Friday, April 19, 2013
Monday, April 8, 2013
North Korea: Beyond the cold war theatrics, is there really a nuclear threat to US?
by Patrick Henningsen
North Korea’s recent series of weekly verbal provocations towards Seoul and their ally the US – should be taken seriously in diplomatic terms, but is Pyongyang’s bark worse than its bite?
Instead of taking the high road of international diplomacy, Obama’s war hawks chose a more neoconservative approach by baiting the North with a nuclear-capable B-2 Stealth flyover of the country by the US, by F22 aerial exercises and a US Navy Destroyer parked off the South Korean peninsula this week.
Further fanning the flames, China also mobilised some of its own troops and military assets along the North Korean border.
The regime in Pyongyang is clearly one on the brink of collapse. The reality is that the crypto-Marxist North Korean nation is one of the planet’s most marginalized states, not only on a diplomatic level, but also economically – as evidenced by the state’s extreme internal propaganda designed to reinforce the state’s unworldly narrative for its own population.
Knowing full well that North Korea is already being strangled economically – effectively being starved by blanket UN and other sanctions, is it such a wise move for the US to poke them further?
As the young Kim Jong-un carries on his late father’s tradition of surreal state-run propaganda campaigns, so does the United States carry on with its own, slightly more sophisticated brand of propaganda as well. For the average American, their general grasp of geopolitical risk and strategy is still on the level of the film Team America, and Washington knows this, and has regularly attempted to pass off shallow intelligence as definitive, and building its foreign policy on top of this.
Still, amongst all the public war chatter back and forth between the US, South Korea and North Korea, one serious question is being mostly ignored – with regards to Pyongyang, what is exactly real, and what is fiction? If we ask this question, then the next most logical question naturally follows: to what degree is Washington DC inflating the threat from North Korea, and why?
The US ‘War Economy’
One can also argue that there are very powerful vested interests in the US corporate structure who have and will continue to benefit from a heated arms build-up, and will certainly use the North Korea threat as a justification to push forward spending, especially in light Washington’s new-found austerity culture ushered in through recent budget sequestrations. America’s new pivot towards Asia provides the catch-all policy net, while the two-way propaganda duel between the two countries provides the fear needed to justify a new military build up in the region.
In recent weeks and months, experts in Washington and the UN have been at pains to clarify and actually prove the full scope and ability of the North Korean nuclear threat, which so far are mostly theatre and of little substance.
Pyongyang’s nuclear tests
Beyond all the flamboyant rhetoric from the succession of Dear Leaders, and beyond all of their spectacular military parades, there is very little proof that North Korea is advanced in its military prowess and nuclear abilities as many are led to fear in the United States and Western Europe. Their recent nuclear test on February 19th of this year was a perfect example of this.
US officials have speculated that North Korea has upgraded its nuclear capabilities from plutonium, to a much more effective enriched uranium ‘HEU’ type warhead.
When no such evidence, or tell-tale physical data, was picked up from North Korea’s recent test – including readings taken from Japanese aircraft and multiple monitoring stations in South Korea, it prompted US officials to claim that the North Koreans merely “went to some length to try to contain releases. One possible reason to try to contain releases is secrecy, so we don’t know very much about their nuclear testing.”
In a recent report published in the Washington Post today, a former senior Obama administration official admitted there is no evidence of any such advancement, saying, “We’re worried about it, but we haven’t seen it”, and adding, “They cooperate in many areas, especially missiles. Why it hasn’t yet extended to the nuclear program is frankly a mystery.”
These types of statements leaked into the media are seemingly always done under anonymity, perhaps because those people issuing them are in fear of losing their jobs because their intelligence assessment does not jibe with US foreign policy rhetoric, nor does it promote the need for an expensive arms race.
Likewise, following North Korea’s previous test in 2009, US officials were on record as saying that unfortunately, the blast ‘left no detectable traces’.
Not convinced that North Korea’s capabilities are anything less than the most advanced, one U.S. official with access to the classified data on the tests derides the lack of evidence, claiming that: “Still, it would not be surprising for North Korea to take extra steps to prevent outsiders from gaining insights into its nuclear capability.”
As is the case with Iran, politicians in Washington and their corporate media partners have sought to validate the nuclear threat in such a way that suggests a preemptive strike may be necessary in order to save lives. Although we are used to hearing this every day in the US and Europe, that concept of a preemptive strike has been used as far back as Japan, and most recently in the context of Weapons of Mass Destruction (WMDs) in Iraq and now again in Syria.
Constantly, we see US officials sculpting the narrative in order to fit into a preconceived conclusion. Very sophisticated propaganda indeed.
Attaching North Korea to Iran
The big danger with Washington and its allies’ polarising approach to foreign policy today is that it is eerily reminiscent of the type of power-politics that led the world into two previous world wars.
In order to join North Korea and Iran at the hip, links are needed, and speculation is then used in order to build the type of theoretical case that one often sees emanating from the mouths of both hosts and guests on networks such as FOX News, CNN and the BBC, which is then taken on by the general populace as a genuine threat, skillfully articulated by an official source. Although less blunt than Kim Jong-un’s style of state-run propaganda, it’s just as effective in the end.
Still, there is no actual hard evidence to show that North Korea and Iran are sharing uranium enrichment technology, which is of course countered by US officials by claiming that, ‘the sharing of enrichment know-how would be harder to spot than missile know-how’.
Again with Syria, the North Koreans are thought to have signed a technology exchange agreement with Damascus over a decade ago, which U.S. officials ‘think’ led to the construction of a secret reactor near Deir al-Zour which the Israelis bombed in 2007. Did this facility have anything to do with nuclear weapons? We’ll never know for sure, and neither will the intelligence community based on the ambiguous comments by US officials.
Breaking the international nuclear monopoly
Most of the Western narrative of rogue nuclear threats stems from the alleged exploits of Pakistani scientist A.Q. Khan, who is accused of peddling black-market enrichment technology to various foreign governments. The reality is much more complex and might surprise followers of A.Q. Khan’s résumé of international intrigue. Both North Korea and Iran’s nuclear programs have made strides mostly through the help of two countries … the US and Britain.
Former US Secretary of Defense Donald Rumsfeld was key in doing the deal which allowed Swiss technology giant ABB to supply North Korea with two nuclear power plants located near Kumho, on North Korea’s east coast. The US would have known full well when this took place in 2000, that any waste material from the two reactors might eventually be used towards creating weapons-grade material.
Likewise, Iran’s first functional nuclear reactor at the University of Tehran was designed and built by the US and Britain during the Shah regime. From this technology, Iran was able to replicate and expand the domestic nuclear energy and medical isotope capabilities.
Linking either Iran, or Syria, to the nuclear activities of North Korea based on conjecture and half-baked intelligence would be a mistake by US politicians and overzealous policy think-tanks in Washington. If we continue to see this happen, then you can wager that the West may be working hard to create an Axis of Evil with whom to do battle at a future date.
The reality behind all of the nuclear arms rhetoric from the West is that there exists an international cartel monopoly on the building, engineering and fuel transportation in the nuclear power industry. Notice that North Korea said on Tuesday that it would restart its nuclear reactor. Some are reporting that this is to feed its atomic weapons programme, but it’s hardly mentioned in the Western media and political circles that North Korea has energy independence needs too. The situation with Iran is almost identical, who itself is also being starved and put under extreme economic sanctions as well.
Both countries need energy independence and both countries are more or less operating outside of the international nuclear cartel. The nuclear industry’s global cartel has three main players who divide the trade amongst themselves exclusively. Production material is handled by France, production systems are handled by the United States, and reprocessing is done by the British. One could easily argue, then, that both North Korea and Iran have been labeled as ‘Axis of Evil’ because they are seen as competition.
China’s stewardship of North Korea
It stands to reason that Pyongyang sits in the shadow of its superpower neighbor and chief, China. Many an analyst or pundit will tell you that they cannot make a move, much less pick a fight with the West without China knowing or endorsing such a move.
Even a major nuclear test carried out by Pyongyang is of interest to China considering its proximity and the many risks involved in testing nuclear weapons.
If North Korea launched any nuclear strike against the US, South Korea or Japan, if would almost certainly result in retaliation by the US. The fall-out from any military nuclear detonation by the United States inside North Korea, would certainly be of chief concern to the Chinese. Central planners in Washington also know that any major escalation with North Korea will not only involve China, but Japan and Russia, too, which would also be a pretext more a multi-regional war.
Taking all this into account, it’s highly unlikely that unless North Korea wanted to become extinct, or the US and its allies wanted to spark an all-out third world war intentionally, it’s hard to see this drama playing out in the way that the US media and Washington DC politicians and experts are alluding to.
