Tuesday, January 29, 2008

 

To All My Right Wing Friends Who Say That Private Enterprise Needs No Government Regulation... I give you Exhibit A of why that's Fucking Stupid.

House Of Cards: The Mortgage Mess
Jan. 27, 2008
(CBS) It was another nervous week for the world's financial markets and for Wall Street. In the last six months, Americans have seen their investments shrink, their property values plummet, and the country edge closer towards a recession. At the heart of the problem is something called the subprime mortgage crisis, which began last summer and continues to ricochet through the economy.

It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.

And as correspondent Steve Kroft reports, it started in places like Stockton, Calif.



Stockton is a city of 280,000 people in the Central Valley; 80 miles east of San Francisco and 80 miles north of San Jose. In many ways, this is ground zero for the current financial crisis and a microcosm of everything that went wrong.

A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.

Real estate agent Kevin Moran represents 102 properties and says all of them are in foreclosure.

Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses.

"If you see a 'for sale' sign in this neighborhood, that probably is a sign of distress, right?" Kroft asks.

"I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains.

The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O’Toole's Web site, foreclosureradar.com, which tracks distressed properties in Stockton and other California communities.

"The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender."

As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over.

"Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole.

"We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts.

Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000.

Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy.

"What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets.

"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.

"When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains.

Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.

But Jerry Abbott, who runs the Coldwell Banker office in Stockton, says it didn’t concern the borrowers, many of whom were getting mortgages for more than their houses were actually worth.

"They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."

"So, they were getting paid to buy a house?" Kroft asks.

"They were getting paid to buy a house. Yes. Yeah," Abbott says.

And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans.

"Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says.

Abbott says borrowers got the money, without a down payment.

Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I,'" Grant says.

"And he got a cut, too?" Kroft asks.

"Yes, oh, yes. Everyone gets a cut," Grant says.

Almost all of the people involved in the transactions made huge amounts of money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.

Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.

"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.

It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.

All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.

It’s not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200.

"Did you understand any of this?" Kroft asks.

"No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork.

"But you knew this was a big decision, right? You were borrowing hundreds of thousands of dollars," Kroft remarks.

"I didn't really look at it like that," Fontenot says.

"How did you look at it?" Kroft asks.

"I looked at it as far as my family. I can get my family off of this block," he replies.

"And that we could pay the payments that she said that we could pay," Fontenot's wife Kim adds. "But after it was all said and done, and the paperwork was drawn up, it was something different."

But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn't do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them.

"The house keeps going down, payments keep going up. Where's the logic in that? And how can we fix it? I mean, that's what this whole thing's about for us is how can we fix this? And if we can't fix it, then what do we do?" Matt Valdez asks.

"Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense," Stephanie Valdez adds.

"That's what you agreed to do when you bought the house," Kroft points out.

"Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way," Stephanie Valdez replies.

"You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?" Kroft asks.

"You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?" she says.

There is a certain cold logic to just walking away.

Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.

"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.

"Just a business decision," Kroft says.

"A business decision that has to be made," Moran agrees.

"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.

Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table."

"What do you mean?" Kroft asks.

"Lenders and borrowers," Grant says. "Everyone was gaming the system."

That is not to suggest that there aren’t huge losers in all this and much suffering and particularly hard-working people who have lost their dream. Home values are plummeting, and the housing sector - one of the largest and most vital parts of the American economy - has ground to a standstill, pushing the country towards recession.

The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them.

"That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says.

The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them.

"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says.

"How much on the dollar, do ya think?" Kroft asks.

"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.

Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."

Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety."

It’s that anxiety that spooked the world’s stock markets last week, that and the knowledge that things are likely to get worse, at least for a while.

"Still houses going into foreclosure?" Kroft asks Kevin Moran.

"Yeah. I don't think we're 40 percent into this. I think we've got a long way to go," he predicts.

There’s already a two-year supply of properties on the market in Stockton and so many foreclosures that real estate agent Cesar Diaz decided to start the "Repo Bus" to take bargain hunters and bottom feeders on a weekly tour to see some of them. He got the idea from the Hollywood tour of the stars' homes.

The day Kroft went along, there were two busloads checking out houses that are now 70 percent cheaper than they were when the crisis began. The consensus seemed to be prices are going to drop still further. Not particularly encouraging news for the past two chairmen of the Federal Reserve Board.

"Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."

"It's still spreading?" Kroft asks.

"Yeah," Grant says.



In the past few months, Wall Street's top investment banks have written off more than $120 billion in losses related mortgage backed securities, and some are now under new management.

Two of the fired CEO's responsible for the biggest losses rode off into the sunset with some free money of their own. Charles Prince of Citigroup collected $29 million on his way out the door; Stan O'Neal of Merrill Lynch left with $161 million.

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Thursday, January 17, 2008

 

Big Corporations Don't Give a Shit About You. Today's example: Yum! Brands.

