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The Travesty of the Anti-Commons – Part Two

by Dmitry Orlov

Club Orlov (September 24 2013)

[This week’s guest post is by Eerik Wissenz of Solarfire. It is part two of a four-part series leading up to a wider exploration of Communities that Abide, based on the example of certain small nations which, much to the chagrin of neoliberal economists, have preserved a large and productive commons.]

The central message that the tragedy of the commons sends to many economists is that private ownership is better than public ownership. The argument is essentially a transposition of the old “what’s good for the master is good for the slave”. In any slave-owning society there is always plenty of justifications for slavery. Most of them boil down to slaves not being able to get along without a master. The tragedy of the commons is the same argument but with respect to non-human property such as a meadow: without a master who privately controls it and rents out access to it, the shepherds will ruin it.

Each shepherd will want to always graze that extra sheep because each shepherd reasons that every other shepherd is either doing the same or will likely do so soon – so get your grazing in while the grass lasts! Note the underlying assumption: the shepherds are too stupid to unite and act in concert to prevent the meadow from being destroyed. It is therefore assumed that private management is better for the meadow, just like slave-owners assumed that being owned is better for the slaves.

What is of course never debated openly is the travesty of the anti-commons: if a meadow is put in the hands of some profit-motivated private entity, this entity is motivated to extract as much wealth from the meadow as possible to then invest the proceeds in some other, more profitable venture. Unless the meadow happens to be the highest-yielding property in the world (which is unlikely) the motivation is to make intensive use of the meadow, extract the value out of it and invest that capital elsewhere, where the yield is better. And even if the meadow were the highest-yielding piece of property in the world, the motivation would still be to maximize the short-term profitability of the meadow. If overgrazing it slightly could produce more profits over the short term, and if these profits could be invested elsewhere to more than make up for the gradual production losses from the meadow, then this too would produce the same result: the meadow would be overgrazed.

Unsurprisingly, these are the two scenarios that we can actually witness playing out. In the first, private land-holders practice the equivalent of slash-and-burn agriculture, with massive overgrazing and over-farming, topsoil destruction and erosion, and then use the profits to acquire more land and repeat. In the second scenario, private land-holders have a longer term profit-generating plan for the land, but nevertheless always try to graze that extra sheep to provide that extra bit of margin to invest elsewhere.

Especially in places where land is expensive but chemical fertilizer is relatively cheap, letting the land degrade but propping up vegetation with artificial nutrients provides a clear path to profitability, especially when using mechanized agriculture. And indeed, letting the land erode and degrade is what we see nearly all profit-motivated agricultural land-holders doing, and what neoliberal bureaucrats view as sound business and land management practices. In this they are bolstered by the idea that non-private ownership would lead to erosion and degradation of the land in a sad, sad tragedy of the commons which they, of course, work hard to avoid.

Are these sound practices? In propaganda, it is a generally recognized principle that the simpler the lie, the better it works, because then believing that lie requires no complicated thought process, and there is far less risk of critical thinking slipping in somewhere. Now, it turns out that the lie behind the tragedy of the commons is so simple that just a bit of critical thought is sufficient to make it disappear in a puff of logic. To be thorough, we will do this in two ways. First, we will try to apply the principle of the tragedy of the commons to non-renewable resources. Second, we will attempt to to define private property without recourse to the concept of a commons (tragic or non).

As an example of non-renewable resources, let’s take a mine, although an oil and gas field would work just as well. The tragedy of the commons doctrine would lead us to believe that a mine is better stewarded over the long term by a private holding than when it is held in common, public ownership. In the case of a renewable resource such as a meadow, there was at least a proposed mechanism that might motivate a profit-seeking private holding not to let overgrazing occur, if doing so hurt its profits … although overgrazing may just as well raise its profits in the short-term, allowing it to reinvest them elsewhere and get better overall yield. But, for the sake of the argument, let’s pretend this proposed mechanism does operate sometimes, turning private land-owners into conservationists even in an unregulated environment. (Yes, this is a bit of a stretch.)

In the case of a mine, however, the resource in question isn’t renewable, so this mechanism to avoid depletion can’t possibly apply: no amount of stewardship will make a mine produce forever, and any exploitation of a mine by anyone will eventually deplete it. So what justifies private ownership of non-renewable resources? Why wouldn’t we want to treat non-renewable resources as a commons, since either way the result is the tragedy of permanent depletion? Answer: Precisely because there is a short-term motivation for profits to invest elsewhere, we can trust a private holding to produce the mine as quickly as possible. That is, a private holding will strive to achieve the maximum possible extraction rate from the mine, which will provide more of the resource to society, in the short term, keeping prices low and stimulating economic growth. Everybody wins! But won’t this accomplish exactly the same thing as overgrazing a meadow? Last we heard, that’s what happened to it when it was allowed to languish in public hands, and this was considered to be a tragedy … Except here we have short-term resource extraction by a host of mechanized shepherds, along with an entire industrial infrastructure conditioned to operate on cheap resources, soon to end in tragedy when the nonrenewable resources first become expensive, then run out entirely. One can pick one type of tragedy over the other, but what makes one better than the other?

When they find themselves in this particular corner, neoliberal economists start spouting replacement theory, which goes roughly like this: “You fool! Resources are infinite! If one runs short, people switch to another, which they value just as much, so it’s the same thing! Extracting maximum short-term profit from one mine will just allow the holders to invest in new mines, and even if one element did become rare innovation would easily provide a substitute. When we run out of grain, we will switch to eating excrement, and when we run out of excrement, we will switch to eating dirt. And since dirt will cost just as much as grain used to, economically speaking it’s all the same.”

Simple enough to believe … but wait … If resources are infinite, then why is destruction of the commons a tragedy? If nonrenewable resources are infinite (thanks to replacement theory), then why wouldn’t the commons be infinite as well, and therefore impossible to destroy? Why should we worry about land degradation in the first place if there is always more land? And if there isn’t always more land, won’t we just find substitutes for land, or at least for its functionality, through technical innovation? That, after all, is largely what is being done already, using chemical fertilizers. Why couldn’t the overgrzazing shepherds do the same thing, and import nutrients when the pastures become degraded?

The basic assumption behind the tragedy of the commons is that resources must be stewarded over the long term for the benefit of society, and that this is best done by placing them in private hands. But now it turns out that what matters is letting private entities extract all wealth from a given resource as quickly and profitably as possible, whereas society might do a slower job at it and even get in the way. Indeed – horror of horrors! – a mine that is in public hands might be purposefully exploited slower and more efficiently, precisely because the society that controls it as a commons is aware if its dependence on it. (Unlike private capital, it’s difficult to move whole societies elsewhere once all value is extracted from their resource base.)

There is no reason to believe that privatizing the commons will save it from destruction; just the opposite, it is a good way to ensure that it will be destroyed.

http://cluborlov.blogspot.jp/2013/09/the-travesty-of-anti-commonspart-ii.html

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How Obama Made Fukushima Worse

2013/09/26 1 comment

In the Pocket of the Nuclear Industry

by Douglas A Yates

CounterPunch (September 24 2013)

The Obama administration’s failure to alert Americans to the danger of Fukushima radiation is motivated by corporate politics and the interests of the nuclear power industry. The March 11 2011 earthquake off the northwest coast of Japan wrecked a complex of nuclear power plants, throwing three units into meltdown and exploding high-level radionuclides into the environment. With the industry’s reputation and billions of dollars in financial arrangements hanging in the fire, the president chose expediency, saying there’s no threat to Americans.

These assurances were highlighted recently when Fukushima Dai-ichi’s operators reported that since the earthquake it has been spilling large amounts of radioactive water into the Pacific Ocean. While great efforts have been made to sequester hot water in tank farms, the tanks are leaking and the buildings are insecure. Among the toxics soaking coastal zone soils are fission products: cesium-134 and -137, strontium-90, iodine-131 and -129, along with various isotopes of tritium, uranium and plutonium. These elements and hundreds of others have escaped containment and are moving into the North Pacific at the rate that varies from 300 to 900 tons of water per day.

Following the president’s lead, most of the media has ignored the story, leaving many Americans in the dark. But the blinders are off in Alaska and the west coast of North America as more people figure the implications of tainted seafood. Pacific tuna ranges between California and Japan on its annual migration. Sampled by scientists from Stanford University in 2012 and 2013, tuna were found with elevated cesium-134 and -137 in their muscle tissue. A public health official in British Columbia is urging the federal government to monitor salmon and tuna. Last week the state of Washington said it will begin testing salmon and steelhead. The newspaper in Alaska’s capital, Juneau, is asking science to settle the question, writing “… Let’s be 100 percent sure our Alaska salmon are safe to eat”.

Distrust of safety assurances here and in Japan mounted when the plant operator, Tepco, admitted that it had low-balled previous data and that actual releases were twenty to thirty percent greater than earlier claims. Numbers are being revised upward almost daily. Currently, while the totals remain in flux, independent observers suggest that Fukushima has surpassed Chernobyl in the amount of radiation released to the environment. Chernobyl spilled 85 quadrillion becquerels across Europe while Fukushima’s totals climb to 276 quadrillion in some estimates. Outliers put it as high as 690 quadrillion. Approximately half of the initial aerosol releases fell into the ocean. Maps show that 12,000 square miles of land has been contaminated with cesium and other isotopes. Of this area, 4,500 square miles exceeds human safety limits of one millisievert per year. Nearly 200,000 Japanese have been turned into refugees.

The Japanese government, as expedient as Obama, quickly raised the allowable dose from one millisievert to twenty millisieverts per year – twenty times higher than the limit on March 11. People who should have been evacuated remain at home, soaking in cesium. According to Physicians For Social Responsibility, the dose exposes children to a one in 200 risk of getting cancer. “And if they are exposed to this dose for two years, the risk is one in 100. There is no way that this level of exposure can be considered ‘safe’ for children.”

Radionuclides concentrate as they move along the food chain, from plankton, kelp and herring, and up the line to salmon, seals, bears and people. Cesium-contaminated food bio-accumulates in the heart and endocrine tissues, as well as kidneys, small intestine, pancreas, liver and spleen. Children, particularly girls, are many times more susceptible than adults to the effects of ionizing radiation.

When the exclusion zone boundaries were announced, at a place inside the red line the oldest man in the village – 102 – killed himself, rather than evacuate. “In front of the village hall, a machine that looked like an oversized parking meter flashed a real-time radiation reading in large red digits: 7.71 microsieverts … 8.12 … 7.57. Being there was equivalent to receiving a chest X-ray every twelve hours.” [The New Yorker, October 17 2011]

At the Berkeley campus of the University of California, rainwater collected on March 23 2011 measured iodine-131 radioactivity at 20.1 becquerels per liter. The federal maximum level of iodine-131 in drinking water is 0.111 becquerels per liter. The sample exceeded this level by 181 times. Fukushima radiation was further confirmed when Berkeley researchers discovered iodine-131 in California dairy milk and in a local waterway. Similarly high levels of iodine-131 were recorded in Portland, Olympia, Boise and points east.

The US government organized a multi-agency stealth response in the wake of the reactor meltdowns. Friends of the Earth and others filed FOIA requests to learn how the crisis was being managed in days after March 11. A trove of emails moving between the Nuclear Regulatory Commission, its field agents in Japan and other agencies show efforts to downplay concern and withhold information. Within days of the event, federal manager’s emails tallied plumes of iodine-131 as they approached America. Supervisors demanded confidentiality while maintaining a press blackout, assuring that most Americans had no chance to prepare or mitigate.