Risks of military confrontation
The regime in Pyongyang is one of the most over-the-top and bizarre governments on Earth, and they are certainly totalitarian in nature. North Korea may have the motivation to lash out at an international community that has imposed collective economic punishment upon them for so long, it’s clear that should they challenge the US and its allies in the region, they have neither the resources, nor the capability to sustain any kind of meaningful military campaign. What they probably need right now, more than anything is food.
The US B-2 fly-by of North Korea should tell the world all they need to know about the true nature of the North Korean threat.
On Friday, South Korean officials admitted that to their knowledge, North Korea is not targeting the US mainland with nuclear missiles, which contradicts official government propaganda coming out of both North Korea and the US. So the US is merely validating Pyongyang propaganda – on more levels than one. If, for whatever reason, the Washington DC wanted to replace the current South Korean regime, or to harden Japan’s pro-American resolve, then pressurizing the North Korean regime would be one path to achieve that outcome.
Perhaps the most dangerous aspect of this hyping of a confrontation in the region is that either side – is that the North Koreans or the US might make just one fatal technical error or mistake resulting in a shooting match, followed by a nuclear strike. Even worse and much less remote than some would care to admit, is the possibility of a staged false flag event that could be used to plunge the situation into a new war (it would not be the first time in history that the US has chosen such a route to war).
People can speculate on the risks of war from either side of any potential conflict, but in this case, Washington DC’s ‘pivot towards Asia’ is very real indeed, and more and more assets are being deployed to US bases around China, as well as the Middle East and Africa. The United States already occupies and maintains hundreds, if not thousands of military installations and sites all over the world – and in these times of economic cuts, the military industrial complex requires more deployments of troops and more orders of equipment, as well as new conflicts in which to test newer technology.
Leases on bases in places like the DMZ, Japan and the Philippines need to be renewed also, in order to preserve those dollar havens overseas. The US depends on opening new bases in these locations to spread its military seed overseas. This is how the machine has functioned since World War II, through the Cold War, and this is exactly how it is functioning today.
To fuel this giant military economy there needs to be a constant threat of an enemy attack. US politicians are all too willing to validate any mythological threat which will help to drive the military-industrial complex which pays for their political careers.
Many have argued that in 2013, this empire is unsustainable. Some have even gone so far as to call it insane, but it will carry on nonetheless – unless American voters decide otherwise. It is the most dangerous game of monopoly the world has ever seen. How long can it continue? Presently, there are more conflicts and resource wars going on around the globe than at any other time in history, and the danger of a multi-regional conflict is drawing nearer with every day that our international leadership fails to see how 21st century power-politics are threatening global stability and peace.
Let’s seriously hope that cooler heads, and some common sense, prevails in the end.
Patrick Henningsen’s many articles and latest video reports can be found at 21st Century Wire where this article first appeared.
Delivered by The Daily Sheeple
Contributed by Activist Post of Activist Post.
North Korea: Beyond the cold war theatrics, is there really a nuclear threat to US?
North Korea: Beyond the cold war theatrics, is there really a nuclear threat to US?
by Patrick Henningsen
North Korea’s recent series of weekly verbal provocations towards Seoul and their ally the US – should be taken seriously in diplomatic terms, but is Pyongyang’s bark worse than its bite?
Instead of taking the high road of international diplomacy, Obama’s war hawks chose a more neoconservative approach by baiting the North with a nuclear-capable B-2 Stealth flyover of the country by the US, by F22 aerial exercises and a US Navy Destroyer parked off the South Korean peninsula this week.
Further fanning the flames, China also mobilised some of its own troops and military assets along the North Korean border.
The regime in Pyongyang is clearly one on the brink of collapse. The reality is that the crypto-Marxist North Korean nation is one of the planet’s most marginalized states, not only on a diplomatic level, but also economically – as evidenced by the state’s extreme internal propaganda designed to reinforce the state’s unworldly narrative for its own population.
Knowing full well that North Korea is already being strangled economically – effectively being starved by blanket UN and other sanctions, is it such a wise move for the US to poke them further?
As the young Kim Jong-un carries on his late father’s tradition of surreal state-run propaganda campaigns, so does the United States carry on with its own, slightly more sophisticated brand of propaganda as well. For the average American, their general grasp of geopolitical risk and strategy is still on the level of the film Team America, and Washington knows this, and has regularly attempted to pass off shallow intelligence as definitive, and building its foreign policy on top of this.
Still, amongst all the public war chatter back and forth between the US, South Korea and North Korea, one serious question is being mostly ignored – with regards to Pyongyang, what is exactly real, and what is fiction? If we ask this question, then the next most logical question naturally follows: to what degree is Washington DC inflating the threat from North Korea, and why?
The US ‘War Economy’
One can also argue that there are very powerful vested interests in the US corporate structure who have and will continue to benefit from a heated arms build-up, and will certainly use the North Korea threat as a justification to push forward spending, especially in light Washington’s new-found austerity culture ushered in through recent budget sequestrations. America’s new pivot towards Asia provides the catch-all policy net, while the two-way propaganda duel between the two countries provides the fear needed to justify a new military build up in the region.
In recent weeks and months, experts in Washington and the UN have been at pains to clarify and actually prove the full scope and ability of the North Korean nuclear threat, which so far are mostly theatre and of little substance.
Pyongyang’s nuclear tests
Beyond all the flamboyant rhetoric from the succession of Dear Leaders, and beyond all of their spectacular military parades, there is very little proof that North Korea is advanced in its military prowess and nuclear abilities as many are led to fear in the United States and Western Europe. Their recent nuclear test on February 19th of this year was a perfect example of this.
US officials have speculated that North Korea has upgraded its nuclear capabilities from plutonium, to a much more effective enriched uranium ‘HEU’ type warhead.
When no such evidence, or tell-tale physical data, was picked up from North Korea’s recent test – including readings taken from Japanese aircraft and multiple monitoring stations in South Korea, it prompted US officials to claim that the North Koreans merely “went to some length to try to contain releases. One possible reason to try to contain releases is secrecy, so we don’t know very much about their nuclear testing.”
In a recent report published in the Washington Post today, a former senior Obama administration official admitted there is no evidence of any such advancement, saying, “We’re worried about it, but we haven’t seen it”, and adding, “They cooperate in many areas, especially missiles. Why it hasn’t yet extended to the nuclear program is frankly a mystery.”
These types of statements leaked into the media are seemingly always done under anonymity, perhaps because those people issuing them are in fear of losing their jobs because their intelligence assessment does not jibe with US foreign policy rhetoric, nor does it promote the need for an expensive arms race.
Likewise, following North Korea’s previous test in 2009, US officials were on record as saying that unfortunately, the blast ‘left no detectable traces’.
Not convinced that North Korea’s capabilities are anything less than the most advanced, one U.S. official with access to the classified data on the tests derides the lack of evidence, claiming that: “Still, it would not be surprising for North Korea to take extra steps to prevent outsiders from gaining insights into its nuclear capability.”
As is the case with Iran, politicians in Washington and their corporate media partners have sought to validate the nuclear threat in such a way that suggests a preemptive strike may be necessary in order to save lives. Although we are used to hearing this every day in the US and Europe, that concept of a preemptive strike has been used as far back as Japan, and most recently in the context of Weapons of Mass Destruction (WMDs) in Iraq and now again in Syria.
Constantly, we see US officials sculpting the narrative in order to fit into a preconceived conclusion. Very sophisticated propaganda indeed.
Attaching North Korea to Iran
The big danger with Washington and its allies’ polarising approach to foreign policy today is that it is eerily reminiscent of the type of power-politics that led the world into two previous world wars.
In order to join North Korea and Iran at the hip, links are needed, and speculation is then used in order to build the type of theoretical case that one often sees emanating from the mouths of both hosts and guests on networks such as FOX News, CNN and the BBC, which is then taken on by the general populace as a genuine threat, skillfully articulated by an official source. Although less blunt than Kim Jong-un’s style of state-run propaganda, it’s just as effective in the end.
Still, there is no actual hard evidence to show that North Korea and Iran are sharing uranium enrichment technology, which is of course countered by US officials by claiming that, ‘the sharing of enrichment know-how would be harder to spot than missile know-how’.
Again with Syria, the North Koreans are thought to have signed a technology exchange agreement with Damascus over a decade ago, which U.S. officials ‘think’ led to the construction of a secret reactor near Deir al-Zour which the Israelis bombed in 2007. Did this facility have anything to do with nuclear weapons? We’ll never know for sure, and neither will the intelligence community based on the ambiguous comments by US officials.
Breaking the international nuclear monopoly
Most of the Western narrative of rogue nuclear threats stems from the alleged exploits of Pakistani scientist A.Q. Khan, who is accused of peddling black-market enrichment technology to various foreign governments. The reality is much more complex and might surprise followers of A.Q. Khan’s résumé of international intrigue. Both North Korea and Iran’s nuclear programs have made strides mostly through the help of two countries … the US and Britain.