Settle in gentle reader and I'll tell you a tale of a simple trip to a fast food restaurant. Remember the days when the customer was always right? Remember when the manager or owner of a store would be personally insulted if you didn't have a fantastic experience at their store or restaurant?

Well those days are long gone. I give you todays example of Yum! Brands who owns the local KFC/Taco Bell on Brownsboro Road here in Lousiville Kentucky. Forget that it's pretty ridiculous to have a KFC and a Taco Bell in one store and forget that disgusting "I'm in a shame spiral famous chicken bowl" they serve and just listen.

I go in last night for a quick meal. I had my reservations about this particular store in the first place because even though I've lived all over the world and all over the U.S. this store seems to be the worst I've ever seen in a fast food restaurant. However I decided to take the risk one last time instead of driving another 5 minutes to a better run store.

So I ordered, and my girlfriend ordered and when we got the bill it seemed a little light. And the girl taking our order seemed a bit on the slow side, but I thought she had it down. First we got the receipt and sat down to wait for our order. I began to scan the receipt to see if our order was correct but honestly couldn't make heads nor tails of it. It was a fucking mess.

Then as we're waiting for our order, an irate customer comes in from the parking lot. Apparently he'd gone through the drive through and they'd told him it would be a few minutes and he'd been sitting out there for 20. He was pissed and just wanted his money back. This seemed to be a foreign concept to the staff of this particular KFC/Taco Bell as they just stared at him with dumb unblinking eyes as if he'd grown a second head coming off his shoulder.

During this little episode a woman calls out our order. When we open the bag I can tell it's immediately wrong. I mean seriously wrong. Of the 7 things we ordered 3 were missing. And we'd ordered very very slowly and were standing two feet away from the woman who took our order.

I didn't feel like waiting in line behind the other guy to complain, so I just decided we'd leave.

However, I was so annoyed that this store had again fucked up my order and confirmed it was the worst fast food restaurant in America that I decided I'd contact Yum! Brands today and register my disgust.

Yum is headquartered in Louisville and I'd thought it might interest them that the worst store in America was right in their back yard.

I headed over to the Yum! Brands website. I looked for some way to contact them. Ahhh the "Contact Us" button seemed to be the only place that had anything to do with customer feedback. I clicked and it immediately asked me to input my birthdate. I thought this was a bit odd, but entered my birthdate and was taken back to the home page. Confused I clicked "Contact Us" again and it said "We're sorry, you're not old enough to use this feature."

Thinking I entered my birthday wrong I tried again. Same result. I logged off, cleared my cookies, and came back and tried again, this time claiming to be 102 years old. Guess what? Same result. Try it yourself if you don't believe me. http://www.yum.com/

Now I know what you're thinking, wow that's pretty stupid. I guess they don't want customer feedback. Good story Punisher, now get on with your life.

But I couldn't let it end there. I had to call Yum! Brands. Yes, I actually called them. When they answered the phone I explained what was happening and that the Corporate Website seemed to have a problem with it's contact us feature. The woman who answered the phone laughed and said "Well I'll put you through to our help desk."

Seriously, she put me through to the fucking corporate help desk. The guy who answered that line thought I was an employee. I told him "No, I'm a customer." and I explained why I called and he said, "Oh, that's not our department. Thanks for calling" and hung up on me.

Apparently Yum! Brands doesn't give a shit what it's customers have to say.

Corporate America. Ugh.

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Wednesday, January 16, 2008

 

This Week in Corporate Malfeasance: Merck and Schering-Plough Drug Makers hide test results for almost two years that prove their drug does nothing.

January 15th, 2008 2:37 pm
Drug Has No Benefit in Trial, Makers Say

By Alex Berenson / New York Times

A clinical trial of Zetia, a cholesterol-lowering drug prescribed to about 1 million people a week, failed to show that the drug has any medical benefits, Merck and Schering-Plough said on Monday.

The results will add to the growing concern over Zetia and Vytorin, a drug that combines Zetia with another cholesterol medicine in a single pill. About 60 percent of patients who take Zetia do so in the form of Vytorin, which combines Zetia with the cholesterol drug Zocor.

While Zetia lowers cholesterol by 15 percent to 20 percent in most patients, no trial has ever shown that it can reduce heart attacks and strokes — or even that it reduces the growth of the fatty plaques in arteries that can cause heart problems.

This trial was designed to show that Zetia could reduce the growth of those plaques. Instead, the plaques actually grew almost twice as fast in patients taking Zetia along with Zocor than in those taking Zocor alone.

Patients in the trial who took the combination of Zetia and Zocor were receiving it in the form of Vytorin pills. The trial, called Enhance, lasted two years and covered about 720 patients with extremely high cholesterol, mostly in the Netherlands.

Dr. Steven Nissen, the chairman of cardiology at the Cleveland Clinic, said the results were “shocking.” Patients should not be prescribed Zetia unless all other cholesterol drugs have failed, he said.