James Mangano, an epidemiologist, and Janette Sherman, a toxicologist, are expert in calculating health effects from radiation exposure. Their review of US deaths before and after the March 11 event indicates that 18,000 to 22,000 Americans could die as a result of radiation from Fukushima. Carried east by the jet stream, and deposited as rain and snow, uptake into people, plants and animals is primarily through inhalation, ingestion and contact. Infants under the age of one had the highest increase in reported deaths in the fourteen weeks after Fukushima’s initial explosions. Increased mortality was also seen in the aged, the infirm and immune compromised.

Today radioactivity washing out to sea is in a combination of seawater that’s being used to cool the wreckage and an influx of groundwater. The groundwater is rising at the toe of the slope behind the facility, threatening to inundate the complex. People working there say the surface is becoming unstable and that building foundations may fail.

Hiroaki Koide, assistant professor at Kyoto University’s Research Reactor Institute, represents a growing consensus that speculates the nuclear fuel in the three melted units has burned through the containment vessels and the basement foundations. The molten fuel (about 360 tons) is now tunneling through geologic strata that underlay the Japanese archipelago. If true, Tepco’s engineers have lost control; with no options for retrieval, this is an unprecedented catastrophe with no end in sight.

Arnie Gundersen, a former nuclear engineer who leads the watchdog group Fairewinds Energy Education, says this is the last year he’ll eat fish from the Pacific, reasoning that Fukushima’s toxic stew has contaminated the ocean. Gundersen says that north of Hawaii, midpoint between Japan and North America, scientists are measuring cesium levels ten times higher than normal. Background levels of one becquerel per cubic meter have been constant for years. It has now increased to ten becquerels per cubic meter.

The Fukushima disaster is worse than Chernobyl, it’s ongoing. While the North Pacific is a big place, wind and currents move in Alaska’s direction. Dilution is not a solution. A declassified military report, written in 1955, concluded that seawater may not adequately dilute radiation from nuclear accidents and that it’s likely to travel in highly concentrated “pockets” and “streams”.

While the radiation pouring out of Fukushima can’t be seen or smelled, its implications to Alaska’s fisheries, our economy and cultural resources are obvious. It’s past time to begin talking about the threat and planning for its consequences. We might begin by retrieving the president from the pocket of the nuclear power industry.

_____

Douglas A Yates is a writer and photographer who lives in Ester, Alaska.

http://www.counterpunch.org/2013/09/24/how-obama-made-fukushima-worse/

Categories: Uncategorized

Toxic Debt Wasteland

by David Malone, author of The Debt Generation (2010)

Golem XIV (July 15 2010)

I have been sitting here listening and thinking, feeling vaguely guilty that I haven’t written anything. I have been watching what seemed a perplexingly contradictory series of events and facts. And it has led me to consider this – too often, when we think and even more so when we speak, we do so in familiar phrases. Phrases, which if we aren’t careful, can shape what we think without us being aware it is happening. If we don’t think about the phrases we use, they can limit how we understand and explain to ourselves what is going on.

In our present economic situation much of our thinking is framed and constrained by the interlocking concepts of recession and recovery. Like a swing or a spring they are inverses of each other. The spring pulled down by a weight of debt and bad news, is recession. As things ‘spring back’ we leave recession behind and feel the upward acceleration of recovery.

But in a non linear world, just as with a real spring, you can pull a system too far and it doesn’t simply spring back. It has a new shape, a new configuration. Things don’t have to go back to how they were. Things don’t have to ‘recover’ their former state. Things in a non-linear world, when pulled too far from their former equilibrium, don’t come back. They run away. To another, often very different equilibrium. The finger of fate simply moves on. And nothing, but nothing, can bring it back to erase what has been written.

This is the thought that took shape these last days as I sat and watched and listened …

Earlier this week the financial press was all of a twitter about earnings and the rally in stocks. Would the US earnings’ reports keep the rally going? And the answer was ‘yes’ – at first. Alcoa reported a slim earnings report but the market loved it and the rally went on. Then Intel reported a big surge in sales of its chips and therefore in its profits, and the market lunged higher.

What I wanted to know, however, was who are they going to sell the end products to? Who is going to buy all the aluminium and all the electronic devices with chips in them? But the rally seemed unconcerned. Why weren’t they bothered by my question?

Then came news about UK unemployment. Now it was only the UK, but the picture the data paints is very similar to the situation in the US. Unemployment in the UK stands at 7.9%. This is the more inclusive, less politically fiddled number published by the International Labour Organization (ILO). But what caught my eye was not the unemployment but the part time work. Of those in work 27%, about 7.82 million, have only part time work. Of those, about 1.07 million (based on extrapolating from significant samples) would rather have full time work. A different survey out this week seems to tell us a bit more about these people. It found that one if five people now say they are having to use debt to make ends meet. What do you bet many of these people are the part time workers?

Put these together and it means that on top of the unemployed there are another million people who need and want a full time job to pay their bills but the job market doesn’t have such a job for them.

Can the stock market really think these people are going to be buying all of Alcoa’s aluminium or all of Intel’s chips?

In the US the picture is similar. Household income has been declining slowly but steadily. And so has the average number of hours worked. This week the US reported that 367,948 people stopped claiming unemployment benefits. This third of a million people didn’t get jobs. Their number doesn’t appear in the jobs added column. These are almost all people who have fallen off the end of extended benefits and are now not eligible for ANY benefits. They have simply stopped being – officially at least. How many of them will now become the residents of the many tent towns cropping up across the states?

I kept asking myself why the markets seemed not to care about this? Not why they weren’t ‘caring people’, but in strictly market terms of worrying who was going to buy the products of the companies whose stocks they were eagerly buying. Someone has to buy. Its no good Alcoa mining aluminium or Intel making chips, if at the other end of the chain of commerce, there are not enough consumers.

So I watched and listened some more. A report from the UK’s  Office of National Statistics (ONS) said rather baldly that they calculated the UK public debt was 4.84 trillion pounds rather than the government’s official figure of a mere 903 billion. Four trillion more in debt than we thought. Of this, the largest single debt was one to 1.5 trillion pounds gone to bail out RBS and Lloyd’s Group. The same report said that Public Service and State Pensions were both more than a trillion in debt. But with the money gone to bail out the banks there was now no more money available to mend the pensions.

Again, apart from a few slightly stunned reports there was no reaction. The pound didn’t slip. Gilts didn’t fall over. Not much happened. And yet those figures tell us quite clearly that the amount of our future labour and tax which will have to go to pay these debts is quite impossible to reconcile with a picture of the UK ‘recovering’ to anything like the days when everyone felt things could only get better. The figures are much more in line with the report which said UK house prices would not recover for a decade.

But there is something about these vast but abstract debt numbers and long time frames which makes the whole picture hard to fix in the mind. As if they are huge but insubstantial, made of smoke that dissipates before you can really grasp them.

In Spain five percent of councils (400 of the 8000) have already just STOPPED paying their electricity, water and telephone bills. A full third of them think they will stop payments by the end of the year. The reason is simple. twenty percent unemployment means the councils have lost up to thirty percent of their tax revenue. Are these people going to be the essential consumer driving the recovery? Or should we rather expect, as in the UK and US, that there are going to be many, many more unemployed as councils can’t pay their people?

In every country, the US included, local governments and states are broke and going to lay off teachers and bin men and anyone else they possibly can.

This is what I have had in mind, and then I watched the stock market rally and I asked myself, is this rally really ‘our’ recovery’? In the framework of ‘recession/recovery’ does the market rise mean the ‘recovery’ of OUR economy from its recession? Does it mean WE are going to be pulled to the surface from the depths? Or did they only talk of ‘a’ recovery, and it was just our habit to assume it would be ours?

Does the evidence really point to the recovery including you? It seems to me it doesn’t. It seems to me that if there are any signs of recovery it is not in YOUR wages, or YOUR job prospects. The Bankers got bonuses while you will get the sack. Is there not a hint in there?

And then ask yourself this, if YOUR job prospects and YOUR wages don’t ‘recover’, then what exactly is your role, in this ‘recovery’? What importance or place will you have in the plan?

Everyone must have a part to play. Ours used to be clear. We were the consumers. The market had found people to make the stuff cheaper than we were willing to. But that was okay. Because we had a different job. We consumed. The miners dug stuff up. The poor Chinese and Indians worked long hours for a quarter of a minimum US wage to turn the raw stuff into all the things it was our ‘job’ to consume.

The illness in the arrangement however, was that we weren’t earning what we were spending. In fact we couldn’t, because for a decade, our wages, real wages, didn’t actually grow. Our consumption did though. And so long as it did all seemed to be fine. The miners mined, the makers made, the workers worked and we, the consumers, did our part and gorged ourselves as fast as we could to use it all up, throw it away and reach for more. We thought we were still workers. But we had subtly changed job, from Maker to Consumer without realising.

And the magic, working all the time unseen, making this all possible, was debt. We spent debt. Our banks conjured it out of property price inflation, and leveraged every dollar or pound into forty or fifty or eighty more dollars or pounds. Which they lent to us, so we could do our job – to consume – without question or care or thought. For a decade we spent and consumed and threw away, doing our bit for the system of debt and defecation. Turning our values and our selves to waste.

And then it stopped, didn’t it.

The spring was stretched out of shape. And for two years we have tried to push it back to the way to was. But it won’t go.

Oh I’m not saying a system of debts can’t be brought to life again. But not our system. Not our debts.

I think the bail outs are not about ‘recovery’. They are about quarantine. They are about dumping that debt in a pit, in some place the wealthy won’t live in, or even visit. ‘Our’ governments are buying debts like any ignorant and corrupt banana republic buys up drums of toxic waste. We are going to be the debt dumping ground. The toxic debt wasteland where the debts of the rich are left behind, to blight the lives of people the rich will never care to acknowledge. And once this is done, the Recovery will lift the ‘Golden’ up to the sunlight, but not us.

The recovery will be an airlift from a guarded airstrip where we will not be allowed. They will fly away, and we will watch them go.

How could this happen we might cry out? Surely we are still needed?

I wonder if we are any more?

There are only seventy million people in the UK. 250 million in the US. 330 million in Europe. But there are 1.3 billion in China. Another billion in India. What the market wants, the ONLY thing the market wants, is a place to get a return on their investment. Why invest in places saddled with huge debts, where a decade of toil is going to do nothing more than pay off debts and leave very little to spare for consuming? Is that a place to build a recovery?

Or would it be far better to put the money to work in a place where growth is going to be ‘healthy’ – a place not poisoned with debts? A place where wages are low but increasing, rather than in our countries, where wages are high and going to decrease?

If I were a financial princeling I would want a place to dump my toxic waste. A place where, somehow, others could be forced to clean it up for me. If I could dump my debt there, not have to deal with it, or pay for it, or worry about it, just bury it in unmarked pits and get my lawyers to claim it was never mine in the first place, then I would be free to move on.

Then, what I would want is a new place to do my business. A new place to live, with people who thought I was their new friend. Once my debts were dumped and buried all I would need to re-create my old system, would be new consumers. New people to sell to. A new place without debts.

That’s what I might do if I were such a princeling of the golden class.

We are fooling ourselves. We think because we live in a democracy that this means everything must be done with us in mind. We overlook the fact that we also live in an economy, a ‘free-market’. That market is not democratic. It has no allegiance to democracy or to us. In the market, nothing has to be with us in mind. Nothing at all.

We are out of work. Out of a job. Perhaps for good. Perhaps the system has found or is finding, people who can do it better and for less. Those people are going to do the job of consuming. Not us. We don’t have the income any more.

Our new role, is to be the people who pay off, and clean up the toxic waste the old factory left behind when it went bust.

_____

About the Author:

My name is David Malone. I am a second generation documentary film-maker. My father made The Ascent of Man (1973~) with Bronowski, The Age of Uncertainty (1977)  with Galbraith and Cosmos (1980) with Sagan.

