Wednesday, October 03, 2007

NYPD To Set Up 24-Hour Surveillance Center Downtown

Alice McQuillan
WNBC
Wednesday October 03, 2007

A 24-hour command center will be soon be chosen for the ambitious plan to scrutinize almost every vehicle or person passing through the Financial District with security cameras and license plate readers, Police Commissioner Ray Kelly said Tuesday.

The hub of the city's Lower Manhattan Security Initiative, based on London's "ring of steel," this new command center will be hidden from public view in an office building, away from the high profile locations it's designed to monitor and protect, Kelly said.

"We are attempting to get a location that is indeed right in Lower Manhattan so that it's easy for the private sector and public sector stakeholders to get there," said Kelly. "We envision it being manned 24 hours a day and it will be where the cameras terminate for the most part, there will be camera monitoring conducted at the coordination center."'

A "redundant command center" located away from Lower Manhattan will also be part of the $90 million plan to upgrade security in the 1.7 miles from Canal Street to the Battery.

Kelly said there will be new security cameras at 17 downtown locations by year's end with 1,000 in place when the program is fully operational by mid 2009. He said he expected major corporations to support the effort by sending personnel to the command center, which will be run by the NYPD. And he said he expects to "significantly increase" the number of police officers assigned to the area.

The police commissioner said the department is also trying to determine the type and placement of retractable street barricades, like several already in place by the New York Stock Exchange.

"Where we ultimately determine where they go will to a certain extent drive the type of barrier that we get," he said.

Speaking at a forum hosted by the Economist magazine entitled "The Future of New York City as the World's Business Hub," Kelly said staying vigilant and increasing protection of the Financial District are critically important because "there is every indication that terrorism will be with us for a very long time to come."

ID card-based criminal record checks get thumbs up

Gemma Simpson
silicon.com
Tuesday October 02, 2007

Plans for a new service using the government's controversial ID cards scheme to speed up criminal record checks have met with approval from volunteers involved in a trial of the technology.

The volunteers piloted two potential online services developed by the Identity and Passport Service (IPS) and the Criminal Records Bureau (CRB) which could be used to authenticate the identities of and information supplied by job applicants.

At the trials, all volunteers went through a simulated experience of applying for a position requiring a CRB check. The participants met a prospective employer, filled out the CRB disclosure application form and had their identity authenticated by a counter-signatory. Their criminal record information was then disclosed to the company requesting it.

Each volunteer completed two legs in the trial — one using a passport and one using an ID card.

The passport-based system would use an applicant's UK passport with information from the IPS to make sure the data provided is correct — with this system likely to come into effect before the second system. The second online service would use ID cards issued to UK citizens and foreign nationals residing in the UK for more than three months with information from the IPS to check application data. This system could be introduced in the longer term.

Nearly all (96 percent) of the 160 volunteers said the passport-related service is an improvement on the current arrangement and 71 percent rated it as a "great improvement".

Nearly nine out of 10 volunteers said the ID card-linked service is even more robust than the passport-linked process.

But Phil Booth, national co-ordinator of the NO2ID anti-ID card campaign, criticised the trial because he said it tested the customer experience of the CRB check in isolation, while "glossing over the inconvenience and intrusiveness of the ID system as a whole".

Booth said: "IPS is trying to sell a so-called benefit without any reference to actual cost or reality."

ACLU requests Supreme Court review of warrantless wiretaps

Nick Juliano
Raw Story
Wednesday, October 3, 2007

Attempting to force a definitive ruling on the Bush administration's warrantless wiretapping scheme, the American Civil Liberties Union has asked the Supreme Court to consider an appeal of its lawsuit against the National Security Agency.

The ACLU joined with lawyers, scholars and journalists who argue that the NSA's possible interception of their phone calls and e-mails violated their rights and interfered with their jobs.

The Supreme Court petition comes as Congress is considering a permanent update to the Foreign Intelligence Surveillance Act that the ACLU says would give President Bush even more authority to intercept Americans' communications than he claimed in authorizing the warrantless wiretapping program.

The ACLU's lawsuit was dismissed earlier this year by the 6th Circuit Court of Appeals, which said the plaintiffs were ineligible to sue the government because they could not prove their communications were intercepted. The administration has refused to release details about the program's scope or the number of Americans who were eavesdropped on, saying such information is classified.

“The president has claimed the power to disregard any law that, in his view, infringes on his ability to collect intelligence,” Steven R. Shapiro, National Legal Director of the ACLU, said in statement. “The government should not be able to avoid scrutiny of its surveillance activities simply by refusing to identify the victims of its unlawful behavior.”

The ACLU argues that the 2-1 appeals court decision was wrongly decided and did not address the underlying legality of the NSA program. The Supreme Court ought to intervene, the ACLU argues, because of the need for a definitive judicial ruling on the program.

In its petition to the court, the ACLU outlines past government abuses of its surveillance authority that led to FISA's passage, such as spying on suspected Communists in the 1950s to wiretaps of Martin Luther King Jr. and other civil rights and anti-war activists during the Nixon administration.

A judicial review of the program's merits is needed to prevent similar abuses of Americans' privacy rights under the new program, the ACLU argues.

“Innocent people who are harmed by illegal government surveillance should be able to challenge that surveillance in court,” said Jameel Jaffer, Director of the ACLU’s National Security Project. “It should not be left to executive branch officials alone to determine what limits apply to government surveillance and whether those limits are being honored.”

Police Report 4 Fires in Senate Offices

WASHINGTON (AP) - U.S. Capitol Police reported four fires in Senate office buildings Wednesday. All were extinguished by midafternoon, but an investigation continued.

"They are suspicious in nature," said Sgt. Kimberly Schneider.

She said two fires in the Dirksen Senate Office Building and one in the Hart building next door were reported in women's bathrooms and were extinguished between 10:45 a.m. EDT and 12:30 p.m. A fourth, also in Dirksen, was reported later and extinguished by mid-afternoon, Schneider said.

Police were still investigating.

Mottaki says U.S. can't start war against Iran

Claudia Parsons
Reuters

Wednesday, October 3, 2007

UNITED NATIONS (Reuters) - Iranian Foreign Minister Manouchehr Mottaki said on Wednesday the United States was in no position to start a war against Tehran against the wishes of its taxpayers, given its military commitment in Iraq.

Mottaki reiterated that Iran's nuclear program, which the United States believes is aimed at producing nuclear weapons, was purely peaceful. He accused Washington of arrogance and engaging in "psychological warfare" against his country.

"The U.S. is not in the position to impose another war in the region against the (U.S.) taxpayers," Mottaki told a news conference at the United Nations.

He said that since the Iraq war, "some arrogant power" was no longer able to impose its will in the Middle East, but Iran still needed to take precautions.

"Any country, based on its defense policies and doctrine, should be prepared," he said.

"We have informed two years ago the Americans what will happen if they make such a mad decision against our country," Mottaki said. Asked to expand on possible Iranian retaliation, he declined to say how Iran would defend itself.

"I prefer to talk about the peace than the war," he said.

The United States says it seeks a diplomatic solution with Tehran over its nuclear program but has ruled out no option.

Mottaki, speaking in English, said that every six months there was a "kind of psychological war" suggesting a U.S. strike against Iran was imminent.

"We were receiving information which looked very exact of some specific hour and date the strike will take place."

In an apparent reference to the United States, Mottaki said: "They were looking ... at some specific goals. The nuclear issue itself was not the goal."

"We tried to brief our friends in the region that Iran was trying its best to avoid any confrontation in the region," Mottaki said.

DEFYING THE U.N. ON ENRICHMENT

Iran has defied two U.N. resolutions demanding it suspend sensitive activities such as uranium enrichment. Iran agreed with the U.N.'s atomic agency, the International Atomic Energy Agency, in August to gradually explain the scope of its nuclear program but Western powers suspect this is a delaying tactic.

Mottaki said Washington was trying to deprive Iran of its right to nuclear power. "Enrichment is part of our right to have nuclear technology for peaceful purposes," he said.

Six major powers last week delayed a U.N. vote on tougher sanctions on Iran until late November at the earliest.

Washington also accuses Iran of interfering in Iraq by giving support to anti-American militants there.

Mottaki said Tehran's policy was to ensure stability in the region, not only in Iraq, but also in Afghanistan and Lebanon.

