The most promising trend in geopolitics is the transition from hydrocarbon-based economies to knowledge-based societies. Leadership for that change is emerging from Arab nations.
The appeal of the Knowledge Society is apparent. Who could object to nations preparing their citizens for the 21st century? Yet unless knowledge is changed, the result could worsen an already dangerous situation.
The sharing of values and knowledge has long been the best way to bridge cultures and promote peace. That strategy is now essential to counter the success of those promoting The Clash of Civilizations.
Bahrain, Egypt, Jordan, Morocco, Qatar and the United Arab Emirates are breaking new ground with education models that build on state-of-the-art information and communication technologies.
This is the inevitable path for the Middle East and North Africa. Yet despite the best of intentions, if knowledge itself is not changed, the impact on Arab societies could aggravate trends that undermine progress.
Just consider the costs when knowledge is corrupted….
How Zionists Corrupt Knowledge
Those who induced the U.S. to war in the Middle East deployed knowledge like a weapon. With lengthy pre-staging, a narrative emerged that made it appear plausible—even desirable—to invade Iraq in response to the provocation of 911.
In retrospect, we now know that the knowledge on which the U.S. relied was false. All of it.
Iraqi WMD. Iraqi ties to Al Qaeda. Iraqi meetings in Prague with Al Qaeda. Iraqi yellowcake uranium from Niger. Iraqi mobile biological laboratories. All false, all traceable to pro-Israelis and all portrayed as true by media outlets dominated by pro-Israelis.
The Knowledge Society holds great potential to connect the Arab world globally. And to build with the West cross-border understanding and empathy. That is the Knowledge Society at its best. At its worse, knowledge can be exploited to manipulate behavior.
The ongoing manipulation of thought and emotion in the U.S. typifies the danger. When Arab nations grasp the common source of the false knowledge that brought war to the region, both the perils and the promise of the Knowledge Society will become apparent.
Yet even the risk of being seduced to war understates the threat. In the modern era, psychological operations (“psy-ops”) are routinely deployed to create consensus opinions and generally accepted truths—akin to the truth of Iraqi WMD.
The modern-day battlefield is the shared field of consciousness. Where else could consensus opinions reside? Or generally accepted truths. There too are found “field-based” phenomena such as credibility and celebrity that are also deployed to exploit thought and emotion.
When waging field-based warfare, the power of association ranks near the top as effective weaponry. For example, with global public opinion the target, Zionists arranged for U.N. testimony in February 2003 by Secretary of State Colin Powell who vouched for intelligence showing that Iraq had mobile biological weapons laboratories.
When the U.N. Security Council and a global television audience watched the testimony of this former four-star general, what they saw was his reputation for honesty. By the power of association, his credibility “bled over” to grant legitimacy to phony intelligence.
General Powell was only a celebrity prop in an elaborately staged play meant to enhance the plausibility of a global war on terrorism. That war began six weeks later.
Where other than in plain sight could such duplicity succeed? You can be watching field-based warfare and still not see it.
Even now, Powell may not yet grasp how two field-based properties (credibility and celebrity) were key to the psy-ops that seduced the U.S. to war for an Israeli agenda.
Freedom from Deceit
Mental and emotional exploitation lie at the heart of how knowledge is corrupted to catalyze conflicts, manipulate behavior and influence affairs from afar.
With a solid grasp of the methodology of deceit, the Knowledge Society can expose and, by design, displace those complicit in this cunning form of combat.
In preparing for the 21st Century, Arab nations have an opportunity to free their citizens from the exploitation of those who for centuries have abused knowledge for their selfish ends.
Much of that abuse now proceeds through the unfettered freedom allowed finance. Educated over decades in a “consensus” mindset, lawmakers worldwide now believe in financial freedom as a proxy for personal freedom—regardless of the real-world results.
For the Knowledge Society to realize its potential, modern-day information and communication technologies must make these various forms of duplicity apparent and the perpetrators transparent.
Only with widespread knowledge of how facts can be displaced with false beliefs can the Knowledge Society be protected from such treachery.
Since 1913, debt has been the only way that we in the U.S. have known to create money. Choking on debt yet short on money, Americans are reeling from too much monetary theory and too little commonsense.
