Airport "Security"

Agreed in spades. If it so urgent to intercept potential bombs being smuggled onto our aircraft, why do we hire $5/hour TSA agents to do the job rather than highly trained bomb detection and disposal agents? New York Times

December 28, 2007, 6:52 pm
The Airport Security Follies

By Patrick Smith

Six years after the terrorist attacks of 2001, airport security remains a theater of the absurd. The changes put in place following the September 11th catastrophe have been drastic, and largely of two kinds: those practical and effective, and those irrational, wasteful and pointless.

The first variety have taken place almost entirely behind the scenes. Explosives scanning for checked luggage, for instance, was long overdue and is perhaps the most welcome addition. Unfortunately, at concourse checkpoints all across America, the madness of passenger screening continues in plain view. It began with pat-downs and the senseless confiscation of pointy objects. Then came the mandatory shoe removal, followed in the summer of 2006 by the prohibition of liquids and gels. We can only imagine what is next.

To understand what makes these measures so absurd, we first need to revisit the morning of September 11th, and grasp exactly what it was the 19 hijackers so easily took advantage of. Conventional wisdom says the terrorists exploited a weakness in airport security by smuggling aboard box-cutters. What they actually exploited was a weakness in our mindset — a set of presumptions based on the decades-long track record of hijackings.

In years past, a takeover meant hostage negotiations and standoffs; crews were trained in the concept of “passive resistance.” All of that changed forever the instant American Airlines Flight 11 collided with the north tower. What weapons the 19 men possessed mattered little; the success of their plan relied fundamentally on the element of surprise. And in this respect, their scheme was all but guaranteed not to fail.

For several reasons — particularly the awareness of passengers and crew — just the opposite is true today. Any hijacker would face a planeload of angry and frightened people ready to fight back. Say what you want of terrorists, they cannot afford to waste time and resources on schemes with a high probability of failure. And thus the September 11th template is all but useless to potential hijackers.

No matter that a deadly sharp can be fashioned from virtually anything found on a plane, be it a broken wine bottle or a snapped-off length of plastic, we are content wasting billions of taxpayer dollars and untold hours of labor in a delusional attempt to thwart an attack that has already happened, asked to queue for absurd lengths of time, subject to embarrassing pat-downs and loss of our belongings.

The folly is much the same with respect to the liquids and gels restrictions, introduced two summers ago following the breakup of a London-based cabal that was planning to blow up jetliners using liquid explosives. Allegations surrounding the conspiracy were revealed to substantially embellished. In an August, 2006 article in the New York Times, British officials admitted that public statements made following the arrests were overcooked, inaccurate and “unfortunate.” The plot’s leaders were still in the process of recruiting and radicalizing would-be bombers. They lacked passports, airline tickets and, most critical of all, they had been unsuccessful in actually producing liquid explosives. Investigators later described the widely parroted report that up to ten U.S airliners had been targeted as “speculative” and “exaggerated.”

Among first to express serious skepticism about the bombers’ readiness was Thomas C. Greene, whose essay in The Register explored the extreme difficulty of mixing and deploying the types of binary explosives purportedly to be used. Green conferred with Professor Jimmie C. Oxley, an explosives specialist who has closely studied the type of deadly cocktail coveted by the London plotters.

“The notion that deadly explosives can be cooked up in an airplane lavatory is pure fiction,” Greene told me during an interview. “A handy gimmick for action movies and shows like ‘24.’ The reality proves disappointing: it’s rather awkward to do chemistry in an airplane toilet. Nevertheless, our official protectors and deciders respond to such notions instinctively, because they’re familiar to us: we’ve all seen scenarios on television and in the cinema. This, incredibly, is why you can no longer carry a bottle of water onto a plane.”

The threat of liquid explosives does exist, but it cannot be readily brewed from the kinds of liquids we have devoted most of our resources to keeping away from planes. Certain benign liquids, when combined under highly specific conditions, are indeed dangerous. However, creating those conditions poses enormous challenges for a saboteur.

“I would not hesitate to allow that liquid explosives can pose a danger,” Greene added, recalling Ramzi Yousef’s 1994 detonation of a small nitroglycerine bomb aboard Philippine Airlines Flight 434. The explosion was a test run for the so-called “Project Bojinka,” an Al Qaeda scheme to simultaneously destroy a dozen widebody airliners over the Pacific Ocean. “But the idea that confiscating someone’s toothpaste is going to keep us safe is too ridiculous to entertain.”

Yet that’s exactly what we’ve been doing. The three-ounce container rule is silly enough — after all, what’s to stop somebody from carrying several small bottles each full of the same substance — but consider for a moment the hypocrisy of T.S.A.’s confiscation policy. At every concourse checkpoint you’ll see a bin or barrel brimming with contraband containers taken from passengers for having exceeded the volume limit. Now, the assumption has to be that the materials in those containers are potentially hazardous. If not, why were they seized in the first place? But if so, why are they dumped unceremoniously into the trash? They are not quarantined or handed over to the bomb squad; they are simply thrown away. The agency seems to be saying that it knows these things are harmless. But it’s going to steal them anyway, and either you accept it or you don’t fly.

But of all the contradictions and self-defeating measures T.S.A. has come up with, possibly none is more blatantly ludicrous than the policy decreeing that pilots and flight attendants undergo the same x-ray and metal detector screening as passengers. What makes it ludicrous is that tens of thousands of other airport workers, from baggage loaders and fuelers to cabin cleaners and maintenance personnel, are subject only to occasional random screenings when they come to work.

These are individuals with full access to aircraft, inside and out. Some are airline employees, though a high percentage are contract staff belonging to outside companies. The fact that crew members, many of whom are former military fliers, and all of whom endured rigorous background checks prior to being hired, are required to take out their laptops and surrender their hobby knives, while a caterer or cabin cleaner sidesteps the entire process and walks onto a plane unimpeded, nullifies almost everything our T.S.A. minders have said and done since September 11th, 2001. If there is a more ringing let-me-get-this-straight scenario anywhere in the realm of airport security, I’d like to hear it.

I’m not suggesting that the rules be tightened for non-crew members so much as relaxed for all accredited workers. Which perhaps urges us to reconsider the entire purpose of airport security:

The truth is, regardless of how many pointy tools and shampoo bottles we confiscate, there shall remain an unlimited number of ways to smuggle dangerous items onto a plane. The precise shape, form and substance of those items is irrelevant. We are not fighting materials, we are fighting the imagination and cleverness of the would-be saboteur.

Thus, what most people fail to grasp is that the nuts and bolts of keeping terrorists away from planes is not really the job of airport security at all. Rather, it’s the job of government agencies and law enforcement. It’s not very glamorous, but the grunt work of hunting down terrorists takes place far off stage, relying on the diligent work of cops, spies and intelligence officers. Air crimes need to be stopped at the planning stages. By the time a terrorist gets to the airport, chances are it’s too late.

In the end, I’m not sure which is more troubling, the inanity of the existing regulations, or the average American’s acceptance of them and willingness to be humiliated. These wasteful and tedious protocols have solidified into what appears to be indefinite policy, with little or no opposition. There ought to be a tide of protest rising up against this mania. Where is it? At its loudest, the voice of the traveling public is one of grumbled resignation. The op-ed pages are silent, the pundits have nothing meaningful to say.

The airlines, for their part, are in something of a bind. The willingness of our carriers to allow flying to become an increasingly unpleasant experience suggests a business sense of masochistic capitulation. On the other hand, imagine the outrage among security zealots should airlines be caught lobbying for what is perceived to be a dangerous abrogation of security and responsibility — even if it’s not. Carriers caught plenty of flack, almost all of it unfair, in the aftermath of September 11th. Understandably, they no longer want that liability.

