Credit Card Fraud

Posted on April 12, 2014 by

Banks fined $1.66 Billion for illegal credit card practices that ripped off over 10 million customers

Bank of America will refund up to 2.9 million customers $727 million plus pay $45 million in fines for illegal credit card practices such as credit monitoring and identity theft protection.

It should be obvious why banks tried so hard to kill the Consumer Financial Protection Bureau (CFPB) and continue to try to weaken this new institution’s ability to fight the rampant fraud that infests all our institutions — banking, insurance, health care, the political system, and Wall Street.

Bank of America $772 million to 2.9 million customers. Chase & JPMorgan Chase $369 million to 2.1 million customers. Discover $214 million to 3.5 million customers. Capital One $165 million to 2 million customers.  American Express $112.5 million to 335,000 customers.   GE CareCredit $34.1 million to 1.2 million customers.

Feb 27, 2014. CFPB Calls on Top Credit Card Companies to Make Credit Scores Available to Consumers.  Bureau Report Finds Accuracy Issues Top Credit Report Complaints; Warns on Avoiding Investigations

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Who lives, who dies in a never-ending energy crisis. Book review of Nothing to Envy. Ordinary Lives in North Korea

Posted on April 6, 2014 by

Preface. Much of this post comes from Barbara Demick’s 2010 “Nothing to Envy. Ordinary lives in North Korea”.  But first I summarize why and how energy shortages led to the hardships chronicled in this book.

Related Posts:

Alice Friedemann  www.energyskeptic.com  Author of Life After Fossil Fuels: A Reality Check on Alternative Energy; When Trucks Stop Running: Energy and the Future of Transportation”, Barriers to Making Algal Biofuels, & “Crunch! Whole Grain Artisan Chips and Crackers”.  Women in ecology  Podcasts: WGBH, Jore, Planet: Critical, Crazy Town, Collapse Chronicles, Derrick Jensen, Practical Prepping, Kunstler 253 &278, Peak Prosperity,  Index of best energyskeptic posts

***

North Korea and Cuba were the first countries to lose oil, the lifeblood of civilization.  Since we will all share that fate, it’s interesting to see what happened, though keep in mind that how severe the consequences are will depend on the carrying capacity of the region you’re in, how much civil order can be maintained, and the effectiveness of the leaders in power (i.e. see “Lessons Learned from How Cuba Survived Peak Oil” that compares California to Cuba).

There are enormous differences between the fates of Cuba and North Korea. Cuba had many advantages — a benign climate with year-round rainfall where three crops a year could be grown, a culture of helping one another out, and Castro prevented middlemen and speculators from charging astronomical amounts for food.  For a detailed understanding of what happened in Cuba read this Oxfam analysis.

North Korea couldn’t be more opposite – a cold mountainous nation with only 15% of its land arable, and dictators so crazy and cruel they’re almost unmatched in history.  North Korea might be the only nation with more prisoners per capita than America.   There are many kinds of prisons, from detention centers to hard-labor camps, to gulags where your children, cousins, brothers, sisters, and parents would also be sent to for a crime you committed for generations to come.  About 1% of the population– 200,000 people –permanently work in labor camps. The threat of these prisons has made it impossible for organized resistance to happen.

It’s hard to escape, and if you do, then your relatives end up labor camps. Other nations aren’t keen on refugees – South Korea fears a collapse of North Korea and being overrun by 23 million people seeking food and shelter, and China has their own problems with 1.2 billion poor people.

The consequences of peak energy in North Korea are worse than what’s likely to happen initially in America, though some regions of the United States are likely to suffer more than others.  On the other hand, when times get hard, group-oriented cultures that depend on a large network of people tend to do better than highly individualist cultures, which is as you can learn more about in Dmitry Orlov’s Post-Soviet Lessons for a Post-American Century.

The only good aspect I could find about North Korea was that the women there are less repressed than in the past. A century ago Korean women were so completely covered in clothing that the Taliban would find no faults.  In one village north of Pyongyang women wore 7 foot long, 5 feet broad and 3 feet deep wicker hat constructions that kept women hidden from head to toe.  Perhaps even more than Muslim women Korean women were imprisoned in family compounds and could only leave at special times when the streets were cleared of men.  One historian said that Korean women were “very rigidly secluded, perhaps more absolutely than women of any other nation”.

After the Korean War ended, North Korea lost most of its infrastructure and 70% of its housing.  It was amazing that Kim Il-sung managed to create a Spartan economy where most were sheltered and clothed, had electricity, and few were illiterate.  Grain and other foods were distributed as well.  In autumn each family got about 150 pounds of cabbage per person to make kimchi, which was stored in tall earthen jars buried the garden so they would stay cold but not freeze and hidden from thieves.

North Korea became utterly dependent on the kindness of other countries for oil, food, fertilizer, vehicles, and so on.

What happens when the oil stops flowing? 

In the early 1990s North Korea suffered a double blow at a time when they were $10 billion in debt.  China wanted cash up front for fuel and food while at the same time the Soviet Union demanded the much higher price of what oil was selling for on world markets

The nation spun into a crash. Without oil and raw materials the factories shut down.  With no exports, there was no money to buy fuel and food with.  Electric plants shut, irrigation systems stopped running, and coal couldn’t be mined.  The results were:

  • Power stations and the electric grid rusted beyond fixing
  • The lights went out.
  • Running water stopped so most went to a public pump to get water
  • Electric trams operated infrequently
  • People climbed utility poles to steal pieces of copper wire to barter for food
  • There were few motor vehicles
  • And few tractors, farming was done with oxen dragging plows

Hunger struck, which made people too exhausted to work long at the few factories and farms that were still surviving.

Oil is liquid muscle. One barrel of crude oil (42-gallons) has 1,700 kilowatts of energy.  It would take a fit human adult laboring more than 10 years to equal one barrel of oil.

Perhaps this is why many nations have had no choice but to rely on muscle power after an economic crash or during a war, which means putting many people to work on farms.  After the energy crisis, North Koreans over 11 were sent out to the country to plant rice, haul soil, spray pesticides, and weed.  This was called “volunteer work”.  Now that they couldn’t afford to buy fertilizer, every family was expected to provide a human bucketful of excrement  to a warehouse miles away. The bucket was exchanged for a chit that could be traded for food.

Like Mao’s crazy schemes, North Korea’s dictators lurched from one mad idea to another — one day it was goat breeding, the next ostrich farms, or switching from rice to potatoes.

Food staples were grown on collective farms, and the state took the harvest and redistributed it.  The farmers weren’t given enough to survive on, so they slacked on their collective fields to grow food to survive on, making the food crisis even worse.   In the end, it was people in cities with no land to grow their own food on who ended up starving first.  Every year, rationed amounts of food went down.

People were told the United States was at fault, and propaganda campaigns encouraged Koreans to think of themselves as tough, and that enduring hunger without complaint was a patriotic duty, and kept everyone’s hopes up by promising bumper crops in the coming harvest.  The Koreans deceived themselves like the German Jews in the 1930s, and told themselves it couldn’t get any worse, things would get better. But they didn’t.

Worse yet, instead of spending money on agriculture, the defense budget sucked up a quarter of the GNP.  One million men out of 23 million people were kept in arms – the 4th largest military in the world.

The only place to get food became the illegal black market, where prices were terribly high, sometimes 250 times higher than what the state used to sell food for.

Natural disasters made harvests even worse – in 1994 and 1995 Korea was struck with an extremely cold winter and torrential rains in the summer that destroyed the homes of 500,000 people and rice crops for 5.2 million people.

People began picking weeds and wild grasses to stretch out meals, as well as leaves, husks, stems, and the cobs of corn.  Children can’t digest food this rough and could end up in a hospital, where doctors advised the rough material be ground up fine and cooked a long time.  It wasn’t long before malnutrition led to increasing numbers of people with pellagra and other diseases.  Hospitals soon ran out drugs and other supplies.

Who died?

Children under five.  Mothers couldn’t produce enough breast milk, nor was there baby formula, regular milk, or even ground up rice.   Children were the most vulnerable from poor diets. A minor cold would turn into pneumonia, diarrhea into dysentery.

Then the elderly.  First those over 70, then people in their 60s and 50s.

Even men and women in the prime of their lives began to die.  Men first because they have less body fat.  Also, the strongest and most athletic because their metabolisms burn more calories.

The most innocent.  People who wouldn’t steal food, lie, cheat, break the law, or betray a friend. The simple and kind-hearted who did what they were told.  It’s said that the survivors of Auschwitz didn’t want to see each other again because they’d all done things they were ashamed of.

Death was certain for people who didn’t have the initiative to do something.

Chronic malnutrition makes it hard to fight infections, and people grow more susceptible to tuberculosis and typhoid.  Once starved enough, antibiotics stop working, so curable illnesses become fatal.  Hunger changes body chemistry to wildly fluctuate resulting in strokes and heart attacks.

The city of Chongjin had always suffered epidemics because its sewage system let untreated feces into streams.  Once electricity stopped working, running water became so unreliable that people stored water in large vats which bred typhoid bacteria.  Between a lack of soap and antibiotics it wasn’t long before typhoid epidemics broke out.

By 1998 about 10% of the population had died from famine, and in some areas 20%, up to 2 million people.  The numbers would have been much higher if North Korea hadn’t received $2.4 billion in food aid between 1996 and 2005.

The North Korean government began to execut people for just about anything: stealing copper wire, goat, corn, or cattle theft, anyone stealing or hoarding or selling grains on the black market, adultery, prostitution, resisting arrest, disorderly conduct, and so on.  Thousands of people were thrown into prisons and many didn’t survive.

