Showing posts with label Clean Elections - CE. Show all posts
Showing posts with label Clean Elections - CE. Show all posts

Friday, March 27, 2009

$5 billion in political contributions bought Wall Street freedom from regulation and restraint

Steps to financial cataclysm paved with industry dollars, according to Essential Information and Consumer Education Foundation
 
March 4 - The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, "Sold Out: How Wall Street and Washington Betrayed America," shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

"The report details, step-by-step, how Washington systematically sold out to Wall Street," says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. "Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price -- trillions of dollars -- for that betrayal."

"Congress and the Executive Branch," says Robert Weissman of Essential Information and the lead author of the report, "responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape."
 
12 Key Policy Decisions Led to Cataclysm
Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:
1. 1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.
3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.
4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."
7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.
 
Financial Sector Political Money and 3000 Lobbyists Dictated Washington Policy
During the period 1998-2008:
• Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
• Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
• Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
• Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).
The betrayal was bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the financial sector's 2008 election cycle contributions.
The financial sector buttressed its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.

Financial firms employed a legion of lobbyists, maintaining nearly 3,000 separate lobbyists in 2007 alone. These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, "Sold Out" finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Executive Branch or Congress.


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Rolling Stone: The Big Takeover

by Matt Taibi, posted March 19, and in print in the April 2 edition

It's over -- we're officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline -- a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history -- some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we're still in denial -- we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck -- bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get it too." In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet's investment portfolio down."

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else's financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town -- and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'Ètat. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de gr‚ce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve -- "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron -- a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

I. PATIENT ZERO
The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders -- people who wear seat belts and build houses on high ground -- and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

That guy -- the Patient Zero of the global economic meltdown -- was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington's deregulation of the Wall Street casino. "It's all about the regulatory environment," says a government source involved with the AIG bailout. "These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that."

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you'll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or "tranche." They then convinced ratings agencies like Moody's and S&P to give that top tranche the highest AAA rating -- meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. "The banks knew they were selling crap," says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. "They had some back room somewhere where a bunch of Indian guys who'd been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years," says one young trader who sold CDOs for a major investment bank. "It was nuts."

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages -- read: enough unemployed meth dealers willing to buy million-dollar homes for no money down -- to fill them all. As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets -- some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or "warehousing" CDOs when they wrote more than they could sell. And that's were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice "Hank" Greenberg, the head of AIG, who admired the younger man's hard-driving ways, even if neither he nor his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG's internal operations, Cassano basically told senior management, "You know insurance, I know investments, so you do what you do, and I'll do what I do -- leave me alone." Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of "insurance" to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS.

The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the "Morgan Mafia," as many of them would go on to assume influential positions in the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted a way to help boost the bank's returns. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans. What they came up with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators -- from the Federal Reserve to the Office of the Comptroller of the Currency -- accepted the argument, and Morgan was allowed to put more money on the street.

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope -- it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.
In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn't have even a fraction of that amount of cash on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come.

Initially, at least, the revenues were enormous: AIGFP's returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary's 400 employees were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in compensation. Everyone made their money -- and then it all went to shit.

II. THE REGULATORS
Cassano's outrageous gamble wouldn't have been possible had he not had the good fortune to take over AIGFP just as Sen. Phil Gramm -- a grinning, laissez-faire ideologue from Texas -- had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, Washington had kept a watchful eye on the nation's banks. Ever since the Great Depression, commercial banks -- those that kept money on deposit for individuals and businesses -- had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business.

But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more "business-friendly." Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks -- which, thanks to Gramm, were now competing directly with investment banks for customers -- were driven to buy credit swaps to loosen capital in search of higher yields. "By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market," said Eric Dinallo, head of the New York State Insurance Department.

The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. "You have to remember, investment banks aren't in the business of making huge directional bets," says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don't have to hedge. And that's what AIG did. "They just bet massively long on the housing market," says the source. "Billions and billions."

In the biggest joke of all, Cassano's wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP -- a London-based subsidiary of an American insurance company -- ought to have been regulated by one of Europe's more stringent regulators, like Britain's Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms -- GE, AIG and Ameriprise.

That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a "disparity between the size of the agency and the diverse firms it oversees." Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff -- and this despite the fact that it was the primary regulator for the world's largest insurer!

"There's this notion that the regulators couldn't do anything to stop AIG," says a government official who was present during the bailout. "That's bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, 'You don't exist anymore,' and that's basically that. They don't even really need due process. The OTS could have said, 'We're going to pull your charter; we're going to pull your license; we're going to sue you.' And getting sued by your primary regulator is the kiss of death."

When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant -- a guy named C.K. Lee -- basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano's portfolio were "fairly benign products." Why? Because the company told him so. "The judgment the company was making was that there was no big credit risk," he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.)

In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a thinly veiled shot at the OTS, calling AIG a "huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision." But even without that "adult supervision," AIG might have been OK had it not been for a complete lack of internal controls. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company -- like, for instance, how much exposure the firm had to the residential-mortgage market.

III. THE CRASH
Ironically, when reality finally caught up to Cassano, it wasn't because the housing market crapped but because of AIG itself. Before 2005, the company's debt was rated triple-A, meaning he didn't need to post much cash to sell CDS protection: The solid creditworthiness of AIG's name was guarantee enough. But the company's crummy accounting practices eventually caused its credit rating to be downgraded, triggering clauses in the CDS contracts that forced Cassano to post substantially more collateral to back his deals.

By the fall of 2007, it was evident that AIGFP's portfolio had turned poisonous, but like every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view. That August, balls bulging, he announced to investors on a conference call that "it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions." As he spoke, his CDS portfolio was racking up $352 million in losses. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became "gravely concerned" about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was "deliberately excluded" from the financial review for fear that he might "pollute the process."

The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of Cassano as head of AIGFP, saying an auditor had found a "material weakness" in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to "retain the 20-year knowledge that Mr. Cassano had." (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.)

What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral -- not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its top executives didn't even know it.

On the weekend of September 13th, AIG's senior leaders were summoned to the offices of the New York Federal Reserve. Regulators from Dinallo's insurance office were there, as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of Goldman Sachs. The only relevant government office that wasn't represented was the regulator that should have been there all along: the OTS.

"We sat down with Paulson, Geithner and Dinallo," says a person present at the negotiations. "I didn't see the OTS even once."

On September 14th, according to another person present, Treasury officials presented Blankfein and other bankers in attendance with an absurd proposal: "They basically asked them to spend a day and check to see if they could raise the money privately." The laughably short time span to complete the mammoth task made the answer a foregone conclusion. At the end of the day, the bankers came back and told the government officials, gee, we checked, but we can't raise that much. And the bailout was on.

A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others -- a move the company insisted was necessary to "retain key employees." When Congress balked, AIG canceled the $90 million in payments.

Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano's old unit, AIGFP, which is due to go out of business shortly! Yes, that's right, an average of $1.1 million in taxpayer-backed money apiece, to the very people who spent the past decade or so punching a hole in the fabric of the universe!

"We, uh, needed to keep these highly expert people in their seats," AIG spokeswoman Christina Pretto says to me in early February.

"But didn't these 'highly expert people' basically destroy your company?" I ask.

Pretto protests, says this isn't fair. The employees at AIGFP have already taken pay cuts, she says. Not retaining them would dilute the value of the company even further, make it harder to wrap up the unit's operations in an orderly fashion.

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can't even get used to the tragedy of having to fly coach. "These people need their trips to Baja, their spa treatments, their hand jobs," says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. "They don't function well without them."

IV. THE POWER GRAB
So that's the first step in wall street's power grab: making up things like credit-default swaps and collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb people -- to say nothing of federal regulators and even the CEOs of major corporations like AIG -- are too intimidated to even try to understand them. That, combined with wise political investments, enabled the nation's top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and 1998, the years leading up to the passage of Phil Gramm's fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone -- then the chairman of the Senate Banking Committee -- collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America -- and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. "We're moving to an oligopolistic situation," Kenneth Guenther, a top executive with the Independent Community Bankers of America, lamented after the Gramm measure was passed.

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America's big investment banks if the U.S. didn't strengthen its own oversight. So the top five investment banks got together on April 28th of that year and -- with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson -- made a pitch to George Bush's SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

Donaldson OK'd the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox's tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear's collapse, the firm's debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in 2007 when one of its trading units smartly shorted the housing market, the move didn't tell the whole story. In truth, Goldman still had a huge exposure come that fateful summer of 2008 -- to none other than Joe Cassano.

Goldman Sachs, it turns out, was Cassano's biggest customer, with $20 billion of exposure in Cassano's CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG.

When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. "One might say that it's because Goldman had so much exposure to AIGFP's portfolio," he says. "You'll never prove that, but one might suppose."

Market analyst Eric Salzman is more blunt. "If AIG went down," he says, "there was a good chance Goldman would not be able to collect." The AIG bailout, in effect, was Goldman bailing out Goldman.

Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG -- a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari.

V. REPO MEN
There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs -- a company whose average employee still made more than $350,000 last year, even in the midst of a depression -- was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That's the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers' credit card.

The people who have spent their lives cloistered in this Wall Street community aren't much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a sentence without sounding stupid -- well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.

That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers.

Some aspects of the bailout were secretive to the point of absurdity. In fact, if you look closely at just a few lines in the Federal Reserve's weekly public disclosures, you can literally see the moment where a big chunk of your money disappeared for good. The H4 report (called "Factors Affecting Reserve Balances") summarizes the activities of the Fed each week. You can find it online, and it's pretty much the only thing the Fed ever tells the world about what it does. For the week ending February 18th, the number under the heading "Repurchase Agreements" on the table is zero. It's a significant number.

