One thing we cannot afford is a nation of Warren Buffets

Warren Buffet has a wonderful image in the media. People look up to him, apparently because he is a wise investor who does wise things and puts money only into sound, meaningful, legitimate businesses that grow the economy, put people to work, etc etc. Many a young investor grows up wanting to emulate Buffet; many people attend his conferences, study his words, and read his pronouncements eager to gain the success that he has gained.

The recent Coburn-Levin US Senate report on the financial crash of 2008 might make us want to think twice. Is all that glitters about Mr Buffet really gold?

Mr Buffet, as part of his 'sage of Omaha' "common sense business man" image, has been quoted as having decried the abuses of the Credit Default Swap market in the late 90s/early 2000s. The most used quote is from one of his Investor newsletters, in which he referred to credit derivatives as 'financial weapons of mass destruction'. Pick up any book on the financial crisis; chances are probably 50/50 that this Buffet quote is in there somewhere; the implication being that if we had all listened to wise old Mr Buffet then we wouldn't be in this mess.

That is missing the story. If you dig through the dozens of financial crisis books, and dig around the internet, and dig through the new Senate Report, you will see a less appealing side of the whole Buffet Myth. For the truth is, that while Buffet was decrying Credit Default Swaps in his investor letters, he was profiting from them on a massive scale.

Mr Buffet is a large shareholder in Moody's credit rating agency. In fact, his company is the largest shareholder in Moody's credit rating agency. What Buffet's people say, goes, at Moody's. From 2000-2006, when Moody's began rating massive amounts of mortgage securities and Synthetic CDOs, it's share price increased several hundred percentage points. Not 10, not 20, not 50 percent. Several hundred; an unbelievable climb in profits. Where did it come from?

Moody's was payed by the investment banks, and others, to give high ratings to the junk products the banks were churning out; mortgage backed CDOs, junk bond and hostile takeover based CLOs, and finally, Synthetic CDOs, which are constructed out of Credit Default Swaps and thus charitably described by many financial insiders as 'gambling'. These are the same Credit Default Swaps that Buffet is continuously quoted as having said were 'financial weapons of mass destruction'.

If you dig far enough on youtube, you will find a video where someone asks Mr Buffet directly about this. He says, quite literally, that just because he doesn't smoke, doesn't mean he wouldn't invest money in a tobacco company. Apparently, just because he doesn't use financial WMDs, doesn't mean he wouldn't profit off of them massively while the entire economy was collapsing in ruins, either.

Mr Buffet was forced to appear before the US Congress in 2010, because he refused to go voluntarily. When he went, he was grilled about the mortgage business, and Moody's was grilled alongside him. They plead innocent, they claimed they didn't know the housing market would falter and die. They claimed they were not responsible for anything.

The problem here is that the mortgage market was directly linked to the Synthetic CDO market, which was directly linked to Moody's ratings. If there had been no Moody's ratings, then the Synthetic CDOs would never have found buyers. If there had been no oceans of Synthetic CDO garbage washing around the system, then nobody could have created the massive number of Credit Default Swaps to go into them. The Swaps, in turn, were created by gambling on mortgage bonds. And the mortgage bonds, in turn, were created by massive amounts of horrible mortgage loans.

When the housing bubble should have died down, in 2005, as it had done before in the late 1990s, then the market should have 'self corrected' and the crash been just a relatively small bump on the road for most people, like it was in the 1990s. However, the Synthetic CDO market drove the creation of massive quantities of bad mortgages; not for people to live in; but for hedge funds and banks to gamble on the failure of. They made money when those houses foreclosed. They made money from investors who were duped by credit ratings into thinking that a bundle of gambling bets is the same thing as a good solid investment like a US Government Treasury Bond. Thus, we saw the building of hundreds of billions of dollars worth of of houses and other real estate that nobody needed or wanted. The Synthetic CDO market is how Moody's was able to gain hundreds of percentage points in profit in 6 short years; rating the junk as high quality, so that pension funds and universities and school systems and cities would buy it.

The Synthetic CDO market is what Warren Buffet was railing against; it's main ingredient, the Credit Derivative, was what he called a Financial WMD. Did he ever stop and ask himself a question that I think most people with a conscience would ask themselves? Was it ethical to be making massive profits off of a product you considered to be a 'financial weapon of mass destruction'?