Who survived?

People did not passively die.  When the public food distribution ended they did whatever they could figure out to feed themselves.  Some made bucket and string traps to catch small field animals, used nets to catch sparrows, stripped the sweet inner bark of pine trees and ground it into a powder to replace flour. Acorns were mashed into a paste.  Kernels of undigested corn were pulled out of the feces of farm animals.  Shipyard workers scraped the slime off the bottom where food had been stored and dried the foul-smelling goop on roofs to get tiny grains of uncooked rice out.  Others dug shellfish out  and ate seaweed.  When making cornmeal, the husk, cob, leaves and stem were thrown into the grinder. Grass was added to make stews look like they had vegetables.

People rested instead of moving around to preserve their calories.

To stay alive, you had to suppress any impulse to share food.

You had to stop caring, to be able to see a dead body on the street and walk on by, and not stop to help a beloved neighbor’s 5-year-old on the verge of death.  Indifference was a survival skill.

At this point, just about everyone looked at what they owned and could sell to get food. Usually within 5 years most people had run out of possessions to sell, and even sold goods that helped them survive like bicycles for transport or sewing machines to make clothes to sell.

One of the most valuable items a person could own was a hand mill to grind corn, because there was no electricity for electric grinders.  People would come for miles to have their corn ground manually.

Some walked around the edges of their city looking for shellfish, birds, or berries, but most cities were concrete jungles, and people needed to go much further in their search for food.  In the city of Chongjin families hiked 3 miles to a collective orchard to look for fruit that had fallen and rolled under the fence surrounding the orchard.  As food dwindled, children cut school to go to the orchard and squeezed through the wire fence to get fruit.  When there was no more fruit to be scavenged, people went further out from the cities looking not just for food, but for firewood. Farms began to hire armed guards.

Children climbed walls and dug up vegetables and kimchi pots buried in private gardens. As the famine worsened, hungry soldiers began raiding people’s gardens as well.

In smaller towns and villages, people crammed the narrow spaces between homes with peppers, radishes, and cabbages, those with flat roofs put pots of vegetables on top.

Some raised pigs or made tofu.  Many women made cookies because they only took 10 minutes to bake, a lot less time than bread, at a time when firewood and anything else that would burn was hard to find.  Cookies made a quick meal for hungry people on the move.  When many made the same goods, having the best personality counted.

As coal and wood ran out, and electricity very rare, many foods people had made to trade for rice couldn’t be done anymore.

Even dandelions and weeds grew scarce.  Hot pepper, salt, and other flavorings that might have made weeds, ground sawdust, and inner bark flour palatable were expensive.  Oil was unavailable at any price, making cooking even more difficult.  It wasn’t long before North Korea’s frog population was wiped out by over-hunting.  People ate grasshoppers, tadpoles, cicadas, and dogs.

Many hung out at train stations, hoping to go somewhere better.  The homeless began to live at the train stations, most of them children or teenagers, often because the parents and grandparents had starved themselves to death first to keep the children alive. Many orphans roamed fearing others would steal from them, or even eat them, as rumors of cannibalism spread.  Train stations were a place many dead bodies could be found.

Train stations also were full of prostitutes, often young married women desperate to feed their children.   The only payment they asked for was food. Those with apartments nearby could get money or food letting prostitutes briefly rent out a room.

Cities that relied on the falling apart roads and rail lines had to pay the most for food, especially rice, the main staple.

Those with keys to abandoned factories dismantled them and made everything from the machinery to the wood doors into other sell-able products.

Women made sneakers from discarded rubber, built carts from old tires and doors.

Some found books on Oriental medicine and picked mountain herbs.  Doctors performed abortions because families couldn’t afford babies.

Food aid agencies did a survey in the summer of 2008 and found that two-thirds of people were still picking grass and weeds to survive on.

Despite all the crackdowns on the black market, by 2009 there were some who’d made so much money they were becoming almost middle class. Kim Jong-il solved that problem by invalidating the currency in circulation and issuing new bills as a to confiscate the cash people had saved.  The new currency was so worthless that the most money you could convert was $30, instantly throwing anyone who’d done well back into poverty.  The economy crashed even lower, and starvation became common again.

Supply chains broke down

Just about anything you could think of grew scarce –  there were no bricks, cement, glass, or lumber.  When windows broke they were covered with boards or plastic.  Supply chains were broken.  One school, desperate for glass, devised a scheme to sell the famous pottery of their town for salt in Nampo, sell the salt at a profit, and use that money to buy glass from the only factory in North Korea that still made glass.

A clothing factory that made uniforms started to have trouble in 1988 when shipments of fabric were delayed. Sometimes this was because there was no anthracite coal which was a raw material used to make the fabric (vinalon), or there wasn’t electricity at the factory.  Management tried to keep the women busy by sending them out along railroad tracks to collect dog shit for fertilizer. Other days they’d look for scrap metal along the tracks or in the effluent coming out of the pipes at the steelworks.

How to be a Dictator

If you want to be a dictator this book is a good how-to manual.  Kim Il-sung went further than most dictators by fostering a cult of personality that made him into a God so he could harness the power of faith by invoking religious sentiments in the people. He took the cult of personality to an extreme – everyone had to have a photo of him on a blank wall with nothing else, and use a white cloth that could be used for nothing else to keep the photo clean.  Surprise visits of the Public Standards Police ensured this was the case.

He also terrified everyone with the threat of going to prison.

Children didn’t celebrate their own birthdays, only Kim Il-sung and Kim Jong-il’s, whose birthdays were national holidays and often the only time people got meat.  After the energy crisis, these would were the only days when there was electricity, and children got about two pounds of sweets.  Children were expected to stand in front of the portrait while enjoying their treats.

Korean teachers are required to play the accordion to motivate children, or “voluntary hard labor” in the fields or a construction site.

Further Reading

Inside North Korea’s Environmental Collapse. Phil McKenna 06 Mar 2013. pbs.org

Pfeiffer, Dale Allen. 17 Nov 2003. Drawing Lessons from Experience; The Agricultural Crises in North Korea and Cuba. From the Wilderness.

 

 

 

 

 

 

 

 

Posted in Agriculture, Energy Books, North Korea, Oil shock collapse | Tagged , | 1 Comment

Food Rationing

Posted on April 6, 2014 by

Many nations during war or hard times institute food rationing to make sure there’s enough for everyone and to prevent the connected few from buying up more than their share and selling food at prices several times higher

Venezuela Issues Food Ration Cards

Electronic cards that restrict families to shopping once a week aim to prevent widespread food shortages across country.

4 April 2014    Virginia López. theguardian.com

Venezuelans queued on Friday to register for an ID card that will limit Venezuelans to once-a-week shopping and will set off an alarm if a purchaser breaks the rules. The government wants to prevent shoppers from “over-buying” in a country hit by acute shortages of basic items including milk, sugar and toilet paper and selling them at many times the original price.

By keeping a record of what is purchased and limiting shopping trips, the electronic card is supposed to curb hoarding and prevent speculative shoppers from buying to resell at a profit. But the larger aim is to halt the huge outflow of food to neighboring Colombia, where it sells for up to 10 times as much. It is estimated that almost 40% of Venezuela‘s food is transported illegally across the border.

Outside the Bicentenario megastore in Plaza Venezuela, a middle-class neighbourhood in the capital, Caracas, the line stretches for several blocks. Some of the people here have come to register for the new system; others simply want to buy food. Most of them have already been waiting for several hours. They are desperate over what they say is a lifetime spent standing in queues. The card, they hope, will put an end to a perverse cycle they say they cannot bear for much longer.

“This card will take the edge, the sense of panic, out of shopping. If we know that we will find rice or milk next time we come we don’t need to stock up and so there will be more to go around,” says Oscar Romero, as he orders a cup of coffee from a street vendor to make the wait more pleasant.

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Biomass Electricity More Polluting Than Coal and Waste Incinerators

Posted on April 5, 2014 by

Trees, Trash, and Toxics: How Biomass Energy Has Become the New Coal

Mary S. Booth, PhD Partnership for Policy Integrity April 2 , 2014

Executive Summary Highlights

Because of a perfect storm of lax regulation and regulatory rollbacks , biomass power plants marketed as “clean” to host communities are increasingly likely to emit toxic compounds like dioxins; heavy metals including lead, arsenic, and mercury; and even emerging contaminants, like phthalates , which are found in the “waste-derived” fuel products that are being approved under new EPA rules.

Permissive emission standards for biomass plants mean that these pollutants can be emitted at higher levels than allowed from actual waste incinerators. As such, it is not a stretch to conclude that biomass plants being permitted throughout the country combine some of the worst emissions characteristics of coal-fired power plants and waste incinerators, all the while professing to be clean and green.

The biomass power industry is undergoing a new surge of growth in the United States. While bioenergy has traditionally been used by certain sectors such as the paper-making industry, more than 70 new wood-burning plants have been built or are underway since 2005, and another 75 proposed and in various stages of development, fueled by renewable energy subsidies and federal tax credits. In most states, biomass power is subsidized along with solar and wind as green, renewable energy, and biomass plant developers routinely tell host communities that biomass power is “clean energy”.