Why? In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then "repurchase" them in a short period of time, usually one to seven days. This was the Fed's primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual -- $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion -- "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy -- until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

No one knows who's getting that money or exactly how much of it is disappearing through these new holes in the hull of America's credit rating. Moreover, no one can really be sure if these new institutions are even temporary at all -- or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders.

"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting notices every six months or so that they're being renewed. They just sort of quietly announce it."

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself -- or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

VI. WINNERS AND LOSERS
Stevens isn't the only person in Congress to be given the finger by the Fed. In January, when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went -- only $1.2 trillion had vanished by then -- Kohn gave Grayson a classic eye roll, saying he would be "very hesitant" to name names because it might discourage banks from taking the money.

"Has that ever happened?" Grayson asked. "Have people ever said, 'We will not take your $100 billion because people will find out about it?'"

"Well, we said we would not publish the names of the borrowers, so we have no test of that," Kohn answered, visibly annoyed with Grayson's meddling.

Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets -- in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were "marked to market" -- a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded -- Kohn answered, mysteriously, "The ones that have market values are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively -- paying real money for God knows what.

"Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"

"None are worthless," Kohn snapped.

"Then why don't you mark them to market?" Grayson demanded.

"Well," Kohn sighed, "we are marking the ones to market that have market values."

In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary -- a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. "We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It is beyond comprehension."

Count Sanders among those who don't buy the argument that Wall Street firms shouldn't have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. "I guess if we made that public, they'd go on strike or something," he muses.

And the Fed isn't the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn't -- particularly the first $350 billion given out under Bush appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded -- and this isn't a joke -- by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.

"Do you believe that?" she says incredulously. "That's not what we had in mind."

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. "I think basically if you knew Hank Paulson, you got the money," he says.

This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away -- remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency -- many small banks are still waiting for help. Five months into the TARP program, some not only haven't received any funds, they haven't even gotten a call back about their applications.

"There's definitely a feeling among community bankers that no one up there cares much if they make it or not," says Tanya Wheeless, president of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. "They're not giving out subprime loans or easy credit," says Wheeless. "At the community level, it's much more bread-and-butter banking."

Nonetheless, the lion's share of the bailout money has gone to the larger, so-called "systemically important" banks. "It's like Treasury is picking winners and losers," says one state banking official who asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.
In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations.

In other words, it's AIG's rip-roaringly shitty business model writ almost inconceivably massive -- to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that's been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren't such a nightmare.

VII. YOU DON'T GET IT
The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner -- himself a protÈgÈ of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm -- picked a former Goldman lobbyist named Mark Patterson to be his top aide.

In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets -- the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.

God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. "This is exactly what the financial system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren't many people who don't run hedge funds who have expressed anything like that kind of enthusiasm for Geithner's ideas.

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system -- transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Good luck with that, America. And enjoy tax season.


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Friday, July 11, 2008

McCain Pledges Allegiance to NAFTA

By Robert Borosage

Arizona Sen. John McCain continues his rousing campaign tour of the swing states of NAFTA this week. He will celebrate July 3 in Mexico City after a jaunt through Colombia to pledge support for the pending free trade accord with that center of cocaine trade. He surely will increase his margin over Illinois Sen. Barack Obama among business elites in Mexico and Canada. Obama will travel to Zanesville, Ohio, once more exposing himself to McCain's jibes about embracing "protectionist" policies.

No, this isn't a joke. McCain is stumping Colombia and Mexico, a week after his visit to Ottawa, championing the North American Free Trade Agreement to business elites in those countries.

McCain's has a pat routine for these junkets. He piously intones homilies on the benefits of free trade: "We need stand up for free trade with no ifs, ands or buts about it. We let trade and globalization be politicized at our own peril." He repeats a sanctimonious pledge never to "dishonor" America by even contemplating any deviation from the "sacred" NAFTA treaty. He issues stern condemnations of the dangers of "mindless protectionism." And expresses his fervent faith in the ability of American workers to compete with anyone anywhere.

You can't teach an old dog new tricks, goes the old saw. And with McCain, it seems ever more obvious that you can't trust an old salt on a new ocean. He simply doesn't get it. For years, the trade debate featured the above mantra he repeats. Trade, by definition, benefited America. Sure, a few privileged union workers might lose their cushy jobs and padded salaries, but they would find new jobs in the expanding global economy. Americans would prosper from investments abroad, our financial services industry would capture the high end of the expanded world economy, we'd sustain our manufacturing edge by becoming more productive and we'd benefit from lower priced goods imported from abroad. The earth was flat, Tom Friedman taught us, and we're all the better for it.

Except it hasn't quite worked out like that. Productivity went up, but wages stagnated at best and insecurity increased. Corporations clubbed workers with the threat of moving abroad, and cut back on salaries, job security, and benefits like health care and pensions. Families went ever deeper into debt as the cost of basics—education, health care, retirement security, and now food and gas—soared. More and more workers lost good jobs, only to be forced into those that paid less with fewer benefits. And now with the global workforce effectively doubled as China and India and the former Soviet Union joined the global maw, it isn't just industrial workers at risk, but some 30 million jobs that could face offshoring, according to such sober free trade advocates as Alan Blinder. Financial services did prosper, until their greed and gambling blew up in the housing bubble.

The U.S. went further and further into global debt, running up trade deficits that are still $2 billion a day despite the decline in the dollar. Last month, the Chinese announced they were netting $2.5 billion a month—$100 million an hour—in foreign exchange. Their sovereign investment funds are now hunting for good deals across the world.

NAFTA, sold as a source of jobs for the U.S. and a solution to the immigration flows from Mexico, hasn't worked that way either. Our trade deficit with Mexico has soared from a basic balance before NAFTA to an all-time high of $74.3 billion last year. Mexico now exports more cars to the United States than the U.S. exports to the world. Immigration tensions grew as small farmers got displaced in Mexico by subsidized U.S. food exports, and started coming north in large numbers.

Elites found ways to protect themselves. Lawyers, doctors, prescription drug companies use licensing and patent laws to protect their wages and profits, but most Americans worry about how their kids were going to sustain a middle-class life style. Globalization isn't the only reason the middle class is declining—the war on labor, the worship of the CEO and other factors contribute—but it certainly is a significant reason.

And across the world, developing countries discovered the NAFTA model didn't work for them either. The countries that have enjoyed success—the Asian tigers, China—play by a very different set of rules. They target industries, and pursue aggressive mercantilist policies to capture export markets. They run up large foreign reserves to be able to protect their currencies from global speculators. China's bosses have been happy to lend us the money to keep buying the goods our companies were making over there—and will manipulate the value of their currency until they capture the markets they are seeking. But it is hard to argue, as McCain does, that free trade is spreading democracy across the world when the most successful economy is a communist dictatorship.

Now even champions of free trade, like former Treasury Secretaries Robert Rubin and Larry Summers admit this hasn't quite worked out as they hoped. Across the world, the revolt against the corporate trade model is growing. In the U.S., a majority —58 percent—of those polled in a January 2008 Wall Street Journal/NBC survey agreed that "globalization has been bad... because it has subjected U.S. companies and employees to unfair competition and cheap labor."

We face not a choice between "free trade" and "isolationism," as McCain claims, but the challenge of developing a serious strategy for sustaining a robust middle class in a global economy. It isn't a choice between keeping our word and "dishonoring" our commitments, but making a clear reassessment of how we get out of the hole we are in.

Sherrod Brown was elected to the Senate in 2006 through a campaign in Ohio focused on opposition to the trade treaties that have devastated manufacturing jobs in that state. He now has joined with other senators, unions, family farm groups, religious and public interest groups to put forth the TRADE Act. The bill calls for a halt on all new trade accords until the U.S. Comptroller General undertakes a comprehensive assessment of the benefits and the costs of our current agreements, looking at who has benefited—here and abroad—and who has suffered. The legislation then calls for developing a strategy that insures that the benefits of trade are widely shared, that we pursue a policy designed to benefit working people and Main Street, and not simply Wall Street. Obama has laid out elements of an alternative strategy that may form the basis of a new course.

McCain's response to this is like an Inquisition priest discovering free thinking in the pews. Doctrine is sacrosanct. Questioning it is dishonorable. He calls upon Americans to sustain the course we have been on, like lemmings marching stolidly to the sea.

He pretends this is an American tradition, claiming that "every time the United States has become protectionist... we've paid a very heavy price." But this ignores the entire history of this country's rise—with sharp eyed mercantilist trade policies behind tariff walls—to a world economic power with a broad middle class. "Yankee traders" were famed for cutting a tough, practical deal, not for sacrificing their interests for ideological principles.

Nor is McCain such an innocent. He says we mustn't "politicize" trade accords, but trade accords are already heavily politicized. Every trade agreement—particularly NAFTA—features fierce lobbying over every clause. McCain knows this because his entire campaign is staffed from top to bottom by corporate lobbyists, many of whom have earned a hefty buck lobbying to influence and pass trade accords. If McCain is elected, their clients know that they are in line to be first to the trough.

Saint John doesn't sully his rhetoric with these unseemly realities. He seems to want to make trade policy a centerpiece of his election campaign, and doing so will surely help him raise some dough. Obama should take him up on it. Let McCain stump the business elites of Mexico City, Bogota and Ottawa. Obama can join Sherrod Brown championing the concerns of working people in Zanesville and Flint and Pittsburgh. Let voters decide which candidate has his priorities right.


This post originally appeared on HuffingtonPost.com.