"Always we had our constructive role in the region," he said. "But yes, we do follow justice. We cannot accept imposed policies of some arrogant power toward my country. That is the right of our nation."

Prince Philip 'told MI6 to murder Diana and lover'

Andrew Vine
Yorkshire Post

Wednesday, October 3, 2007

SENSATIONAL claims that Princess Diana was murdered on the instructions of the Duke of Edinburgh after she expressed fears of an attempt on her life dominated the opening of the inquest into her death yesterday.

The jury heard allegations that Prince Philip was at the heart of a conspiracy to murder Diana and her lover, Dodi Fayed, after ordering MI6 to prepare a report on them for the Royal Family. The car crash that killed them both in Paris on August 31, 1997 was then engineered, the jury heard.

The claim of murder by Dodi's father, Harrods owner Mohamed al-Fayed, was at the heart of coroner Lord Justice Scott Baker's opening statement to the jury at the inquest at the High Court in London yesterday.

And the jury was told how Diana had expressed fears that she would be the victim of an arranged accident if, as she believed, the Queen abdicated and Prince Charles succeeded to the throne, saying that would create a need to "get rid of her, via some accident in her car such as prepared brake failure".

The judge told the jury of six women and five men that many had come to believe something "sinister" may lie behind the crash in the Pont de l'Alma tunnel in which Diana, 36, and 42-year-old Dodi were killed with their driver, Henri Paul.

He added that Mr al-Fayed also believes MI6 had been commissioned to write a special report on his family to be presented to the Royal Family.

The judge said: "It is his belief that a decision was taken at that time to kill Diana and Dodi. He places Prince Philip at the heart of the conspiracy, you will have to listen carefully to the witnesses you hear to see whether there is any evidence to support this assertion."

Mr al-Fayed believes that Diana was carrying Dodi's child and that they would have announced their engagement on September 1 that year, the day after the crash, but the Royal Family "could not accept that an Egyptian Muslim could eventually be stepfather to the future King of England".

He is convinced that Henri Paul was in the pay of MI6 and French secret services, and the crash was caused by a combination of a collision with a mystery white Fiat Uno and a blinding flash from a stun gun deliberately fired. Two official inquiries concluded that Paul had been drinking and lost control of the car whilst driving too fast. But the inquest heard that Diana had written a note to her ex-butler, Paul Burrell, saying Prince Charles wanted her dead so he could marry their nanny, Tiggy Legge-Bourke. Diana also claimed Ms Legge-Bourke had undergone an abortion.

The jury was told of a note written by one of Diana's lawyers, Lord Mishcon, following a meeting at Kensington Palace in October 1995.

In the note, Lord Mishcon said: "Her Royal Highness said that she had been informed by reliable sources whom she did not wish to reveal ... that (a) The Queen would be abdicating in April and the Prince of Wales would then assume the throne and (b) efforts would be made if not to get rid of her (be it by some accident in her car such as prepared brake failure or whatever) between now and then."

Lord Justice Scott Baker also said Mr al-Fayed had claimed Diana had told him she believed her life was in danger.

He said: "Mohamed al-Fayed says during the summer holiday she often told him she would be murdered by the Royal Family.

"She would go up in a helicopter and never come down alive."

He went on: "It is clear that there are many members of the public who are concerned that something sinister may have caused the collision in which Diana and two others died.

"One of the purposes of the inquest is to investigate the incident thoroughly so that the public suspicion is either dispelled or substantiated."

He said there would be a "vigorous and searching" investigation of the evidence to find the truth.

Lord Justice Scott Baker told the jury: "Most, if not all, of you will remember where you were when you heard about the subsequent death of the Princess of Wales.

"None of you would for a moment have thought that over 10 years later you might be in a jury investigating the events related to that tragic August night."

The inquest is set to continue for up to six months.

Scary encounter transforms St. Louis student into police watchdog

The Associated Press

ST. LOUIS -- College student Brett Darrow has become a one-man police watchdog in the St. Louis area, videotaping encounters as he cruises town with a camera installed in his car.

The 20-year-old posts his police videos on the Internet, feeding a growing virtual community of activists.

Darrow gained notoriety earlier this month when he taped a suburban St. Louis police officer who threatened to arrest him on fake charges because he didn't like Darrow's attitude. The video was a sensation on Internet sites like YouTube, and the officer has since been fired from the St. George Police Department.

Video

While he might have his fans, Darrow's name has been transformed into a short-handed warning for police.

"Stay on your toes. We don't know how many other Brett Darrows there are out there," the St. George police chief has said.

Darrow said he became motivated after a March 2005 encounter with an off-duty police officer. Before that night, Darrow, who was 17 at the time, had never been in serious trouble.

According to a police report, an off-duty officer claimed Darrow was driving recklessly, so he followed the teen as he pulled into a lot.

Darrow said the man yelled at him, while pressing a gun to his head and claiming to be a cop. The stranger wearing a uniform or carrying a badge.

Darrow admits he swung a metal baton at the man.

"He told me if I hit him again he'd blow my brains out," Darrow recalled.

Darrow fled home in his car, and was arrested and charged with a weapons felony and third-degree assault. But the grand jury chose not to indict him after listening to him recount what happened.

The officer left the force the next month.

"It was an eye-opener," Darrow said. "It really did change me."

Darrow said he wanted protection from the police. He found it in the form of a $500 video camera, which he installed inside his car.

On Sept. 7, Darrow videotaped the now famous exchange with St. George police Sgt. James Kuehnlein. The officer became curious after Darrow pulled into a commuter parking lot in south St. Louis County.

In the videotape, Darrow asks whether he did anything wrong, and Kuehnlein orders him out of the car and starts shouting.

"You want to try me? You want to try me tonight? You think you have a bad night? I will ruin your night. Do you want to try me tonight, young boy?"

Darrow responds with a "no."

"Do you want to go to jail for some (expletive) reason I come up with?" officer Kuehnlein continues.

Later, Darrow says "I don't want any problems, officer."

The next day, Darrow uploaded the video to the Web, calling it "Cop Gone Wild." Since then, the video has been viewed more than 500,000 times online.

Last Friday, Kuehnlein was fired. Prosecutors now are investigating.

Kuehnlein's attorney, Richard Sindel, said his client was a victim of a setup. "That's what this kid likes to do," Sindel said.

Iraq PM says 'unfit' Blackwater must go

BAGHDAD (AFP) — Iraqi Prime Minister Nuri al-Maliki said on Wednesday that Blackwater should leave the country because of the mountain of evidence against the under-fire US security firm.

His comments came amid growing anger among Iraqis that "above-the-law" security contractors are continuing to operate in Iraq while Blackwater is being probed over a deadly shooting 17 days ago.

"I believe the abundance of evidence against it makes it unfit to stay in Iraq," Maliki told a televised press conference in Baghdad.

A New York Times report on Wednesday citing witnesses, Iraqi investigators and a US official said that as many as 17 people were killed and 24 wounded when Blackwater employees opened fire in central Baghdad on September 16.

Blackwater maintains its men were legitimately responding to an ambush while protecting a US State Department convoy but they are accused of firing into crowded Nisoor Square indiscriminately.

Immediately after the incident, in which at least 10 people were confirmed killed, Maliki said Washington should replace Blackwater forthwith.

He later backed down and agreed to await the outcome of investigations.

A member of the Shiite ruling coalition, Amira al-Baldawi, told AFP: "Some foreign companies believe they are above the Iraqi law."

Baghdad lawyer Hassan Shaaban said the firm should have been shut down at least until investigators had finished their work.

"This company should halt its work until investigations are over," he said. "There should have been an investigation into the Nisoor Square event before a decision was taken to say if they should continue working in Iraq or not."

Three investigations have been called by the US State Department, whose staff Blackwater was protecting during the shootings, and US Secretary of State Condoleezza Rice has called for a "360-degree" look at the events.

The US Defence Department, which also employs hired guns from Blackwater to protect a number of its personnel, has launched a fourth inquiry.

"As far as the law is concerned, if the probes prove they are responsible for the incident they should be expelled in accordance with Iraqi law," said Hassan.

"They are not an army neither US armed forces. They merely present company services and consequently any violation on the land of Iraq should be subject to the Iraqi judiciary."