If we were truly to become a nation of Warren Buffets, we would, in fact, be a nation of people that doesn't ask that sort of ethical question. Warren Buffet was not financially struggling when he failed to make any sort of analysis of his own behavior. He could have walked away at any time, and kept his lifestyle exactly as it is. But he chose not to. He chose to continue profiting from products he knew were incredibly harmful to the economy of the nation and the world. Is this really the sort of behavior we want to emulate?

This is what Warren Buffet is about. For all the doughy eyed fans he has, for everyone who thinks there is some wise Oracle in Omaha, who has common sense while the rest of us don't; be warned. If we were all to become 'common sense' businessmen like Buffet, then we would all be seeking out the new 'financial weapon of mass destruction' with which we could make massive personal fortunes while destroying the planet's economy. We would all sit around like Charlie Munger, his associate, and tell ordinary people to 'suck it up' while we promote bailouts for our friends in high finance. We could all claim we did nothing wrong, though we had just used phrases like 'weapons of mass destruction' to describe the products that our own companies were helping to sell; the products upon which we built our mansions, our fortunes, and our reputations.

If there is one thing that the world cannot afford, it is any more "investors" like Warren Buffet.

References

*All the Devils are Here, Bethany McLean, Joe Nocera, 2010
*Colossal Failure of Common Sense, Lawrence McDonald, Patrick Robinson
*Confidence Game, Christine S Richards
*EConned, Yves Smith
*Structured Finance and Collateralized Debt Obligations, 2nd ed, Janet Tavakoli, 2008
*The Magnetar Trade, ProPublica
*The Big Short, Michael Lewis
















Aristotle and Thomas Drake

From Aristotle's "Politics", book 5 part 11 (selection from White Rose Society 3rd leaflet), translation by Benjamin Jowett, MIT Classics Archive

"... A tyrant should also endeavor to know what each of his subjects says or does, and should employ spies, for the fear of informers prevents people from speaking their minds, and if they do, they are more easily found out. . . . Also he should impoverish his subjects; he thus provides against the maintenance of a guard by the citizen and the people, having to keep hard at work, are prevented from conspiring."

I apologize for having butchered Mr Aristotle, because he makes many good points. But for the purposes of this article, I have cut it down to two. The first: tyranny is associated with a massive domestic spying apparatus. The second: tyranny is associated with a hugely expensive security operation which requires large amounts of taxpayer money. The two reinforce each other - the more security contractors (guards and soldiers) you pay, the more spying you can do, and the poorer you can keep your people, which, in turn, makes them more docile and easier to spy on and repress.

Let us compare Aristotle with this quote from Mr Drake, from the Ridenhour Prizes site.

“I did what I did because I am rooted in the faith that my duty was to the American people" . . . "I knew that you did not spy on Americans and that we were accountable for spending American taxpayer monies wisely."


Sign a petition to stop the prosecution of NSA whistleblower Thomas Drake.

Au Contraire, Mr Presidential Spokesperson: In general, the unauthorized release of classified information is perfectly legal

In April 2011 President Obama accidentally made a boo boo by declaring Bradley Manning guilty before trial. The blogosphere went nuts. Soon after, though, Presidential spokesperson Tommy Vietor said the following:

“The president was emphasizing that, in general, the unauthorized release of classified information is not a lawful act" (quoted at Politico.com)

Actually, in general, it is a completely lawful act, and Congress has repeatedly failed or refused to criminalize it; why? That's how government gets things done! Leaking to the media! Then you fight your battle in the realm of public opinion instead of having to fight it through Congress with your wits alone. And Americans love it; they love to read newspapers and books based on what 'senior officials' have said. They love trying to figure out who the senior officials are, and why they are saying what they are saying.

Is it ethical? Will it get you fired? Will you get blacklisted from government contract work? Will your security clearance be revoked? Will your boss yell at you? I don't know any of those answers.

But is it illegal? That is an entirely different qusetion. "In general", I believe that the answer is no. Why? Because there is no single blanket law outlawing classified information. Jennifer Elsea, in her January 2011 paper for the Congressional Research Service, calls the law here a "patchwork"; there are different laws covering different kinds of information, in different cirucmstances, affecting different people differently. The word "classified" in fact has no clear, set, simple definition. Let alone terms like "national defense information". Benno and Schmidt in their 1973 paper make similar points. Congress has even stopped itself from passing such a 'blanket law', on purpose.

