Results tagged “Tamara de Silva” from Timely Objections Blog

Kermit Gosnell's Horror Practice

April 13, 2013


Dr. Kermit Gosnell's Horror Practice


By R. Tamara de Silva

April 13, 2013



       Dr. Kermit Gosnell's illegal abortion practices such as killing babies born alive and performing an abortion on a 14 year old girl who was 30 weeks pregnant, as alleged in a grand jury report, are horrifying.  I first read about this case in the NYT, but it has otherwise received scant national media attention.  It seems that the same CNN that was obsessed with the Casey Anthony trial has gone on to obsess over the Jodi Arias trial.  Or perhaps editorial boards and news editors do not want to run a story that mentions abortion-for whatever reason.  Sex and scandal sell, ghoulish murders that do not involve guns, remarkably less so.     But the story of Kermit Gosnell's medical practice, to the extent that it can be called this, is not an abortion story; it is a sordid tale of deliberate murders, concealment of crime and massive regulatory failure.

       Abortion is perhaps the single most polarizing issue in American politics argued between the same parties along predictable lines.  To frame the story of Dr. Gosnell's case as part of the abortion debate, although tempting, is to miss the fact that it is a human rights issue and a civil rights issue.  Pro-choice advocates are not well cast by the story nor is the story done justice as an opportune trophy for the pro-life crowd.  This is not an abortion story yet a much larger one than Trevon Martin, some selectively chosen missing teenager or much of what the main stream media obsesses on including at this point, Sandy Hook.  According to the testimony contained within the grand jury report on Dr. Kermit Gosnell, many more lives have been deliberated killed than were lost in the last lunatic's tragic shooting spree. 

       If the facts are to be believed, the trial of Kermit Gosnell is nothing less than the indictment of several murders.  Murder is murder and you need not inject politics into the matter.  The murder of innocents ought to shock a conscience and the failure to do so is a separate and perhaps more troubling diagnosis.  Wherever one may stand on the abortion issue and separately, what the government's role in that is or should be, the deliberate taking of a life that is born alive, without legal justification, is murder.  It debases both sides of the abortion issue and evades reality to deny this.

       The Born-Alive Infants Protection Act defines a human as  "somebody who's been completely expelled from the mother and has either a heartbeat, pulsating cord, or is moving."  Hence under federal law, it was murder for Kermit Gosnell to have killed many of the babies (by the accounts of one witness over one hundred), he killed because they were not just viable fetuses, they were human beings born alive.

       Pennsylvania's Abortion Control Act prohibits abortions past 24 weeks unless the mother's health is in jeopardy. It is illegal to kill a baby born alive and outside of the womb.  At 24 weeks, fetuses are presumed viable and even if delivered early have a good prognosis.  Of course, outside of the abortion setting, because fetus are presumed viable at 24 weeks, the medical standard of care for dealing with a pregnancy that threatens a mother's health or life is the inducement of labor or the performing of a c-section.   A c-section preserves the mother's health and life and does not demand that the fetus be killed.  Pennsylvania law requires a doctor to provide medical aid to living babies outside the womb.

       According to the grand jury report, when law enforcement raided Kermit Gosnell's office on February 2010, they found the remains of 26 week old and 28 week old fetuses.  The 28-week-old male fetus came to be called Baby Boy B.   Gosnell had inserted a pair of scissors into the back of the baby's neck and severed his spinal cord in order to kill him.   One of the clinic workers, Tina Baldwin testified that Gosnell routinely cut the back of babies' necks and once joked as a baby was writhing that, "that's what you call a chicken with its head cut off."  Two other clinic workers said that in second and third trimester abortions, Gosnell always cut the back of the fetus' neck even though the babies often moved and breathed on the table.

       Three of the grand jury witnesses had taken photographs of the discarded body of another male fetus referred to as Baby Boy A.  Baby Boy A was almost 32 weeks when he was aborted and one witness claimed he seemed to weigh over 6 pounds.  Though he was born alive and observed to be breathing and moving, Gosnell slit his neck and placed him in a shoebox.

       Baby C was breathing and moving for twenty minutes before its neck was slit.  One of the clinic workers actually described playing with the baby before slitting its throat.

       The grand jury report contains many heart breaking stories of what cannot be termed medical malpractice but were simply medical murder and mutilation.  Gosnell had allegedly admitted to an investigator that he had performed over a hundred late term abortions.  His staff testified to killing many babies that were observed, breathing, moving or crying prior to having their necks slit.  Gosnell also had a photo library of his patient's genitalia and jars full of severed baby's feet.  His abortions resulted in the death of at least one 41 year old patient and critical injury many other including organ perforation and life-threatening infection.

       This story could not have happened without the passive complicity of the Pennsylvania Department of Health, which fielded reports of medical malpractice and did nothing.  It was the Pennsylvania Department of Health's job to police and enforce Pennsylvania's Abortion Control Act, "so as to protect the health and safety of women having abortions and of premature babies aborted alive."

       One of the arguments I have read made about the Gosnell trial is its illustration of the unavailability of low-cost abortion service.  This argument fails in that Gosnell's prices for abortions were comparable to that of Planned Parenthood.  Gosnell made $1.8 million a year, according to the grand jury report-in cash.  What Gosnell offered that other abortion providers did not, was a willingness to perform abortions well into the third trimester of a pregnancy, when they were illegal and the fetuses viable.  Undoubtedly the cost of an abortion, anywhere would be less than the cost of raising and caring for a child, but this is an entirely different argument from the assertion that not having more low-cost abortion providers is to blame.

       Dr. Gosnell's defense team in its opening arguments referred to the prosecution as a witch-hunt, an "elitist, racist prosecution."   Yet within the grand jury report itself, workers from the clinic tell the grand jury that white women were treated by Dr. Gosnell while non-white women were treated by unlicensed clinic staff.  Gosnell allowed his patients to self-select their level of sedation.  He allowed his non-white clients to be treated with medical tools that do not appear to have even been rinsed from the prior procedure, much less sterilized.  It is a bit odd to cry racism and seem to practice it yourself in the deadliest manner. 

       I have a case where I defend against the prosecution of a prominent medical doctor and it is truly a witch hunt, devoid of evidence or actual misconduct but driven by a sullied Illinois regulatory body egged on by a yellow journalist-this is not such a case- there is no basis to believe the prosecution of Dr. Gosnell is anything approximating a persecution. 

       The trial of Dr. Gosnell started on March 18, 2013 and what we know from outside that courtroom is based on the grand jury's report and reports of witness testimony.  It is important to keep in mind that the facts related in a grand jury report are alleged facts.  They are unrebutted and constitute testimony that is essentially unexamined by cross.  Though if one were to believe even two of the witnesses, the facts alleged are overwhelming and they are profoundly sad.

       On a personal note, I thought to write this today when I saw the picture of the baby boy named Baby Boy B born alive and killed with a pair of scissors, by severing his spine.  Today is my birthday and I was about 24 weeks old when I was born, weighing no more than two and half pounds.  The doctor told my mother, who nearly died giving birth, to leave me in the hospital because there were no incubators and I would not survive.  Fortunately, my grandfather was a lion of a man and as utterly stubborn as my mother.  He told my mother to snatch me up and they left.  As sick as I became they saw me through two difficult and sleepless years until my immune system developed.  My mother did not sleep much for two years as I was prone to catching every illness but still had an immense desire to survive- a trait that is shared by all forms of life on the planet. 

       My will to live as a premature baby was hardly unique.  This is the one thing we have in common with all other races, people and beings, from puppies to seal cubs.  I have seen it when volunteering at the intensive care premature ward of a hospital while in college.  There in the rows of incubators, weeks before they are supposed to be born are babies in a remarkably democratic state.  Some have daily visitors, some do not ever get a visit and do not get held or picked up other than by the nurses and volunteers.  Even at this early age, the brains of some babies exposed to tactile stimulation and being carried, will develop much faster.  While the volunteers and nurses try to equalize the difference, it is not entirely possible. Some of the babies, who are never held other than by volunteers and nurses were suffering from drug withdrawls because they were born to addicts.  The random inequality of life commences there amongst a crowd of newborns most of whose skin is yet translucent.  It is by no means fair.  When we lose the ability to see this one commonality, the struggle for life, anything becomes possible.

       When we do not care, for the babies in that clinic, or the ones far away and older killed by drones, we are losing our humanity and it is we that are breaking.   Alan Paton's question is one for all time, "What broke in a man when he could bring himself to kill another?"

       It is the lack of empathy that incubates evil in human beings.  What happened in Kermit Gosnell's clinic must matter to anyone of us who has ever had feeling for any other living thing.  The one magical thing about the feeling of unconditional love for another living thing is that if you are able to love that being enough, you will find yourself having empathy and affection for all living things, in whom you may be able to see your beloved.  As grateful as I am for my mother and grandfather, I cannot but think of Baby Boy B today, killed by a pair of scissors that would sever his spine-it is a great and hopeful thing to know that there are many people in the world that would have snatched him from that table at all cost.    Kermit Gosnell's trial deserves much more attention because we cannot be silent and allow this to happen again.

R Tamara de Silva

Proposition 8 at the Supreme Court-Marriage Equality-Part I

March 27, 2013

Proposition 8 at the Supreme Court-Marriage Equality -Part I


By R Tamara de Silva

March 27, 2013


       The Supreme Court has not delved into marriage lightly, tending to defer to state governments.  While marriage is one of the most democratic and universal states shared across almost all cultures, socio-economic strata, ethnicities and religions, it remains withheld to one group in America.  In the United States, marriage is a legal contract that confers specific treatment in tax, probate and property law. This week, the United States Supreme Court begins to consider the constitutionality of marriage between people of the same gender.  The first topic on marriage equality to be covered this week is Proposition 8 followed by the Defense of Marriage Act ("DOMA") on Wednesday.  The Court may potentially decide whether one specific group of people can be treated differently when it comes to one right.  Perhaps it may even consider whether marriage is an unenumerated right.  Alternatively, the Court may defer the issue and rule on narrow grounds of the standing -that the Petitioners cannot bring their defense of Proposition 8 to the Court.     Yesterday, the highest Court heard oral arguments on California's ban on same sex marriages called Proposition 8 in the case of Hollingsworth v. Perry.[1]

       Gay marriage is more polarizing than any other of the other social issues that divide the political right and left except abortion.  In Hollingsworth v. Perry, the Court considers whether California's Proposition 8, which prohibits marriage between people of the same sex or gender, violates the United States Constitution and whether the advocates of Proposition 8 have legal standing to speak on the matter.  

       Prior to November 8, 2008 when Proposition became law by amending the Constitution of the State of California to eliminate the right to same-sex couples to marry, same sex marriage was, albeit briefly, legal in California.  The District Court struck down Proposition 8 finding that it violated the Fourteenth Amendment's Equal Protection Clause because there was no rational basis for the state to deny the status of marriage to same-sex couples and also because Proposition 8 violated the Due Process Clause in that California had no compelling interest in denying the right of marriage to same-sex couples.

       States can legally enact laws, which treat different people differently, under the Fourteenth Amendment so long as there is a legitimate governmental interest or a rational interest for their doing so.   This is not a particularly high standard to meet.  However, when the government enacts measures to treat people differently based upon differences between them like, their race, the courts have applied a higher standard of scrutiny upon the laws, one which is called "heightened scrutiny," this is more than having to merely show a rational interest.  It is unclear under which standard the Court will scrutinize Proposition 8, which is clearly discriminatory to same-sex couples, based upon their being same-sex couples.

       Proposition 8 allows same-sex couples to do pretty much everything the status of being married in California confers such as; raising children together, constructive parentage, being able to adopt each other's children, becoming foster parents, filing joint state taxes, enjoying group health plans, having rights to hospital visitation, making medical decisions, being able to sue for wrongful death, and being conservator on their same-sex partner's estate.  Same sex couples in California can do everything married couples can do under Proposition 8, except be given the title of "married."

       Proponents of Proposition 8 argued that its purposes were to advance California's interest in responsible procreation and childrearing.  They argued that this interest justified giving same-sex couples all the activities and interests of married couples, save for the title and stature of marriage. 

       The Court of Appeals did not rule over whether the goals and rationale for Proposition 8 were legitimate state interests that though discriminatory, survived an analysis of the Fourteenth Amendment because it pointed out that Proposition 8 did not remove all the childrearing rights of same-sex couples that existed prior to its enactment.  The Court of Appeals upheld the District Court's ruling but in an extremely narrow manner-without addressing the rationale for discrimination under Proposition 8.  They did use some interesting language in the background referring back to previous laws against marriage which were struck down,


If tradition alone is insufficient to justify maintaining a prohibition with a discriminatory effect, then it is necessarily insufficient to justify changing the law to revert to a previous state. A preference for the way things were before same-sex couples were allowed to marry, without any identifiable good that a return to the past would produce, amounts to an impermissible preference against same-sex couples themselves, as well as their families.[2]



       The Court of Appeals was referring to the last time the Supreme Court looked at a comparably important and discriminatory law against marriage- almost 46 years ago in Loving v. Virginia.  In the Loving v. Virginia, 388 U.S.1 (1967)., the Supreme Court struck down Virginia's anti-miscegenation law which prohibited inter-racial marriage for the sake of protecting racial purity and preserving segregation.  The trial judge in the Loving case had a simple rationale that invoked God,


Almighty God created the races white, black, yellow, malay and red, and he placed them on separate continents. And but for the interference with his arrangement there would be no cause for such marriages. The fact that he separated the races shows that he did not intend for the races to mix.



       Whether discrimination based on sexual orientation is on a par with discrimination based on race is deeply contested among the American people.  In an extraordinary move, the United States Justice Department has taken a stand in this question and this case, by filing an amicus brief with the Court on February 28, 2013.[3]  

            I have heard both proponents and opponents of same-sex marriage cite the decidedly higher authority, as in Loving.  For example, Cardinal Dolan and many others, who oppose legalizing same-sex marriage cite the unquestionable authority,


"Our country's founding principles speak of rights given by God, not invented by government, and certain noble values - life, home, family, marriage, children, faith - that are protected, not re-defined, by a state presuming omnipotence.


Please, not here!  We cherish true freedom, not as the license to do whatever we want, but the liberty to do what we ought; we acknowledge that not every desire, urge, want, or chic cause is automatically a "right."  And, what about other rights, like that of a child to be raised in a family with a mom and a dad?


Our beliefs should not be viewed as discrimination against homosexual people.  The Church affirms the basic human rights of gay men and women, and the state has rightly changed many laws to offer these men and women hospital visitation rights, bereavement leave, death benefits, insurance benefits, and the like.  This is not about denying rights. It is about upholding a truth about the human condition.  Marriage is not simply a mechanism for delivering benefits:  It is the union of a man and a woman in a loving, permanent, life-giving union to pro-create children.  Please don't vote to change that.  If you do, you are claiming the power to change what is not into what is, simply because you say so.  This is false, it is wrong, and it defies logic and common sense.


Yes, I admit, I come at this as a believer, who, along with other citizens of a diversity of creeds believe that God, not Albany, has settled the definition of marriage a long time ago."[4]



       There are legal weaknesses with Cardinal Dolan's position, or any religious one for that matter- the principal one being that the Church's position on marriage lacks relevance on the laws of the United States or its Constitution.  The Courts and the Legislature are sovereign from the theological realm because America is not like Iran, or other countries, a theocracy. 

       When political groups speak of religion and the Christian roots of America as evidenced by reference to God in the Declaration of Independence for example, they tend almost never to also refer to the suspicion of any established religion by the state that was so deeply held by the Founding Fathers.  For example, the historical and cultural anti-Catholicism of many of the Founding Fathers, whether carried over from the Church of England or not, was profound and pervasive.  Yet what was agreed ab initio about America was that it must never be allowed to be a theocracy where anyone's religious freedom would be curtailed by the joining of the state and a church.

       Speaking of looking back, an interesting exchange took place between the Court's originalist jurist, Justice Antonin Scalia and the former Republican Solicitor General Ted Olsen,

Scalia: "When did it become unconstitutional to exclude homosexual couples from marriage?"   "1791? 1868, when the 14th Amendment was adopted?"

Olsen: "When did it become unconstitutional to prohibit interracial marriage?" Olson asked. "When did it become unconstitutional to assign children to separate schools?"  [Referring to Loving v. Virginia and Brown v. Board of Education].

Scalia: "At the time that the equal protection clause was adopted," he said, before adding, "but don't give me a question to my question."

Olsen: "You've never required that before."


Advantage Ted Olsen.

       From an historical perspective, marriage has been a secular institution; longer than it has been a religious one-with state recognition of marriage going back to Roman times and in other parts of the world preceding the Roman Empire.  The early church in Roman times did not have a marriage rite.  In fact in much of the ancient world, marriage was to secure social and political alliances and for economic purposes as much as for procreation.  In England, until 1753 and the Marriage Act of Lord Hardwicke became law, the Church of England permitted what we would consider very irregular marriages (where one of the parties was a child, one of the parties was already married, or the parents did not know) so long as they were performed by an ordained clergyman of the Church of England.  Your idea of "traditional marriage" may depend quite a bit on the length of your historical memory.

       The Supreme Court hears oral arguments on DOMA latter this morning.  Stay tuned for what may be the most interesting and important ruling of the high court in a very long time.@

R. Tamara de Silva

[2] Perry v. Brown, 671 F.3d 1052, 1101 (9th Cir. 2012)


The President as Executioner

March 6, 2013

The President As Executioner; the Unconstitutionality of Targeted Killings of Americans on American Soil

By R. Tamara de Silva

March 6, 2013


       In the 2004 decision of Hamdi v. Rumsfeld, the Supreme Court of the United States reminded President George W. Bush's administration that, "we are heirs to a tradition given voice over 800 years ago" by the signing of the Magna Carta and the idea insisted upon by the barons to their king, that his power and that of any subsequent executive would be confined to the rule of the law.  America was founded on this one idea above any other-that we are a country ruled by law as opposed to the historical alternative we had determined to get away from-the rule of men, unanswerable to law and capable of wielding power that would never be unchecked and therefore in its application, absolute.  So it was that American began-in a deeply held commitment to avoid tyranny.  A fair part of this stubborn legacy was set aside yesterday by Attorney General Eric Holder in a letter, which was released in answer to Senator Rand Paul's questions about the Administration's nominee for director of the Central Intelligence Agency, John Brennan.[1]  Mr. Holder's letter dated March 4, 2005 stated that while very unlikely, the President, after conferring with him, could kill an American citizen by drone even within the United States if he thought he must.  