As for Americans themselves, I suppose that it’s less than realistic to expect street protests or airport sit-ins from citizen fliers, and maybe we shouldn’t expect too much from a press and media that have had no trouble letting countless other injustices slip to the wayside. And rather than rethink our policies, the best we’ve come up with is a way to skirt them — for a fee, naturally — via schemes like Registered Traveler. Americans can now pay to have their personal information put on file just to avoid the hassle of airport security. As cynical as George Orwell ever was, I doubt he imagined the idea of citizens offering up money for their own subjugation.

How we got to this point is an interesting study in reactionary politics, fear-mongering and a disconcerting willingness of the American public to accept almost anything in the name of “security.” Conned and frightened, our nation demands not actual security, but security spectacle. And although a reasonable percentage of passengers, along with most security experts, would concur such theater serves no useful purpose, there has been surprisingly little outrage. In that regard, maybe we’ve gotten exactly the system we deserve.

Bankers Trying to Avoid Mortgage Fraud Suits?

Sean Olender in SF Chronicle:

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."

Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.

Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.

As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.

The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.

The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.

This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Sean Olender is a San Mateo attorney. Contact us at insight@sfchronicle.com.

Insider Insight: Mortgage Crisis

Herb Greenberg:

Even before this mortgage mess started, one person who kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Someobody’s got to warn people.”

Since then, I’ve kept up an active dialog with Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena — primarily on the West Coast. He lives in the Bay Area. So far he has been pretty much on target as the situation has unfolded. I should point out that, based on his knowledge of the industry, he has been short a number of mortgage-related stocks.

His current thoughts, which I urge you to read:

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.

The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again? Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.

Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.

Always Expect the Worst

James May, president of the Air Transport Association is speaking of modern search and seizure at our airports. But it seems to apply to this current administration especially well:

“Always expect the worst,” he said. That way, “you’ll be pleased when you have a great experience.”

But they do so excel at lowering expectations, don't they?

The Definition of Optimism

via The Straight Dope:

Regarding Transcendental Meditation:

The contestants weren't continuously airborne; rather, they proceeded by a series of hops--all this, mind you, in full lotus, the familiar yogic sitting position.

A skeptic might say it's ridiculous to call hopping levitation, but Thom says it's merely the first stage of a three-stage process. Stage two, which apparently no one has achieved yet, is hovering, and stage three is full-scale flying.

(Iraq) War in 100 words or less

Matthew Baldwin on Catch-22 by Heller:

Yossarian is shaping up to be a pretty great antihero. Craven, carnal, self-absorbed, and downright dangerous at times, he often reflects on and epitomizes the ridiculousness of the war. The central problem, of course, is that every character is looking out for himself alone, and therefore butting heads with all the other vain and self-serving characters strewn throughout the book. By getting us to sympathize with one, Heller demonstrates that, individually, everyone is acting sanely, insofar as their only aim to to advance their own interests. It's only when you look at the "Big Picture" that you see that the whole is much, much less than the sum of its parts--a bunch of rational actors to collectively make up the enormous clusterfuck of war..

Columnists Current Role

"You're misunderstanding the role of the [NYT] columnists. You think that they are supposed to inform and provoke. They do that occasionally, but their main role is to comfort and confirm people in their prejudices - by helping readers fit the news into pre-existing narratives. Repetition and familiarity are more important than interesting ideas. Think of the op-ed page as the comics without pictures,"

Commenter at MatthewYglesias

Is Waterboarding Torture?

This guy thinks so. He should know.

Small Wars Journal

I’d like to digress from my usual analysis of insurgent strategy and tactics to speak out on an issue of grave importance to Small Wars Journal readers. We, as a nation, are having a crisis of honor.

Last week the Attorney General nominee Judge Michael Mukasey refused to define waterboarding terror suspects as torture. On the same day MSNBC television pundit and former Republican Congressman Joe Scarborough quickly spoke out in its favor. On his morning television broadcast, he asserted, without any basis in fact, that the efficacy of the waterboard a viable tool to be used on Al Qaeda suspects.

Scarborough said, "For those who don't know, waterboarding is what we did to Khalid Sheikh Mohammed, who is the Al Qaeda number two guy that planned 9/11. And he talked …" He then speculated that “If you ask Americans whether they think it's okay for us to waterboard in a controlled environment … 90% of Americans will say 'yes.'” Sensing that what he was saying sounded extreme, he then claimed he did not support torture but that waterboarding was debatable as a technique: "You know, that's the debate. Is waterboarding torture? … I don't want the United States to engage in the type of torture that [Senator] John McCain had to endure."

In fact, waterboarding is just the type of torture then Lt. Commander John McCain had to endure at the hands of the North Vietnamese. As a former Master Instructor and Chief of Training at the US Navy Survival, Evasion, Resistance and Escape School (SERE) in San Diego, California I know the waterboard personally and intimately. SERE staff were required undergo the waterboard at its fullest. I was no exception. I have personally led, witnessed and supervised waterboarding of hundreds of people. It has been reported that both the Army and Navy SERE school’s interrogation manuals were used to form the interrogation techniques used by the US army and the CIA for its terror suspects. What was not mentioned in most articles was that SERE was designed to show how an evil totalitarian, enemy would use torture at the slightest whim. If this is the case, then waterboarding is unquestionably being used as torture technique.

The carnival-like he-said, she-said of the legality of Enhanced Interrogation Techniques has become a form of doublespeak worthy of Catch-22. Having been subjected to them all, I know these techniques, if in fact they are actually being used, are not dangerous when applied in training for short periods. However, when performed with even moderate intensity over an extended time on an unsuspecting prisoner – it is torture, without doubt. Couple that with waterboarding and the entire medley not only “shock the conscience” as the statute forbids -it would terrify you. Most people can not stand to watch a high intensity kinetic interrogation. One has to overcome basic human decency to endure watching or causing the effects. The brutality would force you into a personal moral dilemma between humanity and hatred. It would leave you to question the meaning of what it is to be an American.

We live at a time where Americans, completely uninformed by an incurious media and enthralled by vengeance-based fantasy television shows like “24”, are actually cheering and encouraging such torture as justifiable revenge for the September 11 attacks. Having been a rescuer in one of those incidents and personally affected by both attacks, I am bewildered at how casually we have thrown off the mantle of world-leader in justice and honor. Who we have become? Because at this juncture, after Abu Ghraieb and other undignified exposed incidents of murder and torture, we appear to have become no better than our opponents.

With regards to the waterboard, I want to set the record straight so the apologists can finally embrace the fact that they condone and encourage torture.

History’s Lessons Ignored

Before arriving for my assignment at SERE, I traveled to Cambodia to visit the torture camps of the Khmer Rouge. The country had just opened for tourism and the effect of the genocide was still heavy in the air. I wanted to know how real torturers and terror camp guards would behave and learn how to resist them from survivors of such horrors. I had previously visited the Nazi death camps Dachau and Bergen-Belsen. I had met and interviewed survivors of Buchenwald, Auschwitz and Magdeburg when I visited Yad Vashem in Jerusalem. However, it was in the S-21 death camp known as Tuol Sleng, in downtown Phnom Penh, where I found a perfectly intact inclined waterboard. Next to it was the painting on how it was used. It was cruder than ours mainly because they used metal shackles to strap the victim down, and a tin flower pot sprinkler to regulate the water flow rate, but it was the same device I would be subjected to a few weeks later.