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Saturday, June 21, 2008

Is Obama Flipflopping on So-Called "Free Trade"?

Friday 20 June 2008

Opinion
by: Jonathan Tasini, glabour writers

http://www.truthout.org/article/pressuring-obama-free-trade

photoDemocratic presidential hopeful Senator Barack Obama takes a tour of the National Gypsum plant in February during his campaining during the primary election in Lorain, Ohio. (Photo: Rick Bowmer / AP)

Yesterday, Sen. Obama made comments to a business reporter that leave the impression that he is already shifting his stated position on NAFTA and, by extension, so-called "free trade". It is worth looking at as a sign where Sen. Obama really intends to lead us on trade if he wins the White House.

A few overall observations to try to steer the discussion in a productive way:

1. This isn't a debate about whether you are for Sen. Obama or for a third George Bush term. That's a no-brainer.

2. If elected, Sen. Obama has the potential to be a great president - not principally because of his abilities and vision but because of the expectations he has created from millions of people who are really pissed off and are ready to get behind deep, systemic change.

3. The issue of so-called "free trade" and, by extension, how one views the power of corporate America to shape our economic lives is, from my little vantage point, THE deep, systemic change question on the economic vision side. Sen. Obama's economic solutions, at least those embodied in his proposals to date, are inadequate, some seriously so, in meeting the expectations he has raised - which raises for him, and the Democratic Party, a very serious political dilemma. No more so than on the question of so-called "free trade".

4. Some would say, "let's not have these debates before November". That is a legitimate position with which I respectfully disagree. Whatever mandate Sen. Obama comes into office with (and I believe the election will not be close, Electoral College-speaking) has to be shaped by agreements and views shaped now.

So, yesterday, here is what Sen. Obama said to Fortune Magazine:

The general campaign is on, independent voters are up for grabs, and Barack Obama is toning down his populist rhetoric - at least when it comes to free trade.

In an interview with Fortune to be featured in the magazine's upcoming issue, the presumptive Democratic nominee backed off his harshest attacks on the free trade agreement and indicated he didn't want to unilaterally reopen negotiations on NAFTA.

"Sometimes during campaigns the rhetoric gets overheated and amplified," he conceded, after I reminded him that he had called NAFTA "devastating" and "a big mistake," despite nonpartisan studies concluding that the trade zone has had a mild, positive effect on the U.S. economy.

Does that mean his rhetoric was overheated and amplified? "Politicians are always guilty of that, and I don't exempt myself," he answered.

Here is what Sen. Obama says on his website about trade and NAFTA:

Obama believes that trade with foreign nations should strengthen the American economy and create more American jobs. He will stand firm against agreements that undermine our economic security.

• Fight for Fair Trade: Obama will fight for a trade policy that opens up foreign markets to support good American jobs. He will use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks. Obama will also pressure the World Trade Organization to enforce trade agreements and stop countries from continuing unfair government subsidies to foreign exporters and nontariff barriers on U.S. exports.

• Amend the North American Free Trade Agreement: Obama believes that NAFTA and its potential were oversold to the American people. Obama will work with the leaders of Canada and Mexico to fix NAFTA so that it works for American workers.

Here is what Sen Obama said on the campaign trail:

"Sen Clinton has gotten mad at me, because I said she supported NAFTA," Obama said at a rally in Toledo. "She said, 'Well, that's misleading.' And I had to say, 'Well, hold on a second.' The Clinton administration championed NAFTA, passed NAFTA, signed NAFTA. She's saying that part of the experience that makes her the best qualified to be president is all the work that she was doing in the Clinton administration. You can't take credit for everything that's good in the Clinton administration and then suddenly say you don't want to take credit for what folks don't like about the Clinton administration."

Here is what Sen Obama said back in 2004 when he was running for the Senate:

"Obama said the United States benefits enormously from exports under the WTO and NAFTA. He said, at the same time, there must be recognition that the global economy has shifted, and the United States is no longer the dominant economy." [emphasis added]

I do not want to go down the road of the hoo-hah over what, if anything, was said to the Canadians by Sen. Obama's campaign because that is a black hole, with people still arguing whether it was true or not. I think the record, in his own words, is much more useful.

And what does that show? Believe it or not, I think this is complicated - and complication is not the stuff of political debate these days. Here is what I would say:

First, Sen. Obama believes in so-called "free trade". He has said so, on numerous occasions.

Second, during the campaign, he took a very hard, negative line against NAFTA, in large part because it was a useful - and correct - criticism of Sen Clinton's support for NAFTA (she simply lied about her past position but that is not the topic of this post so I'll just leave it at that).

Third, of more concern, he found it now necessary, as the nominee, to "moderate" his views on so-called "free trade", particularly to a business readership - the Fortune magazine interview. Instead, he could have co-sponsored a ground-breaking piece of trade legislation offered by fellow Democrats - but he has not. This should raise concerns about how he would conduct his presidency on the topic of trade, rhetoric aside. If even as the nominee he feels a need to appease the business community, what can be expected when he is president?

Fourth, I think he is somewhat conflicted. I think the community organizer in him comes out when he speaks to union audiences or listens to the policy arguments that make a persuasive case about the damage of so-called "free trade". He understands oppression and corporate power. But, I think he also has deeply ingrained a faith - misguided, I would add - in marketing phrases like "free trade" and "free market". I think those faiths have been ingrained in him not the least of which comes from his Harvard education, an institution where the belief in these marketing phrases is almost a religion.

From the beginning of his campaign, I have been concerned about the contradiction I see between Sen. Obama's calls for change, on the one hand, versus his continued advocacy for so-called "free trade" and the "free market", which, as I have argued before, are just marketing phrases. We need to keep asking questions (like these questions) now. I believe asking those questions will make Sen. Obama a better, stronger and, yes, a truly change president.


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Friday, June 20, 2008

What Does Obama's 'Love of Markets' Mean for Our Economic Future?

Naomi Klein: What Does Obama's 'Love of Markets' Mean for Our Economic Future?

By Naomi Klein, The Nation. Posted June 19, 2008.

Barack Obama waited just three days after Hillary Clinton pulled out of the race to declare, on CNBC, "Look. I am a pro-growth, free-market guy. I love the market."

Demonstrating that this is no mere spring fling, he has appointed 37-year-old Jason Furman to head his economic policy team. Furman is one of Wal-Mart's most prominent defenders, anointing the company a "progressive success story." On the campaign trail, Obama blasted Clinton for sitting on the Wal-Mart board and pledged, "I won't shop there." For Furman, however, it's Wal-Mart's critics who are the real threat: the "efforts to get Wal-Mart to raise its wages and benefits" are creating "collateral damage" that is "way too enormous and damaging to working people and the economy more broadly for me to sit by idly and sing 'Kum-Ba-Ya' in the interests of progressive harmony."

Obama's love of markets and his desire for "change" are not inherently incompatible. "The market has gotten out of balance," he says, and it most certainly has. Many trace this profound imbalance back to the ideas of Milton Friedman, who launched a counterrevolution against the New Deal from his perch at the University of Chicago economics department. And here there are more problems, because Obama--who taught law at the University of Chicago for a decade -- is thoroughly embedded in the mind-set known as the Chicago School.

He chose as his chief economic adviser Austan Goolsbee, a University of Chicago economist on the left side of a spectrum that stops at the center-right. Goolsbee, unlike his more Friedmanite colleagues, sees inequality as a problem. His primary solution, however, is more education -- a line you can also get from Alan Greenspan. In their hometown, Goolsbee has been eager to link Obama to the Chicago School. "If you look at his platform, at his advisers, at his temperament, the guy's got a healthy respect for markets," he told Chicago magazine. "It's in the ethos of the [University of Chicago], which is something different from saying he is laissez-faire."

Another of Obama's Chicago fans is 39-year-old billionaire Kenneth Griffin, CEO of the hedge fund Citadel Investment Group. Griffin, who gave the maximum allowable donation to Obama, is something of a poster boy for an unbalanced economy. He got married at Versailles and had the after-party at Marie Antoinette's vacation spot (Cirque du Soleil performed) -- and he is one of the staunchest opponents of closing the hedge-fund tax loophole. While Obama talks about toughening trade rules with China, Griffin has been bending the few barriers that do exist. Despite sanctions prohibiting the sale of police equipment to China, Citadel has been pouring money into controversial China-based security companies that are putting the local population under unprecedented levels of surveillance.

Now is the time to worry about Obama's Chicago Boys and their commitment to fending off serious attempts at regulation. It was in the two and a half months between winning the 1992 election and being sworn into office that Bill Clinton did a U-turn on the economy. He had campaigned promising to revise NAFTA, adding labor and environmental provisions and to invest in social programs. But two weeks before his inauguration, he met with then-Goldman Sachs chief Robert Rubin, who convinced him of the urgency of embracing austerity and more liberalization. Rubin told PBS, "President Clinton actually made the decision before he stepped into the Oval Office, during the transition, on what was a dramatic change in economic policy."

Furman, a leading disciple of Rubin, was chosen to head the Brookings Institution's Hamilton Project, the think tank Rubin helped found to argue for reforming, rather than abandoning, the free-trade agenda. Add to that Goolsbee's February meeting with Canadian consulate officials, who left with the distinct impression that they had been instructed not to take Obama's anti-NAFTA campaigning seriously, and there is every reason for concern about a replay of 1993.

