The Great American Bubble Machine – The Fraud of Goldman Sachs

From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again

Matt Taibbi

Posted Jul 13, 2009 1:49 PM

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibilliondollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in goldenparachute payments as his bank was selfdestructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailedout insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman — not to mention …

But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pumpanddump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumercredit rates, halfeaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.

If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year’s strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn’t one of them.

BUBBLE #1 The Great Depression

Goldman wasn’t always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids — just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his soninlaw Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out shortterm IOUs to smalltime vendors in downtown Manhattan.

You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrantled investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of precrash Wall Street in the late 1920s.

This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an “investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and etrading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regularguy investors into the speculation game.

Beginning a pattern that would repeat itself over and over again, Goldman got into the investmenttrust game late, then jumped in with both feet and went hogwild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was in large part owned by Goldman Trading.

The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line. The basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.

In a chapter from The Great Crash, 1929 titled “In Goldman Sachs We Trust,” the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leveragebased investment. The trusts, he wrote, were a major cause of the market’s historic crash; in today’s dollars, the losses the bank suffered totaled $475 billion. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity,” Galbraith observed, sounding like Keith Olbermann in an ascot. “If there must be madness, something may be said for having it on a heroic scale.”

BUBBLE #2 Tech Stocks

Fast-forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor’s assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a topdrawer firm that had a reputation for attracting the very smartest talent on the Street.

It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “longterm greedy.” One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a longterm loser. “We gave back money to ‘grownup’ corporate clients who had made bad deals with us,” he says. “Everything we did was legal and fair — but ‘longterm greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.”

But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s cochairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of babyboomer, Sixtieschild, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.

Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national clichè that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline The Committee To Save The World. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin’s complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits.

The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via IPOs, hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.

“Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public,” says one prominent hedge-fund manager. “The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash.” Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there saying Bullshit.com is worth $100 a share.”

The problem was, nobody told investors that the rules had changed. “Everyone on the inside knew,” the manager says. “Bob Rubin sure as hell knew what the underwriting standards were. They’d been intact since the 1930s.”

Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. “In the early Eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future.”

Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a littleknown company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.

How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,” which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show” to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price — let’s say Bullshit.com’s starting share price is $15 — in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the daytrader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit — a six percent fee of a $500 million IPO is serious money.

Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nicholas Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television asshole Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman.

“Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “They totally fueled the bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation — manipulated up — and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed to pay $40 million for its laddering violations — a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)

Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price — ensuring that those “hot” opening-price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger firstday rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business — effectively robbing all of Bullshit’s new shareholders by diverting cash that should have gone to the company’s bottom line into the private bank account of the company’s CEO.

In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman’s board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, Goldman gave special stock offerings to executives in 21 companies that it took public, including Yahoo! cofounder Jerry Yang and two of the great slithering villains of the financial-scandal age — Tyco’s Dennis Kozlowski and Enron’s Ken Lay. Goldman angrily denounced the report as “an egregious distortion of the facts” — shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. “The spinning of hot IPO shares was not a harmless corporate perk,” then-attorney general Eliot Spitzer said at the time. “Instead, it was an integral part of a fraudulent scheme to win new investment-banking business.”

Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.

Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits — an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman’s mantra of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement.

The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else’s Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that “I’ve never even heard the term ‘laddering’ before.”)

For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent — they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.

BUBBLE #3 The Housing Craze

Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and excons carrying five bucks and a Snickers bar.

None of that would have been possible without investment bankers like Goldman, who created vehicles to package those shitty mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con’s mortgage on its books, knowing how likely it was to fail. You can’t write these mortgages, in other words, unless you can sell them to someone who doesn’t know what they are.

Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO, as a whole, was sound. Thus, junkrated mortgages were turned into AAArated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance — known as creditdefault swaps — on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the excons will default, AIG is betting they won’t.

There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated — and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.

More regulation wasn’t exactly what Goldman had in mind. “The banks go crazy — they want it stopped,” says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. “Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped.”

Clinton’s reigning economic foursome — “especially Rubin,” according to Greenberger — called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.

But the story didn’t end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housingbased securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgagebacked securities — a third of which were subprime — much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.

Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the mortgages belonged to secondmortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation — no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.

Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners — old people, for God’s sake — pretending the whole time that it wasn’t gradeD horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions … However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

“That’s how audacious these assholes are,” says one hedgefund manager. “At least with other banks, you could say that they were just dumb — they believed what they were selling, and it blew them up. Goldman knew what it was doing.”

I ask the manager how it could be that selling something to customers that you’re actually betting against — particularly when you know more about the weaknesses of those products than the customer — doesn’t amount to securities fraud.

“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”

Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. New York state regulators are suing Goldman and 25 other underwriters for selling bundles of crappy Countrywide mortgages to city and state pension funds, which lost as much as $100 million in the investments. Massachusetts also investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders who got stuck holding predatory loans. But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million — about what the bank’s CDO division made in a day and a half during the real estate boom.

The effects of the housing bubble are well known — it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.

And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm’s payroll jumped to $16.5 billion — an average of $622,000 per employee. As a Goldman spokesman explained, “We work very hard here.”