On a Mekong River trip, I met a 60-year-old man, happy to be alive and a cheerful travel companion, who survived the genocide and torture … he spoke openly about it and gave me a valuable lesson: “If you want to survive, you must learn that ‘walking through a low door means you have to be able to bow.’” He told his interrogators everything they wanted to know including the truth. They rarely stopped. In torture, he confessed to being a hermaphrodite, a CIA spy, a Buddhist Monk, a Catholic Bishop and the son of the king of Cambodia. He was actually just a school teacher whose crime was that he once spoke French. He remembered “the Barrel” version of waterboarding quite well. Head first until the water filled the lungs, then you talk.

Once at SERE and tasked to rewrite the Navy SERE program for the first time since the Vietnam War, we incorporated interrogation and torture techniques from the Middle East, Latin America and South Asia into the curriculum. In the process, I studied hundreds of classified written reports, dozens of personal memoirs of American captives from the French-Indian Wars and the American Revolution to the Argentinean ‘Dirty War’ and Bosnia. There were endless hours of videotaped debriefings from World War Two, Korea, Vietnam and Gulf War POWs and interrogators. I devoured the hundreds of pages of debriefs and video reports including those of then Commander John McCain, Colonel Nick Rowe, Lt. Dieter Dengler and Admiral James Stockdale, the former Senior Ranking Officer of the Hanoi Hilton. All of them had been tortured by the Vietnamese, Pathet Lao or Cambodians. The minutiae of North Vietnamese torture techniques was discussed with our staff advisor and former Hanoi Hilton POW Doug Hegdahl as well as discussions with Admiral Stockdale himself. The waterboard was clearly one of the tools dictators and totalitarian regimes preferred.

There is No Debate Except for Torture Apologists

1. Waterboarding is a torture technique. Period. There is no way to gloss over it or sugarcoat it. It has no justification outside of its limited role as a training demonstrator. Our service members have to learn that the will to survive requires them accept and understand that they may be subjected to torture, but that America is better than its enemies and it is one’s duty to trust in your nation and God, endure the hardships and return home with honor.

2. Waterboarding is not a simulation. Unless you have been strapped down to the board, have endured the agonizing feeling of the water overpowering your gag reflex, and then feel your throat open and allow pint after pint of water to involuntarily fill your lungs, you will not know the meaning of the word.

Waterboarding is a controlled drowning that, in the American model, occurs under the watch of a doctor, a psychologist, an interrogator and a trained strap-in/strap-out team. It does not simulate drowning, as the lungs are actually filling with water. There is no way to simulate that. The victim is drowning. How much the victim is to drown depends on the desired result (in the form of answers to questions shouted into the victim’s face) and the obstinacy of the subject. A team doctor watches the quantity of water that is ingested and for the physiological signs which show when the drowning effect goes from painful psychological experience, to horrific suffocating punishment to the final death spiral.

Waterboarding is slow motion suffocation with enough time to contemplate the inevitability of black out and expiration –usually the person goes into hysterics on the board. For the uninitiated, it is horrifying to watch and if it goes wrong, it can lead straight to terminal hypoxia. When done right it is controlled death. Its lack of physical scarring allows the victim to recover and be threaten with its use again and again.

Call it “Chinese Water Torture,” “the Barrel,” or “the Waterfall,” it is all the same. Whether the victim is allowed to comply or not is usually left up to the interrogator. Many waterboard team members, even in training, enjoy the sadistic power of making the victim suffer and often ask questions as an after thought. These people are dangerous and predictable and when left unshackled, unsupervised or undetected they bring us the murderous abuses seen at Abu Ghraieb, Baghram and Guantanamo. No doubt, to avoid human factors like fear and guilt someone has created a one-button version that probably looks like an MRI machine with high intensity waterjets.

3. If you support the use of waterboarding on enemy captives, you support the use of that torture on any future American captives. The Small Wars Council had a spirited discussion about this earlier in the year, especially when former Marine Generals Krulak and Hoar rejected all arguments for torture.

Evan Wallach wrote a brilliant history of the use of waterboarding as a war crime and the open acceptance of it by the administration in an article for Columbia Journal for Transnational Law. In it he describes how the ideological Justice Department lawyer, John Yoo validated the current dilemma we find ourselves in by asserting that the President had powers above and beyond the Constitution and the Congress:

“Congress doesn’t have the power to tie the President’s hands in regard to torture as an interrogation technique....It’s the core of the Commander-in-Chief function. They can’t prevent the President from ordering torture.”

That is an astounding assertion. It reflects a basic disregard for the law of the United States, the Constitution and basic moral decency.

Another MSNBC commentator defended the administration and stated that waterboarding is "not a new phenomenon" and that it had "been pinned on President Bush … but this has been part of interrogation for years and years and years." He is correct, but only partially. The Washington Post reported in 2006 that it was mainly America’s enemies that used it as a principal interrogation method. After World War 2, Japanese waterboard team members were tried for war crimes. In Vietnam, service members were placed under investigation when a photo of a field-expedient waterboarding became publicly known.

Torture in captivity simulation training reveals there are ways an enemy can inflict punishment which will render the subject wholly helpless and which will generally overcome his willpower. The torturer will trigger within the subject a survival instinct, in this case the ability to breathe, which makes the victim instantly pliable and ready to comply. It is purely and simply a tool by which to deprive a human being of his ability to resist through physical humiliation. The very concept of an American Torturer is an anathema to our values.

I concur strongly with the opinions of professional interrogators like Colonel Stewart Herrington, and victims of torture like Senator John McCain. If you want consistent, accurate and reliable intelligence, be inquisitive, analytical, patient but most of all professional, amiable and compassionate.

Who will complain about the new world-wide embrace of torture? America has justified it legally at the highest levels of government. Even worse, the administration has selectively leaked supposed successes of the water board such as the alleged Khalid Sheik Mohammed confessions. However, in the same breath the CIA sources for the Washington Post noted that in Mohammed’s case they got information but "not all of it reliable." Of course, when you waterboard you get all the magic answers you want -because remember, the subject will talk. They all talk! Anyone strapped down will say anything, absolutely anything to get the torture to stop. Torture. Does. Not. Work.

According to the President, this is not a torture, so future torturers in other countries now have an American legal basis to perform the acts. Every hostile intelligence agency and terrorist in the world will consider it a viable tool, which can be used with impunity. It has been turned into perfectly acceptable behavior for information finding.

A torture victim can be made to say anything by an evil nation that does not abide by humanity, morality, treaties or rule of law. Today we are on the verge of becoming that nation. Is it possible that September 11 hurt us so much that we have decided to gladly adopt the tools of KGB, the Khmer Rouge, the Nazi Gestapo, the North Vietnamese, the North Koreans and the Burmese Junta?

What next if the waterboarding on a critical the captive doesn’t work and you have a timetable to stop the “ticking bomb” scenario? Electric shock to the genitals? Taking a pregnant woman and electrocuting the fetus inside her? Executing a captive’s children in front of him? Dropping live people from an airplane over the ocean? It has all been done by governments seeking information. All claimed the same need to stop the ticking bomb. It is not a far leap from torture to murder, especially if the subject is defiant. Are we willing to trade our nation’s soul for tactical intelligence?

Is There a Place for the Waterboard?

Yes. The waterboard must go back to the realm of SERE training our operators, soldiers, sailors, airmen and Marines. We must now double our efforts to prepare for its inevitable and uncontrolled use of by our future enemies.