The irony is that there is absolutely no reason for this backsliding. The movement launched by Friedman, introduced by Ronald Reagan and entrenched under Clinton, faces a profound legitimacy crisis around the world. Nowhere is this more evident than at the University of Chicago itself. In mid-May, when university president Robert Zimmer announced the creation of a $200 million Milton Friedman Institute, an economic research center devoted to continuing and augmenting the Friedman legacy, a controversy erupted. More than 100 faculty members signed a letter of protest. "The effects of the neoliberal global order that has been put in place in recent decades, strongly buttressed by the Chicago School of Economics, have by no means been unequivocally positive," the letter states. "Many would argue that they have been negative for much of the world's population."

When Friedman died in 2006, such bold critiques of his legacy were largely absent. The adoring memorials spoke only of grand achievement, with one of the more prominent appreciations appearing in the New York Times--written by Austan Goolsbee. Yet now, just two years later, Friedman's name is seen as a liability even at his own alma mater. So why has Obama chosen this moment, when all illusions of a consensus have dropped away, to go Chicago retro?

The news is not all bad. Furman claims he will be drawing on the expertise of two Keynesian economists: Jared Bernstein of the Economic Policy Institute and James Galbraith, son of Friedman's nemesis John Kenneth Galbraith. Our "current economic crisis," Obama recently said, did not come from nowhere. It is "the logical conclusion of a tired and misguided philosophy that has dominated Washington for far too long."

True enough. But before Obama can purge Washington of the scourge of Friedmanism, he has some ideological housecleaning of his own to do.

Naomi Klein's latest book is The Shock Doctrine: The Rise of Disaster Capitalism.


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Sunday, May 4, 2008

Did the US Supreme Court just elect John McCain?

by Bob Fitrakis & Harvey Wasserman
April 30, 2008
www.freepress.org/departments/display/19/2008/3090

The US Supreme Court has just dealt a serious blow to voters' rights that could help put John McCain in the White House by eliminating tens of thousands of voters who generally vote Democratic.

By 6-3 the Court has upheld an Indiana law that requires citizens to present a photo identification card in order to vote. Florida, Michigan, Louisiana, Georgia, Hawaii and South Dakota have similar laws. Though it's unlikely, as many as two dozen other states could add them by election day. Other states, like Ohio, have less stringent ID requirements than Indiana's, but still have certain restrictions that are strongly opposed by voter rights advocates.

The decision turns back two centuries of jurisprudence that has accepted a registered voter's signature as sufficient identification for casting a ballot. By matching that signature against one given at registration, and with harsh penalties for ballot stuffing, the Justices confirmed in their lead opinion that there is "no evidence" for the kind of widespread voter fraud Republican partisans have used to justify the demand for photo ID.
Voting rights activists have long argued that since photo ID can cost money, or may demand expensive trips to government agencies, the requirement constitutes a "poll tax." Taxes on the right to vote were used for a century to prevent blacks and others from voting in the south and elsewhere. They were specifically banned by the 24th Amendment to the Constitution, ratified in 1964.

But the Court's lead opinion, written by Justice Stevens, normally a liberal, said that though rare, the "risk of voter fraud" was nonetheless "real" and that there was "no question about the legitimacy or importance of the state's interest in counting only the votes of eligible voters." The burden of obtaining a voter ID, said the court, was not so difficult as to be deemed unConstitutional. Ohio election protection Attorney Cliff Arnebeck believes Stevens joined the decision to divide the Court's conservative majority, and to leave the door open for further litigation.

But there is no indication the corporate media or Democratic Party will be pursuing significant action on this issue any time soon. Though the Kerry Campaign solicited millions of dollars to "protect the vote" in 2004, it has not supported independent research into that election's irregularities. In the King-Lincoln Civil Rights lawsuit, in which we are attorney and plaintiff, 56 of Ohio's 88 counties destroyed ballot materials, in direct violation of federal law. There has been no official legal follow-up on this case, no major media investigation, and no support from the Democratic Party either to investigate what happened in Ohio 2004, or to make sure it doesn't happen again in 2008. The issue has yet to be seriously raised by the major Democratic candidates despite the fact that it could render their campaigns moot.

This latest Supreme Court decision is yet another serious blow to voting rights advocates---and probably to the Democratic nominees for President and other offices. It will clearly make it far more difficult for poor, minority, elderly and young citizens to vote. Tens of thousands of normally Democratic voters in key states---especially Florida, Michigan, Georgia and Louisiana---will simply be prevented from getting a ballot.

The Brennan Center for Justice at New York University's School of Law in its "Friend of the Court" brief noted that between 10% and 13% of eligible voters lack the identification now required in Indiana. People without an official photo ID tend to be disproportionately minorities and poor, ushering a new Jim Crow era based on race and class apartheid. One Indiana study, according to Inter Press Service reporter Jim Lobe, found that 13.3% of registered Indiana voters lacked the now-required ID, but the numbers were significantly higher for black voters at 18% and young voters age 18-34 at more than 20%.

Kathryn Kolbert, President of People for the American Way, put the number at "millions of eligible voters who don't have the ID these laws require."

Photo ID has long been a lynchpin of a concerted GOP strategy to eliminate Democratic voters. In the wake of the theft of the 2004 election in Ohio, Republican activists produced heavily publicized allegations of massive voter fraud, virtually all of which proved to be false.

Nonetheless, the drumbeat for restrictive ID requirements has been steadily rising from GOP strongholds. Other such laws are now virtually certain to follow in states with Republican-controlled legislatures, though it's unclear how many more can be put into law by November.

Nor has the GOP let up in its other campaigns to restrict access to the polls. Extremely harsh limitations on voter registration campaigns in Florida have severely restricted attempts by the League of Women Voters and others to sign up new voters. GOP election officials also have made it clear they will severely restrict the franchise of those who have minor irregularities in the registration forms, such as an errant middle initial or changed address.

It is also unclear how many electronic voting machines will still be in place come November. Despite a wide range of high-level studies showing them easily hackable, the elimination of touch screen voting machines has proceeded at a glacial pace. No significant federal legislation has been passed to eliminate electronic voting machines or even to make them more secure. With a few exceptions, most notably Florida, progress at the state level has been minimal.

Thus the GOP hope that millions of Americans will be voting on hackable computers this November, and that millions more may be eliminated from the rolls altogether, seems very close to fruition. Whether this will swing the election to John McCain remains to be seen. But this Supreme Court decision allowing the demand for photo ID makes it much more likely.

--
Bob Fitrakis & Harvey Wasserman are co-authors of HOW THE GOP STOLE AMERICA'S 2004 ELECTION & IS RIGGING 2008 (www.freepress.org) and, with Steve Rosenfeld, of WHAT HAPPENED IN OHIO? (The New Press). Bob is publisher of www.freepress.org, where Harvey is Senior Editor.


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Tuesday, January 15, 2008

A Supreme Court Reversal: Abandoning the Rights of Voters

Published: January 15, 2008

http://www.nytimes.com/2008/01/15/opinion/15tue4.html?_r=1&ref=opinion&oref=slogin
http://www.truthout.org/docs_2006/011508F.shtml

The Supreme Court heard arguments last week in a hugely important case about voter ID laws. Asking for identification at the polls may sound reasonable, but an Indiana law disenfranchises large numbers of people without driver’s licenses, especially poor and minority voters. If the court upholds the law, as appears likely, it will be a sad new chapter in its abandonment of voters, a group whose rights it once defended vigorously.

As long as there have been elections, there have been attempts to keep eligible people from voting. States and localities adopted poll taxes, literacy tests, “white primaries,” “malapportionment” — drawing district lines to give a small number of rural voters the same representation as a large number of urban voters — and restrictions on student voting. In recent decades, the Supreme Court has rejected all of them.

The court understood that the Constitution guaranteed a robust form of democracy and saw its clear value for the nation. During the tumultuous late-1960s, Chief Justice Earl Warren declared that most of the country’s problems could be solved through the political process if everyone “has the opportunity to participate on equal terms with everyone else and can share in electing representatives who will be representative of the entire community and not of some special interest.”

In recent years, however, with a conservative majority in place, the court has become increasingly hostile to voters. During the oral arguments in the Bush v. Gore case in 2000, Justice Sandra Day O’Connor showed disdain for voters who had trouble with Florida’s disastrous punch-card ballots. After insisting that the directions “couldn’t be clearer,” she suggested that the court ignore the ballots of voters who had failed to master the intricacies. That is precisely what it did, by a 5-4 vote.

Since Bush v. Gore, disdain for voters has become the norm. The court rejected two successive challenges to gerrymandered Congressional districts. One was Tom DeLay’s brazen redrawing of the lines in Texas, which all but guaranteed a Republican victory and made the voters seem irrelevant.

The justices also seem poised, if comments during oral arguments are any indication, to uphold New York’s undemocratic process for selecting state court judges. An appeals court rightly ruled against the system of shadowy nominating conventions, which allows political machines to thwart the will of the voters and handpick judges.

It might seem that today’s court is simply judicially restrained, deferring to rules adopted by the democratically elected branches. Recently, however, the court struck down parts of the McCain-Feingold campaign finance law that limited “Swift boat” style attack ads on the eve of elections. It was perfectly willing to reverse a federal law when the political power of corporations and wealthy individuals was at stake.

The Indiana voter ID case should not be a hard one. Restrictions on voting are subject to heightened constitutional scrutiny, and the state cannot justify the enormous burdens the law imposes. There is no evidence that in-person vote fraud has ever occurred in the state, but there is considerable evidence that voters will be disenfranchised. Indiana could have deterred fraud in less harmful ways, including by accepting a wider range of ID’s.

Critics of the court are already dubbing the voter ID case Bush v. Gore II, and ascribing political motives. The Indiana law, like others nationwide, was pushed through by Republican legislators, evidently with the intent of reducing Democratic turnout.

