Wealth International, Limited

Offshore News Digest for Week of September 3, 2007

Note:  This week’s Finance Digest may be found here.


Does it make sense for stock prices to plunge one day and soar the next, with little in the way of new information to explain either move? Maybe not, but it happened last week, just as it did earlier in August. It was the first time in more than four years that the American stock market experienced such wild swings, and could be a harbinger of a reversal of direction in either the stock market or the economy, or both. Or it could just show that changes in the financial system have left many investors confused about what is going on.

In the past, such wild swings have sometimes indicated that markets were turning in a new direction. In retrospect, there seem to be good reasons for the turnaround. But at the time, there were also plenty of investors who believed that the prevailing trend was sure to continue and jumped in to drive prices in the old direction. In September 1974, with the economy in a severe recession and the stock market in the worst bear market since the Depression, there was a string of sharp, contradictory moves. Share prices hit bottom in early October, and a strong recovery followed.

In 2000, the bull market was going strong, led by the technology stocks that had soared and made many traders feel rich. The first big reversal came in January, with prices plunging one day and recovering the next. It happened again in April, and again in October. The Internet bubble was finally deflating, and a prolonged bear market was beginning. By 2002, investors were as depressed as they had been in a generation. The 2001 recession was over, but that was not clear. A series of summer reversals signaled that a bottom was near, and was followed by more reversals in October, November and the following March. The bull market had revived.

But while such reversals can signal major market moves, they can also occur when markets are stirred by changes that leave many investors simply perplexed. The 1987 crash, which seemed at the time to warn of impending recession, now appears to have been caused by a new investment strategy involving stock index futures that led to major selling after the first decline. The strategy, called portfolio insurance, decimated portfolios, but it did not reflect what was going on in the economy. Aided by quick action on the part of the Federal Reserve, the next recession was still three years away.

Similarly, reversals in 1997 and 1998 came amid an Asian credit crisis, a Russian default on debt, and problems with a hedge fund, Long-Term Capital Management, whose strategies were not as brilliant as its founders had believed. But they did not presage an end to the 1990s bull market.

This year’s sharp moves have come as investors vacillated over how extensive the effects of the subprime mortgage problems will be. Those problems have led to a sharp contraction of credit markets and to difficulties for a number of hedge funds, but it is unclear if the crisis will also bring on a recession and end a bull market that has sent most stocks well above the highs they reached in 2000.

To some traders, it is ridiculous to expect the entire economy to falter because of problems in the subprime mortgage market. Others are convinced that tighter credit standards will force American consumers to curtail spending, slowing the economy and damaging corporate profits. It is from such contradictory beliefs that the wild days of August sprang.

Link here.


Contradictions now wrack the world’s financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. If we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, we are on the verge of a serious crisis – if not now, then in the near future.

The International Monetary Fund (IMF), the Bank for International Settlements, the British Financial Services Authority, the Financial Times, and innumerable mainstream commentators were increasingly worried and publicly warned against many of the financial innovations that have now imploded. Warren Buffett last year called credit derivatives – only one of the many new banking inventions – “financial weapons of mass destruction.” Very conservative institutions and people predicted the upheaval in global finances we are today experiencing.

The IMF has taken the lead in criticizing the new international financial structure, and over the past three years it has published numerous detailed reasons why it has become so dangerous to the world’s economic stability. Events have confirmed its prediction that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan obligations (CDOs and CLOs), will cause a flight to security that will dry up much of the liquidity of banking. “Financial innovation itself,” as a FT columnist put it, “is the problem.” The ultra-creative system is seizing up because no one understands where risks are located or how it works. It began to do so this summer and fixing it is not very likely.

It is impossible to measure the extent of the losses. The final results of this deluge have yet to be calculated. Even many of the players who have stakes in the countless arcane investment instruments are utterly ignorant. The sums are enormous. Only a few of the many measures give us a rough estimate. The present crisis began – it has scarcely ended there – with subprime mortgage loans in the U.S., which were valued at over $1.3 trillion at the beginning of 2007 but are, for practical purposes, worth far, far less today. Indirectly, of course, the mortgage crisis has also brought many millions of people into the larger financial world and they will get badly hurt.

What the subprime market did was unleash a far greater maelstrom involving banks in Germany, France, Asia, and throughout the world, calling into question much of the world financial system as it has developed over the past decade. Investment banks hold about $300 billion in private equity debts they planned to place – mainly in leveraged buy-outs. Now they will be forced to sell them at discounts or keep them on their balance sheets. Either way they will lose.

The near-failure of the German Sachsen LB bank, which had to be saved from bankruptcy with €17.3 billion in credit, revealed that European banks hold over $500 billion in so-called asset backed commercial paper, much of it in the U.S. and subprime mortgages. A failure in America caused Europe too to face a crisis. The problem is scarcely isolated.

The leading victim of this upheaval are the hedge funds. What are hedge funds? There are about 10,000 and, all told, they do everything. Some hedge funds, however, provided companies with capital and successfully competed with commercial banks because they took much greater risks. A substantial proportion are simple gamblers. Many look to their computers and mathematics for models to guide their investments, and these have lost the most money, but funds based on other strategies also lost during August. The spectacular Long-term Capital Management 1998 failure was also due to its reliance on ingenious mathematical propositions, yet no one learned any lessons from it, proving that appeals to reason as well as experience fall on deaf ears if there is money to be made.

Some gained during the August crisis but more lost, and in the aggregate the hedge funds lost a great deal – their allure of rapid riches gone. There have been some spectacular bankruptcies and bailouts, including some of the biggest investment firms. Investors who got cold feet found that withdrawing money from hedge funds was nigh impossible. The real worth of their holdings is hotly contested, and valuations vary wildly. In reality, there is no way to appraise them realistically. They all depend largely on what people want to believe and will take, or the market.

We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. It is impossible to speculate how long today’s turmoil will last, but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s. This ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

Central banks have neither the resources nor the knowledge, including legal powers, to remedy the present maelstrom. Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of “moral hazards”. Is the Federal Reserve’s responsibility to save financial adventurers from their own follies? Throughout August the central banks in effect relied on banks to restore confidence in the financial system, subsidizing their efforts.

Central banks’ efforts succeeded only very partially but, in the aggregate, they failed. Banks and investors now seek security rather than risk, and they will sit on their money. The Federal Reserve privately acknowledges its inability to cope with an inordinately complex financial structure. European central bankers are in exactly the same dilemma. They simply do not know what to do.

But this scarcely touches the real problem, which is structural and impinges wholly on the way the world financial structure has evolved over the past two decades. As in the past, there is a critical split in the banking and finance world and each has political leverage along with clashing interests. More important, central banks were not designed to cope with today’s realities and have neither the legal powers nor knowledge to control them.

Central banks will have increasing problems and the solutions they propose, as in the past, will be utterly inadequate, not because their intentions are wrong but because it is impossible to regulate such a vast, complex economy. Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level.

Link here.


Greg Bertrand and Jan Tilston left Toronto in 2002 to build a small hotel and a new life in Costa Rica. They counted on it being tough. What they did not count on was the help they would get along the way.

Greg, a partner in a graphic arts firm, and Jan, a family law attorney and director of the Toronto Family Law Office, had had enough of cold winters and workday stress. They had both done quite a bit of traveling over the years, but they decided that in the future they would like the world of travel to come to them. A small hotel, they reasoned, would let them bring the world to their doorstep. And it has, says Jan: “We thoroughly enjoy our guests and find that everyone has a story. We appreciate them all, from the boat captain from South Africa and the police sergeant from Canada to the Dutch environmentalist and the ex-American Marine who works as a bodyguard in Iraq.”

Greg and Jan chose Costa Rica because it is an easy flight from Toronto, so family and friends can readily come to visit. They like it that Costa Rica is politically stable with a long established democracy and no army – which allows more spending on things like universal medical care and free and subsidized educational programs. The magnificent weather was a factor, too. But the biggest magnets pulling Jan and Greg to Costa Rica were the “wonderful and generous” people they met here. “Their help and friendship has been invaluable,” says Jan.

Their real estate agent helped them set up their business, and their architect positioned the hotel in just the right location to capture the ocean and mountain breezes. Two nearby hotel owners happily gave them suggestions about running the hotel and told them where to buy the best mattresses and supplies at the best prices. Staff at the local garden center helped them choose the perfect plants for the gardens. One neighbor cautioned them against using a red neon sign on the hotel – this generally attracts a transient pay-by-the-hour type of guest in Latin American.

Vista Pacifico Hotel opened for business in January 2004. Perched on a mountaintop, the location offers a view in one direction of the beach town of Jaco and the Pacific Ocean, and in the other direction, pastoral green Costa Rican farmlands and mountains. “We enjoy sharing the magic of this country with our guests, and we find ourselves becoming more generous than we had been in North American society,” Jan says. “Both of us offer our professional services without payment. Of course, we now have the option to do this with whom and when we want. Greg got paid a pound of coffee per hour for an exceptionally time-consuming graphic design job he did for some friends who started a coffee roasting company.”