But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down — and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.

BUBBLE #4 $4 a Gallon

By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn’t leave much to sell that wasn’t tainted. The terms junk bond, IPO, subprime mortgage and other once-hot financial fare were now firmly associated in the public’s mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years — the notion that housing prices never go down — was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.

Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.

That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be “very helpful in the short term,” while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.

But it was all a lie. While the global supply of oil will eventually dry up, the shortterm flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the shortterm supply of oil rising, the demand for it was falling — which, in classic economic terms, should have brought prices at the pump down.

So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physicalcommodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the oncesolid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. The commodities market was designed in large part to help farmers: A grower concerned about future price drops could enter into a contract to sell his corn at a certain price for delivery later on, which made him worry less about building up stores of his crop. When no one was buying corn, the farmer could sell to a middleman known as a “traditional speculator,” who would store the grain and sell it later, when demand returned. That way, someone was always there to buy from the farmer, even when the market temporarily had no need for his crops.

In 1936, however, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission — the very same body that would later try and fail to regulate credit swaps — to place limits on speculative trades in commodities. As a result of the CFTC’s oversight, peace and harmony reigned in the commodities markets for more than 50 years.

All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldmanowned commoditiestrading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren’t the only ones who needed to hedge their risk against future price drops — Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.

This was complete and utter crap — the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman’s argument. It issued the bank a free pass, called the “Bona Fide Hedging” exemption, allowing Goldman’s subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.

Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market — driven there by fear of the falling dollar and the housing crash — finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers — and that’s likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.

What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. “I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC,” says Greenberger, “and neither of us knew this letter was out there.” In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.

“I had been invited to a briefing the commission was holding on energy,” the staffer recounts. “And suddenly in the middle of it, they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Duh, duh.’ So we went back and forth, and finally they said, ‘We have to clear it with Goldman Sachs.’ I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?’”

The CFTC cited a rule that prohibited it from releasing any information about a company’s current position in the market. But the staffer’s request was about a letter that had been issued 17 years earlier. It no longer had anything to do with Goldman’s current position. What’s more, Section 7 of the 1936 commodities law gives Congress the right to any information it wants from the commission. Still, in a classic example of how complete Goldman’s capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.

Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index — which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil — became the place where pension funds and insurance companies and other institutional investors could make massive longterm bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly “long only” bettors, who seldom if ever take short positions — meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it’s terrible for commodities, because it continually forces prices upward. “If index speculators took short positions as well as long ones, you’d see them pushing prices both up and down,” says Michael Masters, a hedgefund manager who has helped expose the role of investment banks in the manipulation of oil prices. “But they only push prices in one direction: up.”

Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an “oracle of oil” by The New York Times, predicted a “super spike” in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commoditiestrading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives.”

But it wasn’t the consumption of real oil that was driving up prices — it was the trade in paper oil. By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up presentday profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.

In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees’ Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn’t just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World.

Now oil prices are rising again: They shot up 20 percent in the month of May and have nearly doubled so far this year. Once again, the problem is not supply or demand. “The highest supply of oil in the last 20 years is now,” says Rep. Bart Stupak, a Democrat from Michigan who serves on the House energy committee. “Demand is at a 10-year low. And yet prices are up.”

Asked why politicians continue to harp on things like drilling or hybrid cars, when supply and demand have nothing to do with the high prices, Stupak shakes his head. “I think they just don’t understand the problem very well,” he says. “You can’t explain it in 30 seconds, so politicians ignore it.”

BUBBLE #5 Rigging the Bailout

After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.

It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman’s last real competitors — collapse without intervention. (“Goldman’s superhero status was left intact,” says market analyst Eric Salzman, “and an investmentbanking competitor, Lehman, goes away.”) The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35yearold Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bankholding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.

Converting to a bank-holding company has other benefits as well: Goldman’s primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflictofinterest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bankholding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.

The collective message of all this — the AIG bailout, the swift approval for its bankholding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn’t a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. “In the past it was an implicit advantage,” says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. “Now it’s more of an explicit advantage.”

Once the bailouts were in place, Goldman went right back to business as usual, dreaming up impossibly convoluted schemes to pick the American carcass clean of its loose capital. One of its first moves in the postbailout era was to quietly push forward the calendar it uses to report its earnings, essentially wiping December 2008 — with its $1.3 billion in pretax losses — off the books. At the same time, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009 — which apparently included a large chunk of money funneled to it by taxpayers via the AIG bailout. “They cooked those firstquarter results six ways from Sunday,” says one hedgefund manager. “They hid the losses in the orphan month and called the bailout money profit.”

Two more numbers stand out from that stunning first-quarter turnaround. The bank paid out an astonishing $4.7 billion in bonuses and compensation in the first three months of this year, an 18 percent increase over the first quarter of 2008. It also raised $5 billion by issuing new shares almost immediately after releasing its firstquarter results. Taken together, the numbers show that Goldman essentially borrowed a $5 billion salary payout for its executives in the middle of the global economic crisis it helped cause, using halfbaked accounting to reel in investors, just months after receiving billions in a taxpayer bailout.

