Repression or Care? Cops or Kids?

Tom Frazier, former director of the COPS Office in the United States Department of Justice, Police Commissioner of the Baltimore Police Department, served twenty-eight years with the San Jose Police Department, and was a decorated Military Intelligence officer in Viet Nam.

Back in 1998 Thomas Frazier, then chief of the Baltimore Police, was invited to testify before the U.S. Senate to share his perspective on how to most effectively improve public safety.

“I speak very confidently for the major city police chiefs who in a conference a week ago endorsed the position that child care, early child care, before school care, and after school care, were really keys to crime prevention,” Frazier told the Senate Labor and Human Resources Committee.

Today Frazier is the court appointed compliance director of the city of Oakland’s police department. Frazier is tasked with implementing whatever reforms are necessary to ensure that the OPD carries out a public safety mission without violating the civil rights of the city’s residents. The department has been bogged down and unable to comply with federally mandated reforms for over a decade stemming from systematic civil rights abuses perpetrated by numerous officers. Over this same time-frame, OPD has come to consume more than 40 percent of Oakland’s budget, crowding out other programs, including youth and children’s services.

Oakland Mayor Jean Quan’s budget proposal for the next two years proposes a major cut to early child care. The cut results from a reduction of $1.7 million in federal funds due to the budget sequester orchestrated by the Obama administration and Republican members of the Congress. Mayor Quan and the Oakland City Administrator’s proposal is to leave this hole mostly empty, even though the city expects to collect millions in new revenues over the next two years from an improving real estate market and increased sales and other taxes.

Oakland’s budget proposal allocates most of these funds to the police department for the training and hiring of new officers. The new cops presumably will execute the crime fighting plan currently being developed by William Bratton and Robert Wasserman, two well-known former chiefs who advocate zero-tolerance policies, stop and frisk, and similar aggressive tactics developed during the 1990s war-on-crime model of policing.

Here’s how the cut to Head Start is described in the budget proposal:

“This will require reducing staff positions, the number of days of service at Head Start and Early Head Start sites, and eliminating 102 half day classroom slots for new families (closing the San Antonio CDC site that services 68 families and reducing Eastmont Town Center by 34 families, when there are already 396 families on the waiting list for these slots). The FY 2013-2015 budget proposal includes backfilling with the General Purpose Fund $184,000 of lost federal funding, which could sustain one part day classroom at Eastmont Town Center for 34 families ($114,000) and restore one Family Advocate ($70,000) to support the parents and siblings of Head Start children.” (p. A-4, 2013-2015 Proposed Budget)

Today Thomas Frazier avoids the limelight. He declined interviews during and after his investigation of OPD’s conduct during the Occupy Oakland protests, during which OPD repeatedly violated policies the department had agreed to under the terms of the federal Negotiated Settlement Agreement. Frazier keeps a low profile, choosing instead to focus on implementing change behind the scenes.

Still, Frazier’s opinions about how to best improve public safety can be gleaned from his past statements, and his policy record.

Frazier’s testimony to the Senate over a decade ago focused on the socioeconomic determinants of crime. According to Frazier, crime in Baltimore during his tenure was the outcome a long, historical process of de-industrialization, job losses, and disinvestment in the community. Frazier identified inequality and the creation of a privileged upper-class, and an impoverished working class with little mobility as the root of Baltimore’s violence:

“Let me paint the picture of a post-industrial city. Twenty-five years ago when Baltimore was fully employed and 925 thousand people lived in the city, we had an industrial economy. In an industrial economy you have a jobs pyramid. We have your well educated managerial at the top, union and manufacturing jobs in the middle, service sector jobs at the bottom. As right sizing, down sizing, all those things occur, your social economics change. If you’re computer literate and well-educated, there are more jobs for you at the top. The union and manufacturing jobs are severely diminished. There are more service sector jobs at the bottom. Our jobs pyramid has turned into a jobs hourglass. For a police chief that’s a recipe for civil disorder.”

“Our middle class is gone. We are stratified economically,” the chief concluded.

So how did Frazier respond to this crisis as the top cop in what was then America’s most violent city? Frazier advocated a well-funded and staffed police force, but repeatedly told politicians in Baltimore and Washington D.C. that without investments in social and economic programs to reduce inequality, there would be little change in crime rates, no matter how many cops were put on patrol, and no matter the aggressive tactics they were urged to use.

Instead of waging a war on drugs, Frazier told his cops to de-emphasize possession and use of drugs as crimes – even though he firmly opposed decriminalization proposals floated by then Baltimore mayor Kurt Schmoke.

Instead of adopting stop and frisk, hot spot policing, and zero tolerance tactics that were being implemented in other big city departments, Frazier advocated the community-oriented policing model which is based first and foremost around having officers who are respected by the communities they work in, and who do much more than simply profile, stop, and arrest targeted populations. It was a policing philosophy that set Frazier apart during the war on crime-era that raged through the 1990s, and from other top cops like Bratton.

Frazier departed Baltimore upon the election of Martin O’Malley. O’Malley, a Democrat, and technocratic city manager, ran on a zero-tolerance platform that required a dramatic boost to police spending and staffing levels. O’Malley dissed Frazier when the latter took a job at the justice department. A reporter asked what O’Malley thought of Frazier’s promotion; O’Malley said “sic semper tyrannus” – the meaning of which translates “death to tyrants.”

A press report from 1999 described O’Malley’s platform as the same “strategy embraced by cities such as New York”:

“The plan has five points that include giving police civil citation powers to keep lesser crimes out of courts. The plan also calls for prosecutors to charge suspects, allowing police to get back on the streets more quickly after an arrest. Other antidotes include using minimum mandatory sentencing to keep repeat offenders behind bars and placing a judge in the central booking center for swifter justice.” (“MD: Mayoral Hopefuls Offer Cures For High Murder Rate,” The Bulletin’s Frontrunner, July 27, 1999)

Frazier’s now forgotten Senate testimony, coming near the end of his career as a big city cop, was unique in that it focused on police work that sounds more like social work. Of the Police Athletic Leagues he set up across Baltimore, Frazier told the Senate:

“We know that we have to provide services for kids from seven to seventeen. That is a population who is at risk. That is, in the older end of that, our offenders. Those are the kids that need an opportunity to make good life decisions. We know that we have to provide services from two in the afternoon till ten at night. I would love to see schools go till four o’clock and we’d run PAL centers four till mid-night. Because then we have a safe space with positive activities and good role models, we put our very best men and women police officers in there to be the role models for these kids. Now what has the result of that been? In our center that has been the center in operation the longest, about two and one-half years now, the kid’s grade point average went from 66 to 81.”

And per the main measure by which police chiefs are judged, the crime rate, Frazier noted that: “Crime in that neighborhood went down 42 percent the first year, and it can’t go down 42 percent every year after the year before. It’s holding in the 30′s. That neighborhood has become a neighborhood of choice.”

In the current budget proposal for Oakland, most of the changes in spending levels for parks and recreation, libraries, human services, are reductions, transfers, and eliminations that cut budget resources for these city functions.

A table summarizing changes in funding to “Human Services” budget items in the 2013-2015 proposed Oakland budget. Numbers in parenthesis are negative, indicating cuts.

Akin to Baltimore under Frazier’s watch, Oakland has relatively lax attitudes toward the possession of marijuana – indeed the city has earned considerable tax dollars by regulating pot shops.

But the presence of Bratton and Wasserman as advisors to Oakland’s City Council and Mayor indicates that the city’s leaders are looking to adopt zero-tolerance strategies, the sorts of which Frazier steered away from years ago in Baltimore.

How all this will translate into policy now that Frazier is effectively running OPD remains to be seen.