Link here.


The gringos I have encountered through the years I have lived in central Mexico have moved here for many different reasons. Some have moved to Mexico for the good weather. Others moved because of lower health costs or because they could not afford retirement in the States. Yet others came to buy cheap houses, to study, to raise their kids, or to escape a bad marriage. A few moved here to escape detection from the law. The reasons are quite remarkably extensive.

So how do these people choose just where to live in Mexico? How do they evaluate what city or state in Mexico they want to settle in? Is there a right way and is there a wrong way? While I do not think there is a specific right way to do it, I do believe there is a wrong way: impulsivity.

If you are moving for legal and more or less legitimate reasons, to do so on a whim or impulse can be the quickest way to heartache and despair. You will soon be finding your way back from whence you came. You have got to do your homework, ask every question, and read everything you can get your hands on – especially those books which spell out not only the pluses about living in Mexico but also the hard stuff, the minuses. If you can follow what my wife and I did when we were in the research stage of our move to Mexico, or adapt it to your own situation, you just might find yourself having a successful expatriation experience.

What climate do you want to live in?

There is a climate for everyone in Mexico. Some gringos, accustomed to areas of the U.S. where humidity is high, might do very well in one of the Mexican coastal cities. Trust me when I tell you that if you are not used to regions of extremely high humidity, you want to consider some other place in Mexico. You can consult some guidebooks, such as Fodor’s, that will list ranges of temperatures for the year in the region of Mexico you are considering. You can also find this information online. Another thing you can do is to check the daily weather report for the city you are considering for expatriation. This site lists foreign cities and daily weather reports and forecasts. You can keep a running record of the places you are considering to study highs, lows, and precipitation.

What are you going to do about the language issue?

I believe many gringos underestimate this issue and how it is going to affect not only themselves but also the nationals where you choose to live. If you simply do not want to learn Spanish, you want one of the areas of Mexico that has an established gringo community like Lake Chapala or San Miguel de Allende. In the places with well-organized gringo enclaves, you will never have to utter one word of Spanish. It will be like moving to anyplace in the U.S. to retire.

If you want to live in a more authentic Mexican area largely untainted by Americanization, then you are going to have to master Spanish. What I mean is to develop an intermediate to high level of spoken fluency in order to make do. From time to time, my wife tells me of gringo wannebees who post on the various internet chat forums. They want to move to some small, isolated village where there are Mexican nationals but few, if any, English speakers. When questioned, they say they have absolutely no Spanish skills – none – and yet it did not occur to them that it would be virtually impossible for them to survive in rural Mexico without Spanish. Amazingly, there are gringos in cities such as Guanajuato and Dolores Hidalgo who cannot speak Spanish. I cannot tell you how they do it but they manage somehow. My wife and I have stayed up many nights contemplating this horror. What happens if you become seriously ill and there is no one to interpret for you?

If anti-gringo sentiment exists for any reason, being Spanish-challenged is number one. In the small rural, conservative, and provincial towns, if you do not speak Spanish, there can be some pretty tough feelings you are going to have to overcome with the nationals where you live. Most anti-gringo feelings melt away almost instantly when you make the effort to speak Spanish. In cities where the locals’ livelihood does not depend on the gringo expats or on tourists, there is not going to be a pressing need for the nationals to speak English, nor is there going to be a pressing need to being particularly nice to you. Not all Mexicans are going to like that you have moved into their town. And, if you cannot speak their language, you cannot get to know your neighbors or show them what a great person you are.

How much do you want to spend?

In a nutshell, the smaller and more rural the town, the cheaper everything is going to be. However, more rural towns may not have the services you need, like banks, ATMs, satellite or cable television, telephones, or internet service. What you do not want to do is buy a house before knowing if you are going to fit into the town you are considering. Rent first then buy later. The bigger and more established the gringo enclave in a particular city, the higher the prices of everything will be.

What will you do with your time?

Well-defined and long-established gringo enclaves present opportunities for the new expat, especially the one who does not speak Spanish. There will be things to do, people to see, relationships to start and develop, and lots and lots of activities for the displaced gringos. For all practical purposes, it is like moving to a country club with long-term living accommodations. You have the country-club lifestyle in a foreign country with all your needs provided (waited on hand and foot) by Mexican nationals.

I understand the attraction of, for example, San Miguel de Allende. One American expat there told me that the local resident population is there to serve the foreign community. You have everything there that you would have in a Florida retirement community, but even better weather. Move to another area of Mexico where there is not an established gringo community and you will have to come up with your own distractions. That is how it is, so plan accordingly.

Link here.


The subject of heating has already been covered very competently by several expat bloggers living in Montevideo. So why do I feel the urge to write about this subject again? Because despite all the information available, I think many North Americans and Northern Europeans will still assume that because the Uruguayan winter is milder, there is nothing to worry about. And they may wrongly assume that all homes are heated and they will have the same comfort they are accustomed to back home. This would be a big mistake.

First the good news. If you choose to live in a newer apartment building with good windows and radiant floor heating (central losa), your experience will be similar to what you may be accustomed to in North America for example, i.e., roughly uniform temperature throughout the home. It will not necessarily be the same, because many buildings only turn on the heating system for part of the day. Even then, you will probably be fairly comfortable due to the high thermal lag of the brick and concrete structures.

On the other hand, if you choose to buy or rent a house, and being cozy and warm in the winter is important to you, you will need to do a lot of homework. The main problems you will encounter are these:

Even in houses with central heating, the lack of insulation and the draftiness creates temperature gradients and makes heat distribution uneven. This means it is unlikely one would be comfortable at home without a heavy sweater or a light jacket. It also means that the cost to heat an old house of equivalent size to an equivalent level of comfort would be more expensive than in Minnesota, despite the milder Uruguayan climate.

Houses not only lack insulation, but they are also built without a vapor barrier. When you spot-heat the house (just enough to heat the air around you), the dew point of the air inside becomes higher than the outside air, but the walls will still be cold. The warmer inside air will hold more moisture than the outside air. With no vapor barrier, it will cause the water vapor to diffuse across the brick, from the inside to the outside. Since the walls are cold, the vapor will condense inside the first centimeters of the wall as soon as it cools enough to reach the dew point. This will eventually create moisture and mildew stains and will be more pronounced in the areas where the walls are coldest and poorly painted. With a good central heating system, if the house is heated more thoroughly and regularly, to the point where the walls are aways warmer than the dew point, the humidity will never condense.

Before buying a house for what appears to be a bargain, it is important to consider the heating factor. If you plan to live in Uruguay year round and if being warm is important to you, you will need to factor in the cost of replacing all windows, doors and installing radiant floor heating and be prepared to spend maybe a few hundred dollars a month to keep it toasty.

Link here.


Moving home, they say, is one of life’s five most stressful experiences. It comes in at number three. Ranked a bit below bereavement, a bit above divorce. But in Cuba it is different. Packing up a home in Cuba is easy.

The reason is that you do not have to go through that agonising problem of wondering about what to do with all your junk. You can sell it, or give it away. All of it. In a matter of hours. Cuba is a place where almost all consumer items are prohibitively expensive, or, more likely, not available. And scarcity breeds desire.

Most Cubans, and plenty of foreigners living on the island, spend the majority of their time not thinking about the country’s future, or transitional governments, or the health of Fidel Castro, but on rather more mundane things. Like how to find a square meal, a fridge that works, or an electric fan.

I had a first-hand glimpse of all this when I returned to my home in Old Havana, just days after hearing the disappointing news that I was one of three foreign correspondents to be stripped of their press accreditation by the Cuban government. Our reporting was deemed “negative” by a nameless committee. As I entered my apartment the phone was ringing. It was an ex-pat friend whom I had not heard from for some time. The conversation went along these lines: “I am so sorry to hear you are being thrown out,” he said, “what a disgraceful attempt to intimidate the foreign press.” And then, after a brief pause, the real point of the call. “That sofa in your living room ... are you selling it? And what about the microwave?”

As the news spread that I was on my way out, my Cuban neighbors congratulated me on what they saw as a promotion. Then came the not-so-subtle requests for a farewell present. I soon realized that anything would do. A broken watch, a 2005 calendar, all were received with embarrassing gratitude.

I had little time to decide which memories of my life in Cuba I would keep for myself. One I did manage to save was a copy of the first story I had filed, just days after arriving in Havana in 1960. Back in my apartment, I put the copy of the story in my “keep” file, together with something else which brought back another memory.

It was a DVD of the film Hotel Rwanda. A couple of years ago, the Oscar-nominated film was put on Cuban state television. I was at home watching it, when, a few minutes after the opening titles, I noticed that some shots had been clumsily repeated. It had been edited. I happened to have a DVD of the original version. I put it on to compare the two. It became obvious that the Cuban censors had gone to the trouble of cutting out a 30 second portion of the film. The banned images contained a couple of harmless jokes about Cuban cigars.