I learned my craft at the BBC science department where I worked for nine years, ending up on Horizon. Since then I have made films for C4, BBC2 and more recently BBC4.

I have always made films I believed in. Films I thought had something to say. I have won a handfull of awards.  These days I appear in front of camera as often as I direct from behind it.

I also lecture on both film and finance.

If you want to hear someone speak passionately about the power and cultural importance of film or a hear a cogent and challenging view of the financial world from outside the concensus call me.

If you want to contact me please email me at golemxivg@gmail.com

http://www.golemxiv.co.uk/2010/07/toxic-debt-wasteland/

Categories: Uncategorized

Glaciers for Sale

A global-warming get-rich-quick scheme

by McKenzie Funk

Harper’s Magazine Report (July 2013)

The Canadian dentist behind what may or may not have been the world’s first global-warming Ponzi scheme either lives or does not live in Iceland. His name is Otto Spork, and when I first learned of him, in 2008, he had secured the water rights to a glacier north of Reykjavik and quit his dental practice to run the most successful hedge fund in Canada. His Toronto investment firm, Sextant Capital Management – the name was chosen to honor his paternal grandfather, Johan Marinus Spork, a Dutch sea captain – had recently been claiming 730 percent returns for its investors. Spork’s sales pitch was simple: the world was warming and parts of it were running dry, so Sextant bought water companies. Hundreds of Canadian and offshore investors were persuaded to buy in – and Spork earned millions of dollars in management fees as money poured into his funds. The arrangement succeeded magnificently until December 8 2008, three days before Bernie Madoff was arrested, when the Ontario Securities Commission accused Spork of a massive fraud.

Water is the medium of climate change – the ice that melts, the seas that rise, the vapor that warms, the rain that falls torrentially or not at all. It is also an early indicator of how humanity may respond to climate change: by financializing it. In the year following the release of Al Gore’s 2006 documentary An Inconvenient Truth, at least fifteen water-focused mutual funds were created. The amount of money controlled by such funds ballooned from $1.2 billion in 2005 to $13 billion in 2007. Credit Suisse, UBS, and Goldman Sachs hired dedicated water analysts. A report from Goldman called water “the petroleum for the next century” and speculated excitedly about the impact of “major multi-year droughts” in Australia and the American West. “At the risk of being alarmist”, it read, “we see parallels with … Malthusian economics”.

In the summer of 2008, I was starting work on a book about climate change when a Spork tip came in from a sales executive at the trade publication Global Water Intelligence. “The transportation of potable water is becoming increasingly popular as a solution to cases of acute water shortage”, wrote the salesman as he tried to entice me with a $1,060 subscription. The tankers that had sailed that spring between Marseille and a drought-stricken Barcelona had eventually been outcompeted by rainfall, he admitted. But “one of our subscribers (and the sponsor of our most recent conference in London), iGlobalWater . . . has recently been heavily involved in such projects”. He claimed that iGlobalWater – unlike the handful of stillborn bulk-water schemes in decades past – had moved beyond the planning stage. The company was already shipping water from Iceland. I didn’t buy a subscription, but I was intrigued.

The website iglobalwater.com was registered to something called Spork Capital. The name Spork led to Sextant Capital. Sextant and iGlobalWater turned out to be on the same floor of the same office tower at the Royal Bank Plaza, Downtown Toronto’s most prestigious address. (It would later become clear that iGlobalWater’s global headquarters consisted of half of a long table inside Sextant.) I phoned and emailed both companies repeatedly. No one ever responded. A few months later, the securities-fraud charges were unveiled and I began to understand why Spork had stonewalled me. According to his lawyers, Spork had moved to Iceland. It was the beginning of a five-year chase.

The dentist ignored Canadian authorities too, skipping meetings with investigators and appearances before the Ontario Securities Commission. On May 18 2011, with almost $100 million from Sextant investors still unrecovered, the Ontario Court of Justice found him guilty. Nearly all Sextant’s funds had been funneled into two Icelandic water businesses that Spork himself controlled through a web of shell companies in Luxembourg and the Cayman Islands, and the dentist and his family had paid and loaned themselves close to $50 million. What wasn’t clear was whether Sextant had been a kind of Ponzi scheme from the start – or had Spork really believed he could sell Icelandic water to a drought-stricken world?

I decided to fly to Iceland with my friend Damon Tabor, a fellow journalist who had shared my Spork interest from the beginning, to see if we could find him and discover the truth. It was a small country. We would bring cameras and voice recorders and GPS units and binoculars and walkie-talkies. Before we left, we consulted the financial journalist Sigrun Davidsdottir, one of the few Icelanders to report on Spork. She told us about the poet Einar Benediktsson, who at the beginning of the twentieth century had gathered a bunch of Swiss investors and tried to sell them the northern lights. “What I think of Spork?” she wrote in an email.

 

It pains me to say (because also I would most certainly like to see the water export pump money and jobs) that I think he is, what we say in Icelandic, a “Northern Lights-salesman”.

 

Spork’s glacier was on the Snaefellsnes, a peninsula a few hours north of Reykjavik that is dominated by Snaefellsjokull, a 4,744-foot volcano that stars in Jules Verne’s Journey to the Center of the Earth. We set out for it one afternoon in a rented Chevy Spark, taking a tunnel under one fjord and skirting the next, then turning off onto a narrow road that climbed the flanks of the volcano. The grass was replaced by rock, and there were waterfalls and patches of snow. The road became gravel at a pass and then dropped to the shoreline, where we zipped past dark beaches with breakers rolling in. When we neared the fishing village of Rif, we saw a harbor and the massive, half-built shell of a factory: Spork’s water plant. In this spare landscape, the 100,000-square-foot plant was incongruous, a gleaming, hangarlike edifice of sheet metal on the tundra. Next to it, two short waterfalls emerged from two black pipes, dumping clear, cold glacier water into the harbor at a rate of 86,000 gallons an hour.

Iceland has more water per capita than any other country on earth: 142 million gallons of annual runoff for each of its 300,000 residents, roughly six times more than water-rich Canada, fifty times more than the United States, 250 times more than China, and 25,000 times more than the United Arab Emirates. Until the global financial crisis that locals call the kreppa – from a verb meaning “to clench” – Iceland also had more bubble per capita: there was no country more in the thrall of commercial banking and paper wealth. In 2008, three formerly high-flying banks had to be nationalized, the International Monetary Fund stepped in with a bailout, and the government collapsed. All this helped explain why no one in Iceland seemed worried about building an economy on water, not when the last one had been built on air.

In Rif, Damon and I met with Mayor Kristinn Jonasson, the man who in 2007 had granted Spork an exclusive ninety-five-year water lease. Locals called him the Major because in Icelandic j‘s sound like y‘s and they would overcorrect when translating to English. He was waiting in his office when we arrived. “Do you want water or something?” he asked. He popped into the next room, returning with two full glasses.

“I think the next war in the world is about water”, he said. “Because, you know, you need water if you want to live”. The Major is one of the longest-serving mayors in Iceland: he has run the 1,700-person, 260-square-mile Snaefellsbaer municipality since 1998, when he was thirty-three. Water seekers had come to Rif from all over the world. “Companies from England, from Norway, from Denmark”, he said. “An Arab from Kuwait. An agent for a guy from China, or something like that. Most of them, they are thinking the same thing: using old oil ships. Old oil ships, they have just one hull” – considered unsafe and outlawed in the United States after the Exxon Valdez spill – “so they have nothing to do now”. If the Arctic melted enough, Iceland could become the next Singapore, and ships conveying bulk water could go to Asia over the top of the world. But there were no publicly announced water deals with China yet. Only rumors. “Before, people said, ‘We have a lot of Arabs who want to buy water’ “, the Major told us. “Now, they’re not talking about Arabs. Now it is China.”

Many had come, but Spork was the first outsider to build anything tangible here. Under the terms of the lease, Iceland Glacier Products – a sister corporation to iGlobalWater – would give Snaefellsbaer $50,000 a year plus twenty-three cents per thousand liters of exported water. Snaefellsbaer also received a million shares of IGP, or about 1.4 percent of the company. The venture crashed before exports began, but Spork paid at least the first $50,000, and he paid most of the workers who built the multimillion-dollar plant and million-dollar pipelines. He had also erected a billboard near the plant:

 

ICELAND GLACIER WATER

CAPTURED AT THE SOURCE OF SNAEFELLSJOKULL

In the middle of the billboard was a corporate seal that depicted what looked like an eagle with its wings raised above the word SPORK.

“Otto was always very nice with me”, the Major said. “I cannot be angry about what happened, because, you know, in Iceland, we had the kreppa – we lost so much money in the bankrupt”. Had Spork come a few years earlier, he might already be exporting their water. “I have heard about the court in Canada and everything about that”, the Major said, “but I believe in the good in every person”.

He had not seen Spork in months, but he told us where he lived. “Otto has a house, a big house”, he said. “It’s in a willage … how do you call it in English? A willage?”

A village, I said.

“A willage near Reykjavik”, he said.

One guess as to how Spork the dentist was transformed in 2006 into Spork the hedge-fund manager is that he emulated a Canadian self-made billionaire named Eric Sprott. Spork knew Sprott: for almost thirty years, his sister Anne was Sprott’s deputy. While Otto filled cavities, she co-managed a Sprott hedge fund, investing in such commodities as molybdenum, a trace element crucial to the global desalination boom (each new reverse-osmosis plant requires as much as a million pounds of it). Anne helped the fund grow by 600 percent over the course of a decade and became supremely rich in the process. Sprott had later hired Spork’s eldest daughter, J’Aime, to work at Sprott Asset Management headquarters in Royal Bank Plaza. (Spork sometimes got Sprott’s mail.)

Sprott had made wildly successful bets on gold and silver; in 2011, Bloomberg Businessweek reported that his company “oversaw more gold than Brazil held in its reserves”. He and a thirty-five-year-old protege named Kevin Bambrough had authored “Investment Implications of an Abrupt Climate Change” in 2006 – one of the first reports of its kind. “Harsher summers and intense winters are in the offing”, wrote Sprott and Bambrough,

 

and they generally cause agriculture yields to drop sharply. Rising sea levels that intrude into coastal aquifers and lead to hotter summers also sap water resources. Mankind is staring starkly at the possibility of a severe crisis in water and food supply.

 

Unlike Spork, Sprott never found the right way to invest in water. “Governments get involved and don’t allow companies to raise prices exorbitantly”, Bambrough explained to a reporter from the National Post in 2007. “It’s hard to make outsized returns”. Instead, Bambrough and Sprott began investing in farmland as the grain belt moved north. In 2009, they founded One Earth Farms, leasing cheap, underutilized lands in Canada’s prairie provinces from First Nations tribes. The company now controls more farmland than anyone else in the country.

I called Sprott to run my Spork origin story past him. “Yes, he might have tried to copy something that we did”, Sprott granted, “but you have to figure that out when you talk to him. I mean, lots of people invest in commodities. I have no idea why he moved into [my] building – I really don’t know. He goes from being a dentist to a hedge-fund manager. That’s quite a leap. I guess he was driven. I guess that’s the word to describe it.” Sprott assured me that Anne Spork, an apparent straight arrow with plenty of money of her own, had nothing to do with anything at Sextant. As for Otto, “he was kind of a fun-loving guy”, said Sprott. “He – he might’ve – well, he was a fun-loving guy. He was a fun-loving guy.”

Sprott had never talked to Spork about Sextant. But the plan to export Icelandic glacier water did not strike him as too outlandish. “There are all sorts of waters that we get all the time, and they’re all from some special goddamn place”, he said. “Iceland might make some sense”.