“This is as bad a result for the drug as anybody could have feared,” Dr. Nissen said. Millions of patients may be taking a drug that has no benefits for them, raising their risk of heart attacks and exposing them to potential side effects, he said.

Still, patients who are taking Vytorin or Zetia should talk to their doctors if they are concerned and not discontinue taking the medicines on their own, Dr. Nissen said.

Dr. Howard Hodis, a cardiologist at the University of Southern California, also said he was concerned by the trial’s results. Growth in fatty plaques — called atherosclerosis — is highly correlated with heart attacks and strokes, Dr. Hodis said.

“Clearly, progression of atherosclerosis is the only way you get events,” Dr. Hodis said. “If you don’t treat progression, then you get events.”

The results of the trial “necessitate further investigation — that just can’t be ignored,” Dr. Hodis said.

Both companies’ stocks fell on Monday, with Merck’s share price down a bit more than 1 percent. Shares of Schering-Plough, whose profits are much more dependent on the drugs, were down nearly 8 percent.

The results will also add to the controversy surrounding a long delay in releasing the results of the trial. Merck and Schering-Plough completed the trial in April 2006 and had initially planned to release the findings no later than March 2007. But the companies then missed several self-imposed deadlines, citing the complexity of the data analysis from the study and saying they did not know when or if the data would be ready for publication.

Last month, after several news articles highlighted the delay, they finally agreed to release the results soon.

For Merck and Schering-Plough, which jointly market Zetia and Vytorin and share profits from the drugs, the trial’s results are a serious setback. Zetia and Vytorin are important contributors to both companies’ profits, especially to Schering, which is smaller and less profitable than Merck.

Analysts estimate that about 70 percent of Schering’s earnings depend on the drugs. The controversy over the trial is also a problem for Merck, which is trying to repair its reputation after withdrawing the painkiller Vioxx from the market in September 2004.

In the United States, Zetia and Vytorin combined account for about 20 percent of the overall cholesterol-lowering market. More than 100 million prescriptions have been filled in the United States for Zetia and Vytorin since the Food and Drug Administration approved them in November 2002 and August 2004 respectively. Both drugs cost about $3 a day.

Because Zetia reduces cholesterol differently from statins like Lipitor and Zocor, doctors often prescribed it as an additional therapy for patients whose cholesterol remains high even after they are already taking statins. But even before Zetia was introduced in 2002, some cardiologists argued that statins had positive cardiovascular effects that go beyond their ability to reduce cholesterol, and that Zetia lacks those effects.

The Enhance trial covered patients with a gene that causes them to produce very high levels of low-density lipoprotein cholesterol, commonly called L.D.L., or bad cholesterol. Patients in the trial had L.D.L. levels of about 320 milligrams per deciliter at the beginning of the trial, about three times the level cardiologists recommend.

Over the two years of the trial, patients who took Zocor alone reduced their L.D.L. by 41 percent on average, while patients who took Vytorin reduced their cholesterol by 58 percent. Yet despite the larger cholesterol reduction, patients taking Vytorin actually had more growth in fatty plaques in their carotid arteries than those on Zocor. The carotid artery runs through the neck and delivers oxygenated blood to the brain.

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Wednesday, October 17, 2007

 

American Corporate Republic: Corporate Welfare Queens Gorge Themselves at the Public Trough.

Food Companies
Face U.S. Probe
Over Iraq Deals

October 17, 2007; Page A1 Wall Street Journal

WASHINGTON -- Prominent American food companies are under scrutiny in a federal probe of possible fraud and corruption in the military's food-supply operations for the Iraq war.

MORE
[Gavel]
Public Warehousing Co. disclosed the federal investigation in two lawsuits filed in federal courts in Washington earlier this year.
• In this complaint the company contended that the Pentagon was blocking its pursuit of further contracts because of the investigation. A PWC executive states his position here. After a Federal Claims Court judge indicated he would side with the company, the Justice Department and Pentagon reached a settlement with the company granting most of its demands.

Investigators from the Justice Department and the Defense Department are looking into deals that Perdue Farms Inc., Sara Lee Corp., ConAgra Foods Inc. and other U.S. companies made to supply the military, according to people involved in the inquiry. The companies made the deals with the help of former U.S. military procurement officials they hired as consultants or executives.

The inquiry is focused on whether the food companies set excessively high prices when they sold their goods to the Army's primary food contractor for the war zone, a Kuwaiti firm called Public Warehousing Co. A related question is whether Public Warehousing improperly pocketed for itself refunds it received from these suppliers. Public Warehousing bought vast amounts of meat, vegetables and bakery items from the food companies, and delivered them to U.S. troops.

Public Warehousing's dealings are the subject of "a very large and active investigation into criminal and civil fraud involving amounts in the hundreds of millions of dollars," Justice Department lawyer Brian Mizoguchi told a judge in Federal Claims Court in Washington, D.C., on June 12. Public Warehousing, which receives more than $1 billion annually to feed troops in Iraq and Kuwait, denies wrongdoing.