One of the enduring questions that has crossed my mind while working in Cuba is whether the government really needs to go to the lengths it does in managing the flow of information to its people. Cuban officials are surprisingly unapologetic on the issue. Their justification is that Cuba is in the midst of an undeclared war with a shameless U.S. administration which is determined to undermine the Cuban revolution. But one of the side effects of 48 years with the same leader is an extraordinary degree of resignation among the people. It works both ways.

Those that support the revolution believe that their future is in good hands. Those that yearn for change feel that things are out of their hands. Would it really threaten the status quo if you could buy a foreign paper in the streets of Havana? Or if the foreign press in Cuba were able to act a little more freely? I doubt it. But clearly someone right at the top feels that such an experiment is not worth the risk.

Link here.


Billionaire Sergey Veremeenko has figured out how to play by Russia’s new rules.

Sergey Veremeenko is working the crowd at a caviar-vodka-and-cognac-drenched VIP reception celebrating Estar Holding’s new $100 million steel plant in Rostov-on-Don, a river port city in southern Russia. He spots the Kremlin-anointed governor who okayed the building permits, site plans and tax incentives for the plant. “In Russia nothing happens without the approval of the government,” explains Veremeenko, a 25% owner of Estar, as he hustles over to the pol to schmooze. Estar has paid Sir Elton John $1.6 million to perform on this sultry July evening. In the background, as if on cue, Sir Elton croons, “What do I do to make you love me?”

That question is likely never far from the 51-year-old Veremeenko’s mind. He is one of a new generation of Russian industrialists who owe their continued prosperity, in good part, to making sure President Vladimir Putin and his operatives can, if not love, at least tolerate them. These demi-tycoons are not as powerful or independent as the oligarchs of Boris Yeltsin’s era, yet their wheeling, dealing and enterprise are crucial to Russia’s economy and Putin’s power. Mostly, they avoid the Western press. But this summer Veremeenko allowed Forbes to tag along with him for four days, providing a peek at the leashed version of capitalism creating wealth in Russia today.

Veremeenko has a net worth that we estimate at $1 billion, built with assets including luxury housing developments in Moscow’s northwesternmost suburbs and vast agricultural land in the western regions of Tver, Kaluga and Penza. His investments in steel, mining, banking and microchips seem to have been chosen with an eye toward advancing the Kremlin’s agenda and/or avoiding direct competition with Kremlin favorites. Estar churns out yearly 1 million tons of specialty metal products like corrosion-resistant alloy and steel plates used in auto engines, posing little threat to Putin’s friends at steel giants Magnitogorsk and Severstal. Last fall, after Putin spoke about the need for the country to achieve scientific and technological superiority, a Veremeenko company agreed to buy the equipment at an Advanced Micro Devices microchip factory in Germany and plans to move it to Russia. The transplanted factory should begin operations in 2009.

No surprise that Veremeenko enjoys the good life – a chauffeured Mercedes, a lavish pad in Putin’s gated suburban neighborhood. Last year he wed 18-year-old Sofia Arzhakovskaya, a ballerina and aspiring actress, who was then crowned Mrs. World 2006 in a St. Petersburg pageant some contestants claimed was rigged. He is now angling to invest in Hollywood, in part to further his new wife’s acting career.

Hollywood aside, Veremeenko eschews the foreign indulgences of some of the oligarchs. At the steel plant ribbon-cutting, he spent an hour quaffing beer out of plastic cups with workers before joining the VIPs for champagne toasts from glass flutes. He collects Russian religious art, not Picassos. Asked if he owns any cognac houses in France, his answer oozes Mother Russia. “My new focus is on producing and distributing bottled horse milk to Russian grocers,” he responds in his stilted (but serviceable) English. “It has almost the same nutrients as human breast milk. It’s tasty, very good.”

But the most striking contrast with the old oligarchs is political. In 2003, the same year that now-jailed Yukos founder Mikhail Khodorkovsky began his ill-fated foray into politics as Putin’s opposition, Veremeenko waged a campaign for president of his native Bashkortostan region (near the Ural mountains) – at the behest of the Kremlin. Then, just before a runoff election, he quit the race – again at the Kremlin’s urging. Russian political experts say Veremeenko was a pawn in a Kremlin scheme to consolidate more power at the national level. Better for his business to be seen as a Kremlin stooge than as its enemy.

Outside of that episode, Veremeenko has spent his life toiling in science and business, not politics. In 1989 he met Sergei Pugachyov, a Putin pal who was then a senior executive at Saint-Petersburg Bank. Pugachyov brought Veremeenko into banking and, in 1992, a year after the fall of communism, the two men started the International Industrial Bank, known as MezhpromBank. Under Yeltsin MezhpromBank snagged billions of rubles in state deposits and secretly issued credit cards to Yeltsin’s daughters, creating a political brouhaha. Veremeenko insists the bank did nothing illegal but otherwise declines to discuss it.

Still, MezhpromBank seems to have been solidly run. After the Russian financial system collapsed in 1998 the World Bank cited it as one of only three Russian banks to have remained solvent and liquid during the crisis. While many of their competitors were preoccupied restructuring bad loans, Veremeenko and Pugachyov expanded. Then in 2003 Veremeenko took his political detour.

Vadim Deyneko, acting general director of Central Commercial Bank, notes that some uninformed wags “started to say Sergey’s political loss meant he was not on friendly terms with the Kremlin.” But, he adds, those questioning Veremeenko’s future did not understand Russian politics. Veremeenko had little trouble getting back into business – or into sectors of interest to the Kremlin.

Like any Russian entrepreneur, Veremeenko still faces political risks. For example, Estar Holding could be taken over (at a below-market price) by the state weapons export agency Rosoboronexport, which has already rolled up titanium producers and now shows interest in specialty alloys. Or Veremeenko could face grief if it turns out his vast landholdings were purchased through the same kind of shadowy deals with collective farmers that led government officials to imprison one wealthy developer and send another fleeing in 2007. (He says they were not.) And then there is the drain from employee theft and official favors. (He estimates the two combined come to 5% of sales.)

Ah, but at least it’s the devil he knows. Recently, when Veremeenko decided to invest in the American movie biz, he was shocked. “At first I came to Hollywood asking, ‘How much money you need?’ But then you only get eaten by sharks,” he says. “Now I am thinking smarter. I am learning the rules.” Arguably about as opaque and treacherous as the rules he has mastered back home.

Link here.


Last year, the Cayman Islands maintained their international ranking of 6th place for total banking assets held by a jurisdiction, and growth of the economy outpaced that of the U.S., Financial Secretary Kenneth Jefferson has told lawmakers. Jefferson reported to the Cayman Legislative Assembly that of the total global banking assets of $29.4 trillion, Cayman held $1.7 trillion in 2006. The Cayman figure represents a growth of 37.2% during that year, while the global amount grew by 22.9%. Meanwhile, the Cayman economy grew by 4.6%, outpacing the U.S., where the growth was 3.2%.

The Financial Secretary credited Cayman’s 2006 growth to robust performance in the financial services sector, recovery of stay-over tourism, and continued expansion of the construction and utilities sectors. He revealed that increases in the financial sector were seen in insurance company licences, mutual funds, company registrations, and stock exchange listings and capitalisation. Jefferson pointed out that in its August 2006 report on the Cayman Islands, Moody’s gave the highest country ceiling for long-term and short-term foreign currency obligations, and short-term foreign currency deposits.

“The tourism sector staged a strong rebound in 2006 after the hurricane-induced setback in 2005. The rebound came mainly through the stay-over tourists, who comprise the higher spending segment of the market,” Mr. Jefferson explained. In 2006, air arrivals jumped 59.3% over the previous year, to 267,257 visitors. With 1.9 million visitors last year, cruise visitor numbers moved up 7.3% over the previous year. He added that construction of additional housing units contributed to stabilization of housing rentals and softening of the inflation rate.

Link here.


Two new prominent international banks – Japan’s Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) and Germany’s Commerzbank – have been granted licences by the DIFC to begin operations in Dubai, and expand their reach in the Middle East region.

Nasser Al Shaali, Chief Executive Officer, DIFC Authority, commented, “The long and fruitful history of capital flows between the markets of East Asia and the Middle East continues with the opening of BTMU’s office at the DIFC. BTMU’s arrival here will contribute immensely to the corporate, government and project financing relationship between Japan and the wider Gulf region.”

BTMU, a commercial bank, forms the core part of Mitsubishi UFJ Financial Group (MUFG). MUFG is Japan’s leading financial group, with 1,261 domestic and 429 overseas offices. It is ranked by Bloomberg as the world’s 10th largest in aggregate market value.

Meanwhile, Commerzbank’s 21st branch outside its home country is intended to give the bank a gateway into the Middle East finance sector and to provide the region with access to investment markets in Europe. It will also serve as a financial partner for its German and Arab customers’ international trade relationships.

“The addition of Commerzbank to the DIFC’s growing number of eminent financial institutions will help strengthen ties between this region and the markets of Europe. Commerzbank is a respected and influential force in global”banking, and its presence in the Middle East will significantly invigorate the sector here," observed Al Shaali.