       Mr. Holder's letter clarifies the White House's position on the extra-judicial killing of Americans contained in what has come to be called, the Drone Memo.   I have written more extensively about what the Drone Memo means here.  The import of the Drone Memo is that a high ranking official of the Executive Branch can now kill an American if he deems that American a "continuing threat to the country."  No actual evidence prior to killing is deemed necessary by the Drone Memo.  In fact, there need not be an imminent threat to the United States nor even, "clear evidence that a specific attack on U.S. persons and interests will take place in the immediate future."[2]

       What Mr. Holder's letter states is that it is within the sole power of the President to kill Americans on American soil, without providing them a trial, a jury, any due process, notice, or their death justified by the existence of any concrete and articulated standard.  

       This is unconstitutional for many reasons, foremost among which is that the Fourth and Fifth Amendments exist... the seeming unwillingness of Congress to exercise its Constitutionally mandated duty to serve as check on the Executive and prevent Executive overreach, especially when it comes to matters as monumental as taking American lives, is another matter entirely.  The Drone Memo makes it clear that the Executive Branch does not need to have clear evidence of an imminent threat or any evidence of imminent harm to make a targeted killing of an American-this plainly violates the Fourth Amendment's guarantee of protection against unreasonable searches and seizures.  The Fifth Amendment grants upon all Americans the right not to be deprived of life or liberty without due process of law.  No notice of warning is given to an American before they can be killed according to the Drone Memo-again violating the Fifth Amendment's due process clause. 

       Article I, Section 9, Clause 3 of the United States Constitution also prohibits the federal government from passing bills of attainder-this is alternately termed the Bill of Attainder clause.  This was put into the Constitution to prevent the federal government, as had been the practice in common law, from passing a law or act stating that a certain person would be executed because they were deemed by their government to have committed treason.  The founding fathers wanted to ensure that in America, there would never be the equivalent of the English Law of Treason whereby the state or a tyrannous legislature would dispose of a dissenter or critic by declaring them an enemy of the sovereign-without trial or hearing.   There are only two civil liberties that are protected in the Constitution against infringement by the federal government and the state governments, liberty against ex post facto laws and bills of attainder. 

       The United States Supreme Court has viewed the Bill of Attainder clause as an important separation of powers issue-one that prohibits legislative acts that affect the life or property of an American and call for punishment without a judicial trial.[3] James Madison in Federalist No. 44 wrote that, "Bills of attainder, ex post facto laws and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation."


Concocting Executive due process

       Attorney General Eric Holder had set the stage for making an end run around the Constitution last year when he invented, absent even the most gossamer thread of Constitutional authority, something called "Executive Due Process."  On March 5, 2012, he delivered a speech at Northwestern University Law School where he declared that the Constitution's guarantee of due process does not necessarily mean judicial due process (actually it does)-that it now can mean something called Executive due process.  Mr. Holder said that for a President to now deprive an American of life or liberty, that American did not first have to be provided with due process of law, the President just had to check with his Attorney General first.  That checking, according to Mr. Holder, constitutes due process.   

       Unchecked power allows for abuse and in its worst iteration, tyranny.  Getting away from unchecked Executive power was to a large extent, the impetus behind the American experiment. Mr. Holder would have the few bulwarks against pernicious law enforcement and illegal prosecution like trial by law, a jury, the right to counsel, the right to confront witnesses against you all supplanted by two men conferring about another, with no check on whether either of them could be in error or have any reason to be less than objective in deciding whether an American will be killed.  Mr. Holder's reassurances about the use of targeted killings through Executive due process are well intentioned and reassuring but they are not checks and balances against the potential misuse of an extraordinarily terrifying power. 

       Under the Constitution, no authority has ever been given to the Executive Branch to kill an American without due process of law, unchecked, unquestioned and unanswerable to any other branch of government.   Our system of government was intended to be established so that we would never find ourselves having to rely on the good nature of one or two men.  We are heirs to the Magna Carta because we instituted a government of checks and balances designed to guard against overreach by any one branch of government and to preserve the rule of law-not blind faith in a handful of men.  Our system of government was established on far more substantial foundations.  The ability to authorize targeted killings unchecked by any independent overseer, invites an abuse that is counter to our way of government-it is quintessentially, un-American.


Authorization for Use of Military Force

       What is the source of the President's newly stated authority to kill Americans? Congress passed the Authorization for Use of Military Force against Terrorists ("AUMF") in the wake of 9-11.  The AUMF has been invoked as the source of authority for the President to use targeted killings in other nations.  Pursuant to the AUMF, the President is authorized to use "all necessary and proper force" against those "he determines planned, authorized, committed, or aided the terrorist attacks that occurred on September 11, 2001."[4]  What is unclear is how this act provides the President authority to kill Americans suspected of terrorism who have nothing to do with 9-11--a premise of the act itself that circumscribes its application?

       This becomes a critical question because the government's definition of "associated forces" has never been defined.   What is worse, we invite the very possibility for abuse, which the Constitution's Bill of Attainder clause was designed to prevent--a shifting definition of terrorism.   This does not seem an impossible scenario if you consider a study funded by the Department of Homeland Security entitled, "Hot Spots of Terrorism and Other Crimes in the United States, 1970-2008," which found that terrorists were people, "reverent of individual liberty...suspicious of centralized federal authority or anti-government."[5]  This definition would include so many engaging people I know and respect specifically for their outspoken views on politics and their government.



       Article II Section II of the Constitution names the President as Commander-in-Chief of the armed forces.  This section vests the Office of the President with powers over the military that are to be shared with Congress-the degree of sharing has historically varied with Congress latterly taking a turn for the lackadaisical.  In the case of Al-Aulaqi v. Panetta, civil rights groups including the ACLU, filed suit against the government for the killings of United States citizens Al-Aulaqi, Samir Khan and the 16-year-old Abdulrahman Al-Aulaqi who were killed under President Obama's program of targeted killings in Yemen.[6]  In their briefings, the government stated that its authority to kill Americans abroad stemmed from the AUMF and more broadly, the President's war powers under Article II Section II.

       In their analysis, the government pointed out that the Supreme Court has permitted the use of lethal force in domestic law enforcement settings where a suspect poses a serious threat of physical injury to police officers.   The problems with using the law enforcement model for killings by drone in Yemen are numerous but I do not have to cover them because in the Drone Memo released on February 5, 2013, the Department of Justice stated that it found the President able to kill Americans even if there was no imminent threat of harm posed to the United States or evidence of a prospective harm.

       Why not simply send the Judiciary packing now?  Admittedly their inscrutability, when at times so much seems to rest on them-is likely irksome.  According to Mr. Holder that other branch does not have a say in the matter of targeted killings anyhow.  But before you toss your copy of the Constitution with the debris of the spring's cleaning, take heart-  I doubt these newfound and self-granted extra-Constitutional powers will survive judicial review.  And last I checked, no executive order had been directed at Marbury v. Madison.

       The Supreme Court made it clear to the Bush administration in Hamdi v. Rumsfeld that the War on Terror did not give the Executive Branch a blank check to violate the separation of powers doctrine or due process, "We have long since made clear that a state of war is not a blank check for the President when it comes to the rights of the Nation's citizens."[7]   It is simply not as simple as Mr. Holder's letter or memo would suggest.@

R. Tamara de Silva

March 6, 2013

[3] See Fletcher v. Peck (1810), United States v. Brown (1965) and Marbury v. Madison (1803)

[4] Authorization for Use of Military Force, Pub. L. No. 107-40, 115 Stat. 224 (2001) (codified at 50 U.S.C. § 1541 note (2006))



[7] Hamdi v. Rumsfeld, 542 U.S. 507, 5


Senator Rand Paul holds a filibuster against John Brennan on Senate floor.  While he will not ultimately prevail, he remains committed to principle that the Constitution prohibits the President from assassinating Americans on American soil without any due process of law.

Sen. Paul speaking on Senate floor

What the Department of Justice's Drone Memo Means

February 7, 2013


What the Drone Memo Means

By R. Tamara de Silva

February 7, 2013


[W]e are heirs to a tradition given voice 800 years ago by Magna Carta, which, on the barons' insistence, confined executive power by "the law of the land."  Justice Souter and Justice Ginsburg, Hamdi v. Rumsfeld 542 U.S. 507 (2004)


       On February 5, 2013, a Department of Justice memo ("Drone Memo") was released to NBC justifying the President's killing of Americans by lethal force, such as by drones.[1]  The targeted killing of Americans as justified in this memo gives the Executive Branch a power over American lives that is at once unprecedented and terrifying in scope.   The idea of a government unilaterally assassinating its citizenry is fundamentally at war with America's Constitutional legacy, which was established with separate and equal branches of power specifically to limit the possibility of an abuse of government power or outright tyranny.  The issues presented in the memo have Constitutional implications that cease due process rights based upon what may be unsubstantiated accusations and go against traditions of justice dating back to the Magna Carta.  Americans need to understand what is at stake.  The Drone Memo justifies the assassination of Americans by the Executive Branch based on the equating of terror (a term and concept that is not defined in the memo) with war and making Americans into enemy combatants without any due process of legal proceedings for actions and associations that are similarly ill-defined.  This memo does outline an enlargement of Executive power over due process that is without historical precedent in American history.  It bears note, that the Drone Memo asserts for the first time in American history, the power of a President to assassinate Americans, unchecked and unanswerable to anyone, including the Judiciary and the Legislature.

       The legitimacy of a government that would kill its citizenry has been portrayed and accepted by many Americans as merely a political issue the idea being-if our guy is doing it, we must stand by him because after all he's not the other party's guy.  After all, the same people who once complained bitterly about renditions and enhanced interrogation techniques have no objection to mass killings by unmaned drones-with civilian and child casualties in the hundreds.  But this is not a political issue and looking at it in simplistic tribal terms will prevent the public from understanding its import to them.  It may be an unwritten rule to fall in line behind your party's line, but this is one instance worthy of exception.  According to a senior legal official in President George W. Bush's administration, no other President of any political stripe has ever before authorized the targeted killing of Americans.[2]  The import of this memo, on the heels of the Patriot Act, and the NDAA's striving for a permanent suspension of habeas corpus, among other recent laws, is nothing less than the crossing of a legal Rubicon that would now permanently allow for the suspension of the due process of law.  At a minimum, this memo strips Americans of the protections of Fifth Amendment and in so doing, alters what it means to be an American.  This administration's authorization to use deadly force upon Americans without any legal safeguard of due process has a legal and moral significance that is difficult to comprehend or quite honestly, believe.

       Never before have an American president and his Attorney General openly stated that the Executive Branch can bypass Due Process of law to kill an American-if they (solely at their discretion), think they have a good enough reason because they have invented something called, "Executive Due Process."  It is the Executive Branch, boldly asserting an absolute power to suspend a significant portion of the Bill or Rights, unchecked by any other branch of government and unfettered in the scope or protocols used in the exercise of this new power.

       It is not as I write this that I do not understand first principles.  A nation must exist before it can provide its citizens any rights, liberties or anything.  A nation must also be allowed broad latitude to protect its citizens.  Security was a large part of the bargain described by Hobbes for leaving a state of nature and war to enter into a social contract.  It is the function of the Executive Branch to protect the security of Americans.  Terrorism remains a tremendous threat and after two wars in Iraq and Afghanistan, it would be naïve to think that the sentiments behind terror groups like Al-Qaeda have diminished because of our war on terror-there is evidence to suggest the opposite case. 

       As the late Allan Bloom often remarked, the first principle of any nation state was no different from that of any individual's-it is and must always be, self-preservation.  With this understood, most Americans have accepted an implicit tradeoff and the loss of some civil liberties and privacy for the sake of national security.   However, what the Drone Memo does is give away two entire Amendments and the bedrock of the freedoms that are uniquely American.  It is as if Americans have become so cowered of terrorists after 9/11 that we would as a country surrender the soul of America and its most deeply held values for the promise of a hope of a bit more security.  

        But in giving absolute authority to kill an American to any one man, President, CIA director or intelligence officer, unfettered by the United States Constitution's prohibition of such, we are making America into a country of rule by the men who would wield this power-no longer is it a country of rule by law.  We cannot just rest on knowing we are protected by a Bill of Rights- we now have to hope for the good characters of those we elect because we have surrendered the laws that would have kept their power over our freedom in check.   In America, the protections of the Bill of Rights were never to be handed over to an elected official with whom we were told to just "trust" them.  This is not America- nor is it consistent with the historical point of the American experiment in the first place.

       In fact, the United States Supreme Court in Hamdi v. Rumsfeld ruled that we are not required to "just trust" the government in matters of indefinite detention either.  The Court in Hamdi reiterated the principle that the Executive Branch cannot detain an American citizen without some form of due process.[3]   Hamdi was a United States citizen arrested in Afghanistan and taken into the custody of a military prison in Virginia.  From there he filed a petition for habeas corpus that ended up in the Court, which ruled that Mr. Hamdi did have a right as an American to be heard before an impartial judge.  President George W. Bush's administration had argued that Mr. Hamdi had no rights as an enemy combatant and that it could dispense with Hamdi as they saw fit.

       Ironically, it is the decision in Hamdi on which much of the Drone Memo relies.  This is a spectacle of legal gymnastics whose logic is ephemeral.  The Obama Administration's lawyers try to make the case that Hamdi is distinguishable because he was detained-that it was feasible to detain him.  The Drone Memo asserts a right to kill an American if he cannot feasibly be detained, because he cannot feasibly be detained.  They are wrong.  If the Supreme Court believes an American has the right to appear before an impartial fact-finder before being deprived of his liberty, then that American should at least have that right before being deprived of his life. 

       The Fifth Amendment guarantees on all Americans the right to due process of law before the taking of life or liberty.  The taking of an American's life by the government legally, as common-sensically, demands a higher level of due process than being imprisoned or detained--not less. Does the separation of powers doctrine require federal courts to defer to Executive Branch determinations that an American citizen is an "enemy combatant"?   Not according to the Court in Hamdi,


Finally, even if history had spared us the cautionary example of the internments in World War II, even if there had been no Korematsu,  there would be a compelling reason to read §4001(a) to demand manifest authority to detain before detention is authorized. The defining character of American constitutional government is its constant tension between security and liberty, serving both by partial helpings of each. In a government of separated powers, deciding finally on what is a reasonable degree of guaranteed liberty whether in peace or war (or some condition in between) is not well entrusted to the Executive Branch of Government, whose particular responsibility is to maintain security. For reasons of inescapable human nature, the branch of the Government asked to counter a serious threat is not the branch on which to rest the Nation's entire reliance in striking the balance between the will to win and the cost in liberty on the way to victory; the responsibility for security will naturally amplify the claim that security legitimately raises. A reasonable balance is more likely to be reached on the judgment of a different branch, just as Madison said in remarking that "the constant aim is to divide and arrange the several offices in such a manner as that each may be a check on the other-that the private interest of every individual may be a sentinel over the public rights." Hence the need for an assessment by Congress before citizens are subject to lockup, and likewise the need for a clearly expressed congressional resolution of the competing claims.[4]



       Societies have normative values and also ones that are pre-textual--designed to mask far baser values.  Historically, one nation that has effectively used the pretext of danger to the state to imprison all who would criticize it is the Soviet Union.  All societies have normative values and at times some of them are pretextual-designed to mask much baser values.  Security was a value with which the Soviet system used to hide the interests of its leaders from Nikita Khrushchev to Vladimir Putin.  A pretextual interest in security is used to control not only an entire population but also its public opinion.  Vladimir Putin has his own record of repressive psychiatry and the imprisonment of anyone whose only crime appears to be the insult of his vanity.

       America was established to guard against the assertion of pretextual values on the people by any one branch of government.  The American system of government has several ingenuous structural safeguards such as having three branches of government where each is in theory at least powerful enough to keep the other in check.  In writing down what rights a people had and suggesting the existence of many others, unenumerated like the right to privacy or to travel-America's founders established a system of rule by law and not men.  If for example a tyrant came into power, his power would be curtailed at the boundaries of the rights retained by the people, subject of course to Constitutional amendment, within the Constitution and specifically, the Bill of Rights.  In theory, as long as you could freely associate and assemble and speak, and your life and liberty were still protected by due process of law, there would be very real checks on the harm to be caused by any one elected official with pretextual values.  It is specifically because of our legal system and Constitution that we have, within our own borders, enjoyed being the freest people in the world.  The greatness of America and its attraction to so many immigrants has in large part always been its core values, tracing back to the Magna Carta, of human dignity, freedom of expression and individual liberty.

       America was the birthplace of sedition.  Born out of the fury and ideals of those who were then considered religious kooks, fanatics, terrorists and worse.  Not surprisingly, we became a nation, the envy of the world, where unlike everywhere else, you could say anything and not be locked up as a political prisoner because you have annoyed someone in elected office.  The First Amendment protects your speech and the Fifth Amendment guarantees that your life and liberty cannot be dispensed with just on the whim of someone in power.

       Due process of law is the most American of all civil liberties-it is nothing less in the American law to civil liberty than everything.  It is only because of the Fifth Amendment that you have a presumption of innocence.  Governments mean well and are filled with honorable prosecutors who care deeply about civil liberties.  However, they also make mistakes.  We have jailed people for decades only to find them exonerated by DNA evidence-we have even made erroneous executions.  If the justice system, with all the protections of due process intact can make mistakes, what can one man or two do without any check on their judgment and without affording the alleged target, any due process or notice whatsoever?  Is it possible that the Executive Branch can err in declaring someone an enemy combatant?  Why are its determinations unchecked by any other branch of government, as the Drone Memo would have them be?  Is this not in itself for such an enormous power claimed, so obviously at odds with the principle of a separation of powers? 

       Targeted killings of non-Americans have proven themselves to hit wide of their marks.  CIA Director, John O. Brennan once stated that there were no civilian casualties in drone strikes and then admitted that there were casualties but then stated that they were "exceedingly rare."  Many independent sources confirm over 3,000 militants and civilians have been killed by drones. Drone strikes have killed over 176 children in one country alone and unless this was the Administration's intention, how can it be argued that drone strikes do not make mistakes?  

       The Drone Memo also uses terms like "associated forces" and "imminent threat" that are nowhere defined and capable of shifting interpretation depending on who is using them and to fit what purpose.   What constitutes being an associated force?  Is intention required, or mens rea required or is this a crime that can be stumbled into?  For example, if an American is a social acquaintance of someone who looks at a website that is later considered to offer, "material support" (again a term undefined) by expressing opinions, does that American become an associated force of the offending American?  Are his family also in danger?  If they can be killed without any due process, these questions will never be answered.

       What about the shifting definitions of terrorism?  Is it that difficult to envision the power to kill Americans without due process being abused?  If you think so, then you may not be aware of whom the Department of Homeland Security considers a likely terrorist.