Even more amazing, Goldman did it all right before the government announced the results of its new “stress test” for banks seeking to repay TARP money — suggesting that Goldman knew exactly what was coming. The government was trying to carefully orchestrate the repayments in an effort to prevent further trouble at banks that couldn’t pay back the money right away. But Goldman blew off those concerns, brazenly flaunting its insider status. “They seemed to know everything that they needed to do before the stress test came out, unlike everyone else, who had to wait until after,” says Michael Hecht, a managing director of JMP Securities. “The government came out and said, ‘To pay back TARP, you have to issue debt of at least five years that is not insured by FDIC — which Goldman Sachs had already done, a week or two before.”

And here’s the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?

Fourteen million dollars.

That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion — yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.

How is this possible? According to Goldman’s annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly twothirds of all corporations operating in the U.S. paid no taxes at all.

This should be a pitchforklevel outrage — but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. “With the right hand out begging for bailout money,” he said, “the left is hiding it offshore.”

BUBBLE #6 Global Warming

Fast-forward to today. It’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.

Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s cohead of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.

The new carboncredit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.

Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigmshifting legislation, (2) make sure that they’re the profitmaking slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for capandtrade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climatechange problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that capandtrade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.”

The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utahbased firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in greentech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energyfutures market?

“Oh, it’ll dwarf it,” says a former staffer on the House energy committee.

Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe — but capandtrade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private taxcollection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected.

“If it’s going to be a tax, I would prefer that Washington set the tax and collect it,” says Michael Masters, the hedgefund director who spoke out against oilfutures speculation. “But we’re saying that Wall Street can set the tax, and Wall Street can collect the tax. That’s the last thing in the world I want. It’s just asinine.”

Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees — while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.

It’s not always easy to accept the reality of what we now routinely allow these people to get away with; there’s a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can’t really register the fact that you’re no longer a citizen of a thriving first-world democracy, that you’re no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.

But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going.

Watch Matt Taibbi break down the Great American Bubble Machine in our exclusive video, and for more on how Wall Street is taking over Washington, read an excerpt from his “The Big Takeover.”

Originally appeared on Rollingstone.com

http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine/

Former Colorado Governor Caught Lying Under Oath – Churchill Trial Update

Churchill v. University of Colorado:

The (Former) Governor
Takes the Stand

by J. Robert Brown

Former Governor Bill Owens was on the stand for a couple of hours. Not long after the 9/11 essay surfaced, the Governor called on CU to fire Churchill.

David Lane’s main point was to show that the Governor, with line item veto authority over the University of Colorado, applied pressure to get the University to fire Ward Churchill.

The jury heard the former president of CU, Betsy Hoffman, describe a conversation with the Governor where she said he told her to fire Ward Churchill “tomorrow,” that his tone was “threatening,” and that if she didn’t he would “unleash his plan.”

Governor Owens did not specifically recall the conversation but doubted that it was not “in that tenor” and that he did not have a “plan.”

Later, when a partial transcript of an interview on the O’Reilly Factor was put up on the screen, Lane pointed to an exchange where Owens denied he had the authority to fire Churchill but then admitted: “I do have some budget authority over the budget.” Owens declined to admit that this was a threat, noting that its a true statement and repeated over and over that he had actually raised the CU budget during his administration.

On recross, Lane asked whether in fact Governor Owens had a “strategy” for CU if Churchill wasn’t fired. He answered in the negative. Lane then pointed to this exchange on the O’Reilly transcript:

• O’REILLY: One more question for you. You have basically a strategy, and I want to get this right. You’re not going to pay him off, so he’s not going to get the big bucks. You’re going to go through the lengthy process to prove that he did something that you can legitimately fire him [for], and then he goes — “See you.”
• OWENS: That’s exactly right. That’s exactly right. That process is starting. I think it will ultimately result in him being fired.

The quick denial followed by the reference in the O’Reilly Factor caused a slight stir in the courtroom. Governor Owens then repeated that he didn’t have a strategy and that he was merely acknowledging that based on the evidence that he knew, there was sufficient basis to fire Churchill.

Governor Owens did acknowledge in his testimony that he was glad the University had not heeded his advice and fired Churchill immediately after the 9/11 essay surface.

Trial Begins – Churchill v. University of Colorado

Right Wing Attempting to Bankrupt Ward Churchill

Protect your First Amendment Rights! CLICK TO DONATE TODAY!

Professor Churchill was fired after a 30 month long “investigation” by the University of Colorado where they dug into all 4,000 pages of his published works and combed through his over 12,000 footnotes! In the end, the investigation finds 7 alleged errors and/or plagiarism.

Since his firing, Ward has mounted a full-scale lawsuit against the Board of Regents of the University of Colorado and now his coffers are nearly empty. PROTECT YOUR FIRST AMENDMENT RIGHTS!

CLICK TO Donate to the Ward Churchill Legal Fund TODAY! If a few thousand people will simply donate $10-30, then Ward and HIS legal team will have the financial resources to finish this trial.

