Contrarian Pundit

I’m sorry for the dearth of posts in the last two weeks, but I’ve had to deal with some important personal stuff that has resulted in some news: I have accepted a job to become Boston Review’s new web editor. I am absolutely thrilled by the opportunity.

As for my Macy’s investigation, the article made quite a splash on the Internets. Consumerist, the blog of Consumer Reports, picked up my story, as did Mitch Lipka’s Consumer Ally and Reddit.

Back to our regularly scheduled cynicism.

The feds are finally getting serious about pursuing mortgage fraud and related crimes during the bubble era.  Yesterday it was announced that the FDIC is suing four former executives at IndyMac for negligently approving billions in ADC loans to, shall we say, less-than-credit-worthy borrowers. If you recall, Indymac was seized by the FDIC in July 2008 before the agency even had a chance to issue a cease-and-desist order.  At the time, it was the second-largest bank failure in U.S. history.

The 309-page complaint is quite a read.  My personal highlight is the “Flamingo Rule”—a phrase that should be included in the lexicon of our new Guilded Age (p. 17):

One of IndyMac’s “core values” was that “speed rules at IndyMac.” This was a firmly ingrained culture at IndyMac and, for example, was implemented by [CEO Michael] Perry through his “Flamingo Rule” requiring employees seeking his guidance to “pop in my office, quickly present the issue (in the amount of time you can ’stand on one leg!’) and get my feedback.” [Indymac's Homebuilder Division President Scott] Van Dellen implemented a similar arbitrary rule limiting discussions of loans in the loan committee to 20 minutes.  At one point, Van Dellen even attempted to implement a policy abolishing loan approval memoranda altogether.

It is unclear whether CEO Perry actually had his employees stand on one leg while seeking his wisdom.  I suppose that would make yoga the key to advancement at IndyMac, which is not necessarily a bad thing.

The Special Inspector General for Afghanistan Reconstruction (SIGAR) released a damning report last week on the U.S. military’s ongoing training program for Afghan security forces. According to the Washington Post, the Pentagon has vastly exaggerated its success in creating Afghan military and police units, does not have an adequate system for measuring their capabilities, and lacks sufficient trainers for the program’s goals.  As in Iraq, so in Afghanistan: creating a capable, independent Afghan security force is supposedly essential for our “exit strategy.”

Of course, the report itself is so much more damning than what has been published in newspapers.  Let me offer three personal highlights …

(1) The Department of Defense (DOD) misled Congress by assigning grades to units that were not even being mentored or assessed (p. 14):

[I]n some reports to Congress, DOD reported capability ratings for more police units than had actually been assessed.  Units that had not been assessed were reported by DOD at the CM-4 level [i.e. the lowest level].  In biannual reports to Congress, prior to April 2010, Defense reported capability ratings for as many as 559 ANP units. However, as of March 2010, only 229 police units were being directly mentored or partnered and assessed using the CM system, according to IJC [International Security Assistance Force Joint Command] reports. IJC and NTM-A/CSTC-A [NATO Training Mission-Afghanistan/Combined Security Transition Command - Afghanistan] officials agreed that the charts included in DOD’s June 2009 and October 2009 reports to Congress on Progress toward Security and Stability in Afghanistan included CM ratings for units that had not been assessed.

The Pentagon effectively inflated the size of the total Afghan police forces by 144 percent. Someone please inform Brookings scholar Michael O’Hanlon.

(2) The IJC has assigned the highest grade (CM-1) to units that barely function.

Take, for example, Baghlan-e Jadid: In March 2010, IJC reported the highest rating for the Baghlan-e Jadid police unit in the northeast Afghanistan.  The grade indicates that the force has graduated the program and is capable of functioning on its own.  The unit completed its training in June 2009.

In February 2010, a month before the reported grade, the SIGAR inspection team requested a visit to Baghlan-e Jadid.  But their request was denied (p.13):

U.S. police mentors working in Regional Command North stated that they could not support our request because the police district was “not secure.” We also consulted IJC officials who said that the district was “overrun with insurgents.” One IJC official … added that in his opinion the Baghlan-e Jadid police force had “withered away to the point that it barely functions.” Another U.S. military official, operating from within RC-North said, “I doubt CM1.  Most of their police officers do not even have uniforms, nor has the majority received basic training, either.”