Until recently, only a few countries considered it effective. Now American use of the waterboard as an interrogation tool has assuredly guaranteed that our service members and agents who are captured or detained by future enemies will be subject to it as part of the most routine interrogations. Forget threats, poor food, the occasional face slap and sexual assaults. This was not a dignified ‘taking off the gloves’; this was descending to the level of our opposition in an equally brutish and ugly way. Waterboarding will be one our future enemy’s go-to techniques because we took the gloves off to brutal interrogation. Now our enemies will take the gloves off and thank us for it.

There may never again be a chance that Americans will benefit from the shield of outrage and public opinion when our future enemy uses of torture. Brutal interrogation, flash murder and extreme humiliation of American citizens, agents and members of the armed forces may now be guaranteed because we have mindlessly, but happily, broken the seal on the Pandora’s box of indignity, cruelty and hatred in the name of protecting America. To defeat Bin Laden many in this administration have openly embraced the methods of by Hitler, Pinochet, Pol Pot, Galtieri and Saddam Hussein.

Not A Fair Trade for America’s Honor

I have stated publicly and repeatedly that I would personally cut Bin Laden’s heart out with a plastic MRE spoon if we per chance meet on the battlefield. Yet, once captive I believe that the better angels of our nature and our nation’s core values would eventually convince any terrorist that they indeed have erred in their murderous ways. Once convicted in a fair, public tribunal, they would have the rest of their lives, however short the law makes it, to come to terms with their God and their acts.

This is not enough for our President. He apparently secretly ordered the core American values of fairness and justice to be thrown away in the name of security from terrorists. He somehow determined that the honor the military, the CIA and the nation itself was an acceptable trade for the superficial knowledge of the machinations of approximately 2,000 terrorists, most of whom are being decimated in Iraq or martyring themselves in Afghanistan. It is a short sighted and politically motivated trade that is simply disgraceful. There is no honor here.

It is outrageous that American officials, including the Attorney General and a legion of minions of lower rank have not only embraced this torture but have actually justified it, redefined it to a misdemeanor, brought it down to the level of a college prank and then bragged about it. The echo chamber that is the American media now views torture as a heroic and macho.

Torture advocates hide behind the argument that an open discussion about specific American interrogation techniques will aid the enemy. Yet, convicted Al Qaeda members and innocent captives who were released to their host nations have already debriefed the world through hundreds of interviews, movies and documentaries on exactly what methods they were subjected to and how they endured. In essence, our own missteps have created a cadre of highly experienced lecturers for Al Qaeda’s own virtual SERE school for terrorists.

Congressional leaders from both sides of the aisle need to stand up for American values and clearly specify that coercive interrogation using the waterboard is torture and, except for limited examples of training our service members and intelligence officers, it should be stopped completely and finally –oh, and this time without a Presidential signing statement reinterpreting the law.

Credit Cards Follow Sub-Prime Mortgages in Downturn

Seems in addition to defaulting on mortgages, people are now "defaulting" on their credit card payments.

via The Big Picture:

"US consumers are defaulting on credit card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate - a measure of cardholders' willingness and ability to repay their debt - fell for the first time in more than four years."

But one "analyst"/columnist doesn't seem fit to worry:

"But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry.Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before losing their credit cards."

Yes, you read right: "underwriting standards in the credit card sector have been more robust than in the mortgage industry."

How many of us have received pre-approved credit cards in the mail? How many people have successfully gotten credit cards for their dogs?

Propaganda 101

Bob Wallace

How Propaganda Works
by Bob Wallace

"Once you base your whole life striving on a desperate lie,
and try to implement that lie,
you instrument your own undoing."

- Ernest Becker, The Denial of Death.


It's not hard to understand how propaganda works. You don't need a college degree, or to even to read any of those thick textbooks everybody hates. Everything relevant can be explained in one not-particularly-long article. And, I guarantee you, you must understand how propaganda targets you, to immunize yourself against the attempts.

Propaganda works by appealing to our most base, animalistic instincts. It does not appeal to our better nature, although one of the purposes of it is to convince us it does. It pretends to appeal to our reason, when in fact it appeals to our most primitive emotions. There is good reason for this: perception travels through the emotional brain first, to the rational brain last.

Specifically, propaganda works by appealing to three things: emotionalism, tribalism and narcissism.

I just mentioned perception travels first to the emotional brain, then the rational brain. This happens to everyone, including people who con themselves they are the most rational and intelligent of intellectuals.

As for tribes, we share with every nearly every animal in the world the instinct to form tribes, arranged in a hierachy, with a leader. We are group animals. The fact we look to a leader to take care of us is one of the most firmly established principles in psychology (if you don't remember anything else, remember that).

When anyone transgresses the taboos of a tribe, they can, and often are, ostracised or even expelled. An example? Say some people oppose a war. What happens? They are often called cowards and told to leave the country. Who hasn't heard the insult, "You're a coward! If you don't like it here, get out!" People who say such things think they're being patriotic; in reality they're acting like animals. Emotional, irrational, herd animals, prone to the fear and flight activated by propaganda. Individuals think; groups do not, and cannot.

Narcissism is our inborn tendency to see everything as grandiose or devalued, good or bad, with nothing in-between. It's why nearly every tribe in the world -- and nations are just tribes writ large -- called itself "the People," "the Humans," "the Chosen," "the Motherland," "the Fatherland," or "the greatest nation on earth," relegating everyone outside the tribe to a devalued non-people, non-human status (aka "collaterial damage"). No wonder it's so easy to kill the outsiders -- they're just not quite human.

When you combine those three concepts, you have the basis for all propaganda. If a leader of a tribe tells the people their goodness is under attack by insane, evil people who want to destroy them, they will react just like animals and attack. The Nazi propagandist Herman Goering noticed all you had to do to get people to march off to war is for the leaders to tell them they were under attack, denounce protestors as traitors exposing the tribe to danger, and the people would slander, ostracize and expell the protestors, and then tramp straight off to be slaughtered. He said this technique worked in every country of the world.

The Bush administration used exactly this technique to start two wars. Essentially they told the public that our goodness was under attack by insane and evil people who wanted to destroy us. See how it works? Tribalism, emotionalism, and narcissism.

Supporter of the war responded by attacking protestors as traitors -- trying to expell them from the tribe -- and marching off to war. It's altogether too simple, and too easy.

One man everyone should know is Edward L. Bernays, the American disciple and nephew of Sigmund Freud. He was for all practical purposes the founder of modern propaganda techniques.

Bernays despised most people and regarded them as his inferiors, especially because of intellectual or social claims. (See how it works? I just appealed to your emotions, and convinced you Bernays was attacking you. You fell for it, right?)

Bernays not only pretty much founded modern propaganda techniques, but was also the father of modern PR. Although, you could say they are same thing, and that there's really no difference between them.

In his 1928 book, Propaganda, Bernays wrote, "The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country…"

Remember that quote. Burn it into your memory. Bernays thought people should be ruled by an extremely small elite, who should manipulate them through propaganda. That means you. People who believe in the wonders of government, and that it is their friend, should think twice about it.

In another book, In Crystallizing Public Opinion, Bernays wrote how governments and advertisers can "regiment the mind like the military regiments the body." This can be imposed, he said, because of "the natural inherent flexibility of individual human nature," and suggested the "average citizen is the world's most efficient censor. His own mind is the greatest barrier between him and the facts. His own 'logic-proof compartments,' his own absolutism are the obstacles which prevent him from seeing in terms of experience and thought rather than in terms of group reaction."

Bernays also thought "physical loneliness is a real terror to the gregarious animal, and that association with the herd causes a feeling of security. In man this fear of loneliness creates a desire for identification with the herd in matters of opinion."