Detailed Chronology of Events:

Sept. 12, 2001 Prof. Churchill writes an op-ed piece published online by Dark Night Field Notes, giving a “gut reaction” to possible causes of the Sept. 11 attacks. This is later expanded and published as On the Justice of Roosting Chickens: Reflections on the Consequences of U.S. Imperial Arrogance and Criminality (AK Press, 2003). Neither receives much public attention.

January 26, 2005 A Syracuse, NY newspaper discusses Prof. Churchill’s scheduled lecture at Hamilton College sponsored by the Kirkland Project for the Study of Gender, Society and Culture. The Kirkland Project had already been targeted by various rightwing organizations, including Lynne Cheney’s American Council of Trustees and Alumni (ACTA) and David Horowitz’ Center for the Study of Popular Culture and its spin-off, Students for Academic Freedom. A well-coordinated campaign at Hamilton had recently succeeded in forcing cancellation of a class which was to have been taught by former political prisoner Susan Rosenberg (who was to speak on a panel with Prof. Churchill).

Within a few days the story, which focused on two words (“little Eichmanns”) taken out of context from the 2001 op-ed piece, had been picked up by AP, newspapers around the country, and highlighted by Fox News’ Bill O’Reilly, who urged viewers to contact Hamilton College. Both Ward Churchill and Hamilton College soon received thousands of calls, letters and e-mails, including threats of violence and death.

Despite initial vows to protect freedom of speech, Hamilton College President Joan Hinde Stewart cancels the program on January 31. She attributes it to security concerns, but it later becomes clear that threats from alumni to withdraw financial support play a major role in the decision. The director of the Kirkland Project is soon removed and the Project threatened with de-funding.

January 27, 2005 With total disregard for the CU’s written policies on academic freedom, Interim Chancellor Philip DiStefano immediately denounces Prof. Churchill’s statements as “abhorrent” and “repugnant.” Two days later Colorado Congressman Bob Beauprez demands Prof. Churchill’s resignation. Beauprez later boasts on the radio that he has discussed the Churchill case with President Bush on Air Force One. Within the week Gov. Bill Owens demands that Prof. Churchill be fired, and both chambers of the Colorado legislature pass resolutions condemning Prof. Churchill and threatening to withhold funds from CU.

February 3, 2005 The CU Board of Regents convenes an emergency meeting. Although billed as a “public meeting,” an undergraduate is immediately arrested for attempting to read a brief statement on behalf of the students. His charges were eventually dropped, but community activist Shareef Aleem faces a sixteen-year prison term for allegedly assaulting officers who attempted to forcibly eject him when he asked why the students were not being allowed to speak.

The Regents issue a blanket “apology” to the entire country for Prof. Churchill’s statements, and accept Chancellor DiStefano’s proposal that he, CU Law dean David Getches, and Arts & Sciences dean Todd Gleeson convene an “ad hoc” committee to determine within 30 days whether any of Prof. Churchill’s public writing or speeches “crossed” some undefined boundary of protected speech. The Regents’ own rules on academic freedom and CU’s internal faculty procedures – to say nothing of the First Amendment – are completely disregarded. CU posts DiStefano’s statements prominently on its website.

February 8, 2005 CU-Boulder students sponsor a speech by Ward Churchill on campus. Interim Chancellor DiStefano attempts to cancel it at the last minute, citing “security” concerns, but the possibility of a federal court injunction persuades him otherwise. More than 1500 people attend; they are orderly and extremely supportive of Prof. Churchill.

Despite on-going efforts by Bill O’Reilly, David Horowitz and his “Students for Academic Freedom,” and even personal communiqués from Governor Bill Owens to College Republican around the country to have his speeches cancelled, during the spring Ward Churchill speaks to large and overwhelmingly supportive audiences at the University of Hawai’i, the University of Wisconsin-Whitewater, the University of California-Berkeley, Reed College, Pitzer College, the University of California-Monterey Bay, and at numerous public events in Denver and the San Francisco Bay area. President Jordan of Eastern Washington University, then vying for a job in Denver, cancels a talk; he is unanimously rebuked by his faculty and his students bring Ward Churchill to speak anyway. Ironically, only the very “liberal” Antioch College and Wayne Morse Center for Law and Politics at the University of Oregon actually cancel scheduled appearances.

February 25, 2005 Nearly 200 tenured faculty members at UC-Boulder take out an ad “demanding that school officials halt their investigation of Ward Churchill’s work. On March 22 this is followed by a full-page open letter endorsed by hundreds of scholars across the country, demanding that the Regents’ and administration’s “utterly gratuitous and inappropriate action[s]” be reversed. During this period thousands of individuals sign petitions supporting Prof. Churchill and hundreds write letters of protest to CU officials.

March 3, 2005 CU President Elizabeth Hoffman warns an emergency session of the Boulder Faculty Assembly of a “new McCarthyism,” pointing out that there is “no question that there’s a real danger that the group of people [who] went after Churchill now feel empowered.” Within 5 days she announces her resignation.

Mid-March 2005 Having bought time with its “ad hoc” investigation of his every word, the University negotiates with Prof. Churchill. He is willing to take early retirement for nominal compensation, but only on the condition that the Regents formally and publicly affirm the University’s processes of academic review and their own rules on academic freedom. They refuse.