Yes,  Baghlan-e Jadid’s police received the IJC’s seal of approval a month after an IJC official opined that the force had all but disappeared.

(3) Many of the newly minted Afghan security forces spend their days getting high.  More than 50 percent of “policemen” in Ghazni and Paktika Provinces are using. Some units spend all day, every day toking in the “department”:

According to several officials with responsibility of ANSF development, an extreme case of drug abuse had occurred at an ANC unit of about 100 personnel based at Nimla Gardens, Nangarhar Province.  There, according to eye witness accounts from U.S. military personnel, ANCOP personnel were openly using marijuana and were unwilling to conduct operations or even leave their compound.

I don’t know if I’d hold it against them.  They’re merely following the role model of President Karzai himself.

The New York Times‘ Louise Story and Gretchen Morgenson, whose work on Goldman Sachs will likely net them a Pulitzer next year, published another bombshell yesterday on how federal regulators orchestrated A.I.G.’s $182 billion bailout on terms even more overwhelmingly favorable to Goldman Sachs and other investment banks than simply recouping their contracts at 100 cents on the dollar.  A.I.G. was forced to sign a legal waiver, abandoning its right to sue over the toxic mortgage securities it insured.

Buried in the story are some nuggets that are not to be missed.  Consider the case of Dan H. Jester, Treasury’s “point man” on A.I.G.:

Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout. Mr. Paulson previously served as Goldman’s chief executive before joining the government.

Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis. According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.

Although the value of Goldman’s shares could have been affected by the terms of the A.I.G. bailout, Mr. Jester was not required to publicly disclose his stock holdings because he was hired as an outside contractor, a job title at Treasury that allowed him to forgo disclosure rules applying to appointed officials.

That certainly gives new meaning to the term “independent contractor.”

Or consider Tim Geithner’s plea that he had no choice on the A.I.G. bailout when he was head of the Federal Reserve Bank of New York:

But two entirely different solutions to A.I.G.’s problems were presented to Fed officials by three of its outside advisers, according to the documents. Under those plans, the banks would have had to accept what the advisers described as “deep concessions” of as much as about 10 percent on their contracts or they might have had to return about $30 billion that A.I.G. had paid them before the bailout.

Had either of these plans been implemented, A.I.G. may have been left in a far better financial position than it is today, with taxpayers at less risk and banks forced to swallow bigger losses.

Do you understand now why people like Tim Geithner get promoted despite massive incompetence and shady dealing?  He is incredibly valuable to a certain politically well-connected group of people.

You might be hard pressed to imagine a pro-banking-industry proposal that Geithner, Bernanke, Sheila Bair, and John Dugan all think is stupid and destructive, but Rep. Ed Perlmutter (D., Colo) has succeeded:

Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. But a provision added, almost unnoticed, to a help-small-business bill that passed the House last week would allow all but the 100 largest banks to pretend they haven’t made bad loans, to prompt them to lend more to small businesses.

The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately.

This wink-wink accounting, letting banks act as if they have bigger capital cushions than they do, is a remake of an old movie: the savings-and-loan horror show of the 1980s and the Japanese banking monster of the 1990s.

Perlmutter says his unique experiences with banks and small businesses give him a superior insight into what’s necessary to aid both.  Obama’s proposed $30 billion isn’t enough.  What they really need is pixie dust to make their toxic loans disappear, so that they can create … more toxic loans!

As my recent piece on banking makes clear, the notion that community thrifts are necessarily responsible and beneficent institutions is a complete myth.  It all depends on the people who run them. The bad players need to be weeded out, before they cause more damage.

If you’ve every doubted whether medical research is thoroughly contaminated by conflicts of interest and corporate dollars, be sure to read Marcia Angell, the former editor of the New England Journal of Medicine, in the latest Boston Review.

Consider the following statistic she cites:

[I]n 2004, after the NIH National Cholesterol Education Program called for sharply lowering the acceptable levels of “bad” cholesterol, it was revealed that eight of nine members of the panel writing the recommendations had financial ties to the makers of cholesterol-lowering drugs.

Or this one:

[O]f the 170 contributors to the most recent edition of the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders (DSM-IV), 95 had financial ties to drug companies, including all of the contributors to the sections on mood disorders and schizophrenia.