Former US Secretary of Defense Donald Rumsfeld was key in doing the deal which allowed Swiss technology giant ABB to supply North Korea with two nuclear power plants located near Kumho, on North Korea’s east coast. The US would have known full well when this took place in 2000, that any waste material from the two reactors might eventually be used towards creating weapons-grade material.
Likewise, Iran’s first functional nuclear reactor at the University of Tehran was designed and built by the US and Britain during the Shah regime. From this technology, Iran was able to replicate and expand the domestic nuclear energy and medical isotope capabilities.
Linking either Iran, or Syria, to the nuclear activities of North Korea based on conjecture and half-baked intelligence would be a mistake by US politicians and overzealous policy think-tanks in Washington. If we continue to see this happen, then you can wager that the West may be working hard to create an Axis of Evil with whom to do battle at a future date.
The reality behind all of the nuclear arms rhetoric from the West is that there exists an international cartel monopoly on the building, engineering and fuel transportation in the nuclear power industry. Notice that North Korea said on Tuesday that it would restart its nuclear reactor. Some are reporting that this is to feed its atomic weapons programme, but it’s hardly mentioned in the Western media and political circles that North Korea has energy independence needs too. The situation with Iran is almost identical, who itself is also being starved and put under extreme economic sanctions as well.
Both countries need energy independence and both countries are more or less operating outside of the international nuclear cartel. The nuclear industry’s global cartel has three main players who divide the trade amongst themselves exclusively. Production material is handled by France, production systems are handled by the United States, and reprocessing is done by the British. One could easily argue, then, that both North Korea and Iran have been labeled as ‘Axis of Evil’ because they are seen as competition.
China’s stewardship of North Korea
It stands to reason that Pyongyang sits in the shadow of its superpower neighbor and chief, China. Many an analyst or pundit will tell you that they cannot make a move, much less pick a fight with the West without China knowing or endorsing such a move.
Even a major nuclear test carried out by Pyongyang is of interest to China considering its proximity and the many risks involved in testing nuclear weapons.
If North Korea launched any nuclear strike against the US, South Korea or Japan, if would almost certainly result in retaliation by the US. The fall-out from any military nuclear detonation by the United States inside North Korea, would certainly be of chief concern to the Chinese. Central planners in Washington also know that any major escalation with North Korea will not only involve China, but Japan and Russia, too, which would also be a pretext more a multi-regional war.
Taking all this into account, it’s highly unlikely that unless North Korea wanted to become extinct, or the US and its allies wanted to spark an all-out third world war intentionally, it’s hard to see this drama playing out in the way that the US media and Washington DC politicians and experts are alluding to.
Risks of military confrontation
The regime in Pyongyang is one of the most over-the-top and bizarre governments on Earth, and they are certainly totalitarian in nature. North Korea may have the motivation to lash out at an international community that has imposed collective economic punishment upon them for so long, it’s clear that should they challenge the US and its allies in the region, they have neither the resources, nor the capability to sustain any kind of meaningful military campaign. What they probably need right now, more than anything is food.
The US B-2 fly-by of North Korea should tell the world all they need to know about the true nature of the North Korean threat.
On Friday, South Korean officials admitted that to their knowledge, North Korea is not targeting the US mainland with nuclear missiles, which contradicts official government propaganda coming out of both North Korea and the US. So the US is merely validating Pyongyang propaganda – on more levels than one. If, for whatever reason, the Washington DC wanted to replace the current South Korean regime, or to harden Japan’s pro-American resolve, then pressurizing the North Korean regime would be one path to achieve that outcome.
Perhaps the most dangerous aspect of this hyping of a confrontation in the region is that either side – is that the North Koreans or the US might make just one fatal technical error or mistake resulting in a shooting match, followed by a nuclear strike. Even worse and much less remote than some would care to admit, is the possibility of a staged false flag event that could be used to plunge the situation into a new war (it would not be the first time in history that the US has chosen such a route to war).
People can speculate on the risks of war from either side of any potential conflict, but in this case, Washington DC’s ‘pivot towards Asia’ is very real indeed, and more and more assets are being deployed to US bases around China, as well as the Middle East and Africa. The United States already occupies and maintains hundreds, if not thousands of military installations and sites all over the world – and in these times of economic cuts, the military industrial complex requires more deployments of troops and more orders of equipment, as well as new conflicts in which to test newer technology.
Leases on bases in places like the DMZ, Japan and the Philippines need to be renewed also, in order to preserve those dollar havens overseas. The US depends on opening new bases in these locations to spread its military seed overseas. This is how the machine has functioned since World War II, through the Cold War, and this is exactly how it is functioning today.
To fuel this giant military economy there needs to be a constant threat of an enemy attack. US politicians are all too willing to validate any mythological threat which will help to drive the military-industrial complex which pays for their political careers.
Many have argued that in 2013, this empire is unsustainable. Some have even gone so far as to call it insane, but it will carry on nonetheless – unless American voters decide otherwise. It is the most dangerous game of monopoly the world has ever seen. How long can it continue? Presently, there are more conflicts and resource wars going on around the globe than at any other time in history, and the danger of a multi-regional conflict is drawing nearer with every day that our international leadership fails to see how 21st century power-politics are threatening global stability and peace.
Let’s seriously hope that cooler heads, and some common sense, prevails in the end.
Patrick Henningsen’s many articles and latest video reports can be found at 21st Century Wire where this article first appeared.
Delivered by The Daily Sheeple
Contributed by Activist Post of Activist Post.
North Korea: Beyond the cold war theatrics, is there really a nuclear threat to US?
Sunday, April 7, 2013
North Korea: Beyond the cold war theatrics, is there really a nuclear threat to US?
by Patrick Henningsen
North Korea’s recent series of weekly verbal provocations towards Seoul and their ally the US – should be taken seriously in diplomatic terms, but is Pyongyang’s bark worse than its bite?
Instead of taking the high road of international diplomacy, Obama’s war hawks chose a more neoconservative approach by baiting the North with a nuclear-capable B-2 Stealth flyover of the country by the US, by F22 aerial exercises and a US Navy Destroyer parked off the South Korean peninsula this week.
Further fanning the flames, China also mobilised some of its own troops and military assets along the North Korean border.
The regime in Pyongyang is clearly one on the brink of collapse. The reality is that the crypto-Marxist North Korean nation is one of the planet’s most marginalized states, not only on a diplomatic level, but also economically – as evidenced by the state’s extreme internal propaganda designed to reinforce the state’s unworldly narrative for its own population.
Knowing full well that North Korea is already being strangled economically – effectively being starved by blanket UN and other sanctions, is it such a wise move for the US to poke them further?
As the young Kim Jong-un carries on his late father’s tradition of surreal state-run propaganda campaigns, so does the United States carry on with its own, slightly more sophisticated brand of propaganda as well. For the average American, their general grasp of geopolitical risk and strategy is still on the level of the film Team America, and Washington knows this, and has regularly attempted to pass off shallow intelligence as definitive, and building its foreign policy on top of this.
Still, amongst all the public war chatter back and forth between the US, South Korea and North Korea, one serious question is being mostly ignored – with regards to Pyongyang, what is exactly real, and what is fiction? If we ask this question, then the next most logical question naturally follows: to what degree is Washington DC inflating the threat from North Korea, and why?
The US ‘War Economy’
One can also argue that there are very powerful vested interests in the US corporate structure who have and will continue to benefit from a heated arms build-up, and will certainly use the North Korea threat as a justification to push forward spending, especially in light Washington’s new-found austerity culture ushered in through recent budget sequestrations. America’s new pivot towards Asia provides the catch-all policy net, while the two-way propaganda duel between the two countries provides the fear needed to justify a new military build up in the region.
In recent weeks and months, experts in Washington and the UN have been at pains to clarify and actually prove the full scope and ability of the North Korean nuclear threat, which so far are mostly theatre and of little substance.
Pyongyang’s nuclear tests
Beyond all the flamboyant rhetoric from the succession of Dear Leaders, and beyond all of their spectacular military parades, there is very little proof that North Korea is advanced in its military prowess and nuclear abilities as many are led to fear in the United States and Western Europe. Their recent nuclear test on February 19th of this year was a perfect example of this.
US officials have speculated that North Korea has upgraded its nuclear capabilities from plutonium, to a much more effective enriched uranium ‘HEU’ type warhead.
When no such evidence, or tell-tale physical data, was picked up from North Korea’s recent test – including readings taken from Japanese aircraft and multiple monitoring stations in South Korea, it prompted US officials to claim that the North Koreans merely “went to some length to try to contain releases. One possible reason to try to contain releases is secrecy, so we don’t know very much about their nuclear testing.”