Those who sold us the theory also ensured recurring recessions. Each debt-induced cycle features rich-get-richer booms followed by debilitating busts. We designed our way into this mess. We can design our way out.
As yet, there’s no sign that policy-makers know a way out. Nor do their advisers. Over the past century, every economist has been educated the same. They are unable to see the real problem because the theory they were taught is the source of the problem.
The U.S. Federal Reserve model of central banking was one of America’s key exports. Every nation now “monetizes” pretty much the same way—with debt.
Good news is on the horizon from major exporting nations. Many of them are Islamic and flush with money. Much of that money originated as debt in industrialized nations.
Those nations are staggering under immense debt. Much of that debt is owed to nations where they must buy oil and gas to fuel their economies and generate funds to…repay debt.
Yet the creditors too are in a bind. Where can they prudently invest their vast pools of debt-backed money? Do they buy more U.S. government debt? Euro bonds? Do they hold their reserves in dollars, euros or pounds sterling—all debt-based?
Invest instead in commodities and they just bid up the price. That may be good news for speculators but it is not a sensible risk management strategy. So what to do? When all else fails, commonsense may yet find its way into this debate.
Tomorrow’s Commodity Today
The safest commodity is one you can control. Look at China’s control over rare earth metals. However control of that sort is a beggar-thy-neighbor approach, akin to investing in precious metals like gold or silver. Such investments miss the point—and the opportunity.
The commodity hedge for the foreseeable future is clean energy, particularly solar power due to its abundance and ease of collection. Clean energy is also what must be monetized—not debt but electrons captured by solar panels and converted to useable energy.
Monetization comes with an implied promise. To maintain value, currencies must be backed by productivity—the capacity to generate real goods and services. Productivity is what makes a financial security truly secure.
Those who designed America’s central banking system assured us that debt-based “monetization” would be backed by real productivity. That thin tether to reality was severed in 1971 when backing for the U.S. dollar shifted from precious metals to a candid slogan now stamped on U.S. currency: “In God We Trust.”
Federal Reserve Chief Alan Greenspan not only trusted Wall Street’s “financial creativity,” he also enabled it with cheap credit. Layer upon layer of cross-collateralized debt produced little more than more money for financial sophisticates. Meanwhile real people living in real communities witnessed the dismantling of the U.S. economy.
Ask around. Would those with commonsense prefer their money secured with debt or with clean energy? Which is more secure?
Those who propose we reform central banking miss the point. Why reform it when, by design, it can gradually be displaced?
Instead of relying solely on debt-backed money, why not also issue asset-backed currencies? Why not complement centralized money with decentralized monies? Instead of one-size-fits-all money, why not tailor currencies to the diverse needs of communities?
Rather than trust in God, why not put your faith in money secured by clean energy?
Total assets in sovereign wealth funds now exceed $8.1 trillion. China has reserves approaching $2.4 trillion. Oil exporters have considerably more including $1 trillion held by the United Arab Emirates and $510 billion by Norway.
As an energy exporter with large currency reserves, Russia is revisiting the wisdom of investing in other countries those funds generated by the sale of its natural resources.
With increasing frequency, political leaders are looking at the global financial crisis as an opportunity to reconsider what they monetize—and for whom. That suggests commonsense may yet find a way.
An alternative is known, available and viable with energy-backed “complementary currencies” designed to operate parallel with national currencies.
Do not expect leadership from the U.S. Those who sold us the current system retain too much control—for now. Their interest lies in more money secured by more debt. Or backed by nothing at all.
Look for this overdue innovation to emerge from cultures long wary of those who collect fixed interest regardless of the debtor’s condition. The Qur’an forbids it as “riba.” The Bible forbids it as “the pound of flesh.”
The source of this common malady is now coming sharply into focus—as is the cure.
The phrase “enemy within” brings to mind the image of a shadowy spy stealing military secrets. That was the case for Israeli master spy Jonathan Pollard jailed for 1980s espionage that compromised U.S. Cold War strategy.
That phrase also describes those involved in a form of psy-ops that is not easily detected because it operates so brazenly. For instance, the well-timed release of diplomatic cables by WikiLeaks displaced reports of Israeli obstinacy in peace talks with reports of a need for war with Iran.
