What price for the new democracy? Goldman Sachs conquers Europe

While ordinary people fret about austerity and jobs, the eurozone's corridors of power have been undergoing a remarkable transformation

The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.

This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank's alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund's European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as "the Vampire Squid", and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman's interests are intricately tied up with the answer to that question.

Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren't "bought and paid for" by corporations, as in the US, he says. "Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions."

This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

Mr Monti is one of Italy's most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him. First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman's bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury's committee on the banking and financial system, which set the country's financial policies.

With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank's two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro.

Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman's UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland. He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country's financial woes. The EU agreed to cut Ireland's interest rate this summer.

Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman. He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank.

Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn't be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.

The bank's traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled $1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap. On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece's unity government, was a technocrat running the Central Bank of Greece at the time.

Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: "It is clear with hindsight that the standards of transparency could have been and probably should have been higher."

When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn't involved in the swaps deals either at the Treasury or at Goldman.

It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a "voluntary" haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent's big banks, and it is their health that is the primary concern of policymakers. The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus.

"My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?" says Simon Johnson. "It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same."

So certain is the financial elite that the banks will be bailed out, that some are placing bet-the-company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a $6bn bet with the firm's money that Italian government bonds will not default.

When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent.  Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries' debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse.

Shared illusions, perhaps? Who would dare test it?

Sarkozy thinks Israeli PM Netanyahu 'is a liar', Obama can't stand him either

French President Nicolas Sarkozy called Israeli Prime Minister Benjamin Netanyahu a "liar" in remarks to US President Barack Obama overheard by journalists.

"I can't stand him any more, he's a liar," Mr Sarkozy said in French.

"You may be sick of him, but me, I have to deal with him every day," Mr Obama replied.

The exchange at the G20 summit was quoted by a French website, Arret sur Images, and confirmed by other media.

The remarks - during a private conversation - were overheard by a few journalists last week but were not initially reported, the BBC's Christian Fraser in Paris says.

Journalists at the bilateral press conference had been handed translation boxes but had been told not to plug in their headphones until the backroom conversation had finished. But those who did heard the revealing comments.

For several days there was media silence in France about the exchange - a decision had been taken not to embarrass the French president, our correspondent says.

But Israeli newspapers have reported it in full.A correspondent for Le Monde newspaper referred to the conversation without the quotes.

It is said Mr Obama was taking Mr Sarkozy to task for voting in favour of the Palestinian bid for full membership of the UN cultural organisation, Unesco, a bid that was approved despite American opposition.

The remarks indicate a breakdown of trust with the Israeli leader which could have wider implications for the Middle East peace process, our correspondent says.

When the Government Lies

The Department of Justice has proposed federal regulations that would authorize the United States government to lie to the American people. This sounds bad, but in truth it's a big step forward. In the past, the government would simply have lied, without announcing its intention to do so. This was certainly true, for example, during the administrations of Lyndon Johnson (Gulf of Tonkin), Richard Nixon (Watergate) and Ronald Reagan (Iran-Contra). The Obama administration, reflecting an admirable commitment to transparency, wants everyone to know it will lie.

This is not as crazy as it seems. The issue concerns the Freedom of Information Act (FOIA), which requires the government to reveal certain information to the public upon request. The government does not have to reveal all information, however. FOIA permits the government to refuse to reveal certain types of confidential information. For example, §522(c) provides that the government need not disclose information if its disclosure would jeopardize an ongoing criminal investigation, reveal the identity of a confidential informant, or divulge classified information pertaining to foreign intelligence, counterintelligence or international terrorism.

When someone files a FOIA request for such information, the government is authorized under existing regulations to refuse the request by explaining that such information is exempt from disclosure. Recently, however, the Department of Justice concluded that this response does not adequately protect the government. The government's concern is that this response implies that the government has the information requested, a disclosure that might in itself cause some harm to the government.

To address this concern, the Department of Justice has proposed to amend the FOIA regulations to provide that, in such circumstances, the government will respond to such requests by saying that it has no such records, even if it does. In other words, it will lie.

For example, suppose a reporter wants to know whether the FBI is investigating a mayor for corruption. The reporter files a FOIA request asking for any records involving such an investigation. The government's concern is that if it responds by saying that such information is exempt from disclosure, the reporter will naturally infer that the government is in fact investigating the mayor, because otherwise the government would have said (honestly) that it has no record of any such investigation. By claiming the exemption, the government is tacitly admitting that it does have records of such an investigation. It's easy to understand why the government might legitimately not want the reporter (and thus the public and the mayor) to know about the ongoing investigation. If the government has to lie in order to prevent the investigation from being exposed, it's easy to see why the government might want to do so.