The willage the Major had mentioned, Mosfellsbaer, could more aptly be described as a suburb: tidy rows of single-story, single-family homes – big for Iceland, average for the United States or Canada – set between a bay called Leirvogur to the north and Highway One from Reykjavik to the south. Alone at the end of a winding street was an ultramodern villa unlike any other home in the neighborhood, with slate paneling and mirrored-glass windows that reflected the snowfields of a distant ridge. The house bore the address listed for Spork in Iceland’s handy national phone book, and it was where Canadian authorities had tried (unsuccessfully, as usual) to serve him with papers. Spork had bought his lair, the rumor went, from a local couple who built it during the boom times. Spork’s Icelandic fixer had appeared at their doorstep and made them a generous offer, and they promptly moved out.

Damon and I sat a few hundred feet from the property in the Spark, surveying the area with my camera’s telephoto lens. There were no cars out front, no lights, no movement. Clusters of yellow flowers were sprouting in the gravel driveway, and the grass was getting long. A few doors down, a girl bounced on a trampoline. An old couple strolled past and gave us a funny look.

The Spark began to feel cramped, and we got up the nerve to go to the door. OTTO ROBERT SPORK, HELEN EKONOMIDIS SPORK, read a plaque above the mail slot. There was no answer when I knocked. We wandered around the perimeter of the house, peering through one of the few windows without blinds. On a dark granite countertop in the kitchen, across from an oven mitt shaped like a gingerbread man, was a glass bottle of water. Atop a white piano were five family photos, three of which featured the family poodle.

I had a file on the poodle. I had first noticed it in the archives of Canada’s Globe and Mail, in a photo accompanying a 2007 article with the headline “Fears Make Resources Sparkle”. The photo shows a gray-haired Spork sitting in front of three white Samsung computer monitors. The top button of his shirt is undone, and his jowly, bespectacled face is staring intently at the nearest screen. Behind him, next to some boxes, is the poodle, staring intently, and cutely, at the camera. Dogs were not allowed in the Royal Bank Plaza towers, but he brought the poodle to work anyway. Find the poodle, Damon and I joked, and we’ll find Spork.

We listened for yips at the door. There were none. Stymied, we returned to our cheap hotel in Reykjavik and looked up every website registered under the name Otto Spork. For ninety-nine dollars, I got a list of twenty domains – ibulkwater.com, sporkag.com, sporkdonations.com, sporkinfo.com, sporkwildlifefund.com – but no physical address other than that of the house in Mosfellsbaer. I called the number listed for Spork in the phone book. It rang and rang. I found some old press releases for Iceland Glacier Products and called the local and Canadian numbers listed there for Dino Ekonomidis, Spork’s brother-in-law. (A vice president at Sextant, Ekonomidis had also been charged with fraud, and he had also been dodging summonses from the OSC.) A male voice answered at the Canadian number. I asked for Dino. “Uh, he’s not here”, the voice said after a long pause. “Can I take a message?”

Sextant Capital Management, like Madoff Securities, was a family affair. Ekonomidis was second-in-command, charged with drumming up buyers for Sextant’s funds. Spork’s younger daughter, Natalie, until her unlikely promotion to president in May 2008 following her father’s departure for Iceland, was Sextant’s marketing assistant. Helen, Spork’s wife, had no title but was always around. The poodle was on the floor. Sextant also hired an amateur bodybuilder named Randy, unrelated to the family, to help with sales. The chief compliance officer, Robert Levack, who later settled with the OSC, attested that in its early days Sextant engaged in perfectly legitimate trades – mainly in the gold and molybdenum markets – five or six times a week. The firm’s turn toward Icelandic water – and, eventually, toward self-dealing and fraud – happened because Spork frequented a Toronto bar called Little Anthony’s that was popular among the financial set. There he met someone who worked at a company called Icelandia, which was planning to export water running off Iceland’s Snaefellsjokull volcano. Icelandia had an exclusive ninety-five-year water lease with Mayor Kristinn Jonasson and the municipality of Snaefellsbaer: $50,000 a year, twenty-three cents per thousand liters.

“Spork was a dentist”, recalls Bob Heward, a former Icelandia director who now runs a website called sextantcapitalfraud.com. “He didn’t know the first thing about water”. But Sprott’s climate report had just come out, and so had An Inconvenient Truth. Spork was interested.

Monetizing the melting Snaefell glacier had not been Heward’s idea. The pioneers were David Powley, an American veteran of San Pellegrino and Shasta Beverages, and Birgir Halldorsson, or Biggi, an Icelandic entrepreneur known for introducing prepackaged deli sandwiches to the country’s gas stations. The pair had signed a water contract with Snaefellsbaer in the early 1990s, but back then they had planned only for bottling operations, not bulk shipments throughout a warming world – and in any case, their plans never got off the ground.

Icelandia was formed in 2005 by Biggi, Powley, Heward, and a former ExxonMobil logistics manager named Madeline Vinski, Heward’s girlfriend at the time – “a gathering of titans”, according to a press release. Its confidential business plan, shown to potential investors who included a British defense contractor and an American investment bank, envisioned three revenue streams. First would come “super-premium bottled water” branded with such slogans as “Drink the Glacier” and “Born of Ice”. Next would be “small bulk” sales, in which standard shipping containers would be filled by 20,000-liter plastic bladders. In time would come the third and most lucrative stream, “large bulk”: converted oil tankers as big as 130,000 tons. Because of the target clientele, Heward had a British law firm declare Icelandia sharia-compliant. In the optimistic projections of the business plan, each tankerload sold would net $1.5 million in profits, and Icelandia would run three tankers more than 300 days a year. Before a single drop was bottled, a US valuation firm declared that Icelandia’s Snaefellsjokull deal was worth $432,144,520.

Heward was the first Icelandia director to meet with Spork – he remembers distractingly perfect teeth and a sizable gut – and he later introduced him to Biggi and Powley. In late 2006, in a swank restaurant in Zurich, Heward agreed to sell Spork and Sextant $500,000 worth of Icelandia stock. But the money – much needed to begin construction of pipes and a plant – never appeared. Instead, Spork double-crossed him. Heward claims – and leaked emails appear to confirm – that Spork, Biggi, and Powley successfully colluded to bankrupt Icelandia and drive out Heward and Vinski. By mid-2007, Spork, Biggi, and Powley appeared in Icelandia’s place, signing a strikingly similar water contract with the Major and producing a strikingly similar business plan. Eventually, multiple sources told me, Spork forced Biggi and Powley out too, offering them a payoff in the low millions of dollars – a fraction of what they believed the company was worth. (The pair would not talk to me, citing nondisclosure agreements. “Also, quite frankly, I get nauseated when I think about Spork”, Powley said.)

After the takeover, Sextant issued a triumphant press release:

 

Sextant Capital Management Inc, led by founder Otto Spork, announces he has gained a position in a Luxembourg based private Water Company, which has the ability to deliver a hundred gigalitres per year of pure glacier drinking water anywhere in the world.

 

The moneyed public was invited to get into global-water-crisis profiteering on the ground floor. “Invest in Pure Water with Sextant Capital”, read another release. “Otto Spork, President and founder of Sextant Capital, says: ‘Investing in Sextant Capital Funds today is like buying a 1982 Lafite Rothschild Bordeaux wine in 1985’ “. Lafite Rothschild Bordeaux, it explained, was pretty much the best wine ever.

The number of weekly trades at Sextant soon dropped to approximately zero, but the OSC, like so many regulators in those heady times, was nowhere to be seen. Sextant’s funds, successful on paper and prescient in their play on drought, attracted such luminary investors as Baron Philippe Lambert, heir to a Belgian banking fortune, and Bill Linton, the CFO of the Canadian telecom giant Rogers. There is a photograph from this period in which Spork and his wife, Dino Ekonomidis, the Major, and other men in suits are standing on the gravel of the Snaefellsbaer construction site. Spork is shaking hands with the man in the middle of the frame – Icelandic president olafur Ragnar Grimsson, a prominent voice on climate change and one of the few national leaders to survive the kreppa – and grinning at the camera with very white teeth.

On our next visit to Mosfellsbaer, we parked the Spark on a side street and approached Spork’s house on foot. It was a beautiful Arctic June afternoon, the sun hanging immobile in the sky, and I was hopeful until the moment we rounded the corner: again an empty driveway, again a lifeless house. We went through his recycling bin. Along with an empty carton of tomato juice were two parking stubs dated December 24. Nothing else. I began taking note of what I hadn’t wanted to see before: the unplugged Christmas lights ringing the house, the snow boots near the door, the festive pinecone near the entryway.

Back in the capital, I called Spork’s onetime fixer, a Rif native turned Reykjavik banker named Sverrir Hermann Palmarsson, and asked him to meet me and Damon for coffee. A former employee of both Icelandia and IGP, Sverrir now worked on foreclosures at Iceland’s Landsbanki, one of the three banks that had failed during the kreppa. The foreclosure division was booming. “When I started, we were two persons”, he said. “Now we have sixty”.

Sverrir did not know where Spork was, and he said he never wanted to see him again. But he believed that Spork was something more complex than a Ponzi schemer. “Otto could sell the northern lights, he was such a good salesman”, Sverrir said, “but I think he was trying to honestly establish this company. We worked long hours. He worked long hours with us. Maybe Otto was maybe five or six years too early, because I think the price of water is going up.” In fact, Sverrir himself was a consultant on a new water project involving Chinese buyers.

He had heard that the dentist was moving around a lot, that he still had his house and Porsche in Luxembourg.

“Is that his main residence?” I asked.

“I don’t know. I think so”, Sverrir said.

“We thought he was here”, Damon said.

“Too bad for you”, Sverrir said.

Sverrir and another former Spork employee, Gudjon Engilbertsson, had started their own bulk-water venture in the Westman Islands, fifteen or so volcanic lumps off Iceland’s southern coast. Gudjon was friendlier than Sverrir. “I will give you a tour of the Westmans”, he said when I called. We bought ferry tickets.

After the hour-long crossing, Gudjon, who had white hair and blue eyes, picked us up in a new Toyota Land Cruiser. Before entering the water business, he said, he had worked in fisheries. In the surrounding ocean there lived a small, sardinelike fish, the capelin, whose value was far greater than Icelanders had initially understood. “When the first Japanese came”, Gudjon explained, “they saw all the roe flowing into the waste at the processing plant, and they scooped it up with their hands and ate it like there was no tomorrow!” The roe, known in Japanese as masago, is a staple in sushi restaurants. In addition to undertaking the water venture with Sverrir, Gudjon was again helping set up a fish plant, this one in northern Norway. It was a good time to be back in fish; as the ocean warmed, many species were moving north. “Mackerel is totally new”, he said. “It was never here before”.

Gudjon followed a winding road through a lava field covered in purple lupines. He parked at the edge of a precipice. “There is the Eyjafjallajokull glacier”, he said, pointing toward a volcano on the mainland, “and the pipe starts there and comes directly in here and into the city water system”. He traced its undersea route with his finger. It had been upgraded in 2009, he said. The water now came from a reservoir 600 feet up the volcano; gravity and pressure alone brought it to the Westmans – no pumps needed. Except during the two-week peak of the capelin-processing season, the islands had much more water than they could use.

Gudjon, like Sverrir, did not want to talk about the new project, but he talked freely about the past: He got into the water business after answering a help-wanted ad placed by Icelandia, which was seeking an operations manager for its planned bottling plant in Rif. Gudjon, with his fish-plant experience, was a shoo-in. Soon, he said, “Otto came in with a big chunk of money from his funds and things started to roll. We had plans for Suezmax tankers – 130,000 tons.”