Bernays claimed that "the group mind does not think in the strict sense of the word…In making up its mind, its first impulse is usually to follow the example of a trusted leader. This is one of the most firmly established principles in mass psychology." What Bernays called the "regimentation of the mind" is accomplished by taking advantage of the human tendency to self-deception [logic-proof compartments], gregariousness [the herd instinct], individualism [exalting their vanity] and the seductive power of a strong leader.

Bernays also expressed the opinion people "have to take sides...[they] must step out of the audience onto the stage and wrestle as the hero for the victory of good over evil." This also means appealing to our narcissism, our inborn tendency to see everything as either good or bad, with little or nothing in-between.

He also noted the need for people to feel as if they belong to something larger than themselves. Again, this also means appealing to our narcissism, such as people claiming they belong to "the greatest nation on earth."

When people consider themselves as part of the Humans (by whatever name they call themselves), they exalt themselves. Still again, those outside the tribe are non-people, "collateral damage."

"Mental habits create stereotypes just as physical habits create certain definite reflex actionism," Bernays wrote. "...these stereotypes or clichés are not necessarily truthful pictures of what they are supposed to portray." Perception is everything, the truth matters little or not at all.

Now, let's boil all this down and see what we have:

Mass Man, the herd, cannot think, and is instead ruled by its feelings. The herd will look to a leader to save it. The best way to accomplish this is for the herd to feel it is under attack. The herd will draw together, expell those who see the truth and protest, and then march off to war.

The full quote from Hermann Goering? "Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country."

Tell the herd they are the Humans, or the People, or best of all, have God on their side. Paint their enemies as insane and evil. Again, this is appealing to people's narcissism, the tendency to see everything as either good (us) or evil (them). Evoke paranoia and hysteria in them by convincing them the insane evil ones want to conquer and destroy them. What will happen? You can get them to march off to war by the millions, just as Goering noticed. The truth doesn't matter, only the manipulation of perception.

To make it as simple as possible, everything that is needed for a successful propaganda campaign can be summed up in those three aforementioned words: emotionalism, tribalism and narcissism.

We con ourselves we are so advanced. In reality, the human race is stuck in One Million Years BC, except there's no Raquel Welch in a two-piece fur bikini.

I forgot -- there is one another component to sucessful propaganda: keep repeating the message over and over.

Financial Auditors - What are They Good For?

Deloitte & Touche gives American Home Mortgage a clean bill of health three months before it declares bankruptcy. Auditing's new battle cry - 'Remember the Enron'?

Bloomberg

Aug. 15 (Bloomberg) -- You think your job is tough? Think about the poor schlimazels from Deloitte & Touche LLP who blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up.

The Deloitte accountants faced a crucial decision as they finished their audit work in March. Deloitte could resign and walk away. The firm could qualify its audit opinion by saying there was ``substantial doubt'' about American Home's ability to continue as a ``going concern'' through the end of the year -- as many short sellers already had concluded. Or it could give the company a clean opinion, expressing no doubt, which is what Deloitte did.

Five months later, on Aug. 6, American Home filed for Chapter 11 bankruptcy-court protection, still brandishing the firm's clean audit-opinion letter.

There's a reason why you don't see auditors pursuing second careers as tarot-card readers. They wouldn't be very good at it. Yet every time an accounting firm renders an opinion on a client's financial statements, the auditing standards say it must evaluate the company's ability to continue as a going concern, and warn the public if it concludes there's ``substantial'' doubt, a term the rules don't define.

The home-mortgage industry's growing casualty list is a reminder: They're not very good at that either.

You almost have to feel sorry for the Deloitte accountants who drew this thankless task. While in hindsight it looks like they made a bad call, they also were in a pickle.

Dreaded Language

Tucked inside American Home's credit-facility agreement was a clause that said the Melville, New York-based company would be in default with lenders if its auditor tagged it with the dreaded going-concern language.

For the accountants, if they thought for even a second about this, it must have felt like staring into a house of mirrors. Had they made what proved to be the right call, they probably would have inflicted a mortal wound on American Home. Then again, looking back, a self-fulfilling prophecy would have spared investors from the company's April 30 public offering of 4 million shares at $23.75 each, the prospectus for which incorporated Deloitte's audit opinion. American Home's shares closed yesterday at 22 cents.

The auditing standards stress that auditors are ``not responsible for predicting future conditions or events,'' and that a company's sudden failure without any going-concern warning ``does not, in itself, indicate inadequate performance by the auditor.''

Auditors' Judgments

Even so, financial statements depend heavily on auditors' judgments about a company's forecasts. Look at almost any balance sheet, and the asset and liability values hinge on the company's ability to remain in business. Those numbers would look far different if the company were preparing for liquidation, with holdings listed at fire-sale prices.

That's why going-concern evaluations by outside auditors are a necessity. Auditors may not be particularly skilled at making them. When they do bark, though, you can bet shareholders will skedaddle, because then it's clear the problems lack plausible deniability.
...

The State of Newspaper Research

John Marshall details how he was singled out by the LA Times as someone who doesn't do his research:

Annals of Reporting
For a variety of reasons I try to stay out of the debates over blogs as such, what they're good or bad at and the rest. But this morning I was alerted to an opinion column in the Los Angeles Times by Michael Skube, a journalism professor at Elon University. The sum of the piece is that the blogosphere is as rife with disputation as it is thin on information, or more specifically, reporting, writing that demands "time, thorough fact-checking and verification and, most of all, perseverance."

Now, fair enough. There's certainly no end of blog pontificating fueled by puffed-up self-assertion rather than facts. But Skube's piece reads with a vagueness that suggests he has less than a passing familiarity with the topic at issue. And I will confess to you that what really caught my attention was that in a column bewailing how blogs don't do any real reporting one of the four bloggers he mentioned was me.

Now, whether we do any quality reporting at TPM is a matter of opinion. And everyone is entitled to theirs. So against my better judgment, I sent Skube an email telling him that I found it hard to believe he was very familiar with TPM if he was including us as examples in a column about the dearth of original reporting in the blogosphere.

Now, I get criticized plenty. And that's fair since I do plenty of criticizing. And I wouldn't raise any of this here if it weren't for what came up in Skube's response.

Not long after I wrote I got a reply: "I didn't put your name into the piece and haven't spent any time on your site. So to that extent I'm happy to give you benefit of the doubt ..."

This seemed more than a little odd since, as I said, he certainly does use me as an example -- along with Sullivan, Matt Yglesias and Kos. So I followed up noting my surprise that he didn't seem to remember what he'd written in his own opinion column on the very day it appeared and that in any case it cut against his credibility somewhat that he wrote about sites he admits he'd never read.

To which I got this response: "I said I did not refer to you in the original. Your name was inserted late by an editor who perhaps thought I needed to cite more examples ... "

And this is from someone who teaches journalism?

Perhaps I'm naive. But it surprises me a great deal that a professor of journalism freely admits that he allows to appear under his own name claims about a publication he concedes he's never read.

Actually, if you look at what he says, it seems Skube's editor at the Times oped page didn't think he had enough specific examples in his article decrying our culture of free-wheeling assertion bereft of factual backing. Or perhaps any examples. So the editor came up with a few blogs to mention and Skube signed off. And Skube was happy to sign off on the addition even though he didn't know anything about them.

I grant you that the blogosphere needs better bloggers. But, as usual, the need for better critics seems even more acute.

--Josh Marshall

What the Credit Crunch Looks Like On the Inside, Pt III

Ritholtz

Way back in the late 1990s into the early 2000s, a previously well regarded group -- stock analysts -- subtly shifted the objectives of their work. Previously, they plied their skills looking for stocks their clients and trading desks could make money buying and selling.

