of the American people in matters of national security.

Cooper is a national security and constitutional expert and a senior fellow at the American Civil Rights Union.

Polar Bears Will Be Just Fine, Thank You Very Much!

Alaska's Polar Bears: Going With The Floe?

By INVESTOR'S BUSINESS DAILY

June 16, 2008

Energy: The green light given by the Fish and Wildlife Service for oil drilling off Alaska is being portrayed as an OK to hurt polar bears. But there are so many polar bears, it's the drillers who should worry.

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IBD Series: Breaking The Back Of High Oil

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Environmentalists rejoiced last month when Interior Secretary Dirk Kempthorne declared the polar bear endangered. The designation gave them a poster pet for the dangers of global warming and a club to bludgeon oil companies.

Last week, however, there was a break in the ice, so to speak. New Fish and Wildlife regulations gave legal protection to seven oil companies that plan to search for oil in the Chukchi Sea off Alaska's northwest coast if "small numbers" of polar bears and Pacific walruses are incidentally harmed over the next five years.

The Associated Press went ballistic, proclaiming that less than a month after the polar bear was listed as endangered, "the Bush administration is giving oil companies permission to annoy and potentially harm them in the pursuit of oil and natural gas."

What the administration is doing is honoring contracts signed in February, before the polar bear was listed — wrongly, we believe — as endangered. Fact is, polar bears aren't endangered, either by oil companies or climate change.

When he made the listing, Kempthorne noted that exploration in the Chukchi Sea was exempt. "Polar bears are already protected under the Marine Mammal Protection Act," he explained, "which has more stringent protections for polar bears than the Endangered Species Act does."

Listing the polar bear as endangered was a political decision made under political pressure.

The Mineral Management Service estimates we could recover 15 billion barrels of oil plus 76 trillion cubic feet of natural gas from the Chukchi Sea's 29.7 million acres. Oil companies enjoyed a similar exclusion in the Chukchi from 1991 to 1996 and in the Beaufort Sea since 1993 with no effect on the bears.

In fact, there's no proof of a single bear being harmed by oil operations in Alaska since 1993. Since 1960, when the Alaska oil hunt began, only two oil-related bear fatalities have been documented.

The world polar bear population is at a modern high and growing. Mitch Taylor, polar bear biologist with the Government of Nunavut, a territory in Canada, puts the current population at 24,000, up 40% since 1974. Some 2,000 of these bears live in and around the Chukchi Sea, where the oil companies purchased leases worth $2.6 billion in February.

Taylor says that, contrary to greenie hype, climate change, particularly in the Arctic, is not pushing them to the brink of extinction. They have and will continue to adapt to their environment.

The ice-loving bears have survived warmer periods than we are experiencing now. The most recent such period occurred 6,000 and 9,000 years ago, and it was even warmer between 110,000 and 130,000 years ago, long before the first SUV hit the road.

In a report to Fish and Wildlife, Taylor stated: "No evidence exists that suggests that both bears and the conservation systems that regulate them will not adapt and respond to the new conditions." Taylor stressed polar bears' adaptability, saying they evolved from grizzlies 250,000 years ago and as a distinct species about 125,000 years ago when natural climate change occurred.

From caribou that have thrived for 30 years as 15 billion barrels have been pumped from Prudhoe Bay in Alaska to marine life thriving among drilling platforms that act like artificial reefs off the Louisiana, evidence says oil exploration and the environment can coexist. Katrina ravaged Gulf of Mexico oil facilities and not a single drop of oil was leaked or spilled.

Oil companies are criticized for not using their "obscene" profits to find more oil but then attacked when they want to. Lift the polar bear's endangered status. Drill in the Chukchi. Drill now.

The Next Nuclear War Starts Here!

A U.N. Khan Job

By INVESTOR'S BUSINESS DAILY
June 16, 2008

WMDs: Blueprints for a nuclear weapon compatible with the ballistic missiles of Iran, North Korea and other rogue states were found on computers of the notorious Khan smuggling ring. Will a complacent world wake up?

Read More: Iran | Global War On Terror

It's clear that it's getting easier to build and use a nuclear bomb. If civilized countries want to stop their biggest cities from becoming radioactive craters, they'd better implement a no-tolerance policy against nuclear proliferation.

It's unacceptable to find — four years after their seizure — that computers in Switzerland, Bangkok and several other cities housed sophisticated electronic designs for a Pakistani atomic bomb, in a form easy to reproduce.