At some point after the takeover in Snaefellsbaer, Spork began “looking around for more water to export”, and Gudjon realized the Westmans were perfect. “We have a water pipeline”, he said. “We have a great harbor. We could do it right away, just very simple and easy, just in containers.” He and Sverrir negotiated a water-rights contract with the local utility and entered into what they believed to be an equal partnership with Spork, incorporating a new small-bulk water-export company, Iceland Global Water, or IGW, in Luxembourg. The documents were in French. Gudjon and Sverrir could not read French. They later discovered they had been given shares of nonvoting Class B stock and had been tricked out of their company.

We drove down to the bay, to the water plant Gudjon had helped build for IGW. It was many times smaller than the facility in Rif – two stories, four garage doors – but it was more than an empty shell. Through a window I saw a fire extinguisher on the wall, concrete floors, and what seemed to be industrial-grade plumbing. Though Gudjon drove us there, he was reluctant to be seen hanging around outside. It wasn’t his anymore – it was Spork’s.

Only one Sextant investor was willing to talk to me. Jeremy Charlesworth was CEO of Moonraker, a UK-based investment firm, and when I cold-called him in London one afternoon, he was delighted to know that there were other people still stuck on Spork. In 2007, he decided to bet his fund’s funds on water. He landed on Sextant, which was then sending out press releases with such titles as “Water Shock has Sextant Global Water Fund on Fire”. Spork seemed to ignore typical water investments – the utility stocks, the desalination companies, the makers of valves and gaskets – in favor of the thing itself. “Of the seven or eight funds we looked at, he was the only one who actually had water rights”, Charlesworth said. “The rest were plays on utilities” – political plays, really, because governments, not markets, set utility prices. “You can invest in gold shares”, he said, “or you can invest in gold”.

Before Moonraker bet millions on Sextant, it did its due diligence on Spork’s career as a dentist, which Spork once explained to Worth magazine by saying, “I got caught up in the competition and the prestige of getting into dentistry”. Charlesworth hired a private investigator who came back with a glowing report. “We were told that clients came from abroad just to have their dental work done by him”, he said. But the investigator either overlooked or downplayed an important fact: that Spork was censured by Ontario’s Royal College of Dental Surgeons, the OSC of teeth, at least three times. In 1984, after he charged “excessive or unreasonable” fees and repeatedly neglected to take X-rays, Spork had his license taken away for five months. In 1993, he was found guilty of allowing employees to work without a license and again of charging excessive fees. In 1998, he “recommended and/or provided an unnecessary dental service”.

The office Spork ran before launching his hedge-fund career occupied a small strip-mall storefront near a dry cleaner, a Subway, and a Sherwin-Williams in the rundown city of Brantford, Ontario, about an hour east of Toronto. In August 2005, a Romanian immigrant named Marius Beca bought the practice from Spork for $828,000 and paid Spork a $100,000 consulting fee. Beca was told it had 1,800 to 2,000 active clients; in fact, it had about 200. He was told that the practice usually acquired thirty to forty new patients a month; in fact, it usually acquired zero new patients a month. He was told that it had accounts receivable totaling about $40,000; in fact, it had debts totaling $347,257.50. He was shown hundreds of patient records – but most turned out to belong to another dentist. The practice’s sterilizer and other equipment were sold to him broken, and he was saddled with Spork’s $1,334 phone bill. Spork or his wife also gained remote access to the office computer after the sale, whereupon they added a bunch of fake appointments to the calendar.

Beca sued Spork. In the case file at the Brantford courthouse I found a stack of a hundred returned letters that Beca had sent to nonexistent patients reminding them of nonexistent appointments. Beca’s lawyer, Peter Quinlan, told me that they had tried many times to serve Spork with court papers, without success. During one attempt, Spork’s lawyer acknowledged being Spork’s lawyer – but he denied being his lawyer in this particular matter. When Quinlan finally won a $600,000 default judgment, a new lawyer showed up to argue that Spork had never been served, and a judge ruled in Spork’s favor and threw the previous decision out.

As the OSC began investigating Sextant, Beca and Quinlan tried to secure an injunction to keep Spork’s assets from following him out of Canada. A judge denied them one for lack of prima facie evidence; it was one man’s word against another’s. “The guy skeedaddled on us”, Quinlan said, “and eventually Marius gave up chasing the shadow”.

In August 2008, on the verge of the global financial crisis, Spork sent his funds’ clients an upbeat newsletter: “Even though the broad markets are down and most commodities have been heading for a fifty percent retrenchment from their recent highs”, he wrote, “I am very happy to report to you, the Investors in our Sextant Funds, that you are in invested in ‘Water’. Congratulations!!!” The letter enumerated the reasons for water’s rise as a commodity – climate change, population growth, pollution, urbanization, China – and disparaged desalination as pumping out a product that tasted bad and a byproduct, brine, that was bad for the environment. “This month’s return for your Fund is, we believe, only the tip of the iceberg”, Spork continued. “Consider adding to your investment before the rest of the world discovers us”.

By the summer of 2008, at least one investor, Baron Lambert, began to think that Sextant’s numbers were too good to be true. The baron asked Dino Ekonomidis to explain how the funds could possibly be doing so well. He was ignored. He then asked for his $7 million investment back, plus any profits. He was again ignored, until late September, when Dino issued an official notice of redemption – only to then claim he lacked the authority to actually release Baron Lambert’s money. Like Beca, Lambert filed an injunction in an unsuccessful attempt to get his money back before Spork disappeared.

Other investors were shown letters of intent from three of the thirstiest water utilities on the planet: the Los Angeles Department of Water and Power, the San Diego County Water Authority, and the Orange County Water District. “Whereas, IGP is the exclusive provider of the pure water derived from the Snow Mountain Glacier in Iceland and delivered in bulk”, read the LADWP letter, “and it makes these waters available globally in all packaging sizes; and whereas, Mr Wally Know is a qualified business entity … ” The letters looked official, but the LADWP commissioner’s real name was Wally Knox. They were forgeries.

In December 2008, Sextant issued a final public statement, with the title “Sextant Categorically Denies Any Wrong Doing and Will Vigorously Defend the Unproven Allegations to Protect Its Investors and Reputation”. The OSC uncovered the rest of the story: Investors learned that more than ninety percent of their money was tied up in two Spork-controlled companies, IGP and IGW – a breach of securities laws against self-dealing. Sextant’s returns were so high because Spork overstated the value of the underlying companies; IGP’s value jumped 984 percent before the pipelines were even in place. Regulators failed to notice. Companies hired to determine the market value of Sextant’s funds – Investment Administration Solutions, Spardata, and Hempstead – relied exclusively on numbers provided by Spork himself. BDO Dunwoody, the Canadian branch of one of the world’s biggest accounting firms, used something it called probability-weighted sensitivity analysis to establish what Sextant’s investment in IGP was worth – and magically came up with the same number Spork had provided, $23.3 million. The effect of juicing Sextant’s returns was that Spork’s own fees – the hedge-fund manager’s standard two percent of total holdings plus twenty percent of any gains annually – were juiced as well.

But perhaps Spork, rather than being a Madoff-style con man, had simply run short on cash for his water businesses. Eric Sprott thought so: “Maybe he said, ‘Well, shit, I’ll just say that the value is ten million dollars higher, and I’ll pump the two million dollars the fund owes me into the plant’ “. Investigators eventually showed that much of the money Spork was paid by Sextant was indeed reinvested in the water ventures. And according to the Major, construction in Rif continued well after the OSC filed charges and Sextant was put into receivership. This supported the argument that Spork, though willing to cut corners, was no Ponzi schemer.

The press releases also continued after the OSC investigation began – only now in the name of IGP.

 

Iceland Glacier Products: Fresh Drinking Water for Asia Available

Iceland Glacier Products: Fresh Drinking Water for the Middle East Available

Iceland Glacier Products – A Solution for Water Shortages

 

As time passed, they seemed increasingly desperate – unedited, ungrammatical. Water, said an April 2010 release,

 

keeps cells hydrated and capable of fighting harmful disease-causing substances … IGP’s water is unchallenged in its Ancient Purity Unchanged the Creme de la Creme of Waters.

 

The tone had become pleading.

 

PLEASE contact us if your community is experiencing a water crisis. It cannot hurt to get a quote. The sooner the better, so fresh drinking water can be provided for your people as soon as possible.

 

There was a problem that neither Spork nor any of the other bulk-water schemers readily discussed: water is heavy. A gallon weighs 8.3 pounds, and whether by pump or pipeline or tanker, it is not easily moved. In Reykjavik I met a recent business school graduate who had written his thesis on small-bulk exports. “Everywhere in the world”, he told me, “it is cheaper to do desalination”.

The man who has thought more than almost anyone about how to convey freshwater across oceans of salt water is Terry Spragg, the inventor of the Spragg Bag. He got his start in bulk water in the early 1970s, after a friend mentioned that the RAND Corporation was studying the possibility of towing icebergs to California. Spragg talked his way into a job with Iceberg Transport International Limited, a company founded by Prince Mohammed bin Faisal Al-Saud. In 1977, the prince flew a small iceberg to Iowa, where chunks of it floated in cocktails at the first international conference investigating their use as a water source. (Presentations included “A Laboratory and Field Study of Iceberg Deterioration”, and the succinctly titled “Calving”.) The next year, Spragg got the California State Legislature to endorse iceberg towing. But then he lost faith in the idea: icebergs melt too quickly. Why not tow a giant water-filled bag instead? He began envisioning enormous floating polyester bladders the shape and size of a nuclear submarine connected in fifty-bag trains and deposited one by one in water-bag depots worldwide. But after Spragg’s most successful prototype was towed across Puget Sound to Seattle in 1996, a tugboat ran into it. He had no insurance, and he has been trying to raise money for another test for the past seventeen years. Someone from Spork’s office called him once. He remembers only the name Spork, not the conversation, but it is likely that he told the caller what he told me: From Iceland seems like a very long way to drag a bag.

The swords-into-plowshares dream of enlisting single-hull oil tankers is no more realistic than a water bag. Old tankers may be inexpensive to buy, but they are very expensive to retrofit. The ships’ holds need to be cleaned, and their pipes, pumps, valves, and washers all need to be replaced. Most are so old that they have only a few years of service left. There is a reason water has yet to be shipped around the world like oil.

For nearly three years, Sextant and its Canadian assets were in receivership; a court order put a senior vice president at PricewaterhouseCoopers, Andrew Wilczynski, in charge. His task was to get as much money as possible back to Sextant’s investors, though the task was complicated by the fact that he billed at $650 an hour. PwC and its lawyers would eventually take a $1.7 million cut from Sextant ($1.85 million if you include the service tax), leaving little more than $200,000 to return to its 246 Canadian investors – less than a hundredth of what they put in. In the Cayman Islands, Sextant’s offshore funds were overseen by Kenneth Krys, called “the Controller” in court documents, who had just played a similar role unwinding Madoff’s largest offshore feeder funds. The amount Krys will return to Sextant’s investors has yet to be determined.

Spork had long ignored the receiver and the controller, once even standing them up at a meeting in his lawyer’s office in Reykjavik. But then there appeared what the court called the “prospective purchaser”, an entity that might buy IGP, its Snaefellsjokull water lease, its pipelines, and its factory: Moonraker, the fund run by Jeremy Charlesworth.

Wilczynski and Krys had their first phone call with Spork in September 2010, and in January 2011 they met him in the flesh in London. “It was a special moment”, Krys told me. “I’d almost wondered if he was real”. According to another of the meeting’s attendees, Spork seemed a man deflated; he was contemplating giving up his dream in Rif. Soon, Wilczynski and Krys were deflated, too. They learned that Moonraker had decided not to buy IGP. Instead, Charlesworth had persuaded the Major to void IGP’s lease, and Moonraker had just signed its own lease – exclusive for sixty-five years – to the water running off Snaefellsjokull. What Spork had taken from Biggi and Powley, and Biggi and Powley and Spork had taken from Heward and Vinski, had now been taken from Spork.