Blackwater boss, ex-Navy SEAL Erik Prince, denied at a hearing before Congress on Tuesday that his staff ran riot like "cowboys" after a Congressional report suggested the company's security teams in Iraq are out of control.

A committee report found that Blackwater, which protects US diplomats and visiting dignitaries, had been involved in nearly 200 shootings in Iraq since 2005, and accused it of covering up fatal shootings involving its staff.

In one incident cited by the committee, a drunken Blackwater employee shot and killed a guard of Iraqi Vice President Adel Abdel Mahdi.

Europe urges tough line on dollar

Tony Barber and Ralph Atkins
Financial Times
Wednesday October 03, 2007

Eurozone policymakers will urge the US and other countries at the next G7 meeting to take a strong stance against exchange rate volatility in an effort to halt the dollar’s decline against the euro, European Union officials said on Tuesday.

Finance ministers of the 13-member eurozone plan to forge a common position in Luxembourg next Monday, 11 days before the meeting in Washington of central bankers and finance ministers of the Group of Seven leading industrialised countries.

European politicians and business leaders have issued increasingly loud warnings about the dollar’s decline since the euro rose above $1.40 on September 20 for the first time since its launch in 1999. The euro hit a high on Monday of $1.4281.

Jean-Claude Juncker, chairman of the eurozone finance ministers’ group, on Monday said that the euro’s rise “tends to worry us a lot” and that it was no longer acceptable that Europe was bearing the brunt of “the consequences of the existing global imbalances”.

Christine Lagarde, French finance minister, said in an interview with Les Echos: “I’d really like to hear again [US Treasury secretary] Henry Paulson saying loud and clear that a strong dollar is good for the American economy.”

The US has given no ­public signal yet as to what language it will accept on exchange rates in the communiqué to be issued at the G7 meeting.

Such communiqués must have the consent of all seven governments – Canada, France, Germany, Italy, Japan, the UK and the US – and Washington can count on UK support in resisting language that implicitly questions the role of currency markets in determining exchange rates.

The US is also keen to highlight the need for China to accept more flexibility in its exchange rate regime to address the issue of its vast current account surpluses.

In Europe, Jean-Claude Trichet, the European Central Bank president, has become noticeably more ­strident in recent days in emphasising the US’s interest in a strong dollar.

His comments may reflect ECB concern about fears of US inflationary pressures after the Federal Reserve cut its benchmark interest rate on September 18 by 0.5 ­percentage points to 4.75 per cent.

Although eurozone inflation expectations might remain unaffected, the US experience could strengthen the ECB’s determination to hold the line against eurozone inflation, which last month rose above its target of an annual rate of “below but close to” 2 per cent.

The ECB’s governing council meets in Vienna on Thursday, when it is expected to hold its main interest rate at 4 per cent. With eurozone growth showing clear signs of weakening and the global credit squeeze clouding the outlook, the chances of another ECB rate rise have all but disappeared.

While Mr Trichet’s comments after Thursday’s ECB meeting may acknowledge the eurozone’s changed prospects, he is likely nevertheless to keep a hawkish tone.

Speaking in Malta on Monday, Mr Trichet said he had “noted with extreme attention that the US Treasury secretary and ... the Federal Reserve have said a strong dollar is in US interests”.

Robert Barrie, European economist at Credit Suisse, said the combination of a strengthening currency and weakening economy was proving awkward for the ECB. Mr Trichet’s comments might have been “the start of attempts to embark on verbal intervention”.

The Alarming Parallels Between 1929 and 2007

Robert Kuttner
The American Prospect
Wednesday October 03, 2007

Testimony of Robert Kuttner
Before the Committee on Financial Services
Rep. Barney Frank, Chairman
U.S. House of Representatives
Washington, D.C.
October 2, 2007

Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.

In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.

Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.

Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials -- excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.

The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.

There is good evidence -- and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo -- that even much of the boom of the late 1990s was built substantially on asset bubbles. ["Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s"]

A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank -- e.g. Morgan or Chase -- as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks -- part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s -- lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction -- assuming perpetually rising asset prices -- so in a credit crisis they can act as net de-stabilizers.

A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.

The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business -- the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.

Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today's derivatives on which technical traders make their fortunes.

By contrast, in the traditional banking system a bank examiner could look at a bank's loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today's examiner is not able to value a lot of the paper held by banks, and must rely on the banks' own models, which clearly failed to predict what happened in the case of sub-prime. The largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.

A last parallel is ideological -- the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way.

We all know the history. The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history. Financial regulation was pro-efficiency. America's squeaky clean, transparent, reliable financial markets were the envy of the world. They undergirded the entrepreneurship and dynamism in the rest of the economy.

Beginning in the late 1970s, the beneficial effect of financial regulations has either been deliberately weakened by public policy, or has been overwhelmed by innovations not anticipated by the New Deal regulatory schema. New-Deal-era has become a term of abuse. Who needs New Deal protections in an Internet age?

Of course, there are some important differences between the economy of the 1920s, and the one that began in the deregulatory era that dates to the late 1970s. The economy did not crash in 1987 with the stock market, or in 2000-01. Among the reasons are the existence of federal breakwaters such as deposit insurance, and the stabilizing influence of public spending, now nearly one dollar in three counting federal, state, and local public outlay, which limits collapses of private demand.

But I will focus on just one difference -- the most important one. In the 1920s and early 1930s, the Federal Reserve had neither the tools, nor the experience, nor the self-confidence to act decisively in a credit crisis. But today, whenever the speculative excesses lead to a crash, the Fed races to the rescue. No, it doesn't bail our every single speculator (though it did a pretty good job in the two Mexican rescues) but it bails out the speculative system, so that the next round of excess can proceed. And somehow, this is scored as trusting free markets, overlooking the plain fact that the Fed is part of the U.S. government.

When big banks lost many tens of billions on third world loans in the 1980s, the Fed and the Treasury collaborated on workouts, and desisted from requiring that the loans be marked to market, lest several money center banks be declared insolvent. When Citibank was under water in 1990, the president of the Federal Reserve Bank of New York personally undertook a secret mission to Riyadh to persuade a Saudi prince to pump in billions in capital and to agree to be a passive investor.

In 1998, the Fed convened a meeting of the big banks and all but ordered a bailout of Long Term Capital Management, an uninsured and unregulated hedge fund whose collapse was nonetheless putting the broad capital markets at risk. And even though Chairman Greenspan had expressed worry two years (and several thousand points) earlier that "irrational exuberance" was creating a stock market bubble, big losses in currency speculation in East Asia and Russia led Greenspan to keep cutting rates, despite his foreboding that cheaper money would just pump up markets and invite still more speculation.

And finally in the dot-com crash of 2000-01, the speculative abuses and insider conflicts of interest that fueled the stock bubble were very reminiscent of 1929. But a general depression was not triggered by the market collapse, because the Fed again came to the rescue with very cheap money.

So when things are booming, the financial engineers can advise government not to spoil the party. But when things go bust, they can count on the Fed to rescue them with emergency infusions of cash and cheaper interest rates.

I just read Chairman Greenspan's fascinating memoir, which confirms this rescue role. His memoir also confirms Mr. Greenspan's strong support for free markets and his deep antipathy to regulation. But I don't see how you can have it both ways. If you are a complete believer in the proposition that free markets are self-regulating and self- correcting, then you logically should let markets live with the consequences. On the other hand, if you are going to rescue markets from their excesses, on the very reasonable ground that a crash threatens the entire system, then you have an obligation to act pre-emptively, prophylactically, to head off highly risky speculative behavior. Otherwise, the Fed just invites moral hazards and more rounds of wildly irresponsible actions.

While the Fed and the European Central Bank were flooding markets with liquidity to prevent a deeper crash in August and September, the Bank of England decided on a sterner course. It would not reward speculators. The result was an old fashioned run on a large bank, and the Bank of England changed its tune.

So the point is not that the Fed should let the whole economy collapse in order to teach speculators a lesson. The point is that the Fed needs to remember its other role -- as regulator.

One of the odd things about the press commentary about what the Fed should do is that it has been entirely along one dimension: a Hobson's choice: -- either loosen money and invite more risky behavior, or refuse to enable asset bubbles and risk a more serious credit crunch -- as if these were the only options and monetary policy were the only policy lever. But the other lever, one that has fallen into disrepair and disrepute, is preventive regulation.