Capital of Inequality

Part of San Francisco’s Union Square hyper-lux retail offerings, the De Beers store which features armed guards at the entrances. Ferrari recently opened a store a block away on Stockton Street. Haute Couture names obscure fill the district’s buildings offering items of conspicuous consumption.

Through the Financial Crisis and the Great Recession, inequality has intensified through income, housing, and public debt in the Bay Area. Black and Latino communities have lost wealth and power, while white and Asian communities have mostly to recovered. At the top, the wealthiest 5 to 10 percent, have made enormous gains.

Imagine a place where the hills are lined with the mansions of millionaire families, some of them billionaires. Their residences sit atop forested ridge lines with views of a peaceful ocean, or upon oak-studded peninsulas that jut into an azure bay. In this place they want for nothing. De Beers opened a retail store in one of their favorite shopping districts a few years ago, next to haute couture names like Bulgari, Cartier, and Gucci. An investment bank opened a “coffee shop” just a couple blocks from the headquarters of no less than seven Fortune 500 corporations, to catch their employees after work for talks over lattes about what to do with all that money crowding their bank accounts. Posh towers filled with luxury apartments sprout from the city center where multiple cranes seem to perpetually dot the skyline. iPhones pop from the palms of pedestrians like third hands, and newfangled apps like third eyes give them instantaneous information about the latest opulent consumer activities. Everything glows with money and power, a lot of it.

Below the hillsides glittering with wealth are even more expansive terrains of crumbling homes and apartment buildings —many foreclosed upon and awaiting some kind of financial death— packed with families that barely scrape together twenty thousand dollars a year to live on. Their views: smokestacks, port cranes, freeway overpasses, and scrap yards, or, sometimes on a clear day, if they ever think to pause from survival mode, they can see the hills, the mansions, the gleaming skyscrapers beyond reach, the towering campaniles of universities where they can never afford to send their children.

This place is characterized by the crowding of impoverished human beings, most of them of African and Latin American descent, into hollowed out industrial zones where factory buildings and abandoned warehouses echo the bustle of past decades. This economy of yesterday was exported to the new shop floors of China. Among the only things left are the toxic plumes of chemicals spreading slowly under fence lines. In this place entire generations face severe poverty and a decimated public sector – especially the schools. Tens of thousands of adults exist, persist, somehow without meaningful work or income. Tens of thousands of house-less persons —likely no longer even part of the statistical surveys used to calculate joblessness and income— wander the streets and sleep in the cracks of weathered concrete each night. Every few months the police slay a youngster under questionable circumstances. Crime is rampant. Violent crime is hard to avoid, part of the overall suffering.

The splendid heights and stratospheric wealth would not be so contemptible was it not hanging directly over such desperate poverty. Of course the two things are not unrelated.

Welcome to the San Francisco Bay Area, in the Golden State of California.

The West Coast financial center of the United States.

The epicenter of the tech industry.

The global vortex of venture capital.

One of the most brutally unequal places in America, indeed the world.

If measured by the same metrics that are used to gauge income inequality within nation states, the Bay Area’s internal divide between its rich and its poor would place San Francisco between China and the Dominican Republic, making it roughly the 30th most unequal state in the world. China is now the estimated home to 317 billionaires. California counts perhaps 90 billionaires. Half of these, mostly white men, live in San Francisco and Silicon Valley. The Census counted 4.2 million persons slipping below their definition of poverty last year in California.

In the distribution of income and wealth, California more resembles the neocolonial territories of rapacious resource extraction and maquiladora capitalism than it does Western Europe. Oakland is more El Salvador than it is EU. The Bay Area metropolis is more Bangladesh than Belgium.

California is just one of seven states that has the distinction of ranking higher than the national average on three basic metrics of income inequality, as measured by the Bureau of the Census. Its gini coefficient of income inequality was most recently measured at 0.47.

The ratio of income between the top 10 percent and the bottom ten percent, as well as the ratio of income between the top five percent and the bottom twenty percent show staggering divides in economic power that few other places in America, indeed the world, surpass.

Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The only states that compare to California’s harsh inequalities are deep southern states structured by centuries of racist fortune building by pseudo-aristocratic ruling classes, and the East Coast capitals of the financial sector.

Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The economies of Louisiana, Mississippi, and Alabama remain bound by racial inequalities founded in slavery and plantation agriculture; the wealthy elite of all three states remain a handful of white families who control the largest holdings of fertile land, and own the extractive mineral and timber industries, and the regional banks.

Texas, with its sprawling cities, global banks, energy corporations, universities, and tech companies, is more like California in that its extreme economic inequalities are as new as they are old. Stolen land and racial segregation combine with unworldly new fortunes built on the Internet and logistical revolutions in manufacturing and markets to manifest a gaping divide in power and wealth between the few and the many. The Texas border, like California’s, opens up vast pools of Mexican and immigrant labor for super-exploitation by agribusiness and industry.

The same goes for New York, Connecticut, and Washington D.C. the other most unequal places in the United States. New York and Connecticut, like California, have become societies divided by an upper stratum of financial-sector workers and corporate employees whose salaries and investments simply dwarf the bottom half of the population’s earnings, and unlike the South, this extreme level of inequality is rather new in its source of valorization. Washington D.C. is split between the federal haves, mostly fattened contractors who run the military, or who represent the interests of the billionaires in California and New York, and the have-nots, mostly Black and immigrant service sector workers who wait on these technocrats of empire.

It’s a strange club, the super-inequitable states of the U.S. This exclusive list pairs the bluest coastal enclaves of liberal power with the reddest Southern conservative states. In terms of wages and wealth these places have a lot in common.

San Francisco’s real estate roller coaster. The Financial Crisis cut 20% off home values in San Francisco, but the U.S. Federal Reserve’s bond buying program, coupled with broader tax and fiscal policies, has created a rally in securities markets, handing the wealthiest Americans enormous gains in net worth. These economic policies benefiting the rich are evident in San Francisco’s real estate prices. Secondarily is the Tech 2.0 boom in San Francisco and Silicon Valley, pulling in thousands of new residents to work in Internet, biotech, and other industries where six figure salaries are the norm.

In San Francisco homes now routinely sell for millions. Not mansions. Not even particularly large houses. Just simple homes built decades ago. In most other markets they would fetch the national median home price of about $170,000. San Francisco, which locals like to call “the City,” sees dozens of real estate deals every month in which a cool million or two pass hands, and afterward the new owner, usually someone with freshly minted tech or finance money, has the modest structure demolished and scraped away. The new thing is to build upward, and lavishly, from scratch. Heated stone bathroom floors and wine cellars are popular. Securing a pad in Noe Valley or Bernal Heights for a few million is seen as a reasonable way to spend money.

In San Francisco the western end of Broadway is known as “billionaire’s row.” Quite a few of the side streets and parallel avenues like Jackson, Pacific, and Washington are lined with estates that trade hands on occasion for a few tens of millions. No tear downs here. The villas and manors along these avenues were built by sugar barons and banking tycoons of centuries past. Silicon Valley’s most senior executives, and the City’s hedge fund managers, buyout barons, bankers, and a few celebrities make up most of the neighborhood’s owners. Their children attend exclusive private schools in Pacific Heights where they are preened for Stanford and Princeton.

It is becoming hard to identify any part of San Francisco as an “elite” enclave. Tech 2.0, as the Google and Facebook-led regional boom is being called now, has vested thousands of twenty somethings as well as senior executives with billions in IPO cash and billions more in salaries to hunt for real estate, and they have chosen San Francisco, nearly all of it, as their preferred stomping grounds. Maybe it will only be another decade until Broadway starts getting called trillionaire’s row.