But things change, commissions shrunk from 10 cents per share to 6 to 3 to mere half pennies today. The old business model no longer applied. What rose in its place was a new model that emphasized not the trading of equities, but the investment banking fees that accompanied IPOs. Many analysts compromised their objectivity on the altar of banking fees. This was especially true in the Internet/Technology/Telecom space.

Thus, they went from being somewhat valued allies of the investor class to the guys helping to dump the dogs into an unknowing public's portfolios. Since then, many of this crowd has been vilified (Jack Grubman, Henry Blodgett, etc.), and the securities industry got Spitzerized to the tune of some $$1,387.5 Million dollars in fines (a deal I suspect they would do all over again if they could).

Fast forward to the early 2000s. Interest rates are at 46 year lows, and this time around, another group of shameless whores analysts are following the same playbook: The ratings agencies that gave their AAA blessings to the now defaulting alphabet soup of RMBS, CDOs, CLOs, ABX structured products that has so recently seized up the credit markets.

It was a simple case of pay-to-play to get rated. Portfolio's Jesse Eisinger goes into the ugly details of a surprisingly familiar story:

"Moody’s and S&P dominated for decades, and their business model was straightforward: Investors bought a subscription to receive the ratings, which they used to make decisions. That changed in the 1970s, when the agencies’ opinions were deemed a “public good.” The Securities and Exchange Commission codified the agencies’ status as self-regulatory entities. The agencies also changed their business model. No longer could information so vital to the markets be available solely by subscription. Instead, companies would pay to be rated. “That was the beginning of the end,” says Rosner.

It might come as a surprise, but rating credit is a heck of a business to be in. In fact, Moody’s has been the third-most-profitable company in the S&P 500-stock index for the past five years, based on pretax margins. That’s higher than Microsoft and Google. Little wonder that Warren Buffett’s Berkshire Hathaway is the No. 1 holder of Moody’s stock.

McGraw-Hill’s most recent financial report shows that S&P has profit margins that would put it in the top 10. Fitch Ratings, owned by the French firm Fimalac, is a distant third in market share but nevertheless has an operating margin above 30 percent, about double the average for companies in the S&P 500.

In 2006, nearly $850 million, more than 40 percent of Moody’s total revenue, came from the rarefied business known as structured finance. In 1995, its revenue from such transactions was a paltry $50 million. . ."

The entire article is well worth your time to read in full.

Yes, Moody's, S&P, and Fitch were complicit in what is slowly coming to be viewed as widespread fraud. However, there is more than enough blame for the failure of the credit markets to spread around. The ratings agencies fraudulent ratings -- I won't even bother with the word alleged -- are merely the tip of the iceberg.

As much as the whores credit agencies have a large share of responsibility in this mess, do not forget to save some blame for an even greater ethically challenged industry: those clever folks who work at Wall Street's biggest iBanks. As related by Reuter's Patrick Rucker, it seems that Wall Street often shelved damaging subprime reports. (Sweet!) Here are the details:

"Investment banks that bundle and sell home mortgages often commissioned reports showing growing risks in sub-prime loans to less credit-worthy borrowers but did not pass on much of the information to credit rating agencies or investors, according to some of those who prepared the reports.

The mortgage consultants, known as due-diligence firms, were hired by investment banks to make sure blocks of mortgages conformed to the mortgage seller's own standards. The studies provided a first glimpse of loan quality for ratings agencies and investors who do not normally see the full reports.

As the U.S. housing boom reached its crescendo in 2006 and investors showed a strong appetite for mortgages, lenders relaxed their underwriting standards, and millions of borrowers with poor credit records were able to obtain subprime mortgages as a result.

Default rates on many of those subprime mortgages are now rising, some borrowers face foreclosure on their homes, and investors in the mortgages face losses." (emphasis added)

At this point, we should expect to see a flurry of investigations into the rating agencies and the same slew of Wall Street firms that were involved in the last analyst scandal.

The saving grace for Wall Street maybe (emphasis maybe) that this was less of a "systemic fraud" than the 1998-2002 scandal. They may perhaps escape by merely jettisoning these bad actors, throwing them under the bus to save their own skins. Perhaps.

Trade with China: How Iraq *Should* Have Been Handled?

China's new revolutionaries: U.S. consumers,
by Nathan Gardels, Commentary, LA Times:

Who would have thought that tainted pet food and toys would threaten to unravel the authoritarian export model of Chinese growth that the brutal Tiananmen Square crackdown in 1989 was partly meant to secure? China's then "paramount leader" Deng Xiaoping, who had been purged during the Cultural Revolution, could well imagine how political upheaval would derail China's stable path to prosperity. But it surely never entered his mind, nor that of his descendant comrades, that the fickle American consumer would one day become, as the students in the square wanted to be, the agent of revolutionary change in China.

In the name of sovereignty, China's leaders for a long time have gotten away with suppressing their own citizens while ignoring the get-gloriously-rich-quick corruption that has thrived in the absence of the rule of law. But, thanks to globalization, China's export reliance on the U.S. market has imported the political demands of the U.S. consumer into the equation. Americans won't hesitate to cut the import lifeline and shift away from Chinese products that might poison their children or kill their pets.

Unlike organized labor or human rights groups, consumers don't have to mobilize to effect change; they only have to stop spending. And their bargaining agents -- Wal-Mart, Target, Toys R Us -- have immensely more clout than the AFL-CIO and Amnesty International in fostering change in China.

Ironically, the United States' "most favored nation" trade treatment for China (and its later entry into the World Trade Organization), which labor and human rights groups so virulently opposed in the past, has become a Trojan horse. China's future is now so linked to the American consumer that Beijing will be forced to curb corruption and strengthen regulation through the rule of law or face the certain doom of its export-led growth. ...

For consumers to trust Chinese products, they must trust regulation of those products. And regulation cannot be trusted without the rule of law, which doesn't bend to bribery, fraud and quanxi (connections). ...

[T]he ultimate paradox of Deng's soft totalitarianism is that privatizing people's lives will ultimately deprive the authorities of their power. As more people come to enjoy private freedom, fewer will abide it being taken away. Globalization, it seems, has accelerated this process by forging a kind of objective coalition of the growing Chinese middle class and the American consumer in favor of the rule of law. ...

Savvy consumers are not likely to buy China's response of prosecuting or executing high-level officials -- "killing the chicken to scare the monkey." They simply want the lead removed from their children's toys or they will take their purchases elsewhere.

Of course, a move toward the reliable rule of law is not democracy, but it is a big step on the long march in that direction.

Some years ago, the once-famous but now forgotten dissident, Wei Jingsheng, lamented how the attention of global public opinion and that of most Chinese had shifted "from Democracy Wall [where Wei was arrested for putting up posters calling for democratic political reforms] to the shopping mall."

Now, especially as the spotlight of next summer's Olympics approaches, it seems the tables may be turning again.

Exit Rove: What Was His Strategy?

Joshua Green forNY Times

THERE is a paradox at the heart of Karl Rove’s tenure in the White House, and it is a key to understanding why he failed to remake American politics, despite ambitious plans to do so. In seeking to establish a lasting conservative majority, Mr. Rove violated one of the central tenets of modern conservative ideology: the idea that government cannot effectively refashion American society.

For decades, conservatives have inveighed against what they consider to be the hubris of liberals — the belief that regulations, laws and bureaucrats can contend with deep cultural forces. Daniel Patrick Moynihan, the New York senator and a chastened veteran of the Great Society, liked to warn about government overreach by citing Rossi’s Law, so named for the sociologist Peter Rossi, who had declared that “the expected value for any measured effect of a social program is zero.”