Link here.


Two years ago, William Stout lost his home in Allentown, Pennsylvania, to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show. Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.

But on July 9, they received a bill from the I.R.S. for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.

For those who struggle to pay their bills, who watch their housing payments rise out of reach with their adjustable-rate mortgages, who lose a job or who fall victim to illness, losing one’s home can feel like hitting bottom. But one more financial indignity may await as the fallout from the great housing boom ripples across the U.S. Notices of unpaid taxes, unanticipated and little understood, will probably multiply as more people fall behind on their mortgages, said Ellen Harnick, senior policy counsel at the Center for Responsible Lending, a nonpartisan research and policy center in Durham, North Carlina.

Foreclosure is one way that beleaguered homeowners can fall into this tax trap. The other is when homeowners are forced to sell their homes for less than the value of the mortgage. If the lender forgives that difference, they are liable for income taxes on that amount. The 1099 shortfall, as it is called, stems from an I.R.S. policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy.

The Center for Responsible Lending expects that 20% of the home loans made in 2005 and 2006 to people with weak credit, commonly called subprime loans, will end in foreclosure. Because so little money was required as a down payment during the boom, the value of many of these houses may be less than what is owed.

Some people in this predicament are fighting the I.R.S. and winning. Sometimes, lower payments can be negotiated with the I.R.S., tax experts say. In other cases, bankruptcy or a claim of insolvency can eliminate the tax burden. Sometimes, the bills are sent out erroneously, as banks fail to keep track of home values and what price the properties ultimately sell for.

“The tax laws are far too complex for borrowers to understand,” said Kurt Eggert, a professor at Chapman University School of Law, noting that there are distinctions between selling a house for less than the loan amount and losing one in foreclosure. He says it is crucial to get expert tax advice to sort through the bewildering complications. The whole concept can be counterintuitive. “Your home has declined in value and you lose it,” Mr. Eggert said. “Then the I.R.S. says you owe tens of thousands in taxes because you got a windfall when the debt was forgiven.”

Stephen G. Doherty, of Bennett & Doherty in Doylestown, Pennsylvania, set out to appeal the Stouts’ tax bill by arguing that Wells Fargo got the home as collateral so the family did not reap a benefit. The Stouts and their lawyer also hoped to show that Wells Fargo was able to sell the house for far more than $1. Finally, they contended that penalties were inappropriate because they did not receive a tax notice in 2005 or 2006. After a reporter inquired about the Stout matter, Wells Fargo Home Mortgage said last week that it had reviewed the Stouts’ tax documents and was filing a corrected 1099 tax form to show that no debt had been canceled, because the fair market value of the home was actually more than Mr. Stout had owed.

Mr. Doherty pointed out that the acquiring lender has some leeway in valuing a house. The fair market value can be the high bid at a sheriff’s sale, or an alternative valuation. In this case, Wells Fargo’s about-face was tied to an appraisal that Mr. Doherty says he believes was completed before the sale. It set the value of the house at $132,844, eliminating the Stouts’ liability.

An I.R.S. spokesman would not comment on the Stout matter or how the agency applies the tax rules on forgiven debt, but referred to a document on the I.R.S.’s policies. Diane Thompson, a lawyer in Godfrey, Illinois, for the National Consumer Law Center, says the tax can be a real hardship for some people. She recalled a client who owed $39,000 to her lender and got a tax bill after her house was sold in foreclosure for $10,000. Ms. Thompson appealed to tax authorities, contending that her client, a part-time waitress, was broke because her debts were greater than her assets. “If you can prove you are insolvent, the I.R.S. does not treat the forgiveness of debt as income,” Ms. Thompson said. Her client did not have to pay.

Lawyers may also be able to show that the original loan process was so flawed that the borrower is not liable for taxes. Indeed, during the real estate bubble, lenders and mortgage brokers sometimes encouraged homeowners to borrow more based on inflated home values.

Link here.


The owner of the nation’s largest maker of machine tools agreed to plead guilty to conspiracy in cheating the government out of $34.3 million in taxes through what the I.R.S. called “deceptive and elaborate tax evasion schemes.” Gene F. Haas, 55, of Camarillo, California, a coastal town 55 miles northwest of Los Angeles, will be the fourth and last defendant to admit guilt in the case, which involves his company, Haas Automation, as well as several others.

Back taxes, a $5 million fine, fraud penalties of 40% and interest will bring Mr. Haas’s total cost for cheating on his 2000 and 2001 taxes to more than $70 million. He also agreed to serve two years in prison. “Under the circumstances, it was a good result,” said one of Mr. Haas’s lawyers, Kenneth M. Barish of Kajan Mather & Barish, a Beverly Hills firm that specializes in criminal tax defense.

The criminal charges stemmed from three fake-invoice schemes that involved Mr. Haas’s main company as well as his Nascar racing team and a land title company. The deception included creating a fake company in Nevada called Supermill. Mr. Haas paid three employees or associates, who have already pleaded guilty, 2% of what he avoided paying in taxes, according to court papers.

The tax evasion apparently began with a patent infringement lawsuit against Mr. Haas. According to court papers, the schemes stemmed from Mr. Haas’s “dislike of the federal judicial system” and anger toward the federal judge who presided over the patent infringement suit, which Mr. Haas lost in August 2000. The indictment said that the primary purpose of the tax fraud was “to recoup the patent infringement settlement payment by defrauding” the government.

The scheme surfaced after Mr. Haas had a dispute with one of the participants, John Phillips, the former chief financial officer of Haas Automation. Mr. Haas sued Mr. Phillips, accusing him of cheating the company out of $27.5 million in the same transactions listed in the indictment. Haas Automation won a default judgment against Mr. Phillips, who then went to the F.B.I. and revealed the tax schemes. Mr. Phillips was named as a co-conspirator in the case but was not charged with any crime.

In 2005, President Bush cited Haas Automation’s success in exporting machine tools as a reason to adopt a free trade agreement with Central American countries.

Link here.


The IRS has announced the release of the summer 2007 issue of the Statistics of Income Bulletin, featuring data from 21.5 million individual income tax returns that reported non-farm sole proprietorship activity in tax year 2005. Profits from all non-farm sole proprietorships totaled $269.9 billion in 2005, up 9% from tax year 2004. After adjusting for inflation, profits rose by 5.5% in 2005, which is the biggest year-to-year increase since a 7.2% gain in 1998.

The real estate and rental leasing sector posted a 19.4% gain in profits, which was the biggest in percentage terms among the sector categories. Transportation and warehousing was second highest with a 15.5% profit gain. Retail trade was third, with a 14.6% increase. (The sector-specific figures have not been adjusted for inflation.) Wholesale trade (merchant wholesalers) was the only sole proprietor industrial sector to post a profit decline in tax year 2005, of 3.5%.

The Bulletin also includes articles about:

Link here.


Structuring of buyout deal may have been too clever by half.

Global mobile telecommunications firm Vodafone has confirmed that it had received a letter from the Indian Income Tax Department concerning the company’s liability for capital gains tax resulting from its $11 billion takeover of Hutchison-Essar, India’s fourth largest mobile phone operator. While people familiar with the case have observed that it is unusual for the buyer, rather than the seller, to receive a capital gains tax bill on such a transaction, it is thought that the liability may have arisen because of the complex manner in which Vodafone structured the deal.

Reports indicate that the purchase may have been arranged via an offshore subsidiary in Mauritius, with Vodafone-Essar acting as an “agent” in the deal. This could give the Indian tax department cause to show that a transfer took place and that capital gains tax at 22% should have been deducted at source by Vodafone. Vodafone has refused to elaborate on the case, but one spokesman said that the company received “clear” advice that no tax would be due on the deal, and that it intends to defend its position “vigorously”.

Link here.


The Bush administration is signaling that it plans to turn again to a legal tool, the “state secrets” privilege, to try to stop a suit against SWIFT, a Belgian banking cooperative, which secretly supplied millions of private financial records to the U.S. government. The suit against the consortium threatens to disrupt the operations of a vital national security program and to disclose “highly classified information” if it continues, the Justice Department has said in court filings.

The “state secrets” privilege, allowing the government to shut down litigation on national security grounds, was once rarely used. The Bush administration has turned to it more than 30 times in terrorism-related cases, seeking to end public discussion of cases like the claims of an F.B.I. whistle-blower and the abduction of a German terrorism suspect.

Most notably, the administration has sought to use the privilege to kill numerous suits against telecommunications carriers over the NSA’s eavesdropping program. But a California judge rejected the argument because the program had been discussed so widely. The government challenge is pending before the U.S. Court of Appeals for the Ninth Circuit, where judges at a hearing two weeks ago expressed skepticism on the secrecy argument. Asserting the privilege requires the director of national intelligence and the attorney general to certify legally the potential harm to national security.