In July 2011, little more than a month after the OSC found Spork guilty and a few weeks after Damon and I returned from Iceland, Spork, Wilczynski, and Krys finalized their settlement. Their hand was forced; bad publicity from the OSC was eroding any value the water companies still had. From Spork, the receiver and controller got a check for $1 million – actually two checks, because the first one he sent was invalid – along with all his shares of IGP, which, stripped of its water lease, soon went bankrupt. Spork got to keep his heavily leveraged houses and his two Porsches – and all of IGW in the Westman Islands. A year later, the OSC decided on its sanctions against Spork: trading bans, fines, fees, and a clawback of Sextant bonuses. Spork owed the Canadian government $7.7 million. But from the safety of Iceland, or wherever he was, he directed his lawyer to appeal the penalty, and the likelihood that the OSC will ever collect from him is small. It appears even less likely that criminal charges against Spork will ever be filed.

I asked Krys, who had just wrapped up his work on Madoff when I called, whether Spork was an unusual case. “Down here”, he said, “he’s quite normal – normal for the jobs we get. People come up with a great dream, then they get into that dream.” That is, so into their dream that they try to realize it at any cost. The line between visionary and swindler is frightfully thin. In twenty years in the Caymans, Krys had seen true Ponzi schemes only half a dozen times. “Spork inflated fees – that was his rip-off”, he said. “But Madoff never invested his money. It just sat in his bank accounts.” Spork spent his money – nearly all of it – and he seemed to still be scheming. “I just don’t think he’s given up the dream of selling Iceland’s water”, Krys said.

I had failed to get my man, but for a long time I couldn’t let go. I went down to Palm Beach to stare at Spork’s empty condo. I found Dino Ekonomidis’s house in a small town south of Toronto, but he shut the door in my face.

I called Jeremy Charlesworth in London, and he passed along a few Spork stories. “I heard the dog in Canada died”, he said, “so they got themselves another one”. Charlesworth emailed me photos of Moonraker’s new facility in Rif: a bottling plant at first, but bulk would come – that was the dream. He mentioned that Spork had showed up in Iceland just days after Damon and I left. Charlesworth had seen him with his own eyes. “It was in June”, he said. “I went to the coffee shop in Mosfellsbaer on my way to Rif – they have great coffee – and there he was”. Charlesworth hadn’t known what to do, so he walked up and said hello. “Otto looked like he’d seen a ghost”, he said.

In the winter, Damon and I reunited to make a pseudonymous offer for the Web domain sporkwildlifefund.com. Spork ignored it. We left messages for him, his wife, and Dino Ekonomidis at various email addresses and numbers. They went unanswered. We attempted to reach almost a hundred Canadian former Spork associates and Sextant investors. Nearly all declined to talk. We finally decided to go through Spork’s lawyer, who would not speak on the record but promised to forward his client an email from us. The response came a few days later from Helen Spork, who had apparently copied Damon and me by mistake:

 

Hi Jay.

This is the em from Damion I never acknowledged. Talks about people he spoke to while in Iceland.

Sent from my iPhone

 

It was the first time I knew for sure that the Sporks knew about me, knew about Damon, knew we wanted to hear the real story from them – and didn’t care.

Eventually, I simply became like Canada and its regulators: Spork outlasted me. I couldn’t keep up the hunt.

Late one night, a few weeks after we received Helen Spork’s email, I decided to check in on iglobalwater.com one more time. For many years it had been dark, but now it was back. Spork was back. “Let it SNO!” proclaimed a banner, and little snowflakes cascaded down the screen. The site advertised Icelandic water for export straight from the legendary slopes of Eyjafjallajokull and invited visitors to stop by the Iceland Global Water booth at the upcoming Food & Drink Expo in Birmingham, England. SNO bottled water was already being sold at the UK supermarket chain Tesco, the second-largest retailer in the world. IGW had a new slogan: “We challenge you to taste water for the first time”.

For now it’s just bottles – stage one of Spork’s plagiarized business plan – but iglobalwater.com and a newer companion site, iglacierwonders.com, advertise bulk sales too: “Now you can have pure luxury, pristine glacier water delivered in bulk directly to [your] home estate, condo, hotel, villa, yacht or any location you choose”. According to recent press releases, SNO has a high oxygen content of 13.3 mg/L, a perfect pH level of 7.4, and a nitrate concentration of zero – “making it suitable even for infants”. SNO is supposedly coming to America in 2013. It may already be here.

It was too late for me to get to the Food & Drink Expo in time, but Charlesworth was there. Spork’s booth was adjacent to that of the baked-goods retailer Honeybuns. It was staffed by his new Icelandic fixer, a man named Petur Juliusson, and by two blonde models who handed out free samples. Southern England was experiencing a severe drought at the time – “I could get fined a thousand pounds for running my garden hose!” Charlesworth told me – and Thames Water, the utility serving Greater London, would soon put out a request for proposals for bulk-water imports. Spork’s booth was wildly popular. His blondes ran through their samples. Charlesworth stopped by three times. “His water”, he admitted, “was the best water at the show”.

 

(c) 2012 Harper’s Magazine

Categories: Uncategorized

Plan B

2013/09/24 1 comment

How to Loot Nations and Their Banks Legally

by David Malone, author of The Debt Generation (2010)

Golem XIV (December 15 2011)

Information Clearing House (December 17 2011)

Is there a Plan B? That question is usually asked of governments regarding their attempts to ‘save’ the banks domiciled in their country. But has anyone asked if the banks have a Plan B?

Does anyone think that if our governments fail to keep to their austerity targets and fail to keep bailing out the banking sector, that the banks will just shrug and say, “Well, thanks for trying” and accept their fate? Or do you think the banks might have a Plan B of their own?

First let’s be clear about Plan A. That plan is to enforce an era of long-term austerity cuts to public services, in part to cut public expenditure so as to free up money for spending on the banks, but perhaps more importantly to further atrophy public services so that private providers can take over. A privatization of services which will bring great profits and cash flow to the private sector and to the banks who finance them, and a further general victory for those who feel that private debts rather than public taxes should be what underpins our national life and social contract.

Plan A therefore requires that governments convince their populace that private debts should be taken on to the public purse and that once taken on, the contracts signed by governments on behalf of the taxpayers/citizens, are then sacrosanct and above any democratic change of mind. If governments can hold their peoples to this, then the banks are ‘saved’ with the added bonus that democracy and the ‘Rights’ it once guaranteed will all have been redefined as subordinate to finance and its contracts, and our citizenship will have become second to one’s contractual place in a web of private debts. Debts to the private lenders will become more important than taxes to the public exchequer. And as they do the State will wither away, leaving free-market believers and extreme libertarians exactly where they have always wanted to be – in charge – by dint of being rich. It is, in my view, a bleak future which I once described as A Toxic Debt Wasteland {1}.

BUT it does all depend on governments being able to suppress discontent and to outlaw opposition in the sense of saying to people you  may disagree but we have now declared these debts and their repayment to be outside democratic control and immune to any attempt to rescind or repudiate the agreed debt contracts. As the severity of the austerity cuts to social services (health, education, pensions, et cetera)  becomes painfully clearer  to people and the ‘necessity’ for them is ‘regretfully’ extended year after year, it will become harder and harder to justify, let alone impose, such suffering. We will enter an era of vicious sectarian blame. We are already in it, but it will get much darker.

The banks and those whose wealth and power is tied to them, would obviously prefer Plan A to succeed. It makes governments do all the dirty work and it would profit the banks far more in the long run. If you want to bleed a man – kill him and you get about five litres. But strap him to a gurney with a catheter in his arm and a drip feed in his nose, and he will bleed for you for as long as his system can stand it. That is Plan A. But what if it fails?

I cannot believe the banks, with everything at stake, have not thought it prudent to have a Plan B. So here are my thoughts on what that plan could be.  Let me say now, I do not think this plan was a long term conspiracy. I do not think the end game was in mind when the first elements were put in place. It has, I think, been constructed opportunistically.  But the end result is no less dark and threatening.

What I offer from here on is thinking out loud. I obviously have no proof at all that there is a Plan B. All I can hope to do is show you the elements which I think could make a Plan B for the banks. Then my argument is that if the mechanism I describe could work, if I have not simply misunderstood something, then I think the banks will surely have thought of it before me. And so it either already exists or it will. I think there are scraps of information that suggest it does exist and the collapse of MF Global might even be the first example of Plan B in action. The MF Global case certainly contains all the clues.

MF Global imploded when it could not get the short term funding it needed. There were two kinds of funding MF Global relied upon for its liquidity/cash flow: Repo and Hypothecation. For those not familiar, Repo is when a bank or brokerage ‘sells’ an asset for cash but with the agreement that it will re-purchase – hence ‘repo’ – the asset at an agreed date for an agreed price. It is not really a sale but a loan. Repo is the oxygen the financial world breathes. Repo is a $10 Trillion market {2}.

The other main source of the essential short term funding was Hypothecation. This is when a bank or brokerage pledges an asset to a ‘lender’ in return for cash but the asset remains in the possession of the borrower. What the ‘lender’ gets is hypothetical control of the asset. Although the asset never actually changes hands, the new ‘owner’s’ hypothetical control of the asset allows her  to do what she wishes with the asset. Including re-hypothecating the asset to another bank or brokerage. If she does so then the hypothetical control passes to yet another ‘owner’. Even though physically it remain where it started.

Like repo, hypothecation and re-hypothecation are truely massive parts of modern debt-based banking. So the first thing the MF Global case tells us is that what happened is not due to some peripheral, parochial rogue trader-esque, isolated problem. What happened was as a result of a mechanism right at the very heart of the financial system.

In the MF Global collapse what ZeroHedge {3}, and following them, I and others wrote about, was the way in which not only did MF Global go bankrupt, but so also did some of their clients when they found the money they thought MF Global was holding for them, went unaccountably missing {4}. Clients’ money went missing because it was ‘mingled’ with the brokerage’s money when it should not have been. Brokers should keep them separate. But it seems in the ‘re-hypothecation’ of assets it was mingled. Former CEO of MF Global, Mr Corzine has sworn under oath he knew nothing {5} about his co-mingling nor the irregularities with his company’s re-hypothecation.  It has been rumoured the clients’ money may now be, possibly, in the hands of JP Morgan.

This hint of illegality has grabbed everyone’s attention. But I think it is actually the legal part of the story not the possibly illegal part which is by far the more important.

In my opinion the key to the bank’s Plan B is in understanding why any money/assets were taken from MF Global after it had gone bankrupt and how exactly it went under in the first place. We all know MF Global had huge holdings of dicey European sovereign debt. But those debts have not become worthless so what caused MF to collapse? .

The answer to all these questions  lie in a change to Bankruptcy laws that happened around the world between 2002 and 2005. This might seem like a detour into nerd city but it is not. It is the key.

When a company declares bankruptcy there is what the Americans call an ‘automatic stay’, which means all the assets left in a company at the moment it goes bankrupt are protected from the rush of creditor’s demands until appointed auditors can sort out who should get what. The automatic stay prevents a first come first served disorderly looting where those with the most muscle getting everything and everyone else getting nothing. As we are all painfully aware now, there is a legal pecking order to who gets paid before who, with Senior bond holders at the top. But, in America culminating in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) the order was changed. And that change is the crucial event.

At the time the law was being passed few were aware of this change and even fewer were aware of how important it would become. At the  time the furore was all about changes to personal bankruptcy. The Credit Card industry (aka Banks) had spent more than a decade and its rumoured as much as $100 million lobbying to make bankruptcy much harder and more punitive for ordinary debtors.