Sea View Avenue, Piedmont, California. 71 percent white, only 5 percent of Piedmont’s population is Black or Latino. Median household income is $200,000, and wealth holdings are much more. Piedmont supports its own public schools, police force, parks, and libraries.

Across the Bay is a slightly more modest version of billionaire’s row, probably better called a millionaire’s row running across the ridge line from Oakland north to Kensington. In the middle of Oakland, in fact completely surrounded by the scrappy industrial city by the Bay, is the city of Piedmont. When it was founded in the 1920s its first residents gave it the nickname “city of millionaires.” They restricted housing to single family residential homes on large lots from the start to prevent Black and immigrant families from moving up the hillside. Sea View Avenue is where the big money that wants to show off buys real estate, but the entire city boast a median home price of $1.4 million. The Berkeley hills are similarly rich and populated by an unusually high number of lawyers.

Lawyers, especially tort defense, corporate, and tax lawyers who serve the wealthy and defend corporate America from labor unions, environmentalist, and consumer advocates, also love Marin County. Across the Golden Gate from San Francisco, Marin is not much more than a bedroom community for corporate lawyers and CEOs who want a little more room and sun than San Francisco provides. If Piedmont was a city shelter to exclude the working class, then Marin is similar, but on the level of a county. Despite growing pockets of Latino poverty in older towns like Novato and San Rafael, Marin remains one of the wealthiest counties in the U.S. on a per capita basis. Marin’s Black population is segregated into the tiny Marin City, one of the only places public housing was allowed to be built. Marin City’s residents work in the retail sector and some of the industry along San Rafael’s waterfront. They earn near the bottom of the region’s wage scale and subsist on a fraction of the income their wealthy neighbors take in each month.

Hagenberger Road, East Oakland. Oakland is over 50 percent Black and Latino. Sections of the city such as the area pictured above are 90 percent non-white. In the typical pattern of environmental racism, residential homes are in close proximity to major roadways, highways, rail lines, industrial facilities, scrap yards, and utilities.

Unemployment stalks the working poor of the Bay Area, threatening to force them into insolvency and bankruptcy, foreclosure and displacement. During the first Dot Com boom of the late 1990s unemployment was at five percent for white Bay Area residents. For those living along the billionaire’s and millionaire’s rows, unemployment is a meaningless concept. The capital invested by the rich, by their clever advisers who run the hedge funds and private equity shops, earns interests and returns on equity far larger than any years honest wage labor can eek out. The tax code provides for this with carried interest and the lowest personal income tax rates for top earners in many decades. Hordes of tax lawyers, many who live in Marin, the Oakland hills, and San Francisco, will eagerly structure a family’s investments and bills to minimize taxes, so long as they possess a minimum of $5 million in liquid assets – preferably more.

Black men in the Bay Area have consistently suffered an unemployment rate double that of white men. Through the entire George W. Bush presidency, a period characterized by an economic policy to benefit the wealthiest with low taxes and interest rates, Black men endured double digit unemployment rates, reaching about 13 percent when Obama took office. The Financial Crisis sent Black unemployment rates skyrocketing in San Francisco, Oakland, Richmond, and Vallejo, upwards of 22 percent in 2010.

Economic policies under Obama —both those he championed, and those he compromised on— have been very good for the wealthy, and that’s reflected best by the real estate and consumption bubbles frothing over places like San Francisco. The Federal Reserve Bank’s unprecedented purchases of bonds and its low lending rates have produced rallies in stock and debt markets which have greatly re-inflated the fortunes of the rich.

The Pew Research Center recently summed up this polarizing redistribution of wealth from the bottom to the top by noting simply that since 2009 the wealthiest 7 percent of Americans experienced an increase of 28% in their net worth, while the bottom 93 percent actually lost 4 percent of their savings.

The San Francisco Bay Area’s current tech boom is further dividing the wealthy few from the impoverished masses. Companies like Google, Apple, and Oracle are among the least diverse workplaces places where men outnumber women, and white and Asian employees dominate the ranks of lowly programmers and senior executives. The need to hire thousands of engineers is drawing waves of college graduates to Silicon Valley and San Francisco, and they’re washing over the current residents like a tide of suffocating oil. Some of the tech buses —private transit systems operated by Silicon Valley’s largest firms to shuttle employees from San Francisco to their suburban campuses in Santa Clara County— now run lines into Oakland and Hayward, a sign that their employees are increasingly colonizing formerly undesirable zones of real estate.

The drift apart between the pale wealthy few and the impoverished multitudes of darker-skinned peoples is evident on the level of whole cities. San Francisco enjoys robust public finances, high credit ratings, low per capita debt to income ratios, and many well funded public services. However, two decades of intense gentrification mean that this healthy public sector increasingly caters only to those “citizens” who can afford to live in San Francisco.

Pushed out of the region’s urban core, in the 1990s and 2000s Black, Latino, and some Asian immigrants found themselves in the affordable locales of Vallejo, Stockton, Richmond and Oakland. Further out towns like Antioch, Brentwood, and Pittsburg became increasingly non-white and working class. In the Financial Crisis these cities hemorrhaged residents and revenues due to some of the highest foreclosure rates in the nation. Vallejo and Stockton went bankrupt after slashing the most basic services. Vallejo is 75 percent non-white. Stockton is 80 percent non-white.

The wealthiest Bay Area communities, the “towns” of Hillsborough, Woodside, Atherton, Los Altos Hills, and the city of Piedmont are three quarters white with median incomes in the six figures. Public finances barely flinched during the Great Recession. A few of these local governments in fact have no outstanding public debt.

Atherton and Los Altos Hills have zero bonded public debt.

Oakland has almost a billion just in bonded debt.

In the tony Marin hamlet of Fairfax the public debt burden resting on each resident is about 1.7 percent of their annual income.

In Richmond the ratio of public debt to personal income for each resident is 16 percent.

Richmond, a quarter Black and a third Latino, is a tangle of oil and chemical refineries run primarily by Chevron. Not a year ago a massive fire at one of the company’s plants spewed toxic vapors and smoke into the sky, poisoning thousands of residents.

Chevron is headquartered in San Ramon, another exclusive, mostly white suburban environment with low municipal debt and a household median income of $121,000 a year.

San Francisco’s Tar Sands

Far from being an epicenter of ‘cleantech,’ the Bay Area actually is host to some of the largest oil corporations exploiting Canada’s oil sands.

Sidney Martin Blair, Bechtel’s man in Canada, an early proponent of mining the oil sands of Alberta.

In 1951 Sidney Martin Blair, the vice president of Bechtel Canada, visited Alberta at the behest of the regional government to examine the economic case for mining the thick deposits of bitumen resting underneath much of the boreal forests and grasslands that reach up and around frigid Lake Athabasca. Blair was no stranger to what are known popularly today as the tar, or oil sands. In 1924 Blair, who grew up in the northern clime of Canada’s interior, submitted his thesis for a Master of Science degree from the University of Alberta: “An Investigation of the Bitumen Constituent of the Bituminous Sands of Northern Alberta.” His later study of the oil sands for Alberta came to be known as the Blair Report and served as the founding document for what is becoming one of the largest industrial projects in human history, and one of the most dire environmental threats we have ever faced.

On the economic end Blair concluded, importantly, that extraction of a barrel of oil from the Alberta sands had reached a cost of $3.10, while that same barrel would be worth $3.50 in the regional and Western U.S. markets. It was still high above the cost of pumping sweet crude from plentiful wells in Canada and south of the border in America’s abundant oil plays of Colorado, Texas, Utah, and Wyoming, but the price arrangements were headed toward more parity over the long-term, Blair and others surmised. Easy to drill gushers would disappear by the 1980s in the United States, leading to increasing imports of more expensive oil, and finally to the fracking boom which requires much higher levels of capital and investment to squeeze petroleum from fickle rock formations. The economic price per barrel of oil from Alberta’s bituminous sands would only become more attractive.