But this first-ever detailed analysis of the bioenergy industry reveals that the rebooted industry is still a major polluter. Comparison of permits from modern coal, biomass, and gas plants shows that a even the “cleanest” biomass plants can emit:

> 150% the nitrogen oxides,
> 600% the volatile organic compounds,
> 190% the particulate matter, and
> 125% the carbon monoxide of a coal plant per megawatt-hour
> 800% the emissions from a natural gas plant for every major pollutant

Biomass power plants are also a danger to the climate, emitting nearly 50% more CO2 per megawatt generated than the next biggest carbon polluter, coal.

Compounding the problem, bioenergy facilities take advantage of gaping loopholes in the Clean Air Act and lax regulation by the EPA and state permitting agencies, which allow them to emit even more pollution.

Our examination of 88 air emissions permits from biomass power plants found:

  • Although biomass power plants emit more pollution than fossil fueled plants, biomass plants are given special treatment and are not held to the same emissions standards. A double standard written into the Clean Air Act allows biomass power plants to emit two and a half times more pollution 250 tons of a criteria pollutant than a coal plant where the threshold is 100 tons before being considered a “major” source that triggers protective measures under the Clean Air Act’s Prevention of Significant Deterioration (PSD) program–even though the pollutants, and their effects, are the same.
  • The biomass power industry is increasingly burning contaminated fuels, blurring the lines between renewable energy that has been portrayed as “clean,” and waste incineration. While most biomass power plants burn forest wood as fuel, the majority of the permits we reviewed also allowed burning waste wood, including construction and demolition debris.
  • EPA rules allow biomass plants to emit more heavy metals and other hazardous air pollutants (HAPs) than both coal plants and waste incinerators. An EPA rollback on regulation that allows more contaminated wastes to be burned as biomass, rather than disposed of in waste incinerators with more restrictive emissions limits on air toxics, will only increase toxic emissions from the bioenergy industry

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Biomass Electricity more polluting than coal

By Partnership for Policy Integrity  04 April 14

iomass electricity generation, a heavily subsidized form of “green” energy that relies primarily on the burning of wood, is more polluting and worse for the climate than coal, according to a new analysis of 88 pollution permits for biomass power plants in 25 states.

Trees, Trash, and Toxics: How Biomass Energy Has Become the New Coal, released this week and delivered to the U.S. Environmental Protection Agency (EPA) by the Partnership for Policy Integrity (PFPI), concludes that biomass power plants across the country are permitted to emit more pollution than comparable coal plants or commercial waste incinerators, even as they are subsidized by state and federal renewable energy dollars. It contains detailed emissions and fuel specifications for a number of facilities, including plants in California, Connecticut, Florida, Georgia, Hawaii, Kentucky, Maine, Massachusetts, New Hampshire, New York, Oregon, Pennsylvania, South Carolina, Texas, Virginia and Washington.

“The biomass power industry portrays their facilities as ‘clean,’” said Mary Booth, director of PFPI and author of the report. “But we found that even the newest biomass plants are allowed to pollute more than modern coal- and gas-fired plants, and that pollution from bioenergy is increasingly unregulated.”

The report found that biomass power is given special treatment and held to lax pollution control standards, compared to fossil-fueled power plants.

Biomass plants are dirty because they are markedly inefficient. The report found that per megawatt-hour, a biomass power plant employing “best available control technology” emits more nitrogen oxides, volatile organic compounds, particulate matter and carbon monoxide than a modern coal plant of the same size.

Almost half the facilities analyzed, however, avoided using BACT by claiming to be “minor” sources of pollution that skim under the triggering threshold for stricter pollution controls. Minor source permits are issued by the states and contain none of the protective measures required under federal air pollution permitting.

“The American Lung Association has opposed granting renewable energy subsidies for biomass combustion precisely because it is so polluting,” said Jeff Seyler, president and CEO of the American Lung Association of the Northeast. “Why we are using taxpayer dollars to subsidize power plants that are more polluting than coal?”

The analysis also found that although wood-burning power plants are often promoted as being good for the climate and carbon neutral, the low efficiency of plants means that they emit almost 50 percent more CO2 than coal per unit of energy produced. Current science shows that while emissions of CO2 from biomass burning can theoretically be offset over time by forest regrowth and other means, such offsets typically take several decades to fully compensate for the CO2 emitted during plant operation. None of the permits analyzed in the report required proof that carbon emissions would be offset.

EPA rules also allow biomass plants to emit more hazardous air pollutants than both coal plants and industrial waste incinerators, including heavy metals and dioxins. Even with these weak rules, most biomass plants avoid restrictions on the amount of toxic air pollution they can emit by claiming to be minor sources, and permits usually require little testing for proof of actual emissions. When regulated as a minor source, a facility is not required to meet any limitations on emissions of hazardous air pollutants.

The potential for biomass power plants to emit heavy metals and other air toxics is increasing, because new EPA rules allow burning more demolition debris and other contaminated wastes in biomass power plants, including, EPA says, materials that are as contaminated as coal. A majority of the facilities reviewed in the report allowed burning demolition debris and other waste wood.

“Lax regulations that allow contaminated wastes to be burned as biomass mean that communities need to protect themselves,” said Mary Booth. “They can’t count on the air permitting process to ensure that bioenergy pollution is minimized.”

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The Fall of AIG

Posted on April 5, 2014 by

2 articles below:

March 18, 2009  The Real AIG Scandal

by Eliot Spitzer slate.com

It’s not the bonuses. It’s that AIG’s counterparties are getting paid back in full.

Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars? For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold.

And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already. It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

So here are several questions that should be answered, in public, under oath, to clear the air:

  • What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
  • Was it already known who the counterparties were and what the exposure was for each of the counterparties?
  • What did Goldman, and all the other counterparties, know about AIG’s financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn’t they bear a percentage of the risk of failure of their own counterparty?
  • What is the deeper relationship between Goldman and AIG? Didn’t they almost merge a few years ago but did not because Goldman couldn’t get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG’s business model was not to pay on insurance it had issued.
  • Why weren’t the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.

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Joseph Cassano: the man with the trillion-dollar price on his head

May 17, 2009.  Tim Rayment. Sunday Times.

The furor over bonuses is a convenient distraction from the real causes of the crisis, which go to the heart of how the world is run.

There is dishonesty in this collapse, on a scale that is almost too vast to comprehend.

There are conflicts of interest in American finance and politics that make our own, dear House of Lords look like beginners.

There are frauds so large, and so long-standing, that it can be hard to see them for what they are.

And all these things were allowed to thrive in an intellectual atmosphere that tolerated no dissent.

The official version is that Cassano gambled and lost.

But the official version overlooks many things, including episodes of fraud at AIG that go back at least 15 years. It fails to explain why Public Enemy No 1 was allowed to leave the company on generous terms, with a retainer of $1m a month and up to $34m in bonuses. And it does nothing to tell us why other big companies, whose profits looked as smooth and certain as AIG’s in the good times, are also fighting for survival.

Christopher Whalen, managing director of Institutional Risk Analytics, an expert on banking who has testified before Congress, believes that at some point between 2002 and 2004, AIG concluded that the game was up, and that “…Cassano was trying to cover up a wounded, dying beast. Was he doubling up, to try and hit a home run and save the house? It looks like it, because otherwise it was just greed on his part, and he was writing as much of this crap as he could to inflate his bonus.

If Whalen is right, the implications are profound. Any bank that thought it was protected by credit-default swaps with AIG would have been exposed from the start, putting taxpayers at risk. The banks’ credit traders would — or should — have realised that AIG was never likely to pay out. “The key point that neither the public, the Fed nor the Treasury seems to understand,” says Whalen, “is that the CDS contracts written by AIG were shams, with no correlation between fees paid and the risk assumed. These were not valid contracts but acts to manipulate the capital positions and earnings of financial companies around the world.

For the world to go truly insane, leading to what the Bank of England has called “possibly the largest crisis of its kind in human history”, two things are needed. The first is the intellectual capture of the Establishment, so that everyone — politicians such as Gordon Brown, regulators such as the SEC and the FSA, and academic and media commentators — is persuaded that a new way of thinking is in the public interest. The second step is when vested interests exploit the intellectual capture and take it to extremes.

That is one reason we need governments…. But our governments were mesmerised by our bankers. “From 1973 to 1985,” says Simon Johnson, a former chief economist at the IMF, “the financial sector never earned more than 16% of [US] corporate profits. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%.” The whole point of financial companies is to allocate your savings to those who can use the money best. If they are taking 41% of the profit in an economy, something is out of balance. These figures reveal an enormous transfer of wealth.

AIG posted the biggest quarterly loss in corporate  history: $61.7 billion. But by now, the company’s problems were the property of the American taxpayer, creating extraordinary new conflicts of interest. Hank Paulson, the Treasury secretary in the outgoing Bush administration, was an ex-CEO of Goldman Sachs. He received tax benefits of about $200m for taking on a government role. When the US decided to bail out AIG, the chief beneficiary of the rescue was? Goldman Sachs, which received $12.9 billion of public funds via the insurer. AIG tried to keep secret its payments to Goldman Sachs and others, somehow imagining you could have $182.5 billion of taxpayers’ money and not say how you were using it. And so the task facing Obama is even greater than we imagine.

Intellectually, the president might see what is required, but execution still depends on the very club that helped bring about the collapse in the first place.

“It is not outright fraud that has caused the most damage to the market,” says Tim Freestone, the analyst first to see AIG’s troubles. “It is the suppression of information, wittingly or unwittingly, by most of the market’s players.” A rush to regulation is not the answer, he adds: each new rule creates a minimum target for compliance, with unintended results. The challenge is to confront the keiretsu, the interlocking relationships that give insiders such an advantage.