If the administration makes good on its intention to invoke the privilege in the SWIFT suit, it would be one of the most significant tests of the privilege. SWIFT is considered the nerve center of the global banking industry, routing trillions of dollars each day among banks, brokerage houses and other financial institutions. Its partnership with Washington gave CIA and Treasury Department officials access to millions of records on international banking transactions.

Months after September 11, 2001, SWIFT began turning over large chunks of its database in response to a series of unusually broad subpoenas from the Treasury Department. Administration officials have defended the program as an important tool in the war on terror. European banking regulators and privacy advocates were quick to denounce the program as improper and possibly illegal. The pressure resulted in an agreement this year by SWIFT and U.S. officials to tighten restrictions for using the data.

Two American banking customers also sued SWIFT on invasion-of-privacy grounds. Legal and financial analysts had expected that the suit would have been thrown out because American banking privacy laws are considered much laxer than those in much of Europe. But the chief judge in Federal District Court in Chicago, James F. Holderman, ruled in June that he would allow the suit to proceed, partly on grounds of claims of a Fourth Amendment violation and his finding that SWIFT’s arguments on that point were “unpersuasive.”

“The decision in Chicago was a pretty big win for our side,” Steven E. Schwarz, a lawyer in Chicago who represents the plaintiffs, said in an interview. The SWIFT program, Mr. Schwarz said, “is an Orwellian example of government overreaching and unfettered access to private financial information that is not consistent with the values upon which our country was founded.”

In a motion filed on July 25, the Justice Department urged the court to throw out the suit to “preserve” the program against financing terrorism, “protect SWIFT from the burden of further litigation here and minimize the likelihood that highly classified information will be threatened.”

Tom Blanton, director of the National Security Archive at George Washington University, said, “What seems clear is that until a year or two ago, the judges rarely even questioned it when the government raised the ‘state secrets’ claim. It was a neutron bomb – no plaintiffs left standing. “But we’re now seeing that judges are starting to actually look behind the government’s secrecy claims and see what’s really there.”

Link here.


Recent news about a certain much-anticipated work of fiction being posted to the internet, in advance of its scheduled release, was not terribly surprising. The method used was, perhaps, a bit crude, and certainly time consuming, but it got the job done. Unbeknownst to the anonymous poster, their camera helpfully provided some extra information that might be used to track them down. Our devices are collecting all kinds of data about our habits and they are increasingly divulging that data in unexpected ways.

In the case of the Harry Potter book, the camera serial number was recorded in the Exchangeable image file format (Exif) data of the JPEG files of each page. Based on that information, Canon, the camera’s manufacturer, may be able to match the camera to its original purchaser. If the camera has been serviced in the three years since it was released, that would also create an entry matching the serial number to the owner at that time. Neither of those conclusively links a person to the “crime”, if it even is a crime, but they could give any investigators a good place to start.

It could have been a lot worse – some camera models have GPS capability built-in with Exif fields available to store that information on each shot. It would be pretty easy to track down where the photos were taken if some were tagged with latitude and longitude coordinates. GPS data encoded into each photograph that you take, is a useful feature, keeping track of where the photos were taken some years down the road after (human) memory has failed. The other Exif data, much of which is detailed information about camera settings, is probably quite useful to photographers and is much simpler than trying to keep a record of exposure settings as you take pictures. Gathering and storing the data is quite helpful, it is the unexpected disclosure that causes problems.

It would be easy to ignore this problem, writing it off to an ignorant user, who should have scrubbed the Exif data before posting, but the problem comes in other guises as well. The U.S. Secret Service evidently wants to be able to track your printer output, presumably as part of their anti-counterfeiting responsibilities, so they have convinced laser printer manufacturers to secretly add the now-famous yellow dots to each color page that is printed. Some of these codes have been cracked by the Electronic Frontier Foundation and others, and have been found to contain model and serial numbers along with a timestamp of the print time.

It is much harder to blame ignorant users when the device manufacturer actively tries to hide the fact that identifying information is being leaked. Worse yet, it appears that inquiring about this practice and asking how to turn it off can lead to a visit from the Secret Service. The folks at Seeing Yellow have lots more information, including a plan to overwhelm the agency through sheer numbers of people asking how to turn this “feature” off.

Imagine a world where the government required each person to carry a device that knew its location via GPS, had the ability to take pictures, and had wireless connectivity. In many ways, lots of people already, voluntarily, live in that world as cell phones have all those characteristics. It is not inconceivable that the cell phone manufacturers have already had a visit, from the Department of Homeland Security or some other three-letter agency of the government, asking for help in the “War on Terror”. The devices are certainly capable of reporting location (possibly with a helpful photo of people in the vicinity) back to the carrier and through them to the DHS. That might not (yet?) be happening, but there is no real technical barrier.

If we ratchet the paranoia level down a notch, cell phones, in particular smart phones, still pose an enormous target for the criminal world. Subverting phones that have cameras and GPS, to run them under the control of an attacker, makes an incredible surveillance tool. By using the same kinds of techniques that are used to spread viruses and spyware today, it should not be difficult to get targets to willingly perform actions that will lead to the subversion of their phone. From there, the attacker can get all of the call records, photos, calendar items and contacts while directing the phone to transmit its location every minute to the attacker.

Not only could this kind of information be used by stalkers, muggers and other criminals, this same capability could be used by lovers or employers to track people, keeping tabs on their movements and contacts. Rather than hire a private investigator, a jealous husband or wife might just borrow the other’s phone, surf to a spyware site, and install a tracking program themselves. The opportunities are endless.

There are no easy answers on how to protect oneself against these unintentional data leaks. The organizations and individuals interested in collecting the data are doubly interested in concealing the fact that they are doing it, and it is difficult for users to detect. If a cell phone is sending a short burst of encrypted information every minute, how would the average user, or even a sophisticated lab, detect and decode that data? If someone had not stumbled upon the yellow dots, we might be printing traceable documents, in blissful ignorance, to this day. What other, similar kinds of tracking are going on that we do not yet know about?

Free software can certainly help with this problem, but it is no panacea. Being able to replace the software in a device, with code that can be scrutinized and built before installing, is a good way to know what the device will do. Getting code that is vouched for by a trusted group, also serves to alleviate privacy leakage concerns. Unfortunately, the hardware itself may be the culprit. Laser printer hardware is likely responsible for the identifying information in the output, making it rather difficult to replace. It is extremely difficult to know what the hardware in other devices might be doing behind our backs.

The truly paranoid will not be willing to trust any hardware they did not build themselves, perhaps from individual transistors, while trying to figure out how to trust the compiler. For the rest of us, open platforms with free software and hardware, may provide reasons to believe that our data is protected – unless, of course, the device gets stolen or lost. Encryption anyone?

Link here.


If you make a phone call to your friend in the UU.S.S or Europe today and happen to mention the car you bought is a real old bomb, a computer somewhere will wake up, record your call and you will be screened as a possible terrorism suspect. Your details may well be shared with intelligence agencies round the world.

If you walk across the Sydney Harbour or ANZAC bridges, your actions will be followed by an intelligent network of videocams that can identify and track you through a crowd and analyse your actions without needing a human observer. If you walk across London today, it is said, you can appear on TV as many as 300-400 times.

Your supermarket already knows what you eat, and your bank, what you spend and where you spend it. Your airline knows where you go and scores of commercial stickybeaks know all about your purchasing habits, especially if you are so rash as to use the Internet or a credit card.

If you work in a factory, cameras and computers observe you clock on and clock off, and count the minutes between, informing the payroll office accordingly. If you work in a call center, not only your time but all your actions are measured, precisely timed and recorded ew ostensibly “for training purposes”. In reality so you can be sacked more easily. For the sake of public safety, we are told, road vehicles may soon carry mandatory GPS devices to control their speed in restricted zones. Of course these devices also know exactly where your vehicle is, any time, night or day.

Robot aircraft now prowl battlefields and assassinate enemy captains. Soon they will prowl cities and highways under the guise of traffic, crime or terrorism control. You visit a new doctor and he or she will soon be able to call up your entire medical, dental and optical records on line – no matter where you were treated, for what or by whom – using new health informatics systems. Even your home, increasingly, will know when you are there and what your are doing from your power and water use, your security sensors and other devices that may prove to be a two-edged sword, spying on their owner.

But these contemporary intrusions are nothing compared to the power which quantum computing and nanobots will shortly unleash to monitor and record each individual in an advanced society, almost every minute of their lives. For the first time in history it will be possible to observe any individual, cradle to grave – and even, via genetics, beyond the grave and before the womb – and file the results.

Historically, from Elizabeth 1’s Walsingham and Fouche’s secret police to the Tsar’s Okhrana, the Soviet Union’s KGB, America’s CIA and our own ASIO, the task of surveillance has been carried out imperfectly by bungling and fallible human beings. This is about to change. The task is being handed to brains that do not sleep, weary, get drunk or need to take a leak. That have almost limitless storage and data fusion capacity. That remember everything and are capable of regurgitating it, chapter and verse, in the most microscopic detail. That are capable of construing patterns of suspicion from the most innocent of incidents or a mass of unrelated sources.