Blair’s affiliation with Bechtel was no accident. The secretive corporation was by the 1940s a major player in the petroleum industry, building pipelines and other infrastructure for oil giants, and national oil corporations all over the world. Bechtel’s close ties to the U.S. military and CIA gave the company access to the highest levels of government in the Middle East, South America, Europe, and Asia, where newly rich princes and anti-communist dictators flush with cash, and with U.S. foreign aid, sought to build gargantuan energy projects. The Bechtels and their close associates made billions many times over.

Where once existed a Boreal forest, now an open pit oil sands mine worked by shovels and trucks.

The Bechtel family viewed Canada’s oil sands as a potential source of profits many years before the regional government and oil corporations were willing to invest. Blair gave Bechtel entry when the time came; in 1962 Bechtel began construction of the Athabasca Tar Sands project in Alberta’s northern reaches for the Greater Canadian Oil Sands company. It was the first large scale attempt to mine and refine the bitumen into oil and other hydrocarbon products. Imitators, from smaller independent companies to the big majors like Exxon and Chevron, would eventually pile aboard.

Over the next several decades Bechtel built many of the “upgrading facilities” as the giant cookers that heat and separate the filthy mixture of bitumen, sand, and water, are called. Today Bechtel, along with its subsidiary Bantrel, remains one of the largest oil sands engineering firms in the world. Bantrel designs and Bechtel builds. Over the last two decades Bantrel designed and Bechtel built several massive upgraders for Suncor, the corporate successor of the Greater Canadian Oil Sands company.

Suncor’s open pit mines lie northwest of Fort McMurray. Miles of scraped-bare earth crawl with one-hundred ton shovel excavators and trucks capable of hauling four-hundred tons of earth across miles of devastated moonscape to waiting crushers and conveyors. The tar sands mines are visible from space, probably even from the moon.

Suncor’s bitumen is processed on site resulting in the equivalent of over 300,000 barrels of oil equivalent extracted each day. In-situ extraction, a process of pumping oil from deeper sand deposits after its is heated and precipitated into thick veins within the soil using steam and other injectants, provides another 100,000 barrels, much of which is piped to a refinery in Denver.

Suncor aspires to produce a million barrels of oil a day from its tar sands holdings. Bechtel will likely build the facilities.

Bechtel today actually plays second string to another San Francisco corporation when it comes to providing engineering and construction services to exploit the oil sands. Last year URS, the giant engineering company that Dianne Feinstein’s husband Richard Blum once owned a big stake in, bought out Flint Energy Services, a Canadian oil and gas production services provider, for $1.25 billion. Flint is less well-known that other oil services companies like Schlumberger and Halliburton, but it does the same work.

In-situ oil sands mining utilizes steam and other heated injectants to emulsify bitumen deep in the ground. It is then pumped to the surface and piped to nearby separation and treatment plants. As much as 80 percent of Canada’s tar sands is too deep to pit mine, meaning that in-situ extraction is of paramount importance to the fossil fuel industry’s plans.

One of URS’s biggest and newest oil sands contracts is a $130 million project to lay 43 miles of pipes that will shoot steam deep underneath the surface of the Wood Buffalo region, a remote and mostly forested plain northeast of Fort McMurray. This single in-situ tar sands project will extract 85,000 barrels of bitumen a day according to the application filed by Canadian Natural Resources, Inc. URS is carrying out several similar projects to heat up enormous expanses of the Canadian landscape far beneath the surface in order to liquify and suck out bitumen.

The in-situ tar sands extraction method is less destructive to the immediate landscape than open pit mining, but it poses the greater risk in terms of climate change. Approximately 80 percent of the oil sands are buried too deep to excavate. Thus in-situ extraction methods being engineered by URS and Bechtel are being used to tap these hundreds of billions of barrels equivalent of oil. Needless to say, if this happens levels of CO2 in the atmosphere will surpass the counts that most scientists say will lead to catastrophic rises in global temperatures.

The roads, pipelines, and “pads” —the patches of cleared earth upon which drilling rigs operate and where valves and other machinery are built— required for in-situ oil sands mining are also visible from satellite photos of the region. From high above the roads and pads of the region’s in-situ oil plays look like tan nets cast over the landscape, covering hundreds of square miles, cutting wild boreal forests into neat, logical grids.

Expansion of the open pits and in-situ fields of the tar sands will all happen regardless of whether the Keystone XL pipeline is approved, but URS noted in their annual report for the last year that such a decision would impact their earnings as it would significantly restrict expansion. “Should the proposed Keystone XL pipeline project application be denied or delayed by the federal government,” explained the company, “then there may be a slowing of spending in the development of the Canadian oil sands.”

Martin Koffel, CEO of URS Corp. URS is also one of the largest U.S. military contractors, and co-operates the multiple sites within the U.S. nuclear weapons complex, including the nation’s two primary weapons design and testing labs.

Regardless, San Francisco’s URS is going all in for the tar sands. On a recent conference call URS’s long-time CEO Martin Koffel said, “Flint, in our view, is the perfect fit for us, given our long-held ambition to expand our position in the oil and gas market.” Koffel noted that 20 percent of URS Corp’s revenues are now dependent upon oil and gas projects, and most of these will involve the Canadian oil sands, or fracking projects in the United States. “We’re more than enthusiastic about this sector,” said Koffel.

Other Bay Area corporate giants have been eager to invest in the tar sands in recent years. San Ramon-headquartered Chevron owns interests in the Athabasca Oil Sands Project near Fort McMurray, an operation that pipes out over a quarter million barrels each day. Chevron has been one of the most aggressive oil and gas corporations in the political sphere. The company has contributed millions in recent years to campaigns aimed at gutting state and federal environmental laws. Chevron’s army of lobbyists are active on Capitol Hill and across various oil and gas-rich states pressing to keep lucrative subsidies in place, and to prevent climate change and other environmental bills from being considered. Chevron is also one of the sponsors of MIT’s Energy Initiative, the pro-oil, gas, and coal think tank from which Obama’s current Energy Secretary Ernest Moniz hails.

Fluor Corporation, an engineering rival of URS, has an office in the East Bay city of Dublin that employs approximately one hundred engineers. When it opened its Dublin office in 2008, Fluor cited its proximity to Chevron’s East Bay operations and headquarters as a deciding factor for the move.

Fluor’s global headquarters is in Irving, Texas, just one mile down the road from another of the company’s key clients, the world’s largest oil corporation, ExxonMobil. Fluor’s East Bay office employes about one hundred engineers who plug away full-time on oil and gas projects. For Chevron Fluor is designing and building facilities at the Muskeg River Mine, a giant oil sands site 75 miles northwest of Fort McMurray that will spit out 155,000 barrels of bitumen each day for three decades. This will result in a total of 1.6 billion barrels of bitumen that will be refined into upwards of billion barrels equivalent of oil.

That the San Francisco Bay Area is now an epicenter of oil sands engineering and services is ironic given the region’s reputation for environmentalism, and strong pushes for renewable energy development by various local governments. San Francisco, Sonoma County, Marin County, and Richmond are all developing community choice aggregation programs to replace PG&E as their utility, and to develop local renewable sources of electricity. San Francisco’s Board of Supervisors voted just last month to urge the city’s pension system to divest about half a billion dollars from stocks in oil, gas, and coal companies, some of them the same corporations named above. Berkeley’s mayor is urging similarly, and is even pressing California’s massive public employees pension system CalPERS to divest its stock and bond portfolios from fossil fuel energy companies.