The five conservative justices may like the fact that voter ID laws increase the odds that Republicans will hold on to the White House in 2008. Or they may have a disregard for poor and minority voters that transcends partisan politics. At the oral arguments, Chief Justice John Roberts suggested that if a voter has to travel 17 miles by bus to a clerk’s office to fight over whether his vote should count, it is no great concern since the trip is not “very far.”

When the court struck down parts of the McCain-Feingold law, Chief Justice Roberts emphasized that the Constitution “requires us to err on the side of protecting political speech rather than suppressing it.” When it comes to voters’ rights, the court appears eager to err in the opposite direction.


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Sunday, January 6, 2008

Can You Count On These Machines?

Sunday 06 January 2008

http://www.truthout.org/docs_2006/010508C.shtml
http://www.nytimes.com/2008/01/06/magazine/06Vote-t.html?_r=1&oref=slogin&ref=magazine&pagewanted=all

Alejandra Laviada for The New York Times

Readers' Comments

Do you trust your vote to be counted with electronic voting machines?

For a while, it had looked as if things would go smoothly for the Board of Elections office in Cuyahoga County, Ohio. About 200,000 voters had trooped out on the first Tuesday in November for the lightly attended local elections, tapping their choices onto the county’s 5,729 touch-screen voting machines. The elections staff had collected electronic copies of the votes on memory cards and taken them to the main office, where dozens of workers inside a secure, glass-encased room fed them into the “GEMS server,” a gleaming silver Dell desktop computer that tallies the votes.

Then at 10 p.m., the server suddenly froze up and stopped counting votes. Cuyahoga County technicians clustered around the computer, debating what to do. A young, business-suited employee from Diebold — the company that makes the voting machines used in Cuyahoga — peered into the screen and pecked at the keyboard. No one could figure out what was wrong. So, like anyone faced with a misbehaving computer, they simply turned it off and on again. Voilà: It started working — until an hour later, when it crashed a second time. Again, they rebooted. By the wee hours, the server mystery still hadn’t been solved.

Worse was yet to come. When the votes were finally tallied the next day, 10 races were so close that they needed to be recounted. But when Platten went to retrieve paper copies of each vote — generated by the Diebold machines as they worked — she discovered that so many printers had jammed that 20 percent of the machines involved in the recounted races lacked paper copies of some of the votes. They weren’t lost, technically speaking; Platten could hit “print” and a machine would generate a replacement copy. But she had no way of proving that these replacements were, indeed, what the voters had voted. She could only hope the machines had worked correctly.

As the primaries start in New Hampshire this week and roll on through the next few months, the erratic behavior of voting technology will once again find itself under a microscope. In the last three election cycles, touch-screen machines have become one of the most mysterious and divisive elements in modern electoral politics. Introduced after the 2000 hanging-chad debacle, the machines were originally intended to add clarity to election results. But in hundreds of instances, the result has been precisely the opposite: they fail unpredictably, and in extremely strange ways; voters report that their choices “flip” from one candidate to another before their eyes; machines crash or begin to count backward; votes simply vanish. (In the 80-person town of Waldenburg, Ark., touch-screen machines tallied zero votes for one mayoral candidate in 2006 — even though he’s pretty sure he voted for himself.) Most famously, in the November 2006 Congressional election in Sarasota, Fla., touch-screen machines recorded an 18,000-person “undervote” for a race decided by fewer than 400 votes.

The earliest critiques of digital voting booths came from the fringe — disgruntled citizens and scared-senseless computer geeks — but the fears have now risen to the highest levels of government. One by one, states are renouncing the use of touch-screen voting machines. California and Florida decided to get rid of their electronic voting machines last spring, and last month, Colorado decertified about half of its touch-screen devices. Also last month, Jennifer Brunner, the Ohio secretary of state, released a report in the wake of the Cuyahoga crashes arguing that touch-screens “may jeopardize the integrity of the voting process.” She was so worried she is now forcing Cuyahoga to scrap its touch-screen machines and go back to paper-based voting — before the Ohio primary, scheduled for March 4. Senator Bill Nelson, a Democrat of Florida, and Senator Sheldon Whitehouse, Democrat of Rhode Island, have even sponsored a bill that would ban the use of touch-screen machines across the country by 2012.

It’s difficult to say how often votes have genuinely gone astray. Michael Shamos, a computer scientist at Carnegie Mellon University who has examined voting-machine systems for more than 25 years, estimates that about 10 percent of the touch-screen machines “fail” in each election. “In general, those failures result in the loss of zero or one vote,” he told me. “But they’re very disturbing to the public.”

Indeed, in a more sanguine political environment, this level of error might be considered acceptable. But in today’s highly partisan and divided country, elections can be decided by unusually slim margins — and are often bitterly contested. The mistrust of touch-screen machines is thus equal parts technological and ideological. “A tiny number of votes can have a huge impact, so machines are part of the era of sweaty palms,” says Doug Chapin, the director of Electionline.org, a nonpartisan group that monitors voting reform. Critics have spent years fretting over corruption and the specter of partisan hackers throwing an election. But the real problem may simply be inherent in the nature of computers: they can be precise but also capricious, prone to malfunctions we simply can’t anticipate.

During this year’s presidential primaries, roughly one-third of all votes will be cast on touch-screen machines. (New Hampshire voters are not in this group; they will vote on paper ballots, some of which are counted in optical scanners.) The same ratio is expected to hold when Americans choose their president in the fall. It is a very large chunk of the electorate. So what scares election observers is this: What happens if the next presidential election is extremely close and decided by a handful of votes cast on machines that crashed? Will voters accept a presidency decided by ballots that weren’t backed up on paper and existed only on a computer drive? And what if they don’t?

“The issue for me is the unknown,” Platten told me when we first spoke on the phone, back in October. “There’s always the unknown factor. Something — something — happens every election.”

NEW VOTING TECHNOLOGIES tend to emerge out of crises of confidence. We change systems only rarely and in response to a public anxiety that electoral results can no longer be trusted. America voted on paper in the 19th century, until ballot-box stuffing — and inept poll workers who lost bags of votes — led many to abandon that system. Some elections officials next adopted lever machines, which record each vote mechanically. But lever machines have problems of their own, not least that they make meaningful recounts impossible because they do not preserve each individual vote. Beginning in the 1960s they were widely replaced by punch-card systems, in which voters knock holes in ballots, and the ballots can be stored for a recount. Punch cards worked for decades without controversy.

Until, of course, the electoral fiasco of 2000. During the Florida recount in the Bush-Gore election, it became clear that punch cards had a potentially tragic flaw: “hanging chads.” Thousands of voters failed to punch a hole clean through the ballot, turning the recount into a torturous argument over “voter intent.” On top of that, many voters confused by the infamous “butterfly ballot” seem to have mistakenly picked the wrong candidate. Given Bush’s microscopic margin of victory — he was ahead by only a few hundred votes statewide — the chads produced the brutal, monthlong legal brawl over how and whether the recounts should be conducted.

The 2000 election illustrated the cardinal rule of voting systems: if they produce ambiguous results, they are doomed to suspicion. The election is never settled in the mind of the public. To this date, many Gore supporters refuse to accept the legitimacy of George W. Bush’s presidency; and by ultimately deciding the 2000 presidential election, the Supreme Court was pilloried for appearing overly partisan.

Many worried that another similar trauma would do irreparable harm to the electoral system. So in 2002, Congress passed the Help America Vote Act (HAVA), which gave incentives to replace punch-card machines and lever machines and authorized $3.9 billion for states to buy new technology, among other things. At the time, the four main vendors of voting machines — Diebold, ES&S, Sequoia and Hart — were aggressively marketing their new touch-screen machines. Computers seemed like the perfect answer to the hanging chad. Touch-screen machines would be clear and legible, unlike the nightmarishly unreadable “butterfly ballot.” The results could be tabulated very quickly after the polls closed. And best of all, the vote totals would be conclusive, since the votes would be stored in crisp digital memory. (Touch-screen machines were also promoted as a way to allow the blind or paralyzed to vote, via audio prompts and puff tubes. This became a powerful incentive, because, at the behest of groups representing the disabled, HAVA required each poll station to have at least one “accessible” machine.)

HAVA offered no assistance or guidelines as to what type of machine to buy, and local elections officials did not have many resources to investigate the choices; indeed, theirs are some of most neglected and understaffed offices around, because who pays attention to electoral technology between campaigns? As touch-screen vendors lobbied elections boards, the machines took on an air of inevitability. For elections directors terrified of presiding over “the next Florida,” the cool digital precision of touch-screens seemed like the perfect antidote.

IN THE LOBBY OF JANE PLATTEN’S OFFICE in Cleveland sits an AccuVote-TSX, made by Diebold. It is the machine that Cuyahoga County votes on, and it works like this: Inside each machine there is a computer roughly as powerful and flexible as a modern hand-held organizer. It runs Windows CE as its operating system, and Diebold has installed its own specialized voting software to run on top of Windows. When the voters tap the screen to indicate their choices, the computer records each choice on a flash-memory card that fits in a slot on the machine, much as a flash card stores pictures on your digital camera. At the end of the election night, these cards are taken to the county’s election headquarters and tallied by the GEMS server. In case a memory card is accidentally lost or destroyed, the computer also stores each vote on a different chip inside the machine; election officials can open the voting machine and remove the chip in an emergency.

But there is also a third place the vote is recorded. Next to each machine’s LCD screen, there is a printer much like one on a cash register. Each time a voter picks a candidate on screen, the printer types up the selections, in small, eight-point letters. Before the voter pushes “vote,” she’s supposed to peer down at the ribbon of paper — which sits beneath a layer of see-through plastic, to prevent tampering — and verify that the machine has, in fact, correctly recorded her choices. (She can’t take the paper vote with her as proof; the spool of paper remains locked inside the machine until the end of the day.)