An article from 2005 in the Boston Globe {6} quoting a very senior Republican Senator, gives a flavour of what was then being said about ordinary people who fell into debt.

Senator Orrin Hatch (Republican, Utah) has said that millions of Americans are bankrupt or near-bankrupt because “they run up huge bills and then expect society to pay for them”.

After four years of bailing out banks who did exactly that the irony is enough to gag on.

But what was not talked about was an amendment which was put into the bill and, as far as I know little debated. Don’t let the word ‘amendment’ mislead you. Amendments are generally not there as refinements and improvements on the original idea. Whenever a bill goes through Congress every lobby group and industry with something it wants done, gets their tamed/owned political friends to tack on the change in the law that suits them in return for supporting the original bill. The bill emerges from this process festooned with ‘amendments’ to other vaguely related laws. Amendments are the price of getting the original bill passed.  They are often little understood, written by and for the benefit of the sponsoring lobby group and can be far more influential than the bill they are smuggled in on. This is certainly the case here.

According to a scholarly article in the American Bankruptcy Law Review {7},

the provisions [in the amendment] were derived from recommendations from the President’s Working Group and revisions espoused by the financial industry

The President at the time was Bush and one of the most vociferous sponsors of the amendment was none other than Senator Leach whose other claim to fame was the Gram-Leech-Bliley Act which repealed most of the Glass Steagall Act of 1933 whose repeal virtually assured that the present debt crisis would happen. When bankers play pocket billiards, Senator Leach is what they prod their balls with. Ribaldry aside Senator Leach can certainly be described as one of the principle architects of our present global misery. But I digress.

What was this amendment? The amendment exempted repos (and hypothecated and re-hypothecated assets) and a whole range of derivatives from the automatic stay. It also allowed lower quality assets to qualify for the exemptions.

Which means {8},

The special bankruptcy treatment given repos and derivatives means that repo lenders and parties to derivative contracts can keep the collateral if their trading partner becomes insolvent. This exempts them from the “automatic stay” rule in bankruptcy, which prohibits most creditors from trying to collect ahead of others.

Or as the official report from the US Financial Crisis Inquiry Commission said {9},

under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy. (page 48)

So when a bank goes bankrupt, BEFORE even the most senior bond holders, the repo lenders and derivatives traders can remove, or keep all the assets pledged to them.

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies also allowed a whole range of far riskier assets to be used, making them too immune from the automatic stay in the event of bankruptcy. Which meant traders flocked to a market where risky assets would be traded and used as collateral without apparent risk to the lender. The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get your money back before anyone else and no one could stop them.

It also did one other thing. Because the repo and derivatives traders ran no risk – they could get their money out of a failing bank before anyone else, it meant they had no reason at all to try to stop a bank from going under. Quite the opposite.

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

According to Enrico Perotti, professor of international finance at Amsterdam Business School, speaking at the London Conference on The Future of Bank Funding {10}, held in June of this year, 2011,

The financial crisis happened when repo lenders and derivative parties lost confidence in the mortgage-backed securities they’d accepted as collateral for repo loans and credit default swaps. They demanded to be paid, forcing their troubled trading partners into fire sales of their holdings to raise cash. They were  unconcerned that they might drive their trading partners into bankruptcy, because they were exempt from the automatic stay.

Professor Perotti went on to say,

As often in financial regulation, this leads to unintended consequences. As a default leads to repossession of collateral for all safe harbor claims, repossession accelerates fire sales, resulting in a disorderly resolution, with a rush to sell collateral ahead of others, creating a downward spiral in valuations. The timing of the jumps in risk spreads on Lehman, two days after the default, demonstrates this effect, as does AIG.

Should the bankers and their political fluffers like Mr Leach have known? Well they were warned at the time. In 2005 a paper entitled “Derivatives and the Bankruptcy Code: Why the Special Treatment?” by Franklin R Edwards and Edward R Morrison, in the Yale Journal of Regulation {11}:

VI. Conclusion

… the Code’s special treatment of derivatives contracts cannot be justified by a fear of systemic risk … Indeed, exempting derivatives counterparties from the automatic stay may make matters worse by increasing systemic risk … Our analysis, however, should worry members of Congress and legislators in other countries. They have been lobbied heavily by special interest groups (such as ISDA) to expand the special treatment of derivatives on grounds that such legislation is necessary to prevent a systemic meltdown in OTC derivatives markets should a derivatives counterparty suffer financial distress.

Our analysis casts serious doubt on this proposition. Systemic risk may be a real threat, but bankruptcy law has no role to play in addressing it.

The same changes to the bankruptcy laws were also adopted in the UK and throughout Europe. In fact they may well have preceded them. I simply have not done that research yet. And the changes in the UK and Europe were also lobbied for and sponsored  by the banks via among others the ISDA (International Swaps and Derivatives Association {12}). Most of the Big Banks are ISDA members.

Okay all of that was the back-ground to show you how we got here and that it is all ‘legal’. On the basis of laws sponsored by the banks  of course. Now lets come to the present.

MF Global is where I started. There was something about its collapse which did not seem right to me. Mr Corzine’s claim that he ‘didn’t know’ where his clients’ money had gone might be true, but I was and am still, left with the feeling that there is a deeper story here. When I wrote about MF Global and the renewed crisis of bank lending, I came across the fact that in the six months to June 2011 the global trade in Derivatives increased by eighteen percent to an astonishing $707 trillion {13} in nominal value (the face value of all the contracts). And remember the Repo market is $10 trillion.

Somehow MF Global’s collapse and the huge increase in derivatives trading felt related. For me it was not the huge exposure to risky European bonds which MF Global had deliberately amassed, it was the nature of its demise, the trigger, and what happened to its assets afterwards, which were key. MF Global collapsed because it could not get short term funding. It could not get other financial institutions to accept its assets as collateral for Repo agreements nor hypothecate them any longer.

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. The co-mingling story is what brought the whole thing into the light but also provided a wonderful distraction.

The important point is the change in the Bankruptcy laws. The change, as illustrated by Bear Stearns, Lehman Brothers and AIG has made the markets more not less systemically unstable. Yet the banks have defeated all attempts to reform these unwise laws. The Dodd Frank financial reform act in the US did nothing to address them AT ALL.  Mr Dodd was lobbied very hard to make sure of this.

Why?

Here, finally, is my answer.

Let us say you are a bank or broker that has bought up a lot of European bank and sovereign bonds from Italy, Spain and Greece for example. You would be very exposed to great losses should those countries or their banks default. You are relying on the politicians forcing their tax payers to bail out you and the other banks you trade with. What if they don’t?

One solution would be to sell as many of those bonds as you could accepting the inevitable losses as being better than a much larger loss if the banks or nations or both, defaulted.  The other solution, counter-intuitively, would be to do more business with them. But make sure it is repo lending and derivative trading. Specifically offer the banks in troubled nations CDS (Credit Default Swap) insurance on their own bad debts and currency swaps. How would this help?

First, lets keep in mind that the trade in both these types of derivatives did increase by eighteen in the first six months of 2011 precisely as the Euro crisis has worsened.

If a bank or nation was to default on you as a mere bond holder, you would have to wait in a the queue of creditors to see what you were going to be given back. And some ‘hair cut’ would be likely. But if you had done rather a lot of derivatives trading (CDS insurance and currency swaps are both derivative trades) then you would not have to wait. You would seize all the collateral the bank had pledged to you for repo lending or derivative trading and walk away. Now you will say that if you had done CDS insurance then you might well have to pay back out the money you had seized. Except that possession is nine tenths of the law. While lawyers set about arguing about what you owe, the critical fact is that in the mean time, in the height of the crisis you HAVE the money. JP Morgan allegedly has MF Global money {14}  while other people’s lawyers can only argue about it.

This will also be true if you have also rather wisely been on the right side of lots of re-hypothecation deals and repo deals with the collapsed bank. In both cases if the collapsed bank had pledged to you assets for Repo or hypothecation then you get to keep all those assets in the case of the bank going bankrupt.  We have the clear proof of this already. As Zerohedge reported some days ago, “HSBC Sues MF Global Over Disputed Ownership Of Physical Gold” {15}. It seems HSBC’s gold may have been hypothecated or re-hypothecated. Someone else, some other bank, has their gold and all they have are lots of lawyers charging them fat fees.

So what we have, courtesy of the change in the bankruptcy laws is the means for banks to loot each other. Simply become a major short term funder via repo or hypothecation or a major counterparty in derivatives deals with the ailing bank and in both cases should the bank you are lending to go bankrupt, you will keep all  the assets it pledged to you before any other creditor get a chance.

If I am right then MF Global was the first hint of Plan B in action. The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can. To me, this gives a possible answer to why there has been such a surge in derivatives trading.

If I am right about all this, I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system. If they have and they have explained any of this to our politicians then it would explain why our governments have been so abjectly willing to bail out any and all of the biggest banks and sacrifice anything else in the process. Any hint of reluctance and the banks can make veiled reference to the extreme ‘risk’ of systemic ‘panic’ and forced liquidations. None of which is really a panic, since they have engineered it.

Are the banks threatening us? No, no, good lord no! Just pointing out the reality of the state of the system. There just happens to be a gun pointed at our head and the banks just happen to find their finger on the trigger. All they ask is that we do nothing to make them feel that their best interests are served by pulling it. And all we have to do to avoid that is stick to Plan A. Simple.

But now I come to the really ugly part.

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Federal Reserve, ECB and various taxpayer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with.

It is the money we have been putting in to bail out the biggest banks which they have then been using as collateral for offering weaker banks in weaker nations repo loans or hypothecation. And the money or government bonds the weaker banks are using to pledge as assets and collateral for those loans or in  derivative deals with the bigger banks is also from us. We have and are funding both sides of the deal.

The result is that the assets which the Big Banks would be legally allowed to seize and keep in the event of the failing bank actually going under would be ours.

To give a concrete example. Spain or Greece puts its taxpayer money in to one of its insolvent banks. That bank then uses that money to get a short term repo or hypothecated it for loan. Or it uses it to hedge its currency problems via a currency swap or buys CDS insurance on assets it is deeply worried about. If the weak bank then goes down all those assets are seized by the big bank who was lending or was the counter-party to the derivative deals. The taxpayer gets zero. And there is no redress. It was legally done. And the money the big bank would have used to get themselves into this position would be the bail out money we had earlier given to the mega banks. They would have used that money against us – again.

The largest banks, those with the greatest exposure to bank and sovereign bonds from the most indebted euro nations, have the most to gain from doing derivative, repo and hypothecation deals with the troubled euro area banks and nations. The more assets the weak banks and nations have pledged in deals with the Big Banks, the more the Big Banks will walk away with in the event of a crash.  I suggest this is why, even as this crisis has worsened, the Big Banks have been increasing by eighteen percent their trade in derivatives and why Repo and Hypothecation is as large or larger than even before the crash.

I am sorry this has been such a long piece but I wanted you to see exactly how I came to this because I hope you can show me how I am wrong. Please do so politely and I will go downstairs and celebrate my stupidity with a cup of tea, before apologizing to you all.  I would very much like to be wrong.

But if I am not wrong, then the banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months not even days. It could happen in hours if not minutes. Our leaders would have only a few hours to decide who they would side with: the banks or us. The past four years give me no faith they would chose us.