The Bay Area’s business community plays up its green credentials, even if it’s undeserved. Every company touts “sustainability” as a major goal. Even URS and Bechtel both publish glossy annual sustainability reports touting beach clean ups, community garden volunteer days, light bulb replacements in their offices, and the number of their employees who bike or take the train to work.

If they succeed in their quest to exploit Canada’s mostly un-tapped oil sands, in the not-too distant future URS and Bechtel employees might be cleaning up beaches that have shifted miles inland from calamitous rises in sea level, and they might be biking to work in 120 degree heat.

According to James Hansen, the recently retired chief climate scientist of NASA, the oil sands are an end game for the environment.

“Canada’s tar sands, deposits of sand saturated with bitumen, contain twice the amount of carbon dioxide emitted by global oil use in our entire history,” wrote Hansen in a New York Times op-ed last year.

“If we were to fully exploit this new oil source, and continue to burn our conventional oil, gas and coal supplies, concentrations of carbon dioxide in the atmosphere eventually would reach levels higher than in the Pliocene era, more than 2.5 million years ago, when sea level was at least 50 feet higher than it is now. That level of heat-trapping gases would assure that the disintegration of the ice sheets would accelerate out of control. Sea levels would rise and destroy coastal cities. Global temperatures would become intolerable. Twenty to 50 percent of the planet’s species would be driven to extinction. Civilization would be at risk.”

From Puerto Rico to Oakland, a New York Private Equity Firm Is Gaining Control Over Critical U.S. Infrastructure

In February of this year the main airport of Puerto Rico was privatized under a deal that allows a New York private equity group to take control the facility for 40 years. The firm is called Highstar Capital, and their link to Oakland is through the city’s port. In 2009 the Port of Oakland awarded Highstar a lucrative concession to take over the Outer Harbor Terminal for 50 years. Concessions are a form of privatization in which the underlying ownership of a public asset remains legally with a public authority, municipality, or the state, but control over the asset’s revenues, capital investments, and operations is effectively handed over to a private company.

A map of Ports America’s terminal leases and concessions. The company, owned by Highstar Capital, is the largest operator of port infrastructure in the U.S.

Highstar runs the Oakland port berths through Ports America, a terminal operator the firm purchased in 2007. The Oakland deal gives Highstar a monopoly over a major terminal at the Port in exchange for lease payments made to the Port of Oakland.

Highstar also controls a marine terminal in the Port of Baltimore under a virtually identical 50-year privatization deal. Ports America is the largest terminal operator in the United States, leasing more waterfront facilities than any other company under more traditional lease agreements that usually only extend three to seven years. In California alone, Ports America operates facilities at the ports of Concord, Long Beach, Los Angeles, Port Hueneme, Sacramento, San Deigo, and Stockton, in addition to its privatized Oakland property.

The Concord operation focuses on shipping military goods and ammunition overseas. Several of Ports America’s other operations handle similar military cargoes. The company’s major port operations pass through millions of containers every year with products bound for U.S. and overseas markets.

This is partly why Highstar, through Ports America, controls such a vast swath of the U.S. maritime acreage. Back in 2006 P&O Ports, an independent company, operated most of these marine terminals, but P&O was bought that year by Dubai Ports World, an aggressively expanding terminal operator based in the United Arab Emirates. Various members of the U.S. Congress objected to a company from a Arab nation taking over a good chunk of the U.S. port infrastructure. Behind the scenes Highstar, which was then still a subsidiary of the AIG insurance company, maneuvered to purchase P&O Ports from Dubai Ports World.

Highstar is among a growing number of infrastructure privatization funds focusing on U.S. public assets. These companies utilize their access to cheap debt, their considerable equity (much of it sourced from wealthy individuals and institutional investors like pensions), and their political connections, to take control of highways, bridges, ports, railroads, and other goods.

Highstar is also one of the biggest owners of oil and gas pipelines in North America. And in addition to its ownership stake in Puerto Rico’s Luis Muñoz Marin Airport, Highstar also owns the London City Airport in the U.K.

Wayne Berman, lobbyist, Highstar “adviser,” current Blackstone government relations director.

Integral to Highstar’s business strategy is the cultivation of friends in high places, and influence in the halls of government. The company’s executives have never been shy about showering money on political campaigns, and buying the most connected lobbyists to push their interests. Highstar executives have spent over $900,000 to fund the campaigns of federal candidates and the Republican Party since 1990, with most of this spending concentrated in the mid to latter 2000s.

Highstar has spent $3.8 million over the past decade lobbying Congress. Most of this money was used to obtain the services of Wayne Berman, a Republican Party fundraiser who has been on the inside of numerous GOP presidential administrations.

Berman is a super-lobbyist who raises millions of dollars for conservative candidates. Individually Berman has contributed over $800,000 to federal elections campaigns since 1990. Berman is directly employed by Highstar as a “senior advisor.” Currently he is the in-house lobbyist for another private equity group Blackstone, but he remains in the employ of Highstar also.

Who Owns the Private Prison Corporations?

Davey D has an interesting blog post about private prisons, incarceration, and the mass media. There’s numerous excellent bits of information throughout the piece linking the criminalization and mass incarceration of people of color with the complicity of the entertainment industry.

What’s really important about this post, what I appreciate about it, is that Davey is asking some key questions about the economics of a small part of the mass incarceration phenomenon; Who owns the private prison industry? What else do they control in the corporate economy? How much power do they have to influence government policy, and the activities of other corporations?

The question of who owns the private prison industry is quite complicated, however. Davey’s post claims that there is a direct link between the owners of the mass media industry and the private prisons, and that the owners are in fact coordinating their activities to increase incarceration rates. He goes on to imply that when private prisons make profits from locking human beings up, these profits also flow to the mass media companies. The evidence Davey presents for this claim is that the same “investors” who own the private prison companies also are the largest shareholders of the big media companies.

Here’s how Davey explains it:

“According to public analysis from Bloomberg, the largest holder in Corrections Corporation of America is Vanguard Group Incorporated. Interestingly enough, Vanguard also holds considerable stake in the media giants determining this country’s culture. In fact, Vanguard is the third largest holder in both Viacom and Time Warner. Vanguard is also the third largest holder in the GEO Group, whose correctional, detention and community reentry services boast 101 facilities, approximately 73,000 beds and 18,000 employees. Second nationally only to Corrections Corporation of America, GEO’s facilities are located not only in the United States but in the United Kingdom, Australia and South Africa.
You may be thinking, “Well, Vanguard is only the third largest holder in those media conglomerates, which is no guarantee that they’re calling any shots.” Well, the number-one holder of both Viacom and Time Warner is a company called Blackrock. Blackrock is the second largest holder in Corrections Corporation of America, second only to Vanguard, and the sixth largest holder in the GEO Group.
There are many other startling overlaps in private-prison/mass-media ownership, but two underlying facts become clear very quickly: The people who own the media are the same people who own private prisons, the EXACT same people, and using one to promote the other is (or “would be,” depending on your analysis) very lucrative.”

There’s problems with these claims, especially the notion that “the people who own the media are the same people who own private prisons, the EXACT same people[.]” I doubt this, and the evidence offered above certainly does not support it.

Figuring out who is calling the shots behind the private prison industry is important, but pointing at the Vanguard Group and Blackrock isn’t going to be a very productive exercise. Neither of these companies in fact “calls the shots” for any of the corporations they invest in, even though they routinely buy what are technically controlling stakes —more than 5% of a company’s outstanding shares— in publicly traded corporations.