March 24, 2005 Interim Chancellor DiStefano, who has never consulted Ward Churchill or even officially informed him of the investigation, publicly announces the findings of the “ad hoc” committee. The Interim Chancellor has discovered, apparently to his surprise, that all of Prof. Churchill’s writings and speeches are protected by the First Amendment. But in the meantime, he states, other allegations have surfaced which require further investigation.

Spring 2005 Beginning in late January the “Churchill controversy” is highlighted by O’Reilly, Sean Hannity, Rush Limbaugh, Joe Scarborough, and other neoconservative media personalities; a Denver Clear Channel radio station (closely aligned with Fox News) begins devoting 6-8 hours a day to disparaging Ward Churchill, and The O’Reilly Factor highlights Professor Churchill in over 40 segments. The two major Denver newspapers as well as the two Boulder dailies (three of the four now owned by Scripps-Howard) engage in uniformly negative coverage, running 400 stories in the next two months.

This “news” coverage rapidly turns into an all-out attempt at character assassination. The opinions of an ex-wife, former in-laws, and long-term political adversaries are highlighted. Ward Churchill’s driving record, credit history, employment and military record, high school football team, and even baby pictures are scrutinized. One week the theme is vague accounts of heretofore unreported “intimidation” supposedly occurring a decade or two earlier; then supposed misrepresentations of his academic credentials; then claims that he attempted to incite violence. As each set of claims was proven false, reporters simply moved on to another.

The Interim Chancellor now decides to invoke existing faculty procedures and refers numerous allegations culled from this media barrage to CU’s Standing Committee on Research Misconduct (SCRM). One set of allegations concerns Prof. Churchill’s interpretation of the U.S. Army’s participation in the spreading of smallpox to Indians and about the implementation of “blood quantum” requirements pursuant to the 1887 General Allotment Act and the Indian Arts and Crafts Act. A second set is widely characterized as “plagiarism,” although it is primarily devolves from a claim that Prof. Churchill wrote material published under someone else’s name. In addition, Chancellor DiStefano instructs SCRM to investigate Prof. Churchill’s American Indian identity. Disregarding the University’s own rules on confidentiality, the allegations are released to the press even before Prof. Churchill receives them.

Prof. Churchill protests the investigation as pretextual punishment of protected speech and contests the convening of a racial purity board, but provides SCRM with evidence countering each allegation, including evidence that he meets three standard federal definitions of “American Indian.”

April 25, 2005 Predictably the media feeding frenzy (as well as organized rightwing writing campaigns) has resulted in a barrage of e-mails, telephone calls and letters to Prof. Churchill and the Department of Ethnic Studies. For several weeks the Department cannot otherwise function. While many express support, Prof. Churchill and the Department each receive several thousand hostile and usually virulently racist e-mails. Students of color on the Boulder campus experience a heightened level of racist hostility. Prof. Churchill receives a steady stream of death threats and his home is vandalized. The University ignores all of this; the racist attacks are not condemned and the Department receives no additional support or security. The Ethnic Studies faculty finally sends an Open Letter to the Regents and all of the relevant University administrators, requesting support and attaching excerpts of e-mails which are racist, homophobic and threaten violence. Interim Chancellor DiStefano apparently finds these neither “abhorrent” nor “repugnant.” The Department never receives acknowledgment of its Open Letter from any University official.

May 17-19, 2005 The office of the Keetowah Band of Cherokee Indians in Tahlequah, Oklahoma is overwhelmed by media inquiries concerning Prof. Churchill’s status. On May 17 Prof. Churchill learns that, in the face of this pressure, the Band has issued a statement falsely asserting that he was never on the band rolls. Prof. Churchill issues a response documenting his May 1994 enrollment as an Associate Member; on May 19 the Band confirms this fact.

Summer 2005 Having taught an overload during the spring semester, Prof. Churchill also teaches a Maymester course. He wins a 2005 teaching award, voted on by students, but its sponsor (the CU alumni association) withholds the award “pending the outcome of the investigation,” despite the fact that the allegations have nothing to do with teaching.

Early June 2005 The Rocky Mountain News, having put at least 5 reporters on “special assignment” for several weeks, runs a 5-part, multi-page series with its conclusions on each allegation being investigated by the SCRM in its purportedly “confidential” process. The University spokesperson says that only allegations from individual complainants, not news reports, can be investigated. Immediately thereafter, Interim Chancellor DiStefano, as complainant, sends 59 pages of stories downloaded off the Rocky Mountain News website to the SCRM, which forwards the entire package to Prof. Churchill with instructions to answer “any new allegations.”

Late June 2005 Prof. Churchill files a formal grievance with the faculty Privilege and Tenure (P&T) Committee concerning the pretextual nature of the investigations against him and the University’s violations of his academic freedom, First Amendment, and due process rights. He subsequently files additional grievances concerning the University’s persistent violations of confidentiality and its refusal to grant him a sabbatical. He is eventually informed that the P&T Committee will only consider the grievances about the investigative process after the process has been completed.

