Republished from Sanders Research Associates
Chris Sanders: So, Where is the Collateral?
Tuesday, 5 July 2004

Commentary
Independence Day Special

So, where is the collateral?

By Chris Sanders
Sanders Research Associates

"The evil that men do lives after them;
The good is oft interred with their bones"
   - Mark Antony in William Shakespeare,
in Julius Caesar, Act 3, Scene 2

If you tell the truth,
you don't have to remember anything
   - Mark Twain

One of the conceits of liberal capitalism is that it is a constructive economic free for all, more productive than other alternatives because competition is "regulated" by "transparency" and the "rule of law." In practice, the alternatives are defined as "socialism" in which the state directs investment and allocates income. The collapse of the Soviet Union is held to be the conclusive proof that socialism doesn't work, and that liberal capitalism, ipso facto, is the apogee of economic evolution. Ergo, we have reached the end of history.

Any small businessman knows that this is complete rubbish, but that does not stop the ideologues in universities and the capital markets from pretending otherwise. Curiously, even the so-called political "left" so critical of liberal capitalism's celebration of self-interest supports this fiction by its dependence on foundation grants that are basically nothing more than the self-interested charity of the liberal capitalists. The likes of George Soros, for instance, funds causes ranging from the destabilisation of central European states[i] to The Narco News Bulletin,[ii] which simply proves that smart governance in the age of monopoly understands that it is better to fund dissent than it is to fight it, the better to control it. I forget who it was that said that no one ever made any money without inside information, but whoever it was, was very practical.

These thoughts come to mind because on the 15th of July the case of United States ex rel Ervin & Associates vs. Hamilton Securities resumes in Federal District Court in Washington D.C., the Honourable Judge William Oberdorfer presiding. The CEO of Hamilton is none other than our advisory board member Catherine Austin Fitts. The case is what is known as a Qui Tam action filed by a citizen, called a relator, alleging fraud against the government. We wrote about this last autumn (Where is the Collateral?) just before the trial opened in October. We said at the time that investors should follow the outcome of this case carefully. The case against Hamilton was always political; the economics behind it overwhelmingly supports Hamilton's position. The use of the Federal courts to pursue the destruction of a competitor or to secure the fruits of fraud is nothing new; anyone who doubts this is referred to History of the Great American Fortunes by Gustavus Myers. This is not just any case however, because the destruction of Hamilton Securities goes to the heart of the fraud that underlies the management of the Federal credit today.

Frequency of usage of terms "transparency" and "privatisation"
in web-stored documents in Google universe.
Contrast this with the growth of US net foreign debt in the next chart...

Hamilton stands accused by Ervin as relator of engaging in fraudulent activity that adversely impacted a series of HUD asset sales. From the beginning Ervin's action was suspect. His original qui tam complaint was filed in June 1996. Although qui tam complaints can be filed without presenting substantiating evidence, the complaint and the reasons for it must be made public within sixty days by law. In August, Judge Charles Richey of the Washington Federal District Court grated an extension until November but warned Ervin's attorneys that if they did not come up with substance for their allegations that he would grant no more extensions. Richey, sadly, contracted a fast-acting cancer and died, the practical consequence of which was that he was replaced by Judge Stanley Sporkin. Sporkin, for those with memories, was once chief counsel for the CIA. A man compliant to power, Sporkin was very accommodating. So accommodating indeed, in his December 20 hearing with Ervin's attorneys, he offered them a six month extension which they turned down with what, one feels, was a sense of embarrassment.[iii]

Hamilton filed a complaint against HUD for breach of contract, Hamilton Securities Advisers Inc. v. the United States, the underlying matters of which are substantively the same as those underlying The U.S. ex rel Ervin. The purpose of the suit was to recover monies owed to Hamilton under its loan sales contract with HUD. Ervin filed a motion in January this year demanding intervenor status in Hamilton's suit against HUD. Ervin argued that having brought a qui tam against Hamilton in Federal District Court that he should also enjoy a percentage in any settlement against Hamilton in its case with HUD. Tellingly, Ervin's attorneys also tried to get a stay of Hamilton's case, arguing that a judgment in Hamilton's favour would prejudice their qui tam.

They were right to worry abut it, because in April the US Court of Federal Claims found in Hamilton's favor, awarding it the $2.5 million owed it by HUD. In June the court denied a government motion for reconsideration. Eight years on, Hamilton stands vindicated in court and the government's case is in the dustbin where it belonged in the first place. While the government may appeal the decision, the stunning sequence of first HUD dropping its internal investigation of Hamilton in 2003 and then losing in Hamilton's suit in 2004 is a powerful indictment. What case? There never was one.

As privatisation has increased, so has debt.
The taxpayer gets the liabilities, and Bob & Co. get the assets.

Great work if you can get it!

Ervin's intervenor motion and motion to stay were both denied earlier this year, but without prejudice to his qui tam suit. For the layman, however, it is difficult to understand on what basis his suit could possibly proceed, never mind succeed. Not only has every allegation he has brought been discredited, but he is left in effect in the position of arguing that Hamilton is guilty not of fraud or wrongdoing, but of not preventing the government from making a mistake. Franz Kafka could not have dreamed this up.