Federal investigators are also examining the role Army officials played in picking the food companies that are Public Warehousing's suppliers. Once a "prime vendor" is chosen by the Pentagon to deliver the food -- in this case, Public Warehousing -- that vendor receives guidance from the Army on what should be on the menu. Sometimes the Army demands specific brands of food from specific manufacturers. The prime vendor must then negotiate prices for these menu items with these manufacturers.

Profit Margins

In general, many military contracts pay suppliers the cost of the goods they distribute plus a profit margin. In such cases, it is a challenge to ensure that the supplier seeks the lowest price from the maker of the goods. Unless adequate safeguards are in place, the supplier and the maker have an incentive to inflate the cost and share the extra profits among themselves.

Federal law prohibits government contractors from obtaining money through false or fraudulent pretenses.

[Food]

Details of the Kuwait transactions and the federal probe are spelled out in hundreds of pages of court documents, emails, spreadsheets and military files seen by The Wall Street Journal. Among other things, the records show that Sara Lee paid 5% of the purchase price back to Public Warehousing for meat and bakery orders to feed U.S. troops in Iraq and Kuwait. The agreement was negotiated by a Sara Lee executive in charge of military sales, Paul Simmons, who formerly served as a chief warrant officer for the Army. Mr. Simmons declined to comment.

A key figure in the probe is David Staples, a top procurement official at the Army who formerly worked at Sara Lee's Jimmy Dean sausage unit. Records show Mr. Staples required Army food contractors to purchase products from certain suppliers rather than allowing the contractors to shop around.

In a brief telephone interview, Mr. Staples said it is "not true at all" that he favors specific firms. "We follow standard business practices," he said. A Sara Lee spokesman said: "Sara Lee was subpoenaed, and has cooperated fully with the Department of Defense's investigation." Sara Lee and the other U.S. food companies declined to address specifically whether they overcharged Public Warehousing for their products.

While Army officials deny that they designate vendors for food, an internal spreadsheet that Mr. Staples emailed to a vendor in 2006 names specific vendors for specific products.

In one of the most striking examples of the agency's selectivity, Tyson Foods Inc., one of the world's largest chicken producers, has been virtually shut out in the competition to supply the troops for the Iraq conflict. Much of the chicken supplies for Iraq and Kuwait are provided by Perdue and a ConAgra unit called Pilgrim's Pride Inc. That is in line with a recommended menu on a spreadsheet issued by Mr. Staples's agency. The spreadsheet lists foods and recommended suppliers such as "turkey thigh roast, raw, netted, 8-10 lb avg" next to "Sara Lee."

In an April 3, 2007, letter to the Pentagon, a lawyer for Tyson complained that "elements within the military" were providing sole-source contracts "to certain companies employing former military personnel."

A spokesman for Public Warehousing said it is cooperating with the investigation. The company, which is also called PWC, says it had revenues of more than 1 billion Kuwaiti dinars in 2006, or about $3.6 billion, and employs more than 20,000 people. (The company isn't related to the accounting firm PricewaterhouseCoopers.) "PWC welcomes a full and impartial review of its work and its performance under these government contracts, and will continue to cooperate fully with all such inquiries," the spokesman said.

[nowides] FIGHT FOR IRAQ
[Iraq map]
See continuing coverage of developments in Iraq, including an interactive map of day-to-day events in Iraq and a tally of military deaths.

Public Warehousing attributes its high food prices to the costs of operating in a war zone. It says all discounts or refunds it receives from food makers after it pays its bills are specifically allowed by its contracts and represent normal practice in the food industry as an incentive for prompt payment. Pentagon officials have repeatedly heaped praise on the firm for its record in making hazardous deliveries to U.S. bases in Iraq.

One internal Public Warehousing email obtained by federal investigators refers to an agreement under which the firm's primary Kuwaiti supplier paid a 10% refund to Public Warehousing on all orders received from the military. In other words, the supplier would return to Public Warehousing 10% of the money the supplier received in exchange for its goods. Company officials confirmed the arrangement but said these large discounts are standard in the Middle East. The supplier, Sultan Center, is owned by a Kuwaiti merchant family that is also among Public Warehousing's largest stockholders. Sultan Center did not respond to requests for comment.

Within the U.S., the investigation is focused on an Army agency in Virginia known as Army Center for Excellence, Subsistence. It plays a key role in determining the Army's favored suppliers. Mr. Staples, a senior official at the center, works closely with sales agents for a handful of U.S. firms including Sara Lee, ConAgra and Quantum Foods Inc., according to emails and people involved in the investigation.

Since 2003, the Army agency has issued guidelines directing that chicken breast, turkey breast, ham and sausage consumed by U.S. forces in Iraq and Kuwait be supplied by Sara Lee.