Under Ohio law, the paper copy is the voter’s vote. The digital version is not. That’s because the voter can see the paper vote and verify that it’s correct, which she cannot do with the digital one. The digital records are, in essence, merely handy additional copies that allow the county to rapidly tally potentially a million votes in a single evening, whereas counting the paper ballots would take weeks. Theoretically speaking, the machine offers the best of all possible worlds. By using both paper and digital copies, the AccuVote promised Cuyahoga an election that would be speedy, reliable and relatively inexpensive.

Little of this held true. When the machines were first used in Cuyahoga Country during the May 2006 primaries, costs ballooned — and chaos reigned. The poll workers, many senior citizens who had spent decades setting up low-tech punch-card systems, were baffled by the new computerized system and the rather poorly written manuals from Diebold and the county. “It was insane,” one former poll worker told me. “A lot of people over the age of 60, trying to figure out these machines.” Since the votes were ferried to the head office on small, pocket-size memory cards, it was easy for them to be misplaced, and dozens went missing.

On Election Day, poll workers complained that 143 machines were broken; dozens of other machines had printer jams or mysteriously powered down. More than 200 voter-card encoders — which create the cards that let voters vote — went missing. When the machines weren’t malfunctioning, they produced errors at a stunning rate: one audit of the election discovered that in 72.5 percent of the audited machines, the paper trail did not match the digital tally on the memory cards.

This was hardly the first such incident involving touch-screen machines. So it came as little surprise that Diebold, a company once known primarily for making safes and A.T.M.’s, subsequently tried to sell off its voting-machine business and, failing to find a buyer, last August changed the name of the division to Premier Election Solutions (an analyst told American Banker that the voting machines were responsible for “5 percent of revenue and 100 percent of bad public relations”).

Nearly a year after the May 2006 electoral disaster, Ohio’s new secretary of state, Jennifer Brunner, asked the entire four-person Cuyahoga elections board to resign, and Platten — then the interim director of the board — was tapped to clean up the mess. Platten had already instituted a blizzard of tiny fixes. She added responsibilities to the position of “Election Day technician” — filled by young, computer-savvy volunteers who could help the white-haired poll workers reboot touch-screens when they crashed. She bought plastic business-card binders to hold memory cards from a precinct, so none would be misplaced. “Robocalls” at home from a phone-calling service reminded volunteers to show up. Her staff rewrote the inscrutable Diebold manuals in plain English.

The results were immediate. Over the next several months, Cuyahoga’s elections ran with many fewer crashes and shorter lines of voters. Platten’s candor and hard work won her fans among even the most fanatical anti-touch-screen activists. “It’s a miracle,” I was told by Adele Eisner, a Cuyahoga County resident who has been a vocal critic of touch-screen machines. “Jane Platten actually understands that elections are for the people.” The previous board, Eisner went on to say, ridiculed critics who claimed the machines would be trouble and refused to meet with them; the new replacements, in contrast, sometimes seemed as skeptical about the voting machines as the activists, and Eisner was invited in to wander about on election night, videotaping the activity.

Still, the events of Election Day 2007 showed just how ingrained the problems with the touch-screens were. The printed paper trails caused serious headaches all day long: at one polling place, printers on most of the machines weren’t functioning the night before the polls opened. Fortunately, one of the Election Day technicians was James Diener, a gray-haired former computer-and-mechanical engineer who opened up the printers, discovered that metal parts were bent out of shape and managed to repair them. The problem, he declared cheerfully, was that the printers were simply “cheap quality” (a complaint I heard from many election critics). “I’m an old computer nerd,” Diener said. “I can do anything with computers. Nothing’s wrong with computers. But this is the worst way to run an election.”

He also pointed out several other problems with the machines, including the fact that the majority of voters he observed did not check the paper trail to see whether their votes were recorded correctly — even though that paper record is their legal ballot. (I noticed this myself, and many other poll workers told me the same thing.) Possibly they’re simply lazy, or the poll workers forget to tell them to; or perhaps they’re older and couldn’t see the printer’s tiny type anyway. And even if voters do check the paper trail, Diener pointed out, how do they know the machine is recording it for sure? “The whole printing thing is a farce,” he said.

What’s more, the poll workers regularly made security errors. When a touch-screen machine is turned on for the first time on Election Day, two observers from different parties are supposed to print and view the “zero tape” that shows there are no votes already recorded on the machine; a hacker could fix the vote by programming the machine to start, for example, with a negative total of votes for a candidate. Yet when I visited one Cleveland polling station at daybreak, the two checkers signed zero tapes without actually checking the zero totals. And then, of course, there were the server crashes, and the recording errors on 20 percent of the paper recount ballots.

Chris Riggall, a spokesman for Diebold, said that machine flaws were not necessarily to blame for the problems. The paper rolls were probably installed incorrectly by the poll workers. And in any case, he added, the paper trail was originally designed merely to help in auditing the accuracy of an election — it wasn’t supposed to be robust enough to serve as a legal ballot, as Ohio chose to designate it. But the servers were indeed an issue of the machine’s design; when his firm tested them weeks later, it found a data bottleneck that would need to be fixed with a software update.

The Nov. 6 vote in Cuyahoga County offered a sobering lesson. Having watched Platten’s staff and the elections board in action, I could see they were a model of professionalism. Yet they still couldn’t get their high-tech system to work as intended. For all their diligence and hard work, they were forced, in the end, to discard much of their paper and simply trust that the machines had recorded the votes accurately in digital memory.

THE QUESTION, OF COURSE, is whether the machines should be trusted to record votes accurately. Ed Felten doesn’t think so. Felten is a computer scientist at Princeton University, and he has become famous for analyzing — and criticizing — touch-screen machines. In fact, the first serious critics of the machines — beginning 10 years ago — were computer scientists. One might expect computer scientists to be fans of computer-based vote-counting devices, but it turns out that the more you know about computers, the more likely you are to be terrified that they’re running elections.

This is because computer scientists understand, from hard experience, that complex software can’t function perfectly all the time. It’s the nature of the beast. Myriad things can go wrong. The software might have bugs — errors in the code made by tired or overworked programmers. Or voters could do something the machines don’t expect, like touching the screen in two places at once. “Computers crash and we don’t know why,” Felten told me. “That’s just a routine part of computers.”

One famous example is the “sliding finger bug” on the Diebold AccuVote-TSX, the machine used in Cuyahoga. In 2005, the state of California complained that the machines were crashing. In tests, Diebold determined that when voters tapped the final “cast vote” button, the machine would crash every few hundred ballots. They finally intuited the problem: their voting software runs on top of Windows CE, and if a voter accidentally dragged his finger downward while touching “cast vote” on the screen, Windows CE interpreted this as a “drag and drop” command. The programmers hadn’t anticipated that Windows CE would do this, so they hadn’t programmed a way for the machine to cope with it. The machine just crashed.

Even extremely careful programmers can accidentally create bugs like this. But critics also worry that touch-screen voting machines aren’t designed very carefully at all. In the infrequent situations where computer scientists have gained access to the guts of a voting machine, they’ve found alarming design flaws. In 2003, Diebold employees accidentally posted the AccuVote’s source code on the Internet; scientists who analyzed it found that, among other things, a hacker could program a voter card to let him cast as many votes as he liked. Ed Felten’s lab, while analyzing an anonymously donated AccuVote-TS (a different model from the one used in Cuyahoga County) in 2006, discovered that the machine did not “authenticate” software: it will run any code a hacker might surreptitiously install on an easily insertable flash-memory card. After California’s secretary of state hired computer scientists to review the state’s machines last spring, they found that on one vote-tallying server, the default password was set to the name of the vendor — something laughably easy for a hacker to guess.

But the truth is that it’s hard for computer scientists to figure out just how well or poorly the machines are made, because the vendors who make them keep the details of their manufacture tightly held. Like most software firms, they regard their “source code” — the computer programs that run on their machines — as a trade secret. The public is not allowed to see the code, so computer experts who wish to assess it for flaws and reliability can’t get access to it. Felten and voter rights groups argue that this “black box” culture of secrecy is the biggest single problem with voting machines. Because the machines are not transparent, their reliability cannot be trusted.

The touch-screen vendors disagree. They point out that a small number of approved elections officials in each state and county are allowed to hold a copy in escrow and to examine it (though they are required to sign nondisclosure agreements preventing them from discussing the software publicly). Further, vendors argue, the machines are almost always tested by the government before they’re permitted to be used. The Election Assistance Commission, a federal agency, this year began to fully certify four private-sector labs to stress-test machines. They subject them to environmental pressures like heat and vibration to ensure they won’t break down on Election Day; and they run mock elections, to verify that the machines can count correctly. In almost all cases, if a vendor updates the software or hardware, it must be tested all over again, which can take months. “It’s an extremely rigorous process,” says Ken Fields, a spokesman for the voting-machine company ES&S.

If the machines are tested and officials are able to examine the source code, you might wonder why machines with so many flaws and bugs have gotten through. It is, critics insist, because the testing is nowhere near dilligent enough, and the federal regulators are too sympathetic and cozy with the vendors. The 2002 federal guidelines, the latest under which machines currently in use were qualified, were vague about how much security testing the labs ought to do. The labs were also not required to test any machine’s underlying operating system, like Windows, for weaknesses.

Vendors paid for the tests themselves, and the results were considered proprietary, so the public couldn’t find out how they were conducted. The nation’s largest tester of voting machines, Ciber Inc., was temporarily suspended after federal officials found that the company could not properly document the tests it claimed to have performed.