That operation relied on editors at four major newspapers chosen by WikiLeaks to manage the releases. Despite the delight at their impact voiced by Israeli Prime Minister Benjamin Netanyahu, mainstream media failed to mention the possibility of undisclosed bias by those who chose what to release and when.
The bias of The New York Times is well known. Less clear is the role of Ian Katz, Deputy Editor at The Guardian (London) and Executive Editor Sylvie Kauffman at Le Monde in Paris. The geopolitical success of the WikiLeaks operation suggests an enemy within.
Israeli duplicity often operates through what U.S. Defense Secretary Robert Gates describes as “the people in between.” When waging unconventional warfare, those people are the most dangerous combatants, particularly those operatives in mainstream media.
The People in Between
For systems of governance reliant on informed consent, nothing could be more perilous. The “people in between” routinely target media—freedom’s greatest vulnerability—as a means for displacing facts with what a targeted populace can be deceived to believe.
How old is this duplicity? How long have false beliefs been used to manipulate behavior? Modern technology—particularly media—enables deception on a global scale. Between the American populace and the facts they require to protect their freedom—that’s where this enemy within imbeds its operatives.
The false intelligence claiming Iraqi WMD was a people-in-between operation. Judith Miller at The New York Times fed us a steady diet of front-page news that we now know was fixed around Israeli goals promoted by Ahmad Chalabi, a London-based Iraqi expatriate who, like Israel, sought regime change in Iraq.
Pentagon insider Richard Perle developed Chalabi over two decades. A Jewish Zionist, Perle has long been a strategically well-placed “person in between.” Miller left The Times and joined Fox News and then Newsmax.
Yet the impact of complicit media pales in comparison to the enemy within that brought the U.S. economy to its knees and undermined national security at its financial core.
The most devastating in this chronicle of enemies is the most difficult to see. As with other “in between” operations, this too succeeds by displacing facts with false beliefs. Only in this case, those beliefs were imbedded in education and over decades worked their way into law.
Known as the “Washington Consensus,” this widely shared perspective shapes economic policy worldwide. At the heart of this generally accepted truth is found the belief that money should be accountable only to itself.
In this mindset, financial freedom is an article of faith. Instead of the civil rights refrain, “Let my people go,” its proponents insist: “Let my money go.” Allow money the freedom to work its will worldwide and everything will work out fine.
That shared belief works “in between” in the same way that Jonathan Pollard undermined national security, WikiLeaks shifted attention to Iran and Judith Miller induced us to war in Iraq. Only in this case a false belief has been so thoroughly internalized that it’s difficult to see because this shared mindset has become that with which we have been educated to do our seeing.
A Global Sanhedrin
The World Bank and the International Monetary Fund are the primary apostles of this consensus faith. The World Trade Organization (WTO) now seeks to take this belief to global scale by enforcing unrestricted free trade not only in goods and services but also financial capital.
The WTO operates like a global Sanhedrin akin to a Jewish high council accountable only to itself. What’s now emerging as a global enemy within is a finance-guided form of transnational governance marketed as free trade but accountable only to itself.
That ‘self’ traces its origins to an internalized mindset in which financial freedom serves, by consensus, as a proxy for personal freedom. That mindset was decades in the making.
This modern-day Mindset Warfare is being waged by an enemy that is truly within. Fast globalizing financial forces now induce us to freely embrace the very forces that undermine our freedom.
By waging war on us from the inside out, the originators of this money-myopic mindset dismantled the U.S. economy, enabled vast financial pillaging and induced us to fiscal ruin.
Those wielding this weaponry operate from our internal shadows as the Zionist entity within.
Three days before Christmas, the U.S. Congress authorized $725 billion in defense spending for 2011. Adjusted for inflation, that’s the most since 1945, the last year of World War II.
With numbers that large, making comparisons is difficult. Yet consider this. The United Nations reports that 1.5 billion people still live without electricity. For less than $100, a solar panel can power a cell phone charger and four high-efficiency LED lights.
At that price, 1.5 billion people could become partially electrified for $150 billion. Defense-wise, which taxpayer outlay offers better long-term security?
With the U.S. humbled in Iraq, mired in Afghanistan and in danger of being drawn into Iran, is it time to replace aggression with development and firepower with solar power?
With extremism the new enemy, what’s our best defense? What if the U.S. projected its power by defending against the indignities of energy poverty and illiteracy?