Mr. Chairman, you have had a series of hearings on the sub-prime collapse, which has now been revealed as a textbook case of regulatory failure. About half of these loans were originated by non-federally regulated mortgage companies. However even those sub-prime loans should have had their underwriting standards policed by the Federal Reserve or its designee under the authority of the 1994 Home Equity and Ownership Protection Act. And by the same token, the SEC should have more closely monitored the so called counterparties -- the investment and commercial banks -- that were supplying the credit. However, the Fed and the SEC essentially concluded that since the paper was being sold off to investors who presumably were cognizant of the risks, they did not need to pay attention to the deplorable underwriting standards.

In the 1994 legislation, Congress not only gave the Fed the authority, but directed the Fed to clamp down on dangerous and predatory lending practices, including on otherwise unregulated entities such as sub-prime mortgage originators. However, for 13 years the Fed stonewalled and declined to use the authority that Congress gave it to police sub-prime lending. Even as recently as last spring, when you could not pick up a newspaper's financial pages without reading about the worsening sub-prime disaster, the Fed did not act -- until this Committee made an issue of it.

Financial markets have responded to the 50 basis-point rate-cut, by bidding up stock prices, as if this crisis were over. Indeed, the financial pages have reported that as the softness in housing markets is expected to worsen, traders on Wall Street have inferred that the Fed will need to cut rates again, which has to be good for stock prices.

Mr. Chairman, we are living on borrowed time. And the vulnerability goes far beyond the spillover effects of the sub-prime debacle.

We need to step back and consider the purpose of regulation. Financial regulation is too often understood as merely protecting consumers and investors. The New Deal model is actually a relatively indirect one, since it relies more on mandated disclosures, and less on prohibited practices. The enormous loopholes in financial regulation -- the hedge fund loophole, the private equity loophole, are justified on the premise that consenting adults of substantial means do not need the help of the nanny state, thank you very much. But of course investor protection is only one purpose of regulation. The other purpose is to protect the system from moral hazard and catastrophic risk of financial collapse. It is this latter function that has been seriously compromised.

HOEPA was understood mainly as consumer protection legislation, but it was also systemic risk legislation.

Sarbanes-Oxley has been attacked in some quarters as harmful to the efficiency of financial markets. One good thing about the sub-prime calamity is that we haven't heard a lot of that argument lately. Yet there is still a general bias in the administration and the financial community against regulation.

Mr. Chairman, I commend you and this committee for looking beyond the immediate problem of the sub-prime collapse. I would urge every member of the committee to spend some time reading the Pecora hearings, and you will be startled by the sense of déjà vu.

I'd like to close with an observation and a recommendation.

My perception as a financial journalist is that regulation is so out of fashion these days that it narrows the legislative imagination, since politics necessarily is the art of the possible and your immediate task is to find remedies that actually stand a chance of enactment. There is a vicious circle -- a self-fulfilling prophecy -- in which remedies that currently are legislatively unthinkable are not given serious thought. Mr. Chairman, you are performing an immense public service by broadening the scope of inquiry beyond the immediate crisis and immediate legislation.

Three decades ago, a group of economists inspired by the work of the late Milton Friedman created a shadow Federal Open Market Committee, to develop and recommend contrarian policies in the spirit of Professor Friedman's recommendation that monetary policy essentially be put on automatic pilot. The committee had great intellectual and political influence, and its very existence helped people think through dissenting ideas. In the same way, the national security agencies often create Team B exercises to challenge the dominant thinking on a defense issue.

In the coming months, I hope the committee hears from a wide circle of experts -- academics, former state and federal regulators, financial historians, people who spent time on Wall Street -- who are willing to look beyond today's intellectual premises and legislative limitations, and have ideas about what needs to be re-regulated. Here are some of the questions that require further exploration:

First, which kinds innovations of financial engineering actually enhance economic efficiency, and which ones mainly enrich middlemen, strip assets, appropriate wealth, and increase systemic risk? It no longer works to assert that all innovations, by definition, are good for markets or markets wouldn't invent them. We just tested that proposition in the sub-prime crisis, and it failed. But which forms of credit derivatives, for example, truly make markets more liquid and better able to withstand shocks, and which add to the system's vulnerability. We can't just settle that question by the all purpose assumption that market forces invariably enhance efficiency. We have to get down to cases.

The story of the economic growth in the 1990s and in this decade is mainly a story of technology, increased productivity growth, macro-economic stimulation, and occasionally of asset bubbles. There is little evidence that the growth rates of the past decade and a half -- better than the 1970s and ‘80s, worse than the 40's, 50's and ‘60s -- required or benefited from new techniques of financial engineering.

I once did some calculations on what benefits securitization of mortgage credit had actually had. By the time you net out the fee income taken out by all of the middlemen -- the mortgage broker, the mortgage banker, the investment banker, the bond-rating agency -- it's not clear that the borrower benefits at all. What does increase, however, are the fees and the systemic risks. More research on this question would be useful. What would be the result of the secondary mortgage market were far more tightly subjected to standards? It is telling that the mortgages that best survived the meltdown were those that met the underwriting criteria of the GSE's.

Second, what techniques and strategies of regulation are appropriate to damp down the systemic risks produced by the financial innovation? As I observed, when you strip it all down, at the heart of the recent financial crises are three basic abuses: lack of transparency; excessive leverage; and conflicts of interest. Those in turn suggest remedies: greater disclosure either to regulators or to the public. Requirement of increased reserves in direct proportion to how opaque and difficult to value are the assets held by banks. Some restoration of the walls against conflicts of interest once provided by Glass Steagall. Tax policies to discourage dangerously high leverage ratios, in whatever form.

Maybe we should just close the loophole in the 1940 Act and require of hedge funds and private equity firms the same kinds of disclosures required of others who sell shares to the public, which in effect is what hedge funds and private equity increasingly do. The industry will say that this kind of disclosure impinges on trade secrets. To the extent that this concern is valid, the disclosure of positions and strategies can be to the SEC. This is what is required of large hedge funds by the Financial Services Authority in the UK, not a nation noted for hostility to hedge funds. Indeed, Warren Buffet's Berkshire Hathaway, which might have chosen to operate as private equity, makes the same disclosures as any other publicly listed firm. It doesn't seem to hurt Buffett at all.

To the extent that some private equity firms and strategies strip assets, while others add capital and improve management, maybe we need a windfall profits tax on short term extraction of assets and on excess transaction fees. If private equity has a constructive role to play -- and I think it can -- we need public policies to reward good practices and discourage bad ones. Industry codes, of the sort being organized by the administration and the industry itself, are far too weak.

Why not have tighter regulation both of derivatives that are publicly traded and those that are currently regulated -- rather weakly -- by the CFTC: more disclosure, limits on leverage and on positions. And why not make OTC and special purpose derivatives that are not ordinarily traded (and that are black holes in terms of asset valuation), also subject to the CFTC?

A third big question to be addressed is the relationship of financial engineering to problems of corporate governance. Ever since the classic insight of A.A. Berle and Gardiner Means in 1933, it has been conventional to point out that corporate management is not adequately responsible to shareholders, and by extension to society, because of the separation of ownership from effective control. The problem, if anything, is more serious today than when Berle and Means wrote in 1933, because of the increased access of insiders to financial engineering. We have seen the fruits of that access in management buyouts, at the expense of both other shareholders, workers, and other stakeholders. This is pure conflict of interest.

Since the first leveraged buyout boom, advocates of hostile takeovers have proposed a radically libertarian solution to the Berle-Means problem. Let a market for corporate control hold managers accountable by buying, selling, and recombining entire companies via LBOs that tax deductible money collateralized by the target's own assets. It is astonishing that this is even legal, let alone rewarded by tax preferences, even more so when managers with a fiduciary responsibility to shareholders are on both sides of the bargain.

The first boom in hostile takeovers crashed and burned. The second boom ended with the stock market collapse of 2000-01. The latest one is rife with conflicts of interest, it depends heavily on the perception that stock prices are going to continue to rise at multiples that far outstrip the rate of economic growth, and on the borrowed money to finance these deals that puts banks increasingly at risk.