In a recent report published in the Washington Post today, a former senior Obama administration official admitted there is no evidence of any such advancement, saying, “We’re worried about it, but we haven’t seen it”, and adding, “They cooperate in many areas, especially missiles. Why it hasn’t yet extended to the nuclear program is frankly a mystery.”
These types of statements leaked into the media are seemingly always done under anonymity, perhaps because those people issuing them are in fear of losing their jobs because their intelligence assessment does not jibe with US foreign policy rhetoric, nor does it promote the need for an expensive arms race.
Likewise, following North Korea’s previous test in 2009, US officials were on record as saying that unfortunately, the blast ‘left no detectable traces’.
Not convinced that North Korea’s capabilities are anything less than the most advanced, one U.S. official with access to the classified data on the tests derides the lack of evidence, claiming that: “Still, it would not be surprising for North Korea to take extra steps to prevent outsiders from gaining insights into its nuclear capability.”
As is the case with Iran, politicians in Washington and their corporate media partners have sought to validate the nuclear threat in such a way that suggests a preemptive strike may be necessary in order to save lives. Although we are used to hearing this every day in the US and Europe, that concept of a preemptive strike has been used as far back as Japan, and most recently in the context of Weapons of Mass Destruction (WMDs) in Iraq and now again in Syria.
Constantly, we see US officials sculpting the narrative in order to fit into a preconceived conclusion. Very sophisticated propaganda indeed.
Attaching North Korea to Iran
The big danger with Washington and its allies’ polarising approach to foreign policy today is that it is eerily reminiscent of the type of power-politics that led the world into two previous world wars.
In order to join North Korea and Iran at the hip, links are needed, and speculation is then used in order to build the type of theoretical case that one often sees emanating from the mouths of both hosts and guests on networks such as FOX News, CNN and the BBC, which is then taken on by the general populace as a genuine threat, skillfully articulated by an official source. Although less blunt than Kim Jong-un’s style of state-run propaganda, it’s just as effective in the end.
Still, there is no actual hard evidence to show that North Korea and Iran are sharing uranium enrichment technology, which is of course countered by US officials by claiming that, ‘the sharing of enrichment know-how would be harder to spot than missile know-how’.
Again with Syria, the North Koreans are thought to have signed a technology exchange agreement with Damascus over a decade ago, which U.S. officials ‘think’ led to the construction of a secret reactor near Deir al-Zour which the Israelis bombed in 2007. Did this facility have anything to do with nuclear weapons? We’ll never know for sure, and neither will the intelligence community based on the ambiguous comments by US officials.
Breaking the international nuclear monopoly
Most of the Western narrative of rogue nuclear threats stems from the alleged exploits of Pakistani scientist A.Q. Khan, who is accused of peddling black-market enrichment technology to various foreign governments. The reality is much more complex and might surprise followers of A.Q. Khan’s résumé of international intrigue. Both North Korea and Iran’s nuclear programs have made strides mostly through the help of two countries … the US and Britain.
Former US Secretary of Defense Donald Rumsfeld was key in doing the deal which allowed Swiss technology giant ABB to supply North Korea with two nuclear power plants located near Kumho, on North Korea’s east coast. The US would have known full well when this took place in 2000, that any waste material from the two reactors might eventually be used towards creating weapons-grade material.
Likewise, Iran’s first functional nuclear reactor at the University of Tehran was designed and built by the US and Britain during the Shah regime. From this technology, Iran was able to replicate and expand the domestic nuclear energy and medical isotope capabilities.
Linking either Iran, or Syria, to the nuclear activities of North Korea based on conjecture and half-baked intelligence would be a mistake by US politicians and overzealous policy think-tanks in Washington. If we continue to see this happen, then you can wager that the West may be working hard to create an Axis of Evil with whom to do battle at a future date.
The reality behind all of the nuclear arms rhetoric from the West is that there exists an international cartel monopoly on the building, engineering and fuel transportation in the nuclear power industry. Notice that North Korea said on Tuesday that it would restart its nuclear reactor. Some are reporting that this is to feed its atomic weapons programme, but it’s hardly mentioned in the Western media and political circles that North Korea has energy independence needs too. The situation with Iran is almost identical, who itself is also being starved and put under extreme economic sanctions as well.
Both countries need energy independence and both countries are more or less operating outside of the international nuclear cartel. The nuclear industry’s global cartel has three main players who divide the trade amongst themselves exclusively. Production material is handled by France, production systems are handled by the United States, and reprocessing is done by the British. One could easily argue, then, that both North Korea and Iran have been labeled as ‘Axis of Evil’ because they are seen as competition.
China’s stewardship of North Korea
It stands to reason that Pyongyang sits in the shadow of its superpower neighbor and chief, China. Many an analyst or pundit will tell you that they cannot make a move, much less pick a fight with the West without China knowing or endorsing such a move.
Even a major nuclear test carried out by Pyongyang is of interest to China considering its proximity and the many risks involved in testing nuclear weapons.
If North Korea launched any nuclear strike against the US, South Korea or Japan, if would almost certainly result in retaliation by the US. The fall-out from any military nuclear detonation by the United States inside North Korea, would certainly be of chief concern to the Chinese. Central planners in Washington also know that any major escalation with North Korea will not only involve China, but Japan and Russia, too, which would also be a pretext more a multi-regional war.
Taking all this into account, it’s highly unlikely that unless North Korea wanted to become extinct, or the US and its allies wanted to spark an all-out third world war intentionally, it’s hard to see this drama playing out in the way that the US media and Washington DC politicians and experts are alluding to.
Risks of military confrontation
The regime in Pyongyang is one of the most over-the-top and bizarre governments on Earth, and they are certainly totalitarian in nature. North Korea may have the motivation to lash out at an international community that has imposed collective economic punishment upon them for so long, it’s clear that should they challenge the US and its allies in the region, they have neither the resources, nor the capability to sustain any kind of meaningful military campaign. What they probably need right now, more than anything is food.
The US B-2 fly-by of North Korea should tell the world all they need to know about the true nature of the North Korean threat.
On Friday, South Korean officials admitted that to their knowledge, North Korea is not targeting the US mainland with nuclear missiles, which contradicts official government propaganda coming out of both North Korea and the US. So the US is merely validating Pyongyang propaganda – on more levels than one. If, for whatever reason, the Washington DC wanted to replace the current South Korean regime, or to harden Japan’s pro-American resolve, then pressurizing the North Korean regime would be one path to achieve that outcome.
Perhaps the most dangerous aspect of this hyping of a confrontation in the region is that either side – is that the North Koreans or the US might make just one fatal technical error or mistake resulting in a shooting match, followed by a nuclear strike. Even worse and much less remote than some would care to admit, is the possibility of a staged false flag event that could be used to plunge the situation into a new war (it would not be the first time in history that the US has chosen such a route to war).
People can speculate on the risks of war from either side of any potential conflict, but in this case, Washington DC’s ‘pivot towards Asia’ is very real indeed, and more and more assets are being deployed to US bases around China, as well as the Middle East and Africa. The United States already occupies and maintains hundreds, if not thousands of military installations and sites all over the world – and in these times of economic cuts, the military industrial complex requires more deployments of troops and more orders of equipment, as well as new conflicts in which to test newer technology.
Leases on bases in places like the DMZ, Japan and the Philippines need to be renewed also, in order to preserve those dollar havens overseas. The US depends on opening new bases in these locations to spread its military seed overseas. This is how the machine has functioned since World War II, through the Cold War, and this is exactly how it is functioning today.
To fuel this giant military economy there needs to be a constant threat of an enemy attack. US politicians are all too willing to validate any mythological threat which will help to drive the military-industrial complex which pays for their political careers.
Many have argued that in 2013, this empire is unsustainable. Some have even gone so far as to call it insane, but it will carry on nonetheless – unless American voters decide otherwise. It is the most dangerous game of monopoly the world has ever seen. How long can it continue? Presently, there are more conflicts and resource wars going on around the globe than at any other time in history, and the danger of a multi-regional conflict is drawing nearer with every day that our international leadership fails to see how 21st century power-politics are threatening global stability and peace.
Let’s seriously hope that cooler heads, and some common sense, prevails in the end.
Patrick Henningsen’s many articles and latest video reports can be found at 21st Century Wire where this article first appeared.
Delivered by The Daily Sheeple
Contributed by Activist Post of Activist Post.
North Korea: Beyond the cold war theatrics, is there really a nuclear threat to US?
Wednesday, April 3, 2013
There Is a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with Stock Market Super-Star James Chanos
Editor"s note: This article is the first in a new AlterNet series, “The Age of Fraud.“
Hustlers. Cheaters. Crooks. American business has always had them, and sometimes they’ve been punished. But today, those who cheat and put the rest of us at risk are often getting off scot-free. The recent admission of Attorney General Eric Holder that systemically dangerous megabanks may escape prosecution because of their size has opened a new chapter in fraud history. If you know your company won’t be prosecuted, a perverse logic says that you shouldcheat and make as much money for shareholders as you can.