Bankers and politicians like to blame the catastrophe on this or that cause, which swelled into a tsunami nobody could have foreseen. But as Simon Johnson points out, each reason — light regulation, cheap money, the promotion of homeownership — has something in common. “Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.

“There is no need to have an overt conspiracy, or to be incompetent,” says a thoughtful internet poster called Anonymous Jones. “Unfortunately, those ultimately bearing the risk — savers, taxpayers — did not have as strong a personal incentive to keep watch over the system, and those in charge of the financial sector ran roughshod over the entire enterprise, extracting profits far in excess of any value generated by their actions. When there are enormous incentives for each participant to cheat, the efficiency of any market breaks down.

This is Joseph Cassano. He is the multimillionaire trader accused of bringing down the insurance giant AIG — and with it the world’s economy. So is he a criminal, an incompetent or a scapegoat?

They were frightened for a long time, then suddenly they were angry. For millions of Americans, anxiety about a jobless, debt-laden future turned to disbelief when it emerged that AIG, the company at the centre of the world’s financial crisis, was handing out £300m in bonuses. It was the superpower’s Sir Fred moment. Just as Britain reacted with fury to the disclosure that Sir Fred Goodwin’s pension pot had been doubled as his bank neared collapse, so the US was shocked. The death threats came soon after. “I want them dead!” said one of a stream of messages that caused AIG staff to travel in pairs, park in well-lit areas, and dial 911 if followed. “I want their spouses dead! I want their children dead! I want their children’s children dead! I want the earth upon which they have walked salted so nothing will ever grow again!

This was one of the greatest bailouts in history, after the biggest corporate loss in history, during the most serious challenge to world stability since the 1962 Cuban missile crisis. And here was AIG, the recipient of so much taxpayers’ money that the cheques exceed the value of the gold reserves in Fort Knox, paying bonuses to the very people who engineered the catastrophe.

Protesters toured the posh houses on Long Island Sound, an estuary northeast of New York City, with letters for AIG executives describing the plight of homeowners. But they were in the wrong place. Because the man who knows most about AIG’s troubles lives in a stucco-fronted house 3,000 miles away. Some call him Patient Zero: the virus that infected the world financial system was transmitted from a genteel square near Harrods. If you wait patiently in Knights-bridge you will see him, and he appears not to be a risk-taking type. He puts on his red crash helmet and cycles greenly off across the city, politely declining to comment on global calamities. This does not look like a person waiting at the curtains for the arrival of the FBI.

Can one man in London really be to blame for the collapse of capitalism?

Until now, the economic crisis has been seen as a giant intellectual error, and AIG’s multimillionaire employees in England were simply the people who made the biggest mistakes. The first to own up to misjudgment was Gordon Brown’s friend Alan Greenspan — once so revered in his role as America’s central banker that to be photographed with him was as flattering as being seen now with President Obama. “I have found a flaw,” said Greenspan, referring to his free-market philosophy, after the banks started falling over. “I don’t know how significant or permanent it is. But I have been very distressed by that fact.

Others have repeated this innocent-sounding explanation for the wrecking of so many lives. “There is no fail-safe way to offset this human tendency to collective error,” says Lord Turner, chairman of the Financial Services Authority (FSA). And it is true, of course. Now and again, historical forces come together in a way that is mutually reinforcing, and individual changes that are powerful in themselves become so strong that their effects are wrongly seen as permanent. If 150m people — 2Å times the British population — stop tilling the land and start making things, as happened in China between 1999 and 2005; if the Chinese recycle their export earnings into cheap credit; if interest rates stay low for reasons that seem important at the time (the millennium bug, the tech-stocks crash, 9/11); if new ideas allow you to spread financial risk? well, by now you know the explanations. It became easy to imagine that the world was growing rich because we understood the universe better than our ancestors, until we didn’t.

There is, however, an alternative reading. This says that the furore over bonuses is a convenient distraction from the real causes of the crisis, which go to the heart of how the world is run. There is dishonesty in this collapse, on a scale that is almost too vast to comprehend. There are conflicts of interest in American finance and politics that make our own, dear House of Lords look like beginners. There are frauds so large, and so long-standing, that it can be hard to see them for what they are. And all these things were allowed to thrive in an intellectual atmosphere that tolerated no dissent. This reading is optimistic for those who believe in free markets, even if it is pessimistic for the US. “Capitalism has not failed,” says Bernard-Henri Lévy, the French philo-sopher. “We have failed capitalism.” The thesis can be tested through Patient Zero.

The official version is that Joseph Cassano, who occupies the stucco-fronted house near Harrods, brought down a safe and stable company — and by extension, the world — with incompetent gambles. “You’ve got a company, AIG, which used to be just a regular old insurance company,” Obama explained during a recent TV appearance. “Then they decided — some smart person decided — let’s put a hedge fund on top of the insurance comp-any, and let’s sell these derivative products to banks all around the world.” Ben Bernanke, the chairman of the Federal Reserve, adds: “This was a hedge fund, basically, that was attached to a large and stable insurance company.

Cassano, who ran AIG’s financial-products division in London, “almost single-handedly is responsible for bringing AIG down and by reference the economy of this country”, says Jackie Speier, a US representative. “They basically took people’s hard-earned money, gambled it and lost everything. And he must be held accountable for the dereliction of his duty, and for the havoc he’s wrought on America. I don’t think the American people will be content, nor will I, until we hear the click of the handcuffs on his wrists.

This account is as satisfying as it is easy to understand. It treats the blowing up of the world financial system like a global version of Barings, the bank that collapsed in 1995, with Cassano in the role of Nick Leeson. Operating from the fifth floor of a polished white stone building in Mayfair, Cassano’s unit sold billions of pounds of derivatives called credit-default swaps (CDS), allowing banks to buy risky debt without attracting the attention of regulators. AIG took the fees, but did not have the money to pay up if the loans went bad. By the time the music stopped, European banks had protected more than $300 billion of debt with this bogus “insurance”. And that is just one corner of a web of risk extending to over 1,500 big corporations, banks and hedge funds. In a 21-page paper known as the Mutually Assured Destruction memo, AIG claims that if the bailouts stop and the company is allowed to go bust, it will take the world with it. Cassano must have played with handcuffs as a child: he is the son of a Brooklyn cop. Now he waits for the fallout.

But the official version overlooks many things, including episodes of fraud at AIG that go back at least 15 years. It fails to explain why Public Enemy No 1 was allowed to leave the company on generous terms, with a retainer of $1m a month and up to $34m (£23m) in bonuses. And it does nothing to tell us why other big companies, whose profits looked as smooth and certain as AIG’s in the good times, are also fighting for survival.

When Forbes published its first list of the world’s biggest companies in 2004, AIG ranked third, after Citigroup, the dying bank, and General Electric, the industrial giant now drowning in its own debt. If you can think of a risk to insure, AIG was there: the company even made plans to survive a nuclear holocaust. It was built into a behemoth by one of the 20th century’s corporate titans, Hank Greenberg. Less famous than the other insurance legend, Warren Buffett, Greenberg gave shareholders a return of 14% a year, and was equally loved. “I just think you are the most stupendous, unbelievable person in the entire industry, the entire world,” one investor told an annual meeting, without irony.

But Greenberg faced a problem. Insurance is not like iPods, where if you invent the market, growth comes fast. Over time, it performs in line with the economy. In 1987 he found an answer: AIG would enter a joint venture with Howard Sosin, a pioneer in the new “Frankenfinance” of derivatives trading. You can thank Sir Isaac Newton for Frankenfinance. By showing in the 17th century that the universe conforms to natural laws, he encouraged our age to see money as a branch of physics. Starting in 1952, two generations of economists worked to show that people are like molecules, whose behaviour can be predicted in ways that are stable over time. Science then infected everything, from how much capital banks need to protect themselves against insolvency, to the risk in credit-default swaps. But there was a flaw: the City’s faux physicists never go back far enough in their analysis, because the data on the Bloomberg terminal cover a tiny period of history. “Real scientists tend to be much more sceptical about their data and their models,” says William Janeway, an MD of the private-equity firm Warburg Pincus and a Cambridge University lecturer. “They had all of the maths, but none of the instincts of good scientists.” There is also the 4×4 effect: if you give people a safer car (read, a safer world through financial innovation), they tend to drive faster. But we are getting ahead of ourselves.

To start with, AIG trod carefully in the new, scientific universe. Sosin’s idea was to buy financial risk from people who did not want it, then sell the risk to others in a series of “hedges” so that AIG kept the fees but not the risk. If a big organisation wanted to lock in an interest rate, for example, AIG would promise to pay the difference in costs if rates rose, then pass the risk to other parties in separate contracts. Sosin supplied the nerds and the models, AIG supplied the reassurance of its AAA rating, and for a long time the alchemy worked. AIG Financial Products (AIGFP), a unit with 0.3% of AIG’s 116,000 employees, made over $1 billion in profits between 1987 and 1992, a vast sum at the time. But Sosin left. And so did his successor, a mathematician named Tom Savage. When Savage departed in 2001, Greenberg put in charge a man he saw as “smart, tough and aggressive”: the unit’s chief operating officer, Joseph Cassano. The new leader had no background in Frankenfinance; his degree, from Brooklyn College, was in political science. The cop’s kid had ascended through what is called the “back office”: his expertise was in supervising the contracts and running the lawyers and accountants. This did not matter, Greenberg thought. Underlings had the right maths, and besides, Greenberg’s AIG held everyone, Cassano included, to account. The London team would be scrutinised. Which was just as well, as the huge intellectual error meant nobody else was in charge. “Why did no-one see it coming?” asked the Queen last November, on a visit to the London School of Economics. Well, they did, ma’am. Charles Bowsher, head of the US government’s General Accounting Office, testified as long ago as 1994 that “the sudden failure or abrupt withdrawal from trading” of large dealers in derivatives “could cause liquidity problems in the markets and could also pose risks to others, including? the financial system as a whole”. It took another 13 years, but that is exactly what happened.