Conservatives believe the Great Society programs that liberals pushed in the 1960s demonstrated that government engineering doesn’t work. Lyndon Johnson’s War on Poverty failed, this critique goes, because liberals simply didn’t understand the limits of government’s power to transform culture.

Whether or not one accepts Rossi’s Law, there can be little dispute that Mr. Rove pursued his vision of a new political order with the activist zeal of a 1960s Great Society liberal. From the outset of the Bush administration, Mr. Rove aimed to create a “permanent majority” for Republicans, just as Franklin Roosevelt did for Democrats in the 1930s, and as William McKinley and his campaign manager Mark Hanna — Mr. Rove’s hero — did for Republicans in the 1890s.

As Mr. Rove sought a political realignment that would create a durable Republican majority, he seized on government as his chief mechanism. He tried to realign American politics principally through the pursuit of major initiatives that he believed would reorient a majority of Americans to the Republican Party: establishing education standards; rewriting immigration laws; partially privatizing Social Security and Medicare; and allowing religious organizations to receive government financing.

The only thing that united these government actions was the likelihood that they would weaken political support for Democrats. Social Security privatization would create a generation of market-minded stockholders. Pork-barrel spending on religious organizations would keep evangelical Christians engaged in the political process — and pry loose some African-American voters by funneling money to black churches. No Child Left Behind would appeal to voters who traditionally looked to Democrats as the party of education. And generous immigration policies would persuade Hispanics to vote Republican.

Mr. Rove’s entire vision for Republican realignment was premised on the notion that he could command government to produce the specific effects that he desired. But as a conservative could have predicted, his proposed policies unleashed a series of failures and unintended consequences.

Mr. Rove had extraordinary power within the administration to shape domestic policy. But pushing through many of his programs proved difficult. On Social Security and immigration reform, Congress and the country weren’t prepared to embrace his vision. Like a 1960s liberal in love with the abstract merits of a guaranteed income, Mr. Rove misread the mood of the country and tried to do too much.

Mr. Rove married a liberal’s faith in the potential of government to a conservative’s contempt for its actual functioning. This was the contradiction at the heart of “compassionate conservatism,” and it helps explain the tension between the president’s fine words about, say, helping those hurt by Hurricane Katrina, and his actions.

Conservatives don’t have a lot to celebrate these days. Mr. Rove’s attempt at a Great Republican Society has left his party in tatters and, in this sense at least, his influence will be felt long after George W. Bush has left the White House.

Of course, there is a bright side. If nothing else, Mr. Rove has strengthened the conservative critique of what happens when you try to engineer great societal changes through government policy. Perhaps conservatives can find some solace by telling themselves they were right all along.

Joshua Green is a senior editor for The Atlantic.

What the Credit Crunch Looks Like On the Inside, Pt II

Ritholtz

August 13, 2007
Dear Client:
As you undoubtedly know, the credit markets, along with most other markets, have experienced
a liquidity crisis in the past several weeks. Investor fear has overtaken reason and has induced a period
in which most securities have simply ceased to trade. We’ve all read the stories about one hedge fund
or another suffering losses related to subprime exposure and closing down or being rescued. This fear,
while warranted in some cases, has spilled over into the rest of the credit market and liquidity has dried
up all over the street. In addition, investment banks and securities firms are stuck with LBO deals
they’ve already entered into but cannot find buyers for the bonds so must inventory them themselves.
This liquidity crisis has caused bids to disappear from the market and makes it virtually impossible to
properly price securities or to trade them. High grade securities are trading like junk bonds as panicked
investors dump names like General Electric at Tyco‐like prices.
We have carefully monitored this situation for the past several weeks and have met regularly to
discuss the potential impact it may have on our clients. We had previously thought that the market
would return to some semblance of order and that our clients would not join in the panic.
Unfortunately, this has not been the case. We are concerned that we cannot meet any significant
redemption requests without selling securities at deep discounts to their fair value and therefore causing
unnecessary losses to our clients. We contacted the CFTC today and asked for their permission to halt
redemptions until we can honor them in an orderly fashion.
Sentinel has always sought to protect your interests and since our inception in 1980, we have
never experienced a situation quite like this one. We will continue to monitor the markets and we will
raise cash as opportunities present themselves.
We understand that this will obviously cause inconveniences on your part however, at present,
we do not see an alternative and we don’t believe it is in anyone’s best interest if a run on Sentinel took
place and we were in a forced liquidation mode.
We value your trust in us these past 28 years and this has been a very difficult decision for us
and we understand the implications of this decision both on you and on Sentinel. We feel, however,
that this is the best way to assure you the best possible value on your investment.
We will remain in contact with you and update you as things progress.
Sincerely,
Sentinel Management Group, Inc.

Our Biggest Iraq Enemy: Ourselves

Cincinnati Post

Helping enemies in Iraq
By Martin Schram

For years, the list of enemies targeting U.S. troops in Iraq has included Sunni insurgents, Shiite militia and, more recently, a group that calls itself al-Qaida of Mesopotamia. The enemies list in Iraq also includes outsiders such as Iran and Syria, who President Bush and Vice President Cheney have blamed for providing those combatant enemies with weapons that are used to kill U.S. troops in Iraq. Now there is one more, according to infuriating new intelligence.

An investigation by the U.S. Government Accountability Office identified a new culprit who has been shipping into Iraq massive numbers of weapons that U.S. officials now fear are being used to kill American troops. It is our Pentagon.

The Defense Department has no clue about what happened to at least 190,000 guns - 110,000 AK47s and 80,000 pistols - that it gave Iraqi security forces in 2004 and 2005, according to a GAO report released Monday. And U.S. officials now concede that at least some of the missing weapons are now being used to kill American troops.

"One senior Pentagon official acknowledged that some of the weapons probably are being used against U.S. forces," the Washington Post reported Monday. "He cited the Iraqi brigade created at Fallujah that quickly dissolved in September 2004 and turned its weapons against the Americans."

The statistics are both shocking and enraging. The Pentagon cannot account for 110,000 of the 185,000 AK47 rifles it gave the Iraqis; 80,000 of the 170,000 pistols; 135,000 of the 215,000 items of body armor; 115,000 of the 140,000 helmets.

According to the GAO, these security-assistance programs are traditionally overseen by the State Department. But during the reign of then-Defense Secretary Donald Rumsfeld, his department insisted it could provide the flexibility that could best do the job. Those were the days when nobody said no to Rummy, so it came to pass.

But the GAO report chronicled haphazard and often nonexistent property-accounting procedures as the Pentagon rushed to create, arm and equip Iraqi security forces. Pentagon officials told GAO investigators they didn't have enough personnel to keep track of the weapons they were handing out in Iraq and that their computers were inadequate for the task. Defense officials didn't create central records to track the weapons until December 2005.

Responsibility for the massive failure of accountability lies with the general in charge of creating and equipping the Iraqi security forces. It was Gen. David Petraeus, who is now in command of the entire U.S. military effort in Iraq. Petraeus, who until this finding has always enjoyed an excellent reputation in military circles, will be providing that much-awaited Sept. 15 report on the status of the U.S. military effort in Iraq.

The GAO report of the Pentagon's failure to account for the weapons reads like a classic in witless bureaucracy. "During our review, DOD officials expressed differing opinions about whether DOD regulations applied to the train-and-equip program for Iraq," the report said. The officials were unable to decide which set of procedures applied to their mission - so they basically used none of them and got no guidance from superiors. As of last month, the report said, defense officials still had not identified which set of procedures to use.