For the first time in history it will soon be possible to assemble virtually the entire life of an individual, all they do and say or is done or said to them, everywhere they go, all the records and all the vision they generate – and retrieve it at need using “intelligent” computer systems rather than bored police constables. The slaves of old enjoyed transient hours of precious freedom when they were out of the scrutiny of their overseers – locked in the barracoons at night or when unsupervised about the house or farm, perhaps. Not so the citizen of the modern democratic state. She or he will potentially be under surveillance, one way or another, 24/7 for a lifetime. It will be a system beyond the most megalomaniac dreams of the KGB Registry. And it will be here within a generation.

The public image of a gigantic “big brother” surveillance brain is a misconception. In reality the information on any individual will exist in hundreds, even thousands of separate databases, most of them owned by the private sector. But these will be searchable in microseconds by a centralised agency with the authority to do so – and a quantum computer. These are, of course, no less than the enabling technologies for the global police state, though no one is admitting as much.

This is the dawn of the nanocracy. It is the tyrant’s dream come true. It is a power that no state, nor authority and probably no big company anywhere on earth, can refuse. If one adopts it, all must. None can afford to stand outside it. Besides, for the first time, it gives them a true method for controlling dissidents – whether in politics, society, the media or the workplace. Each tool of control will be introduced from the best of motives – to keep us safe and healthy, to reduce crime, to improve workplace efficiency, to raise productivity, to protect the environment, to cater to our personal needs and tastes.

It is their storage, fusion, mining and synthesis which is so fearsome. I have concluded – with some dark amusement – that the real wielders of power in the nanocracy will not be the presidents, prime ministers, heads of department or corporation. Or even the chiefs of police or the intelligence services. Of necessity, these can only oversee its application and use our money to build it. The real wielders of power will be those who run the quantum computers. These spiders at the heart of the informational web will have the dirt on everyone, the president included.

We can be reasonably certain none of the nanocrats will be a statesperson or even an idealist. They will probably enjoy power for its own unalloyed delight. Under the pretext of “keeping us safe” governments will for the first time in history have the power to watch and control each individual at almost all times. There is no human life – not even that of Mother Theresa – that could withstand such scrutiny.

No doubt many will dismiss this as Orwellian fantasy, pointing out that 1984 did not come true in 1984 either. However Orwell was not writing about 1984 but rather warning of actual trends under totalitarianism in 1948. He masked his critique by modifying the temporal context in which he placed it. He knew only too well the depths of human turpitude in any age, our own included.

Where Orwell’s scenario differs from mine is that his theme is based on the ultimate crime of betrayal. In the nanocracy there will be no need of traitors. We are all already betrayed by our own recorded words and deeds and associations. And, like the observer principle in quantum physics where the mere act of observation changes the event being observed, people who know they are, or may be, under surveillance around the clock are bound to modify their natural behavior.

There is a further thread to my scenario I wish to explore, the potential impact of the nanocracy on human evolution. Many people are by nature explorers of new ideas, adventurers, challengers of accepted wisdoms, reformers, liberals, researchers, creators and innovators. They have been among us since we first emerged onto the African savannah from the dying forests four million years ago. They have led every major phase of social and technological advancement since civilization began. They are the foil to our natural conservatism and apathy.

In the nanocracy such people will be easily picked out and “discouraged”. If they are not explicitly censored, they will self-censor rather than invite scrutiny. Historically, reformers and dissidents often pay a high price, from Socrates and Jesus to Galileo, Martin Luther King and Mandela. In the nanocracy they will not be given the opportunity. They can be quietly swept up and hushed before they have a chance to cause trouble.

A race deprived of its radicals, visionaries and adventurers is a poor sort of humanity. A lobotomized species, more like a termite mound than a society. It may be stable and industrious, but it will also be less competitive, less creative, less progressive and, as Darwin might point out, less fit for survival – because it would suppress the warning voices. In the nanocracy, the ability to control everyone could signal a profound fork in the path of human evolution.

According to the best estimates, the first quantum computers will be on line in half that time and most of the basic surveillance tools are going in now. For once, we have a clear opportunity to act in advance of a disruptive new technology, to capture its benefits and to avert or limit its dangers. For the sake of our ancient human freedoms and our right to a creative and progressive future, please let us do so.

Link here.


The system is far more intricately woven into the nation’s telecom infrastructure than observers had previously suspected.

The FBI has quietly built a sophisticated, point-and-click surveillance system that performs instant wiretaps on almost any communications device, according to nearly a thousand pages of restricted documents newly released under the Freedom of Information Act.

The surveillance system, called DCSNet, for Digital Collection System Network, connects FBI wiretapping rooms to switches controlled by traditional land-line operators, internet-telephony providers and cellular companies. It is far more intricately woven into the nation’s telecom infrastructure than observers suspected. It is a “comprehensive wiretap system that intercepts wire-line phones, cellular phones, SMS and push-to-talk systems,” says Steven Bellovin, a Columbia University computer science professor and longtime surveillance expert.

DCSNet is a suite of software that collects, sifts and stores phone numbers, phone calls and text messages. The system directly connects FBI wiretapping outposts around the country to a far-reaching private communications network. Many of the details of the system and its full capabilities were redacted from the documents, but they show that DCSNet includes at least three collection components, each running on Windows-based computers.

The $10 million DCS-3000 client, also known as Red Hook, handles pen-registers and trap-and-traces, a type of surveillance that collects signaling information – primarily the numbers dialed from a telephone – but no communications content. DCS-6000, known as Digital Storm, captures and collects the content of phone calls and text messages for full wiretap orders. A third, classified system, called DCS-5000, is used for wiretaps targeting spies or terrorists.

Together, the surveillance systems let FBI agents play back recordings even as they are being captured, create master wiretap files, send digital recordings to translators, track the rough location of targets in real time using cell-tower information, and even stream intercepts outward to mobile surveillance vans. FBI wiretapping rooms in field offices and undercover locations around the country are connected through a private, encrypted backbone that is separated from the internet. Sprint runs it on the government’s behalf.

The network allows an FBI agent in New York, for example, to remotely set up a wiretap on a cell phone based in Sacramento, California, and immediately learn the phone’s location, then begin receiving conversations, text messages and voicemail pass codes in New York. With a few keystrokes, the agent can route the recordings to language specialists for translation.

Link here.


It has been a bad few weeks to be a voting machine vendor. Three separate governments, California, Florida and the UK looked at the devices and have come to remarkably similar conclusions. The machines they looked at are poorly designed, poorly implemented and subject to a wide variety of security threats. None of the studies mentioned it, but it is likely that the machines looked great.

The most comprehensive study was done by California Secretary of State Debra Bowen’s office. That study looked at three electronic voting systems, each from a different manufacturer. Each system had three separate teams investigating, one looking at the source code, a “red team” that had physical access to the device and an accessibility team. Their conclusions were not surprising to anyone who has paid attention to this issue over the years. All three of the voting machine systems were found to be sorely deficient by all three teams. Even accessibility, which is one of the major benefits touted by electronic voting advocates, was found lacking.

The red team reports were released first and the conclusions were devastating: “The red teams demonstrated that the security mechanisms provided for all systems analyzed were inadequate to ensure accuracy and integrity of the election results and of the systems that provide those results.”

The teams were able to defeat the physical security of the voting machines, modify or overwrite the software in the machines as well as subvert the tabulation machines in order to provide incorrect vote counts. All of this just by having access to the machines themselves – the same access that election officials, poll workers and, to a lesser extent, voters, have.

Several days later, the source code teams’ reports were released and, at that point, were almost anti-climactic. Unsurprisingly, they found numerous, hideous source code flaws in all three systems. Buffer overflows, hard coded passwords (“diebold” being a particularly difficult one to guess), misuse of encryption, integer overflows (wrapping vote counts to negative or zero perhaps) ... the list goes on an on. It is as if the voting machine vendors are completely unaware of the last 20 (or 30 or 40) years of software security flaws.

In reality, they are most likely not unaware, they are just arrogant. Diebold, Hart and Sequoia do not depend solely on their technical “prowess” to win bids for providing voting machines, politics plays a huge role. These are well connected companies. It also helps that they are all uniformly bad. There are literally no secure choices for a government agency to make.

Florida’s study only covered Diebold equipment, but it echoed the findings in the California study. The UK also released reports on the outcome of electronic voting trials held in May. The overall summary of the trial, was, once again, not very favorable: “The level of implementation and security risk involved was significant and unacceptable.”

The California study had one major flaw. It was done long after the equipment was bought and used in elections. Due to the conclusions of the study, Bowen revoked the certification of the equipment from all three vendors, but immediately had to conditionally re-certify them as a practical matter. Even with a six month lead time, replacement systems (either electronic or of some other kind) could not be deployed before the 2008 California presidential primary voting.