       In a study by the National Consortium for the Study of Terrorism and Responses to Terrorism entitled, "Hot Spots of Terrorism and Other Crimes in the United States, 1970-2008," which was funded by the Department of Homeland Security, terrorists are likely people, "reverent of individual liberty...suspicious of centralized federal authority or anti-government," including people who are extremely liberal or extremely conservative.  What about people who belong to the NRA or are against gun control-at what point do their convictions constitute a resistance that is deemed intolerable to their government?[5] 

       The Drone Memo asserts that questions about definitions like enemy combatants and imminent harm are the exclusive province of the Executive Branch, that they are not legal matters and hence not subject to judicial review of the courts.  The Supreme Court made it abundantly clear in Hamdi that the Executive Branch, despite the exigencies of the War on Terror, did not have a blank supra-Constitutional check, nor did get to violate the separation of powers,


In sum, while the full protections that accompany challenges to detentions in other settings may prove unworkable and inappropriate in the enemy-combatant setting, the threats to military operations posed by a basic system of independent review are not so weighty as to trump a citizen's core rights to challenge meaningfully the Government's case and to be heard by an impartial adjudicator.

    In so holding, we necessarily reject the Government's assertion that separation of powers principles mandate a heavily circumscribed role for the courts in such circumstances. Indeed, the position that the courts must forgo any examination of the individual case and focus exclusively on the legality of the broader detention scheme cannot be mandated by any reasonable view of separation of powers, as this approach serves only to condense power into a single branch of government. We have long since made clear that a state of war is not a blank check for the President when it comes to the rights of the Nation's citizens. Youngstown Sheet & Tube. Whatever power the United States Constitution envisions for the Executive in its exchanges with other nations or with enemy organizations in times of conflict, it most assuredly envisions a role for all three branches when individual liberties are at stake.....

    Because we conclude that due process demands some system for a citizen detainee to refute his classification, the proposed "some evidence" standard is inadequate. Any process in which the Executive's factual assertions go wholly unchallenged or are simply presumed correct without any opportunity for the alleged combatant to demonstrate otherwise falls constitutionally short.....[6] 


       The targeted killing of Americans poses an unprecedented threat to due process.   Fortunately, I am convinced the arguments advanced in the Drone Memo would not pass Constitutional muster with the same Supreme Court that ruled in Hamdi.  But it has to get there and if it does not, Congress and the American people must act.  Congress should clarify what this memo means and identify the protocols in which it will be used with enough specificity so that the awesome power it assumes is not abused-and it is at least checked. The argument advanced in the Drone Memo is that the government should be taken at its word that it will be rigorous about identifying terror targets, which are American.  This is not a legally sufficient basis for eliminating due process for American citizens because the Executive Branch is not unbiased and as such it cannot be expected to be an impartial check on itself.  We were established as a nation of laws and not of men.  There is ample historical precedent against trusting any one branch of government or ruler with absolute power to take the lives of its citizenry-by the way, America was established in part to avoid the type of government in which such a power would be exerted unchecked upon its citizenry- remember?@

R. Tamara de Silva

February 7, 2013


[3] Hamdi v. Rumsfeld, 542 U.S. 507, 521

[4] Id., Justice Souter and Justice Ginsberg opinion


[6] Hamdi v. Rumsfeld, 542 U.S. 507, 52-

United States v. Standard & Poor's

February 5, 2013



United States v. Standard & Poor's

By R Tamara de Silva

January 5, 2013

       The Department of Justice filed a civil lawsuit yesterday against one of the of big three credit ratings agencies, Standard & Poor's ("S&P") and its parent company, McGraw-Hill, Inc.[1]  The suit alleges that S&P deliberately gave its coveted triple-A ratings to sub-prime debt in order to win fees.  The suit does not address the structural conflicts of interest within the three credit ratings agencies that are Nationally Recognized Statistical Rating Organizations ("NSRO"), nor will it address or cure any of the underlying causes of the credit crisis.  While there are problems with the credit rating agency business model, it will be difficult to prove that S&P knew any more than even the audit committees of the investment firms on whom it relied, or the issuers of debt instruments themselves.  The suit will of course result in the levy of a fine.  But while S&P's hands may not be entirely unsullied- far more importantly to the untrained public eye, they are as good a scapegoat as any other.

       S&P is a credit rating agency whose business is to provide credit ratings represented by letters from triple-A to D, in exchange for fees.  Federal laws require that certain institutions only hold investments that have a credit rating of "investment grade," but most of the financial world relies on credit ratings agencies to weigh and measure risk, risk defined in terms of the credit worthiness of investments and institutions.    S&P is the largest of three credit ratings agencies that is recognized by the Securities and Exchange Commission ("SEC") as an NSRO.   From 2004 towards the end of 2008, S&P assigned credit ratings on nearly $4 trillion of debt instruments.  In terms of sheer size and credibility, despite this suit and skepticism of the NSROs particularly in Europe, the world has no credible alternative to credit ratings agencies and specifically nothing to replace, Standard & Poors.

       Keep in mind that almost five years after the worst financial crisis in United States history, the Department of Justice has yet to criminally charge a single culpable senior executive or firm.  If history is any guide, the Justice Department will reach a civil settlement with S&P wherein the firm will agree, without admitting any wrongdoing, to pay a fine that in relative terms, will have as large a fiscal impact on S&P as the cost of one month's dry kibble would have to the owners of the Grumpy Cat.  The suit asks for a fine in excess of $1 billion but these will typically be negotiated down and the government has not latterly demonstrated a willingness to go to trial with these suits.  Like so many Wall Street settlements reached over the past ten years, the cost of the settlement fine imposed will ultimately be a pittance relative to the quarterly earnings of the offending firm-S&P is not likely to become the first exception to this rule.

       There in the gilded annals of academic and economic theory yet remains the tidy axiom that markets are self-correcting.  It is thought that market forces of supply and demand will drive out weaker competitors and bring in new ones through their own determinative natural selection.  It is not necessarily so.  Yet this assumption is an inescapable cliché of economic theory now unfortunately embedded into political discourse.  This axiom ignores the asymmetrical political and economic power of some market participants relative to others, and the use of regulation to give some participants a structural competitive advantage over others.  Self-correcting economic behavior occurs famously in the instance of market bubbles like tulip manias, Internet stocks and real estate bubbles, all of which eventually burst.   However, none of this bursting applies to credit ratings agencies. 

       Credit ratings agencies are often wrong, have been wrong and will not, even under Dodd-Frank, need to be correct, much less try harder to do so, or for that matter make any effort towards attempting to.   All three credit ratings agencies adjusted their triple-A ratings of debt instruments to less than investment grade at virtually the same time the rest of the world figured out there was a problem with them.  In their defense, S&P points out that credit ratings are, "forward-looking opinions about credit risk. Standard & Poor's credit ratings express the agency's opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time." [2]  The problem is that by the time the credit ratings agencies, self-correct, their statements are no longer forward looking or even present looking but much more akin to being told how a movie ends a few months after you have seen it.

       Not that long ago, collateralized debt obligations were repackaged during the credit bubble into investment pools and other mortgage backed securities and collectively adorned with the gold standard of financial ratings, the coveted AAA ratings of the largest credit ratings agencies, Fitch, S&P and Moody's.   The credit ratings agencies gave their coveted and in theory elusive triple-A rating to investments that were anything but credit worthy or in the best case, possessed of a very mixed credit pedigree.  The agencies' bestowal of triple-A ratings to companies and investment vehicles that were junk and later discovered to be junk, caused losses in the billions and trillions of dollars to everyone who relied on their ratings--essentially everyone.

       The role of the credit ratings agencies, was present from Goldman Sachs' knowingly selling instruments it bet against in Abacus to Citigroup's selling of investments it also bet against-all these transactions of a seemingly knowing fraud were adorned with triple-A ratings.  Triple-A ratings played an essential role in the credit crisis- enough to make them arguably the largest "but-for" causal culprit of the financial crisis.  "But for" the credit ratings agencies bestowal of triple-A ratings on sub-prime debt investments, the credit crisis would not have occurred.   But the financial world does not operate as simply as the liability model used by personal injury lawyers to make someone pay for car accidents or anything resulting in a personal injury.  The financial world is incomparably more complex and the causes of the financial crisis are many.

       In a larger sense, the credit ratings agencies cannot help it.  The fault lies with their business model and that having no competition, they really can be wrong in the largest possible way and not be "wrong" in the conventional sense. 

       The big three credit ratings agencies are bestowed with a monopoly by the government and if the world did not like the big three credit ratings agencies, it would find (with the exception of a few marginal players) that it had precisely nowhere else to go.  Put another away, even after having the SEC accuse them of consumer fraud, and being about as wrong as they can be, the big three credit ratings agencies still rate 96% of the world's bonds.  Sort of as Henry Ford was reputed to have said about offering customers the choice of a new model T in "any color so long as its black."

       What is more, their business model makes the ratings agencies operate within a closed conflict of interest loop.  The credit ratings agencies are paid by the issuers (who are also their clients) of the securities they were supposed to evaluate-this creates a conflict of interest.

       But the government, or specifically the SEC knew of the conflicts of interest within the credit rating agency business model and approved of them.  In June 2007, the SEC acknowledged that there might be a real problem having the referee in a match being paid by one of the sides-not the investors or the public's side either.   The SEC asked S&P for documentation of how S&P handled conflicts of interests and after several months of scrutiny, approved of S&P as a NSRO--again, after having vetted the inherent conflicts of interest within S&P's business model. 

       The ratings agencies have lobbying power in Washington and every interest in protecting their triopoly, which remains, even after the Credit Crisis and the implementation of Dodd-Frank, wholly unscathed.  But really, in the absence of any alternative and near total dependency, the world has an interest in S&P too.

       The most persuasive mitigating factor against charging the S&P or any of the credit ratings agencies with fraud is that they themselves relied on the internal audit committees of their clients/issuers.  The credit ratings agencies relied on the audit committees of their issuer clients, which committees had signed off and attested to the S&P and the other credit ratings agencies about the value and risk profiles of the investments for which they sought ratings.  Ultimately, unless corporate boards are compromised of crony Chia pets distinctly and wholly incapable of bearing any liability or culpability (a very real possibility upon even a cursory scrutiny- and another discussion for another time), they ought to bear the responsibility for misleading the credit ratings agencies, or simply not knowing what they were doing.

       Either the investment banks' audit committees were not qualified to pass on these investments or the credit ratings agencies were not.  What now seems obvious is that both the credit ratings agencies and the audit committees were not sophisticated enough to understand the investment products they were charged with scrutinizing.  They approved of them anyway.  

       The credit ratings agencies could not give accurate ratings of many of the instruments involved in the housing bubble and credit crisis because of the complexity of the transactions involved and their inability to understand what they were analyzing.  Not knowing what they were doing makes them at least guilty, if they were regular market participants, (which they are not) of criminal fraud.   They may have culpability because they perpetuated a fraud on the marketplace by accepting money and using their position of trust, as a government sanctioned arbiter or investments, to pretend to pass on investments when in reality they did not know what they were examining or did and had a financial incentive to lie.  One thing is certain, were the credit ratings agencies like any number of the two-bit individuals the Department of Justice and SEC have prosecuted, one could say that the prosecution of fraud is not disproportionately tilted towards the smallest financial participants, or at least squarely away from the largest ones.

       In theory, the credit ratings agencies exist to level asymmetries of information.  They are also supposed to evaluate risk.   Unfortunately, the credit ratings agencies have conflicts of interests and they evaluate financial products (like collateralized debt obligations) that they do not understand.  They were far from alone in not understanding the debt instruments presented to them.  In 2007, even Ben Bernanke thought the risk of sub-prime debt was contained.  The ratings agencies, like most of Wall Street during financial crises seemed to lack fixed ways to measure absolute risk, and as a result during financial crises, when you would most want risk models to work, they too prove catastrophically wrong.  Moreover, as much as Wall Street was wrong in assessing its risk, so was the government and many of Wall Street's largest institutions-so why merely pick on S&P?  Unlike all of the players on Wall Street however, the credit ratings agencies are still the only game in town.  The Department of Justice's civil suit will do nothing to change this.@

R Tamara de Silva

Chicago, Illinois


A Tale of Two Classes of Defendant and Lanny Breuer

January 28, 2013

A Tale of Two Classes of Defendant and Lanny Breuer

By R Tamara de Silva

January 28, 2013


"swaying power such as has never in the world's history been trusted in the hands of mere private citizens,...after having created a system of quiet but irresistible corruption-will ultimately succeed in directing government itself.  Under the American form of society, there is now no authority capable of effective resistance." 

Henry Adams writing about the corruption of the Erie Railroad for the Westminster Review in 1870, he described corporate influence growing to the point of being uncheckable with political parties that would sacrifice principle for accommodation.


       Last week, the Head of the Department of Justice's Criminal Division, Lanny Breuer, announced his resignation.  His resignation is remarkable only in so far that it draws attention to the enormity of what he would not do.  Under Breuer's watch, leaving aside some high profile and related insider trading prosecutions, not one senior Wall Street executive was prosecuted or even charged (by some accounts- not even investigated) with anything having to do with the worst financial crisis in American history-a crisis that resulted in a bailout of Wall Street banks and the financial sector at a cost to American taxpayers of between $43.32-$59.75 billion.[1]  A day before Lanny Breuer's resignation, PBS' Frontline aired an investigation about the failure of the Justice Department to prosecute a single senior banker involved in the mortgage crisis called, "The Untouchables."  During this same time that the Department of Justice refused to go after a single head of a Wall Street firm, they took a particularly hard line on a torture whistleblower (not the torturers), and many financial criminals responsible for not the billions caused by elite Wall Street firms but between thousands to hundreds of thousands like elderly couples for possible pension fraud, an appraiser in Florida, individuals who committed bank fraud by lying on mortgage applications and other criminals like pot smokers and Aaron Swartz.  It is not that I condone wrong-doing, only a record of selective prosecution on steroids.  Lanny Breuer's Justice Department exposed its full fury to the chubs of the criminal justice systems while systematically saving the titans and whales.


Prosecutorial Discretion and Sympathy for the Titan

       One of the reasons, Lanny Breuer gave for the non-prosecution of a senior Wall Street executive is sympathy for employees and shareholders.  In his interview with Martin Smith of Frontline, Mr. Breuer repeated a specific if selective, empathy, wholly at odds with the charge he had been given by Senator Kaufman to investigate and hold to account all those responsible for the financial crisis.[2]   This selective empathy is also wholly at odds with the unbiased way in which most of us naively think justice is administered and prosecutions are sought.  By the way, after this interview aired, Martin Smith states that he was called by the Justice Department and told that they would never cooperate with PBS again.[3] 

       In September of last year, Mr. Breuer admitted his particular empathy towards the plight of the largest of Wall Street banks when he addressed the New York Bar Association and said,

In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects.  Sometimes - though, let me stress, not always - these presentations are compelling.  In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct.  I personally feel that it's my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation.  In large multi-national companies, the jobs of tens of thousands of employees can be at stake.  And, in some cases, the health of an industry or the markets are a real factor.  Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement. 

When the only tool we had to use in cases of corporate misconduct was a criminal indictment, prosecutors sometimes had to use a sledgehammer to crack a nut.[4]



       It is odd that this same Justice Department did not take sympathy into account in demanding that Aaron Swartz serve 35 years or for that matter, the plight of all smaller defendants.  The omnibus catchall Computer Fraud and Abuse Act ("CFAA") could make criminals of many of us because it seeks to criminalize the use of a computer without authorization but no where defines what "authorization" means. 

       When the government freezes a defendant's assets or seizes property even before a filing of charges making it impossible for them to pay for a decent lawyer (assuming they can even afford one), does it really care how the defendant (before being proven guilty) manages to eat or live in the interim of years it can take from investigation to sentencing? 

       Where was the sympathy for Senator Ted Stevens?  Was it anything but a sheer lack of empathy that led to the career-ending prosecution of a six term Senator and the deliberate withholding of exculpatory evidence in his case?  What about the many cases where defendants are exonerated by physical evidence that the prosecution possessed but did not reveal at the time?  Where is the sympathy for the years or decades of a life that are lost because exculpatory evidence is not released or DNA evidence kits are not processed?  Or is the empathy that Lanny Breuer refers to, as selectively held as its application under Lanny Breuer's tenor suggests?


Conflicts of Money

       Money influences prosecutions.  Consider the tale of two men performing the identical act in the criminal law Jon Corzine and Russell Wasenfdorf, Sr.  Corzine was one of President Obama's elite bundlers in 2011 and 2012.  He campaigned heavily for the President as governor of New Jersey, and held private fundraisers for President Obama in his home even after MF Global went bankrupt and $1.6 billion of customer funds went missing in October 2011.  The Justice Department announced that they would not prosecute him.

       It was discovered in June 2012 that Peregrine Financial Group CEO, Russell Wasendorf Sr., like Corzine at MF Global, had tapped into customer segregated funds to the tune of $215 million.  Russell Wasendorf Sr was arrested and criminally charged later same that month.   Same act-missing customer funds that were by law not to touched-but a far disparate prosecution.[5] 

       Under Lanny Breuer, the Justice Department announced it would not go after Goldman Sachs. Goldman Sachs' employees were the second largest single contributor to President Obama in 2008 contributing $1,013,091.[6] Goldman Sachs is also one of the largest clients of Mr. Eric Holder's lawyer firm Covington & Burling.

       Speaking of Covington & Burling, Lanny Breuer worked at Covington along with Attorney General Eric Holder.  Their firm's largest clients were many of the Wall Street banks that were involved in the securitization of mortgage debt that contributed to the financial crisis.

       According to Reuters, Attorney General Holder and Lanny Breuer were expected to recuse themselves (a functional impossibility) under federal conflict of interest laws from Department of Justice decisions related to many of Wall Street's largest banks.  Of course they have not admitted to doing so in any instance of which I am aware.[7] 


Abacus and Such

       Goldman's Abacus scheme would fit into the most selective definitions of fraud. Goldman invented Abacus, according to an SEC civil complaint and an investor, to fail so that one of its largest hedge fund clients, Paulson & Co, could short it.[8]  In the meantime, Goldman sold Abacus bonds to many other investors all the while allowing Goldman to take in large investment banking fees from the sale and from the purchase. The problem is, the investors were not aware that Goldman's largest hedge fund client along with Goldman Sachs was betting against them and that as such Goldman Sachs may have a conflict of interest in designing what went into Abacus.  Goldman claimed that somewhere within all the disclosure statements was a reference to all this.   The Department of Justice announced it would not seek any criminal fraud charges against Goldman.  Goldman Sachs settled the civil suit for $550 million, which is not a lot for a company that earns billions of dollars per quarter.