Jim Chanos is one of America’s best-known short-sellers, famed for his early detection of Enron’s fraudulent accounting practices. In deciding which companies to short (short-sellers make their money when the price of a stock or security goes down), Chanos acts as a kind of financial detective, scrutinizing companies for signs of overvaluation and shady practices that fool outsiders into thinking that they are prospering when they may be on shaky financial footing. Chanos teaches a class at Yale on the history of financial fraud, instructing his students in how to look for signs of cheating and criminal activity. I caught up with Chanos in his New York office to ask about what’s driving the current era of rampant fraud, who is to blame, what can be done, and the ways in which fraud costs us financially and socially.
Lynn Parramore: You’re often characterized as a short-seller. How does fraud become a concern in that context?
Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that — that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.
LP: Researchers have created all kinds of tools, like software to detect speech patterns associated with lying, to try to detect fraud. What are some of the best tools for catching financial fraudsters?
JC: There’s no single tool that works all the time, and some of them are kind of interesting, like the voice detection, or Bedford’s law, which looks at numbers and repetition patterns. But we have seen some models that we work with and I teach in my class– frameworks of fraud and fraud analysis – that have been helpful in looking down through the years where we’ve seen patterns continue. One is a wonderful checklist, the seven signs of ethical collapse in an organization. Some are clearly intuitive, such as a board full of one’s cronies or an obsession with making earnings forecasts. But some are not so obvious, for example, doing good to mask doing bad.
LP: Good deeds can be a sign of fraud?
JC: One of the more interesting observations in the world of fraud is that some of the most egregious frauds were some of the most philanthropic companies in their communities. In some ways, if you look at Bill Black’s theory of the corporation as both a weapon and shield (we teach a lot of Bill Black’s things in my class), you can begin to see that that would be one way in which the bad guys in corporate suites would basically use the corporation as a shield. They’d say, well, look at all the wonderful things we do in the community, how many people we employ. We give to hospitals, we give to the Little League team, and so on. Not all these things would be immediately obvious to the casual observer.
LP: You’re known for your early detection of Enron’s problems. How does a company like Enron stay in business for years? How is the fraud sustained over time?
JC: It’s one of the great questions, Lynn, and I think that in the case of Enron, there were a lot of people getting rich aiding and abetting what turned out to be to be a fraud. They may not have known it was go-to-jail fraud, as it turned out to be (and most fraud certainly does not end up in jail sentences for the perpetrators, as we know).
But if you look, for example, at the investment banks that were in on structuring the offshore vehicles that Andy Fastow used to offload bad investments from Enron the parent to these vehicles without telling Enron shareholders that he’d also given them a secret agreement that they would made good any losses by issuing Enron stock (that, by the way, was the crux of the fraud of the firm), when you see just how much in fees a lot of the banks and brokers made in these things, there’s an awfully strong incentive to look the other way and not ask the tough questions. That’s really one of the big flaws, I think, in our current market structure.
LP: What do we know about the timing of frauds? When are they most likely to happen?
JC: One of our models is the Kindleberger-Minsky model, named after Hyman Minsky and Charles Kindleberger. It’s a macro model, and basically it takes a look at various market cycles. What we find is that the greatest clustering of fraud in the financial markets occurs, as you might imagine, during and immediately after the biggest bull markets. As I like to tell my students, it’s basically a period in which people suspend their disbelief. Everybody’s getting rich and it becomes increasingly easy to sell more questionable schemes and investments to investors. Typically the major frauds are uncovered or unmasked after the markets decline, for example, Bernie Madoff or Enron, when investors need money from other losses (and often these things have a Ponzi-like nature and can’t finance themselves from a self-sustaining basis) or people simply begin to build back their sense of disbelief and begin to ask tough questions that they didn’t ask during the bull market. So we do see that the fraud cycle generally does track the broader financial market cycles we see with a little bit of a lag.
LP: One look at your Yale syllabus shows that fraud has been rife through business history. Yet for the last 20 years, many people have insisted with near-religious convictions that markets are efficient and therefore resistant to fraud. Where is this belief coming from, and why is it a problem?
JC: It rests upon an assumption that is deeply flawed, and that is that the people who are stewarding your capital in the marketplace — the boards of directors and the people that the boards hire – management — are acting not only in your best interest, but are playing by the rules all the time, so that, for example, the accounts that the company puts together for the accountants (and keep in mind, management prepares financial statement, not accountants, not the auditors) are accurate. The auditors simply review them, and that’s an important point I always stress to my class. If there are games being played, and if you read the boilerplate of any auditor’s opinion, it says “we rely on the statements of management” – and so if, again, the people in the corporate suite have ethical flaws, we have a system based on truth-telling that may not be exactly always accurate.
I point out to my class that in 1998 there was a survey in Business Week (which is owned by McGraw-Hill) and McGraw-Hill (which also owns Standard and Poor’s) had a conference for the S&P’s 500 chief financial officers. And they asked these chief financial officers if they’ve ever been asked to falsify their financial statements by their superior. Now, the chief financial officer’s superior is the chief executive officer, or the chief operating officer—basically the boss. It was a stunning—of course anonymous – survey. 55 percent of the CFOs indicated they’d been asked, but did not do so. 12 percent admitted that they’d been asked and did so. And then 33 percent said they’d never been pressured to do that. In effect, only one third of the companies in the S&P’s 500 at that time did not have a CEO or COO try to pressure their financial officer to falsify financial results.
So this is agency risk writ large. Investors need to know that. They need to know that an awful lot of games are being played with the numbers and with disclosure and they’ve got to be on their guard. As Tony Soprano once said, as he exhorted his minions to redouble their efforts in the rackets, “We don’t got one of these Enron things going.”
LP: How much of the American economy do you think is built on fraudulent business models? How do we compare with other countries?
JC: Surveys have been very consistent –anonymous surveys of CFOs — and we’ve seen it in some other data we present in our class from various global entities. It appears that incidents of fraud in publicly traded corporations (globally) is somewhere in the order of 10-15 percent of the companies.
Now, that does not mean they’re all Enrons. An awful lot of fraud is, well, I didn’t reserve for bad debts and my earnings were overstated for a few quarters but then we reversed it later, and it’s probably not go-to-jail-type fraud. But it is misrepresenting numbers to the marketplace and to investors. And I think that you can still lose money if it gets revealed when you own the securities. So investors do have to have a healthy skepticism even when it comes to reasonably well-regulated markets like the U.S. and the U.K., because there are incentives, given the stock option-type compensation or the bonuses based on profitability. It gives management an awful lot of latitude to play games with accounting.
LP: Let’s talk about bubbles. Being mistaken or overly excited isn’t fraud. How do you distinguish investor euphoria from fraud? What’s the role of fraud in creating and sustaining bubbles?
JC: If we look at the recent global financial crisis, a lot of people say: why were there no prosecutions? One of the first sort of default defenses you heard over and over again is well, stupidity is not a crime, and making bad decisions is not a crime. It may certainly lead to grievous losses, but that’s the marketplace. And I agree with that 100 percent. The problem is that financial crimes, unlike crimes of passion and crimes of opportunity, come with their alibis already built in. You build a veneer of legitimacy about what you’re doing. You get accountants to sign off on what you’ve done. You don’t look at any emails or get sent any emails –- at Enron Jeff Skilling never saw any emails, so how do you run a global trading powerhouse and never use email, right?
We teach this legal concept called “willful blindness,” and that is, in some cases senior executives are cut out intentionally from controversial things because they don’t want to be able to say, well, I approved that or I saw that. Someone below them is compensated quite handsomely for taking the fall, if you will.
So we have to understand that the classic definition of fraud is intent to deceive. I am intentionally trying to tell you something that is not true, that I know is not true or I have reason to believe is a reckless disregard of the truth. That is still very difficult to prove legally. But sometimes the market renders its own judgment if the preponderance of evidence in the case of a Lehman Brothers or a Countrywide is such that the executives are not exactly being guardians of the truth.
It is difficult to prosecute these cases. We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission. Most people would agree that that’s not the Justice Department’s role. And I think it’s caused a really reasonable, serious, continued undermining of trust in our markets.
While we may have benefitted from not revealing additional fraud during the dark days of ‘08 and ’09 by indictments and so forth, I still think you have the exogenous cost effect of a lack of trust by our public and by other investors. In effect, it raises the cost of capital. It depresses valuations. If people think that the game is rigged and they’re not in on it, they’re going to put their money somewhere else. And that’s almost impossible to quantify. But you know there’s an effect.
LP: If fraud is widespread, that means the government has failed as a regulator. What are the roots of that failure? Are the tricks too hard to understand? Is it is the prosecutors? Money in politics? What’s going on?