Vanguard and Blackrock are institutional investors. They gather billions of dollars from customers including public and corporate pension funds, foundations, non-profits, as well as hundreds of thousands of individual customers who want to purchase IRAs and 401Ks. Out of the billions of dollars they take from their innumerable customers these companies create what are called indexes by buying equities, bonds, and other securities.

The investments of Vanguard and Blackrock are not targeted at particular companies, but instead are designed to replicate, or trend slightly above, the average rates of return across broad sectors of the market. To say that Vanguard or Blackrock happen to be the “the largest holder” of a company’s stock is not particularly relevant to the question of who controlst that company, or even who it is that benefits from the economic fortunes of that company.

Vanguard and Blackrock are the largest owners of probably thousands of large, medium, and small cap companies. Money managers like Blackrock and Vanguard do not exercise any control over their investments. The traders and analysts who work at Vanguard and Blackrock do not necessarily care about what a company does or how it makes its profits. They look at companies as bundles of rates and vectors on a computer screen, plots of data that indicate rates of return on capital invested at particular points in time. They compare these metrics to other metrics in the market, and they allocate vast pools of capital into and out of thousands of particular stocks based solely on the relational value of a stock to certain benchmarks. It’s pure quantitative extraction of income from global dispersed economic activity, and it occurs on a vast scale that picks from tens of thousands of corporate stocks, bonds, and other securities using criteria that are only about the trade-offs between risks and returns on the investment of capital.

Even if we did hypothesize that Vangaurd and Blackrock’s big stakes in private prison companies are relevant in terms of control, we’d have to figure out, who owns Vanguard and Blackrock? These are companies in and of themselves with stock, and certain owners who hold significant equity stakes. However, the ownership of the corporation entities known as Vaguard and Blackrock is separate from the claims made on the investments returns of the funds administered by each company. It’s these funds, distinct legal entities, that are invested in private prison companies, among many, many other sub-sectors of the economy.

For Corrections Corporation of America, there are at least four different Vanguard funds that own chunks of the company’s stock. But within the vast portfolios of these separate Vanguard funds, CCA is a mere tiny fraction of a percent of the fund’s total investments. For example, the Vanguard Windsor II Inv fund owns CCA stock. But CCA isn’t even among the top 25 companies that the Vanguard Windsor II Inv is invested in. The fund’s top company stock picks are JP Morgan, Pfizer, Phillip Morris, Conoco Phillips, IBM, and its total holdings include a huge number of other corporations. CCA is way down on the list, lost amid an index of equities meant to track a vast swath of the global economy.

Anyway, who owns the Vanguard Windsor II Inv fund, and the other Vanguard and Blackrock funds that in turn own CCA and GEO Group stock?

The answer is that hundreds of other institutions and hundreds of thousands of individuals (mostly wealthy persons in the top income brackets) own the Vanguard and Blackrock funds that are used to buy shares of companies like GEO and CCA. So saying Vanguard owns private prisons and media companies is only saying that virtually millions of people own tiny fractional stakes in these companies through their pensions, 401Ks, ETFs, mutual funds, and other money manager products that Vanguard and Blackrock sell.

To say that because Vanguard or Blackrock funds own both private prisons and media companies means that the same people control the prisons and mass media is just plain wrong. There may be other links, but it’s not here.

All that said, perhaps it should be relevant and scandalous that Vanguard and Blackrock include private prison companies in their index funds. That prison companies are simply thought of as mundane stocks that index funds should seek exposure to should be outrageous. It’s troubling that these money managers consider private prison corporations as simply a sector of the “market.” Perhaps pensioners (including many union members and public employees), mutual fund owners, and persons with 401Ks administered by these and other big money managers should object to the inclusion of private prison companies in their investment funds.

There’s certainly a long tradition of shareholder activism to force institutional money managers to divest from companies that do particularly heinous things. The San Francisco Board of Supervisors just voted to divest from fossil fuel companies, meaning the money management firms that place the city’s cash into stock indexes and bonds will now have to tweak their offerings to delete companies like Exxon and TransCanada. There should be a similar campaign around private prisons.

To figure out who really controls the private prison companies requires a different route of analysis than simply pointing at the large institutional investors.

Those interested in tracing ownership to actual persons who own large stakes in prison companies, and who exercise control over these companies, should browse the Securities and Exchange Commission filings for both CCA and GEO.

These documents will include filings of the company’s directors and executives who own considerable stock, and who by definition call the shots. They will also mention actual concentrated outside owners who exercise some control over the policies of the companies through proxy.

Finally, there are a few big investors in the private prison companies that deserve a lot of scrutiny along the lines Davey is advocating. It appears that some of the institutional investors with big stakes in GEO and CCA are private equity firms and more boutique focused money managers. Private equity firms and boutique investment houses also collect money from outside investors, like Vanguard and Blackrock, but their pools of capital are assembled from much smaller groups of individuals, typically under 100 persons. Private equity firms usually do get very involved in the way a company is run. If people want to know who are really the concentrated owners of, and beneficiaries of the private prison boom of the last decade or so, they should try to figure out who’s behind these private equity groups.

As for a link to the media, to me that remains an open question, but it’s productive that Davey is making these kinds of assertions and making some connections between the complicated mess of dots.

Steyer’s Oily Bucks

Obama’s ‘Green’ Billionaire Friend Made a Small Part of His Fortune Investing in Oil and Gas Companies

Tom Steyer speaking at the Democratic National Convention in 2012.

Hosting Obama during his visit to San Francisco last week was Tom Steyer, the former head of Farallon Capital Management. Steyer, who is a billionaire (probably the 344th wealthiest person in America if you trust the Forbes rankings), has been a liberal bankroller of the Democratic Party for many years now. More recently Steyer has been positioning himself to be policy maker for team Obama; Steyer recently was rumored to have been included on the short list for Energy Secretary. Various press clippings from the past couple years state that Steyer’s fundraising for Obama and the Democrats is now driven by his newly invigorated concern for environmental issues. Steyer is said to be very concerned with climate change, and the ecological impact of oil and gas.

Three years ago, while still head of Farallon Capital, Steyer jumped into politics in a big way by funding a campaign against California Proposition 23. Had it passed, that ballot initiative would have gutted the Global Warming Solutions Act of 2006, California’s greenhouse gas reduction plan. Prop 23 was supported by Valero, Tesoro, and Koch Industries, among other oil and gas interests. Steyer told a Forbes reporter he “got pissed” that no one was “stepping up” to fight back, so he dropped a couple million to advertise against the out of state oil lobby. In the end Steyer’s money helped. Prop 23 was defeated. Steyer retired from Farallon last year, and in a letter to his investors (mostly wealthy individuals, pension funds, and endowments) he said he would “focus on giving back,” through philanthropy and the Democratic Party. Steyer’s primary source of power through philanthropy and the Democrats is his money. His enormous personal fortune enables him to fund state or even national-level political campaigns, all by himself if need be.

Steyer’s money is an interesting subject. Farallon Capital, which Steyer founded back in 1986, and closely managed for several decades, minted a lot of money off oil and gas investments, among other environmentally destructive business ventures. Among the oil and gas companies that Steyer and Farallon financed and got rich from were Energy Partners, Ltd., Link Energy LLC, Halcon Resources Corporation, Devx Energy, Inc., and a gold mining company named Global Gold Corporation. In each case, Steyer’s team bought up large, or even controlling interests in the companies, or acquired corporate debt. Most of the companies were in financial straits when Farallon bought them. Farallon’s partners then used their position as the new owners of equity or debt extract value from the corporation as it restructured itself through asset sales and reorganization. In several cases the bankrupted company was turned around and rebuilt into a profitable oil and gas firm. In the process Steyer and Farallon ironically helped save and rebuild a few major oil and gas drillers, or helped sell-off oil and pipeline assets to bigger players in the energy industry.