       On November 28, 2011, Judge Jed S. Rakoff rejected what would have been the sixth civil settlement agreement between Citigroup Global Markets Inc. and the SEC since 2003 for $285 million.  Citigroup had sold $1 billion in mortgage-bonds through a vehicle called Class V Funding III, without disclosing that it was betting against $500 million of those assets-in essence offering something to its customers and not disclosing that it would be betting against its customers.  The Department of Justice was not about to seek criminal fraud charges against Citigroup either.

       Civil settlements between the SEC and other parties are alternatively called consent decrees and they are a far cry from criminal prosecution. Nor do they deter misconduct because no admission of wrong-doing is required and the fines are pin money to the banks. 

       It is in the public's interest to prevent fraud upon the market and to prevent the type of financial engineering solely for the sake of fees that can lead to catastrophic losses ultimately borne by society as a whole.  The type of hyperleveraged machinations, not understood by the banks themselves that wind up privatizing profit and publicizing loss. The problem with selective prosecution of financial crime or any crime, is that it undermines the very idea of justice, whose force and majesty lie in its fair and unbiased application.  When the Executive branch's justice department seeks fines from banks which fees are so small as to be written off as a rational and good cost of doing business, while simultaneously pursuing prosecutions against smaller parties and the comparatively disenfranchised, it is no longer dealing out justice.  It is selectively doling out punishments to those not in its favor.@

R. Tamara de Silva

Prosecutorial Discretion, Cambyses and Aaron Swartz

January 15, 2013


Prosecutorial Discretion, Cambyses and Aaron Swartz

By R Tamara de Silva

January 15, 2013


The Optimist thinks this is the best of all worlds.  The pessimist fears it is true

J. Robert Oppenheimer


       The prosecutor of the late Aaron Swartz and Sisamnes have something to tell us about the purpose of those who have the awesome task of administering justice. The power of the prosecutor in modern times is absolute and as such unlike in the case of King Cambyses and judge Sisamnes, unchecked when it is abused.   All the more reason to ask at these times, what is the purpose of prosecution?  Is prosecution in all instances moral?  And is prosecution the same as justice?  In answer to the latter, in the case of Aaron Swartz, the answer is resoundingly in the negative.  The prosecution of Aaron Swartz may have followed the letter of the law and fit an omnibus catchall federal charge like wire-fraud, but it makes mincemeat out of Justice.  Aaron Swartz's prosecution also highlights some of the many problems with our criminal justice system.

       One of the more memorable stories in the fifth book of Herodotus' Histories takes place in the sixth century BC and it tells the fate of judge Sisamnes.  The Persian King Cambyses discovered that Sisamnes had diverted justice and rendered a verdict in a case based upon his acceptance of a bribe.  King Cambyses understood the majesty and power of justice and his retribution for Sisamnes' abuse of it is unforgettable in its brutality.  King Cambyses had Sisamnes stripped of his flesh, while alive and used the strips of flesh to upholster the court's judge's chair.  But Cambyses' retribution for the abuse of justice did not end there for he made Sisamnes' son Otanes sit on the grisly judge's chair as he was made the replacement justice with the lesson that he must always remember his father's fate when administering justice.

       There is no King Cambysis to check the power of the Executive Branch's Department of Justice. The criminal law and the office of the prosecutor was originally meant to punish actual wrongdoing that would harm society and in so doing deter conduct, intentionally and severely harmful to civil society- like murder, theft, burglary, treason.  The Executive Branch and its Department of Justice is given wide latitude and immunity to bring about justice.

       Prosecutors have an immense amount of power-nothing less than the full force and power of the federal government and all its resources.  The power of the prosecutor to charge and the power to offer plea bargain sets the course of justice in America.  Most people indicted by federal prosecutors are convicted and most take plea bargains.   But it is not a fair fight, not even if you can afford the best lawyers money can buy because after all, a federal prosecutor has a theoretically unlimited budget.

       Most people who take plea bargains are poor and contrary to what those ignorant of the legal system would more comfortably believe, they are not necessarily guilty.   Prosecutors use varying degrees of coercion and intimidation in the process of plea bargains.  They can threaten to increase the counts in an indictment, demand higher sentences, or as in the Giuliani's prosecution of Michael Milken, intimidate Milken's 92 year old grandmother, threaten to indict your spouse, keep you locked up before trial, and add obstruction of justice if your defense is anything other than continual and literal silence by invocation of the Fifth Amendment.  We have come along way from Torquemada and yet if you look closely enough, not exactly far enough.

       Aaron Swartz took his life on Friday January 11, 2013.  In the fall of 2011, his lawyer had tried to work out a plea bargain with Assistant United States Attorney Stephen Heymann but was told that Swartz would have to plead guilty to all 13 indictments and would also have to do jail time.  On Wednesday January 9, 2013, his lawyer tried again to work out some deal on the eve of trial and as Swartz worried about the costs of his defense and having his friends be made to testify- the prosecutor refused to budge. 

       Unceremoniously on January 14, 2014, the United States Attorney who had brought charges against Swartz (Case: 11-cr-10260), Carmen M. Ortiz, dismissed them citing his death as the reason for her doing so.[1]  Carmen Ortiz had filed a 13 count superceding indictment of Aaron Swartz on September 12, 2012 charging him with wire fraud, computer fraud, theft of information from a computer, recklessly damaging a computer, forfeiture and aiding and abetting.[2] 

       Aaron Swartz accomplished a lot in 26 years and one gets the impression he would have done a great deal more.  He was only 14 when he developed RSS and later co-founded Reddit.  He was a powerful force in the fight to keep the Internet free and free of government censorship.  In 2008, he wrote a program that extracted twenty percent of the court documents (all public records), on the government's PACER system and put them online so that they would be available to the public for free.  His death is a real loss and a sad commentary on overzealous prosecutors who not once considered the importance of their obtaining a win against the value of young Aaron's life and the actual harm he had done. 

       While the indictment appears facially solid, the charges are less so.  The indictment charges theft because it states that Swartz stole, "a major portion of JSTOR's archive of digitized academic journal articles" through MIT's computer network.  Yet, Swartz was a fellow at Harvard's Safra Center for Ethics and in this capacity allowed to access MIT's computer network-at least as a guest.  If he was allowed to access the network as a guest, then the allegation of computer fraud and theft in using the network become vulnerable.  Also, JSTOR had settled with Swartz and did not want any part in prosecuting him criminally especially after they had recovered their files from Swartz.  JSTOR has also stated it would not have been a complaining witness in this case.

       The government was able to allege wire fraud because JSTOR's computers were not in Massachusetts-this fact is less meaningful considering that JSTOR did not want to prosecute Swartz.  Moreover, wire-fraud does not translate well in the age of cloud computing because information does not exist merely within a state line-its locations are generally closely guarded and sometimes outside the jurisdiction of the United States calling into question, which laws even apply.


Prosecutorial Discretion in the Backdrop of Burgeoning Laws

       Unfortunately, the practice of administering justice has systemic fragility-at least from the perspective of the Bill of Rights.  Lawmakers hurriedly make new laws and federal agencies invent new regulations that taken together give prosecutors more ways to prosecute Americans. 

       Prosecutors in turn are given an expanding arsenal of tools for use in prosecution on top of their already unfettered and unchecked authority.  Some prosecutions are entered into because they are high profile.  Many prosecutors like Giuliani and Spitzer used high profile cases as stepping-stones for their political ambitions.[3] Congress and many states, cave to political and media pressures to "do something" about virtually any adverse event, and in the process invent new criminal statutes and environmental regulations at a relatively breakneck speed.  This of course results not just in a stunning enlargement of the government's power over the individual (there is no commensurate enlargement in a person's Constitutional rights), but a dilution of Federal power to enforce important criminal laws.  Another consequence is the invitation to abuse the power of the prosecutor to select which criminal statutes to enforce and on whom to enforce them.   The power of the prosecutor in America has never been greater than it is today because of the greater resources of the federal government and the sheer volume of criminal statutes and criminal offenses, which is greater than it has ever been.

       In an actual case, I came across a multi-state drug dealer, who had been well represented by an experienced defense lawyer and who had trafficked in kilograms of cocaine never even got indicted.  He walks free without being indicted because a prosecutor allowed him to escape decades of federal jail time in exchange for ratting out his co-conspirators.   He even went on to be awarded multi-million dollar contracts with the City of Chicago. Arguably, it is alright that the drug dealer walks away free because the government was able to prosecute at least two of his colleagues.  

       A crime is a crime is a crime-or as Carmen Ortiz was once said about her indictment of Swartz, "Stealing is stealing whether you use a computer command or a crowbar, and whether you take documents, data or dollars...It is equally harmful to the victim whether you sell what you have stolen or give it away."   Or is it?

       When a drug dealer peddles pounds of cocaine from New York to Chicago and never gets indicted, can anyone argue that no one was harmed?  By contrast, who was actually harmed in the case of Aaron Swartz?  Why was it so much more important to make him a felon and place him in jail for 35 years? 

       What content from JSTOR did Aaron Swartz give away for free much less sell?

       All guarantees of individual liberty and freedom protected by the United States Constitution under due process, equal protection and the presumption of innocence have remained as they were written by the Constitution's drafters in the first fourteen amendments, yet the reasons the Government may use to exercise it power to deprive its citizens of their liberty have grown several hundred thousand fold.   This would be as if instead of every side getting one chance at bat in a baseball game, one team would get ten thousand chances at bat for every single time the other team went to bat. 

       The Government has hundreds of thousands of ways to deprive an American of his life and liberty, and yet the number of amendments protecting your civil liberty have remained the same.

       If you think that following the law is simple and you will never run afoul of it and all this I write is pablum, you do not know the law.  Keep in mind that federal law touches upon every facet of an American's everyday life.   All Americans engage in conduct, which falls under the penumbra of use of the United States wire or mails.  Americans are regulated by a myriad of laws, at times obscure, and yet their ignorance of them offers no protection. 

       The federal government spends billions of dollars on prosecutions based upon theories of strict liability for obscure crimes honored more in their breach than by their rule because the crimes lack definition.  There are many examples of obscure but actual and costly prosecutions based upon relatively new criminal statutes: Prosecution of four men for bringing lobsters back that were not packed properly according to a foreign law (Lacey Act); prosecution of handicapped elderly woman who had not trimmed her garden hedges that abutted a side street to the required level of under two feet; criminal prosecutions of manufacturing companies for not being able to label their products for uses, wholly unintended by the manufacturer and not capable of being foreseen; growing orchids according to laws of another country (Lacey Act); registering under false name on Facebook or Myspace; filling out any federal form and making a mistake; running out of gas in a blizzard and abandoning your snowmobile, the list of actual prosecutions is much longer.

       To put this in perspective, in 1790 there were about 6 crimes in America, treason, piracy, murder, maiming, robbery and counterfeiting.  In 2011, there were over 4,500 Federal crimes and hundreds of thousands of regulations whose breach would incur criminal penalties.  Congress invents a new crime on average every week for every week of the year.[4]  Congress is not however, simultaneously repealing existing bad, redundant or conflicting criminal laws.  Basic crimes like murder, robbery and theft are regurgitated into new forms, but what is far more worrisome than the explosion of Federal legislation, whose reach touches every aspect of everyday life, is the invention of crimes lacking any wrongful intent-this phenomenon is called, overcriminalization. 

       There are steep economic costs in overcriminalization but the injustice of criminalizing and prosecuting innocuous conduct is far more disconcerting. This said, the economic costs are staggeringly immense in terms of the growth in the Federal prison population and the tens of millions of dollars per case for the cost of high profile prosecutions based upon amorphous statutes, as in the trial of a Martha Stewart, Roger Clemens or even a Lord Conrad Black.  

       There is a culture of prosecution that regards conviction as a benchmark for success to be rewarded with re-election and advancement, even to the Judiciary.  Along with plea-bargainning (something never envisioned by the Constitution's drafters) we seem to be more concerned with securing convictions than making sure the actual guilty are punished and that the innocent and disenfranchised are never placed behind bars in an already over-crowded and expanding prison population.

       Prosecutors often play to the media and the media affects high profile cases to the point of driving prosecutions and hastening indictments-making a circus side-show of the justice system.  If they get it wrong and destroy lives in the process, as so often happens in the prosecution of vague statutes, prosecutors are never held accountable because of absolute and qualified immunity.  There is effectively no check or balance on the powers of the prosecution.

        Things like the presumption of innocence are tossed aside for ratings or marketing for prosecutors with political ambitions.  Very much akin to the idea that there is no such thing as a bad arrest or a bad conviction, the culture of prosecution measures success by the number of convictions-it is very much a numbers game-unless of course a very high profile defendant comes along.  What suffers in all of this the equal administration of justice.  And let us make no mistake about it Aaron Swartz was a high profile defendant.

       Another contrast to Aaron Swartz's prosecution within the same year is a notable non-prosecution and also of an high profile figure- Jon Corzine.   Corzine engineered the eighth largest bankruptcy in United States history and caused over $1.2 billion in customer funds to go missing when MF Global was supposed to keep their customer funds safeguarded, segregated and not touch them.  Mr. Corzine, like the drug dealer, was never indicted and never will be.  He did not fight against government censorship or control of the Internet, he was not unlike Swartz determined to change the world-he was one of the largest campaign donors to a sitting President and a close friend of the Chairman of the SEC. 

       At the same time that the Department of Justice began its indictment of Aaron Swartz, it announced it would not prosecute Jon Corzine.  You must also keep in mind that prosecutorial discretion is not always discrete.@

R. Tamara de Silva

January 15, 2013

Chicago, Illinois

[3] It is the coolest of ironies that Spitzer was indicted because he asked a bank teller not to put his name on a wire transfer (a request that would have meant violating anti-money laundering laws)-the same action he had prosecuted so many people of doing.

[4] From 2000 through 2007, Congress enacted 452 new criminal offenses.


Bob Costas' NFL Gun Speech Deconstructed

December 3, 2012

Bob Costas' NFL Gun Speech Deconstructed


December 3, 2012

By R. Tamara de Silva

"This year will go down in history. For the first time, a civilised nation has full gun registration! Our streets will be safer, our police more efficient, and the world will follow our lead into the future!"

                                  Adolf Hitler

"Among the many misdeeds of British rule in India, history will look upon the Act depriving a whole nation of arms as the blackest."

                    Mahatma Mohandas K. Gandhi 

       Bob Costas used the incident of Kansas City Chief's Linebacker, Jovan Belcher's murder of the mother of his three-month-old daughter on Saturday before taking his own life as call for more gun control.  In Chicago, eight people also died from gun violence over the weekend. 

       The causes of murder and suicide, especially inner-city violence are numerous and complex.  The causes of gang related shootings involve suboptimal societal and economic factors that have no easy remedy.  What is predictable and easy, is to blame the guns used either by a low-life gang-banger or a cold-blooded murderous NFL linebacker.  It is easier than blaming the parents of the murderer, his family, teachers, pastor, genetics, mental illness, economic factors, cultural influences, randomness or societal failure in raising yet another psychopathic killer.  As is often the norm, whatever the premeditation, mental illness or depravity of the murderer, we shift our blame towards the object used by the murderer-the gun.  It happens after almost every publicized shooting, and with a high degree of predictability.  Politicians clamor, as they do in Cook County, to abridge the plain language and intent of the Second Amendment of the United States Constitution, to appear like they are "doing something" and to ostensibly express their profound empathy for the victims of murderers by imposing yet more regulations on gun ownership and taxes.

       True to the playbook, yesterday, NBC's ubiquitous sports commentator Bob Costas used the half-time segment of the Sunday Night Football to call for more gun control, "In the coming days, Jovan Belcher's actions and their possible connection to football will be analyzed. Who knows?  But here, wrote Jason Whitlock, is what I believe.  If Jovan Belcher didn't possess a gun, he and Kasandra Perkins would both be alive today."  Or he would have found another way to kill her...but this would not have been newsworthy.  Blaming an inanimate object also subtly removes a layer of culpability and provides an easier answer, as if the problem of the existence of the murderer and his intent would be erased just as particles in Heisenberg's uncertainty principle appear and then disappear on the quantum scale- in this instance somehow leaving the presence of the more culpable gun.

       According to a report by the Federal Bureau of Investigation, guns were involved in roughly over 65% of violent crimes in 2008.[1] There are in the aggregate of all municipal, state and federal gun regulations, well over 14,000 to 19,000 gun regulations on the books.  Gun ownership is well regulated.  The United States has the highest gun ownership rate in the world but is 28th in the world in the rate of murders committed by firearms.[2] Most people that own guns never commit gun violence.  Do all these regulations have the effect of reducing deaths by gun?

       In Illinois, the answer would be resoundingly in the negative.  Illinois is arguably the most gun restrictive state in terms of the sheer number and nature of its gun regulations.  Chicago is also, in 2012, on track to being the nation's murder capital.  Do we have too few gun regulations or too many murderous criminals? 

       There is an unwritten law in politics at any level, if you are going to bring up a problem, pretend you can solve it-certainly at least say you know how.  There is no profit for any candidate running for elective office in Chicago or anywhere else to simply say that we have too many really nasty unsocial people in Cook County and that they will kill you and there is almost nothing, short of moving and trying to avoid these people, that would save you from them and their unsocial behaviors, in all their possible iterations.   In order to win tell Logic: drop dead.  Blame the gun. 

       Costas could have blamed Blecher and the fact that athletic ability is prized more than character or psychopathic temperament in the NFL but then again he is hosting an NFL half-time show and this may have been tantamount to going to a dinner party and denigrating all the food.  He could have said that if you are one of the statistically improbably gifted athletes that can play at the level of the NFL, and attract the sponsorship revenue of a prime-time NFL game, when you murder your daughter's mother, someone will offer to blame the gun you used. 

       However, there are problems with the "but for" theory of gun accountability.  Its principal problem is a failure of its logic.  We cannot blame knives and forks for the epidemic of obesity that caused the greatest toll on our health care system or can we?  But for, the knife, a 300 lb, 5"10 man would not have eaten so much because he would have lacked the means to eat so much macaroni and cheese.  But for the glass manufacturer, some would never have become alcoholics and destroyed their families.  But for cars, we would be perfectly protected from DUIs.  But for cars, we would also be unable to have traffic accidents.  But for the sale of paint, we would not have graffiti.  But for the Internet, we would not have online pornography.  When you think upon it, inanimate objects, were you to suspend logic, are pretty nasty social actors-albeit in varying degrees of accompanying passivity.

Statism v. Individual Responsibility

       The Government can and does legislate desirable social behavior already-often using inanimate objects.  For example, Mayor Michael Bloomberg banned the sale of super big sugary soft drinks like super-sized purple Slurpees.  He had good reason-they are very sugary and excess sugar causes weight gain, diabetes and associated and resultant health problems. 

       If the government could rely on you to act rationally at all times, poor Mr. Bloomberg would not have had to bother to make a law to prohibit you from ingesting larger sized Slurpees.