JC: Well, there are some obvious answers to this. Let me say that one of the things I teach in my class, which is technically a history class, is that this goes in waves. As Bill Black points out, the big financial crisis – the banking crisis – prior to the last one, in the early "90s, saw a rash of prosecutions, as did the 1930s after the Pecora Commission, where there was really a public drive to clean up the markets. But if you go back to the 1870s, and the Crédit Mobilier, which was the Enron of its day, scores of lawmakers and the standing vice president were caught with their hand in public till – being paid off by Union Pacific Railroad through their fraudulent Crédit Mobilier construction company. But there were just reprimands. No indictments. The public was outraged; similarly to today, but law enforcement and Congress at the time did not police themselves.
So we do see different public responses and legal responses to different waves of fraud. Having said all that, I think that certainly some observations would be that the concept of regulatory capture and the revolving door is a big one. I mean, how tough are you going to be on industry that you oversee if you’re going to go back into that industry every four or eight years. I think that really muddies the water in terms of getting people who really feel, like, say, a Stanley Sporkin did in the "70s at the SEC, that wrong is wrong and we’re going to go after it.
In some ways, as much as I consider myself a Democrat, I would say that the most prompt and vigorous response to fraud we’ve seen in the last 20 years has been the Bush administration’s crackdown on Enron, Tyco and Worldcom following the revelations of these massive frauds earlier in the millennium. Despite campaign contributions, John Ashcroft’s Justice Department went after these people and put the resources and set up the task forces and brought them to justice, which is what we’ve not seen in the last five years.
So you never know. A lot depends on the mood, and really, leadership at the top to say, this is wrong and we’re going to bring these people to justice.
LP: Journalists have played a key role in exposing fraud, but they have often been complicit, too. Are the media doing their job covering fraud?
JC: It’s funny because I remember when I spoke to Bethany McClean in early 2001 about Enron, I sort of scoffed at the idea that her magazine – Fortune, at the time – would do anything because Fortune kept putting Enron at the top of its most-admired-companies list. Sometimes it just takes the journalist to actually do the work and get the story and convince a good editor that, well, no matter what we said about it in the past, this is an important story that we need to tell the public. And there are still journalists, like Bethany, out there. Jesse Eisinger is another one who does just amazing work. Jon Weil at Bloomberg –I’m happy to give these people a shout-out because I think they played an important role, and they’re read avidly, so there is a market demand for this kind of journalism—to really call it like they see it.
But journalists are human beings and organizations are filled with human beings and when the bull market gets going, you know, no one wants to be the one who says the emperor has no clothes, unless you can actually point to a smoking gun and say, well, look at this.
LP: Right now, the news is filled of reports of fraud, from companies lying to regulators to money laundering and so on. Yet the GOP is trying to abolish Dodd-Frank, which addresses fraud by providing greater protection for whistleblowers, for example. Why would they be doing this?
JC: Well, I think the best comment was from a senior Democratic senator a number of years ago, who simply and bluntly said, “The banks own this place.” I always tell the story that right after the Bear Stearns collapse in March of ’08, the heads of all the big banks and brokers, they headed down to Washington immediately in April of ’08 to talk to senators and other lawmakers and regulators.
As we now know, what they didn’t ask for was forgiveness for their misdeeds or perhaps forbearance on capital until they could get their house in order or to work with the regulators on what was obviously a massive credit crunch coming. No, what they asked for was two things. They asked for the accounting rules to be liberalized on their hard-to-value assets and for short-sellers to be cracked down on. That was their focus, and, by the way, both happened. There were short-selling bans shortly thereafter and the accounting profession, at the urging of Washington, changed, liberalized, the rules on hard-to-value assets in March of ’09. They got what they wanted, and this tells you something.
It really is amazing to the extent that lawmakers, despite all the evidence that major legislative initiatives that banks have asked for in the last 50 years have generally been harmful to the public purse, they’ve generally gotten what they’ve asked for. You can’t be too cynical.
LP: Will Dodd-Frank really have an impact?
JC: Well, again, banks have gotten into all kinds of trouble throughout their history—with rigorous regulation and not-so-rigorous regulation. It’s the nature of the beast. But things like the Volcker Rule make common sense – that we should not put taxpayers at risk for trading activities, for example. But the banks have made a very strong case that most of what they’re doing can be seen as a hedge in one way or another, and some other part of their business, so therefore it’s not trading. I think all of those activities should be done at the holding company and not at the deposit-taking institutions. That’s a simple way to handle this.
I know banking is complex, but so are $ 700 billion bailouts. And I think there needs to be a sense by depositors and taxpayers who want a safe place to put their money that the deposit-taking institution is regulated tightly and insured properly, and that if banks want to do venture capital lending, private equity investments, hedge fund investments, or derivatives contracts, they can do so in an investment arm that is not as regulated or protected by insurance schemes. It’s seems to me to be common sense, but yet you have armies of lobbyists who will argue vociferously the opposite.
LP: What’s the role of the SEC in preventing and detecting fraud?
JC: The SEC has long held, for example, that short-selling plays an important role because of not only price discovery but also the fraud detection aspect, and they’ve always been pretty vocal about that. But the SEC is outgunned. The markets have grown much, much greater than their budget’s ability to police the markets. They also, you have to remember, have no criminal prosecution powers. That’s the Justice Department, and fraud, by definition is a crime. So you have the 10b-5 rules under the SEC, which are civil, but in fact, in much of this I lay much of the problems about fraud that we have at the feet of the Justice Department, not the SEC, because again, you need to prosecute, and that’s just not happening.
The SEC answers to Congress budget-wise, and this raises certain issues. I think generally when the SEC has gotten involved, they do a good job. But it’s tough, and they’re behind the curve. I think that’s more due to issues of budget and others than to lack of willingness to take on things. I think that they’re doing the best they can but they don’t have the resources.
LP: What are the economic and social impacts of fraud that worry you the most?
JC: The few things that jump out are obviously fraud at institutions that are backed by the taxpayer. Because there you’ve brought someone to the table that doesn’t know they’re at the table – in effect, the public or a small depositor. When the U.S. has to come to the rescue of these big institutions where clearly games were being played, we all lose. If I’m a hedge fund manager or investor, or if I’m a day trader, I understand the risks I’m taking. I’m a big boy, ok? And if I don’t do my work and someone pulls the wool over my eyes, well, shame on me.
But if my aunt in Okauchee Lake ends up having to foot the bill for Countrywide or Lehman Brothers or AIG, that’s not fair. And again, we get to a basic level of fairness. Is that eroded? Is trust in our market eroded because people think the game is rigged? Quite frankly, despite the recovery in the stock market, I think there is still an ongoing perception by the public that the game is rigged, and that my restaurant went out of business, and I didn’t get bailed out, but the guys on Wall Street did and they’re making bigger bonuses than ever. They got to start over with my money, but my restaurant didn’t. And that’s really a sense of fairness, I think, that continues to erode in this country. That’s number one.
Number two, I think that the costs for fraud tend to also disproportionately positively affect the wealthiest people in the country. So it also, in a weird way, increases the income inequality issue, and I think that’s something that’s beyond the purview of me in this interview, but it’s something I think that policy makers should keep in mind, because again, the people taking the biggest risks and taking the biggest paychecks and bonuses — if they had been hedge fund mangers, they would have been wiped out, and that’s that. End of game. But because they were doing it in too-big-to-fail institutions, they got to keep playing. In a weird way it is the antithesis of the free market. The free market would have taken these people out a long time ago. But, in fact, the subsidized market that we have, where the taxpayer stands behind all these bad decisions and the bad accounting, continues to exacerbate the income inequality issues.
LP: How does too-big-to-fail create fraud, and would breaking up the big banks be helpful in addressing it?
JC: Well, as we now know from Lanny Breuer and Eric Holder, too-big-to-fail is also too-big-to-jail. We now have admissions by the federal government that, in fact, this behavior was not extensively examined or investigated because of systemic issues.
It raises an interesting point, doesn’t it? Because if now, as the senior member of a bank, or the board of a bank, I know that there are no criminal penalities for breaking the rules, don’t I have a fiduciary responsibility to my shareholders to actually play fast and loose? Because if I get caught, that’s just the cost of doing business? I know it’s a frightening thought, but if carried to its logical extreme—if truly people believe that because of their size, they can’t be prosecuted, it actually brings forth a new issue of moral hazard extreme: illegal behavior.
That’s why equality under the law is an important concept – one that is being violated now.