One regulator tried to act on Bowsher’s warning, but she was silenced. Brooksley Born, who monitored the futures markets, tried to extend her remit to unregulated derivatives. Alan Greenspan and Robert Rubin, the then Treasury secretary, persuaded Congress to freeze her already limited power, forcing her departure. Rubin had come into government from Goldman Sachs; when he left he went back to banking, and pushed for Citigroup to step up its trading of risky, mortgage-related investments. For his advice, he earned over $126m (£84m) and then, as Citigroup collapsed, became an adviser to Barack Obama. After Greenspan stepped down from the US central bank in 2006, he became a consultant to Pimco, the world’s biggest bond fund, where his insights have been praised by his boss. “He’s made and saved billions of dollars for Pimco already,” said Bill Gross last year. Greenspan is also an adviser to Paulson & Co, a hedge-fund group that has made billions from the collapse in American housing.

The lightness of touch reached a level that defies belief. America has an Office of Risk Assessment, set up in 2004 to co-ordinate risk management for the main regulator, the Securities and Exchange Commission (SEC). Jonathan Sokobin, its director, says it is charged with “understanding how financial markets are changing, to identify potential and existing risks at regulated and unregulated entities”. According to its website, it also helps to “anticipate, identify and manage risks, focusing on early identification of new or resurgent forms of fraud and illegal or questionable activities? across the corporate and financial sector”. By early 2008, this office was reduced to a staff of one. “When that gentleman would go home at night,” says Lynn Turner, the SEC’s former chief accountant, “he could turn the lights out. We had gotten down to just one person at the SEC responsible for identifying the risk at all the institutions.” The $596-trillion market in unregulated derivatives, including $58 trillion in credit-default swaps, was being watched by one person. That’s when he wasn’t looking at the rest of the corporate world, of course.

We are in a hotel in London, sitting on cracked red leather sofas. The interview is with one of the finest analysts of financial statements on the planet. Where you or I see pages of numbers, he sees a narrative. Sometimes the theme is a company’s potential for growth. Sometimes it is the prospect of self-destruction. And at times the story does not make sense, because the figures are hiding a fraud. Charles Ortel, managing director of Newport Value Partners — a firm that provides research to professional investors — is explaining the potential for fraud in insurance. Insurers share their big risks with others. Imagine it is September 12, 2001, and you get a report on the previous day’s terrorist attacks. You don’t know your loss, because it takes time for victims to come forward and costs to be calculated. You decide it’s $12 billion and do a deal with another insurer: I will write you a cheque now for $9 billion, and we agree my liability is capped at $12 billion. If the eventual losses are higher, the second insurer will pay. In the meantime, it is free to invest the $9 billion. Insurers make much of their money from investing premiums while they wait for a claim.

The second insurer can book some of the $9 billion as income. It shouldn’t, because it is exposed to risk. But there’s flexibility in how the numbers can be treated. If the second insurer is not having a good year, the flexibility creates the temptation to book phantom earnings, illegally supporting the share price. In the past, AIG has admitted episodes of improper accounting.

One question has not been answered. Was Cassano’s team simply the dumbest in the room, betting on an ever-rising housing market against the likes of Goldman Sachs? Or was the world financial system brought down by fraud — a fraud made possible by the gradual but relentless takeover of public life by the insiders’ club of finance?

In 2001, with AIG trading at $85 on the New York Stock Exchange, The Economist decided to commission some research on the company’s true value, and chose the little-known firm Seabury Analytic to do it. This was deliberate. The magazine’s New York bureau chief, Tom Easton, had been around long enough to know that nobody on Wall Street ever says “sell”, except perhaps when a market is about to go up, and that the big security firms could not be trusted to give a candid view of AIG.

The research, which took five months, was the work of a team led by Tim Freestone, who is speaking here for the first time. Most analysts are upbeat: their colleagues’ bonuses depend on fees from the company under scrutiny. But Freestone’s firm (now called Crisis Economics) is independent. He judged that AIG was highly overvalued, and he would later realise that its shares were supported by an ability to stifle criticism. In his report for The Economist, however, he was tactful. To justify the share price, he said, “it would have to grow about 63% faster than [its] peers for the next 25 years. If investors believe that AIG can sustain this type of performance for that period of time, then AIG is properly valued”. Any investor who believed that would need to be certified.

After the article came out, researchers from the big banks contacted him, incredulous that he had dug deeper than the industry norm and dared to release the findings. They seemed to be in awe, and at the same time jealous; nobody breaks the rules like this — not without paying a price. A delegation from AIG arrived at his office and presented him with a letter that seemed to renounce the story and to condemn its distortion of his research. He was intrigued to see the author’s name at the end of the letter — why, it was his name, and the AIG contingent was awaiting his signature. The company also sent its executives on a private plane to The Economist headquarters in London to demand a retraction. Legal threats followed.

“I assumed AIG was attempting to railroad us out of business,” says Freestone, who did not sign.

Greenberg was forceful when it came to his share price. He was often on the phone to Richard Grasso, the head of the New York Stock Exchange, with expletive-laden threats to move AIG to the Nasdaq unless the exchange did a better job. Grasso would then be seen on the floor of the exchange, talking to the market-maker for the stock. Grasso says he never asked the market-maker to bid the shares higher, which is just as well: both men could have gone to jail.

What does all this have to do with Joseph Cassano? Seabury Analytic’s research suggests that when Cassano took over the Frankenfinance unit, the parent company was in trouble. “Its ‘distance to default’ was much closer than anyone realised,” says Freestone, whose models would later identify AIG and three peers — Lehman Brothers, Merrill Lynch and Bear Stearns — as insolvent when the markets saw everything as fine. He is not alone in his view. Another authority believes that as the man in Mayfair wrote his credit-default swaps, AIG was already doomed. “AIG’s foray into CDS was really the grand finale,” says Christopher Whalen, managing director of Institutional Risk Analytics, an expert on banking who has testified before Congress. Towards the end, it looked much like a Ponzi scheme, “yet the Obama administration still thinks of AIG as a real company that simply took excessive risks”. In other words, there was never a chance AIG would honour its contracts: its income was nowhere near enough to cover the payouts.

Whalen has a reputation to protect: he is global risk editor of The International Economy magazine, co-founder of the Herbert Gold Society, a group of current and former employees of the US Treasury and the Federal Reserve, and regional director of the Professional Risk Managers’ International Association. His assertion is not an impulse. It comes from months of talking to forensic specialists such as Freestone, insurance regulators “and members of the law-enforcement community focused on financial fraud”.

As evidence of dishonesty, Whalen points to AIG’s occasional habit of using secret agreements to falsify financial statements — either its own or those of other companies. In 2005, a former senior executive at the insurer General Re pleaded guilty to a conspiracy to misstate AIG’s finances, after General Re paid $500m in premiums for AIG to reinsure a nonexistent $500m risk. The transaction was a sham; the only economic benefit to either party was the $5.2m fee paid by AIG for Gen Re’s help.

When the $500m in loss reserves were added to AIG’s balance sheet in 2000 and 2001, Greenberg was able to claim an increase in reserves, when in fact they had declined. “They’ll find ways to cook the books, won’t they?” John Houldsworth, the former executive, said in a recorded phone conversation with Elizabeth Monrad, his chief financial officer. She observed that “these deals are a little bit like morphine; it’s very hard to come off of them”.

Similarly, in 2003 AIG was fined $10m for helping a telecoms company, Brightpoint, hide $11.9m in losses with a “non-traditional” insurance product that AIG offered for “income statement smoothing”. Brightpoint paid $15m in premiums, and AIG refunded $11.9m in fake insurance claims. The ruse allowed Brightpoint to spread its loss over three years, overstating its 1998 net income by 61%. And in 2005, AIG restated five years of financial statements, admitting that they had exaggerated its income by $3.9 billion.

Whalen believes that at some point between 2002 and 2004, AIG concluded that the game was up for secret agreements, and that other methods of enhancing revenue were needed. “The thing I haven’t satisfactorily answered,” Whalen adds, “is whether AIG was so unstable coming out of 2000, 2001, that Cassano was trying to cover up a wounded, dying beast. Was he doubling up, to try and hit a home run and save the house? It looks like it, because otherwise it was just greed on his part, and he was writing as much of this crap as he could to inflate his bonus.” If he is right, the implications are profound. Any bank that thought it was protected by credit-default swaps with AIG would have been exposed from the start, putting taxpayers at risk. The banks’ credit traders would — or should — have realised that AIG was never likely to pay out. “The key point that neither the public, the Fed nor the Treasury seems to understand,” says Whalen, “is that the CDS contracts written by AIG were shams, with no correlation between fees paid and the risk assumed. These were not valid contracts but acts to manipulate the capital positions and earnings of financial companies around the world.