       His was not a novel idea.  From mortgage deductions to marriage deductions to restrictions on the purchase of guns, the government already tries to engineer what it considers socially more acceptable behavior through the tax code.  But the evidence of its efficacy is mixed, at best.  For example, Canada does not have a mortgage interest deduction and yet more Canadians own their homes than Americans.  Cook County Illinois proposed a gun tax to prevent in part the "illegal use of guns in murders."  Murder is already illegal-at the state and federal level.  Also, it is not likely, though possible, that gang bangers would be so off-put by having to pay a tax on gun ownership that they would switch to machetes.  Were the politicians in Cook County a more thoughtful and upstanding cross-section of the populace than their tendency to commit crime (we do after all have and have had more alderpeople, commissioners, and governors in jail than any other North American city), and take to graft, to engage in bribery and other creative means of "pay for play," to refine the art of nepotism- as they do would suggest they are, (albeit a counterfactual hypothesis)--they would realize that people inclined to murder other people in gangs are simply not going to think about the silly tax that has theoretically been imposed upon them.

       The other silent but more massive cost to the governments' various attempts to engineer social behavior either by the tax code or by threat of imprisonment, is that individual freedom and government regulation of social behavior are to a great extent a zero-sum game.  The more authority the government aggregates to itself to get into the private lives and lifestyles of its citizens, even to promote "good" and rational individual behavior, the commensurately less choice the citizen has in choosing how to live. 

       Conceivably, I ought to have a right to be irrational.  I may simply prefer pizza to broccoli and may wish to drink single malt scotch everyday over kale juice.  My enjoyment value in ingesting French fries everyday may outweigh the utility I place in living to be a skinny octogenarian.

        It is not meaningful what opinion a sportscaster has about a right guaranteed by the Second Amendment any more than it matters what Mr. Costas thinks about positron emission tomography's alleged ability to produce an accurate "picture" of the human brain.  What is troublesome is that Mr. Costas, like so many politicians who would offer simple solutions to seemingly insolvable problems, is that he has a pulpit to propagate false solutions and impoverished notions.

       This comes at a time when all branches of government in America today, more than at any time in its brief history, are determined to assault the Bill of Rights-because your fundamental liberties as an American cannot defend themselves, now is not the time to be silent.  My father is a history professor and I learned the value of history early on.  But in studying human nature more directly, I also learned that history, whether read or not, will repeat itself.

       It was not that long ago that the governments of Nazi Germany, Socialist Russia and Fascist Italy disarmed their citizenry.  There was no one to defend themselves, their old, their minorities or their children and neighbors from the atrocities that followed.  Were we to utter that the odds of this scenario ever repeating itself were greater than nil, we may be called right-wing extremists or "nuts."  Yet just seventy years ago, disarming the people was exactly what the governments had engineered, ostensibly in some cases, for the goal of greater safety and social stability.  A trade-off no thinking person ought to acquiescence to ever again. @

R. Tamara de Silva

Chicago, Illinois

December 3, 2012

R. Tamara de Silva is a trial lawyer and independent trader




Drew Peterson's Verdict, Appeal and the Cranes of Ibycus

September 10, 2012

Drew Peterson's Verdict, Appeal and the Cranes of Ibycus

By R Tamara de Silva

September 10, 2012


         Every so often, Lady Justice allows in her hallowed halls occupants, making up in sheer bluster what they wholly lack in gravitas-seemingly more worthy of inhabiting a circus side show than the halls of justice.  So it happened in the case and trial of Drew Peterson, who was convicted on September 6, 2012 after a mere fourteen hours of deliberation of the first-degree murder of his third wife, Kathleen Savio.  According to the jury that returned the guilty verdict, much of the most damning evidence came in the form of out of court utterances by Peterson's fourth wife, Stacy Peterson and his third wife.  Even before the trial of Peterson began the defendant's proclivity to lose wives and solicit the media, was outmatched by a team of lawyers, who would court the Media with all the subtlety of an obsessed stalker.  At one point, Peterson's lawyers gleefully mocked the fate of Peterson's fourth wife, Stacey Peterson, who has been missing since 2007 and is presumed dead.  Yet despite all the limelight, poor taste and unrelenting braggadocio of the defense, it was Stacey Peterson, perhaps from beyond some grave, put on the stand by Peterson's own lawyers, who would convict Peterson.  

        Drew Peterson's verdict is reminiscent of the tale of the poet Ibycus who lived around 500 B.C.  According to Greek myth, Ibycus was blessed by the god Apollo in song, was on his way to the chariot races when he was killed by two thieves somewhere near Corinth.  As he lay dying and alone, he saw cranes flying overhead and begged them to bear witness to the world as to what had been done to him and to seek justice.   Friedrich Schiller's poem tells the rest about a vast crowd watching an enactment of the Furies when someone from the audience remarks,


"See there, see there, Timotheus! Behold the cranes of Ibycus!"

The heavens become as black as night,

And o'er the theatre they see,

Far over-head, a dusky flight

Of cranes, approaching hastily.


"Of Ibycus!" - That name so blest

With new-born sorrow fills each breast.

As waves on waves in ocean rise,

From mouth to mouth it swiftly flies:

"Of Ibycus, whom we lament?

Who fell beneath the murderer's hand?

What mean those words that from him went?

What means this cranes' advancing band?"


And louder still become the cries,

And soon this thought foreboding flies

Through every heart, with speed of light - [1]


        The cranes of Ibycus had told the world what the thieves had done and saw that vengeance upon the murdered poet was dealt.

        Kathleen Savio's voice was heard from the grave in statements in the form of a letter she had written to an assistant State's Attorney in Will County about Peterson's violence against her, along with statements to many co-workers and family who spoke of Kathleen's fears of Peterson and her being certain that Peterson wanted to kill her. 

        However, according to the jurors it was Peterson's fourth wife, Stacey Peterson, and her voice also possibly from the grave, that convinced the jurors that Peterson was guilty.   When the jurors began deliberating, they only asked for two pieces of evidence-not for the testimony of the competing pathologists or any of the investigators-but the testimony of Stacey Peterson's pastor, Neil Schori and her divorce lawyer, Harry Smith.  Neil Schori testified that Peterson returned to their home dressed in black with a bag of woman's clothing on the late morning of the day that Kathleen was found dead and also coached her about being an alibi witness for him.[2]

        According to the jury foreman, Eduardo Saldana, the key piece of evidence against Peterson, the testimony of Harry Smith, was offered not by the state but by Peterson's own lawyers.[3]  One of Peterson's lawyers who always wears sunglasses and calls himself "The Shark," Joe Lopez, remarked that, "[I]t's a dark day in America when you can convict someone on hearsay evidence. A very dark day."   Then why provide the jury with the hearsay evidence yourself unless you are working against your client?

        It is inexplicable that it was Peterson's own lawyers, Joel Brodsky and Joe Lopez who would allow the jury to hear the one piece of evidence most damning of their client.   Harry Smith testified on the stand that Stacey Peterson, "wanted to know if, in my opinion, that the fact he [Peterson] killed Kathy could be used against him in the divorce proceeding."[4]  This was the first time, the jury would hear, because of the defense lawyers, Stacey Peterson say that her husband had killed Kathleen Savio.


Hearsay Evidence and Forfeiture by Wrongdoing

        By way of some background, the Sixth Amendment provides that "[i]n all criminal prosecutions, the accused shall enjoy the right . . . to be confronted with the witnesses against him."  This part of the Sixth Amendment is called the Confrontation Clause.   The Founding Fathers recognized the fundamental importance of cross-examination in discovering the truth.    The right to confront and cross-examine witnesses is one of most crucial safeguards of individual liberty and a sine qua non of due process. 

        The Confrontation Clause requires that the prosecution produce live witnesses so that the jury can see their expression, their demeanor upon cross-examination, watch them take an oath and in every other way, weigh and measure their credibility in the flesh.  The Confrontation Clause helps to ensure the reliability of the evidence used to take away someone's right to life and liberty.  It also allows the accused to see his accuser face to face and in so doing guard against the government ever using secretive "trial by affidavit. "[5]  Confrontation protects the dignity of the accused and preserves the Constitution's  paramount regard for procedural due process.

        This said, there have long been exceptions to the Confrontation Clause in the various types of hearsay evidence that are permitted at trial, wherein the defendant does not get to confront or cross-examine a witness against him.  

        Criminal defense lawyers are widely considered the best cross-examiners in the law because it is most often only through cross-examination that they can discover a witness' bias, confusion and truth-telling ability.  Criminal defense lawyers do not usually get to take depositions, propound interrogatories or requests for production.  In the criminal justice system, the prosecution has the power of a grand jury and all the resources and investigatory powers of the government.   By contrast, the defense attorney has virtually little pretrial discovery.  The most effective and lone tool available to the defense lawyer, is the ability to cross-examine a witness for the prosecution.  It is solely through cross-examination that a defendant can show a jury what a witness may be hiding, their motives, their confusion, their bias, and  reveal the weaknesses of the evidence offered by a prosecution witness-why what they are seeming to say may simply not be true.

        Much of the evidence against Peterson was in the form of otherwise inadmissible hearsay and its use in the Peterson trial will likely be a basis for appeal.   Hearsay evidence during the Peterson trial included the testimony of what Kathleen Savio and Stacey Peterson had allegedly said to other people but were not available to say in court, during the trial.  No defense counsel can cross-examine Kathleen Savio and Stacey Peterson, even as they seemed to speak from the witness stand.

        In 2008, Illinois enacted a piece of legislation called the Hearsay Exception for Intentional Murder of a Witness that allowed for the admission of reliable statements by an out of court declarant (witness) if the reason the declarant is not available to testify in court is that the defendant has murdered them.[6]  This law called, Drew's law, named after Drew Peterson is a state level codification and counterpart to the pre-existing Federal Rule of Evidence 804(b)(6).[7] 

        There is also an older doctrine that mirrors the 2008 Drew's law and Federal Rule of Evidence 804(b)(6)-the common law principle of forfeiture by wrongdoing.  Forfeiture by wrongdoing in a principle in the common law that was first recognized by the United States Supreme Court in Reynolds v. United States.[8]  The Court in Reynolds recognized the forfeiture by wrongdoing rule- which according to the principles of equity did not allow someone to use the Confrontation Clause to profit from their own wrongdoing,


The Constitution gives the accused the right to a trial at which he should be confronted with the witnesses against him; but if a witness is absent by his own wrongful procurement, he cannot complain if competent evidence is admitted to supply the place of that which he has kept away.  The Constitution does not guarantee an accused person against the legitimate consequences of his own wrongful acts.  It grants him the privilege of being confronted with the witnesses against him; but if he voluntarily keeps the witnesses away, he cannot insist on his privilege.  If, therefore, when absent by his procurement, their evidence is supplied in some lawful way, he is in no condition to assert that his constitutional rights have been violated.[9]



        In other words, under the doctrine of forfeiture by wrongdoing, you forfeit your right to confront witnesses against you in a criminal matter if your own behavior has resulted in their being unavailable to testify.

        Justice Scalia in the 2008 Supreme Court case Giles v. California, found that the common law doctrine of forfeiture by wrongdoing, dated back to 1666 and Lord Morley's Case.[10] 

        The Court in Giles v. California required that the doctrine of forfeiture by wrongdoing only applies to allow the statements of a Stacey Peterson and Kathleen Savio, if it can be shown that a defendant like Peterson, "intended to prevent the witness [in this case Stacey and Kathleen] from testifying."

        The requirement of showing intent on the part of a defendant to prevent a witness from testifying before application of forfeiture by wrongdoing is a topic worthy of another article-probably several.  It is also odd.  Consider for the example a cocaine trafficker who is accused of murdering one of his co-conspirators because they were about to testify against the drug trafficker in court.  Before being murdered, the co-conspirator tells several people, including Federal agents, that he is afraid because the drug trafficker has ordered a hit on him and will try to have him killed.  In determining whether to admit the testimony of the co-conspirator to Federal agents and others, the courts will use the standard of a preponderance of the evidence.  A court will decide whether by a preponderance of the evidence, the drug dealer killed the co-conspirator-the same act for which he is on trial.  This determination seems at odds with a defendant's presumption of innocence.  It is also bootstrapping because the testimony being judged for reliability [hearsay] provides the basis for its own reliability. 

Peterson's Appeal on Ex Post Facto Grounds

        Many professional court pundits have remarked that Peterson' case will undoubtedly be appealed to and then overturned by the United States Supreme Court because Drew's law is a violation of the prohibition against the passage pf Ex Post Facto laws.  I disagree because the trial court did not utilize Drew's law in ruling that the testimony of Kathleen Savio and Stacey Peterson were admissible-the court used the common law doctrine of forfeiture by wrongdoing.

        Article I, Section 10 of the United States Constitution declares that, "no State shall pass any ex post facto Law.''   In other words, laws cannot be made to be retroactive in effect.

        The cloak of the presumption of innocence was always trying to fall off Drew Peterson perhaps because his demeanor, actions and words seemed to scream of something altogether unsavory.  The conduct of his counsel at times, joking about the death of his fourth wife did nothing to bolster their side's credibility.  That said, it would be far more odious and far more reprehensible for the Illinois legislature to pass a vindictive law just to convict Drew Peterson.  But this may not be the case.

        The Appellate Court for the Third District of Illinois found the statements of Kathleen Savio and Stacey Peterson admissible against Peterson not because of Drew's law but the pre-existing common law doctrine of forfeiture by wrongdoing, which was in effect at least one hundred and thirty years before the enactment of the 2008 Illinois law called Drew's law,


If the legislature intended to facilitate the successful prosecution of criminal defendants who intentionally prevent witnesses from testifying (as the statute's legislative history suggests), it is unclear why it passed a statute that imposed restrictions on prosecutors that are not found in the common law.8 Regardless, after passing a more restrictive statute, one would expect the State either to enforce the statute as written or act to repeal the statute, not urge the courts to ignore it.

Nevertheless, because the statute neither trumps nor supplants the common law, we must reverse the circuit court's judgment.[11]



        The cranes of Ibycus in the Peterson trial appear to have been sent by Stacey Peterson for Kathleen Savio.  It remains to be seen whether they will return for Stacey Peterson.   During a pre-trial hearing Peterson's second wife testified about Peterson pulling a gun on her and saying that he would kill her and make it look like an accident.[12]  The cranes of Ibycus signify the triumph of justice over murderers.  There is a sense of justice in this case that must not prevent vigilance towards the dangers of extending the doctrine of forfeiture by wrongdoing any further.  There is something profoundly disturbing, were it anyone other than Drew Peterson, in having a judge make a preliminary determination about whether a defendant charged with murder, actually murdered the victim in order to allow the victim's statements to be used as evidence to convict the defendant of murder.  It is difficult to contemplate having to find a basis to appeal a decision based entirely upon circular logic, if that were to become also the norm.@

R. Tamara de Silva

Chicago, Illinois

September 10, 2012


R. Tamara de Silva is a securities lawyer and independent trader



[2] Chicago Tribune, February 23, 2010, Witnesses and hearsay statements that a judge is considering whether to allow in Drew Peterson's Trial,


[5] Dutton v. Evans, 400 U.S. 74, 94 (1970)

[6] Public Act 095-1004, available at, which is now 725 ILCS 5/115-10.6


[8] 98 U.S. 145 (1879)


[9] Id. at 158.


[10] 554 U.S.353, 367 (2008)

[11] People v. Peterson, 968 N.E.2d 204 (Ill.App. 3 Dist. 2012)


The First Amendment of Brandon J. Raub

August 22, 2012

The First Amendment of Brandon Raub

By R Tamara de Silva

August 22, 2012


       The point of demarcation between political expression and dangerous dissent is being discerned in much the same manner the Romans augured the future by looking at the entrails of birds.  Enter social media, which has been flexing its muscles on the topic even managing to draw the somnolent Media to bring national attention to the odd arrest and detention of a 26 year old former combat Marine, Brandon J. Raub.  Brandon, who had served his country in Iraq and Afghanistan from 2005-2011, was taken from his home by this same government in the form of the FBI, Secret Service and police agents for what looks to the outside world as his expression of his First Amendment right to criticize his government and his President. Is he the first known victim of the National Defense Authorization Act or Virginia's involuntary commitment statute? 

       One of my favorite people at the University of Chicago was the late Allan Bloom.  He once suggested that the First Amendment was a grand waste- no longer needed in America.  He said this because he observed that most people simply have nothing to say.  Most people may have opinions about many things but they are merely repeating what someone told them seeming to be incapable of forming a worthwhile thought on their own.  He was right in that as he went on to say, peoples' opinions are about as distinct and undifferentiated as the individual Kleenex are in a tissue box. 

       Social media bears this ought.  Except Brandon Raub was not using his Facebook account to post the perfunctory braggadocio or a travel itinerary.  Or the equally common antipode of the plea of a starving third world child- a picture of a full plate of food with an introduction about how good it is.  Brandon's posts were not so excruciatingly dull, as to be entirely devoted to self aggrandizement or the scatological- but they have all the marks of seditiousness in a Soviet Russia or Hussein's Iraq.  But in America, Brandon, like many Americans was expressing his discontent at the state of his country and its government.  Like many other of his countrymen, intellectually engaged in matters of governance, Brandon Raub used Facebook for what is inarguably its highest use-a gargantuan virtual public square.   Used this way, Facebook is not an ode to the elevation of the miniscule and mundane but a truly interesting and potentially important phenomenon.  Important because it is perhaps also a guardian of liberty in every way the Fourth Estate has been. 

       Opinions expressed in a public square can be diverse and some may even be out there.  However, were the American Revolutionaries alive today and speaking of sedition as they did then, they would not be called Patriots as history has called them-they would today be called terrorists.    This country was the birthplace of sedition and the refuge of many people the Crown considered way too "out there"-a remote place across a vast ocean fitting for the lunatic fringe. 

       The concerns of many about young Brandon are that free speech must be protected especially when what rights we were given by the Constitution have come under an onslaught of multiple new assaults like the monitoring of online computer searches, indefinite detention, indefinite detention without any due process of law [Mr. Eric Holder's invention of something called "Executive due process," which provides for a kind of due process and judgment but with no lawyer, no court of law and no trial] regular warrantless taping and tapping of all cellphone calls, the tracking and sale of customer information via credit card use, and the Department of Homeland Security's tracking of social media and all use of the internet,  tracking of all online activity, tracking of all financial transactions, the National Defense Authorization Act ("NDAA"), etc.-with all this, the willingness to still speak at all is a singularly brave but crucial act.  The law has not kept up with technology and most people are unaware of what their rights are in its wake.  The First Amendment safeguards that one act, speech, which may be one of the few gossamer threads that yet binds together our fragile and aging civil liberties. 