Of course, as a general proposition it is not good for the government to lie to its citizens. Must it do so in this situation in order to achieve its legitimate ends? Critics of the proposed rule change argue that it is unnecessary for the government to lie, because it can instead craft a response that elides the issue. In opposing the proposed authorization to lie, the American Civil Liberties Union, Citizens for Responsibility and Ethics in Government and OpenTheGovernment.org have suggested that the government can serve its legitimate interests simply by responding to such requests by saying, honestly, "you have requested records which, even if they exist, would not be subject to the disclosure requirements of FOIA." They argue that this response fully serves the government's interest because it not even implicitly admit that such records exist.

Let's see if this works. Suppose that, in the investigation of the mayor example, the reporter files a FOIA request seeking any FBI records relating to the mayor. The government responds, "you have requested records which, even if they exist, would not be subject to the disclosure requirements of FOIA." Ooops. There is a problem here. Recall that the government is authorized to withhold information in this situation only if the disclosure of the information "would jeopardize an ongoing criminal investigation." By invoking the exemption, even in the form suggested by the critics of the rule change, the government is necessarily admitting that there is "an ongoing criminal investigation," which is precisely what it doesn't want to disclose. The critics' solution doesn't work in this situation.

The Department of Justice's proposed amendment would allow the government in this situation to respond to the FOIA request by stating falsely that there are no records involving the mayor. Does this solve the government's problem? The theory is that this response will persuade people that there is no investigation of the mayor. This might work if people believed the government's response. But once the government says explicitly in its own regulations that it will lie about whether it has the requested records, the statement that it does not have the records has absolutely no credibility. In effect, then, the government gains little, if anything by honestly lying. Its mistake is not to lie, but to proclaim that it will lie, for its very honesty undermines the value of its deceit.

It would be best for the Department of Justice to go back to the drawing boards.

The Man Who Knew Too Much

Libyans may be celebrating the killing of Muammar al-Qaddafi, but you'd better believe that Western governments are breathing a sigh of relief themselves.

BY DAVID RIEFF | OCTOBER 24, 2011

Whether the NATO countries -- who had only a few years ago welcomed Col. Muammar al-Qaddafi back into the international fold in exchange for his renouncing his chemical and nuclear weapons programs and allowing U.S. and British experts to come and help dismantle them -- played any role in what certainly appeared in first reports from the scene to have been the summary execution of the Libyan dictator will probably never be known. What the video evidence does prove is that the Libyan revolutionary forces did not find him already dead or killed by a NATO airstrike; nor does the initial claim that he was killed in "crossfire" between insurgent forces and diehard regime loyalists stand up to even the most minimal scrutiny.

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NATO does acknowledge that its planes bombarded the convoy in which Qaddafi was fleeing the city of Sirte shortly before it was intercepted on the ground by the insurgents, but it has denied it even knew he was there. If that is true, and the French, British, and Americans did not try to make their own luck, then they certainly were very lucky indeed.

Qaddafi was, quite simply, a man who knew too much. Taken alive, he would have almost certainly have been handed over to the International Criminal Court (ICC), which had indicted him -- along with his son, Saif al-Islam, and brother-in-law and military intelligence chief Abdullah Senussi (whereabouts unknown) -- for crimes against humanity in late June. Imagine the stir he would have made in The Hague. There, along with any number of fantasies and false accusations, he would almost certainly have revealed the extent of his intimate relations with French President Nicolas Sarkozy and British Prime Minister Tony Blair, the details of his government's collaboration with Western intelligence services in counterterrorism, with the European Union in limiting migration from Libyan shores, and in the granting of major contracts to big Western oil and construction firms.

He would have had much to tell, for this cooperation was extensive. In the war against the jihadis -- a war to which Qaddafi regularly claimed to be as committed to prosecuting as Washington, Paris, or London -- links between Libyan intelligence and the CIA were particularly strong, as an archive of secret documents unearthed by Human Rights Watch researchers has revealed. If anything, the CIA's British counterpart, MI6, was even more involved with the Qaddafi family. As the Guardianreported in early September, it was Sir Mark Allen, then the director of the counterterrorism section of MI6, the British overseas spying agency, who was the key figure on the Western side in the secret negotiations to get Qaddafi to give up his WMD programs. The Guardian story further laid out how, after failing to become director of MI6 in 2004, Allen went into the private sector, becoming a senior advisor to the Monitor Group, a consulting firm that was paid huge fees by Qaddafi to burnish his image around the world, and, while they were at it, helped Saif (who had been his father's initial envoy to MI6) research his PhD thesis for the London School of Economics (LSE). Allen was also an advisor to BP, helping the oil giant secure major contracts in Libya from the Qaddafi regime.