So we need a careful examination of better ways of holding managers accountable -- through more power for shareholders and other stakeholders such as employees, proxy rules not tilted to incumbent management, and rules that reward mutual funds for serving as the agents of shareholders, and not just of the profit maximization of the fund sponsor. John Bogle, a pioneer in the modern mutual fund industry, has written eloquently on this.

Interestingly, the intellectual fathers of the leveraged buyout movement as a supposed source of better corporate governance, have lately been having serious second thoughts.

Michael Jensen, one of the original theorists of efficient market theory and the so called market for corporate control and an advocate of compensation incentives for corporate CEOs has now written a book calling for greater control of CEOs and less cronyism on corporate boards. That cronyism, however, is in part a reflection of Jensen's earlier conception of the ideal corporation.

I don't have all the answers on regulatory remedies, but people smarter than I need to systematically ask these questions, even if they are beyond the pale legislatively for now. And there are scholars of financial markets, former state and federal regulators, economic historians, and even people who did time on Wall Street, who all have the same concerns that I do as well as more technical expertise, and who I am sure would be happy to find company and to serve.

One last parallel: I am chilled, as I'm sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn't restore confidence, or revive the asset bubbles.

The fact is that the economic fundamentals are sound -- if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.

It remains to be seen whether we have dodged the bullet for now. If markets do calm down, and lower interest bail out excesses once again, then we have bought precious time. The worst thing of all would be to conclude that markets self corrected once again, and let the bubble economy continue to fester. Congress has a window in which restore prudential regulation, and we should use that window before the next crisis turns out to be a mortal one.

All New Official End Game Trailer

Prison Planet
Wednesday, October 3, 2007

For the New World Order, a world government is just the beginning. Once in place they can engage their plan to exterminate 80% of the world's population, while enabling the "elites" to live forever with the aid of advanced technology. For the first time, crusading filmmaker ALEX JONES reveals their secret plan for humanity's extermination: Operation ENDGAME.

Click here for high quality flash version.

http://whatistheendgame.com

Seven Retards Return For War On Terror Show Trial

FBI provocateurs tried to get "dipshits in a warehouse" to blow up Sears Tower
Paul Joseph Watson
Prison Planet
Wednesday, October 3, 2007

The prosecution's argument that "seven men plotted to bring down the U.S. government by poisoning saltshakers and bombing landmark buildings" in the trial of the "Liberty City Seven" underscores the ludicrous pretense of the "war on terror" and the callous obedience with which the media unquestionably report this farce.

Let's go over a brief refresher course on the details of the alleged plot to blow up Chicago's Sears Tower.

Seven semi-retarded pot smoking wannabe gang member rastafarians in a warehouse are approached by two FBI agents posing as Al-Qaeda terrorists and promised $50,000 if they start talking about waging a "holy war" in America.

One of the plots the ringleader dreams up, in his infinite wisdom, is to march to the White House, knock on the door, and announce "here I am."

The gang decide to go along with the agents in a bid to con them out of the money before disappearing, at which point the announcement that a "plot to overthrow the government" has been averted is saturated across the media as another sterling reason why the war on terror is so necessary.

After the true capability of the retards becomes the butt of a national joke (John Stewart labeled them "seven dipshits in a warehouse"), the Feds have to admit that the plot was "aspirational rather than operational," and posed no real threat because they had neither al Qaeda contacts nor means of carrying out attacks," as reported today by Reuters.

"Defense lawyers said the charges were "nonsense" scripted by the government and orchestrated by paid FBI informants they called Conman No. 1 and Conman No. 2," the report continues.

In almost every single major terror bust or sting that we have covered, the individuals providing the rhetoric, the means and money to actually foment and carry out a terrorist plot have been government informants and provocateurs.

Despite the fact that this whole facade was completely contrived and nurtured by government agents, we are going to be forced to endure yet another terror show trial where the lurid details of the deadly plots will be obsessed upon by the media and doled out as fearmongering to the public, absent the fact that they could never have come to fruition.

If there were real terrorists running around planning to cause carnage, as we are constantly told by authorities, then why are the Feds concentrating on trying to prod a bunch of breadline ghetto dropouts into doing something violent?

If there was a real "war on terror" taking place and the Bush administration was our best defense against it, half of America would have already been suitcase nuked.

The reality is that these terror busts are concocted out of thin air purely for public consumption and scaremongering - to convince the public that they should accept eviscerations on freedom in exchange for government protection - and the real terrorists who carried out 9/11 are feverishly plotting another false flag outrage to put the wheels in motion for a military attack on Iran.

Questions raised over terror exercise

EILEEN SULLIVAN
AP
Wednesday October 03, 2007

WASHINGTON - The nation is preparing for its biggest terrorism exercise ever next week when three fictional "dirty bombs" go off and cripple transportation arteries in two major U.S. cities and Guam, according to a document obtained by The Associated Press.

Yet even as this drill begins, details from the previous national exercise held in 2005 have yet to be publicly released — information that's supposed to help officials prepare for the next real attack.

House lawmakers were expected to demand answers Wednesday, including why the "after-action" report from 2005 hasn't been made public. Congress has required the exercise since 2000, but has done little in the way of oversight beyond attending the actual events.

Next week will be the fourth Top Officials exercise — dubbed TOPOFF. The program costs about $25 million a year and involves the federal government's highest officials, such as top people from the Defense and Homeland Security departments.

"The challenge with TOPOFF is not the exercise itself. It's to move as quickly as possible to remedy what perceives to be the problems that are uncovered," former Homeland Security Secretary Tom Ridge said in an interview with AP this week.

Ridge, who launched his own security consulting company on Monday, said he's a big fan of the TOPOFF exercises. But he said "it's not acceptable" that the review from the 2005 exercise is still not released publicly.

The House Homeland Security emergency communications, preparedness and response subcommittee was holding a hearing Wednesday on the terrorism exercise program.

This year's TOPOFF will build on lessons learned from previous exercises, according to the Homeland Security Department, which runs the program. The agency said the Oct. 15-19 exercise would be "the largest and most comprehensive" to date.

According to an internal department briefing of next week's exercise obtained by AP, a dirty bomb will go off at a Cabras power plant in Guam; another dirty bomb will explode on the Steel Bridge in Portland, Ore., impacting major transportation systems, and a third dirty bomb will explode at the intersection of busy routes 101 and 202 near Phoenix.

Local hospitals and law enforcement agencies will be involved in the "attacks" by the dirty bombs, which are conventional explosives that include some radioactive material that would cause contamination over a limited area but not create actual nuclear explosions.

"Lessons learned from the exercise will provide valuable insights to guide future planning for securing the nation against terrorist attacks, disasters and other emergencies," according to the department's Web site.

The after action report from TOPOFF 3, which deals with issues that came up in the 2005 exercise, is supposed to identify areas for improvement. That report is still going through internal reviews.

According to a brief summary of the 2005 exercise — marked For Official Use Only, but obtained by AP — problems arose when officials realized the federal government's law for providing assistance does not cover biological incidents.

The exercise involved a mustard gas attack from an improvised explosive device in Connecticut and the release of the pneumonic plague in New Jersey. This caused certain federal disaster programs to be unavailable to some residents suffering from the attack, according to the summary.

A 2005 Homeland Security inspector general report suggested the department start tracking the lessons learned from these exercises.

And a 2006 White House report on Hurricane Katrina criticized the department for not having a system to address and fix the problems discovered in the TOPOFF exercises.

"The most recent Top Officials (TOPOFF) exercise in April 2005 revealed the federal government's lack of progress in addressing a number of preparedness deficiencies, many of which had been identified in previous exercises," according to the White House.

Previously, a more detailed version of lessons-learned from TOPOFF 2, held in 2003 was not released to states for security reasons.

New revelations in attack on American spy ship

Veterans, documents suggest U.S., Israel didn't tell full story of deadly '67 incident

John Crewdson
Chicago Tribune
Wednesday October 03, 2007

Bryce Lockwood, Marine staff sergeant, Russian-language expert, recipient of the Silver Star for heroism, ordained Baptist minister, is shouting into the phone.

"I'm angry! I'm seething with anger! Forty years, and I'm seething with anger!"

