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Moral fallout

  A Homegrown Disaster 

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    Published: July 9, 2008

    Vice President Dick Cheney’s office was involved in removing statements on health risks posed by global warming from a draft of a health official’s Senate testimony last year, a former senior government environmental official said on Tuesday.

    The former official, Jason K. Burnett, made the assertion and described similar incidents in a three-page letter to Senator Barbara Boxer, a California Democrat who is the chairwoman of the Senate Environment and Public Works Committee. He then stood with her at a news conference at which she excoriated the Bush administration.

    “History will judge this Bush administration harshly for recklessly covering up a real threat to the people they are supposed to protect,” Mrs. Boxer said.

    Mr. Burnett, a lifelong Democrat, resigned in May from his post as an associate deputy administrator of the Environmental Protection Agency and chief adviser on climate to Stephen L. Johnson, the E.P.A. administrator. Mr. Burnett has previously criticized the administration’s climate policies and endorsed and contributed to Senator Barack Obama’s presidential campaign.

    In the letter, while declining to name individuals, Mr. Burnett said the offices of Mr. Cheney and the White House Council on Environmental Quality “were seeking deletions” of sections of draft testimony describing health risks from warming. The testimony was prepared by Dr. Julie L. Gerberding, the head of the Centers for Disease Control and Prevention, for a hearing last October before Mrs. Boxer’s committee.

    Mr. Burnett’s letter said the council “requested that I work with C.D.C. to remove from the testimony any discussion of the human health consequences of climate change.”

    The changes were made before the testimony was delivered. At the time, the E.P.A., complying with a Supreme Court ruling, was finishing a document assessing whether carbon dioxide, the main emission linked to global warming, endangered public health or welfare as defined under the Clean Air Act.

    At the news conference, Mrs. Boxer strongly chided Dana M. Perino, the White House press secretary, for asserting last year that the changes in testimony were justified because the statements did not comport with the influential review of climate risks by the Intergovernmental Panel on Climate Change. “This was a lie,” Mrs. Boxer said.

    She demanded that Mr. Johnson turn over all documents related to the assessment of carbon dioxide’s risks, or else resign.

    White House officials bluntly rebutted Mr. Burnett and Mrs. Boxer.

    “We stand 100 percent behind what Dana said,” said Tony Fratto, a White House spokesman.

    “Senator Boxer should not throw around charges like lying in cases where there might be a difference of opinion,” he said.

    Marc Morano, a spokesman for James M. Inhofe, an Oklahoma Republican and the ranking minority member on the Senate environment committee, also said the criticism was unjustified.

    “All administrations edit testimony before it is submitted to Congress,” he said, describing incidents during the Clinton administration involving Roy W. Spencer, a NASA scientist at the time who questioned the dangers of human-caused warming. Mr. Spencer said his superiors told him not to express his views about the dangers of global warming in testimony.

    Mrs. Boxer insisted that the efforts last year by the White House constituted a “cover-up” and “censorship,” and she announced plans for more hearings.

    Austin Bogues contributed reporting from Washington.


    Securitisation: life after death

    By Martin Wolf

    Published: October 2 2007 18:49 | Last updated: October 2 2007 18:49

    Ingram Pinn illustration

    “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Chuck Prince, Financial Times, July 10 2007.

    “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” John Maynard Keynes, 1931.

    The dance has stopped: Mr Prince’s Citigroup has just announced $6bn (€4.2bn, £2.9bn) in write-downs and losses for the third quarter of 2007. He is far from alone. More bad news is no doubt to come. As Keynes foretold, the banks joined Mr Prince’s dance together and are leaving it together. Until the dance ends, nobody knows what a bank’s profits are: bankers report (and pay themselves) on the basis of profits that are normally offset by write-offs when the bad lending comes to light.

    What is remarkable about the present crisis is how traditional it is, despite the modern paraphernalia of securitised lending. We are seeing old-fashioned bad lending and old-fashioned mispricing of risk. What is remarkable, in addition, is the severity of the consequences. The US market in asset-backed paper contracted by 21 per cent between August 8 and October 1. The flight from risk also brought about big divergences between interest rates on commercial paper and US Treasury bills and between central bank interest rates and those in interbank three-month markets. This disruption, moreover, has taken place at the core of the world economy: the US housing market and debt markets of advanced countries.