The idea that Allen was the only senior Western official to establish such close ties with the Libyan dictator and his family is ludicrous. To the contrary, both the British and French governments were soon falling all over themselves to curry favor with a newly "respectable" Qaddafi. The Daily Mailreproduced a facsimile of the letter that, while prime minister, Tony Blair wrote to Saif Qaddafi to help him with his research for his LSE doctorate. Both during Blair's premiership and that of his successor, Gordon Brown, Britain aggressively pursued sales of military equipment, up to and including warships, to the Libyan regime, and sent members of the elite Special Air Service (SAS, the equivalent of the U.S. Delta Force) to help train Qaddafi's forces in counterterrorism tactics. Not to be outdone, Sarkozy, to the consternation even of many members of his own cabinet, invited Qaddafi to Paris in Dec. 2007, for an official state visit, the upshot of which was billions of dollars in contracts from Libya won by French firms.

To be sure, when the Libyan uprising began, it was Sarkozy who was the driving force behind the NATO intervention that -- though it was ostensibly carrying out United Nations Security Council resolutions to protect Libyan civilians from Qaddafi and his forces under the new doctrine of the Responsibility to Protect (R2P) -- soon far exceeded its mandate. The Libya intervention revealed itself to be based on the premise that, in Libya at least, R2P and regime change could be one and the same. Moreover, from the beginning of the air campaign, NATO warplanes repeatedly targeted Qaddafi, his sons, and their families. As early as May, General Sir David Richards, the chief of the British defense staff (that is, the equivalent of our head of the Joint Chiefs), told the Daily Telegraph that while NATO was not targeting Qaddafi directly, "If it happened that he was in a command and control center that was hit by NATO and he was killed, then that is within the rules."

Many outside observers were convinced even at the time that NATO was in fact desperately hoping to kill Qaddafi since it was clear by then -- especially during a period when the tide seemed to shift back and forth between Qaddafi's forces and the rebels -- that he would not relinquish power, no matter what offers were made to him in exchange for doing so. Their suspicions were confirmed when a member of the U.S. House Armed Services Committee, Congressman Mike Turner (R-Ohio), revealed that he had been told by Admiral Samuel Locklear, the U.S. officer commanding NATO's Joint Operations Command in Naples, Italy, that NATO forces actually were actively targetingQaddafi.

Qaddafi's death in such a strike would have offered a neat ending then for the West and for the Libyan insurgency, many of whose leaders, it should be remembered, served Qaddafi long and faithfully, enjoying his favors for much of their careers. Qaddafi certainly knew enough about their sins to make the prospect of what he might say during a trial before the ICC a cause for anxiety. His death, coming as it seems to have done, at the hands of Libyans rather than NATO,  makes an even neater ending now.

Qaddafi is dead, the Arab Spring has one more jewel in its crown, and the doctrine of humanitarian military intervention, whose reputation has rather faded of late, seems to have acquired a whole new bloom. The Arab masses thirsting for democracy, the Western powers using their power in support of this morally irreproachable goal -- what could be more edifying?

And so, ever since it became clear that Qaddafi's reign was over, the great and the good have been indulging themselves in an orgy of self-congratulation. Qaddafi alive would have been the ghost at that particular banquet, threatening at any moment to spoil the fun. Dead, he poses no such threat. It is unlikely that even the thorough investigation into the circumstances of his death that has been called for by Navi Pillay, the U.N. High Commissioner for Human Rights, and seconded by Amnesty International and Human Rights Watch, will change this fundamental equation. And even if Qaddafi was not targeted and, as Omran al-Oweib, the electrical engineer-turned-rebel leader who commanded the forces that finally caught up with Qaddafi in a tunnel just outside Sirte, continues to insist, really was killed in a crossfire, leaders like Sarkozy, Blair, Brown, and the Bush State Department must surely be sleeping better these last few nights. Whether they deserve to is another question entirely.

Police Crackdown Harshly on Occupy Melbourne Civilians

The $1trillion jackpot: U.S. discovers vast natural deposits of gold, iron, copper and lithium in Afghanistan

American geologists have discovered a hidden treasure trove of minerals in  Afghanistan that could transform the fortunes of the war-scarred country.