Finally, how about this anecdote about the FDA’s review of Vioxx:

[M]any members of the eighteen standing committees of experts that advise the FDA on drug approvals also have financial ties to the industry. After the painkiller Vioxx was removed from the market in 2005 (it increased the risk of heart attacks), the FDA convened a panel consisting of two of these committees to consider whether painkillers of the same class as Vioxx should also be removed from the market. Following three days of public hearings, the combined panel decided that, although these drugs—called COX-2 inhibitors—did increase the risk of heart attacks, the benefits outweighed the risks. It therefore recommended that all three of the drugs, including Vioxx, be permitted to remain on the market, perhaps with strong warnings on the labels.

A week after the panel’s decision, however, The New York Times revealed that of the 32 panel members, ten had financial ties to the manufacturers, and that if their votes had been excluded, only one of the drugs would have been permitted to stay on the market. As a result of this embarrassing revelation, the FDA reversed the panel and left only one of the drugs, Celebrex, on the market, with a warning on the label.

You know, I hadn’t realized that the most expensive drug for Pharma to produce is the placebo.

I apologize for my recent absence from the blog, but it was for a worthy cause: I was swamped trying to finish two 4,000-word investigative stories.  I’m happy to report that both are now in print and on newsstands across the Bay Area.

The first is “It’s A Wonderful Bank” for San Francisco magazine.  It takes a critical look at community banking and the “Move Your Money” movement, via an in-depth profile of Circle Bank, a well-regarded Novato-based community bank that recently opened its first San Francisco branch up the street from me in Noe Valley.  The institution has some interesting ties with Tamalpais Bank, which was seized by regulators last April.  Readers should be familiar with that name.

The piece cautiously endorses MYM but laments the lack of transparency and regulatory oversight of the industry, which makes the process of deciding on a bank overly difficult for consumers.  If the movement is going to succeed, it needs to find a way to help the public determine which banks are truly community minded in the way we expect community banks to be.

My second piece was the cover story of the SF Public Press’ first print-edition newspaper.  Since it’s not available on line yet, let me just say that it followed up on a previous blog post on this site.  You can pick up a hard copy of the story at these locations.

Both stories owe a lot to the reporting that goes into this site. Yes, you can see tomorrow’s investigative stories today, here, every day.  Well, not every day, but we’re hoping to improve on that score.

Ten days ago, when I was too overwhelmed with work to comment, Brookings scholar Michael O’Hanlon and his researchers published an op-chart in the New York Times with statistics on how we’re doing in Afpakiraq.  Many of the numbers seem to show improvement in our war operations, but under closer examination, they tend to reveal more about O’Hanlon’s credulity than about the headway we’re supposedly making in the War on Terror.

I want to focus on two pairs of stats that I found puzzling on first glance. Here’s the first pair:

Afghan Civilian Deaths From War: April 2008 … 136; April 2009 … 129; April 2010 … 150.

Civilian Deaths Caused Accidentally by NATO (percent of total, based on annual figures): April 2008 … 40; April 2009 … 30; April 2010 … 10–20.

As opposed to civilian deaths caused intentionally by NATO?  I kid.  Or do I?  I asked the scholar himself for clarification, and here was his response:

The first is the % of all Afghan deaths from war that we cause, inadvertently (the resistance causing most of the rest).

So if Le Resistance kills most of the rest (accidentally?) not offed by NATO, there must be a third category of civilian war victim.  Call it mystery meat.  What is the source of mystery meat?  We can only speculate. All we know is that NATO isn’t responsible.

Putting that worry aside, the third statistic in the second line bothers me more.  How are we to understand the 10–20 percent figure from April 2010?  It amounts to a range between 15 and 30 civilian corpses (i.e. 10–20 percent of 150) caused accidentally by NATO, with most of the 120+ other deaths caused by Le Resistance.  But why are we offered a range, rather than a determinate percentage?

Imagine what that might mean in concrete terms: it’s as if there were 30 corpses of Afghan civilians lined up on the ground and NATO’s auditors couldn’t figure out from the evidence whether 15 of them were killed by NATO, Le Resistance, or some mysterious third cause.  That doesn’t seem very plausible, does it?