A map of EPL’s “East Bay” oil leases off the shore of Louisiana, near a channel of the Mississippi River.

One of these investments was Energy Partners Ltd., a medium-sized New Orleans-based oil and gas drilling company operating in the Gulf of Mexico. In the early 2000s Energy Partners (EPL) was rapidly expanding. The company took on lots of debt to grow fast, but Hurricanes Gustav and Ike shut down some of the EPL’s operations, starving it of cash. A drop in oil and gas prices in 2008 drove the company over the edge.

Farallon Capital swooped in after the collapse of EPL’s stock price and de-listing from the New York Stock Exchange, purchasing over 2 million shares in the company in late 2009. Tom Steyer was listed as the “senior managing member” of the Farallon funds that held the stock, and was therefore classified as a “beneficial owner” of the company. EPL’s stock price eventually increased after the company reorganized itself through Chapter 11 Bankruptcy. Farallon sold some of its stock in EPL in 2010, netting a significant profit. Today EPL is pumping 17,000 barrels daily from oil from wells just offshore of Louisiana. The company operates in shallow waters, and its service ships traverse the networks of canals that have seriously damaged Louisiana’s wetlands, leading to coastal erosion and vulnerability to hurricane storm surge.

A map of EPL’s federal oil leases in the Gulf of Mexico. EPL is one of the largest oil drillers in the region.

Two of Farallon’s other oil and gas company investments include Link Energy (formerly EOTT), and Halcon Resources.

EOTT, a was a subsidiary of Enron that bought, transported, stored, and sold crude oil and natural gas, using an extensive 8,000-mile pipeline network, a fleet of 238 semi-trucks, and tanks capable of storing 9.9 million barrels in various locations across North America. The company also had natural gas facilities, a refinery, and other industrial holdings, including facilities in California.

Enron’s collapse in 2001 led EOTT to split off as an independent LLC, but the company, despite an attempt to reorganize itself in bankruptcy, never emerged in-tact. Farallon acquired $7.3 million in unsecured 11% Notes issued by EOTT leading up to the company’s bankruptcy, making Farallon one of the company’s largest creditors. This was a big gamble on Farallon’s part. Steyer’s team was assuming that either the reorganization, or liquidation of EOTT would prove highly profitable, and that the company’s notes and stock were being undervalued due to uncertainty around it’s bankruptcy. As part of EOTT’s reorganization, holders of the 11% Notes took a haircut of about 44 percent of their principle. In exchange they received LLC Units, essentially stock in the company. Farallon’s take was about 2.4 million in LLC Units.

EOTT changed its name to Link Energy in 2003 in an attempt to erase the taint of Enron from its reputation, but company’s reorganization attempts floundered. Throughout 2003 Link cleaved off parts of its operations and infrastructure in various sales in order to pay off liabilities, including debt owed to creditors like Farallon. Valero bought Link’s natural gas liquids operations for $20 million. Other sales provided cash, but ultimately Link sold its core assets to Plains All American for $273 million, effectively dissolving the company in an effort to pay off Farallon and a small group of other creditors and investors.

Screen shot image from Halcon Resources web site. The company drills for oil and gas in multiple states using hydraulic fracturing among other techniques.

Halcon Resources was once called Ram Energy Resources, Inc. Steyer and his colleagues at Farallon gambled on Ram’s bankruptcy in an investment strategy resembling the EOTT play. In November of 2005 Farallon scooped up Ram Energy Resources, Inc. shares as the company entered bankruptcy, paying about $5.50 per share. Multiple Farallon Funds were used to buy about 12.9% of the company. Once again Tom Steyer was listed as a “beneficial owner” and “managing member.” Today Farallon owns about 1.7 million shares of Halcon Resources, a $12.5 million stake. Halcon Resources today drills for oil and gas in North Dakota, Montana, east Texas, Ohio, Pennsylvania, utilizing, among other methods, hydraulic fracturing, or “fracking,” as it is commonly known. Halcon transports its oil and gas to refineries via Shell Oil and Sunoco pipelines that cross parts of the United States.

It’s a Banker’s World

LIBOR litigation to recoup damages after the biggest financial fraud in world history has been thrown out

A cartoon depiction of JP Morgan, the hyper-influential banker of the early 20th Century. Several of Morgan’s banks and bank holding companies merged to form today what is known as JP Morgan Chase, one of the banks at the center of the LIBOR fraud.

Sixteen banks at the core of the global financial system —including JP Morgan, Bank of America, and Citigroup— scored a major victory on Friday when a federal judge dismissed nearly all the charges brought against them by a group of plaintiffs that includes municipal governments, pension funds, bondholders, and other investors who lost billions of dollars as a result of LIBOR rigging. The ruling is a major setback, both legally, and financially, for those harmed by the LIBOR manipulation conspiracy. Among the most damaged are are thousands of local governments that were played like ATMs during the Financial Crisis by the banks. Banks used their power to set 3-Month and 1-Month LIBOR rates so as to extract potentially billions in interest rate swap payments from the public. Countless small investors lost equally huge sums of money as investments indexing LIBOR were rigged to pay out less. The lawsuit’s dismissal ensures that the banks will keep billions of dollars in ill-gotten gains. The ruling may also bolster the banks’ positions against ongoing investigations and settlements sought by government regulators in the US, Europe, and Japan.

Strangely, the judge’s order (available here) acknowledged the massive global fraud that caused financial damages to the public in favor a few wealthy institutions. However, Judge Naomi Reice Buchwald relied on technical legal arguments to throw out the core claims of the lawsuit. In other words, the ruling doesn’t deny that the crime occurred and that the Plaintiffs sustained serious damages, but still dismisses the claims.

“We recognize that it might be unexpected that we are dismissing a substantial portion of plaintiffs’ claims, given that several of the defendants here have already paid penalties to government regulatory agencies reaching into the billions of dollars,” concluded Judge Buchwald in her 161 page order. She justified this position, however:

“…these results are not as incongruous as they might seem.  Under the statutes invoked here, there are many requirements that private plaintiffs must satisfy, but which government agencies need not.  The reason for these differing requirements is that the focuses of public enforcement and private enforcement, even of the same statutes, are not identical.  The broad public interests behind the statutes invoked here, such as integrity of the markets and competition, are being addressed by ongoing governmental enforcement.”

Government regulators have already proven through their own investigations that LIBOR was rigged to enrich the banks at the expense of their customers and counterparties who entered into LIBOR-linked derivatives contracts, or purchased LIBOR-referencing securities. Beginning as early as 2005 Barclays, a member of the British Bankers Association, submitted false quotes to Thompson-Reuters, the company responsible for calculating and disseminating the different LIBOR rates each day. The false quotes were designed to skew LIBOR upward, or downward, by precise amounts, so as to benefit the positions of Barclays traders against their counterparties. In doing so Barclays violated securities laws and committed a fraud that harmed countless other market participants relying on LIBOR to value their financial deals.

To date Barclays, UBS, and the Royal Bank of Scotland have all paid fines for manipulating LIBOR rates. A Japanese subsidiary of UBS even pled guilty to criminal charges, but regulators targeted only the Japanese subsidiary so as to leave the Swiss holding bank UBS legally unscathed. The fines for these three banks totaled only $2.5 billion, probably much less than they gained by manipulating various LIBOR rates for more than a half decade. None of the banks have been criminally charged. Even so, Judge Buchwald said that authorities are adequately investigating and punishing the financial companies, and that civil litigation to recoup money and impose penalties does little to advance justice.