The untapped deposits - including huge veins of gold, iron, copper, cobalt and  key industrial metals like lithium - have been valued at more than £820billion.

US experts believe the find could turn Afghanistan from a bedraggled nation torn apart by generations of conflict into one of the most important mining centres in the world.

Stunning potential: Afghanistan has nearly $1trillion in untouched mineral deposits including lithium

An internal Pentagon memo suggests Afghanistan could become the ‘Saudi Arabia of lithium,’ a vital raw material used to make batteries for computers and BlackBerry phones.

‘There is stunning potential here,’ said General David Petraeus, the top US commander in the region. ‘There are a lot of ifs, of course, but I think potentially it is hugely significant,’ he added.

The mineral jackpot is certain to throw a new light on the US-led nine-year war in Afghanistan and President Obama’s surge to reclaim lost ground in the south of the country.

General David Petraeus, right, pictured last week in London, said there was 'stunning potential' after American geologists discovered a hidden treasure trove of minerals in Afghanistan

Some of the richest ores are said to be scattered along Afghanistan’s border with Pakistan that has been the scene of some of the most deadly combat and is thought to be the hiding place of Al Qaeda leader Osama Bin Laden.

Cynics claimed today that details of the discovery were leaked out because the US administration was desperate for some good news at a time the military offensive was achieving only limited gains against the Taliban and Afghan President Hamid Karzai appears increasingly embittered towards the White House.

It will also raise question marks over the motives behind the long and costly war launched in the wake of the 9/11attacks.

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The potential value of the mineral deposits dwarfs the size of Afghanistan’s current economy, which is based largely on American aid and illicit opium production.

‘This will become the backbone of the Afghan economy,’ Jalil Jumriany, an adviser to the Afghan minister of mines told the New York Times.

But analysts fear that rather than provide a boon to help bring peace to the Afghans, it could end up causing a violent power struggle between the government in Kabul and provincial and tribal leaders in mineral-rich areas.

It could also cause friction between the U.S., which has made heavy investment in Afghanistan, and China and Russia, who are both eager to stake a claim for a share of the riches.

Vast mineral reservers: Spanish soldiers of NATO's International Security Assistance Force visit a coal mining camp, in Herat, Afghanistan. Now the task is to mine untouched mineral deposits including lithium, iron, copper, cobalt and gold

With no mining industry to build on, experts say it will probably take decades to exploit the deposits.

‘This is a country that has no mining culture. They have had some small artisanal mines, but now there could be some very, very large mines that will require more than just a gold pan,’ said Jack Medlin, of the United States Geological Survey’s international affairs programme.

‘On the ground it's very, very promising. Actually it’s pretty amazing,’ he told the Times.

The find was the result of the most comprehensive survey of Afghanistan, carried out in 2007 using an old British bomber equipped with sophisticated instruments that offered a 3-D profile of mineral deposits below the earth’s surface.

The data went largely ignored until last year when a Pentagon task force brought in U.S. mining experts to validate the survey’s conclusions.

So far, the biggest mineral deposits discovered are of iron and copper, but  finds include large deposits of niobium, a soft metal used in producing superconducting steel, as well as rare earth elements and large gold deposits in Pashtun areas of southern Afghanistan.

So just what DOES lithium do?

In its metallic form, lithium is silvery and the lightest of all metals. Most people will remember it from school chemistry lessons when it violently whizzes around on the surface after being dropped into water. The reaction is so vigorous that the metal becomes red hot. 

One of the big problems with the metal is that it is highly corrosive and can catch fire spontaneously - in the science lab it has to be stored under oil to prevent its violent oxidisation. 

The first commercial lithium-ion battery was released by Sony in 1991, a massive development that revolutionised consumer electronics. 

Lithium-ion batteries are filled with a pressurised lithium salt dissolved in an organic solvent, usually ether, with two electrodes and a separator made of non-conductive micro-perforated plastic sandwiched between them. When part of a circuit, lithium ions move from the negative electrode made from carbon (the anode) to a positive electrode (the cathode) made from lithium cobalt oxide, freeing electrons which then travel round the circuit, so creating power. 

The batteries are re-charged by applying power to the battery. This forces the ions to move back to the negative electrode and so the process can start over again. 

Lithium batteries are light, and have a low self-discharge rate at about five per cent a month. They are far more powerful than comparable batteries using other chemical mixes. 

They are available in many shapes and sizes. The battery packs used in electric cars will contain several batteries strapped together to create one unit. 

Lithium-ion batteries have a long shelf life, but eventually they stop holding their charge. They are extremely toxic and need to be recycled.