Lockwood was aboard the USS Liberty, a super-secret spy ship on station in the eastern Mediterranean, when four Israeli fighter jets flew out of the afternoon sun to strafe and bomb the virtually defenseless vessel on June 8, 1967, the fourth day of what would become known as the Six-Day War.

For Lockwood and many other survivors, the anger is mixed with incredulity: that Israel would attack an important ally, then attribute the attack to a case of mistaken identity by Israeli pilots who had confused the U.S. Navy's most distinctive ship with an Egyptian horse-cavalry transport that was half its size and had a dissimilar profile. And they're also incredulous that, for years, their own government would reject their calls for a thorough investigation.

"They tried to lie their way out of it!" Lockwood shouts. "I don't believe that for a minute! You just don't shoot at a ship at sea without identifying it, making sure of your target!"

Four decades later, many of the more than two dozen Liberty survivors located and interviewed by the Tribune cannot talk about the attack without shouting or weeping.

Their anger has been stoked by the declassification of government documents and the recollections of former military personnel, including some quoted in this article for the first time, which strengthen doubts about the U.S. National Security Agency's position that it never intercepted the communications of the attacking Israeli pilots -- communications, according to those who remember seeing them, that showed the Israelis knew they were attacking an American naval vessel.

The documents also suggest that the U.S. government, anxious to spare Israel's reputation and preserve its alliance with the U.S., closed the case with what even some of its participants now say was a hasty and seriously flawed investigation.

In declassifying the most recent and largest batch of materials last June 8, the 40th anniversary of the attack, the NSA, this country's chief U.S. electronic-intelligence-gatherer and code-breaker, acknowledged that the attack had "become the center of considerable controversy and debate." It was not the agency's intention, it said, "to prove or disprove any one set of conclusions, many of which can be drawn from a thorough review of this material," available athttp://www.nsa.gov/liberty .

An Israeli Foreign Ministry spokesman, Mark Regev, called the attack on the Liberty "a tragic and terrible accident, a case of mistaken identity, for which Israel has officially apologized." Israel also paid reparations of $6.7 million to the injured survivors and the families of those killed in the attack, and another $6 million for the loss of the Liberty itself.

But for those who lost their sons and husbands, neither the Israelis' apology nor the passing of time has lessened their grief.

One is Pat Blue, who still remembers having her lunch in Washington's Farragut Square park on "a beautiful June afternoon" when she was a 22-year-old secretary for a law firm.

Blue heard somebody's portable radio saying a U.S. Navy ship had been torpedoed in the eastern Mediterranean. A few weeks before, Blue's husband of two years, an Arab-language expert with the NSA, had been hurriedly dispatched overseas.

As she listened to the news report, "it just all came together." Soon afterward, the NSA confirmed that Allen Blue was among the missing.

"I never felt young again," she said.

Aircraft on the horizon

Beginning before dawn on June 8, Israeli aircraft regularly appeared on the horizon and circled the Liberty.

The Israeli Air Force had gained control of the skies on the first day of the war by destroying the Egyptian air force on the ground. America was Israel's ally, and the Israelis knew the Americans were there. The ship's mission was to monitor the communications of Israel's Arab enemies and their Soviet advisers, but not Israeli communications. The Liberty felt safe.

Then the jets started shooting at the officers and enlisted men stretched out on the deck for a lunch-hour sun bath. Theodore Arfsten, a quartermaster, remembered watching a Jewish officer cry when he saw the blue Star of David on the planes' fuselages. At first, crew members below decks had no idea whose planes were shooting at their ship.

Thirty-four died that day, including Blue, the only civilian casualty. An additional 171 were wounded in the air and sea assault by Israel, which was about to celebrate an overwhelming victory over the combined armies of Egypt, Syria, Jordan, and several other Arab states.

For most of those who survived the attack, the Six-Day War has become the defining moment of their lives.

Some mustered out of the Navy as soon as their enlistments were up. Others stayed in long enough to retire. Several went on to successful business careers. One became a Secret Service agent, another a Baltimore policeman.

Several are being treated with therapy and drugs for what has since been recognized as post-traumatic stress disorder. One has undergone more than 30 major operations. Another suffers seizures caused by a piece of shrapnel still lodged in his brain.

After Bryce Lockwood left the Marines, he worked construction, then tried selling insurance. "I'd get a job and get fired," he said. "I had a hell of a time getting my feet on the ground."

With his linguistic background, Lockwood could have had a career with the NSA, the CIA, or the FBI. But he was too angry at the U.S. government to work for it. "Don't talk to me about government!" he shouts.

U.S. Navy jets were called back

An Israeli military court of inquiry later acknowledged that their naval headquarters knew at least three hours before the attack that the odd-looking ship 13 miles off the Sinai Peninsula, sprouting more than 40 antennas capable of receiving every kind of radio transmission, was "an electromagnetic audio-surveillance ship of the U.S. Navy," a floating electronic vacuum cleaner.

The Israeli inquiry later concluded that that information had simply gotten lost, never passed along to the ground controllers who directed the air attack nor to the crews of the three Israeli torpedo boats who picked up where the air force left off, strafing the Liberty's decks with their machine guns and launching a torpedo that blew a 39-foot hole in its starboard side.

To a man, the survivors interviewed by the Tribune rejected Israel's explanation.

Nor, the survivors said, did they understand why the American 6th Fleet, which included the aircraft carriers America and Saratoga, patrolling 400 miles west of the Liberty, launched and then recalled at least two squadrons of Navy fighter-bombers that might have arrived in time to prevent the torpedo attack -- and save 26 American lives.

J.Q. "Tony" Hart, then a chief petty officer assigned to a U.S. Navy relay station in Morocco that handled communications between Washington and the 6th Fleet, remembered listening as Defense Secretary Robert McNamara, in Washington, ordered Rear Adm. Lawrence Geis, commander of the America's carrier battle group, to bring the jets home.

When Geis protested that the Liberty was under attack and needed help, Hart said, McNamara retorted that "President [Lyndon] Johnson is not going to go to war or embarrass an American ally over a few sailors."

McNamara, who is now 91, told the Tribune he has "absolutely no recollection of what I did that day," except that "I have a memory that I didn't know at the time what was going on."

The Johnson administration did not publicly dispute Israel's claim that the attack had been nothing more than a disastrous mistake. But internal White House documents obtained from the Lyndon B. Johnson Presidential Library show that the Israelis' explanation of how the mistake had occurred was not believed.

Except for McNamara, most senior administration officials from Secretary of State Dean Rusk on down privately agreed with Johnson's intelligence adviser, Clark Clifford, who was quoted in minutes of a National Security Council staff meeting as saying it was "inconceivable" that the attack had been a case of mistaken identity.

The attack "couldn't be anything else but deliberate," the NSA's director, Lt. Gen. Marshall Carter, later told Congress.

"I don't think you'll find many people at NSA who believe it was accidental," Benson Buffham, a former deputy NSA director, said in an interview.

"I just always assumed that the Israeli pilots knew what they were doing," said Harold Saunders, then a member of the National Security Council staff and later assistant secretary of state for Near Eastern and South Asian affairs.

"So for me, the question really is who issued the order to do that and why? That's the really interesting thing."

The answer, if there is one, will probably never be known. Gen. Moshe Dayan, then the country's minister of defense; Levi Eshkol, the Israeli prime minister; and Golda Meir, his successor, are all dead.

Many of those who believe the Liberty was purposely attacked have suggested that the Israelis feared the ship might intercept communications revealing its plans to widen the war, which the U.S. opposed. But no one has ever produced any solid evidence to support that theory, and the Israelis dismiss it. The NSA's deputy director, Louis Tordella, speculated in a recently declassified memo that the attack "might have been ordered by some senior commander on the Sinai Peninsula who wrongly suspected that the LIBERTY was monitoring his activities."

Was the U.S. flag visible?

Though the attack on the Liberty has faded from public memory, Michael Oren, a historian and senior fellow at The Shalem Center in Jerusalem, conceded that "the case of the assault on the Liberty has never been closed."

If anything, Oren said, "the accusations leveled against Israel have grown sharper with time." Oren said in an interview that he believed a formal investigation by the U.S., even 40 years later, would be useful if only because it would finally establish Israel's innocence.