So President Obama's spokesman, Tommy Vietor, appears to have made a flat out, bald faced, false statement to the public. Perhaps President Obama and his staff would do well to read two papers on Espionage Law and Free Speech (both are on the Federation of American Scientists website)

Harold Edgar & Benno C. Schmidt, Jr. (1973). "The Espionage Statutes and Publication of Defense Information". Columbia Law Review

Criminal Prohibitions on the Publication of Classified Defense Information Jennifer K. Elsea, CRS, Jan 2011

Other references

The "Incomprehensible" Espionage Act of 1917, Steven Aftergood, Federation of American Scientists

Barack Obama on Bradley Manning: 'He broke the law' - MJ Lee and Abby Phillip - POLITICO.com 4.25.11

Did Bill Casey, Reagan's head of CIA, violate the same law as Bradley Manning?

In my uneducated opinion, I'm going to say Maybe. If he didn't cross the line, he came damned close to it. But I am pretty confident in saying that Casey violated the same law that Wen Ho Lee, Kenneth Wayne Ford, and Thomas Andrews Drake were alleged to have violated; namely the Espionage Act.

Consider the book entitled "Burn Before Reading", by Stansfield Turner. He writes a chapter on each president, and describes the relationship between each DCI (Director of Central Intelligence) and the president they worked under. In his chapter on Ronald Reagan and William J. Casey he gives us this brief insight into Casey's work habits:

"He also had real problems keeping secret papers secure. Sometimes they would turn up at his home after a search by his security officers."

That is almost a throw-off comment in the book. But pause. Think about it. Consider it. Ponder it.

What he did is specifically illegal under the Espionage Act, 18 USC 793. He 'willfully retained information related to the national defense'. For Turner, this was apparently an amusing anecdote to spice up the first few paragraphs of his chapter on Reagan and Casey. But for other people, this law has meant serious criminal charges and time in jail.

Now, Bradley Manning is charged with a lot of counts. 34 in fact. The one I'm focusing on here is 18 USC 1030(a)(1), The Computer Fraud and Abuse Act. Wait, you say, what do anti-hacking laws have to do with Espionage? It just so happens that 18 USC 1030(a)(1) is a mish-mash of language from the Espionage Act, but that has been broadened to cover information the president has designated as needing protection for national security reasons, oh and it has to be on a computer. I.E. if you 'willfully retain' any of that information, and do it with a computer, then you are in deep trouble and could get many years in jail. Note the difference: the old Espionage Act forbade 'national defense' information; the Computer Espionage law includes any information the president has designated in a certain manner; that is a code phrase for a large swath of classified information. If Bill Casey had been a child of the computer age, he likely would have taken his documents home on his laptop; he would have been flat out guilty. But since Case only took home papers, perhaps he is free of this Computer Espionage charge. But the idea is the same. He had stuff he wasn't supposed to in an unsecure location; namely, his house. He is only a hairs breadth away from violating the same law that Bradley Manning is alleged to have violated.

For Dr. Wen Ho Lee, 'willfully retaining' information almost meant life in prison. Instead, he decided to plea to one count. What was his crime? Backing up his non-classified computer programs to tape, at work, in case LANL's computers crashed (as they had before). His guilty plea made him a felon, made him lose his job, made him unable to vote, and to do many other things that felons can't do. His case was brought as part of a political fight in Washington; a sort of 'Fear of China' gripped Congress and the Whitehouse in the late 1990s and the nations newspapers went looking for the 'Chinese Spy'. Dr. Lee later sued the government and some of these papers; he won over a million dollars.

For Kenneth Wayne Ford, 'willfuly retaining' got him a 6 year prison sentence. He worked at NSA. When he left, he took two boxes home with them. A strange woman befriended him, found the boxes, and turned him in to authorities. They arrested him circa 2004. Coincidentally, Ford was apparently one of those inside the government who said that there was no good evidence that Iraq had any Weapons of Mass Destruction before the 2003 invasion. He was convicted in 2005.