Absent a strategy for addressing the roots of human indignity, it’s not clear that the war on terrorism can be won. Energy poverty is a war we know how to win.
Parents of children using solar-powered LED lights report how their grades improve when they have light for studying. While that’s not enough, it’s a good start.
Can the U.S. afford not to embrace a solar defense? If not literacy, what is the best long-term defense against extremism? For $12, a solar-powered LED system can power a desk lamp and a phone charger.
As yet, there is no business model for home-scale solar systems scattered across a continent. Large-scale solar projects are far easier to finance. Community-scale is where the Pentagon can play an immediate role.
A New Form of Defense
Women living in the Pashtun area between Pakistan and Afghanistan share similar goals. They want to charge their cell phones, power a few light bulbs and refrigerate their food.
That’s a challenge the Pentagon can meet. Solar panels can handle part of that task though not all. But again, that’s a good start. Widespread access to cell phones is also helpful.
Cell phones are fast becoming a key tool for transferring money in developing countries. Transactions seldom exceed $20. By improving personal communications, they also provide another incentive to electrify in order to recharge the phone.
Phones now feature applications able to facilitate distance education, coordinate testing and track student progress. What would be the impact of literacy and electrification on the long-term need for weapons-based defense spending? Is the enemy terrorism or indignity?
Cold War defense outlays totaled $20 trillion (in 2010 dollars) from 1948 until the fall of the Berlin Wall in 1989. The Clinton administration spent roughly $4 trillion. Republican G.W. Bush spent another $4.65 trillion and Democrat Barack Obama is on track to spend $5 trillion. That’s a 63-year bipartisan total of at least $33,650,000,000,000 ($33.65 trillion).
How many educations could that have financed? How many homes electrified? How many schools built? How much poverty eradicated? U.S. defense spending from 1998 through 2011 will total $7.2 trillion. What will we have to show for it?
In Defense of Empathy
Conventional defense strategy assumes we are hard-wired for aggression, violence and a radical self-interest. Yet research suggests we’re soft-wired for sociability, empathy and a drive to belong.
What is the best long-term defense against those who view us as The Other? Answer: a strategy that demonstrates U.S. sincerity in enhancing the capacity of others to flourish. Community is the relevant scale for such an initiative.
Though national governments can help coordinate, the impact must be felt at the level of the family and the neighborhood. Address unmet needs there and the impact will suppress secondary drives such as violence and aggression.
To ensure extremism, fail to address the insecurity of poverty and the vulnerability of illiteracy. An empathy strategy is the missing piece in the national security puzzle.
By demonstrating that America sees others as sojourners rather than enemies, the U.S. prepares the groundwork for lasting peace. To win at The Clash of Civilizations, Americans must show by their conduct how to create a truly empathetic civilization.
You can’t fake it. Either people have electricity or not. Their children can read and write or they cannot. Either commerce is enabled in ways relevant to communities—or not.
While it’s easy to kill, creation requires a long-term commitment. Absent an empathy component, what will change at the end of the next six decades of defense expenditures?
The U.S. can no longer afford $725 billion each year for defense, much of it borrowed. Given the poor return on our investment, it’s clear we need another strategy, one free of Zionist goals that advance behind serial conflicts and the debt incurred to fund them.
We know what to do. What’s required is the leadership to do it.
At the close of World War II, the U.S. was home to 50% of the world’s productive power. That economic strength assured America’s dominant financial position for at least two decades. That strength included the ability to issue the world’s top-rated bonds.
Look at us now.
The financial cost to the U.S. of wars in Iraq and Afghanistan is projected to top $3 trillion—all of it borrowed. The interest expense alone could reach $700 billion.
The U.S. Congress is debating whether to authorize the borrowing of $700 billion to extend Bush-era tax cuts for another decade.
At this pace, annual interest payments on the debt could top $1 trillion by 2020. In 1980, the total federal debt was $900 billion.
The greater the debt, the greater the Wall Street skim. Bond traders don’t care whether markets rise or fall. So long as markets move, they make money.
Thus the financial appeal of warfare, a proven debt creator. Likewise the allure of crises and even perceived crises as either will move financial markets. Thus too the tragic logic of warfare—from the creditor’s perspective.
