“We cannot operate without private security firms in Iraq”

Strange but true. Patrick F. Kennedy, the Under Secretary of State for Management, provided that telling quote to Congress as part of his explanation for why Blackwater Worldwide recently had its contract to provide security for American diplomats in Iraq renewed for a least another year. According to Kennedy, “If the contractors were removed, we would have to leave Iraq.”

So how did Blackwater – the company with significantly more shootings per convoy mission than DynCorp and Triple Canopy (the other US private military companies operating in Iraq) get back to business as usual in Iraq, even after their involvement in a shooting in September that left 17 Iraqis dead, demands from the Iraqi government for Blackwater’s ouster from Iraq, a criminal investigation by the FBI, a series of internal investigations by the State Department and the Pentagon, and high-profile Congressional hearings? According to the New York Times, it was an “intense public and private lobbying campaign” that righted the Blackwater ship.

So, the lobbyists did it? Well, let’s take a look at what Blackwater’s lobbying campaign consisted of. The Center for Responsive Politics provides a look at the dollar figures involved. (Note: Blackwater USA changed the name of some of its operations to Blackwater Worldwide in October 2007, no doubt for the same reason that front companies for illegal arms traffickers change their names: bad publicity. However, Blackwater Worldwide’s website is www.blackwaterusa.com. Ergo, the change was only cosmetic.)

Blackwater USA spent nothing on Congressional lobbying activites until 2006, when they spent $160,000. They almost doubled their lobbying expenditures in 2007, when they spent $302,000. For the first quarter of 2008, they’ve already spent $90,000, which puts them on a pace to drop $360,000 for the year. Meanwhile, their alter ego, Blackwater Worldwide, spent nothing in 2006 (they hadn’t been created yet), dropped $90,000 in 2007, and spent $70,000 in the first quarter of 2008, which puts them on a pace to hit $280,000 for the year. Given that the two companies (USA and Worldwide) are, in reality, two halves of the same whole, we can combine their lobbying expenditures for the following totals: $160,000 for 2006; $392,000 for 2007; and $160,000 for the first quarter of 2008, which makes a projected 2008 total of $640,000.

There you have it. That’s the “intense public and private lobbying campaign” that keeps Blackwater operating in Iraq. From $160,000 (2006) to $392,000 (2007) to $640,000 (2008 projected). Money doesn’t talk in DC – it screams.

The strange, corrupt saga of AEY

In January 2007, AEY, Inc. was awarded a $298 million contract by the US Army that made it the primary supplier of ammunition for Afghan security forces in their fight against Al Qaeda and the Taliban. What was so unusual about this contract award was that it was made to a company that had a 21-year-old president and a 25-year-old vice-president, and had at least six earlier contracts with the State Department and the Defense Department either canceled or delayed for poor quality or late deliveries. In addition, four Eastern European countries (Bulgaria, Bosnia, Hungary, and Albania) had already offered to donate the Soviet-style rifle and machine-gun cartridges that the Afghan army and police forces use. Further, an Army contracting team raised concerns about AEY’s inexperience and concluded that there was “substantial doubt” that the company could fulfill its contract (they were overruled by a contracting officer with the Army Sustainment Command). Finally, even though AEY was on the State Department’s “watch list” for individuals and companies suspected of illegal arms transactions (now numbering around 80,000), the Pentagon never bothered to consult that list before awarding the contract.

Not surprisingly, things didn’t work out well for Army and AEY. The company has been shut down and its top executives have been charged with defrauding the government after it was discovered that the ammunition AEY supplied to Afghan forces was not from Albania (as they claimed), but was, in fact, manufactured in China (which was illegal, and a violation of their government contract.) Making matters worse, the ammunition was in terrible condition, having been stored in cardboard boxes since the 1960s.

Besides this being a case study in military contracting gone terribly wrong, what makes this story so particularly juicy is that, within the past few weeks, allegations have surfaced from a military attaché that the American ambassador to Albania, John L. Withers II, helped cover up the illegal Chinese origins of the ammunition supplied by AEY. According to the attaché, who was present at the November 2007 meeting where the cover-up was engineered, the Albanian defense minister, Fatmir Mediu, expressed concern about a pending visit by a New York Times reporter to the site where AEY’s ammunition was being repackaged to conceal its true origins. He was worried that the reporter would reveal that he had been accused of profiting from selling arms and told the American ambassador that because he had gone out of his way to help the United States, “the U.S. owed him something.” After Mediu ordered the commanding general of Albania’s armed forces to remove all boxes of Chinese ammunition from the site the reporter was going to visit, the US ambassador agreed that this action would alleviate the suspicion of wrongdoing.