The investigation into the General Re affair prompted AIG to oust Greenberg in 2005. He has always denied wrongdoing. In fact, he is suing AIG, claiming his successors abandoned risk controls and destroyed the firm. The old man’s departure meant the brakes were off for Cassano; the new CEO, Martin Sullivan, had risen through the “property and casualty” side of the business. As he is fond of pointing out, he is not an accountant. Who would scrutinise the financial-products team now? The pace of CDS deals suddenly accelerated, until Cassano halted them for ever, all in the space of a few months. He had realised that sub-prime mortgages accounted for an increasing proportion of his trades, and that the underwriting standards were shocking. No model, however carefully constructed, can protect you from that. It was too late: the bomb on AIG’s books was ticking.

For the world to go truly insane, leading to what the Bank of England has called “possibly the largest crisis of its kind in human history”, two things are needed. The first is the intellectual capture of the Establishment, so that everyone — politicians such as Gordon Brown, regulators such as the SEC and the FSA, and academic and media commentators — is persuaded that a new way of thinking is in the public interest. The second step is when vested interests exploit the intellectual capture and take it to extremes.

Alpha males such as Cassano push at boundaries. You could say it is their evolutionary purpose. That is one reason we need governments, to protect us when male ambition reaches too far. But our governments were mesmerised by our bankers. “From 1973 to 1985,” says Simon Johnson, a former chief economist at the IMF, “the financial sector never earned more than 16% of [US] corporate profits. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%.” The whole point of financial companies is to allocate your savings to those who can use the money best. If they are taking 41% of the profit in an economy, something is out of balance. These figures reveal an enormous transfer of wealth.

Which brings us back to bonuses. In August 2007, as the financial crisis broke, Cassano claimed everything was fine. “It is hard for us, and without being flippant, to even see a scenario, within any kind of realm or reason, that would see us losing $1 in any of those transactions,” he told investors, as his CEO listened in on the call. But it seemed to be a different story inside AIG. The company had hired Joseph St Denis, a former SEC official, as part of an effort to improve its internal controls. Cassano shut him out. “I have deliberately excluded you from the valuation of the super seniors [a type of debt] because I was concerned that you would pollute the process,” St Denis recalls Cassano saying. The auditor resigned in protest, yet the minutes of AIG’s audit committee show no sign of concern.

In the final three months of 2007, AIG lost over $5 billion. Under the terms of the bonus scheme, top executives should have had their pay cut for poor performance. When the compensation committee met in March 2008 to award bonuses, however, the Essex-born CEO urged it to ignore the losses. The board approved the change, even though losses were growing by the month, and Sullivan pocketed $5.4m. He was also awarded a golden parachute worth $15m. He was out of the company three months later, with a severance package worth $47m (£31m). That is $39,500 (£26,000) for every day he was in charge. Pension funds and other savers holding AIG shares lost $58.4m (£39m) a day during his tenure.

In seven years, the 400 employees in Cassano’s division were paid $3.5 billion. Cassano received $280m. When the losses became public, AIG parted company with him immediately. But he wasn’t fired: he “retired”, with a contract paying him $1m a month for nine months, and protecting his right to further bonus payments. “Joe has been a very valuable member of the AIGFP senior management team for over 20 years,” said Sullivan, who was soon to leave the scene himself. “He has had a great career with us, and we wish him the very best in the future.

Cassano’s division then imploded. As house prices fell, credit ratings were cut and bankers began to panic, AIG posted the biggest quarterly loss in corporate history: $61.7 billion. This is equivalent to losing $28m an hour, every hour, for the final three months of 2008. But by now, the company’s problems were the property of the American taxpayer, creating extraordinary new conflicts of interest. Hank Paulson, the Treasury secretary in the outgoing Bush administration, was an ex-CEO of Goldman Sachs. He received tax benefits of about $200m for taking on a government role. When the US decided to bail out AIG, the chief beneficiary of the rescue was? Goldman Sachs, which received $12.9 billion of public funds via the insurer. The new CEO, Edward Liddy, whose task is to wind down the company and to close $1.6 trillion in trades that are still outstanding from the Cassano era, is ex-Goldman Sachs. He even has $3.2m in the bank’s shares.

AIG tried to keep secret its payments to Goldman Sachs and others, somehow imagining you could have $182.5 billion of taxpayers’ money and not say how you were using it. And so the task facing Obama is even greater than we imagine. Intellectually, the president might see what is required, but execution still depends on the very club that helped bring about the collapse in the first place. “It is not outright fraud that has caused the most damage to the market,” says Tim Freestone, the analyst first to see AIG’s troubles. “It is the suppression of information, wittingly or unwittingly, by most of the market’s players.” A rush to regulation is not the answer, he adds: each new rule creates a minimum target for compliance, with unintended results. The challenge is to confront the keiretsu, the interlocking relationships that give insiders such an advantage.

Bankers and politicians like to blame the catastrophe on this or that cause, which swelled into a tsunami nobody could have foreseen. But as Simon Johnson points out, each reason — light regulation, cheap money, the promotion of homeownership — has something in common. “Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.

AIG’s early trades showed genuine brilliance; their later CDS deals, many of which were not even “hedged”, were as foolish as can be. Was it fraud? Yes, in the widest sense — but it was fraud as wilful ignorance, in which a whole industry is based on false assumptions, and each participant has little reason to question the system as long as it continues to make him rich. “There is no need to have an overt conspiracy, or to be incompetent,” says a thoughtful internet poster called Anonymous Jones. “Unfortunately, those ultimately bearing the risk — savers, taxpayers — did not have as strong a personal incentive to keep watch over the system, and those in charge of the financial sector ran roughshod over the entire enterprise, extracting profits far in excess of any value generated by their actions. When there are enormous incentives for each participant to cheat, the efficiency of any market breaks down.

In recent weeks, Cassano has grown a beard and changed his crash helmet, which is no longer red but silver. The disguise might not be enough; prosecutors are said to be close to criminal charges. They think he misled investors, an easier case to make than that of knowingly risking the financial system. “To date, neither AIG nor AIGFP is aware of any fraud or malfeasance in connection with the underwriting and creation of the multi-sector CDS portfolio,” says AIG, referring to the trades under scrutiny, “as opposed to what, with hindsight, turned out to be bad business decisions.

If they were bad decisions, they had a context. “Once people who push boundaries understand that the police don’t want to issue tickets,” says Charles Ortel, “they start pushing. ‘If you’re not going to arrest me for going 10 miles over the speed limit, well, I’ll try 20. If I can do 20, I’ll try 30. And then I’ll try flying a plane on a road.’”

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Unemployment

Posted on April 5, 2014 by

The Eternal Depression

Oct 2009. Bill Bonner. DailyReckoning.

Yesterday, we were calculating how long it would take to get the jobless number back down to ’90s levels…that is, around 5%.

There are now about 131 million jobs in the United States…and about 15 million people who would like a job but can’t find one.

Meanwhile, population growth adds about 1.5 million new workers every year.That means the economy has to grow at 1% (in real terms) just to stay even with population growth.

Currently, the economy is going in the wrong direction – backwards. It’s losing jobs…maybe 3 million this year…and maybe another 2 million or so before it finally stabilizes (who knows?)…for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let’s suppose, by some miracle, the economy turns around…and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half – 1.5 million – gradually reduce unemployment. Now, let’s get out the calculator…20 million divided by 1.5 million equals a little more than 13.

By these numbers you can expect full employment again in 2022!

But what if the economy doesn’t grow at 3% per year?

Ooooh…that’s the problem, isn’t it? All the feds – and practically all other economists too – are projecting a return to normal. They expect a ‘recovery.’ But what if there never is a recovery?

Economy Falling Years Behind Full Speed

April 6, 2009. Louis Uchitelle. New York Times.

As the recession grinds on, more and more of the nation’s means of production — its workers, its factories, its retail outlets, its freight lines, its bank lending, even its new inventions — are being mothballed.

This idled capacity, like baseball players after a winter off, takes time to bring back into robust use. So even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.

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Miscellaneous Advice

Posted on April 5, 2014 by

oildrum comment on how to spend time & assets

Based on your age, we recommend on a weekly basis:
hrs/week
40  job
10  building or training around self sufficiency
4  recreation
8  local group activitives

And for your assets:
25%  productive land
5%  livestock
5%  bullion
5%  long term storage food
5%  storable energy (firewood, diesel fuel, solar panels, etc..)
10% of assets in tools
45% in cash

Take Care of Yourself – Entitlements, Savings will vanish, back to tribe and family

Comment about Crash Course Chapter 15 Demographics

Davy: Entitlements are the least of our worries at this point. Just like pensions and stock portfolios, these abstractions are nothing more than an illusion of wealth. When the descent gathers steam the value of these paper assets will evaporate. Liabilities will evaporate as individuals and business close their doors. There is no way to tell the degree or duration of this potential descent but we can say there is severe imbalances, stresses, and pressures. In today’s market with today’s inflated values, the leverage, and the counterparty risk from rehypothocation any contraction will cause serious risk. When the margin calls go out and the market gets flooded with liquidating assets I imagine we will see a herd rushing the door. The problem is a rushing herd cannot get through a door so we will see paralysis from frozen markets and low liquidity from nervous creditors. The central banks have no tools anymore that is plain now. Diminishing returns to the effectiveness of these tools were hit 4 years ago. Now these tools are a liability. They have no clue how to unwind these market distorting positions. These positions are just so large relative to the real economy it is mind-boggling. The entitlements in the post BAU world will be at the level of the family, tribe, and small community through the gift economy. Large abstract plans for the care of the old will be meaningless. Care for the old will be through the family. Not only that but old will change relative to a post BAU decrease in lifespans. I am in my 50’s and do not expect the opportunities to live to my 80’s like my older generation. I may make it but odds are mid 60’s is more realistic. By the way, I am taking care of myself for these reasons.