Funds lent for war generate output that does not compete with other goods and services. It was not the New Deal but WWII that put America back to work and ended the Great Depression.
Thus the recent appeal by veteran Washington Post columnist David Broder when he proposed war with Iran as a strategy for reviving the U.S. economy.
Governed By Debt
As the strongest currency of the post-WWII era, the U.S. dollar was destined to emerge as the dominant reserve currency for global trade. That result was fully foreseeable by those sophisticated in trade and finance.
America’s productive might ensured that U.S. bonds would set the standard for debt as a safe financial security. In 1971, our creation of debt was unleashed from physical limits when we abandoned precious metals as security for the dollar.
Within the decade, a purported fiscal conservative (Ronald Reagan) championed an investment stimulus that was projected to expand the federal debt by $872 billon at a time when total securitized debt was $900 billion
Known as “supply-side” economics, this deficit-financed subsidy set off a frenzy of debt that fueled leveraged buyouts (LBOs), the leveraging of savings and loans, the overvaluation of dotcom companies and, most recently, the subprime mortgage meltdown.
By 2008, combined private and public debt topped $50 trillion plus another $50 trillion in unfunded liabilities. While LBO artisans leveraged private sector balance sheets, specialists in public debt turned to politics to leverage the nation’s fiscal balance sheet.
With trust by then the primary collateral for U.S. debt, America’s credibility became a strategic vulnerability. With our ‘full faith and credit’ in the crosshairs of transnational financial sophisticates, the U.S. soon became financially ungovernable.
With American IOUs now growing at $100 billion per month secured by a sputtering economy growing at $50 billion per month, that faith is faltering and our credit crumbling.
The source of this threat is difficult to see because the weaponry deployed is the shared mindset with which we’ve been seduced to do our seeing.
At the risk of over-simplification, the mindset is this: money is smarter than people. Just let money to do what money does best and stand aside.
No need to worry about trade deficits that the U.S. amassed with China. According to Nobel Prize economist Milton Friedman, those imbalances will “self correct.”
The same mindset rationalized the sustained loosening of credit by Federal Reserve chairman Alan Greenspan. While enabling and praising what he called “financial creativity,” he assured Americans that capital markets would “self correct” any imbalances.
How did this deceit succeed? How was self-governance displaced by a money-myopic mindset touted as self-correcting?
America was seduced by an education curriculum in which this narrow viewpoint was imbedded. Then we were induced to comply by policies granting this mindset the force of law. To financial sophisticates, the results were foreseeable.
Finance: The One True Faith
China is now recycling U.S. purchasing power to build a world-class navy, nurture allies and invest in commodities. Meanwhile we Americans hold steadfast to our faith in financial securities.
This mindset is now branded globally as the U.S.-discrediting “Washington” consensus as the World Bank Group (led by an American since 1946) insisted that emerging economies embrace a worldview that has served us poorly and them worse.
With deference granted the creditor, debtors must adjust—no matter what the cost. The greater the debt, the greater the creditor’s influence—and the greater the skim.
The U.S. is slipping into a debt-induced recession from which we’re assured that more debt is the remedy. Only when Americans grasp the internalized source of this subtle warfare can we prevail over this enemy within.
Copyright Korea Times
Had insurance giant A.I.G. collapsed, losses from its failed insurance coverage would have rippled through banks and investment banks worldwide, destabilizing the world economy.
Yet A.I.G. set aside no reserves to cover the risk of default on those securities it collected premiums to insure. Why should it? Securities rating agencies ranked even the riskiest of those securities akin to U.S.-government bonds with virtually no chance of default.
A.I.G. professed to insure high-risk loans packaged and resold as low-risk securities to unwary pension funds. In a financial markets version of musical chairs, A.I.G. could afford to be the last one standing, confident they were too big to fail. Let’s keep it simple: imagine the casino skim taken to global scale as players extracted fees at each step along the way.
A.I.G.’s lack of financial reserves did not inhibit its financial products unit from charging handsome fees while its insurance unit pocketed vast premiums. A.I.G.’s rare triple-A rating lent the firm an image of strength and stability even as it “insured” the riskiest securities backed by the least secure of subprime mortgages.