In its letter of complaint, Tyson asserted: "It appears that the process for specifying brand-named merchandise may have been inappropriate." A spokesman at Fort Lee, the Army base in Virginia where the agency is located, said officials there aren't aware of the investigation.

The agency also has directed that virtually all of the beef purchased for U.S. troops in Iraq and Kuwait -- several tons per month -- come from Quantum Foods, an Illinois meatpacker. Quantum is represented by a former Army employee, Emily Prior. Until 2002, Ms. Prior held Mr. Staples's position at the Army agency.

Asked if she has been contacted by investigators, Ms. Prior replied: "Absolutely not. And I know of no reason why I would be." She declined to answer further questions.

'Potential Witness'

Perdue is also represented by Ms. Prior, while ConAgra is represented by a former Army sergeant, James Kennedy. A ConAgra spokeswoman, Stephanie Childs, said the company is not a target of the probe. "However, as a potential witness, ConAgra Foods' Lamb Weston division did receive a subpoena to provide its PWC sales records, and Mr. James Kennedy gave an interview as a witness in the investigation of PWC," she said.

Julie DeYoung, a spokeswoman for Perdue, said the company hasn't received a subpoena from investigators. She said that Ms. Prior worked as a consultant for Perdue for three years beginning in April 2003, a month after the U.S. invaded Iraq, and signed a new agreement with the company on Sept. 1.

As of Feb. 14, 2005, internal Public Warehousing pricing data show, Quantum was charging Public Warehousing $5.66 a pound for a 42-pound case of frozen and marinated 14-ounce T-bone steaks. Industry insiders say $5.66 per pound would be in the range of typical retail prices for ungraded T-bone steaks, which tend to be tougher than "choice" or "select" grades, but is steep for a wholesale price. In 2006, according to the Army, U.S. forces in the Iraq theater consumed some 24 truckloads of beef a month, costing more than $3 million.

Investigators are exploring whether Public Warehousing might have been willing to accept high prices because of the payment terms it received from its suppliers. In the case of Quantum, Public Warehousing gets 4% back if it pays its bills in 20 days. That means the higher the price from Quantum, the more Public Warehousing gets back for making a prompt payment.

"Quantum Foods is cooperating with the U.S. attorney general in its investigation," company spokesman Kenneth Trantowski said. "This remains an ongoing investigation and Quantum Foods must limit any detailed disclosures."

Write to Glenn R. Simpson at glenn.simpson@wsj.com

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Who Wants To Stay The Course In Iraq? Take a Guess.

Lockheed Martin stock up from $52 to $109 between July 2003 and Now;

Boeing up from $33 to $96;

ExxonMobil up from $36 to $94;

Chevron up from $36 to $92;

Halliburton up from $22 to $40;

Fluor up from $34 to $159

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Thursday, October 11, 2007

 

"It's the mother of all con jobs... free market rhetoric is being used as the cover story for crony capitalism."

John Cusack
Posted October 10, 2007
The Real Blackwater Scandal: Build a Frontier, You Get Cowboys, Part II

Read Part I of this conversation here.

For the past couple of weeks, I've been posting pieces of my ongoing conversation with Naomi Klein, about her new book, The Shock Doctrine: The Rise of Disaster Capitalism. You can watch our first encounter here, and read our earlier conversations here and here. You can also learn more about the book and read excerpts here.

Yesterday we talked about the Blackwater scandal, setting it in the larger context of what Naomi calls the new economy of the Disaster Capitalism Complex. We also talked about cowboys, frontiers and the perennial power of John Wayne. Here's the rest of that discussion:


Cusack: So apart from getting obscenely rich, what are these private security and other contractor companies doing with this tsunami of public money that is being thrown at them?

Klein: Well, unlike the government, which has allowed the public infrastructure to erode so that we now have collapsing bridges and levees, these guys are making serious and sturdy capital investments. They're planning for the future, building infrastructure -- in Blackwater's case, paramilitary infrastructure. Founded in 1996, the company has used the steady stream of contracts during the Bush years to build up a private army of twenty thousand on-call mercenary soldiers and a massive military base in North Carolina worth between $40 and $50 million. They have armored vehicles, helicopter gunships, manmade lakes, a Boeing 767, a Zeppelin.

Cusack: Like the Hindenburg -- Eric Prince has a lot of toys. The Zeppelin -- that one had to be the fulfillment of a boyhood dream.

Klein: You hear people complain about how Hezbollah is a "state-within-a-state" in Lebanon -- what about Blackwater in the USA? And that's just one company of hundreds, and a relatively small player compared to Lockheed and GE and Booz Allen. But once again, we can't keep being surprised by this shadow world -- it is an inevitable consequence of Rumsfeld's vision of an outsourced and contracted-out state. A right-wing journal in the U.S. called Blackwater "al Qaeda for the good guys" and it's a striking analogy. Wherever the disaster capitalism complex has landed, it has produced a proliferation of armed groupings outside the state. No surprise, really -- when countries are rebuilt by people who don't believe in government, the states they build are invariably weak, creating a market for alternative security forces, whether Hezbollah, Blackwater, the Mahdi Army or the gang down the street in New Orleans.