David Albright, former chief arms inspector for the United Nations who now heads the Institute for Science and International Security, will issue a report this week revealing that the designs were found on computers in the possession of Swiss smugglers linked to nuclear engineer Abdul Qadeer Khan, who is considered the father of Pakistan's bomb.

The computers were seized in 2006. Yet the geniuses at the U.N.'s International Atomic Energy Agency (IAEA) reportedly had more trouble deciphering the more than 1,000 megabytes of information on the computers and finding the bomb plans than the Manhattan Project had building the first atom bomb in the 1940s.

Which raises a question: Why send hundreds of millions of dollars to Vienna, Austria, each year for IAEA head Mohamed ElBaradei's budget? So he can win a Nobel Peace Prize while helping the Islamofascist Iranian regime stall for time while it builds a nuke?

The U.N. agency, which turned 50 last year, exists by law to make sure that nuclear energy "is not used in such a way as to further any military purpose." On winning his 2005 Peace Prize, ElBaradei said it was an "urgently required" step for the IAEA to "keep nuclear and radiological material out of the hands of extremist groups."

Khan's contacts with Tehran's revolutionary regime go back to the 1980s. The IAEA knew at least five years ago that Iran's centrifuge designs were Pakistani.

The IAEA should have been aggressively tracking down every tentacle of the Khan network for years.

Had it done so — who knows? — it might even have found Saddam Hussein was one of Khan's clients, something that may yet be in the cards and that would not enhance ElBaradei's reputation.

Switzerland's government announced that it destroyed 30,000 pages relating to the Khan nuclear plans so they wouldn't fall into the wrong hands. But only a naif would conclude that Khan's plans aren't now in the hands of dozens of unsavory characters around the world, from Pyongyang to Damascus, and perhaps even in the caves of Waziristan.

A real international nuclear watchdog would be carrying out a relentless global manhunt for anyone who might have such instructions on how to kill a million innocent souls.

What we have instead in the IAEA is an incompetent, ideologically leftist bureaucracy that continually is making worse an already dangerous state of affairs.

What Do These Three Men Have In Common?

Posters Of Communist icon Che Guevara and Barack Obama hang on a wall as Common Pleas Judge James Burge speaks in his office in Loraine, Ohio, in this April 22 photo. Last week, Burge ruled that Ohio's lethal injection process is unconstitutional because it could cause pain and the state mandates that an inmate's death be painless.

Your Taxes Will Be Going Up -- WAY UP!

Price Of Not Extending Bush Cuts: Return To Historically High Taxes

By J.T. YOUNG

Despite liberal condemnation of the Bush tax cuts, virtually no one embraces a complete return to their pre-cut level — including the Democratic majority in Congress and both pending presidential nominees. There is good reason.

Implicit in this rejection is the admission that they were too high to return to. While the media won't say it now, and certainly wouldn't then, those supposedly halcyon days of fiscal policy rested on historically high tax levels.

Taxes got there by increasing retroactively in 1993, adding a 36% income-tax bracket and effectively another of 39.6% through a surcharge on incomes above a certain level. That hike also raised the corporate rate to 35%, increased estate taxes and the gas tax, taxed certain Social Security benefits and upped AMT rates to 26% and 28%.

In short, most everyone making more than $20,000 paid more in taxes.

Eight years later, those hikes were reversed. The 2001 tax cut created a low 10% rate bracket and lowered all the rest — the top 39.6% rate to 35%, 36% to 33%, 31% to 28%, and the 28% bracket to 25%.

It also increased the child credit, eased the marriage penalty, incentivized pension contribution and decreased estate taxes.

In short, most everyone paying income taxes paid less in taxes. The difference is reflected in individuals' effective tax rates — the rate of taxes actually paid.

The Congressional Budget Office studied effective rates from 1979 to 2005. It showed the 1993-2000 average for all quintiles at 22.6% — higher than any other single year outside 1993-2000. The 2001 tax cut decreased these effective rates across the board, as the accompanying chart shows.

A comparison of the distribution of the federal income tax burden is similarly illuminating.

Using 2008 Internal Revenue Service statistics, the 2001 cuts shifted the income tax burden up the economic ladder.

In 2000, the top 1% paid 37.4% of all income taxes vs. 39.4% in 2005. The top 2% went from 56.5% to 60%, the top 10% from 67.3% to 70.3%, the top 25% from 84% to 86%, and the top 50% from 96% to 97%.