       Admittedly, some of Raub's postings were outside of mainstream thought in that he cited conspiracy theories related to 9/11 being an inside job and appeared to post a threat when he wrote that he would, "Sharpen up my axe; I'm here to sever heads"-repeating the words of a song called, "Bring Me Down."[1] 

       Were his posting lyrics to this song tantamount to a national security threat?  After the Colorado shootings and the shootings at Virginia Tech, many would argue it makes sense to preemptively lock people up for communications that are even ambiguously threatening.   The problem with this line of thought is that it is a slippery slope and it vests a dangerous amount of discretion in the hands of the government that can easily be abused.   It is also profoundly un-American. 

       When faced with any crisis or a 24 hour news-media human interest story, we seem to think it best to make more laws and invest the government with even more authority to "fix it" -never fully understanding that powers so eagerly bestowed can be abused and turned against their bestower.  As Benjamin Franklin famously wrote and anyone with even a cursory reading of history will understand, "those who can give up essential liberty to obtain a little temporary safety, deserve neither liberty not safety."

       One nation that has effectively used the pretext of danger to the state to imprison all who would criticize it is the Soviet Union.  All societies have normative values and at times some of them are pretextual-designed to mask much baser values.  Security is a value of the Soviet system used to hide the interests of its leaders from Nikita Krushchev to Vladimir Putin, to control the population and public opinion.  Putin's record of repressive psychiatry and the imprisonment of anyone who would insult his distastefully enormous opinion of himself belies any claim that he has divested himself fully of Khrushchev's repressive regime.  Police psychiatry allows for the routine imprisonment of dissidents in mental health institutions effectively silencing all dissidents and protestors from Garry Kasparov and Andrei Sakharov to current human rights lawyers.   Before we magnanimously proffer up parts of the First Amendment on the altar of security, we should imagine living in any one of the many parts of the world where the expression of dissent is met with death, a Soviet labor camp or more typically imprisonment in an asylum.  America must never strive to be a Soviet Union.

       There is little evidence if any, to suggest that Brandon Raub is being detained or was taken into custody for violation of the NDAA.   By all appearances Brandon Raub was involuntarily taken into custody and detained under Virginia's civil commitment law.[2]  Most states have some variant of this law by which on the word of someone in the mental health profession, or a doctor, a nurse or even a social worker, a person can be locked up if they are deemed either a threat to themselves or others.  The standard of proof the person wishing to have someone else locked up under must meet is the presence of "clear and convincing evidence" at an hearing before a magistrate at which the accused is not provided an opportunity to have an independent mental health expert rebut or evaluate the evidence offered.  

       The problems with this are numerous.  Judges and lawyers are ill equipped to evaluate mental illness.   The concept of mental illness itself is a bit like ether, "[M]ental disorder is such a vacuous phrase that the law should consider dispensing with it as an independent criterion for intervention and instead simply identify as precisely as possible the types of mental dysfunction it wants to treat specially."[3]  Social workers and mental health professionals may have no basis by which to discern the difference between sincere political protest and the condition of "dangerousness to society."   Unfortunately for those involuntarily committed by other people, the clear and convincing standard is not difficult to overcome because it is not objective when applied to cases of civil commitment. 

       The Diagnostic and Statistical Manuel of Mental Disorders ("DSM") is used to categorize mental disorders but its categorizations are constantly being revised and subject to debate within the mental health field.   The authors of the DSM themselves warn against using the DSM for legal proceedings because of the danger that the diagnostic descriptions contained within it will be misunderstood and misused.   Of course, I do not mean to presume that the social worker or health care person calling for involuntary commitment has read the DSM.

       The Fifth and Fourteenth Amendments of the United States Constitution prohibit the government from taking from taking away a person's "life, liberty or property" without due process of law.   Civil commitment hearings perform an end run around due process-taking away liberty without the protections given to a criminal defendant.

       This all begs the question what was it about Brandon Raub's Facebook posts that the FBI and Secret Service considered a threat?   Several of Brandon's posts expressed concern about an elite ruling class, the Federal Reserve, and the enormity of the Federal government.  He must be insane for being critical of the government in the following post written on his Facebook wall on November 11, 2011,

The Truth 
by Brandon J Raub on Friday, November 11, 2011 at 10:00 am

America has lost itself. We have lost who we truly are. This is the land of the free and the home of the brave.

This is the land of Thomas Jefferson.

This is the land of Benjamin Franklin.

This is the land of Fredrick Douglas.

This is the land of Smedley Butler.

This is the land John F. Kennedy.

This is the land of Martin Luther King.

This is the land where the cowboy wins. This is the land where you can start from the bottom and get to the top. This is the land where regardless of you race and ethnicity you can succeed and build a better life for you and your family. This is the land where every race coexists peacefully. This is the land where justice wins. This is the land where liberty dwells. This is the land where freedom reigns. This is the land where we help the poor, and people help each other. This is land where people beat racism.

The Federal Reserve is wrong. They have designed a system based off of greed and fear. They designed a system to crush the middle class between taxes and inflation. This is wrong, and it is unjust. It is wrong.

We have allowed ourselves to be deceived and seduced by the powers of the printing press. It is not a good system. It discourages saving: the foundation for all stable economic activity. The Federal Reserve is artificially manipulating interest rates and creating phony economic data.

This thing has deceived our entire nation.

They created it in 1913. They also created the income tax in 1913. They encouraged the growth of debt so they can tax you on it. There is interest on the debt. Your government is in bed with these people. They want to enslave you to the government so that they can control every aspect of your lives. It is an empire based on lies. They operate of greed and fear.

There is a better way. It's called freedom. Freedom is called a lot of things. But there is a true meaning. It means very simply that you have the right to do whatever you want as long as you are not infringing on the freedoms of other people.

I firmly believe that God set America apart from the other nations of the world. He saved a place where people could come to to escape bad systems of goverment. This system we have created works. It really works.

There is evil going on all around the world. The United States was meant to lead the charge against injustice, but through our example not our force. People do not respond to having liberty and freedom forced on them.

Men and Women follow courage. They follow leadership, and courage. Our example has paved the way for people all around the world to change their forms of government.

Force is not the way because liberty is a powerful concept. The idea that men can govern themselves is the basis for every just form of government.

We can govern ourselves. We do not need to be governed by men who want to install a one world banking system. These men have machine hearts. Machine and unnatural hearts.

They have blocked out the possibility of a better world. They fear human progress. They have monopolies on everything.

This life can be free and beautiful. There are enough resources on this earth to support the world's population. There are enough resources on this earth to feed everyone. There is enough land for everyone to own their own land and farm, and produce their own energy.

These people have been hiding technology. There are ways to create power easily. There is technology that can provide free cheap power for everyone. There are farming techniques that can feed the entire world.

The Bill of Rights is being systematically dismantled. Men have spilled their blood for those rights.

Your sons and daughters, your brothers and sisters, and Americas best young men and women are losing their limbs. They are losing their lives. They are losing the hearts. They do not know why they are fighting. They are killing. And they do not know why.

They have done some extraordinary acts. Their deeds go before them. But these wars are lies. They are lies. They deceived our entire nation with terrorism. They have gotten us to hand them our rights. Our Rights! Men died for those rights!

September Eleventh was an inside job. They blew up a third building in broad daylight. Building 7.

Your leaders betrayed you.

You elected an aristocracy. They are beholden to special interests. They were brainwashed through the Council on Foreign Relations. Your leaders are planning to merge the United States into a one world banking system. They want to put computer chips in you.

These men have evil hearts. They have tricked you into supporting corporate fascism. We gave them the keys to our country. We were not vigilant with our republic.




       President Andrew Jackson was also critical of the central bank and would most certainly be detained as a lunatic or worse were he alive today by both political parties and the pundit class,   

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."



       The Department of Homeland Security would consider Brandon a potential terrorist as they would also consider most of the people that express views critical of the government as potential terrorists.   According to a study by the National Consortium for the Study of Terrorism and Responses to Terrorism entitled, "Hot Spots of Terrorism and Other Crimes in the United States, 1970-2008," funded by the Department of Homeland Security, terrorists are likely people, "reverent of individual liberty...suspicious of centralized federal authority or anti-government," including people who are extremely conservative or extremely liberal.[5] 

       Do not depend on some judge or lawyer to protect your First Amendment rights.  Too often I have observed judges and lawyers slavishly reciting precedence and statute with the Constitution being but a tertiary concern.  Law review articles about involuntary civil commitment regurgitate a parade of judicial affronts on due process.   Given this way or reasoning, which is the absence of reasoning but mere recitation of the past as authority binding on the future, un-Constitutional decisions have a theoretically infinite half-life.  We need to pay attention to Brandon Raub's fate just as much as John Bradford observed the fate of fellow going to the scaffold from the Tower of London and remarked, "there but for the grace of God, goes John Bradford."  The scaffold is still there and the tower remains claiming many inhabitants who thought they would certainly never reside there.@

R. Tamara de Silva

Chicago, Illinois

August 22, 2012


R. Tamara de Silva is a securities lawyer and independent trader




[3] Christopher Slogogin, Rethinking Legally Relevant Mental Disorder, 29 OHIO N.U.L. REV. 497, 498 (2003).


Oligarchy and Its Discontents-What Money Buys

August 20, 2012

Oligarchy and Its Discontents-What Money Buys

By R Tamara de Silva

August 20, 2012


            "The optimist thinks this is the best of all possible worlds. The      pessimist fears it is true."

                                                J. Robert Oppenheimer



       Last week it was announced that the United States Department of Justice and the Securities and Exchange Commission would not seek any criminal charges against Goldman Sachs or for that matter the executives of MF Global including its CEO, former United States Senator Jon Corzine.  This likely surprised many people who still read the news, but actually infuriated no more than three people among them... and they were probably on the verge of becoming unhinged anyway.  Most people realize that while economists look for optimized states whose existence is perfectly beyond dispute within their own models...optimized models of the actual economy and democracy for that matter, exist only in the Great Books... and many other books.  In point of fact, the discontents of oligarchy are numerous.  While economists may not spend much time successfully modeling the real world-perhaps in part because there are no repercussions for their being in error, catastrophic events happen in the real world and are not modeled or anticipated by any economist.   Recent events like the decision to give Jon Corzine and MF Global a pass are legitimate examples of the role of money in politics and in the law. 

       Henry Adams sort of foresaw the events of last week.  Henry Adams had a privileged perch from which to view the dilemmas of American democracy as he was the great grandson of the second American President John Adams and grandson of our sixth President, John Quincy Adams.  There are certain scathing critiques of politics that have always attracted me to Henry Adams-in the same way I was drawn as child to the diatribes of Cato the Elder.  For example, he regularly wrote about the mortal danger to American democracy manifested by the role of money, especially corporate influence and how its tendency to corrupt the political system, would be the country's ultimate undoing.  In writing about the corruption of the Erie Railroad for the Westminster Review in 1870, he described corporate influence growing to the point of being unchecked,


          "swaying power such as has never in the world's history been trusted in the hands of mere private citizens,...after having created a system of quiet but irresistible corruption-will ultimately succeed in directing government itself. Under the American form of society, there is now no authority capable of effective resistance."


       He was also disturbed by the party system of politics in America and saw it to be willing to sacrifice principle for accommodation.   This theme comes out in his book, Democracy.  In Democracy the idealistic and hyper-principled heroine, Madeleine Lee is courted by the far more practical and ambitious Senator Silas P. Ratcliffe.  Madeleine decides not to marry Ratcliffe though it seems that he gets the better of her in almost all their arguments about politics.  Ratcliffe has aspirations to the White House and argues that moral authority comes from his political party the party with which he will on principle never disagree, "that great results can only be accomplished by great parties, I have uniformly yielded my own personal opinions where they have failed to obtain general assent."  

       Many of the books exchanges between Madeleine and Ratcliffe find Madeleine losing the argument.  She prefers to remain single and reject Ratcliffe and Washington at the end of the novel as she is determined to return to her philanthropic works saying, "The bitterest part of this horrid that nine out of ten of our countrymen would say I had made a mistake."  And they still would.   I confess I see myself in Madeleine but one who must stay, without leaving, just out of an insatiable curiosity to observe all that will happen.


Citizens United v. FEC and the Judiciary

       Money has always played a role in politics.  Any discussion of the role of money in politics, judicial elections or law enforcement in 2012 has to consider the United States Supreme Court's January 2010 decision in Citizens United v Federal Election Commission in which the Court ruled that political spending is a form of protected speech under the First Amendment.  Citizens United allows corporations and unions to spend money to support or denounce candidates in elections through ads.  This is a titan of a case, perhaps unrivalled in its potential to alter the face of representative government in the United States because of the way that most people who vote decide on a candidate-they watch or listen to broadcast media advertisements.   However, Citizens United did not alter much of the McCain-Feingold campaign law, which still regulates corporate donations to political parties and candidates.  Nor does the case affect political action committees or PACs, which can contribute directly to candidates.

       Perhaps the greatest impact of the Citizens United decision will be in the election of state judges.  Judicial independence at one time meant independence from the Crown.  Since then the term judicial independence has come to mean the expectation (however well grounded or not) that when dealing with the justice system, a person can expect a member of the judiciary free from the appearance of personal, monetary or political bias in the outcome of the case.  This mirrors the all important principle stated in Article 40 of the Magna Carta, "To no one will we sell, to one will we refuse or delay right of justice."    

       More money spent on judicial elections, it is feared, will give rise to the impression that justice is for sale very much reminiscent of John Grisham's book, "The Appeal," wherein a billionaire CEO buys himself a state supreme court justice who rules in favor of his company on an appeal.  Grisham's book is eerily like the true story of Supreme Court of West Virginia Justice Brent Benjamin who ruled in favor of the $3,000,000 campaign donor, Don Blankenship, the CEO of A.T. Massey Coal in a case involving a $50,000,000 verdict.  The United States Supreme Court ruled that Justice Benjamin ought to have recused himself in the case Caperton v. Massey.

       There is however one place where Citizens United may have a salutary effect on the judicial system.  In Chicago's Cook County, Illinois the slating of judges is militantly political and based not on merit per se but on a candidate's payment of $25,000 to one of the members of the Judicial Slating Committee of the Cook County Democratic Party.  Judges that are slated, almost invariably win.  Citizens United cannot but have a salutary effect here because it is difficult to imagine a worse system for picking judges anywhere.


The Imperial Presidency and Money

       James Madison was a staunch advocate for the separation of powers between all three branches of government.  The authors of a recent book, "The Executive Unbound: After the Madisonian Republic," by sitting Seventh Circuit Court of Appeals Judge Richard Posner and an Adrian Vermeule from Harvard Law argue that the separation of powers is a relic of the past and largely beside the point.  Without getting into questions of judicial activism and the phenomenon of hyper-opinionated sitting justices, they are actually right from an anthropological perspective.   They are right in so far that the Executive Branch has become, with the passage of the Administrative Procedure Act and sweeping acts of legislation such as Dodd-Frank and now the Patient Protection and Affordable Care Act, the most powerful branch of government.  The Executive has created so many branches, departments and agencies under its purview, most with rule-making ability-that its power has become tantamount to that of an imperial monarchy.

       However, Justice Posner because he seems only to view the world through the lense of a relentlessly pragmatic cost-benefit, economic analysis, draws at times predictable but disturbingly simplistic conclusions.   In their book, Justice Posner and Dr. Vermeule acknowledge the relative impotence of the other branches to keep up with or check the Executive and go on to assert that this does not much matter because Presidents are checked by elections, "liberal legalism's essential failing is that it overestimates the need for the separation of powers and even the rule of law."  

       In other words, just because Presidents are above the law, it does not matter because they will be checked by the rule of politics-they will be voted out.  This is startling simplistic and weak logic because it assumes an efficient marketplace, with equal participants and perfectly symmetrical information.  It also allows for the interpretation of the Constitution based upon a pragmatic economic analysis completely at  war with the absolute first principles and "inalienable rights" held sacred by the Founding Fathers and all the state legislators that ratified the Constitution. 

            This is also where money comes in.

       In his run for President in 2008, President Obama spend over $730 million and is expected by Reuters to raise $1 billion for 2012.  Spending for the 2012 election for all parties and candidates could, according to one estimate, top $9.8 billion in large part because of spending by super PACs.   Yet almost 25% of super PAC money comes from just five donors, Harold Simmons (pro-Romney) , Sheldon Adelson (pro-Romney), Peter Theil (pro-Ron Paul), Bob Perry (pro-Romney now) and Jeffrey Katzenberg (pro-Obama).[1]

       If money affects voting and elections, then according to Posner's logic, the people who will actually exercise the rule of politics and check the Executive Branch are to be these handful of businessmen and others like them.   According to the Center for Responsive Data, 3.7% of the contributors to super PACs account for 80% of the money raised-46 donors have given in excess of $67,000,000.[2]


Money and Prosecutions

       In the case of MF Global and Jon Corzine, Jon Corzine has been one of President Obama's elite bundlers in 2011 and 2012.  He campaigned heavily for President Obama when he was governor of New Jersey and has held private fundraisers for President Obama in his home even after MF Global went bankrupt and $1.6 billion of customer funds went missing in October 2011.  It was announced last week that he is unlikely to face any criminal charges.

       Contrast this to the Department of Justice's handling of the same violation of the Federal rule requiring the segregation of customer funds in the matter of Peregrine Financial Group.  $215 million of customer funds were discovered to be missing from customer segregated accounts in July 2012 at Peregrine Financial Group.  Russell Wasendorf Sr was arrested and criminally charged later that month.   Same act-missing customer funds-but far disparate prosecution. 

       Remember that in the futures industry, the key difference between futures commissions merchants ("FCMs") like Peregrine and MF Global and securities brokerages is that FCMs, unlike securities brokers, are required by law to keep their customer funds segregated from the FCM's own funds.   It is in this way that FCMs have been able, with comparatively few exceptions, to ensure that customer deposits are completely protected from all losses an FCM may incur due to its own proprietary trading.   Before MF Global, the requirement that FCMs segregate customer funds completely from their own funds largely prevented FCM customers from losing money due to an FCM bankruptcy

       In my first article on MF Global, I suggested that the $1.2 billion missing from customer segregated funds may have been incurred due to over-leveraged positions in European sovereign debt that coincidentally took a dramatic turn for the worse (as they did in fact as yield curves doubled rapidly in some issues) during the last weeks of October, and that funds were transferred to cover margin in customer funds held in European debt.   There is a scenario that nothing illegal would have occurred because CFTC Rule 1.25 had been amended to permit the investment of customer segregated funds in foreign sovereign debt.  Keep in mind that this rule was amended by Jon Corzine's lobbying of Commodity Futures Trading Commission ("CFTC") Chairman Gary Gensler, who is a friend and colleague of Jon Corzine.