The reaction to the California study by the manufacturers was typical. They trivialized the studies. Each released a statement essentially admitting the flaws, but claiming that any “laboratory study” would find vulnerabilities. According to these vendors, it is impossible to make a secure voting system. It would appear that the vendors expend far more effort in deflecting criticism and lobbying various legislative bodies than they spend trying to secure their code and equipment. It is not necessary that the equipment be tamper-proof, merely that tampering can be detected. At least minimal precautions, perhaps to the level taught to computer science undergraduates, should be taken with the software.

This is not anywhere near as hard a problem as the vendors make it out to be. This is an area where open source methods could be and should be applied. Organizations like BlackBoxVoting.org and the NSF Accurate project should be working on solutions. Private companies have shown themselves to be completely incompetent at producing secure voting equipment, it is time for another solution to be tried.

Link here.


The scene in a Durham County courtroom was unusual, to say the least. There was the former Durham County District Attorney Michael Nifong (from here known as DAMN) in the dock, being found guilty of criminal contempt and told to spend a day in jail. There were judges who regularly sentence people to long prison sentences begging the judge to be lenient to the man who, according to the prosecuting attorney in the case, had taken “a jackhammer” to the roots of justice.

Sitting in the audience, an assistant prosecutor wept as her former boss was given the “sentence” of spending a day in the county jail, while others went on about the need for “justice”. Yet, one cannot understand what really happened unless one widens the screen and looks at the larger picture. While some see this as a “historic” moment, I think that the proper perspective here is that it is a “Rothbardian” moment, and something that Murray Rothbard, had he been living today, would have intimately understood.

North Carolina prosecutors have proven themselves adept at pursuing the wrong people and convincing juries that lies are the truth. I have no doubt that had DAMN been able to take his faux rape case to a jury in Durham, there would have been a conviction, and David Evans, Collin Finnerty, and Reade Seligmann would have been dead meat in prison, the target of black gangs seeking revenge against the men who “raped a sister.” So, while the innocent are pursued to prison in the North Carolina system, those who engage in these acts were anxious to defend a man who clearly was hellbent on making a mockery of justice. Special Prosecutor Charles Davis told Judge W. Osmond Smith III, who held the hearing, that he “lay awake at night” wondering what might have happened had Nifong been able to convince a jury to convict, and given what has transpired in North Carolina on a seemingly systematic basis, his fears were justified.

So, where does Rothbard fit into this affair? It was Rothbard who expanded the “capture theory” of government to include government employees or those who work for the state. In standard “capture theory”, government regulators become “captured” by the private monopolies that they are supposed to regulate. For example, the original purpose of the Interstate Commerce Commission was to regulate railroad rates, and it was soon after its 1887 creation that the commission itself became dominated by people with railroad connections.

Rothbard went a step further, however. Monopolies themselves (and Rothbard held, I believe accurately, that all private monopolies exist because of government privileges) become “captured” by their employees. To take point to its next level, we see that government courts have a monopoly on “dispensing justice” (if we can call it that), so if Rothbard is correct, one would expect to see the employees of the justice system itself capturing not only the apparatus of “justice”, but also protecting each other when someone is engaged in wrongdoing.

As a close observer of the Duke case for well longer than a year, it became obvious that Nifong was permitted to set the terms for everything associated with it. Although he insisted that every word of Crystal Mangum’s claims were true (despite her many accounts being mutually exclusive), as soon as the DNA evidence – which Nifong himself claimed would identify the “guilty” and “clear the innocent” – came back empty, then he simply changed the terms of the argument and, in his own contempt hearing, still insisted there was a rape, but it was a “non-ejaculatory event.”

In the end, it was painfully obvious that Nifong had lied to Judge Smith at that fateful September 22, 2006, hearing and Judge Smith subsequently found him guilty. Yet, how did those who were employed with Nifong in the system react when it was determined that he had “taken a jackhammer” to truth and justice? K.C. Johnson explains:

In this case, of course, this behavior manifested itself as part of an effort to send three demonstrably innocent people to jail for 30 years – for a crime that never occurred. The Durham prosecutorial establishment, however, appeared not to care.

Judge Ron Stephens has a reputation as a tough-on-criminals judge. It appears, however, that he holds his friends to a different standard. This sitting judge – the same man who signed the fraudulent NTO that launched this case into the media stratosphere – appeared as a character witness for the convicted Nifong. He suggested that professional jealousy explained the dislike for Nifong: lots of defense lawyers, Stephens asserted, didn’t want to go up against Nifong because he would win close cases. Nifong, he added, was the “appropriate choice” to be DA as of spring 2005.

Stephens also hailed Nifong as a mentor to the next generation of Durham ADA’s. Perhaps he had in mind Judge Marcia Morey, who testified on Nifong’s behalf and then returned to the courtroom to offer solace to Nifong’s family as the verdict was rendered. In her willingness to defend Nifong, Morey disgraced her own office. ...

Sitting alongside Morey was current ADA Jan Paul. Paul vigorously nodded as Nifong attorney Jim Glover insisted in his closing argument that not only did Nifong not lie, but he couldn’t really see any errors his client had made. Paul then visibly wept as the guilty verdict was rendered. Remember, this is someone whose job it is to uphold justice for the people.

The appearances of Paul, Morey, and Stephens brought to mind the equally troubling testimony of Innocence Commission executive director Kendra Montgomery-Blinn, another former Durham ADA and someone who saw no problem with Mike Nifong’s conduct. ...

How confident could any defendant be appearing before Judge Stephens? Or Judge Morey? Or going up against ADA Paul? The trio’s endorsement of Nifong suggested a conception of justice so warped as to defy description.

One can call it corruption or cronyism, or whatever one wishes, but Rothbard’s “capture theory” seems to provide the best explanation. For all of the talk of justice, the purpose of such a system after a while seems to become little more than a mechanism for keeping people employed with nice paychecks. After all, Nifong originally decided to seek the elected position of DA (he originally had been appointed by the governor after promising that he would not seek to be elected) in order to receive a raise and to be able to earn a pension of $15,000 a year more than what would be the case if he were not elected.

But even “capture theory” does not explain fully why Nifong sought to pursue a case in which he had no evidence. The other factor was that he was able to tap into the politics of race and radical, left-wing feminism. Durham is a hotbed of both. When people do not care about truth and have only a politicized view of the world, we should not be surprised when massive injustices arise. Throwing Nifong into prison for a thousand years would not change the fact that leftist political radicalism and injustice against individuals go hand-in-hand. (What else should we expect from collectivism?)

When Judge Smith announced Nifong would spend a day in jail, the reaction was understandably varied. Those people who had followed the case and had been outraged at what Nifong did were outraged that the sentence seemed to be lenient. Others, including attorneys who had represented Reade Seligmann, Collin Finnerty, and David Evans, thought it was just, in large part because they have seen prosecutorial and judicial misconduct unpunished for years and held it to be extraordinary that Nifong had faced any punishment at all.

Yet, as one attorney pointed out, Nifong has lost everything, his job, his license, much of his money, his reputation, and about everything else he held to be important. He has not gone unpunished, and sometimes we forget that prison is not the only form of punishment that one receives.

Furthermore, I would not be surprised if criminal charges are filed against Nifong and others who took part in this legal scam. Lawsuits surely are going to follow, and many people who were swaggering a year ago soon will see the law work against them. While Nifong might seem to have escaped justice, I contend that Rae Evans, the mother of former defendant David, was correct when she told Leslie Stahl of 60 Minutes, “Mr. Nifong, you will pay every day for the rest of your life.” For now, the life of DAMN no longer is worth a damn.

Link here.


Last time, I laid out my “Thirty Day Plan” for de-socializing America. But I did not scrap all of big government. Now it is time for more.

DAY ONE: Foreign junkets are outlawed. If anyone on the federal payroll wants to fly overseas, he has to buy his own ticket. The State Department, Congress, and White House go into hyperventilation.

DAY TWO: Medicare and Medicaid are abolished as illegitimate transfers of wealth that drive up the cost of care. HHS, whose insolent $30,000 clerks cannot speak intelligible English, goes out of business.

DAY THREE: The Supreme Court reads the Constitution, and reverses every court decision of the last 50 years. ...

DAY SIX: To help prevent the growth of a new welfare state, the franchise is restricted: no one on the dole, which includes government employees, may vote.

DAY SEVEN: Civil service is abolished, and the grand, old Jefferson-Jackson “spoils system” reintroduced. With “rotation in office,” there is no permanent governing class of officials, and voters can actually change the government. ...

DAY 12: The war on drugs is no more. Prices and therefore street crime plummet, and hoodlums no longer grow rich, thus restoring the natural socioeconomic hierarchy. ...

DAY 21: The Federal Emergency Management Administration is abolished. Disaster relief is left to private charities, which actually provide it, and there are no more FEMA schemes for “emergency” bureaucratic takeovers of the country. ...

DAY 24: The Seventeenth Amendment mandating direct election of U.S. senators is repealed, and state legislatures once again elect senators as their representatives, vastly strengthening the states as against the federal ex-leviathan. ...