In addition to its impact on taxpayers, the 1993-2000 years also had a historically high federal tax burden on the economy. Over the last 60 years, the federal tax burden has averaged 17.9% of GDP; the 1993-2000 period averaged 19.2%.

While that 1.3% difference may seem slight, it is greater than the 1% level deemed necessary earlier this year to stimulate the slowing economy.

In contrast, the 2001-07 period averaged 17.9% of GDP — equaling the 60-year average despite the 2000 economic slowdown that tipped into a recession following 9/11.

The 1993-2000 burden magnitude is demonstrated by the fact that its 19.2% average was surpassed by only three single years — 1981 (19.6%), 1969 (19.7%) and 1945 (20.4%) — outside the period.

The period's highest year, 2000's 20.9%, is unsurpassed and only equaled by 1944's wartime level.

All told, the period was the highest of any eight years recorded in the Historical Tables of the President's Budget.

Comparing the federal income tax burden to the economy is even more dramatic. The average of the last 60 years is 8% of GDP. The 1993-2000 period average was 8.8%; 2001-07's 8.1%.

Again, the 1993-2000 period was the highest of any eight-year period, and its 2000 peak of 10.3% of GDP was higher than any on record.

We need not simply look backward to understand what will happen going forward. The CBO projects that, even with the removal of the Alternative Minimum Tax's impact, federal taxes will immediately return to 19.8% of GDP in 2012 — easily exceeding the 1993-2000 average — just two years after the 2001 tax cuts expire.

The effect on income taxes is even greater, tying the all-time record of 10.3% of GDP by 2016 and breaking it at 10.4% a year later.

The current fixation on the 2001 tax cuts masks the real, bigger tax story. By myriad measures — marginal rates, effective rates, distribution of the tax burden or as percentage of the economy — taxes were not just high before the 2001 tax cuts; they were also historically high.

It's no wonder that such tax levels are being rejected — at least in part — across the political spectrum this election year. But they will return in 2011.

They will not increase gradually, but immediately return to high levels. They will come regardless of the state of the economy. And they will come regardless of what politicians promise this year . . . unless they act by Congress passing and the president signing legislation.

Talk is cheap, particularly in an election year. But rest assured, the taxes of 2011 will not be.

Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.

We are, indeed, safer now!

Have We Been Safer Under Bush? The Empirical Evidence Says Yes

By JOHN HINDERAKER
May 28, 2008

The debate over Iraq and the war on terror rages, even amid signs we're winning. John Hinderaker of powerlineblog.com recently posted a blog entry answering the perennial question, "Are We Safer?" We rerun it here with his permission.

On the stump, Barack Obama usually concludes his comments on Iraq by saying, "and it hasn't made us safer."

It is an article of faith on the left that nothing the Bush administration has done has enhanced our security, and, on the contrary, its various alleged blunders have only contributed to the number of jihadists who want to attack us.

Empirically, however, it seems beyond dispute that something has made us safer since 2001. Over the course of the Bush administration, successful attacks on the U.S. and its interests overseas have dwindled to virtually nothing.

Some perspective here is required. While most Americans may not have been paying attention, a considerable number of terrorist attacks on America and American interests abroad were launched from the 1980s forward, too many of which were successful.

What follows is a partial history:

1988

February: Marine Corps Lt. Colonel Higgens, chief of the United Nations Truce Force, was kidnapped and murdered by Hezbollah.

December: Pan Am flight 103 from London to New York was blown up over Scotland, killing 270 people, including 35 from Syracuse University and a number of American military personnel.

1991

November: American University in Beirut bombed.

1993

January: A Pakistani terrorist opened fire outside CIA headquarters, killing two agents and wounding three.

February: World Trade Center bombed, killing six and injuring more than 1,000.

1995

January: Operation Bojinka, Osama bin Laden's plan to blow up 12 airliners over the Pacific Ocean, discovered.

November: Five Americans killed in attack on a U.S. Army office in Saudi Arabia.

1996

June: Truck bomb at Khobar Towers kills 19 American servicemen and injures 240.

June: Terrorist opens fire at top of Empire State Building, killing one.

1997

February: Palestinian opens fire at top of Empire State Building, killing one and wounding more than a dozen.

November: Terrorists murder four American oil company employees in Pakistan.

1998

January: U.S. Embassy in Peru bombed.

August: Simultaneous bomb attacks on U.S. Embassies in Kenya and Tanzania killed more than 300 people and injured over 5,000.