August 19, 2005 The SCRM completes its “inquiry” phase. It drops or disregards numerous allegations, including the charge of “ethnic fraud,” but forwards seven allegations for “investigation.” These involve matters of historical interpretation (Prof. Churchill’s attribution of intentionality with respect to two smallpox epidemics and his characterization of the blood quantum requirements of the 1887 General Allotment Act and the 1990 Indian Arts and Crafts Act) and questions of attribution of authorship regarding three articles (one he never claimed authorship of; another a pamphlet which a long-defunct political organization had asked him to use; the third a piece which he readily acknowledged to have ghostwritten).

Late August, 2005 Denver newspapers report that Prof. Churchill is scheduled for a sabbatical in the spring semester of 2006. Interim Provost Susan Avery immediately announces that although Prof. Churchill’s sabbatical had been approved by Dean Todd Gleeson almost a year earlier, she had never forwarded it to the Regents for approval. Prof. Churchill files a grievance and, pending its outcome, announces his intent to “un-bank” two of the six overload courses which he had already taught and for which he was owed the equivalent of “comp time.” In October Dean Gleeson refuses to allow Prof. Churchill to un-bank more than one course in the spring. He states that this is because Prof. Churchill needs to be present on campus, but then contradicts himself by suggesting that Prof. Churchill take an unpaid leave. After Prof. Churchill notifies University officials that he will file suit, they concede that he can un-bank courses in the spring and fall of 2006.

Fall-Winter 2005 The SCRM appoints the investigative committee. Because of the poisoned atmosphere within the University, Prof. Churchill requests an entirely external committee including experts in his field of American Indian Studies. Given the prior actions of law dean David Getches, Prof. Churchill specifically objects to the inclusion of CU law faculty. SCRM chair Joseph Rosse appoints a committee dominated by 3 CU insiders and chaired by a CU law professor. The two outside members include an American Indian Studies expert and a native professor of federal Indian law. Local media pundits immediately begin bashing the two outsiders for having previously made general statements acknowledging the importance of Prof. Churchill’s work. Within 48 hours the two outside members resign, leaving the committee without an expert in the field and without any persons of color. Two additional members are eventually appointed, a white federal Indian law scholar and a Chicano anthropologist. The committee proceeds without any American Indian scholars or experts in American Indian studies.

Winter-Spring 2006 Prof. Churchill submits voluminous responses to and meets with the investigative committee. Because of the committee’s lack of knowledge of the field, much of his time is devoted to basic questions of history and methodology. Four American Indian scholars appear as witnesses to confirm his interpretation of historical matters, as well as the methodology and standards employed in American Indian Studies and in native oral traditions. The committee refuses Prof. Churchill’s repeated requests for extensions of time to submit responses, and only allows him to question witnesses – even his own – by typing questions and e-mailing them.

May 16, 2006 The investigative committee issues an obtuse 124-page report which, despite its many concessions to the flaws in the process, concludes that Prof. Churchill did engage in research misconduct on the seven allegations. Contradicting the evidence presented by all of the American Indian witnesses, the entirely non-Indian committee accuses Prof. Churchill of “disrespecting” American Indian oral traditions. The committee concludes that these are offenses for which a tenured faculty member can be fired, and the members recommend that Prof. Churchill be terminated or suspended for several years. The severity of recommended sanctions appears to be a result of what the report describes as Prof. Churchill’s “bad attitude.” The report was immediately criticized on many grounds, substantive and procedural. (Click here for problems with the report.)

June 16, 2006 Interim Chancellor DiStefano, who has thus far publicly condemned Prof. Churchill, convened an inquiry into “every word” he has published or publicly uttered, solicited allegations and then forwarded them to the SCRM as “complainant,” now serves as sentencing judge, sanctioning the investigative committee’s report and recommending that Prof. Churchill be fired. DiStefano, too, cites Prof. Churchill’s “attitude.”

Prof. Churchill files an internal appeal with the Privilege & Tenure Committee.

April 11, 2007 A review panel convened by CU’s Privilege & Tenure (P&T) Committee concludes that but for the “controversy” over Ward Churchill’s statements regarding 9/11 the investigation would not have occurred. It also finds that the SCRM Investigative Committee “exceeded its charge” in a number of cases, and that the University failed to meet its burden of proof on others, including the claims about misrepresenting the blood quantum requirements of the General Allotment Act of 1887 and the 1990 Indian Arts and Craft Act.

Nonetheless, the P&T Panel concludes that Prof. Churchill engaged in research misconduct on some specifics concerning the 1837 smallpox epidemic, and failed to comply with (unspecified) standards concerning author attribution. The majority of the Panel recommends a 1-year suspension.

May 10, 2007 Research misconduct complaint against the SCRM Investigative Committee filed by 11 professors, including 2 experts in American Indian Studies alleging deliberate falsification and fabrication in their Report. (Never investigated by CU.)

May 28, 2007 Another set of research misconduct allegations filed against the SCRM Committee by 5 professors and 2 attorneys. (Never investigated by CU.)

June 7, 2007 CU President Hank Brown refuses to recuse himself from Ward Churchill case despite his longstanding ties to ACTA. He then overrides the P&T Panel to recommend to the Regents that they fire Ward Churchill.