During the Financial Crisis beginning in late 2007, and through 2010, the banks manipulated 1 and 3-Month LIBOR rates downward in order to both give the impression that they were weathering the global liquidity crisis, and that investors should not withdraw their money or sell bank stock. (LIBOR is supposed to gauge the rate of interest at which a bank can secure a dollar loan from one of its peers, so lower rates appear to indicate a healthier bank balance sheet.) As credit markets froze up in 2007 and 2008, the banks hunted for cash to close out trades on losing positions and settle hefty credit default swap obligations, among other ballooning liabilities. The banks extracted bigger payments from their counterparties on swaps, and other derivatives contracts that use LIBOR to calculate interest rate payments, by further depressing LIBOR.

Much of this cash was squeezed from cities, counties, public schools, public hospitals, public utilities, ports, airports, and other agencies that purchased interest rate swaps to convert variable rate bond debt into fixed rates. The manipulation of LIBOR since 2007 likely impacted swaps hedging hundreds of billions in public debt, causing billions in inflated payments by local governments to the banks.

The City of Baltimore was a big purchaser of interest rate swaps used to hedge bond debt. Baltimore also purchased and held other LIBOR-linked derivatives as investments. Baltimore lost millions of dollars as a result of LIBOR manipulation, and filed its lawsuit against the banks in August of 2011. Other local governments soon joined Baltimore, creating a class action group of plaintiffs that potentially included hundreds or thousands of local governments across the United States.

Bondholders and other securities investors filed their own separate lawsuits alleging fraud and damages due to the bankers’ conspiracy. All of these cases were consolidated before Judge Naomi Reice Buchwald in the Southern District Court, District of New York in 2012.

The local governments united behind Baltimore —including most recently the California cities of Richmond and Riverside, and counties of San Diego and San Mateo, as well as the East Bay Municipal Utility District, all of which filed their own lawsuits early in 2013— sought to recoup damages from the banks by using US anti-trust, and anti-racketeering laws under the Sherman Act, Clayton Act, and the RICO Act. Judge Buchwald ruled, however, that the Plaintiffs cannot sue under these laws because they have not sustained anti-trust damages, among other reasons.

With respect to the anti-trust allegations, Judge Buchwald argued that LIBOR was never a “market” rate that banks competed among one another to set. Instead, Buchwald notes, rightly in fact, that LIBOR was a non-market endeavor that did not reflect an actual rate the banks borrowed money at, but a rate at which the banks claimed they could borrow money from one another. Because the banks were not in competition with one another to produce LIBOR, they cannot be said to have suppressed competition, or manipulated the market. The damages sustained by local governments as a result of LIBOR rigging cannot technically be said to have resulted from an anti-trust conspiracy, said Buchwald.

So even though the banks dishonestly rigged LIBOR, resulting in huge financial damages to countless counterparties and investors, under Buchwald’s reasoning the banks have not violated the letter of the Sherman Act and US anti-trust law. According to Buchwald:

“Regardless of whether defendants’ conduct constituted a violation of the antitrust laws, plaintiffs may not bring suit unless they have suffered an “antitrust injury.”  An antitrust injury is an injury that results from an anticompetitive aspect of defendants’ conduct.   Here, although plaintiffs have alleged that defendants conspired to suppress LIBOR over a nearly three-year-long period and that they were injured as a result, they have not alleged that their injury resulted from any harm to competition.  The process by which banks submit LIBOR quotes to the BBA is not itself competitive, and plaintiffs have not alleged that defendants’ conduct had an anticompetitive effect in any market in which defendants compete.  Because plaintiffs have not alleged an antitrust injury, their federal antitrust claim is dismissed. “

This of course will come as a surprise to close observers of the financial system; LIBOR became the underlying interest rate of reference for the global derivatives market precisely because it was assumed that it was an honest determination of the rate of interest, or price, which banks charge one another to secure dollar denominated loans. Indeed the motives of some of the banks to depress their individual LIBOR quotes between 2007 and 2010 indicates that each bank’s individual quote was compared to other banks to gauge the company’s health, making it a somewhat competitive measure of credit worthiness. Countless financial workers, from CEOs to floor traders, have assumed for years now that LIBOR was a market rate. Even Bloomberg News, the financial industry’s favorite online news and data source, lists LIBOR under its “market data” tab.

But even if LIBOR had taken on some pseudo-market characteristics, and even though it was believed to be an honest determination of lending rates, Judge Buchwald is correct in noting that LIBOR was never a mechanism of the “free markets” which anti-trust laws are designed to regulate. Instead, as I have pointed out elsewhere, LIBOR was always “a club of powerful banks inventing the price of money, and expecting that other banks, corporations, and even sovereign states would accept their word.” This raises a fundamental question that the LIBOR lawsuits have proven incapable of addressing. Because they are predicated on anti-trust laws, these lawsuits assume free markets in which some participants abused ill-gotten power to distort otherwise fair prices. The current financial system is not a “free market,” and bank rates are inherently political in nature.

The second law around which Baltimore and other local governments built their case was the Racketeering Influenced and Corrupt Organizations Act, better known as RICO. Here Judge Buchwald ruled that the Plaintiffs have no case against the banks under RICO, first because of a 1995 law that virtually exempts financial criminals from being subject to RICO law, and because of the global nature of the crime.

The Private Securities Litigation Reform Act (PSLRA) was written by the financial industry and passed after an intensive lobbying effort that included spending millions on the elections campaigns of both Republican and Democratic Senators and Representatives by the world’s biggest banks. Under the PSLRA, crimes by financial companies that would otherwise be subject to RICO, are instead exempted under the rationale that they are better dealt with under securities fraud law.

The PSLRA also made it more difficult for scammed governments and customers to sue powerful financial companies; securities fraud lawsuits can only be filed and advanced with strong evidence of wrongdoing before trial. RICO lawsuits, on the other hand, can be filed with less evidence, relying on the pre-trial discovery process to turn up more facts and build a stronger case. This informational asymmetry that greatly disempowers the public, and small fish in the financial markets, and favors the big banks, brokers, and traders, was precisely the point of the PSLRA, and even though President Clinton vetoed the law upon its passage in 1995, the Congress, in a rare show of bi-partisan cooperation, and swimming in financial industry cash and influence, overturned his veto.

As if this legal roadblock isn’t enough to kill the RICO claims, Judge Buchwald added that the global nature of the LIBOR fraud exempts the crime and the criminals from prosecution under RICO. “RICO applies only domestically, meaning that the alleged “enterprise” must be a domestic enterprise,” ruled Buchwald in her decision. “However, the enterprise alleged by plaintiffs is based in England,” where the British Bankers Association is based, and where Eurodollar securities are traded. So in this case the global nature of the financial system serves to put the banks beyond the reach of the US law.

Judge Buchwald relied on other technical aspects of federal and state laws to dismiss the LIBOR Plaintiffs’ claims, including the the statute of limitations under the Commodities Exchange Act. The CEA’s statute of limitations is two years from the point in time that the harmed parties become aware of the potential crime. Under a complicated chain of reasoning including the publication dates of various press reports and academic articles raising doubt’s about LIBOR’s assumed validity, Judge Buchwald dismissed any claims against the banks stretching back to manipulation of LIBOR prior to May 29, 2008, and barred most other possible claims related to LIBOR manipulation before April 15, 2009, leaving virtually only instances of LIBOR rigging after that date as crimes that the Plaintiffs can sue for damages over.

The Plaintiffs bringing the LIBOR lawsuits forward could not be reached before press time, but they still have the ability to appeal the decision if they so choose.