A.I.G.’s financial “creativity” induced A.I.G. clients to believe their premiums would cover the risk of default. Heads A.I.G. wins. Tails and we’re told that taxpayers must pay. A precedent was set with the massive savings and loan fraud of the late-1980s when policy changes enabled a similar financial “pump-and-dump.” As real estate prices soared, cash was skimmed at the top of the market to acquire assets cheaply at the fire-sale bottom.
The origins of this fraud can be traced to a “Chicago” mindset that likens unfettered financial freedom to personal freedom. The public interest, we’re assured, is best served by allowing money to freely work its will worldwide. Fed Chairman Alan Greenspan reassured us that “financial creativity” would protect us from the very “irrational exuberance” that he enabled with a combination of easy money and free market ideology.
In a classic exercise in political distraction, the public is now incensed at a reported $165 million in incentive payments to the A.I.G. geniuses behind this financial creativity. In truth, their real bonus figure is closer to $450 million. Albeit outrageous, it totals less than one quarter of one percent of a taxpayer bailout for A.I.G. poised to top $200 billion.
Forced to disclose to which firms the first $85 billion in bailout funds were paid, A.I.G. conceded that 16 of the top 22 institutions were foreign-owned firms. Goldman Sachs, a key node in this transnational network of financial creativity, was paid $13 billon by A.I.G. That’s in addition to the $10 billion that Washington paid directly to Goldman last fall.
Obama adviser Larry Summers succeeded Goldman Sachs chair Robert Rubin as Treasury Secretary when key policies were changed that enabled this fraud. He also handpicked a Harvard advisory team who oversaw a similar fraud that financially pillaged the Russian economy. When Moscow hit the “reset” button in its shift from state to private ownership, a national scale fraud created an oligarchy that dominates the Russian economy.
As soon as Russia’s restructuring was complete, its beneficiaries cited sanctity of contract to protect the spoils of their massive fraud while a deceived Russian public was driven into poverty. There, a massive “loan for shares” fraud enabled financial sophisticates to emerge dominant. Here, a massive “funds for shares” program turned to hedge funds and private equity firms to rescue us from our Greenspan-enabled profligacy.
To facilitate an American-style “reset,” government debts will be secured by our full faith and credit to help financial sophisticates buy trashy debt securities from A.I.G.’s defrauded clients. That cost will reduce fiscal resources required to address the retirement needs of 78 million Baby Boomers whose pension funds were ravaged by this “Chicago” fraud.
As this cash-for-trash program proceeds, who will emerge as dominant owners of the nation’s distressed financial sector? Answer: the senior partners of hedge funds and private equity funds—who already dominate the Forbes 400 list of richest Americans.
As in Russia, debate is being framed around sanctity of contract to insulate from a deceived public a vast transfer of wealth into a few hands. Summers cited that sanctity to insist that A.I.G.’s financial products unit be allowed to keep their half-billion dollars in taxpayer-paid bonuses. Obama initially opposed the bonuses while an incensed House approved legislation imposing a 90% tax. Chicagoan Obama has since backed down. That tax could have set a precedent for a bilked public to recover other stolen wealth.
The real issues remain obscured in the outrage over executive pay while the entire economy is being “reset” in plain sight. The policy changes proposed by Summers & Co. will create a uniquely American-style oligarchy. As taxpayers are stuck with the mortgage, our creative financial sophisticates will get the house. Is this the future that Americans want?
Another intelligence “dot disconnect” may be in the works. While Secretary of Homeland Security Janet Napolitano cites our porous borders as the primary danger, intelligence agencies confirm that our weakened economy poses the top threat to national security.
How was U.S. security improved by enabling A.I.G. to make massive payments to foreign banks? How is our national interest served by taking us deeper into debt in order to bail out complicit bankers while creating a Russian-style oligarchy? If those simple questions were asked, the answers would lead us to those who orchestrated this greatest heist in history. And to those now enacting policies destined to make a bad situation worse.
March 24, 2009
Lionized as the world’s most astute investor, Warren Buffet’s recent acquisitions drew on networks that this Wall Street legend may prefer remain obscure. Yet the ongoing market meltdown reveals how Berkshire Hathaway tapped the U.S. Treasury to buy Wachovia Bank with the help of tax dodges that left even the experts speechless.