“The types of malfunctions we’re seeing would be caught in a first-year computer science course,” says Lillie Coney, an associate director with the Electronic Privacy Information Commission, which is releasing a study later this month critical of the federal tests.

In any case, the federal testing is not, strictly speaking, mandatory. The vast majority of states “certify” their machines as roadworthy. But since testing is extremely expensive, many states, particularly smaller ones, simply accept whatever passes through a federal lab. And while it’s true that state and local elections officials can generally keep a copy of the source code, critics say they rarely employ computer programmers sophisticated enough to understand it. Quite the contrary: When a county buys touch-screen voting machines, its elections director becomes, as Warren Parish, a voting activist in Florida, told me, “the head of the largest I.T. department in their entire government, in charge of hundreds or thousands of new computer systems, without any training at all.” Many elections directors I spoke with have been in the job for years or even decades, working mostly with paper elections or lever machines. Few seemed very computer-literate.

The upshot is a regulatory environment in which, effectively, no one assumes final responsibility for whether the machines function reliably. The vendors point to the federal and state governments, the federal agency points to the states, the states rely on the federal testing lab and the local officials are frequently hapless.

This has created an environment, critics maintain, in which the people who make and sell machines are now central to running elections. Elections officials simply do not know enough about how the machines work to maintain or fix them. When a machine crashes or behaves erratically on Election Day, many county elections officials must rely on the vendors — accepting their assurances that the problem is fixed and, crucially, that no votes were altered.

In essence, elections now face a similar outsourcing issue to that seen in the Iraq war, where the government has ceded so many core military responsibilities to firms like Halliburton and Blackwater that Washington can no longer fire the contractor. Vendors do not merely sell machines to elections departments. In many cases, they are also paid to train poll workers, design ballots and repair broken machines, for years on end.

“This is a crazy world,” complained Ion Sancho, the elections supervisor of Leon County in Florida. “The process is so under control by the vendor. The primary source of information comes only from the vendor, and the vendor has a conflict of interest in telling you the truth. The vendor isn’t going to tell me that his buggy software is why I can’t get the right time on my audit logs.”

As more and more evidence of machine failure emerges, senior government officials are sounding alarms as did the computer geeks of years ago over the growing role of private companies in elections. When I talked to Jennifer Brunner in October, she told me she wished all of Ohio’s machines were “open source” — that is, run on computer code that is published publicly, for anyone to see. Only then, she says, would voters trust it; and the scrutiny of thousands of computer scientists worldwide would ferret out any flaws and bugs.

On Nov. 6, the night of the Cuyahoga crashes, Jeff Hastings — the Republican head of the election board — sat and watched the Diebold technicians try to get the machines running. “Criminy,” he said. “You’ve got four different vendors. Why should their source codes be private? You’ve privatized the essential building block of the election system.”

The federal government appears to have taken that criticism to heart. New standards for testing voting machines now being implemented by the E.A.C. are regarded as more rigorous; some results are now being published online.

Amazingly, the Diebold spokesman, Chris Riggall, admitted to me that the company is considering making the software open source on its next generation of touch-screen machines, so that anyone could download, inspect or repair the code. The pressure from states is growing, he added, and “if the expectations of our customers change, we’ll have to respond to that reality.”

IF YOU WANT TO GET a sense of the real stakes in voting-machine politics, Christine Jennings has a map to show you. It is a sprawling, wall-size diagram of the voting precincts that make up Florida’s 13th district, and it hangs on the wall of her campaign office in Sarasota, where she ran for the Congressional seat in November 2006. Jennings, a Democrat, lost the seat by 369 votes to the Republican, Vern Buchanan, in a fierce fight to replace Katherine Harris. But Jennings quickly learned of an anomaly in the voting: some 18,000 people had “undervoted.” That is, they had voted in every other race — a few dozen were on the ballot, including a gubernatorial contest — but abstained in the Jennings-Buchanan fight. A normal undervote in any given race is less than 3 percent. In this case, a whopping 13 percent of voters somehow decided to not vote.

“See, look at this,” Jennings said, dragging me over to the map when I visited her in November. Her staff had written the size of the undervote in every precinct in Sarasota, where the undervotes occurred: 180 votes in one precinct, 338 in another. “I mean, it’s huge!” she said. “It’s just unbelievable.” She pointed to Precinct 150, a district on the south end of Sarasota County. Buchanan received 346 votes, Jennings received 275 and the undervote was 133. “I mean, people would walk in and vote for everything except this race?” she said. “Why?”

Jennings says he believes the reason is simple: Sarasota’s touch-screen machines malfunctioned — and lost votes that could have tipped the election in her favor. Her staff has received hundreds of complaints from voters reporting mysterious behavior on the part of the machines. The specific model that Sarasota used was the iVotronic, by the company ES&S. According to the complaints, when voters tried to touch the screen for Jennings, the iVotronic wouldn’t accept it, or would highlight Buchanan’s name instead. When they got to the final pages of the ballot, where they reviewed their picks, the complainants said, the Jennings-Buchanan race was missing — even though they were sure they’d voted in it. The reports streamed in not merely from technophobic senior citizens but also from tech-savvy younger people, including a woman with a Ph.D. in computer science and a saleswoman who actually works for a firm that sells touch-screen devices. (Even Vern Buchanan’s wife reported having trouble voting for her husband.)

If the election had been in Cuyahoga, the paper trail might have settled the story. But the iVotronic, unlike Cuyahoga’s machines, does not provide a paper backup. It records votes only in digital memory: on a removable flash-memory card and on an additional flash-memory chip embedded inside the machine. Since the Jennings-Buchanan election was so close, state law called for an automatic recount. But on a paperless machine like the iVotronic, a recount is purely digital — it consists of nothing but removing the flash memory inside the machine and hitting “print” again. Jennings did, indeed, lose the recount; when they reprinted, elections workers found that the internal chips closely matched the original count (Jennings picked up four more votes). But for Jennings this is meaningless, because she says it was the screens that malfunctioned.

As evidence, she brandishes pieces of evidence she says are smoking guns. One is a memo from ES&S executives, issued in August 2006, warning that they had found a bug in the iVotronic software that produced a delay in the screen; after a voter made her choice, it would take a few seconds for the screen to display it. This, Jennings noted, could cause problems, because a voter, believing that the machine had not recorded her first touch, might push the screen again — accidentally deselecting her initial vote. Jennings also suspects that the iVotronic’s hardware may have malfunctioned. An August HDNet investigation by Dan Rather discovered that the company manufacturing the touchscreens for the iVotronic had a history of production flaws. The flaw affected the calibration of the screen: When exposed to humidity — much like the weather in Florida — the screen would gradually lose accuracy.

Elections officials in Sarasota and ES&S hotly disagree that the machines were in error, noting that the calibration problems with the screens were fixed before the election. Kathy Dent, Sarasota’s elections supervisor, suspects that the undervote was real — which is to say, voters intentionally skipped the race, to punish Jennings and Buchanan for waging a particularly vitriolic race. “People were really fed up,” she told me. Other observers say voters were simply confused by the ballot design and didn’t see the Jennings-Buchanan race.

To try to settle the question, a government audit tried to test whether the machines had malfunctioned. The state acquired a copy of the iVotronic source code from ES&S and commissioned a group of computer scientists to inspect it. Their report said they could find no flaws in the code that would lead to such a large undervote. Meanwhile, the state conducted a mock election, getting elections workers to repeatedly click the screens on iVotronic machines, voting Jennings or Buchanan. Again, no accidental undervote appeared. Early results from a separate test by an M.I.T. professor found that when voters were presented with the Sarasota ballot, over 16 percent accidentally skipped over the Jennings-Buchanan race — suggesting that poor ballot design and voter error was, indeed, part of the problem.

These explanations have not satisfied Jennings and her supporters. Kendall Coffey, one of Jennings’s lawyers, has a different theory: the votes were mostly lost because of a “nonrecurring software bug” — a quirk that, like the sliding-finger bug, only crops up some of the time, propelled by voter actions that the audits did not replicate, like a voter’s accidentally touching the screen in two places at once. For her part, Jennings brushes off the idea that voters were punishing her and Buchanan. Plenty of Congressional fights are nasty, she says, but they almost never yield 13 percent undervotes.

And on and on it goes. ES&S and Sarasota correctly point out that Jennings has no proof that a bug exists. Jennings correctly points out that her opponents have no proof a bug doesn’t exist. This is the ultimate political legacy of touch-screen voting machines and the privatization of voting machinery generally. When invisible, secretive software runs an election, it allows for endless mistrust and muttered accusations of conspiracy. The inscrutability of the software — combined with touch-screen machines’ well-documented history of weird behavior — allows critics to level almost any accusation against the machines and have it sound plausible. “It’s just like the Kennedy assassination,” Shamos, the Carnegie Mellon computer scientist, laments. “There’s no matter of evidence that will stop people from spinning yarns.”

Part of the problem stems from the fact that voting requires a level of precision we demand from virtually no other technology. We demand that the systems behind A.T.M.’s and credit cards be accurate, of course. But if they’re not, we can quickly detect something is wrong: we notice that our balance is off and call the bank, or the bank notices someone in China bought $10,000 worth of clothes and calls us to make sure it’s legitimate. But in an election, the voter must remain anonymous to the government. If a machine crashes and the county worries it has lost some ballots, it cannot go back and ask voters how they voted — because it doesn’t know who they are. It is the need for anonymity that fuels the quest for perfection in voting machines.