Mon, 04/01/2013 – 13:50
There Is a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with Stock Market Super-Star James Chanos
There Is a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with Stock Market Super-Star James Chanos
Editor"s note: This article is the first in a new AlterNet series, “The Age of Fraud.“
Hustlers. Cheaters. Crooks. American business has always had them, and sometimes they’ve been punished. But today, those who cheat and put the rest of us at risk are often getting off scot-free. The recent admission of Attorney General Eric Holder that systemically dangerous megabanks may escape prosecution because of their size has opened a new chapter in fraud history. If you know your company won’t be prosecuted, a perverse logic says that you shouldcheat and make as much money for shareholders as you can.
Jim Chanos is one of America’s best-known short-sellers, famed for his early detection of Enron’s fraudulent accounting practices. In deciding which companies to short (short-sellers make their money when the price of a stock or security goes down), Chanos acts as a kind of financial detective, scrutinizing companies for signs of overvaluation and shady practices that fool outsiders into thinking that they are prospering when they may be on shaky financial footing. Chanos teaches a class at Yale on the history of financial fraud, instructing his students in how to look for signs of cheating and criminal activity. I caught up with Chanos in his New York office to ask about what’s driving the current era of rampant fraud, who is to blame, what can be done, and the ways in which fraud costs us financially and socially.
Lynn Parramore: You’re often characterized as a short-seller. How does fraud become a concern in that context?
Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that — that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.
LP: Researchers have created all kinds of tools, like software to detect speech patterns associated with lying, to try to detect fraud. What are some of the best tools for catching financial fraudsters?
JC: There’s no single tool that works all the time, and some of them are kind of interesting, like the voice detection, or Bedford’s law, which looks at numbers and repetition patterns. But we have seen some models that we work with and I teach in my class– frameworks of fraud and fraud analysis – that have been helpful in looking down through the years where we’ve seen patterns continue. One is a wonderful checklist, the seven signs of ethical collapse in an organization. Some are clearly intuitive, such as a board full of one’s cronies or an obsession with making earnings forecasts. But some are not so obvious, for example, doing good to mask doing bad.
LP: Good deeds can be a sign of fraud?
JC: One of the more interesting observations in the world of fraud is that some of the most egregious frauds were some of the most philanthropic companies in their communities. In some ways, if you look at Bill Black’s theory of the corporation as both a weapon and shield (we teach a lot of Bill Black’s things in my class), you can begin to see that that would be one way in which the bad guys in corporate suites would basically use the corporation as a shield. They’d say, well, look at all the wonderful things we do in the community, how many people we employ. We give to hospitals, we give to the Little League team, and so on. Not all these things would be immediately obvious to the casual observer.
LP: You’re known for your early detection of Enron’s problems. How does a company like Enron stay in business for years? How is the fraud sustained over time?
JC: It’s one of the great questions, Lynn, and I think that in the case of Enron, there were a lot of people getting rich aiding and abetting what turned out to be to be a fraud. They may not have known it was go-to-jail fraud, as it turned out to be (and most fraud certainly does not end up in jail sentences for the perpetrators, as we know).
But if you look, for example, at the investment banks that were in on structuring the offshore vehicles that Andy Fastow used to offload bad investments from Enron the parent to these vehicles without telling Enron shareholders that he’d also given them a secret agreement that they would made good any losses by issuing Enron stock (that, by the way, was the crux of the fraud of the firm), when you see just how much in fees a lot of the banks and brokers made in these things, there’s an awfully strong incentive to look the other way and not ask the tough questions. That’s really one of the big flaws, I think, in our current market structure.
LP: What do we know about the timing of frauds? When are they most likely to happen?
JC: One of our models is the Kindleberger-Minsky model, named after Hyman Minsky and Charles Kindleberger. It’s a macro model, and basically it takes a look at various market cycles. What we find is that the greatest clustering of fraud in the financial markets occurs, as you might imagine, during and immediately after the biggest bull markets. As I like to tell my students, it’s basically a period in which people suspend their disbelief. Everybody’s getting rich and it becomes increasingly easy to sell more questionable schemes and investments to investors. Typically the major frauds are uncovered or unmasked after the markets decline, for example, Bernie Madoff or Enron, when investors need money from other losses (and often these things have a Ponzi-like nature and can’t finance themselves from a self-sustaining basis) or people simply begin to build back their sense of disbelief and begin to ask tough questions that they didn’t ask during the bull market. So we do see that the fraud cycle generally does track the broader financial market cycles we see with a little bit of a lag.
LP: One look at your Yale syllabus shows that fraud has been rife through business history. Yet for the last 20 years, many people have insisted with near-religious convictions that markets are efficient and therefore resistant to fraud. Where is this belief coming from, and why is it a problem?
JC: It rests upon an assumption that is deeply flawed, and that is that the people who are stewarding your capital in the marketplace — the boards of directors and the people that the boards hire – management — are acting not only in your best interest, but are playing by the rules all the time, so that, for example, the accounts that the company puts together for the accountants (and keep in mind, management prepares financial statement, not accountants, not the auditors) are accurate. The auditors simply review them, and that’s an important point I always stress to my class. If there are games being played, and if you read the boilerplate of any auditor’s opinion, it says “we rely on the statements of management” – and so if, again, the people in the corporate suite have ethical flaws, we have a system based on truth-telling that may not be exactly always accurate.
I point out to my class that in 1998 there was a survey in Business Week (which is owned by McGraw-Hill) and McGraw-Hill (which also owns Standard and Poor’s) had a conference for the S&P’s 500 chief financial officers. And they asked these chief financial officers if they’ve ever been asked to falsify their financial statements by their superior. Now, the chief financial officer’s superior is the chief executive officer, or the chief operating officer—basically the boss. It was a stunning—of course anonymous – survey. 55 percent of the CFOs indicated they’d been asked, but did not do so. 12 percent admitted that they’d been asked and did so. And then 33 percent said they’d never been pressured to do that. In effect, only one third of the companies in the S&P’s 500 at that time did not have a CEO or COO try to pressure their financial officer to falsify financial results.
So this is agency risk writ large. Investors need to know that. They need to know that an awful lot of games are being played with the numbers and with disclosure and they’ve got to be on their guard. As Tony Soprano once said, as he exhorted his minions to redouble their efforts in the rackets, “We don’t got one of these Enron things going.”
LP: How much of the American economy do you think is built on fraudulent business models? How do we compare with other countries?
JC: Surveys have been very consistent –anonymous surveys of CFOs — and we’ve seen it in some other data we present in our class from various global entities. It appears that incidents of fraud in publicly traded corporations (globally) is somewhere in the order of 10-15 percent of the companies.
Now, that does not mean they’re all Enrons. An awful lot of fraud is, well, I didn’t reserve for bad debts and my earnings were overstated for a few quarters but then we reversed it later, and it’s probably not go-to-jail-type fraud. But it is misrepresenting numbers to the marketplace and to investors. And I think that you can still lose money if it gets revealed when you own the securities. So investors do have to have a healthy skepticism even when it comes to reasonably well-regulated markets like the U.S. and the U.K., because there are incentives, given the stock option-type compensation or the bonuses based on profitability. It gives management an awful lot of latitude to play games with accounting.
LP: Let’s talk about bubbles. Being mistaken or overly excited isn’t fraud. How do you distinguish investor euphoria from fraud? What’s the role of fraud in creating and sustaining bubbles?
JC: If we look at the recent global financial crisis, a lot of people say: why were there no prosecutions? One of the first sort of default defenses you heard over and over again is well, stupidity is not a crime, and making bad decisions is not a crime. It may certainly lead to grievous losses, but that’s the marketplace. And I agree with that 100 percent. The problem is that financial crimes, unlike crimes of passion and crimes of opportunity, come with their alibis already built in. You build a veneer of legitimacy about what you’re doing. You get accountants to sign off on what you’ve done. You don’t look at any emails or get sent any emails –- at Enron Jeff Skilling never saw any emails, so how do you run a global trading powerhouse and never use email, right?
We teach this legal concept called “willful blindness,” and that is, in some cases senior executives are cut out intentionally from controversial things because they don’t want to be able to say, well, I approved that or I saw that. Someone below them is compensated quite handsomely for taking the fall, if you will.
So we have to understand that the classic definition of fraud is intent to deceive. I am intentionally trying to tell you something that is not true, that I know is not true or I have reason to believe is a reckless disregard of the truth. That is still very difficult to prove legally. But sometimes the market renders its own judgment if the preponderance of evidence in the case of a Lehman Brothers or a Countrywide is such that the executives are not exactly being guardians of the truth.
It is difficult to prosecute these cases. We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission. Most people would agree that that’s not the Justice Department’s role. And I think it’s caused a really reasonable, serious, continued undermining of trust in our markets.
While we may have benefitted from not revealing additional fraud during the dark days of ‘08 and ’09 by indictments and so forth, I still think you have the exogenous cost effect of a lack of trust by our public and by other investors. In effect, it raises the cost of capital. It depresses valuations. If people think that the game is rigged and they’re not in on it, they’re going to put their money somewhere else. And that’s almost impossible to quantify. But you know there’s an effect.