No wonder the final two recommendations in the GAO report are so pathetically obvious that, written in officialese, they could pass for comic-strip satire. Hardly "Pogo," but maybe "Doonesbury Meets Stephen Colbert": "Determine which DOD accountability procedures apply or should apply to the program. After defining the required accountability procedures, ensure that sufficient staff, functioning distribution networks, standard operating procedures and proper technology are available to meet the new requirements."

But the bottom line is no laughing matter. It is tragically infuriating and sadly ironic. This was a war that began to go badly when the Bush administration disbanded the Iraqi army but never thought to guard that army's arsenals, which were looted for later use against our troops by insurgents and militia.

Now this. We may never know how many of our courageous men and women fighting in Iraq were killed or maimed by unfriendly fire from friendly weapons, guns that were made in, and supplied by, the U.S.A.

Separate But Equal

Today both Barack and Hillary were reported as supporting "Civil Unions" of gays but not marriage. Barack all but conceded that since in his view "civil unions" would differ from marriage in name only, that his stance dissolved into a semantic debate.

Separate But Equal?

Liquidity Collapse: Advice for Rich Uncles

From the Big Picture:

I am going to relate an anecdotal tale that, as far as I can tell, is true. The actual story matters much less than the lessons it teaches, clearly enunciated at the end of this post.

Several years ago, I helped a firm develop a new Distressed Debt/CDO department. The history of the group that I brought in was a strong ability to trade distressed paper, and the expertise to package and resell it institutionally.

Initially, this worked out well for the firm. They managed to do a number of deals, getting their names on the offering books as co-leads with the likes of Merrill Lynch and Goldman Sachs. Very prestigious, huge fees, all good stuff.

After I left, I kept hearing all sorts of sketchy tales about the group: big turnover amongst staff, disagreements about costs, fights with the bond desk, issues with compensation. I chalked this angst up to the usual Wall Street "eat what you kill" philosophy.

Then I heard several stories: That the CDO desk was pitching their product to retail brokers, that this debt was getting placed in the accounts of individual investors where it had absolutely no business going into. Distressed debt and CDOs are sophisticated complex instruments that require a great of expertise in understand, and I was sure neither the retail brokers nor the clients knew these things.

Then, I hear tales that a retail broker from a rather disreputable shop joins the firm. He takes to the CDOs like a fish to water, placing them everywhere and earning huge fees. The rumor I keep hearing is that he even placed a $10 million block with a family member.

You can see where this is going: The $10 million dollar investment is now worth, best as anyone can figure, about $3 million -- assuming anyone can find a bidder. The commission on that one placement was a cool $700,000. The relative/client has gone postal, litigation threatened, all manner of ugliness. You just know this is going to end badly . . .

Now, its time for your 3 lessons to learn from this misadventure:

1. Advice for Investors: Never buy anything you do not understand. This is a very simple rule, regularly ignored by all too many people. If you don't understand what a company does, DO NOT BUY IT. If aan offering doc comes with a 157 page set of disclosures, unless you understand all the risks it contains, stay far far away.

2. Advice for Brokerage Firms: Never place institutional products with retail investors: As a rule, they do not have the sophistication to understand the product (see rule #1). More importantly, when this stuff gets offered to retail clients, it likely means INSTITUTIONAL CLIENTS HAVE REJECTED IT. Hence, the need to stick it somewhere other there where its supposed to go is likely proof that its got some bad mojo attached.

3. Special Advice for Rich Uncles: Don't give money to relatives, instead buy them a new Rolex. This sounds like a quite odd bit of advice, but follow my logic. When you give, say $10M ,to a relative, you are making a major financial decision based not on the merits of their skill set and experience, but rather, on a coincidence of blood relations.

This is not the basis for making a significant financial planning decision.

However, you then must speak to your nephew/niece/relative, with their parents (one of whom is likely to be your sibling). In front of these relatives, explain that your money has been carefully placed in the hands of professionals you have very painstakingly selected after great study of their long term track record (which the kid obviously does not have).

But in order to help them get started on their chosen career, here is a small present: This Rolex Watch (I suggest this one).

Tell them to wear it with pride: It will subtly convey how successful they are to their employers, peers and most importantly of all, their sales prospects. It reeks of their soon-to-be inevitable success.

Wish the best of luck in their new career! And walk away knowing that the $5,000 you just blew saved you untold millions in losses, and no end of grief at all future family gatherings

You'll thank me . . .

Important Finace Quotes to Remember

Culled from The Big Picture

"Markets can remain irrational longer than you can remain solvent."
— John Maynard Keynes

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."
— JP Getty

"You try to be greedy when others are fearful, and fearful when others are greedy."
— Warren Buffett

"A gold miner is a liar standing beside a hole in the ground."
— Mark Twain

Language as Philosophy: Proscriptive vs Descriptive

I received the following from a friend:

Let's face it - English is a crazy language.
There is no egg in eggplant, nor ham in hamburger;
neither apple nor pine in pineapple. English muffins
weren't invented in England or French fries in
France . Sweetmeats are candies while sweetbreads,
which aren't sweet, are meat. We take English for
granted. But if we explore its paradoxes, we find
that quicksand can work slowly, boxing rings are
square and a guinea pig is neither from Guinea nor
is it a pig.

And why is it that writers write but fingers
don't fing, grocers don't groce and hammers don't
ham? If the plural of tooth is teeth, why isn't the
plural of booth, beeth? One goose, 2 geese. So one
moose, 2 meese? One index, 2 indices? Doesn't it
seem crazy that you can make amends but not one
amend? If you have a bunch of odds and e nds and get
rid of all but one of them, what do you call it?

If teachers taught, why didn't preachers
praught? If a vegetarian eats vegetables, what does
a humanitarian eat? Sometimes I think all the
English speakers should be committed to an asylum
for the verbally insane. In what language do people
recite at a play and play at a recital? Ship by
truck and send cargo by ship? Have noses that run
and feet that smell?

How can a slim chance and a fat chance be
the same, while a wise man and a wise guy are
opposites? You have to marvel at the unique lunacy
of a language in which your house can burn up as it
burns down, in which you fill in a form by filling
it out and in which, an alarm goes off by going on.

English was invented by people, not
computers, and it reflects the creativity of the
human race, which, of course, is not a race at all
That is why, when the stars are out, they are
visible, but when the lights are out, they are
invisible.

The methods by which a language evolves to me serves as an analogy to many other ideas, especially the concept of "top-down" vs "bottom-up" control.

Take dictionaries, for example. The fall into two broad types - I'll call the "Proscriptive" and "Descriptive".

Proscriptive dictionaries describe language as it "should be" used. Descriptive dictionaries describe how a language *is* used. Which is right?

At one extreme we can reject all change and mercilessly hammer the dogmatic: words should be used/spelled as described. All variations are unwelcome. While this in theory would lead to a "stale" language over time, the real result is that it will never happen. People will speak however they like, dictionary be damned.

But the other extreme, the Descriptive dictionary is just the opposite, it intends to report on how language is used in real life. When this is taken to extreme, then no variation would be "incorrect". By simply speaking a word or spelling it however one likes, then the usage would be "correct" by deign that it was just "used" that way. With each person speaking/spelling however one likes, communication would break down.
(I'm obviously glossing over the approach used by Descriptive dictionaries, in that they tend to document the most common usages, not every variant.)

Strangely, society seems to slowly rock forward by mediating between these two extremes. Thus language tends to be a very "democratic" creation and as the example above illusrates, continue to appear to be a product of a committee of madmen.