        An alternate illegal scenario is that MF Global may have engaged in some late stage embezzlement of customer funds that were supposed to be segregated from MF Global's accounts and never commingled with any other funds.[3] One way this may have occurred is if the funds were transferred out of customer segregated funds for a legal purpose but without the customers' meaningful consent or, more likely, with an intent to deceive the customer.  

       If MF Global transferred customer funds out of segregated accounts as a loan to MF Global to cover margin calls in existing positions in sovereign debt, (perfectly legal)[4], it may however, be fraud and intent to deceive on its part if MF Global knew it could not repay the money.  This fraud may have occurred if MF Global knew (and it would be interesting to argue how it did not) that it sought to legally borrow from customer funds, knowing that it was de facto insolvent and could not replace the money.   

       During Senate and House hearings on MF Global, Terrance Duffy, the CEO of the Chicago Mercantile Exchange contradicted Corzine's testimony and stated that the CME's investigation of the MF Global matter revealed the existence of emails between MF Global's assistant treasurer and Jon Corzine.  These emails where contrary to what Corzine told Congress and suggested that Corzine had in fact authorized the transfer of customer funds out of customer accounts-the funds that went missing.   We also know that while Jon Corzine claimed he knew nothing about the financials at MF Global, he was peddling them to Interactive Brokers as he was trying to broker a last minute sale of MF Global to Interactive Brokers--in other words, he had to have been extremely familiar with MF Global's financials during the exact time period he claims to Congress to know nothing of what was happening.

       We still do not know everything that really happened at MF Global because the Department of Justice has not yet decided to grant any immunity to the one person who would be their chief witness in the matter, the Assistant Treasurer.  The Assistant Treasurer is represented by Reid H. Weingarten, who is as luck would have it, is one of United States Attorney General Eric Holder's best friends.   Some could say they agreed to let the clock run out on this one. 

       From a purely economic cost benefit analysis, Jon Corzine's raising in excess of $500,000 for President Obama in 2012 alone was the smartest money he ever spent and appears to have bought him justice in the sense of a reprieve from the CEO of Peregrine's fate.

      What about Mr. Adelson?  The billionaire casino magnate is being investigated for possible violations of the Foreign Corrupt Practices Act, money-laundering and bribery.  Perhaps contributing by some accounts close to $100 million towards Mr. Romney's election would ensure a stop to the pesky Federal investigators.  If so, this would be money entirely worth spending.

       This brings us to the last bit of news from last week that Goldman Sachs would not be investigated for criminal wrong-doing in connection with mortgage crisis and certain deals like ABACUS. 

       This Justice Department  and SEC have gotten many investment banks to execute settlement agreements with them including Goldman and Citigroup-essentially selling "get out of jail cards." Are these settlement agreements, as the Judge Rakoff and Bloomberg's Jonathan Weil have asked, merely considered the "cost of doing business" or some part of a transaction tax on offending financial titans?[5]   

       If it were in the public's interest to prevent fraud upon the market, then fines should be significant enough to actually deter illegal conduct.  If not, prosecutions should be endured and convictions gotten.    The historic role of punishment in the criminal justice system has not been just punishment, but deterrence.  Having Citigroup or GS pay $285 million is pin money to banks with quarterly revenue in the billions of dollars-the "cost of doing business" is not a deterrent to anyone but more like the cost of a municipal parking sticker to the average Joe.

       What is problematic about bank settlements is that smaller market participants cannot afford to pay for "get out of jail cards" and because the costs of prosecuting anyone other than an investment bank are less, smaller participants are actually prosecuted and do get jail time.   Peter Boyer and Government Accountability President Peter Schweizer have written about how justice is for sale in Mr. Eric Holder's Department of Justice pointing to the fact that despite President Obama's claims to represent the 99%, Department of Justice "criminal prosecutions are at 20 year lows for corporate securities and bank fraud." [6]  Given the correlation between campaign contributions (admittedly protected speech) and selective prosecutions, the 20 year low in bank fraud prosecutions is unlikely to change  with either political party.

       Consider the money.  Goldman Sachs employees were the second largest single contributor to President Obama in 2008 contributing $1,013,091.[7]   Goldman's employees are the largest single contributor to Mr. Romney in the 2012 election cycle having donated $636,080 by the end of the last quarter.[8]   Goldman Sachs is also one of the largest clients of Mr. Eric Holder's lawyer firm Covington & Burling.

       Money has always played a part in politics and it is rational for everyone with a stake in the political process to participate.  But not all participation is equal-not even close.  The odds of one vote ever making a difference in a Presidential election are between 1 in 10 million and 1 in 100 million-depending upon the state in which you live.  Voting only matters in the aggregate but money seems to matter more in terms of affecting action after election.    Above all, justice must never be for sale because as Cato the Elder and many others have pointed out throughout history the selling of justice, like the selling of indulgences, is an attribute of a decaying and dying political system.

       What is disconcerting is that mere principles, be they the adherence to ideas like freedom and individual liberty or the idea that you are secure in the sanctity of your own home, are always bound to be under-represented in the electoral process and as such destined to play the underdogs.   At one point in Democracy, Madeleine asks the impressive Ratcliffe, "Surely...something can be done to check corruption.  Are we for ever to be at the mercy of thieves and ruffians?  Is respectable government impossible in democracy?"  Ratcliffe's reply is haunting, "No representative government...can long be much better or much worse than the society it represents.  Purify society and you purify the government.  But try to purify the government artificially and you only aggravate failure. @

R. Tamara de Silva

Chicago, Illinois

August 20, 2012


R. Tamara de Silva is a securities lawyer and independent trader


[4] Remember CFTC Rule 1.25 which had been amended to allow the investment of customer segregated funds in foreign sovereign debt, was amended back after the fall of MF Global to disallow the investment of customer segregated funds in foreign sovereign debt.



Chick-Fil-A, the Klu Klux Klan and the Mayor Emanuel

August 1, 2012

Chick-Fil-A, the Klu Klux Klan and the Mayor Emanuel

by R. Tamara de Silva
August 1, 2012

       Chicago Mayor Rahm Emanuel is understandably concerned by the wave of mostly gang-related shootings that have claimed in excess of 238 lives in Chicago this year. But he is also deeply bothered by the restaurant chain, Chick-Fil-A. So much so that Mayor Emanuel has decided that the City of Chicago will ban it entirely--the restaurant that is-not the gangs. This was in response to Chick-Fil-A's president Dan Cathy stating that he is opposed to gay marriage because of his Christian religious beliefs. The expression of personal belief should not be anyone's idea of the news, nor was Dan Cathy, despite his seeming subsequent canonization by the Conservative press, particularly important before uttering these words. After all, we do not live in an America as in other parts of the world where expressed religious beliefs are to be met with state persecution, stoning or in this instance, banning.

       The Mayor's action would seem to plainly violate the First Amendment and it does. Mayor Emanuel's announcement of the ban is an unfortunate example of local government officials who know they can act in violation of the United States Constitution because the Judiciary has chipped away at the Equal Protection Clause by systematically granting elected officials qualified and absolute immunity. This said, it is not a certainty that Mayor Emanuel would successfully plead a defense of immunity because his actions are not only in plain violation of the First Amendment, his motives are Constitutionally suspect.

       It is a violation of the Equal Protection Clause for Mayor Emanuel to ban Chick-Fil-A as doing so would violate the First Amendment rights of Dan Cathy and his company. Yet many municipal officials know that the law grants them near absolute immunity from prosecution even though they may violate the Constitution because of the principle of immunity.

       It was not always so. Following Reconstruction, the Radical Republican dominated 42nd Congress enacted Section 1983 to combat the Klu Klux Klan's actions that hampered Reconstruction efforts in the Southern States. 42 United States Code-Section 1983 of the Klu Klux Klan Act of 1871 imposed civil liability on every person who would under color of law, deprive another of a Federal or Constitutional right. In this case, the Mayor as a public official is acting under the "color of law" to deny Mr. Cathy his First Amendment right of speech and the exercise of his religious beliefs.

       Section 1983 has not materially changed since its enactment in 1871 other than for the piecemeal repeal of it by the Judiciary and the Judiciary's nullification of the legislative intent of Section 1983 by broader and broader application of immunity to Federal officials, then state officials ...or as in this instance, the Mayor of Chicago.

       The concept of immunity being a bar to Section 1983 civil suits is a creation of the Supreme Court.[1] Presidents of the United States are protected by absolute immunity in civil actions.[2] When the Judiciary began to grant absolute immunity to Federal agencies, many of these agencies were organized and operated under the procedural safeguards provided by the Administrative Procedure Act. These safeguards seek to prevent violations of due process and equal protection.

       Mayors usually enjoy a lesser standard of immunity from civil suits for violations of Section 1983 called, qualified immunity. Immunity is an affirmative defense in the law, which means that a defendant must invoke it and then prove it applies as a shield against suit. The Supreme Court's reasoning for inventing immunity as a bar to Section 1983 suits was to allow public officials to perform their functions without continually being hailed into court by a disgruntled public, while also allowing civil actions, in the case of qualified immunity, where an official violates a clearly established law or right and has a malicious or suspect reason for doing so;

[T]he public interest requires decisions and actions to enforce laws for the protection of the public . . . . Public officials, whether governors, mayors or police, legislators or judges, who fail to make decisions when they are needed or who do not act to implement decisions when they are made do not fully and faithfully perform the duties of their offices. Implicit in the idea that officials have some immunity -- absolute or qualified -- for their acts, is a recognition that they may err. The concept of immunity assumes this and goes on to assume that it is better to risk some error and possible injury from such error than not to decide or act at all.[3]

There is a legitimate need for granting absolute immunity for Federal judges and Federal departments that operate with procedural safeguards. However, the public interest would be better served were the courts to more selectively scrutinize grants of immunity to local elected officials whose power can tend to become absolute and unfettered by anything but the Federal courts. The public good may be better served by having public officials acting cautiously in the shadow of Section 1983 than as in this case by mayors, who have no fear of personal liability for anything they do-not even grave offense to the First Amendment.

       History proves that political values are fickle and cultural mores change, but banning is an extraordinary thing. In 1943, Branch Rickey, who was president of the Brooklyn Dodgers decided he would recruit African Americans to play for the Dodgers. This was a monumental decision because at that point there was an unspoken "gentleman's agreement" and absolute ban on having African American baseball players that had been in effect since the 1880s. In 1945, Branch Rickey signed Jackie Robinson to a minor league contract. In 1947, the legendary Jackie Robinson walked onto Ebbets Field to play for the Dodgers at that same moment breaking the color barrier in major league baseball and violating its ban. This was many years before the United States Supreme Court would decide to outlaw school segregation in Brown v. Board of Education and long before Rosa Parks would refuse to give up her seat on the Cleveland Avenue bus.

       On the scheme of things, to be banned by a government or state intolerant of your views, lifestyle or color is not as nearly as bad as being stoned to death, but it can have severe if not fatal economic repercussions. It is also profoundly at war with the United States Constitution. I recently argued before the Court of Appeals for the Seventh Circuit, unsuccessfully, on the perils of granting absolute immunity to local government officials, who had decided to ban one person from part of City Hall, simply because they could-the officials never offered a reason, knowing they did not need one.

       In zoning matters, the City of Chicago and its alderpeople particularly enjoy flexing their political muscle and clout. The courts grant them broad discretion in blocking adult businesses and religious institutions based on some expressed "legitimate government interest." Their interpretation of this term is almost never questioned and zoning matters are so inherently boring that no one else can reasonably care. Aldermen also have the power to issue land use permissions and very few people have the financial resources to disagree with them on their zoning decisions by hailing them into Federal court.

       To be fair, even for a city second to none in the number of aldermen to be jailed--at least in its making of zoning decisions, other than allowing political expression under the First Amendment through graft, bribery and campaign contributions for preferential treatment, it is an extraordinary thing-even in Chicago-to announce a zoning decision based upon the expression of a religious view.

       Admittedly there are legitimate political motives for how politicians act-the aldermen in question and Mayor Emanuel care about their voting blocks and are likely conforming their speech in the interests of their re-elections and to pander to their electorate. They do not need to care about the Constitution anymore than the politicians who rabidly supported Jim Crow laws. Fortunately for Americans, our freedom of expression is not held hostage to political vicissitudes or cultural mores. We do not live under the Taliban. Those that support Mayor Emanuel's ban should remember what it means to have the government discriminate against you simply because they did not like your politics or the looks of you. The only reason Chick-Fil-A matters is that the protections of civil liberty granted by the United States Constitution must not be denied to anyone based on their expression of their views-whatever they may be and however much we may disagree with them. We have been down this road before remember?@

R. Tamara de Silva

August 1, 2012
Chicago, Illinois

R. Tamara de Silva is an independent trader and lawyer

1. The concept of immunity did exist in the common law.

2. Nixon v. Fitzgerald, 457 U.S. 732 (1982)

3.   Scheuer v. Rhodes, 416 U.S. 232, 241-42 (1974)

The Supreme Court's Healthcare Ruling

June 28, 2012
The Supreme Court's Healthcare Ruling and the Making of a New Tax

By R. Tamara de Silva

June 28, 2012

Today a divided Supreme Court held that the individual mandate within the Affordable Care Act ("ACA") is Constitutional (567 U. S. ____ (2012))[1] . The 193 page opinion contains an excellent discourse on the Commerce Clause, state rights, un-enumerated rights and what are supposed to be the limits of the Federal government's power, making the jist of the ruling all the more extraordinary, if not ironic. The decision is remarkable because it is the first time in our history that it has been held that the United States Constitution permits a financial penalty for non-performance of an economic act to be treated as a tax. According to Chief Justice John G. Roberts, "The Affordable Care Act's requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably by characterized as a tax...Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness." As of this writing I cannot think of another example where the non-performance of an act results in the levying of a Federal tax. Federal tax is generally levied on such things as income, investment income and the consumption of certain goods like alcohol, gasoline guzzling cars, telephones, duck stamps, et. al.

In writing about President Obama's healthcare law earlier in the year, I pointed out that the Supreme Court would rule upon the Constitutionality of the ACA based upon three criteria, the Commerce Clause, the Taxing Clause and the Necessary and Proper Clauses within the United States Constitution.[2] Like most others, I dismissed the possibility that the Supreme Court would utilize the Taxing Clause to uphold the individual mandate of the ACA because the mandate is a penalty or punishment rather than a tax, and the purpose of taxes has historically always been to raise revenue - not to be punitive. Apparently I was completely in error.

Commerce Clause Preserved

The Supreme Court's decision was always to be of monumental importance to either keeping the Government's powers under the Commerce Clause checked, or allowing them to be let upon the nation, unfettered, limitless and absolute. The Supreme Court correctly stated that were the ACA to be upheld under the Commerce Clause it, "would open a new and potentially vast domain to congressional authority." The Framers knew the difference between regulating commerce and using the power of the Commerce Clause to coerce commerce and every act that may in the aggregate of all people performing it, have any impact on commerce. Had the Supreme Court upheld the ACA under the Commerce Clause, Congress would be able to regulate absolutely everything in America under its ability to regulate commerce.

Chief Justice John Marshall wrote almost two hundred years ago in Gibbons v. Ogden, 22 U.S. 1 (1824), that Congress' power under the Commerce Clause is the power, "to prescribe the rule by which commerce is to be governed. This power, like all others vested in Congress, is complete in itself, may be exercised to its utmost extent, and acknowledges no limitations, other than are prescribed in the Constitution." [3] Congress has long had the power to regulate insurance and as such and to some degree, health insurance. [4] Chief Justice Roberts rejected the Government's argument for the individual mandate based on congressional use of the Commerce Clause because he stated that Congress had a power to regulate commerce not to create it. In all five Justices rejected the argument that the individual mandate of the ACA would pass Constitutional muster under the Commerce Clause, Chief Justice Roberts, Justices Scalia, Kennedy, Thomas and Alito.

The ACA was meant to help the over 50 million or so Americans without health-care coverage, and to ensure that those with health insurance coverage do not lose it. Much of the most politically broad based support for healthcare reform is based on legitimate concerns over runaway health-care costs. Many opponents of the ACA, while acknowledging problems with the current health care system have suggested alternatives to a national health care plan but their solutions place them squared against two of the most powerful lobbied interests in Washington, insurance companies and tort lawyers. Advocates for private sector solutions like opening up the health care market to allow individuals to purchase insurance across state lines and to select only the type of coverage they need, argue that these two solutions alone would automatically make health care more affordable to a majority of Americans by driving insurance premiums down. It is difficult to argue that medical tort reform, curtailing frivolous medical malpractice suits, and the curbing of medical drug class action suits (plaintiffs for which are shamelessly solicited on every channel during every day of prime time television) would not help the entire medical industry-though who will take on the tort bar?

Those who do not have health insurance and use the emergency room or public hospitals when sick (what are called "cost-shifters") shift an immense economic cost on those who have health insurance and the insurance industry as a whole. Ironically what today's Supreme Court ruling does not address, because it is not addressed in the ACA, is that fact that the largest cost-shifters, illegal aliens (who account of $8.1 billion in health care costs) and low-income persons (who are already covered by Medicaid, at the cost of $15 billion per annum) will be exempt from the mandated health care regime of ACA. The most important feature in the over 2,700 page ACA is its individual mandate because this was always intended to shift some of the costs of health care to the healthy and the voluntarily uninsured -requiring that these groups, and ironically not the costliest cost-shifters, purchase private insurance.

Mandate as a Tax But Not a Penalty?

The purpose of taxation is to raise revenue. The purpose of penalties is to punish and deter unwanted behavior-sometimes, as in the case of the individual mandate, with the promise of criminal prosecution. The two have historically been distinct though with some overlap. For example, there are legal penalties for speeding (below what rises to the charge of reckless driving), streaking, violating the copyright laws or removing stickers from mattresses. Some of these penalties carry fines but the purpose of these fines is not to raise revenue so much as it is to deter conduct. In essence, no where even in the labyrinth of the IRS Code are streaking or removing mattress labels "taxable events."

Chief Justice Roberts, joined by Justices Breyer, Ginsburg, Kagan and Sotomayor agreed with the Government's argument that the individual mandate within the ACA constitutes a tax on people who do not buy health insurance and is permissive under Congress' taxing power. Here is where the logic of Justice Roberts' opinion gets tougher to follow.

How can the individual mandate, which imposes a financial penalty upon anyone who does not purchase health insurance after 2014, and is not exempt from doing so, be called anything other than a penalty? Chief Justice Roberts states that what the mandate is called (Congressional Democrats and the White House have referred to the mandate as a penalty and not a tax-ACA itself refers to the mandate as a penalty) is not determinative of what it is. His opinion states that the individual mandate is distinguishable from a penalty because, "the mandate is not a legal command to buy insurance,"-it is a requirement that people who do not purchase insurance pay the IRS a fine. If this seems like a distinction without a discernable difference-you would not be alone in thinking so. Chief Justice Roberts argues that the failure of an individual to purchase health insurance would not, while subjecting that person to an IRS fine, be unlawful. If this is true, I do not advise passing this along as a defense if the fine is not paid...