One day after Wachovia agreed to be acquired by Citigroup, Treasury Assistant Secretary Eric Solomon published a notice that transformed Wachovia’s $74 billion in losses into $25 billion in potential tax savings for Wells Fargo, Berkshire’s second largest holding. Based on that notice, Buffet renewed a Wells Fargo bid for Wachovia that he had withdrawn just days earlier.
That acquisition typifies the murky relationships key to Buffet’s top ranking in the Forbes 400 list of richest Americans. He bested Citi not with financial expertise but with well-timed political influence that, in effect, treated the U.S. Treasury as his personal bank.
His latest built on the foundation of an earlier bank stock meltdown when, in 1990, Berkshire acquired 10% of Wells Fargo as its share price plummeted by half in the financial bloodbath that followed a nationwide savings and loan fraud. Today’s Wall Street rout resembles the S&L bust but without the perspective of time required to grasp that this latest collapse is likewise a nationwide fraud—in which Buffet was both perpetrator and beneficiary.
At the core of this latest pump-and-dump are the credit rating agencies: Fitch, S&P and Moody’s. Investors recall the key role played in the dotcom fraud by Citigroup analyst Jack Grubman. His inflated financial projections lured investors to over-priced telecom stocks while Citi lent them money, provided them investment banking, sold them insurance and even managed their pension funds. Rating agencies filled the analyst’s role in this latest fraud by making junk securities appear equivalent in risk to gilt-edged government bonds.
Berkshire Hathaway not only owns a 20% interest in Moody’s, Buffet also controls a bond insurer to which Moody’s gave a triple-A rating. But that’s only the most obvious of the conflicts-of-interest that enriched the Oracle of Omaha and his loyal followers who make an annual pilgrimage to Nebraska to marvel at his homespun wisdom.
Much as Solomon’s ruling transformed Wachovia losses into Wells Fargo assets, Moody’s ratings converted financial straw into gold. Or, as during the dotcom era, into fool’s gold when investors realized that genuine risk analysis had been replaced with what the public could be deceived to believe. In return, Moody’s pocketed record fees for Buffet.
Solomon’s ruling was the first of two expanding the losses that banks could use to reduce future taxes. In effect, he shifted to the Treasury much of the cost of those phony ratings along with the entire cost of Buffet’s $25.4 billion purchase of Wachovia. As taxpayers absorb the fiscal pain—an estimated $140 billion—savvy insiders will pocket the gain while also quickening the pace at which banks are consolidated into ever fewer hands.
That barely scratches the surface of the mega-fraud now underway. Over a 10-day stretch in September—amid taxpayer bailouts for AIG, Fannie Mae and Freddie Mac and a bankruptcy filing by Lehman Brothers—the shares of Goldman Sachs dropped 36%. The firm quickly gained approval to become a bank holding company and completed a $5 billion offering, diluting its shareholders by 20%. Under the leadership of Lloyd Blankfein, Goldman had operated more as a hedge fund than a brokerage firm or an investment bank, generating steady returns that relied on bogus credit ratings.
As those phony ratings became transparent and capital markets tumbled, Berkshire received $8.2 billion in value for its $5 billion cash infusion when Buffet further hammered Goldman’s public shareholders by using Berkshire’s cash hoard to extract massive stock warrants and dividend-assured preferred shares paying $1.3 million per day.
The role played by the Treasury was again obscured, hidden in the $180 billion-plus bailout of AIG. Former CEO Maurice “Hank” Greenberg had used that insurance giant as the counterparty for credit default swaps and financial derivatives originated by Goldman and Lehman. Had Treasury Secretary Henry Paulson not backed the AIG bailout, Goldman would have suffered a $20 billion loss. As a former co-chairman of Goldman with a personal net worth exceeding $850 million, Paulson could not have been unmindful that Goldman’s bonus pool for 2007 was $20 billion.
Former Treasury Secretary Robert Rubin, a senior Citigroup director and previously a co-chairman at Goldman, insisted that Citi invest heavily in securitized loans backed by sham credit ratings. When Buffet prevailed over Citi in his Treasury-funded bid for Wachovia, his triumph cleared the way for Goldman alumni at Treasury to offer Citi a $306 billion bailout.
This scale of fraud only works when the public cannot prove who is stealing from whom.