Embassy officials in Tirana, Albania then tried to cover up the existence of the meeting once Congress began an investigation into AEY. While the attaché urged embassy officials to inform the congressional committee of the meeting between the ambassador and the defense minister, the embassy instead omitted any reference to the meeting in its official response to congressional inquiries. The State Department’s Inspector General (who reports directly to Congress and not to the Secretary of State) has been asked to investigate this entire debacle and the House Committee on Oversight and Reform has held the first of what could be many hearings.

So, the Army sought bids on a contract it didn’t need to award, to a company that had no business being trusted – and while that company was actively lying to and defrauding the government, the US ambassador decides to help out local overseas officials with a cover-up (or, at best, purposefully looked the other way, which is a form of help).

This has all the makings of a controversy that will only get more interesting as congressional investigators and journalists dig up more names, places, and interesting business relationships. Can’t wait to see who told who in the Pentagon to make sure AEY gets helped out.

Pirates Get Daring and Attack an Oil Tanker

With all the jitters in today's oil market (tremendous demand from China and India, tight supplies, little spare capacity), the last thing anyone wants is for pirates to start attacking oil tankers and create havoc and uncertainty in the marketplace.

Remember how that mortgage/credit crisis that broke a few weeks ago was turned into a Bear Stearns-destroying catastrophe because the deadly beast of uncertainty was let loose in the marketplace? Now imagine what would happen if ships carrying oil started getting attacked on a regular basis. Not hard to see what kind of devastating impact that would have on global oil markets.

As the villain in my book so aptly stated, while contemplating the very kind of attack that took place yesterday: "Today’s global oil market has very few reserves and little capacity to absorb supply disruptions. Even the threat of a shortage is enough to terrify the commodity traders. Panic buying will send the price of oil shooting through the roof and lay the groundwork for the economic devastation that will follow soon after.”

There's No Corruption Like New Jersey Corruption

Sharpe James, the larger-than-life figure who reigned over Newark, New Jersey for 36 years - 20 as mayor (1986-2006) and 16 on the Municipal Council - was convicted on five counts of fraud and conspiracy last week in a case that centered on James steering city-owned properties to his mistress, who then sold them for a profit of more than $600,000. He faces at least 8 years in prison, and as many as twenty, when he is sentenced in July.

He serves as the latest in a line of Newark mayors who have run afoul of the law. His immediate predecessor, Kenneth A. Gibson (1970-1986), pled guilty to tax fraud in 2002 but did not go to prison. Gibson's predecessor, Hugh J. Addonzio (1962-1970), was convicted in a scheme to take $1.4 million in kickbacks from city contractors and served five years in a federal prison.

James was featured in the unforgettable, 2005 Oscar-nominated documentary, Street Fight - a film that redefined the notion of urban corruption and bare-knuckle machine politics, depicting James as a man who would stoop to anything to retain his power. Mandatory viewing for anyone with even a passing interest in big-city politics.

Just When You Thought It Was Safe To Go Back In The Water

A French triple-masted, 288-foot yacht (picture above) is the latest victim of piracy off the lawless coast of Somalia. Pirates captured the ship, with its crew of 30, in the Gulf of Aden. While I'm tempted to make some joke about hoping the pirates are having fun, given that they now control a four-deck luxury cruise ship in sun-drenched waters, this is clearly no laughing matter. This hostage drama could end peacefully, or in a hail of gunfire with people getting killed.

This hijacking at sea continues the trend I mentioned earlier of increasing levels of piracy attacks off the coast of Somalia.

Earmarks: The Good, The Bad, And The Ugly

In a city that can make money seem boring (it’s called Appropriations – asleep yet?), earmarks seem to be the one cash cow in Washington DC that is too sacred to kill. Despite widespread public revulsion against the practice of individual members of Congress giving piles of cash to whomever they damn well please, the Senate recently killed a measure that would have established a one-year moratorium on earmarks.