LP: If fraud is widespread, that means the government has failed as a regulator. What are the roots of that failure? Are the tricks too hard to understand? Is it is the prosecutors? Money in politics? What’s going on?
JC: Well, there are some obvious answers to this. Let me say that one of the things I teach in my class, which is technically a history class, is that this goes in waves. As Bill Black points out, the big financial crisis – the banking crisis – prior to the last one, in the early "90s, saw a rash of prosecutions, as did the 1930s after the Pecora Commission, where there was really a public drive to clean up the markets. But if you go back to the 1870s, and the Crédit Mobilier, which was the Enron of its day, scores of lawmakers and the standing vice president were caught with their hand in public till – being paid off by Union Pacific Railroad through their fraudulent Crédit Mobilier construction company. But there were just reprimands. No indictments. The public was outraged; similarly to today, but law enforcement and Congress at the time did not police themselves.
So we do see different public responses and legal responses to different waves of fraud. Having said all that, I think that certainly some observations would be that the concept of regulatory capture and the revolving door is a big one. I mean, how tough are you going to be on industry that you oversee if you’re going to go back into that industry every four or eight years. I think that really muddies the water in terms of getting people who really feel, like, say, a Stanley Sporkin did in the "70s at the SEC, that wrong is wrong and we’re going to go after it.
In some ways, as much as I consider myself a Democrat, I would say that the most prompt and vigorous response to fraud we’ve seen in the last 20 years has been the Bush administration’s crackdown on Enron, Tyco and Worldcom following the revelations of these massive frauds earlier in the millennium. Despite campaign contributions, John Ashcroft’s Justice Department went after these people and put the resources and set up the task forces and brought them to justice, which is what we’ve not seen in the last five years.
So you never know. A lot depends on the mood, and really, leadership at the top to say, this is wrong and we’re going to bring these people to justice.
LP: Journalists have played a key role in exposing fraud, but they have often been complicit, too. Are the media doing their job covering fraud?
JC: It’s funny because I remember when I spoke to Bethany McClean in early 2001 about Enron, I sort of scoffed at the idea that her magazine – Fortune, at the time – would do anything because Fortune kept putting Enron at the top of its most-admired-companies list. Sometimes it just takes the journalist to actually do the work and get the story and convince a good editor that, well, no matter what we said about it in the past, this is an important story that we need to tell the public. And there are still journalists, like Bethany, out there. Jesse Eisinger is another one who does just amazing work. Jon Weil at Bloomberg –I’m happy to give these people a shout-out because I think they played an important role, and they’re read avidly, so there is a market demand for this kind of journalism—to really call it like they see it.
But journalists are human beings and organizations are filled with human beings and when the bull market gets going, you know, no one wants to be the one who says the emperor has no clothes, unless you can actually point to a smoking gun and say, well, look at this.
LP: Right now, the news is filled of reports of fraud, from companies lying to regulators to money laundering and so on. Yet the GOP is trying to abolish Dodd-Frank, which addresses fraud by providing greater protection for whistleblowers, for example. Why would they be doing this?
JC: Well, I think the best comment was from a senior Democratic senator a number of years ago, who simply and bluntly said, “The banks own this place.” I always tell the story that right after the Bear Stearns collapse in March of ’08, the heads of all the big banks and brokers, they headed down to Washington immediately in April of ’08 to talk to senators and other lawmakers and regulators.
As we now know, what they didn’t ask for was forgiveness for their misdeeds or perhaps forbearance on capital until they could get their house in order or to work with the regulators on what was obviously a massive credit crunch coming. No, what they asked for was two things. They asked for the accounting rules to be liberalized on their hard-to-value assets and for short-sellers to be cracked down on. That was their focus, and, by the way, both happened. There were short-selling bans shortly thereafter and the accounting profession, at the urging of Washington, changed, liberalized, the rules on hard-to-value assets in March of ’09. They got what they wanted, and this tells you something.
It really is amazing to the extent that lawmakers, despite all the evidence that major legislative initiatives that banks have asked for in the last 50 years have generally been harmful to the public purse, they’ve generally gotten what they’ve asked for. You can’t be too cynical.
LP: Will Dodd-Frank really have an impact?
JC: Well, again, banks have gotten into all kinds of trouble throughout their history—with rigorous regulation and not-so-rigorous regulation. It’s the nature of the beast. But things like the Volcker Rule make common sense – that we should not put taxpayers at risk for trading activities, for example. But the banks have made a very strong case that most of what they’re doing can be seen as a hedge in one way or another, and some other part of their business, so therefore it’s not trading. I think all of those activities should be done at the holding company and not at the deposit-taking institutions. That’s a simple way to handle this.
I know banking is complex, but so are $ 700 billion bailouts. And I think there needs to be a sense by depositors and taxpayers who want a safe place to put their money that the deposit-taking institution is regulated tightly and insured properly, and that if banks want to do venture capital lending, private equity investments, hedge fund investments, or derivatives contracts, they can do so in an investment arm that is not as regulated or protected by insurance schemes. It’s seems to me to be common sense, but yet you have armies of lobbyists who will argue vociferously the opposite.
LP: What’s the role of the SEC in preventing and detecting fraud?
JC: The SEC has long held, for example, that short-selling plays an important role because of not only price discovery but also the fraud detection aspect, and they’ve always been pretty vocal about that. But the SEC is outgunned. The markets have grown much, much greater than their budget’s ability to police the markets. They also, you have to remember, have no criminal prosecution powers. That’s the Justice Department, and fraud, by definition is a crime. So you have the 10b-5 rules under the SEC, which are civil, but in fact, in much of this I lay much of the problems about fraud that we have at the feet of the Justice Department, not the SEC, because again, you need to prosecute, and that’s just not happening.
The SEC answers to Congress budget-wise, and this raises certain issues. I think generally when the SEC has gotten involved, they do a good job. But it’s tough, and they’re behind the curve. I think that’s more due to issues of budget and others than to lack of willingness to take on things. I think that they’re doing the best they can but they don’t have the resources.
LP: What are the economic and social impacts of fraud that worry you the most?
JC: The few things that jump out are obviously fraud at institutions that are backed by the taxpayer. Because there you’ve brought someone to the table that doesn’t know they’re at the table – in effect, the public or a small depositor. When the U.S. has to come to the rescue of these big institutions where clearly games were being played, we all lose. If I’m a hedge fund manager or investor, or if I’m a day trader, I understand the risks I’m taking. I’m a big boy, ok? And if I don’t do my work and someone pulls the wool over my eyes, well, shame on me.
But if my aunt in Okauchee Lake ends up having to foot the bill for Countrywide or Lehman Brothers or AIG, that’s not fair. And again, we get to a basic level of fairness. Is that eroded? Is trust in our market eroded because people think the game is rigged? Quite frankly, despite the recovery in the stock market, I think there is still an ongoing perception by the public that the game is rigged, and that my restaurant went out of business, and I didn’t get bailed out, but the guys on Wall Street did and they’re making bigger bonuses than ever. They got to start over with my money, but my restaurant didn’t. And that’s really a sense of fairness, I think, that continues to erode in this country. That’s number one.
Number two, I think that the costs for fraud tend to also disproportionately positively affect the wealthiest people in the country. So it also, in a weird way, increases the income inequality issue, and I think that’s something that’s beyond the purview of me in this interview, but it’s something I think that policy makers should keep in mind, because again, the people taking the biggest risks and taking the biggest paychecks and bonuses — if they had been hedge fund mangers, they would have been wiped out, and that’s that. End of game. But because they were doing it in too-big-to-fail institutions, they got to keep playing. In a weird way it is the antithesis of the free market. The free market would have taken these people out a long time ago. But, in fact, the subsidized market that we have, where the taxpayer stands behind all these bad decisions and the bad accounting, continues to exacerbate the income inequality issues.
LP: How does too-big-to-fail create fraud, and would breaking up the big banks be helpful in addressing it?
JC: Well, as we now know from Lanny Breuer and Eric Holder, too-big-to-fail is also too-big-to-jail. We now have admissions by the federal government that, in fact, this behavior was not extensively examined or investigated because of systemic issues.
It raises an interesting point, doesn’t it? Because if now, as the senior member of a bank, or the board of a bank, I know that there are no criminal penalities for breaking the rules, don’t I have a fiduciary responsibility to my shareholders to actually play fast and loose? Because if I get caught, that’s just the cost of doing business? I know it’s a frightening thought, but if carried to its logical extreme—if truly people believe that because of their size, they can’t be prosecuted, it actually brings forth a new issue of moral hazard extreme: illegal behavior.
That’s why equality under the law is an important concept – one that is being violated now.
Mon, 04/01/2013 – 13:50
There Is a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with Stock Market Super-Star James Chanos