Benefit From Being A Baby Boomer

Nathan Lewis   January 8, 2009

Move into a big house with all your friends and share expenses, housekeepers, etc.

Brown, Jeffrey, J. 8 Aug 2011. The ELP Plan: Economize; localize & produce

I would especially recommend that you consider buying, perhaps with a joint venture group, a small farm, either currently organic, or that can be converted to an organic farm. In the short term, if nothing else you could lease it out to an organic farmer. Longer term, you might consider building or moving a prefab, small energy efficient house to the farm. If nothing else, this plan may provide a place of work for your unemployed college graduate.

I think that “Tiny Houses” will become more popular, as larger homes are no longer viable. Where there are jobs nearby, many McMansions could be subdivided, but absent local job centers, I expect large swaths of American suburbia to be essentially abandoned. As Jim Kunstler warned, American suburbs represent the “Worst misallocation of capital in the history of the world.”

Very small (250 square feet or so), highly energy efficient, perhaps prefabricated housing makes a lot of sense, and this may become a growth sector.

Jeffrey J. Brown recently agreed to join ASPO-USA’s advisory board. He is a graduate of Texas A&M University, and he is a licensed Professional Geoscientist in the State of Texas. Mr. Brown has written and coauthored several articles on Peak Oil related topics, with a special emphasis on global net oil export capacity

How to invest for a global-debt-bomb explosion. Prepare for an apocalyptic anarchy ending Wall Street’s toxic capitalism

Feb 9, 2010   Paul B. Farrell    Marketwatch.com

Here’s how these savvy Insiders are preparing: In his 2008 best-seller, “Wealth, War and Wisdom,” hedge fund manager Barton Biggs, advised rich insiders to expect the “possibility of a breakdown of the civilized infrastructure.” His advice: Make tons of money. Buy an isolated farm in the mountains. Protect family against the barbarians: “Your safe haven must be self-sufficient and capable of growing some kind of food … It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc.  And when the barbarians do come, firing “a few rounds over the approaching brigands’ heads would probably be a compelling persuader that there are easier farms to pillage.” Imagine a scene like Port-au-Prince after the quake.

In an early 2009 Newsweek article he said, “A Generation of Destruction: Throwing money at the problem and propping up greedy banks is like trying to put out a fire by pouring gasoline on it,” Biggs teased us with a bleak scenario: “Great cycles of wealth creation have usually lasted about two generations, or 60 years. Inevitably, unequal riches corrupt and create envy, and they are always followed by a generation of enormous wealth destruction.”

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Education

Posted on April 5, 2014 by

Jan 14, 2008  DISARRAY  by James Howard Kunstler

We’d better prepare psychologically to downscale all institutions, including government, schools and colleges, corporations, and hospitals. All the centralizing tendencies and gigantification of the past half-century will have to be reversed. Government will be starved for revenue and impotent at the higher scale. The centralized high schools all over the nation will prove to be our most frustrating mis-investment. We will probably have to replace them with some form of home-schooling that is allowed to aggregate into neighborhood units. A lot of colleges, public and private, will fail as higher ed ceases to be a “consumer” activity. Corporations scaled to operate globally are not going to make it. This includes probably all national chain “big box” operations. It will have to be replaced by small local and regional business. We’ll have to reopen many of the small town hospitals that were shuttered in recent years, and open many new local clinic-style health-care operations as part of the greater reform of American medicine.

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Transportation

Posted on April 5, 2014 by

Jan 14, 2008  DISARRAY  by James Howard Kunstler

Stop all highway-building altogether. Instead, direct public money into repairing railroad rights-of-way. Put together public-private partnerships for running passenger rail between American cities and towns in between. If Amtrak is unacceptable, get rid of it and set up a new management system. At the same time, begin planning comprehensive regional light-rail and streetcar operations.

Begin planning and construction of waterfront and harbor facilities for commerce: piers, warehouses, ship-and-boatyards, and accommodations for sailors. This is especially important along the Ohio-Mississippi system and the Great Lakes.

In cities and towns, change regulations that mandate the accommodation of cars. Direct all new development to the finest grain, scaled to walkability. This essentially means making the individual building lot the basic increment of redevelopment, not multi-acre “projects.” Get rid of any parking requirements for property development. Institute “locational taxation” based on proximity to the center of town and not on the size, character, or putative value of the building itself. Put in effect a ban on buildings in excess of seven stories. Begin planning for district or neighborhood heating installations and solar, wind, and hydro-electric generation wherever possible on a small-scale network basis.

Posted in Transportation What To Do | Comments Off on Transportation

Oil, The Final Warning

Posted on April 4, 2014 by

OIL: THE FINAL WARNING

June 25, 2008. Ian Sample. New Scientist (pg. 32)

Howls of protest have been echoing round the globe as the price of oil punches through record highs with every passing week. In the UK, last month, hundreds of truckers descended on London to demand that planned fuel tax rises be scrapped. In continental Europe , where police clashed violently with truckers, two people died during the protests. Fishermen and farmers blockaded ports and depots in protest against the rocketing cost of diesel. Similar scenes played out across South America and Asia .

In the US , the world’s thirstiest oil consumer, gasoline reached an all-time high of $4 per gallon, forcing the administration to lean on domestic producers and consider suing foreign oil exporters for allegedly rigging the market. When President Bush implored Saudi Arabia , which controls the lion’s share of the world’s proven reserves, to pump more from its wells, the Saudis came up with only a token increase.

The situation is not about to improve. Bankers Goldman Sachs and Morgan Stanley have both suggested that the crude oil price could rise from the high of $139 a barrel (as New Scientist went to press) to $200 or more, while the financial speculator George Soros predicts that rising oil prices could send the US economy into recession.

***Expensive fuel at the pumps is just the start. These battles over the price of oil could be the harbinger of something even scarier. There is a growing realization that we are teetering on the edge of an economic catastrophe which could be triggered next time there is a glitch in the world’s oil supply.***

***A number of converging forces are making such an event more likely than ever before.*** First, there is the spectacular rise in global oil consumption, which, according to the International Energy Agency (IEA) now stands at 87 million barrels of crude (about 10 billion litres) a day. Most geologists now accept we have reached, or will imminently reach, peak oil. Some fields in the US and the North Sea have been pumped dry and production is becoming increasingly concentrated within fewer countries. Add a boost from speculators betting that things will get even worse, chicanery by the Organisation of Petroleum Exporting Countries (OPEC) cartel which over the past two years has added Angola and Ecuador to its ranks to mask the decline in production of its existing members, and it’s not hard to see why prices have been forced ever upwards. But price conceals the much more complex mess we’re in.

***In the past, it has usually been possible to ride out any disruption to world oil flows — whether from accidents or hostile acts — by pumping more oil from the ground. That spare capacity has now all but vanished, as oil producers cash in on soaring prices by extracting as much of the stuff as they can. “There is absolutely no slack in the system any more,” says Gal Luft, executive director of the Institute for the Analysis of Global Security, a Washington DC-based think tank specializing in energy security. It is this lack of wriggle-room that has brought us to the brink.***

***In the days when oil producers had more leeway, they could make up for a disruption somewhere in the system by quickly raising production by around 3 million barrels a day, says Nick Butler, head of the Cambridge Centre for Energy Studies, part of the University of Cambridge’s Judge Business School. That crucial reserve capacity has now fallen below the daily output of some producers — meaning that if the taps were turned off in any one of a number of unstable oil- supplying nations, such as Nigeria, Iraq, Iran or Angola, the impact would be felt almost immediately.***

This has left the oil market so fragile that a few well-placed explosives, an energy-sapping cold winter or an unusually intense hurricane season could send shock waves across the globe. *****The potential consequences are so serious that governments are drawing up emergency plans to cope should the worst happen. According to one analyst who took part in a simulation of just such a crisis, the situation most experts fear is what they call a “psychological avalanche”.*****

***Here’s what happens. A small, distant country one day finds it can no longer import enough oil because of a spike in prices or problems with local supply. The news media whip this up into a story suggesting an oil shock is on the way, and the resulting panic buying by the public degenerates into a global grab for oil.***

*****Most industrialised countries keep an emergency reserve as a first line of defence, but in the face of worldwide panic buying this may not be enough. Countries in which the oil runs out face transport meltdown, wreaking havoc with international trade and domestic necessities such as food distribution, emergency services and daily commerce. Without oil everything stops.*****

The roots of our oil addiction can be traced back to the end of the 19th century, when petroleum began to be pumped from wells across America . It wasn’t long before it become obvious what a great transport fuel it could provide. Oil-based fuels paved the way for intensive farming and extensive road networks; they drove the influx of populations into cities, drove growth in shipping and eventually made mass air travel possible. “Oil has shaped our civilisation. Without crude oil you’d have no cars, no shipping, no planes,” says Gideon Samid, head of the Innovation Appraisal Group (IAG) at Case Western Reserve University in Ohio .

And it’s not just about fuels. A giant chemical industry relies on oil as its feedstock, and without it many of the products we now take for granted would vanish. “You’d see no plastics, no bags, no toys, no cases on TVs, computers or radios. It’s absolutely everywhere,” says Samid.

***”Much of the economic expansion and growth of the human population in the 20th century is directly tied to the availability of large amounts of cheap oil,” says Cutler Cleveland, director of the Center for Energy and Environmental Studies at Boston University.*** “There isn’t a single good or service consumed on the planet, except in rural economies, that doesn’t have oil embedded in it. Oil is the lifeblood of the global economy.”