Perfection isn’t possible, of course; every voting system has flaws. So historically, the public — and candidates for public office — have grudgingly accepted that their voting systems will produce some errors here and there. The deep, ongoing consternation over touch-screen machines stems from something new: the unpredictability of computers. Computers do not merely produce errors; they produce errors of unforeseeable magnitude. Will people trust a system when they never know how big or small its next failure will be?

ON THE FRIDAY BEFORE the November elections in Pennsylvania, I wandered into a church in a suburb of Pittsburgh. The church was going to serve as a poll location, and I was wondering: Had the voting machines been dropped off? Were they lying around unguarded — and could anyone gain access to them?

When I approached the side door of the church at 6 p.m., two women were unloading food into the basement kitchen. (They were visitors from another church who had a key to get in, but they told me they’d found the door unlocked.) I held the door for them, chatted politely, then strolled into the otherwise completely empty building. Neither woman asked why I was there.

I looked over in the corner and there they were: six iVotronic voting machines, stacked up neatly. While the women busied themselves in their car, I was left completely alone with the machines. The iVotronics had been sealed shut with numbered tamper seals to prevent anyone from opening a machine illicitly, but cutting and resealing them looked pretty easy. In essence, I could have tampered with the machines in any way I wanted, with very little chance of being detected or caught.

Is it possible that someone could hack voting machines and rig an election? Elections officials insist that they are extremely careful to train poll workers to recognize signs of machines that had been tampered with. They also claim, frequently, that the machines are carefully watched. Neither is entirely true. Machines often sit for days before elections in churches, and while churches may be wonderfully convenient polling locations, they’re about as insecure a location as you could imagine: strangers are supposed to wander into churches. And while most poll workers do carefully check to ensure that the tamper seals on the machines are unbroken, I heard reports from poll workers who saw much more lax behavior in their colleagues.

Yet here’s the curious thing: Almost no credible scientific critics of touch-screen voting say they believe any machines have ever been successfully hacked. Last year, Ed Felten, the computer scientist from Princeton, wrote a report exhaustively documenting the many ways a Diebold AccuVote-TSX could be hacked — including a technique for introducing a vote-rigging virus that would spread from machine to machine in a precinct. But Felten says the chance this has really happened is remote. He argues that the more likely danger of touch-screen machines is not in malice but in errors. Michael Shamos agrees. “If there are guys who are trying to tamper with elections through manipulation of software, we would have seen evidence of it,” he told me. “Nobody ever commits the perfect crime the first time. We would have seen a succession of failed attempts leading up to possibly a successful attempt. We’ve never seen it.”

This is a great oddity in the debate over electronic voting. When state officials in California and Ohio explain why they’re moving away from touch-screen voting, they inevitably cite hacking as a chief concern. And the original, left-wing opposition to the machines in the 2004 election focused obsessively on Diebold’s C.E.O. proclaiming that he would help “Ohio deliver its electoral votes” for Bush. Those fears still dominate the headlines, but in the real world of those who conduct and observe voting machines, the realistic threat isn’t conspiracy. It’s unreliability, incompetence and sheer error.

IF YOU WANTED to know where the next great eruption of voting-machine scandal is likely to emerge, you’d have to drive deep into the middle of Pennsylvania. Tucked amid rolling, forested hills is tiny Bellefonte. It is where the elections board of Centre County has its office, and in the week preceding the November election, the elections director, Joyce McKinley, conducted a public demonstration of the county’s touch-screen voting machines. She would allow anyone from the public to test six machines to ensure they worked as intended.

“Remember, we’re here to observe the machines, not debate them,” she said dryly. The small group that had turned out included a handful of anti-touch-screen activists, including Mary Vollero, an art teacher who wore pins saying “No War in Iraq” and “Books Not Bombs.” As we gathered around, I could understand why the county board had approved the purchase of the machines two years ago. For a town with a substantial elderly population, the electronic screens were large, crisp and far easier to read than small-print paper ballots. “The voters around here love ’em,” McKinley shrugged.

But what’s notable about Centre County is that it uses the iVotronic — the very same star-crossed machine from Sarasota. Given the concerns about the lack of a paper trail on the iVotronics, why didn’t Centre County instead buy a machine that produces a paper record? Because Pennsylvania state law will not permit any machine that would theoretically make it possible to figure out how someone voted. And if a Diebold AccuVote-TSX, for instance, were used in a precinct where only, say, a dozen people voted — a not-uncommon occurrence in small towns — then an election worker could conceivably watch who votes, in what order, and unspool the tape to figure out how they voted. (And there are no alternatives; all touch-screen machines with paper trails use spools.) As a result, nearly 40 percent of Pennsylvania’s counties bought iVotronics.

Though it has gone Democratic in the last few presidential elections, Pennsylvania is considered a swing state. As the political consultant James Carville joked, it’s a mix of red and blue: you’ve got Pittsburgh and Philadelphia at either end and Alabama in the middle.

It also has 21 electoral-college votes, a relatively large number that could decide a tight presidential race. Among election-machine observers, this provokes a shudder of anticipation. If the presidential vote is close, it could well come down to a recount in Pennsylvania. And a recount could uncover thousands of votes recorded on machines that displayed aberrant behavior — with no paper trail. Would the public accept it? Would the candidates? As Candice Hoke, the head of Ohio’s Center for Election Integrity, puts it: “If it was Florida in 2000 and Ohio in 2004, everyone is saying it’s going to be Pennsylvania in 2008.”

The prospect of being thrust into the national spotlight has already prompted many counties to spar over ditching their iVotronics. The machines were an election issue in Centre County in November, with several candidates for county commissioner running on a pledge to get rid of the devices. (Two won and are trying to figure out if they can afford it.) And the opposition to touch-screens isn’t just coming from Democrats. When the Pennsylvania Republican Rick Santorum lost his Senate seat in 2006, some Santorum voters complained that the iVotronics “flipped” their votes before their eyes. In Pittsburgh, the chief opponent of the machines is David Fawcett, the lone Republican on the county board of elections. “It’s not a partisan issue,” he says. “And even if it was, Republicans, at least in this state, would have a much greater interest in accuracy. The capacity for error is big, and the error itself could be so much greater than it could be on prior systems.”

GIVEN THAT THERE IS NO perfect voting system, is there at least an optimal one? Critics of touch-screen machines say that the best choice is “optical scan” technology. With this system, the voter pencils in her vote on a paper ballot, filling in bubbles to indicate which candidates she prefers. The vote is immediately tangible to the voters; they see it with their own eyes, because they personally record it. The tallying is done rapidly, because the ballots are fed into a computerized scanner. And if there’s a recount, the elections officials can simply take out the paper ballots and do it by hand.

Optical scanning is used in what many elections experts regard as the “perfect elections” of Leon County in Florida, where Ion Sancho is the supervisor of elections. In the late ’80s, when the county was replacing its lever machines, Sancho investigated touch-screens. But he didn’t think they were user-friendly, didn’t believe they would provide a reliable recount and didn’t want to be beholden to a private-sector vendor. So he bought the optical-scanning devices from Unisys and trained his staff to be able to repair problems when the machines broke or malfunctioned. His error rate — how often his system miscounts a ballot — is three-quarters of a percent at its highest, and has dipped as low as three-thousandths of a percent.

More important, his paper trail prevents endless fighting over the results of tight elections. In one recent contest, a candidate claimed that his name had not appeared on the ballot in one precinct. So Sancho went into the Leon County storage, broke the security seals on the records, and pulled out the ballots. The name was there; the candidate was wrong. “He apologized to me,” Sancho recalls. “And that’s what you can’t do with touch-screen technology. You never could have proven to that person’s satisfaction that the screen didn’t show his name. I like that certainty. The paper ends the discussion.” Sancho has never had a legal fight over a disputed election result. “The losers have admitted they lost, which is what you want,” he adds. “You have to be able to convince the loser they lost.”

That, in a nutshell, is what people crave in the highly partisan arena of modern American politics: an election that can be extremely close and yet regarded by all as fair. Not only must the losing candidate believe in the loss; the public has to believe in it, too.

This is why Florida’s governor, Charlie Crist, stung by the debacle in Sarasota, persuaded the state to abandon its iVotronic machines before the 2008 presidential elections and adopt optical scanning; and why, in Ohio, Cuyahoga County is planning to spend up to $12 million to switch to optical scanning in the next year (after the county paid $21 million for its touch-screens just a few years ago).

Still, optical scanning is hardly a flawless system. If someone doesn’t mark a ballot clearly, a recount can wind up back in the morass of arguing over “voter intent.” The machines also need to be carefully calibrated so they don’t miscount ballots. Blind people may need an extra device installed to help them vote. Poorly trained poll workers could simply lose ballots. And the machines do, in fact, run software that can be hacked: Sancho himself has used computer scientists to hack his machines. It’s also possible that any complex software isn’t well suited for running elections. Most software firms deal with the inevitable bugs in their product by patching them; Microsoft still patches its seven-year-old Windows XP several times a month. But vendors of electronic voting machines do not have this luxury, because any update must be federally tested for months.

There are also serious logistical problems for the states that are switching to optical scan machines this election cycle. Experts estimate that it takes at least two years to retrain poll workers and employees on a new system; Cuyahoga County is planning to do it only three months. Even the local activists who fought to bring in optical scanning say this shift is recklessly fast — and likely to cause problems worse than the touch-screen machines would. Indeed, this whipsawing from one voting system to the next is another danger in our modern electoral wars. Public crises of confidence in voting machines used to come along rarely, every few decades. But now every single election cycle seems to provoke a crisis, a thirst for a new technological fix. The troubles of voting machines may subside as optical scanning comes in, but they’re unlikely to ever go away.

Clive Thompson, a contributing writer for the magazine, writes frequently about technology.


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