Hamilton is interesting as a case study not just of the perversion of the law but of the privatisation of public services. Privatisation has been sold to the public in the US, Great Britain and elsewhere in the New World Order as being necessary to improve the quality and efficiency of public services. One of the foundational assumptions of liberal capitalism is that private firms can do things more efficiently and even more honestly than the public sector can. On the basis of more than twenty years experience since Ronald Reagan broke the back of the air traffic controllers' union and Margaret Thatcher broke the miners in Britain, the evidence to support this is mixed at best. On the contrary, in case after case whether it is Halliburton or Dyncorp providing logistics services to the US military, the sale of British Rail, the sale of the Inland Revenue's assets or the Carlyle Group's acquisition of the Royal Ordnance's research arm, the evidence suggests that what is actually happening is the sale of public assets or the licensing of public services at below market prices to politically connected investors. This has nothing to do with markets and everything to do with fraud.

In the case of Hamilton, however, the evidence appears to be otherwise. Indeed, Hamilton's case suggests that the biggest problem presented by HUD's subcontract of its loan sales program was that Hamilton forced bidders for the defaulted loan portfolio to actually pay something approaching market prices. Where they had been paying $0.35 on the dollar, under Hamilton's administration they were paying something closer to $0.90. The reason for this is that Hamilton's Community Wizard enabled it as administrator of the loan sales to see what the real default experience in locales actually was in order to construct a better actuarial model on which to base pricing. Obviously Hamilton was a winner from this, but then good old liberal capitalist ideology suggests that they should have been. They were providing a public service at a considerably higher rate of return to the public than HUD had been able to deliver. Given that HUD's defaulted loan portfolio was worth hundreds of billions of dollars, the difference between a 35% as opposed to a 90% recovery rate to the taxpayer who had funded the original loans in the first place was considerable. You have to wonder: why was firm that was actually doing what it was contracted to do attacked and put out of business by its employer? And what about damages? Not only were Hamilton's assets seized and liquidated, the chief executive harassed and forced to liquidate her own assets to defend herself, but for four years this occurred without the government ever presenting a case, or those attacked ever knowing what it was they were accused of. This is not due process, it is political persecution.

The tactics used to shut Hamilton down prefigure the tactics legislated by Congress to prosecute its War on Terror. Hamilton was raided and its IT infrastructure including Community Wizard confiscated and, crucially, destroyed. The cost to Hamilton was colossal, representing hundreds of millions of dollars in foregone profits. But it is important to remember that the costs to the taxpayers in foregone proceeds from the defaulted loan sale program run into the scores of billions. Economically this is equivalent to a covert increase in taxes insofar that it is the taxpayer who foots the bill. For the companies involved the profit margins are so huge that it easily finances whatever political or legal air cover the operation might require. And the personal attacks on Catherine Fitts, Hamilton's CEO, conducted in a campaign of whispers alleging fraud, foreign bank accounts, and worse convinced many who might otherwise have been inclined to aid her to stay away. After all, in jaded Washington that is what everyone has come to understand is the accepted modus operandi. Privatisation is what you do when you take what you have learned from your time in government service at taxpayer expense and then make the taxpayer pay twice for it. So, for example we see special operations soldiers quitting the army to work for private "contractors" as mercenaries at multiples of their service pay. Now that's what I call special operations. And the Vice President of the United States, when he isn't on the floor of the Senate cursing Senators or hiding in a subterranean bunker somewhere in Pennsylvania, can use his influence to guarantee that his firm Halliburton "in which he retains a substantial financial interest" gets the lion's share of prime logistics contracts for the War on Terror.

Hamilton was attacked because with the loan sales program Hamilton had strayed too far into forbidden territory: the land where the real Federal Budget is managed and the real political struggle is over who gets to control access to the Federal credit and through it the most fantastic system of patronage and power in the history of mankind.[iv] The award of Hamilton's contract was, I believe, a blunder made by honest bureaucrats whose real mistake was to think that their job included saving the taxpayers' money. The action taken to shut Hamilton down is the damage control operation to undo that mistake. Which begs the question, what does one do when the damage control operation itself goes wrong?

- Chris Sanders

csanders@sandersresearch.com

FOOTNOTES:

[i] For examples of this in action in Georgia and Serbia see All News is Lies for the activities of Soros' Open Society Institute at www.sandersresearch.com.

[ii] The estimable Narco News Bulletin is supported by the Fund for Authentic Journalism, which in turn is supported by a $30,000 grant form the Tides Foundation Fund for Drug Policy Reform. The fund for Drug Policy Reform used to be directly supported by Soros' Open Society Institute, which has since put another layer between it and the issues it supports, in this case drug legalisation, by contracting the support of the Fund for Drug Policy Reform to The Tides Foundation.

[iii] Reading the December 20 transcript, one has the impression that Judge Sporkin was far more concerned with how much money Ervin as relator was going to earn than with the merits of any extension of the qui tam. Why Sporkin would be more concerned with money than with justice is anyone's guess.

[iv] See Fascinating and Lucrative Patriotism - The negative return economy: a discourse on America's black budget, by Chris Sanders and Catherine Austin Fitts at http://www.sandersresearch.com/.

© 2003-5. Sanders Research Associates. All rights reserved.

  See also the prequel to this article:
Where is the Collateral?, October 2003