Links:

{1} http://www.golemxiv.co.uk/2010/07/toxic-debt-wasteland/

{2} http://repowatch.org/2011/06/06/london-conference-more-calls-to-fix-bankruptcy-exemption-for-mortgage-backed-repos/

{3} http://www.golemxiv.co.uk/2011/12/rumours-disasters-and-re-hypothecation/

{4} http://www.tfmetalsreport.com/blog/3107/be-wary?page=3

{5} http://www.zerohedge.com/news/cme-chairman-terry-duffy-throws-jon-corzine-under-bus

{6} http://bostonreview.net/BR30.5/warrentyagi.php

{7} http://www.google.co.uk/search?client=safari&rls=en&q=100909_06_Gilbane+pdf&ie=UTF-8&oe=UTF-8&redir_esc=&ei=yArpTurbMJLa4QSIyZ37CA

{8} http://repowatch.org/2011/06/06/london-conference-more-calls-to-fix-bankruptcy-exemption-for-mortgage-backed-repos/

{9} http://rortybomb.wordpress.com/2011/01/31/fcic-2-on-bapcpa-and-the-ability-to-determine-relative-importance-of-causes/

{10} http://repowatch.org/2011/06/06/london-conference-more-calls-to-fix-bankruptcy-exemption-for-mortgage-backed-repos/

{11} http://www1.gsb.columbia.edu/mygsb/faculty/research/pubfiles/1666/Morrison%20%26%20Edwards%20Yale%20Rev

{12} http://www2.isda.org/

{13} http://www.golemxiv.co.uk/2011/12/the-hammer-of-debt/

{14} http://silverdoctors.blogspot.com/2011/12/jim-willie-jp-morgan-crashed-mf-global.html

{15} http://www.zerohedge.com/news/gold-rehypotecation-unwind-begins-hsbc-sues-mf-global-over-disputed-ownership-physical-gold

_____

David Malone is author of the The Debt Generation (2010). David has a career spanning nearly twenty years producing and directing documentaries for both the BBC and Channel 4. His series Testing God was shortlisted for the Royal Television Society best documentary series and was described by The Times as “moving and startling – as close to poetry as television gets”. For the last three years David has focused considerable attention on the financial system. His BBC documentary High Anxieties – The Mathematics of Chaos, first broadcast in September 2008, was one of the first films to be made about the financial crisis accurately anticipating the problems that were to unfold in the economy. The Debt Generation was published in November 2010.

http://www.informationclearinghouse.info/article30016.htm

http://www.golemxiv.co.uk/2011/12/plan-b-how-to-loot-nations-and-their-banks-legally/

Categories: Uncategorized

Commotion

by James Howard Kunstler

Clusterfuck Nation – Blog (September 16 2013)

Now that Lawrence Summers has removed himself from consideration as Federal Reserve (“Fed”) chairman, President Obama is free to launch him into Syria as the first human rehypothecation weapon of mass destruction, where he can sow enough confusion between Assad’s Alawites and the Qaeda opposition to collateralize both factions into contingent convertible capital instruments buried in the back pages of Goldman Sachs’s balance sheet so that the world will never hear of them again – and then the Toll Brothers can be brought in to develop Syria into a casino cum assisted living complex that will bring hundreds of good jobs to US contractors in the region.

No doubt the stock markets will fly like eagles today. Nobody knew what monkeyshines Mr Summers might have pulled over at the Fed and it was making investors nervous, as well as the big banks who employed Mr Summers occasionally as some kind of policy bagman. So a big sigh of relief blew over the Northeast Region of the nation like the gusts of autumn air that swept away a fetid hump of stale, wet tropical weather that ruined all the ladies’ party hair in the Hamptons this month.

Now that Syria has been disposed of – that is, indefinitely consigned to failed state purgatory – the world can focus its remaining attention on the almighty taper. I’m with those who think we’ll get a taper test. That is, the Fed will cut back ten or fifteen percent on its treasury bond purchases to see what happens. What happens is perfectly predictable: interest rates shoot above three percent on the ten-year and holders of US paper all the world round fling them away like bales of smallpox blankets and … Houston, we’ve got a problem. After a month (or less) of havoc in the bond market, and the housing market, Mr Bernanke will issue an advisory saying (in more words than these) “just kidding”. Then it will be back to business as usual, which is to say Quantitative Easing Forever, which might as well be saying “game over”.

One must feel for poor Mr Bernanke. He’s tried to run a long-distance foot-race against reality and now it’s breathing down his neck near the finish line. The idea was to pump enough artificial “money” into the economy to give it the appearance of motion, but all he accomplished in the words of my recent podcast guest, Eric Zencey, was a commotion of money, and the commotion was pretty much limited to a few blocks of lower Manhattan, two ribbons of real estate running up the East Side and Central Park West, and a subsidiary disturbance out on the South Fork of Long Island. Everybody else in the country was left to stew in a tattoo-and-malt-liquor torpor at the SNAP Card application office.

The Fed can only pretend to try to get out of this self-created hell-hole. The stock market is a proxy for the economy and a handful of giant banks are proxies for the American public, and all they’ve really got going is a hideous high-frequency churn of trades in conjectural debentures that pretend to represent something hidden in the caboose of a choo-choo train of wished-for value – and hardly anyone in the nation, including those with multiple graduate degrees in abstruse crypto-sciences, can even pretend to understand it all.

When reality crosses the finish line ahead of poor, exhausted Mr Bernanke, havoc must ensue. All the artificial props fall away and the so-called American economy is revealed for what it is: a surreal landscape of ruin with nothing left but salvage value. Very few people will get a living off of the salvage operations, and there will be fights and skirmishes everywhere by one gang or another for control of the pickings. The utility of money itself may be bygone, along with the legitimacy of anyone or anything claiming institutional authority. This is what comes of all attempts to get something for nothing.

By the way, for those of you still watching the charts, notice that gold and silver may bob up and down week-by-week, but the price of oil remains stubbornly above $105-a-barrel no matter what happens. That is the only number you need to know to predict the fate of industrial economies.

_____

James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere (1993), The City in Mind: Notes on the Urban Condition (2002), Home from Nowhere (1996), The Long Emergency (2005), and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation (2012). His novels include World Made By Hand (2008), The Witch of Hebron (2010), Maggie Darling – A Modern Romance (2005), The Halloween Ball (1987), An Embarrassment of Riches (1985), and many others. He has published two novellas with Water Street Press: Manhattan Gothic (2012) and A Christmas Orphan (2010).

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http://kunstler.com/clusterfuck-nation/commotion/

Categories: Uncategorized

The Armageddon Looting Machine

The Looming Mass Destruction from Derivatives

by Ellen Brown

Web of Debt Blog (September 17 2013)

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large {1}, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article {2}, the risk has just moved into the shadows:

 

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

 

Increased regulation and low interest rates have made lending {3} to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system {4}. Shadow banking comes in many forms, but the big money today is in repos {5} and derivatives. The notional (or hypothetical) value of the derivatives market {6} has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Herve Hannoun {7}, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert {8} has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti {9}, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand”. The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding.  But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?

Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims {10}. Perotti writes:

 

Security pledging grants access to cheap funding thanks to the steady expansion in the EU and US of “safe harbor status”. Also called bankruptcy privileges, this ensures lenders secured on financial collateral immediate access to their pledged securities …

Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.

This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation.

 

When orderly liquidation is undermined, there is a rush to get the collateral, which can actually propel the debtor into bankruptcy.

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked. In a December 2011 article titled “Plan B – How to Loot Nations and Their Banks Legally” {11}, documentary film-maker David Malone wrote:

 

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies … allowed a whole range of far riskier assets to be used … The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone else and no one could stop them.

 

Burning Down the Barn to Get the Insurance

Safe harbor status creates the sort of perverse incentives that make derivatives “financial weapons of mass destruction”, as Warren Buffett famously branded them. It is the equivalent of burning down the barn to collect the insurance. Says Malone:

 

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of … Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

 

The global credit collapse was triggered, it seems, not by wild subprime lending but by the rush to grab collateral by players with congressionally-approved safe harbor status for their repos and derivatives.

Bear Stearns and Lehman Brothers were strictly investment banks, but now we have giant depository banks gambling in derivatives as well; and with the repeal of the Glass-Steagall Act that separated depository and investment banking, they are allowed to commingle their deposits and investments. The risk to the depositors was made glaringly obvious when MF Global went bankrupt in October 2011. Malone wrote:

 

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well … JPMorgan allegedly has MF Global money while other people’s lawyers can only argue about it.

 

MF Global was followed by the Cyprus “bail-in” – the confiscation of depositor funds to recapitalize the country’s failed banks. This was followed by the coordinated appearance of bail-in templates worldwide {12], mandated by the Financial Stability Board, the global banking regulator in Switzerland.

The Auto-Destruct Trip Wire on the Banking System

Bail-in policies are being necessitated by the fact that governments are balking at further bank bailouts. In the US, the Dodd-Frank Act (Section 716) {13} now bans taxpayer bailouts of most speculative derivative activities. That means the next time we have a Lehman-style event, the banking system could simply collapse into a black hole of derivative looting. Malone writes:

 

… The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can.

… I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system.

 

The weaker banks may be the victims, but it is we the people who will wind up holding the bag. Malone observes:

 

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Federal Reserve, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with …

… [T]he banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months, not even days. It could happen in hours if not minutes.

 

Crisis and Opportunity: Building a Better Mousetrap

There is no way to regulate away this sort of risk. If both the conventional banking system and the shadow banking system are being maintained by government guarantees, then we the people are bearing the risk. We should be directing where the credit goes and collecting the interest. Banking and the creation of money-as-credit need to be made public utilities, owned by the public and having a mandate to serve the public. Public banks do not engage in derivatives.

Today, virtually the entire circulating money supply (M1, M2 and M3) {14} consists of privately-created “bank credit” – money created on the books of banks in the form of loans. If this private credit system implodes, we will be without a money supply. One option would be to return to the system of government-issued money that was devised by the American colonists, revived by Abraham Lincoln during the Civil War, and used by other countries at various times and places around the world. Another option would be a system of publicly-owned state banks {15} on the model of the Bank of North Dakota, leveraging the capital of the state backed by the revenues of the state into public bank credit for the use of the local economy.

Change happens historically in times of crisis, and we may be there again today.

Links:

{1} http://www.spiegel.de/international/business/the-man-nobody-wanted-to-hear-global-banking-economist-warned-of-coming-crisis-a-635051.html

{2} http://www.reuters.com/article/2013/09/12/us-lehman-fiveyear-analysis-idUSBRE98B05620130912

{3} http://www.forbes.com/sites/richardfinger/2013/05/30/banks-are-not-lending-like-they-should-and-with-good-reason/2/

{4} http://webofdebt.wordpress.com/2013/07/22/5835/

{5} http://webofdebt.wordpress.com/2013/08/26/the-leveraged-buyout-of-america/

{6} http://www.dailyfinance.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/

{7} http://www.bis.org/speeches/sp080403.pdf

{8} http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2218812

{9} http://www.eba.europa.eu/documents/10180/16154/Perotti.pdf

{10} http://webofdebt.wordpress.com/2013/04/09/winner-takes-all-the-super-priority-status-of-derivatives/

{11} http://www.informationclearinghouse.info/article30016.htm

{12} http://webofdebt.wordpress.com/2013/04/29/bail-out-is-out-bail-in-is-in-another-argument-for-publicly-owned-banks/

{13} http://www.dodd-frank-act.us/Dodd_Frank_Act_Text_Section_716.html

{14} http://en.wikipedia.org/wiki/Money_supply

{15} http://publicbanksolution.com/

_____

Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt (2007). In The Public Bank Solution (2013), her latest book, she explores successful public banking models historically and globally. Her websites are http://WebofDebt.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.

http://ellenbrown.com/2013/09/17/the-the-armageddon-looting-machine-the-looming-mass-destruction-from-derivatives/

Categories: Uncategorized