Cusack: You've written a lot about what you call "the moveable green zone", which has extended the reach of these companies way beyond the war...

Klein: Well the first place where we all saw this happen was in New Orleans after the flood. Within weeks, the Gulf Coast became a domestic laboratory for the same kind of government-run-by-contractors that was pioneered in Iraq. And the whole Green Zone gang was there: Halliburton, Blackwater, Parsons, Fluor, Shaw, Bechtel, CH2M Hill.

But again, this is way more than just a story about shoddy work by contractors. These private companies were actually taking over state functions instead of rebuilding the public sphere. And in New Orleans, the supreme irony was that it was the very frail public sphere that caused the disaster in the first place when the levees broke and the public transit system couldn't handle the evacuation and FEMA was nowhere to be found.

This is the opposite of the New Deal, when public works created good jobs and strengthened society. In today's disasters, public money floods into corporate coffers and those corporations replace the public sphere. Look at New Orleans today: public schools have been converted into charter schools, public housing remains boarded up as condo developers circle, the levee system remains inadequate, and the city's largest public hospital -- Charity Hospital -- is still closed. Meanwhile, contractors are driving down wages and working conditions, with African-Americans virtually locked out of reconstruction jobs, and migrant Latino workers locked in, telling horror stories of modern day indentured servitude. This is what I mean when I say that disasters are dress rehearsals for a sci-fi vision of corporate rule -- it's not just that disaster response is being privatized, it's that in places like Baghdad and New Orleans, the public sphere is disappearing completely and there is no plan to bring it back. This is the warfare state you send up so brilliantly in War Inc [see the trailer here and a preview clip here] -- with the same company selling the bombs and the prosthetic limbs for the victims of those bombs. It's crazy, but we are really not that far off from your twisted imagination!

Cusack: Some things are so vicious, you have to look at them through a different lens or you could never get out of bed. It's hard, even in absurdist satire, to stay one step ahead of this crew. Of course, the business will keep coming for these companies. Even if a momentary peace breaks out, natural disasters will ensure that the market will expand for the Disaster Capitalism Complex as a whole. They'll just diversify. A perfect flexibility built into the design.

Klein: Put it this way: after the recent earthquake in Peru, a private U.S. company called Aramark got a contract to manage evacuee camps and they had mini-McDonald's franchises in them.

That was a first -- McRelief.

Cusack: It fills one with pride.

Klein: It's time to face the fact that climate change has created a major new market. And I'm not talking about a new market for sustainable energy, which would be positive, but a market to profit from the disasters caused in large part by our fossil fuel addiction. Responding to the increasing numbers of emergencies is seen as simply too hot an emerging market to be left to the non-profits -- why should UNICEF rebuild schools when Bechtel can do it? Why put displaced people from Mississippi in subsidized empty apartments when they can be housed on Carnival cruise ships? Why deploy a major international peacekeeping force to Darfur when Blackwater has been lobbying for months to go in and get the job done? Why let the CIA read our email when there are hundreds of security "start ups" that want the gig?

This is a transformation of profound consequence. Eisenhower warned of the military-industrial complex, but it was economically insignificant compared to today's disaster capitalism complex. Before 2001, wars and disasters only provided opportunities for a narrow sector of the economy -- the makers of fighter jets, for instance, or the construction companies that rebuilt bombed-out bridges. The primary economic role of wars was as a means to open new markets that had been sealed off and to generate postwar peacetime booms. Now wars and disaster responses are so fully privatized that they are themselves the new market; there is no need to wait until after the war for the boom -- the medium is the message.

And the scariest part of it is the disappearance of any line whatsoever between these private players and the government, as we discussed earlier.

Cusack: Right, you have a quote in the book: "It's impossible to tell where the government ends and Lockheed begins." And the most unbelievable thing about it besides the carnage and the hubris and the insanity of it all is how blatantly they lie about their dedication to strict economic Darwinist rules. It's the mother of all con jobs -- free market rhetoric is being used as the cover story for crony capitalism... They are the biggest welfare freaks on the planet.

On Democracy Now recently, you recited Alan Greenspan's definition of crony capitalism to his face and asked him if the U.S. fits the bill:

"When a government's leaders or businesses routinely seek out private-sector individuals or businesses, and, in exchange for political support, bestow favors on them, the society is said to be in the grip of 'crony capitalism'. The favors generally take the form of monopoly access to certain markets, preferred access to sales of government assets, and special access to those in power."

He dodged the question, of course, but that seems to be a precise description of the Bush administration and its relationship to its favorite corporations. Not exactly the free-market propaganda they've been selling around the world, is it?