July 10, 2007 A P&T review panel belatedly addresses a grievance filed by Ward Churchill in September 2005 regarding the University’s violations of its own rules on confidentiality. The panel concludes that “the actions by the University regarding the SCRM process and press releases/conferences violated Churchill’s confidentiality. In addition, the panel finds that further harm to Churchill’s reputation was done by the delay in hearing his grievance by the Privilege and Tenure Committee.”

July 10, 2007 Churchill fired by Board of Regents

This finding, of course, comes too late to redress any of the harm caused by these breaches of University rules.

July 12, 18, and 19, 2007 Still more research misconduct complaints are filed against the SCRM Investigative Committee. (Never investigated.)

July 24, 2007 The Regents of the University of Colorado vote 8-1 to fire Ward Churchill. Only Regent Cindy Carlisle votes to accept the P&T Panel’s findings.

July 25, 2007 David Lane immediately files suit to vindicate Ward Churchill’s rights under the First Amendment.

March 9-27, 2009: Churchill v. University of Colorado scheduled for trial in Denver State Court.

Families Freezing in Nation’s Poorest County

Families Freezing in Nation’s Poorest County:

PUBLIC UTILITIES “CUT” ON CROW CREEK RESERVATION

(Fort Thompson, SD) Electric company caught “pulling meters” (CLICK TO VIEW THE VIDEO) in the poorest community in the nation, leaving America’s most vulnerable people without power in the dead of winter. Predatory electric companies continue to conduct these atrocious practices amid growing public outcry and damning national media scrutiny. Headlines in newspapers across the country highlight unnecessary tragedies as arctic winter months reveal the electric company’s controversial conduct of shutting off the community’s power, despite the rest of South Dakota having Seasonal Termination Protection Regulations.[1]

CORRECTION: “Central Power Electric Cooperative, Inc” is the wholesale provider, not the retail provider that has been illegally disconnecting the meters on Crow Creek Reservation. The real culprits are at the “Central Electric Cooperative:” We apologize for any confusion caused by this error and our happy to oblige the request of Loren Noess - General Manager of CENTRAL ELECTRIC COOPERATIVE to post his information here for your convenience. See his e-mail request below.

Loren Noess - General Manager

Text of Mr. Noess’ e-mail with:

To Whom it may concern:

Please change the address of Central you have on your web site. Also if you do some research on this video it was played last June on Utube [sic] and we know they were at Crow Creek last March of 2008 doing taping This video we believe is a year old. Our employees are on this video. They are doing their and should not be explosed[sic].

Please refer to the attached letter that I emailed to Eric Klein yesterday and also sent by mail.

I have sent copies of this letter to all 3 Congressional Leaders in Washington and the South Dakota PUC. The 3 Offices in Washington indicated they haven’t received any calls from the Reservation about disconnects. As you’ll read in our letter we haven’t disconnected any[sic] for the months of Dec. Jan and Feb.

Any questions please give me a call.

Contact Information

Office Hours: Monday – Friday 8 am – 5 pm
E-mail: cec@centralec.coop
Phone: 605.996.7516
Toll Free in SD: 800.477.2892
Fax: 605.996.0869

Office Locations:

Headquarters Office:
PO Box 850
1420 North Main Street
Mitchell, SD 57301 USA

Plankinton Branch Office:
PO Box 130
102 South Main Street
Plankinton, SD 57301 USA

Putting LIVES on the Line:

This winter, the Crow Creek Indian Reservation is experiencing record-low temperatures reaching fifty below zero. Hundreds of families living in government housing have had their electric meters removed by Central Electric Cooperative, the local electric cooperative. When these power meters are pulled the residents are left without power; the propane heaters do not run; pipes freeze; and there is no water for cooking, drinking, bathing or flushing toilets. Many of these households have family members whose lives depend upon electronic medical equipment such as defibrillators.

Ironically these families are paying some of the highest electricity rates in the country even though they live adjacent to the Big Bend Hydro-Electric Dam on the Missouri river. These homes are poorly insulated causing electric bills in excess of $300.00 in the coldest months.

Median income in the region is approximately $5,000 a year (typical of the thirteen Lakotah (Sioux) Reservations in the “Great Sioux Nation” as defined in the Treaties of 1851 and 1868 with the US Government).

“I’ve been to disaster areas around the world including Sri Lanka after the tsunami, hurricane Katrina, and after the Iowa floods, but, I have never witnessed such blatant disregard for human life as I have here in my own country on the Crow Creek reservation,” stated Eric Klein, Founder and CEO of Compassion into Action Network – Direct Outcome Organization (CAN-DO). “Especially now, with the new administration focusing on the development of America’s infrastructure, we need to focus our energies and resources immediately to address this critical situation where such infrastructure is being blatantly misutilized.”

Appalled by the abuse and neglect, one US Marine and Crow Creek resident took action to publicize the exploitation. Using a hand-held video recorder, he documented local power companies physically cutting electricity lines and removing meters in the peak of winter.