1999

October: Egypt Air flight 990 crashed off the coast of Massachusetts, killing 100 Americans among the more than 200 on board; the pilot yelled "Allahu Akbar!" as he steered the airplane into the ocean.

2000

October: A suicide boat exploded next to the U.S.S. Cole, killing 17 American sailors and injuring 39.

2001

September: Terrorists with four hijacked airplanes kill about 3,000 Americans in New York, Washington and Pennsylvania.

December: Richard Reid, the "shoe bomber," tries to blow up a transatlantic flight, but is stopped by passengers.

The Sept. 11 attack was a propaganda triumph for al-Qaida, celebrated by a dismaying number of Muslims around the world. Everyone expected that it would draw more Muslims to bin Laden's cause and that more such attacks would follow.

In fact, though, what happened was quite different: The pace of successful jihadist attacks against the U.S. slowed, decelerated further after the onset of the Iraq War, and has now dwindled to essentially zero.

Here is the record:

2002

October: Diplomat Laurence Foley murdered in Jordan, in an operation planned, directed and financed by Abu Musab al-Zarqawi in Iraq, perhaps with the complicity of Saddam's government.

2003

May: Suicide bombers killed 10 Americans, and killed and wounded many others, at housing compounds for Westerners in Saudi Arabia.

October: More bombings of U.S. housing compounds in Riyadh, Saudi Arabia, killed 26 and injured 160.

2004

There were no successful attacks inside the U.S. or against American interests abroad.

2005

There were no successful attacks inside the U.S. or against American interests abroad.

2006

There were no successful attacks inside the U.S. or against American interests abroad.

2007

There were no successful attacks inside the U.S. or against American interests abroad.

2008

So far, there have been no successful attacks inside the U.S. or against American interests abroad.

I have omitted from the above accounting a few "lone wolf" Islamic terrorist incidents, such as the Washington, D.C., snipers, the Egyptian who attacked the El Al counter in Los Angeles, and an incident or two when a Muslim driver steered his vehicle into a crowd.

These are, in a sense, exceptions that prove the rule, since the lone wolves were not, as far as we know, in contact with international Islamic terrorist groups and therefore couldn't have been detected by surveillance of terrorist conversations or interrogations of al-Qaida leaders.

It should also be noted that the decline in attacks on the U.S. was not the result of jihadists abandoning the field.

Our government stopped a number of incipient attacks and broke up several terrorist cells, while Islamic terrorists continued to carry out successful attacks around the world, in England, Spain, Russia, Pakistan, Israel, Indonesia and elsewhere.

There are a number of possible reasons why our government's actions after Sept. 11 may have made us safer.

Overthrowing the Taliban and depriving al-Qaida of its training grounds in Afghanistan certainly impaired the effectiveness of that organization.

Waterboarding three top al-Qaida leaders for a minute or so apiece may have given us the vital information we needed to head off plots in progress and to kill or apprehend three-quarters of al-Qaida's leadership.

The National Security Agency's eavesdropping on international terrorist communications may have allowed us to identify and penetrate cells here in the U.S., as well as to identify and kill terrorists overseas.

We may have penetrated al-Qaida's communications network, perhaps through the mysterious Naeem Noor Khan, whose laptop may have been the 21st century equivalent of the Enigma machine.

Al-Qaida's announcement that Iraq is the central front in its war against the West, and its call for jihadis to find their way to Iraq to fight American troops, may have distracted the terrorists from attacks on the U.S.

The fact that al-Qaida loyalists gathered in Iraq, where they have been neutralized by American and Iraqi troops, may have crippled their ability to attack elsewhere.

The conduct of al-Qaida in Iraq, which revealed that it is an organization of sociopaths, not freedom fighters, may have destroyed its credibility in the Islamic world.

The Bush administration's skillful diplomacy may have persuaded other nations to take stronger actions against their own domestic terrorists. (This certainly happened in Saudi Arabia, for whatever reason.)

Our intelligence agencies may have gotten their act together after decades of failure. The Department of Homeland Security, despite its moments of obvious lameness, may not be as useless as many of us had thought.

No doubt there are officials inside the Bush administration who could better allocate credit among these, and probably other, explanations of our success in preventing terrorist attacks.

But based on the clear historical record, it is obvious that the Bush administration has done something since 2001 that has dramatically improved our security against such attacks.

To fail to recognize this, and to rail against the Bush administration's security policies as failures or worse, is to sow the seeds of greatly increased susceptibility to terrorist attack in the next administration.

Hinderaker blogs at powerlineblog.com.