DAY 27: The U.S. Foreign Service, whose ambassadors live luxuriously in mansions with retinues of personal servants, is replaced with fax machines.

DAY 28: To protect American sovereignty and independence, the U.S. left the U.N., the I.M.F., and the World Bank in my first 30 days. Now we leave 46 other globaloney outfits, including the International Labor Organization, the World Health Organization, and the Inter-American Tropical Tuna Commission. ...

Link here.


Last week a warning was posted at many sites on the internet. The core of this warning was that “the backers, controllers, and allies of Vice President Dick Cheney are determined to orchestrate and manufacture a new 9-11 terror incident, and/or a new Gulf of Tonkin war provocation over the coming weeks and months.” “Massive evidence” was mentioned but not disclosed, nor has it been forthcoming since the document was released. Several prominent anti-war figures were listed as having signed the document.

Given that the U.S. government has been saber-rattling at Iran for months, and that our government has already used the 9-11 attacks so blatantly and successfully to gain new police-state powers (the USA Patriot Act, the Military Commissions Act of 2006, and the John Warner Defense Authorization Act of 2007, to name only three examples), a warning of this nature is quite believable.

Regardless of whether an attack on Iran or a government-orchestrated domestic terrorist attack is imminent, it appears the “Kennebunkport Warning” document itself is a hoax. Whether the “Warning” was a psyop designed to discredit future warnings and complaints about administration behavior (as some are now suggesting), or a desperate and dishonest act by someone sincerely afraid, or an actual message from the listed signers, one critical truth highlighted by the whole affair cannot be dismissed: Millions of people around the world find it all-too-believable that the U.S. government might create a false-flag attack – abroad or even at home – to advance an agenda of martial law and aggressive war.

Imagine anyone believing such things about the governments of, say, Switzerland, Costa Rica, or New Zealand. Those countries are militarily non-aggressive and respectful of human rights both at home and abroad. (Costa Rica does not even have an army). Any government is a danger, but the reputation these three governments enjoy is positive because none has lately been a violent threat to their own citizens or to anyone else.

The U.S. is a different story entirely. It uses its staggeringly expensive military frequently and often aggressively around the world. This record of aggression has been continued and expanded by the Bush administration. Around the world, people have little trouble believing that the Bush administration might create a terrorist attack in America or a false-flag attack overseas because the behavior of the U.S. government since 9-11-2001 has often been dishonest, illegal, and violent, featuring lies in the service of domestic tyranny and aggressive foreign war. Witness systematic torture of detainees in violation of U.S. law and the Geneva Conventions, blatantly unconstitutional police-state legislation, the creation of a gulag of Halliburton-built domestic detention camps, and other horrors consistent with the actions of what may be loosely termed a rogue government.

Years of such behavior is changing the world’s opinion of us. In a story titled “Dream on America”, Newsweek summed up foreign sentiment this way: “58 percent in the BBC poll see Bush’s re-election as a threat to world peace. Among America’s traditional allies, the figure is strikingly higher ... Among the 1.3 billion members of the Islamic world, public support for the United States is measured in single digits. Only Poland, the Philippines and India viewed Bush’s second Inaugural positively.” The story went on to point out something that Americans are only slowly coming to notice: “Tellingly, the anti-Bushism of the president’s first term is giving way to a more general anti-Americanism.”

In short, the actual behavior of the Bush administration suggests to millions that the U.S. is a dangerous rogue government. It is seen as such by many at home and by the majority of adults in many other nations around the world. This cannot be good, or even safe, for American citizens. America once called itself the land of the free and the home of the brave. We prided ourselves on our support for peace, freedom, and human rights. No longer.

Link here.


It was a cold day in New Haven, Connecticut, in the winter of 1899. That year, an arctic blast created record-making blizzards and snowfall. Ice flows in the Mississippi would run all the way to the Gulf of Mexico. (An event, by the way, recorded only one other time – February 13, 1784). Nonetheless, a packed house gathered in the old College Street Hall, where William Graham Sumner took the stage. The respected 59-year-old American intellectual delivered a talk titled “The Conquest of the United States by Spain”.

It was a provocative title. America had “won” the Spanish-American War in 1898. It had taken possession of Spain’s old colonial territories – Puerto Rico, the Philippines, and Guam. But Sumner was not talking about the physical war. He spoke about the realm of ideas. “Expansionism and imperialism,” Sumner warned, “are nothing but the old philosophies of national prosperity, which have brought Spain to where she is now.” America, Sumner maintained, had adopted the imperial ideas of its vanquished foe. And it was America that would wind up no different than Spain, which was, in Sumner’s words, “a poor, decrepit, bankrupt old state.” Those with a nose for empire often mark America’s as beginning with the victory in 1898.

I thought of Sumner when I heard Kevin Phillips speak at a recent event held in Washington, D.C. Like Sumner, Phillips is one of those eggs who study empires as biologists study the California condor or the spotted owl. He is the author of an impressive study of the implications of American empire, titled American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century.

Phillips draws from the experience of empires past, including – as Sumner did – the Spanish empire. He also draws insights from the Dutch, British, Hapsburg, and Roman empires. His book has many threads that show how America is well along the familiar life cycle of empires. But I want to focus on just the rise of finance and America’s oil dependency.

America hooked on oil.

Empires get hooked on certain fuel sources like dope addicts. The Dutch were masters of wind and water. But their commercial dominance faltered with the rise of coal. Coal fed the British Empire. But it eventually gave way to the oil-powered might of the U.S. Phillips maintains that the inevitable transition to a post-oil global economy – whether it is based on natural gas, hydrogen, greater nuclear reliance, renewable energy, or whatever – “could see the United States displaced by a new leading economic power, probably an Asian one.” The history of modern empires is one in which transitions to new fuel sources are just not successful.

Instead, the fading empire fights it out. Not surprising that natural resources fueled many conflicts in earlier centuries. North American fisheries. Baltic timber. East Indian spices. Caribbean sugar and salt. The gold and silver of the New World. The powers of empire hinged on the command of valuable natural resources such as these. Today, that hinge is oil. America’s oil infrastructure is old, past its zenith. Meanwhile, the car culture drinks gasoline in rivers with no sign of slowing down. America consumes 25% of the world’s energy while holding only 5% of the resource.

There was a time when those numbers went the other way. For most of America’s rise to power in the 20th century, it produced far more oil than it consumed. As late as 1964, the U.S. found 48 billion barrels of oil and used only 23 billion. Ever since, it has been getting tighter. By 1988, it was dead even. By 2005, America used 5 times more than it found. As a result of this great surge in demand, oil has been the magic pixie dust that created many an American fortune.

Now America’s oil dependence is the Achilles’ heel of its international dominance. Phillips quotes Michael Klare, a theorist on the resumption of global resource wars. Klare writes that oil is no longer just a commodity but a national security matter. The U.S. military has become a “global oil-protecting service.”

The rise of finance at the expense of making things.

People will say it is not so important to own the resource as it is to have the ability to pay for it. That is true. And that brings us the second mark of empire: the rise of finance at the expense of making things. Empires past all had their manufacturing capabilities hollowed out. In place of that stood the business of financing things, of pushing paper, of printing money.

Spanish observers in the 17th century wrote smugly about how London made fine fabrics, Holland chambrays, Florence cloth, and India linens. But it was Spain that enjoyed these things, because Spain had money. The Dutch and British held similar conceits in their days in the sun. The British economist William Stanley Jevons wrote with assurance, “The plains of North America and Russia are our cornfields, Chicago and Odessa are our granaries, Canada and the Baltic our timber forests, Australia our sheep farms ...” and on and on. The whole world worked for Britain, which paid in sterling.

But this prosperity has a sort of soap bubble fragility to it. It depends on debt and easy credit. The empires of the past became bankrupt because of their spendthrift ways and financial ineptitude.

Phillips writes that in the U.S., moving money around has surpassed making things as a share of U.S. gross domestic product. Historically, this has been a mark of late-stage degeneration. Massive budget shortfalls and a rising national debt point to the seemingly irreversible fiscal decline of the government. Debt loads on consumers at or near record highs speak to the precarious foundation of American families.

Then there is the rise of complex financial instruments, which no one seems to know anything about. Take collateralized debt obligations, or CDOs. They are complex investments that allow investors to buy pools of credit risk. They came out of nowhere in 1997 to total more than $1 trillion in 2001 and over $3 trillion by 2003. Today, CDOs probably top $8 trillion in notional value. And what is a CDO? A big mound of paper no one really knows the worth of. Recent market events, though, suggest the CDOs are not worth much.

It is the high noon of empire. That is the phrase I keep thinking of. Sumner saw its dawn. Phillips foretells its dusk. Investing well while all this mess is going on is more important than ever. In this, the old advice is still the best: Own things and sell paper. Oil, natural gas, water rights, land, timber. The tangible assets, and all the supporting cast, that built the fortunes of old, will also build the fortunes of the future.

Link here.
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