Earmarks are a great way to buy friends and increase campaign contributions. If a presidential candidate receives contributions from 64% of the companies she gets earmarks for, that's a sign that some healthy “win-win” relationships are being established. Lobbyists are usually the ones who set up the connections between private companies and members of Congress. Most lobbyists aren’t stupid or crazy enough to tell an elected official “Give these folks a $70 million earmark and they’ll cut you a nice check for your next election campaign,” but people who do this for a living understand how the system works. Giving money to a senator and then having the senator earmark money that benefits your company is part of the essential process of “establishing a relationship.”

After the lobbyist in my book – the incomparable Hugo Masterson – meets with a senator and is assured that a $230 million earmark will be heading his client’s way, the client says that “it seems like all you have to do is ask for the earmark.” Masterson’s reply succinctly explains the situation: “Once you have the relationship we do, yes, you can skip the bullshit and save everyone’s time. It’s all about establishing relationships so they trust you to do the right thing. When you’ve got that bond cemented, you just mention what would help your client. They know that you’re not just making conversation. They also know that the check’s in the mail. It’s gratitude for their assistance, and not a quid pro quo. It shows that you’re giving because you support what they’re doing, which counts as free speech, and is as American as apple pie.”

The Subprime Beast Escapes Its Cage

In today’s interconnected global marketplace, where billions of dollars can change hands with a few keystrokes, you only need one or two events to set off a catastrophic chain-reaction that spawns panic and fear, destroys trust, and eviscerates capital markets.

Fearing such an event in response to the subprime mortgage fiasco, the Federal Reserve, in a move unprecedented in banking history, lent a whopping $30 billion to JP MorganChase so it could purchase Bear Stearns – the formerly high-flying, fifth largest investment house on Wall Steet whose stock lost 97% of its value in about 100 hours. Then, truly taking the term “bailout” to the next level, the Fed put $400 billion – more than half the cash it keeps on reserve in the Treasury and at various banking institutions – into an open-ended lending program that major Wall Street banks could borrow from, in the the hope that the credit markets won’t dry up and send us all into unheated caves for the next few years.

The Fed is trying to prevent a worst-case scenario that would involve Bear Stearns going belly-up and dumping its entire portfolio of assets onto a market where lenders are terrified and buyers are in hiding. If this happened, every other institution that held the same kind of assets would have to lower their prices, which would force lenders to call in their debts, and cause more failures. Gretchen Morgenson (who won the Pulitzer for 2002 in Beat Reporting "for her trenchant and incisive Wall Street coverage") lays out the behind the scenes action.

It’s a classic run on the bank, powered by panic and fear. Bear Stearns and many other Wall Street banks are highly leveraged, often borrowing 25-30 dollars for every dollar they hold in assets. Which , if they have $1 billion in assets, means they’re in debt for $25-30 billion. Everything is fine as long as the lenders still trust the banks to repay the money. But once the whispers start that a bank is in trouble (perhaps because it financed a gigantic pile of subprime mortgages that are heading toward default) then lenders get nervous and start demanding repayment. Once panic sets in, and everyone calls in their debts at the same time, highly leveraged banks will never be able to make the payments and, well, it only took 100 hours for Bear Stearns to meet its end.

As the villain in my political thriller, Moment of Hercules, so ably put it:

"Globalization has created a gigantic interconnected marketplace, where everything depends on something else happening. It does not take much to let loose the deadly beast of uncertainty in this marketplace, and that starts a chain reaction by creating fear. Fear that promises won’t be kept, that goods won’t arrive, that debts won’t be repaid. If you create enough fear, trust starts to break down and the psychology of panic takes over. Overreaction becomes the norm. Financial institutions stop lending, investment houses stop buying, and everyone in the markets races towards the exits. You have a global sell-off."

What’s really scary is that no central bank has ever been exposed to this kind of market risk before. In taking its actions the Fed is, in the words of one Wall Street analyst, “driving with its tank half full.” Plus, there are land mines lurking in Bear Stearns’ portfolio – assets whose value cannot be determined because, in a market with no buyers, it’s awfully hard to determine what price you can get.

Lehman Brothers looks like it could be next to go. And yes, there most definitely will be a next.