Klein: No, and it's most outrageous in Iraq. When I was in Baghdad, it was clear that this was one of the things that most enraged Iraqis -- watching the non-stop conveyor belt of corporate welfare going to western companies while having to listen to patronizing lectures about the free market. My favorite was from Michael Fleischer -- former White House press secretary Ari Fleischer's brother. In the kind of nepotism rampant in the Green Zone, Michael was put in charge of Iraq's "private sector development" during the first year of the occupation. At one point he told a group of Iraqi business leaders that they would have to lose all their subsidies and trade protections because "protected businesses never, never become competitive."

Cusack: He said this with a straight face?

Klein: Yes -- he seemed entirely unconcerned by the irony that Halliburton, Bechtel, Parsons, KPMG, Blackwater et al were in Iraq, madly gorging off this vast protectionist racket in which the U.S. government had created their markets with war, barred their competitors from even entering the race (remember, French companies weren't invited...), then paid them to do the work on "cost-plus" contracts, which guaranteed them profits -- all at taxpayer expense.

In fact, the Disaster Capitalism industry has been built almost exclusively with public resources: 90 percent of Blackwater's revenues come from state contracts and virtually its entire staff is made up of former soldiers, which means that the training also came at public expense. Yet this vast infrastructure is all privately owned and controlled. The citizens who have funded it have absolutely no claim to this shadow state or its resources.

So I've become quite cynical about the claim that the architects of this new system are free-market ideologues. They are in fact corporate supremacists. The proof is that they will betray their supposed libertarian beliefs at the slightest opportunity if that betrayal will turn a profit for a crony company. You see the hypocrisy most shamelessly in the mega-contracts handed out so private companies can help the Bush administration read our emails and data-mine our lives. It's a kind of triple whammy of hypocrisy: these are people who purportedly believe in restrained government spending, individual liberties, and getting government off our backs, yet without hesitation they will expand the reach of the state, gobble up public money, and violate individual privacy, so long as there is profit in it. Calling the Bush gang "ideologues" gives them way too much credit.

Cusack: You've said that in the future the ultimate luxury will be your own survival...do you really think this is where we're headed?

Klein: Well, the disaster bubble is going to burst, like all bubbles do. And when it does, firms like Bechtel, Fluor and Blackwater are going to lose much of their primary revenue stream. They will still have all the high-tech gear and equipment bought at taxpayer expense, but they will need to find a new business model, a new way to cover their high costs. The next phase of the disaster capitalism complex is staring us in the face: with the state in decay, the parallel corporate state will rent back its disaster infrastructure to whoever can afford it, at whatever price the market will bear.

So imagine that after the next hurricane, Blackwater might not just be working for FEMA, as it was after Katrina -- it could sell its security and evacuation capacity to other corporations, or directly to the public, the very same public that funded its entire start-up phase. Want a helicopter ride off a roof? A bed in a shelter? Bottled water? We'll bill you later. Meanwhile, everyone who can't pay will be out of luck, since evacuation is no longer a "core competency" of the state, and besides, the state shouldn't interfere with the free market. The people who can't pay will either be abandoned -- like the people left on their roofs in New Orleans -- or sucked into the privatized prison surveillance apparatus, to be profited from in another way.

Companies like Blackwater and Halliburton are already roaming the world looking for new markets in other frail states - new governments to guard, new war zones to privatize.

Cusack: Here's what I'm thinking. If these people want to create their own privatized countries, they should practice what they preach, and "take their chances on the open market." Secede from the union and stop bankrolling the whole thing with our tax dollars. I'd love to hear someone make a legal argument that the constitution allows for corporations to build private armies at taxpayer expense. I mean, publicly funded mercenaries are totally outside the boundaries of any conceivably acceptable legal version of the constitutional checks and balances we all learned in civics class. But Blackwater is a symptom of a larger problem which is also more terrifying: basically what the Bush administration has done is use its time in office to fund and create a dangerous counter-power to the very government it is leading.


Klein: That's exactly right. And once you understand this - that a parallel, privatized state has been built for the elites with public money -- it makes Bush's so-called bungling look a lot more sinister. Maybe the construction of this parallel state, and the starving of the public one, is the real "mission accomplished." When the Blackwaters and the Halliburtons and the Lockheeds are looked at as a whole, what you see is a fully articulated state-within-a-state that is as muscular and capable as the actual state is frail and feeble. And of course, as creatures of the new economy, these companies are weightless and stateless. If Blackwater wanted to make like Halliburton and move to Dubai, there would be nothing to stop it.

We need to understand that what we glimpse in these contractor scandals goes well beyond corruption. It's another model of government. War and disasters are being used to advance a radical agenda of corporate rule where the idea of universally accessible public services goes extinct. That's why I wrote The Shock Doctrine -- this thing is way bigger than Bush. Bush isn't an aberration, he's the natural culmination of a 25-year campaign to hollow out and privatize the state. He is the perfect mascot of this movement: if government is unnecessary as anything other than an ATM, who better than Bush to lead it? What is more fitting than having a hollow president to head a hollowed-out state?