For Thomas Drake, "willfull retention" has already meant being fired after a decades long distinguished career in the military and the government. It might also mean decades in prison. He allegedly had 5 documents in his house. One of his documents is even marked UNCLASSIFIED. Another is basically a few sheets of paper saying "great meeting, everyone!" and was declassified shortly after he was indicted; you can go and read this document right now without breaking any laws. There are a few more pages he accidentally brought home from work; they were hiding inside a huge pile of thousands of unclassified documents he had needed to do his job. What was his job? To help the Department of Defense inspect the NSA's massive waste of taxpayer money called the Trailblazer project.

How is what these folks did any different than what Bill Casey, Reagan's DCI, did? How is this different than what people all over the government do every day?

I don't know. I can only quote people who work in President Obama's Justice Department, who are echoing similarly bizarre statements from past administrations.

"The FBI takes very seriously allegations involving government employees who willfully retain or disclose classified information they are not authorized to possess. Working with prosecutors, we will continue to investigate and pursue charges against these individuals whose actions cannot be justified or tolerated," - Arthur M. Cummings II, FBI Executive Assistant Director, National Security Branch.

"Our national security demands that the sort of conduct alleged here – violating the government’s trust by illegally retaining and disclosing classified information – be prosecuted and prosecuted vigorously." - Assistant Attorney General Lanny A. Breuer.

There are many bizarre things about these statements.

First, there is no single law that outlaws having classified information. The "willfully retain" language these two individuals have used comes from Espionage Act; the Espionage Act does not mention 'classified information', (except for 798, but that's only for cryptology / SIGINT information). Most of Espionage law mentions only 'national defense information'. Judge T. S. Ellis III has specifically pointed out these two things are different in the AIPAC (Franklin, Rosen, Weissman) case a few years ago. So have other judges before him.

Second there is the hypocrisy. This law (even in the jumbled, mangled incorrect way they have expressed it) is violated every day by the highest officers of the government. You can go to any bookstore and buy the evidence. The arbitrary application appears to be taking on a historical pattern; scapegoats and whistleblowers and government critics are targeted for prosecution, but everyone else, well, the DOJ just pretends it never happened. What use is a law like that? How does it uphold the "rule of law" that Judge T.S. Ellis forced Larry Franlkin to teach schoolchildren about at his resentencing hearing? How does it uphold the 'nation of laws' that President Obama has reasoned is the thing we must consider in the case of Bradley Manning?

Update:

Some very good evidence for this theory is revealed during the media's extensive reporting of the assassination of Osama Bin Ladin. Massive and numerous leaks about secret operations have been sprayed all over the major news organizations for weeks on end, including the identities of the secret teams that carried out the orders.

References

Save Tom Drake, facebook
Government Accountability Project, Thomas Drake page
Criminal Prohibitions on the Publication of Classified Defense Information Jennifer K. Elsea, CRS, January 10, 2011 from Federation of American Scientists website
Judge T.S. Ellis III, Franklin sentence reduction hearing 2009 (NDI vs Classified Information)
Justice Dept Press Release on Thomas Drake 2010
Oliver North, PBS Frontline, Drug Wars, circa 2000
18 USC 793, Title 18 of the US Code, Section 793, Cornell Law
Manning Charge Sheets, Hague Justice Portal
Federation of American Scientsts selected casefiles on Thomas Drake
Kenneth Wayne Ford, justice-integrity.org, by Andrew Kreig 2009
"we are a nation of laws", President Obama on the Manning case, 2011, San Francisco

The ball thing in the potato field

When Yuri Gagarin fell to Earth, he fell in the fields somewhere between Smelovka and Uzmorye. His space craft, the 'ball thing', fell a little ways further. Some people ran to him; they thought he was another paratroop, and they could sew dresses with the parachute silk. Some ran to the 'ball thing'; a local mechanic sat inside and declared it impressive. Gagarin waved to the first people he saw, an old woman and a girl, who were slightly afraid at first. He told them he was a Soviet, like them...so they should not be afraid.

In 2011, Elena Racheva, of Novaya Gazeta, traveled there to report on the anniversary of his flight; some of the local people had other things on their minds besides the glory of space travel.

“I am a Soviet from Space”, Elena Racheva, Novaya Gazeta, 13.04.2011