Watch the footage at: http://youtube.com/watch?v=wIVgpMK5-Jo&feature=channel

Utilizing their proven approach to providing lasting solutions with full accountability, efficiency and results, CAN-DO is addressing the operation at the Crow Creek Indian Reservation on the local level to raise the nation’s awareness of the urgent human right abuses taking place in the South Dakota region.

“We are calling for a collaborative effort by ethical individuals, organizations, schools and political leaders to assure that this damage is reversed,” said Klein. “Together, we can contribute to real change here at home.”

View the complete Crow Creek plan at www.can-do.org. Join in the ‘Call to Action.’

LAWS OF SOUTH DAKOTA TITLE 49

PUBLIC UTILITIES AND CARRIERS

49-34A-2. Service required of utilities. Every public utility shall furnish adequate, efficient, and reasonable service.

49-34A-6. Rates to be reasonable and just – Regulation by commission. Every rate made, demanded or received by any public utility shall be just and reasonable. Every unjust or unreasonable rate shall be prohibited. The Public Utilities Commission is hereby authorized, empowered and directed to regulate all rates, fees and charges for the public utility service of all public utilities, including penalty for late payments, to the end that the public shall pay only just and reasonable rates for service rendered.

Source: SL 1975, ch 283, § 16.

THE LIE PROPAGATED BY THE STATE OF SOUTH DAKOTA:

Crow Creek Sioux Tribe:

“Every night, the sun slips quietly away behind the bluffs of the Missouri River. These bluffs flank the western edge of the Crow Creek Reservation in central South Dakota. Located one mile south of tribal headquarters at Fort Thompson is Lake Sharpe, one of South Dakota’s Great Lakes. Water recreation abounds on the 80-mile reservoir created by the Big Bend Dam. Visitors enjoy boating, fishing and swimming as well as picnicking and camping along the water’s edge. The tribe’s wildlife department offers guided fishing and hunting trips. It also maintains a buffalo herd that often grazes north of Fort Thompson. ” http://www.travelsd.com/ourhistory/sioux/tribes/crowcreek.asp

THE TRUTH

… thousands of hectares of Indian land have been lost to dams. In North Dakota, a quarter of the Fort Berthold Reservation, shared by the Arikara, Mandan and Hidatsa peoples of the upper Missouri, for example, was flooded as a result of a staircase of dams (the Missouri River Development Project (MRDP), built during the 1950s and 1960s. The land lost included the best and most valuable and productive land on the reservation – the bottom lands along the river where most people lived.105 Five different Sioux reservations also lost land. Again, the impact was quite severe: the dams destroyed nearly 90 per cent of the tribes’ timberland, 75 per cent of the wild game, and the best agricultural lands.106

Ultimately, the Missouri dams cost the indigenous nations of the Missouri Valley an estimated 142,000 hectares of their best land – including a number of burial and other sacred sites – as well as further impoverishment and severe cultural and emotional trauma. A guarantee, used to rationalise the plan in the first place, that some 87,000 hectares of Indian land would be irrigated was simply scrapped as the project neared completion. As researcher Bernard Shanks puts it: “MRDP replaced the subsistence economy of the Missouri River Indians . . . with a welfare economy . . . As a result of the project, the Indians bore a disproportionate share of the social
cost of water development, while having no share in the benefits.”.107

104 Pittja 1994:54.
105 Guerrero 1992.
106 United States v David Sohappy, Snr et al., 477 US 906 (1986), cert. denied. Cited in Guerrero 1992.
107 Guerrero 1992.

About CAN-DO:

Founded by Eric Klein, CAN-DO has set a new standard for humanitarianism and is changing the face of philanthropy. It quickly has become an organization people can trust and depend upon to “get it done” fast and effectively. It is a 501c3, relief organization dedicated to working on the local level to provide lasting solutions, with full accountability, efficiency, and results.
Video footage, photographs and the web site offer documentation of the organization’s efforts at every phase. CAN-DO supporters take pride in watching their generosity directly affect the lives of those in need through the organization’s VirtualVolunteer.TV.

CAN-DO’s successful missions to bring immediate and direct relief to areas in need have captured the attention of renowned philanthropists including Oprah Winfrey and former president Bill Clinton. The organization was recently awarded the Global Compassion Award at the United Nations for its global impact, unparalleled transparency and accountability. For further information, please visit www.can-do.org or email Eric Klein at ek@can-do.org.

About the Republic of Lakotah:

We are the freedom loving Lakotah from the Sioux Indian reservations of Nebraska, North Dakota, South Dakota and Montana who have suffered from cultural and physical genocide in the colonial apartheid system we have been forced to live under.

We are continuing the work that we were asked to do by the traditional chiefs and treaty councils at the first Indian Treaty Council meeting at Standing Rock Sioux Indian Country in 1974.

During the week of December 17-19, 2007, we traveled to Washington DC and withdrew from the constitutionally mandated treaties to become a free and independent country. We are alerting the Family of Nations we have now reassumed our freedom and independence with the backing of Natural, International, and United States law.

We do not represent those BIA or IRA governments beholden to the colonial apartheid system, or those “hang around the fort” Indians who are unwilling to claim their freedom.

For further information, please visit www.republicoflakotah.com or call 605-867-1111.

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