    US commercial paper

    I admit to both surprise and disappointment. No, I am not surprised by the repricing of risk. On the contrary, together with a host of outside observers, I was astonished by the willingness of yield-seeking investors to take on risks for small reward. If anything, the repricing has been remarkably small, at least so far: equity markets are buoyant; spreads over US Treasuries of emerging market bonds in the JPMorgan emerging market composite bond (EMBI Plus) index rose by a mere 39 basis points between July 6 and October 1; on Baa-rated corporate bonds, they rose by 59 basis points; and even on Caa-rated bonds, they rose by no more than 191 basis points.

    US commercial paper and Treasury bill yields

    What I am surprised by is how toxic securitisation of subprime mortgages has turned out to be for the financial markets. I admit that I thought securitisation had attractive features: it should allow banks to remain in the mortgage business as originators and intermediaries without taking too much of the interest-rate, term and liquidity risks on to their own highly leveraged books; it should allow banks to transfer those risks on to investors who want longer-term, higher-yielding assets; and, in the process, riskier borrowers should have access to more credit than before.

    Libor spreads

    In 2005, Alan Greenspan himself, then Federal Reserve chairman, remarked that advances in technology had revolutionised lending: “where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.”* Oops!

    So what went wrong? There are two chief answers. The first has nothing to do with securitisation itself: it is that a fit of all-too-familiar euphoria overwhelmed both lenders and borrowers at a time of low interest rates and rapid rises in the prices of the underlying collateral (namely, housing). But the second has a great deal to do with securitisation: it is that the process of removing lending from the books of the initiators encouraged sloppy lending (“it is not going to end up on our books”) and greater belief that banks were free of the risk (“this special purpose vehicle has nothing to do with us”) than turned out to be the case.

    Why did this happen? As Robert van Order of the universities of Aberdeen and Michigan points out, securitisation necessarily creates a chain of transactors where bank lending interposes just one institution between the borrower at one end and the depositor at the other. Such chains depend on trust or, as he puts it, “reliance on originators and servicers to originate good loans and service them properly”. The trust proved misplaced and has duly vanished: credit means “he (or she) believes”. Alas, he no longer does.

    In trust’s absence, ignorance not only of what securitised assets are worth but also of who holds them has dried up asset-backed paper markets. That has forced banks to lend directly to the conduits, special purpose and special investment vehicles they created. The need to fund these has dried up lending and, above all, the provision of liquidity to interbank markets. One result (among many) was the collapse of Northern Rock’s business model in the UK.

    An obvious reaction to this debacle is to recommend going back to the old bank-based lending model. But that would be a big mistake. The potential advantages of securitisation, vis a vis “plain vanilla” bank lending, remain, because banks are inherently so fragile. But if these markets are to recover, the errors must be fixed: first, a way must be found to demonstrate integrity of lending; second, transparency of the securities will have to increase; and, third, banks must insure themselves adequately against the need to provide liquidity to their off-balance-sheet vehicles. It is not impossible to sell complex products safely: Boeing and Airbus manage it. But only companies that demonstrably care about their reputations are able to do so. It is up to originators of securitised liabilities to do the same.

    A great deal of dust still has to settle in housing markets, financial markets and the world economy. The world that emerges will look different, in many ways. But there is no reason securitisation should not become as normal and reliable an element in financial markets as corporate “junk bonds” and loans to emerging markets have also turned out to be. It is always possible to have too much of a good thing. In this case, the world has had far too much of something that was not as good as it ought to have been. But securitisation is a good thing, all the same. It can re-emerge, provided the lessons of the financial markets’ dance are learnt.