No, it doesn’t.  But that means that the categorization of civilian deaths isn’t based on actual investigations.  If they were, how could NATO end up with such a wide variance?  How could they investigate but not know how 15 Afghan civilians died (or think that NATO may have been involved but not be sure)?  No, the more plausible explanation is that the percentages are estimates.

But if they’re mere estimates, why should we trust them?  And why do they seem to know exactly how many civilians died (136, 129, and 150 don’t sound like guesses) but settle for rough estimates of how many were killed by NATO?

If you click through to the actual chart, you will see that the statistics are color coated from light, which represents more favorable conditions (for whom?), to dark, which represents the less favorable (for whom?).  According to the colors, it counts as an improvement that NATO is causing a smaller percentage of civilian deaths than one year and two years ago in Afghanistan (and so too, presumably, does the corresponding fact that Le Resistance is killing a larger percentage—yes, that’s good news too).  But if the accounting of civilian deaths is based on rough estimates and not actual investigations, why trust the numbers or the narrative that the scholar is trying to tell from them?

On to the second pair of troubling statistics:

Number of Aerial Drone Attacks by U.S. (monthly average): April 2008 … 3; April 2009 … 4; April 2010 … 8

Civilian Deaths From Drone Attacks (as percent of all casualties from drones): April 2008 … 30; April 2009 … 20; April 2010 … 5

I found the second line rather obscure, so I asked the scholar for clarification:

The second is the % of all deaths from drone strikes in Pakistan that are of innocent people rather than extremists.

Let me see if I understand this. There are two kinds of people in Pakistan dying from our drone missiles: innocents and extremists.  (This is an exhaustive classification, the scholar seems to be saying.)  And though we’re averaging more drone attacks now than in previous years, we’re killing more extremists and fewer innocents. Yes, that seems to be an improvement.

No, wait, I was being stupid.  You see, the op-chart doesn’t say how many people our drones are killing in Pakistan.  So the good news is actually the following: of the unknown number of people our drones are killing in Pakistan, a larger percentage of them are extremists and a smaller percentage of them are innocents than in previous years. Sure, our drones may be killing more innocents than before, but it’s all about the percentages.  (Ask any sports fan.)

How do we know this?  Presumably, as in Afghanistan, we conduct a thorough investigation of the deaths caused by our drone attacks.  Special units are dispatched to the scene with Geiger counters, whose readings determine whether the corpses were previously animated by the souls of innocents or extremists.  Oh, wait a minute. Sorry, we figured that we probably don’t investigate the causes of civilian deaths in Afghanistan; we estimate them.  So perhaps these percentages from Pakistan are also based on estimates.

But look at the results.  We’ve more than doubled the number of drone attacks in Pakistan over the past two years, but we’ve reduced the percentage of innocents killed from 30 to five.  That’s really quite a coup for our joystick aces.  How did they do it?  Presumably they’ve picked up the game quickly and achieved higher and higher top scores.  I bet two years ago they were spraying missiles all over God’s creation as they figured out which button-combos did what.  However they managed to do it, there’s a story there.  Why don’t we know more about how they improved their scores?

In all seriousness, what is the more likely cause of the dramatic reduction in the share of civilian deaths? Improved intelligence and skill? Or a change in the way the military estimates casualties?

It would be nice if we lived in a country in which the top scholars at our elite think tanks asked and answered such questions.

I’m sorry for the dearth of posts for the past two weeks.  I was overwhelmed with work, including my first feature for the magazine.

The blog will return to normal, starting with a post on Brookings scholar Michael O’Hanlon.

Bob Hebert captures the vibe of our current malaise: the futility on display in the Gulf, in Afghanistan, on financial reform, and elsewhere.

President Obama’s top adviser on energy policy, Carol Browner, unintentionally underscored the monumental futility of the response in a comment she made on NBC’s “Meet the Press” on Sunday.

“This is obviously a difficult situation,” said Ms. Browner, “but it’s important for people to understand that from the beginning, the government has been in charge.”

Got that? No one has been able to bring the crisis under control, and no one expects it to be brought under control soon, but the important thing for us to know is that the government has been in charge of this epic failure all along.

Yes, they’re in control. And I’m sure things will turn around in six months.