Questions about what happened to the Liberty have been kept alive by survivors' groups and their Web sites, a half-dozen books, magazine articles and television documentaries, scholarly papers published in academic journals, and Internet chat groups where amateur sleuths debate arcane points of photo interpretation and torpedo running depth.

Meantime, the Liberty's survivors and their supporters, including a distinguished constellation of retired admirals and generals, have persisted in asking Congress for a full-scale formal investigation.

"We deserve to have the truth," Pat Blue said.

For all its apparent complexity, the attack on the Liberty can be reduced to a single question: Was the ship flying the American flag at the time of the attack, and was that flag visible from the air?

The survivors interviewed by the Tribune uniformly agree that the Liberty was flying the Stars and Stripes before, during and after the attack, except for a brief period in which one flag that had been shot down was replaced with another, larger flag -- the ship's "holiday colors" -- that measured 13 feet long.

Concludes one of the declassified NSA documents: "Every official interview of numerous Liberty crewmen gave consistent evidence that indeed the Liberty was flying an American flag -- and, further, the weather conditions were ideal to ensure its easy observance and identification."

The Israeli court of inquiry that examined the attack, and absolved the Israeli military of criminal culpability, came to precisely the opposite conclusion.

"Throughout the contact," it declared, "no American or any other flag appeared on the ship."

The attack, the court said, had been prompted by a report, which later proved erroneous, that a ship was shelling Israeli-held positions in the Sinai Peninsula. The Liberty had no guns capable of shelling the shore, but the court concluded that the U.S. ship had been mistakenly identified as the source of the shelling.

Yiftah Spector, the first Israeli pilot to attack the ship, told the Jerusalem Post in 2003 that when he first spotted the Liberty, "I circled it twice and it did not fire on me. My assumption was that it was likely to open fire at me and nevertheless I slowed down and I looked and there was positively no flag."

But the Liberty crewmen interviewed by the Tribune said the Israeli jets simply appeared and began shooting. They also said the Liberty did not open fire on the planes because it was armed only with four .50-caliber machine guns intended to repel boarders.

"I can't identify it, but in any case it's a military ship," Spector radioed his ground controller, according to a transcript of the Israeli air-to-ground communications published by the Jerusalem Post in 2004.

That transcript, made by a Post reporter who was allowed to listen to what the Israeli Air Force said were tapes of the attacking pilots' communications, contained only two references to "American" or "Americans," one at the beginning and the other at the end of the attack.

The first reference occurred at 1:54 p.m. local time, two minutes before the Israeli jets began their first strafing run.

In the Post transcript, a weapons system officer on the ground suddenly blurted out, "What is this? Americans?"

"Where are Americans?" replied one of the air controllers.

The question went unanswered, and it was not asked again.

Twenty minutes later, after the Liberty had been hit repeatedly by machine guns, 30 mm cannon and napalm from the Israelis' French-built Mirage and Mystere fighter-bombers, the controller directing the attack asked his chief in Tel Aviv to which country the target vessel belonged.

"Apparently American," the chief controller replied.

Fourteen minutes later the Liberty was struck amidships by a torpedo from an Israeli boat, killing 26 of the 100 or so NSA technicians and specialists in Russian and Arabic who were working in restricted compartments below the ship's waterline.

Analyst: Israelis wanted it sunk

The transcript published by the Jerusalem Post bore scant resemblance to the one that in 1967 rolled off the teletype machine behind the sealed vault door at Offutt Air Force Base in Omaha, where Steve Forslund worked as an intelligence analyst for the 544th Air Reconnaissance Technical Wing, then the highest-level strategic planning office in the Air Force.

"The ground control station stated that the target was American and for the aircraft to confirm it," Forslund recalled. "The aircraft did confirm the identity of the target as American, by the American flag.

"The ground control station ordered the aircraft to attack and sink the target and ensure they left no survivors."

Forslund said he clearly recalled "the obvious frustration of the controller over the inability of the pilots to sink the target quickly and completely."

"He kept insisting the mission had to sink the target, and was frustrated with the pilots' responses that it didn't sink."

Nor, Forslund said, was he the only member of his unit to have read the transcripts. "Everybody saw these," said Forslund, now retired after 26 years in the military.

Forslund's recollections are supported by those of two other Air Force intelligence specialists, working in widely separate locations, who say they also saw the transcripts of the attacking Israeli pilots' communications.

One is James Gotcher, now an attorney in California, who was then serving with the Air Force Security Service's 6924th Security Squadron, an adjunct of the NSA, at Son Tra, Vietnam.

"It was clear that the Israeli aircraft were being vectored directly at USS Liberty," Gotcher recalled in an e-mail. "Later, around the time Liberty got off a distress call, the controllers seemed to panic and urged the aircraft to 'complete the job' and get out of there."

Six thousand miles from Omaha, on the Mediterranean island of Crete, Air Force Capt. Richard Block was commanding an intelligence wing of more than 100 analysts and cryptologists monitoring Middle Eastern communications.

The transcripts Block remembered seeing "were teletypes, way beyond Top Secret. Some of the pilots did not want to attack," Block said. "The pilots said, 'This is an American ship. Do you still want us to attack?'

"And ground control came back and said, 'Yes, follow orders.'"

Gotcher and Forslund agreed with Block that the Jerusalem Post transcript was not at all like what they remember reading.

"There is simply no way that [the Post transcript is] the same as what I saw," Gotcher said. "More to the point, for anyone familiar with air-to-ground [communications] procedures, that simply isn't the way pilots and controllers communicate."

Block, now a child protection caseworker in Florida, observed that "the fact that the Israeli pilots clearly identified the ship as American and asked for further instructions from ground control appears to be a missing part of that Jerusalem Post article."

Arieh O'Sullivan, the Post reporter who made the newspaper's transcript, said the Israeli Air Force tapes he listened to contained blank spaces. He said he assumed those blank spaces occurred while Israeli pilots were conducting their strafing runs and had nothing to communicate.

'But sir, it's an American ship!'

Forslund, Gotcher and Block are not alone in claiming to have read transcripts of the attack that they said left no doubt the Israelis knew they were attempting to sink a U.S. Navy ship.

Many ears were tuned to the battles being fought in and around the Sinai during the Six-Day War, including those belonging to other Arab nations with a keen interest in the outcome.

"I had a Libyan naval captain who was listening in that day," said a retired CIA officer, who spoke on condition that he not be named discussing a clandestine informant.

"He thought history would change its course," the CIA officer recalled. "Israel attacking the U.S. He was certain, listening in to the Israeli and American comms [communications], that it was deliberate."

The late Dwight Porter, the American ambassador to Lebanon during the Six-Day War, told friends and family members that he had been shown English-language transcripts of Israeli pilots talking to their controllers.

A close friend, William Chandler, the former head of the Trans-Arabian Pipe Line Co., said Porter recalled one of the pilots protesting, "But sir, it's an American ship -- I can see the flag!' To which the ground control responded, 'Never mind; hit it!'"

Porter, who asked that his recollections not be made public while he was alive because they involved classified information, also discussed the transcripts during a lunch in 2000 at the Cosmos Club in Washington with another retired American diplomat, Andrew Kilgore, the former U.S. ambassador to Qatar.

Kilgore recalled Porter saying that he "saw the telex, read it, and passed it right back" to the embassy official who had shown it to him. He quoted Porter as recalling that the transcript showed "Israel was attacking, and they know it's an American ship."

Haviland Smith, a young CIA officer stationed in Beirut during the Six-Day War, said that although he never saw the transcript, he had "heard on a number of occasions exactly the story that you just told me about what that transcript contained."

He had later been told, Smith recalled, "that ultimately all of the transcripts were deep-sixed. I was told that they were deep-sixed because the administration did not wish to embarrass the Israelis."

Perhaps the most persuasive suggestion that such transcripts existed comes from the Israelis themselves, in a pair of diplomatic cables sent by the Israeli ambassador in Washington, Avraham Harman, to Foreign Minister Abba Eban in Tel Aviv.

Five days after the Liberty attack, Harman cabled Eban that a source the Israelis code-named "Hamlet" was reporting that the Americans had "clear proof that from a certain stage the pilot discovered the identity of the ship and continued the attack anyway."

Harman repeated the warning three days later, advising Eban, who is now dead, that the White House was "very angry," and that "the reason for this is that the Americans probably have findings showing that our pilots indeed knew that the ship was American."