***The secret of oil’s success is its portability and extraordinarily high energy density.*** One barrel of oil contains the energy equivalent of 46 US gallons of gasoline; burn it and it will release more than 6 billion joules of heat energy, equivalent to the amount of energy expended by five agricultural labourers working 12-hour days non-stop for a year.

The vast majority of oil is consumed by transport. In the US , that sector accounts for nearly 70 per cent of the 20.7 million barrels the country gets through each day. The chemical industry turns half of the rest into plastics, solvents and pharmaceuticals.

More than half of the world’s oil comes from seven countries, the leading supplier being Saudi Arabia , which produces more than 10 million barrels a day. Then come Russia , the US , Iran , China , Mexico and Canada . Twenty years ago, there were 15 oilfields able to supply 1 million barrels a day. Now, there are only four. The largest is the Ghawar field in Saudi Arabia .

***The IEA, which advises 27 countries on oil emergencies, requires its members to hold at least 90 days’ worth of fuel, which can be pooled and released onto the market if a crisis looms. The system last swung into action in 2005 when hurricane Katrina caused the shutdown of more than 23 per cent of the US ‘s oil production capacity. A few days after Katrina struck, the IEA ordered the release of 2 million barrels a day from reserve stocks for a month, the first time reserves had been released since the Gulf war in 1991.***

About half the world’s oil is distributed by tankers mainly plying a handful of key routes across the oceans. The rest goes through an extensive network of pipelines that can carry different grades of crude and synthetic compounds, such as lubricants. The bewildering complex of pipelines — extending 90,000 kilometres in the US alone – crosses continents and dips under oceans.

The pipelines are often above ground and vulnerable to accidental damage or attacks by saboteurs. When working, however, they provide an extremely efficient way of transporting oil. A pipeline that pumps a relatively modest 150,000 barrels per day delivers the equivalent of 750 oil tanker truck loads or one delivery every 2 minutes, day and night. Even if a pipeline is damaged, it can usually be quickly repaired. Valves at intervals along the pipe can isolate the leak while the damaged section is replaced.

Disruption can still be costly. ***A report in 2005 by a US House of Representatives subcommittee on terrorism reported that sabotage to oil pipelines in Iraq had cost the country more than $10 billion in lost revenues, even though protection had been a high priority for the coalition troops since they invaded two years before. The report suggested that groups hostile to the US and its allies were becoming increasingly expert at mounting these attacks.***

*****Choke points*****

Even outside a conflict zone, accidents can cause serious disruption. Last year, the IEA was on standby to release reserves after an explosion in Minnesota shut down part of the 5000-kilometre Enbridge pipeline, which pumps 1.9 million barrels of crude a day from Canada to the US Midwest. This single incident halted one-fifth of US oil imports for days.

Oil deliveries by sea are vulnerable too. ***A fleet of 4000 tankers plying six main routes delivers more than 43 million barrels of oil every day. Many of these routes pass through narrow “choke points”, and if any of these were to become impassable, even temporarily, the effect on oil supplies could be dramatic.***

For instance, more than 16 million barrels of oil a day are shipped through the Strait of Hormuz, at the mouth of the Persian Gulf, taking oil from Saudi Arabia, Iran, Iraq, Kuwait, Qatar and the United Arab Emirates to the US, western Europe and Asia. At its narrowest point, the strait is only 33 kilometres wide. If necessary, some of Saudi Arabia ‘s exports could be diverted through the 1200-kilometre East- West pipeline to the Red Sea , but its maximum capacity is only 5 million barrels a day, half of which is already taken up.

Between 1984 and 1987, during the Iran-Iraq war, both countries attacked tankers in the Strait of Hormuz , causing shipping to drop by 25 per cent. In 2003, the Bush administration claimed it had prevented further attacks on shipping in the strait.

Another pinch point occurs in the Strait of Malacca, which narrows to just 2.7 kilometres between Sumatra and Singapore . Tankers from the Persian Gulf and west Africa transport some 15 million barrels a day through the strait en route to Japan , China and other Pacific destinations. A report by Luft claims that some tankers have been hijacked here by would-be terrorists whose initial aim has been simply to learn how to operate them. In 2003 a small chemical tanker called Dewi Madrim was taken over by 10 armed men, who sailed it through the strait before leaving with equipment and technical documents.

***One scenario being suggested is that hijackers might commandeer a liquid natural gas tanker plying one of these shipping routes, load it with explosives and use it to ram an oil tanker. If this floating bomb produced a burning oil slick, it could render the passage impassable for months, tipping the global economy into crisis as alternative routes would fail to make up the lost supplies.***

***Another key element in the global oil infrastructure is Abqaiq, an enormous processing facility in Saudi Arabia , which removes sulphur from two-thirds of the country’s crude. The CIA estimates that seven months after a large-scale attack, output would still be only 40 per cent of its full capacity.***

***More than half the oil from Abqaiq is pumped to the largest offshore oil terminal in the world, Ras Tanura on the Persian Gulf , which handles one-tenth of the world’s oil. This makes it a prime target for attack, and the site is as heavily defended as a military base. “If you have a facility like this and a plane crashed into it, or terrorists get in and somehow succeed in blowing it up, then you have a very, very significant disruption on your hands. That is what analysts see as a doomsday scenario,” Lufts says.*** Reuters reported that one planned attack on the terminal was thwarted in 2006. Saudi oil production is particularly vulnerable because it is concentrated in a few massive production and distribution sites. “If one or two of these facilities goes down, then the entire system goes down,” says Luft.

*****So what would the impact be if oil supplies choked? In 2005, a group of current and former US government and national security officials were asked to address this in a live role-play exercise. Playing the part of the national security adviser was Robert Gates, who the following year became Secretary of Defense. The scenarios that unfolded were developed with officials from the Shell oil company in the Netherlands , a former US presidential counter-terrorism adviser and industry analysts.*****

The simulation kicked off with an upsurge of political violence in Nigeria , the fifth-largest supplier of oil to the US . In the ensuing turmoil 600,000 barrels of oil production a day were lost from the Niger delta. The violence coincided with the start of a cold winter in the northern hemisphere, which increased demand by 700,000 barrels a day. Together, these events boosted the price of a barrel of oil from $58 to $82; a proportional rise today would push the price beyond $195.

Events began to gather pace when, a month later, the simulation threw in an attack on the Haradh natural-gas processing plant in Saudi Arabia , which forced the country to cut 250,000 barrels per day from its exports — equivalent to the oil consumed every day in Switzerland – to meet domestic needs. Next, news arrived of an attempt to ram a hijacked supertanker into another vessel moored at a jetty at Ras Tanura. This was closely followed by a similar attack at the oil port of Valdez in Alaska , as well as a ground attack which set fuel depots alight. With the world oil shortfall now at 3.4 million barrels per day, the price per barrel had shot up to $123. Against the recent peak price of $139, that rise would take the cost per barrel to $295.

The turmoil leads to an aggressive crackdown on anti-western groups and their sympathisers, which temporarily quells further attacks. Then, six months into the simulation, a terrorist campaign is launched against foreign workers in Saudi Arabia , killing 200 and wounding 250 within 48 hours. Evacuation of foreign workers follows.

Though oil production continues unchecked, this loss of expertise leaves Saudi Arabia unable to meet future demand and with no spare capacity. Fears that this could lead to shortages in the future bring speculators into the market, and the price per barrel rises to $161. At the end of the simulation, global production has fallen by 3.5 million barrels a day, or 4 per cent of world oil supplies. ***One of the participants, Jim Woolsey, a former head of the CIA, described the scenarios as “relatively mild compared to what is possible”, yet this proved enough to almost triple the price of a barrel of crude.***

*****The key conclusion being drawn from this scenario is how reliant the global oil market is on Saudi Arabia ‘s ability to ramp up production on demand. If this extra oil is not available, the price rockets.***** Saudi Arabia ‘s recent reluctance to increase production and the ensuing price rises in today’s real-life oil market amply bear out this prediction.

So where does this leave us at a time when global oil production is approaching the point when it stops growing and starts to decline? Most industry experts, including geoscientists and economists, who were polled by Samid in 2007 said that peak production will occur by 2010. This contrasted with a similar survey conducted two years earlier, in which respondents were split, with many of the economists opting for a later date. “Now, a real consensus is emerging,” says Samid.

This tells us that we will have to start making serious attempts to wean ourselves off oil, and fast. It will be no easy task. “It’s hardly conceivable that the world could function without oil,” says Didier Houssin, director of oil markets and emergency preparedness at the IEA.

“It is hardly conceivable that the world could function without oil”

***Finding a replacement fuel for transport is the biggest challenge. So far all the alternatives have hit the skids. For example, hydrogen, which could potentially replace oil as a green fuel if made using renewable sources of energy, has storage and distribution problems. While biofuels, which could be an easier replacement for fossil fuels, require feedstocks that compete with food crops for water and agricultural land.*** “To get these alternatives close to what oil can do, you have to invest a lot of money,” says Cleveland, something most governments and energy companies have done reluctantly, and at pathetically low levels. “These aren’t insurmountable problems, but they suggest the transition has some formidable challenges,” he adds. One way or another oil will become more scarce, even more costly and will always have the disadvantage of generating carbon dioxide when it’s burned. However hard it may be, the sooner we make the break, the better.

Ian Sample is science correspondent for The Guardian newspaper in London

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