    *Remarks by Chairman Alan Greenspan, April 8 2005,

    **On the Economics of Securitization,

    Sources for charts: Federal Reserve; Thomson Datastream



    With $40 billon, Putin ‘is now Europe’s richest man’

    December 22, 2007 · No Comments

    Compared to Mobutu Sese Seko, the dictator who plundered Congo, and Ferdinand Marcos, the former ruler of the Philippines. Putin has denounced the claims as “trash”

    Telegraph | Dec 22, 2007

    By Adrian Blomfield in Moscow

    President Vladimir Putin of Russia has been likened to an African plutocrat after a controversial political scientist claimed that he had acquired control of £20 billion in energy assets - enough to make him Europe’s richest man.

    Stanislav Belkovsky, a colourful figure on the political scene, claimed that Mr Putin had made a multi-billion pound fortune by controlling stakes in three Russian energy companies.

    The allegations – if true – would suggest that Mr Putin is one of the wealthiest men ever to hold public office.

    Mr Belkovsky alleged that Mr Putin had acquired $40 billion during his eight years in power, through a network of front-men.

    He compared the president to Mobutu Sese Seko, the dictator who plundered Congo, and Ferdinand Marcos, the former ruler of the Philippines.

    “Russia under Putin is not a version of modern democracy but a typical third world kleptocracy,” said Mr Belkovsky.

    But Mr Putin’s spokesman denounced the claims. “It’s nothing but trash,” said Dmitry Peskov.

    “Certainly it has nothing to do with seriousness; it has nothing to do with professionalism. It’s just trash.”

    According to Mr Belkovsky, Mr Putin controls a 37 per cent stake in Surgutneftegaz, an oil exploration company, as well as 4.5 per cent of Gazprom, the state energy giant, and at least 50 per cent of Gunvor, a Swiss-based oil trading company that has won a series of state contracts.

    Mr Belkovsky claimed his information had come from credible sources in the Kremlin - but admitted he had no documentary evidence.

    “European and U.S. special services have access to these documents but I don’t,” he said.

    Observers were sceptical.

    “In a system of state capitalism and total corruption, it would be strange if Putin was not rich,” said Leonid Radzikhovsky, a political analyst.

    “But the information about this treasure island seems a little exaggerated. Most Russians do not think about corruption at presidential level or do not want to think about it.”

    Mr Radzikhovsky added: “It is difficult to understand Belkovsky. He is known as a source of confusing information and it is hard to treat it seriously.

    “He is an adventurer. He may be driven by his own morbid ambitions. He really knows a lot of people in high places but who is he to know the secrets of the person who has all the possible and impossible ways to hide his secrets?”

    The endgame of Mr Putin’s presidency, and his plans for the succession, have been thrown off balance by infighting between rival Kremlin clans.

    At least three groups, two led by ex-KGB officials, have been in open warfare since October.

    On Oct 3, General Alexander Bulbov, deputy head of the federal drug agency, and a member of a hardline clan of “Siloviki” - former KGB and security officials - was arrested by a rival Siloviki faction.

    The “liberal” faction was damaged when Sergei Storchak, the deputy finance minister, was arrested last month.

    Far from being watertight, Mr Putin’s Kremlin now leaks like a sieve.

    The President is theoretically above the clans and tries to balance their clashes.

    If he does have a faction, it consists of businessmen who have become very wealthy under his rule.

    Mr Belkovsky named at least three of them as front-men for the president’s alleged fortune.

    He also cited Igor Sechin, a deputy chief of Kremlin staff, leader of the most hardline “Siloviki” faction and one of the country’s most powerful men.

    Mr Putin appeared to have sidelined Mr Sechin’s clan when he announced that Dmitry Medvedev, a relative liberal, would be his successor as president.

    Mr Sechin and other ex-KGB figures would never rally around Mr Medvedev.

    Mr Putin may calculate that he can keep their loyalty, leaving the new president isolated.

    Mr Putin may calculate that he can keep their loyalty, leaving the new president isolated.

    What game Mr Belkovsky is playing - and on whose behalf - is unclear.

    He has been accused of starting a smear campaign against the oligarch, Mikhail Khodorokovsky, a fierce critic of Mr Putin who was jailed in 2005.

    Mr Belkovsky’s allegations about the president’s money first emerged in a book he published last year.

    Categories: Crime & Corruption · Monopolies


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