According to a memoir by then-CIA director Richard Helms, President Johnson's personal anger was manifest when he discovered the story of the Liberty attack on an inside page of the next day's New York Times. Johnson barked that "it should have been on the front page!"

Israeli historian Tom Segev, who mentioned the cables in his recent book "1967," said other cables showed that Harman's source for the second cable was Arthur Goldberg, then U.S. ambassador to the United Nations.

The cables, which have been declassified by the Israelis, were obtained from the Israeli State Archive and translated from Hebrew by the Tribune.

Oliver Kirby, the NSA's deputy director for operations at the time of the Liberty attack, confirmed the existence of NSA transcripts.

Asked whether he had personally read such transcripts, Kirby replied, "I sure did. I certainly did."

"They said, 'We've got him in the zero,'" Kirby recalled, "whatever that meant -- I guess the sights or something. And then one of them said, 'Can you see the flag?' They said 'Yes, it's U.S, it's U.S.' They said it several times, so there wasn't any doubt in anybody's mind that they knew it."

Kirby, now 86 and retired in Texas, said the transcripts were "something that's bothered me all my life. I'm willing to swear on a stack of Bibles that we knew they knew."

One set of transcripts apparently survived in the archives of the U.S. Army's intelligence school, then located at Ft. Holabird in Maryland.

W. Patrick Lang, a retired Army colonel who spent eight years as chief of Middle East intelligence for the Defense Intelligence Agency, said the transcripts were used as "course material" in an advanced class for intelligence officers on the clandestine interception of voice transmissions.

"The flight leader spoke to his base to report that he had the ship in view, that it was the same ship that he had been briefed on and that it was clearly marked with the U.S. flag," Lang recalled in an e-mail.

"The flight commander was reluctant," Lang said in a subsequent interview. "That was very clear. He didn't want to do this. He asked them a couple of times, 'Do you really want me to do this?' I've remembered it ever since. It was very striking. I've been harboring this memory for all these years."

Key NSA tapes said missing

Asked whether the NSA had in fact intercepted the communications of the Israeli pilots who were attacking the Liberty, Kirby, the retired senior NSA official, replied, "We sure did."

On its Web site, the NSA has posted three recordings of Israeli communications made on June 8, 1967. But none of the recordings is of the attack itself.

Indeed, the declassified documents state that no recordings of the "actual attack" exist, raising questions about the source of the transcripts recalled by Forslund, Gotcher, Block, Porter, Lang and Kirby.

The three recordings reflect what the NSA describes as "the aftermath" of the attack -- Israeli communications with two Israeli helicopters dispatched to rescue any survivors who may have jumped into the water.

Two of the recordings were made by Michael Prostinak, a Hebrew linguist aboard a U.S. Navy EC-121, a lumbering propeller-driven aircraft specially equipped to gather electronic intelligence.

But Prostinak said he was certain that more than three recordings were made that day.

"I can tell you there were more tapes than just the three on the Internet," he said. "No doubt in my mind, more than three tapes."

At least one of the missing tapes, Prostinak said, captured Israeli communications "in which people were not just tranquil or taking care of business as normal. We knew that something was being attacked," Prostinak said. "Everyone we were listening to was excited. You know, it was an actual attack. And during the attack was when mention of the American flag was made."

Prostinak acknowledged that his Hebrew was not good enough to understand every word being said, but that after the mention of the American flag "the attack did continue. We copied [recorded] it until we got completely out of range. We got a great deal of it."

Charles Tiffany, the plane's navigator, remembers hearing Prostinak on the plane's intercom system, shouting, "I got something crazy on UHF," the radio frequency band used by the Israeli Air Force.

"I'll never forget it to this day," said Tiffany, now a retired Florida lawyer. He also remembers hearing the plane's pilot ordering the NSA linguists to "start taping everything."

Prostinak said he and the others aboard the plane had been unaware of the Liberty's presence 15,000 feet below, but had concluded that the Israelis' target must be an American ship. "We knew that something was being attacked," Prostinak said.

After listening to the three recordings released by the NSA, Prostinak said it was clear from the sequence in which they were numbered that at least two tapes that had once existed were not there.

One tape, designated A1104/A-02, begins at 2:29 p.m. local time, just after the Liberty was hit by the torpedo. Prostinak said there was a preceding tape, A1104/A-01.

That tape likely would have recorded much of the attack, which began with the air assault at 1:56 p.m. Prostinak said a second tape, which preceded one beginning at 3:07 p.m., made by another linguist aboard the same plane, also appeared to be missing.

As soon as the EC-121 landed at its base in Athens, Prostinak said, all the tapes were rushed to an NSA facility at the Athens airport where Hebrew translators were standing by.

"We told them what we had, and they immediately took the tapes and went to work," recalled Prostinak, who after leaving the Navy became chief of police and then town administrator for the village of Lake Waccamaw, N.C.

Another linguist aboard the EC-121, who spoke on condition that he not be named, said he believed there had been as many as "five or six" tapes recording the attack on the Liberty or its aftermath.

Andrea Martino, the NSA's senior media adviser, did not respond to a question about the apparent conflict between the agency's assertion that there were no recordings of the Israeli attack and the recollections of those interviewed for this article.

U.S. inquiry widely criticized

Rather than investigating how and why a U.S. Navy vessel had been attacked by an ally, the Navy seemed interested in asking as few questions as possible and answering them in record time.

Even while the Liberty was still limping toward a dry dock in Malta, the Navy convened a formal Court of Inquiry. Adm. John McCain Jr., the commander of U.S. naval forces in Europe and father of Sen. John McCain (R-Ariz.), chose Adm. Isaac Kidd Jr. to preside.

The court's charge was narrow: to determine whether any shortcomings on the part of the Liberty's crew had contributed to the injuries and deaths that resulted from the attack. McCain gave Kidd's investigators a week to complete the job.

"That was a shock," recalled retired Navy Capt. Ward Boston, the inquiry's counsel, who said he and Kidd had estimated that a thorough inquiry would take six months.

"Everyone was kind of stunned that it was handled so quickly and without much hullabaloo," said G. Patrick March, then a member of McCain's staff in London.

Largely because of time constraints, Boston said, the investigators were unable to question many of the survivors, or to visit Israel and interview any Israelis involved in the attack.

Rear Adm. Merlin Staring, the Navy's former judge advocate general, was asked to assess the American inquiry's report before it was sent to Washington. But Staring said it was taken from him when he began to question some aspects of the report. He describes it now as "a hasty, superficial, incomplete and totally inadequate inquiry."

Staring, who is among those calling for a full congressional investigation on behalf of the Liberty's survivors, observed in an interview that the inquiry report contained several "findings of fact" unsupported by testimony or evidence.

One such finding ignored the testimony of several inquiry witnesses that the American flag was flying during the attack, and held that the "available evidence combines to indicate the attack on LIBERTY on 8 June was in fact a case of mistaken identity."

There are also apparent omissions in the inquiry's report. It does not include, for example, the testimony of a young lieutenant, Lloyd Painter, who was serving as officer of the deck when the attack began. Painter said he testified that an Israeli torpedo boat "methodically machine-gunned one of our life rafts" that had been put over the side by crewmen preparing to abandon ship.

Painter, who spent 32 years as a Secret Service agent after leaving the Navy, charged that his testimony about the life rafts was purposely omitted.

Ward Boston recalled that, after McCain's one-week deadline expired, Kidd took the record compiled by the inquiry "and flew back to Washington, and I went back to Naples," the headquarters of the 6th Fleet.

"Two weeks later, he comes back to Naples and calls me from his office," Boston recalled in an interview. "In that deep voice, he said, 'Ward, they aren't interested in the facts. It's a political issue and we have to put a lid on it. We've been ordered to shut up.'

"It's time for the truth to come out," declared Boston, who is now 84. "There have been so many cover-ups."

"Someday the truth of this will come out," said Dennis Eikleberry, a NSA technician aboard the Liberty. "Someday it will, but we'll all be gone."

James Ennes, now 74, who was officer of the deck just before the attack began, and later spent two months in a body cast, is one of the more vocal survivors. Like the others, Ennes is tired of waiting.

"We want both sides to stop lying," he said.