Cusack: Yeah -- he's the perfect president to have opened this latest frontier for modern pillage. And we sat by while this lawless corporate frontier was opened up. Maybe because we are still in the cultural thrall of the frontiersman/cowboy -- the far right sample John Wayne on a daily basis. And this has been a huge part of Bush's success. He has been consciously drawing on the Wayne iconography for his whole career; it's what allows him to barrel ahead despite his plummeting popularity. Like Wayne's cowboy, they define themselves through the prism of their will. We make our own way through this Darwinist world. The benevolence and altruism of their spirit and will is a given, a reality not to be debated by facts...

The push back on Eric Prince will fall safely inside the aesthetic...he's just a religious libertarian, etc etc... and so we ride on... This iconography may be the ultimate enabler of the disaster economy. We all know the drill.

We've had Poppa Wayne (Reagan) and Baby Wayne (Bush). Ronald Reagan was the old John Wayne...when kindness comes. But the key to the old Wayne is that he was once a killer; you can see it in his eyes... beneath the kindness lingers that hard truth: he was once a killer. He tames the natural world, but he does it with a veneer of benevolence.

Bush is the young John Wayne -- Ethan from The Searchers. Obsessive. Merciless. Ethan is a deranged person. He will fight the battle no one has the guts to fight...do whatever it takes...kill whoever violates the natural law of the frontier (jungle). This cowboy is the great righter of wrongs. He is wrath incarnate. Part of the mythology is that he's wrong a lot and pig headed and stubborn, it's part of the package. But he is a force of nature and you can argue about it all you want, but you must respect a force of nature.

The protector, the son of anger is coming, with god on his side, to protect the ones he has chosen to love. In Bush's case you can substitute the damsel being raped by natives with the US corporation denied 100 percent ownership of a privatized state company.

Klein: This is actually scarily true. Remember that the occupation took its bloodiest turn when U.S. forces laid siege to Fallujah for the first time, in April 2004. An estimated 900 people were killed, many of them civilians, and the country has been spiraling and disintegrating and surging ever since. That siege was in direct retaliation for the killing of the four Blackwater mercenaries who were strung up on that bridge in Fallujah. One of the code names for the siege was "Operation Angry Ghost". The U.S. army played the role of avenging angel for Blackwater... John Wayne in the desert.

Cusack: This mythology always provides cover for the ideology. The Disaster Capitalism complex was built in the realm of archetype, that frontier realm of the Wild West. Bush, being a terrific political operative knows all this is actual political currency in the modern world.

Now I fear we've entered the kamikaze cowboy phase. Though Bush is effectively already heading into the sunset, like Wayne's great Ethan he will see his battle through to the end no matter what. So maybe he will bomb Iran...


I believe that all the players and people involved in these scandals, armed robberies, murders and corruption should go to prison. But that's not going to happen, and even if it did, the ideology behind them would still be in place. As Milton Friedman said, "our basic function is to keep them [ideas] alive and available until the politically impossible becomes politically inevitable." And it's the ideology that is inherently unjust, corrupt and in general a global menace. We need an opposition movement willing and ready to stand on principal. And someone, a leader -- strong and committed, who will leave them choking on their own bile.

We need people to acknowledge and discuss this new Disaster Capitalism economy, Black water being a striking example of its mission. We need Democrats, Republicans, Independents, Libertarians, Greens and anyone else with a shred of meaningful patriotism in their bones band together to expose and disgrace and disengage from this apocalyptic ideology.

Klein: And we really don't need any more shocks to wake us up. In Iraq, New Orleans and the other disaster zones, we are getting a crystal clear vision of the world that will be created if they continue to get their way. It's a world of cowboys and robber barons. They showed their hand with Blackwater, now it's time for the rest of us to put forward a different vision of the world -- and we can't do it timidly or apologetically.

Cusack: Jimmy Breslin calls media enablers the "Pekingese of the press." I always thought that apt as you watch the latest PR rollout for Iran go unquestioned by mainstream media.

And the Democrats just pretend to take action on civil liberties. After extending the domestic surveillance program, they complain in public about it, pretending to be, I guess, unaware that they extended a program that is defined as a federal crime under the laws that the Senate passed. I mean, these are not particularly subtle facts. Following the pattern, they are objecting to the latest secret memos supporting torture without mentioning that their own so-called torture bill approved tactics like water boarding.

In the meantime, the president keeps repeating the same mantra that "we don't torture" without mentioning that he defines torture as excluding anything short of death.

John Wayne was a towering figure -- a great film star. But the era of his exploitation has to end. The Democrats can't stand up to his iconography -- the Shadow Wayne that has been so co-opted. We need a new paradigm. How about Atticus Finch? Watch Jim Webb -- I think he may be able to lead us into an era of post-Wayne politics.

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