Congress may have stumbled upon a new way to mandate every type of behavior the Court correctly forewarned against it using the Commerce Clause to mandate, by use of the Taxing Clause. Losing the distinction between penalties and taxes may prove a slippery and dangerous slope-one that institutionally empowers the lawmaker and makes mincemeat of the ability of the hapless individual to any longer avoid doing any number of things-such as not purchasing any number of items that she simply does not want. Thinking through the potential abuses for Court's reasoning in this instance is disturbing. There is more to the Court's opinion deserving of analysis but the use of the Taxing Clause to uphold the ACA's individual mandate, is a legal and historical first.

Ultimately, like so many things that happen in American life and political discourse, the jury of public opinion will come down on the Court's decision as it does on so much else-along deepening political battle lines between current iterations of liberalism and progressivism. Not everything must be about politics but perhaps it must when the country seems deeply divided within itself about the role of its government. Divided between those who want the government merely to assure equal opportunity to all and those who seek a far more idealized realization of fairness, and even a greater equality of outcomes. What we are lacking is a jury fixed merely on preserving the freedoms and institutions of the Constitution.@

R. Tamara de Silva

June 28, 2012
Chicago, Illinois

R. Tamara de Silva is an independent trader and lawyer

3. Marbury v. Madison, 5 U.S. 137 (1803). at pp. 196
4. Think of ERISA, CORBRA, HIPAA, et. al.

Facebook's IPO, NASDAQ and the Illiquid Electronic Marketplace Revisited

May 24, 2012
Facebook's IPO, NASDAQ and the Illiquid Electronic Marketplace Revisited

By R Tamara de Silva

May 24, 2012

According to the news people, there is blame to be had all around after shares of the largest initial public offering in history, Facebook (FB), lost almost twenty percent of their value in the first three days of being publicly traded. However, the lasting lesson of FB's IPO is that the financial world's increasing reliance exclusively on electronic trading often leads to catastrophic problems during critical market events.

Discontent over FB's IPO is heard from regulators and especially investors who saw the value of the their investment drop, to those who consider that the IPO was priced to perfection at 106 times its last 12 month's earnings or at 5 times the value of the most valuable (according to market capitalization) company in the world, Apple. The possibility of investing in FB's initial public offering, as in any other IPO, always bore the risk of buying an IPO at a price above its market price-that is the price it has in the publicly traded market. That said, very public examples of less than elegant IPOs are said, (whether in practice their impact is meaningful or not), to threaten the investing public's appetite for prospective IPOs. Another concern with FB's IPO is the possibility that FB, and its lead underwriters including Morgan Stanley, J.P. Morgan, and Goldman, Sachs & Co., failed to disclose material information involving new information about FB's revenue prospects during the IPO roadshow to all but a handful of their large clients-not the public supposedly because their larger clients had paid for the seemingly "inside information." Keep in mind that under the federal Securities laws, information about revenue, operations and prospects of a planned IPO are considered "material information" and must be divulged to the public in a very scripted manner. This has already resulted in a class action lawsuit filed for $15 billion in damages to the investing public. Another and more significant class action lawsuit was filed on the third day of FB becoming public, a lawsuit which picks up on the most important aspect of FB's IPO - the failure of one of the world's largest and its fastest electronic trading platforms-the NASDAQ.[1 ] Traders and investors who placed orders in FB on the day of its IPO were stuck in limbo as the electronic exchange that calls itself, "the power behind 1 in 10 of the world's securities transactions" froze and stopped working. NASDAQ's software issues constitute neither a reasonable failure nor an excusable one. Let the world take note that we will rue the end of the trading floor and open outcry as FB's IPO demonstrates how we are hostage to electronic software that like all software will fail or have glitches and show us how worthless electronic markets are when they are completely illiquid and we are held hostage to them.

All market transactions involve a degree of risk. In the law as in the markets, there is a presumption, albeit rebuttable, that the greater the amount of information a market participant has, the better able the participant is to assume and understand the risk behind a transaction. Information is valuable in decision making until such time that too much information leads to diminishing returns because the amount of information incapacitates the decision-maker and prevents him from making a decision. Risk increases dramatically when a market participant's information about price and order execution becomes nil. This is precisely what happened to the traders of close to 30 million shares of FB on the day of its IPO because of a software glitch at the NASDAQ.
What happened on the day of FB's IPO to most of the traders of FB shares is a condition little understood-the state of high illiquidity along with a lack of transparency. Transparency refers to the degree of information that is available. In a perfectly transparent market all relevant information about a market transaction from the price, order size, order flow, trading volume, identity of the traders/counterparties, all bids and offers available, etc. would theoretically be discoverable.

Transparency's value in the marketplace is best explained by its absence- a condition of opaqueness. Lack of transparency in the financial markets is called opaqueness. The environment that led to the past credit crisis was opaque. In the past mortgage debacle, few of the players knew what the baskets of mortgages they were packaging, buying and selling were actually worth. The participants in instruments that led to that last crisis operated in a very opaque if not downright murky environment. The mortgage related securities being traded from brokers to banks and between banks were not pegged to the value of anything tangible and often marked by model to myth. One could make the case that they were not even derivatives because their value was effectively not derived from an underlying anything.[ 2]

Illiquid and opaque markets occurred during FB's IPO. The opposite of illiquidity in the market is liquidity. Liquidity is the lifeblood of well functioning trading markets. In its simplest terms, liquidity is the ability of a market participant to trade at his or her price-that is to get in and out of the market at their chosen price. A history of the financial markets shows that liquidity requires a broad based collection of market makers to keep markets liquid. The more market participants the better. Without market makers, we see wide illiquid market spreads. These wide bid offer spreads in turn lead to market maker defection, to volume decreases and unfavorable trading markets for the public at large.

The regulated futures market, long a stepchild of the financial markets, with open outcry and electronic trading is the most liquid and transparent market in the world. It has been remarkably free from systemic financial crisis . . .with the exception of a certain salad oil scandal. All over the world at any given time, the value and the price of an S&P500 futures contract are known. What is more impressive is that during all major crises from the market crashes to presidential assassinations, the futures markets with open outcry have maintained their liquidity and their ability to absorb even the world's crisis level order flow or volume-without a glitch.

But most people, even corporate governance committees at financial exchanges conflate volume for liquidity-they are completely distinct. Most of the trading volume now on the largest domestic trading exchanges is in the form of electronic trading or more precisely in the equity markets, it is in high frequency trading. High frequency trading is spreading from securities to other markets like futures, currencies, derivatives, and debt instruments and to the overseas exchanges. To put this in perspective, in 2003 high frequency trading accounted for only 5% of all trading volume while today it is well over 70%.

High frequency trading firms ("HFTs") utilize a series of algorithms to take advantage of the computers' speed and proximity to the marketplaces to get information about orders and price before every other market participant. Three types of institutions comprise the trading volume of HFTs and are what is meant by HFTs: 48% proprietary high frequency trading firms, 46% investment banks and 6% hedge funds. Investment banks often have dual roles in owning proprietary high frequency trading firms and directing investment bank trade to and from these firms.

The physical exchanges like NYSE, NASDAQ and CBOE lease out space to HFTs that allows them to place their supercomputers directly next to the supercomputers of the exchanges thereby giving the HFTs advantages of milliseconds and microseconds-to see price and order information (inside information) before anyone else that is not paying for co-location and does not have a supercomputer with algorithms at the physical exchange. Their proximity to the servers at the physical exchanges give them an insurmountable advantage which they utilize to "trade," or effectively front-run everyone else's orders. Any argument that we have a level playing field in terms of price and order information in the market today is simply false.

It should be said that for the majority of the time and in non-crisis conditions, HFT works and is the major revenue generator for the electronic equity exchanges. It is argued that HFTs, like their human counterparts, are market makers in that they provide price discovery. I am profoundly skeptical of the argument that HFTs are pure market makers as this term has historically been understood because they are not active market makers. HFTs are quintessentially passive, largely using their location and software advantage to detect volume and to see order flow before everyone else and to react to it. Their market making activities are essentially different from the floor trader and floor broker who will take an unqualified risk even in the most volatile times, HFTs make markets passively by reacting to other people's activities that they are able to see happening before anyone else can. HFTs hold their market positions for milliseconds up to a few hours. Often HFTs fish for what order flow is out there by sending out false quotes to induce a reaction and therefore gauge the type of order flow that is out there in milliseconds before retracting its bids and offers-long before anyone would react to them...things non HFTs simply cannot do and what would on the trading floor be called the jailable offenses front-running and trading on inside information...but I digress.

The fact is most volume on equity exchanges like NASDAQ and NYSE are the result of electronic order flow and HFTs. However, these "traders" or algorithms are historically the very worst market-makers when crises occur because unlike their human counterparts, they largely bolt-withdrawing and canceling bids and offers en masse. Hence in times of crisis, in the marketplace dominated by HFTs, liquidity not just lessons, in the absence of human market makers, it largely disappears. What this means for all other traders and the public is that they cannot execute their orders or trade when a market crisis occurs.

This is what happened during the Flash crash of May 6, 2010 wherein the Dow dropped almost 1,000 points (the biggest intraday loss in history) losing nearly 10% of its value in seconds along with most of the 8,000 individual stocks and exchange traded funds, some of which traded 60% below their value of seconds prior before ultimately recovering. A September 30, 2010 report by the joint staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, that studied the causes of the Flash crash found that the presence of electronic trading and its interaction with HFTs during that crisis eroded liquidity, "the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets."[3 ]

In the case of FB's IPO, and according to sources including the trading database developer Nanex LLC, HFTs caused the NASDAQ to have to delay the opening of trading on FB because of "excessive quote cancellations," adding that this is "ironic enough, it was mostly HFTs that benefited later when NASDAQ quotes stopped coming from the Securities Information Processor (SIP) which transmits quotes for everyone who doesn't get the premium direct feeds."[ 4] In other words, NASDAQ's software could not handle the volume of bids, offers and cancellations from HFTs before FB's opening.

At this point, it would not be logical for the exchanges to commission independent research and study into the true impact of HFT on price discovery, liquidity and volatility and what this means to their markets because the volume of trades generated by HFTs constitutes their major source of revenue. The exchanges now have a conflict of interest between their vital public functions of providing price discovery and liquidity and their bottom line.[5 ] Both the SEC and CFTC noted in their joint report into the Flash Crash of May 6 2010 that "high trading volume is not necessarily a reliable indicator of market liquidity". As I stated above, liquidity erodes or disappears in a market crisis where there is a prevalence of HFTs because volume comprised of quotes and price information recorded in the milliseconds (1/1000th of a second) if not microseconds (1/millionth of a second and the current speed of many HFTs) that can be withdrawn and cancelled before ever being in danger of being executed is not only not known with certainty to be recorded, but it is "noise" in terms of its impact on price discovery and it is simply not executable liquidity.

There was a time just a few years ago when the largest exchanges in the United States were de facto public utilities. They provided the most crucial of all functions to the world, they established the price of all the metals, grain, oil and bonds the world needed to exist. Price discovery and the liquidity provided by their trading members to the world was a vital service to the world economy. The equity exchanges existed primarily to provide equity capital to businesses through the exchange in ownership of shares traded at the exchange. Now the exchanges are by and large public companies with elaborate corporate structures and well paid corporate boards whose concern has shifted away from assuring the most liquid and crisis-free markets in the world to layers of decisions made by committees all with the view to revenue and deliberately not thinking outside of the revenue generating box. This is not a problem in principle except in this case it will be because the exchanges in protecting their primary revenue source, the HFTs, will no longer function as they once did and the public will suffer. Future crises will likely result in crippling illiquidity that will harm the trading public and result in massive financial losses.@
R. Tamara de Silva

May 24, 2012
Chicago, Illinois

R. Tamara de Silva is an independent trader and lawyer

1. Case 12 cv 04054 Phillip Goldberg v. NASDAQ, OMX Group, Inc. and the NASDAQ Stock Market LLC-which I am attaching here: Goldberg v. Nasdaq .pdf

2. But if they were, their value was not discoverable, or perhaps not verifiable. The values of mortgage securities were not marked to market, they were not pegged to an underlying asset, and if they were, no reasonable allowance was made for unfavorable movements in the value of the underlying assets.



5. According to one credible source, one of the Chicago exchanges has established its own HFT that will likely compete with its customers and the investing public.

J.P. Morgan's $2.3 Billion Loss as a Red Herring

May 14, 2012

J.P. Morgan's Loss as a Red Herring
By R Tamara de Silva
May 14, 2012

Much ado is being made about J. P. Morgan's disclosure of over $2 billion in trading losses and one hopes the media and regulators do not use this as yet another opportunity to completely miss the point. Wall street must not rely exclusively on its present risk models that are based exclusively on VaR and variations of VaR-it must learn to think outside its own box and anticipate worse case scenarios. We cannot afford to have many more systemic crises that threaten to bring down the financial system simply because yet again, the unexpected and un-modeled occurs.

Chief Executive Jamie Dimon's public self-flagellation aside, this loss compromises merely 20% percent of J. P. Morgan's pretax profit for the first quarter of this year. Put another way, J. P. Morgan has a market capitalization of $137.4 billion of which $2 billion comprises a bit more than 1 percent--hardly fodder for anyone's angst against quasi-public Wall Street juggernauts that seem to privatize profit and publicize loss being 'too big to fail." Mr. Dimon is wrong to assert that the trading losses were the result of hedges. It would be more wrong for lawmakers on either side of the aisle to call for hasty regulations on an industry they have never really understood and from whose pockets they are lobbied and receive the heftiest campaign contributions. A cursory look at what has happened to the Volcker Rule illustrates this point. The real lesson of J. P. Morgan's $2.3 billion loss is that Wall Street must once and for all adjust the way it manages and understands risk.

Risk management is the difference between success and ruin in the financial markets and its failure is felt around the world by even those hapless individuals who have never sold a credit derivative. No where is the importance of risk management better illustrated than to recount our most recent crises, which according to Wall Street's most prevalent measurement of risk, Value at Risk (VaR), were never supposed to happen: The market crashes of 1987 and 2000, Long-Term Capital Management, the collapse of Bear Stearns, the Savings and Loan Crisis, the crash of 1929, the collapse of Northern Rock, the Russian Debt crisis. Understanding risk is the single most important consideration for any participant, from the independent trader to the juggernaut of a Goldman Sachs.

But what does Wall Street understand by the term risk? There are many discussions of what constitutes "risk" in the financial markets but not surprisingly, there is no one definition. Typically, discussions of risk revolve around the concepts of Value at Risk (VAR), beta, delta, the capital asset pricing model (CAPM) and the Black-Scholes options pricing model (BSM). All these ways of quantifying risk are based on inarguably faulty assumptions.

This is where a refresher on the Gaussian Bell Curve enters any discussion on Wall Street's risk models. There are really only two things worth knowing about a Gaussian Bell Curve this is also taught to the legions of business school graduates who go on to write risk models as analysts and traders on Wall Street. The first is that a Gaussian Bell Curve assumes events occur in a normal distribution. What this means is that in a Gaussian Bell Curve, if events or occurrences were plotted, they would occur in the largest numbers at or towards the very center of the bell curve. All these events, plotted on a chart would take the shape of a bell curve, hence the name. Events which occur less frequently would occur towards the edges of the curve. The further the event was from the center of the bell curve, the more improbable it is to occur. This is called a normal distribution. The second thing one should know about the Gaussian Bell Curve, perhaps less well taught is that it does not predict market events very well at all.

Analysts at investment banks make models of reality with predictive capability-it is called modeling. J. P. Morgan invented Risk Metrics in 1994 as a set of financial models that were to be used by investors to measure portfolio risk. Risk Metrics like financial modeling in general, attempts to take a certain set of variables or causes and isolate them as being the very variables that account for change in financial markets. This is a bit simplistic but works reasonably well when reality happens within the fat center of a bell curve. Financial models seek to replicate financial reality much like economic models and models of human behavior that have become extremely popular in the social sciences writ large. Financial risk models like social science models suffer from all the weakness and frailty of over-simplifying reality and selectively isolating causal variables. In sum, financial risk models fail catastrophically when worse-case scenarios or even the genuinely unexpected occurs.

This does not mean we have a reasonable alternative to risk models as we humans do not like indeterminacy. We do not like to make decisions or look back in hindsight and think we made decisions by tossing a coin. On the contrary, we like to find reasons for why we made decisions and why events occurred. We tend to think we can. We have at times an irrational belief in the rational. But as Pascal once stated, nothing is more rational than the abdication of reason itself. The ability of social scientists or investment bankers to explain events through the actions of rational human actors appeals to our psyche. It is appealing simply to think we can.

Models of the financial markets like models of the human behavior in the social sciences have serious limitations. To start, they have to simplify reality. One of the ways that modeling simplifies and in a sense, falsifies reality is by making assumptions about human beings, which are not true. For example, modeling tends to assume that humans, whether in a marketplace or in a poker game are rational and that they act at all times in accordance with their best interests. This is not borne out by reality. Any cursory historical account of human behavior belies that humans act rationally. Human beings are emotional actors as much as they are rational actors.

The supremacy of emotions to the human story is only matched by our social scientists willful neglect of them. However, given a choice, time and again, we often act on our emotions and against our rational interests. Our strongest emotions keep us awake at night, they cause us physical pain, they have helped our race to achieve beyond all expectation when at other times they have left us paralyzed. We think wishfully when we rationally should not. The markets are replete with examples of irrational exuberance, traders who act out of hope, fear and greed as much as they act out of a consistent rational interest in maximizing their profits. Markets historically at tops and bottoms have betrayed the irrational mob mentally of the masses of its participants.

If humans were truly rational, we simply would not have addictive behaviors like gambling, drug addiction, drinking or any self-destructive behavior. We may not even have much ill-health, skin cancer, road-rage, or obesity because knowing we should take care of ourselves, we would-this is rational. We may never purchase luxury items or clothes. We may not care so much about how our neighbors live because we would not feel envy, jealousy, sympathy or pity. The pursuit of leisure and charitable activities may well be quite different. So many of Tocqueville's observations about American life would not hold water.

But in reality, half of our brains are devoted to pure emotion. And this half has expressed itself as the stuff of life. We cannot seem to choose our emotions one at a time either. If we were, we would want to be able to love without being vulnerable to grief, to experience the wings of hope without putting ourselves in danger of experiencing disappointment or the failure of our hoped-for event. As a race, we have spent most of our time acting on our emotions and being in their grip as is borne out in our history, our mythologies, culture, our wars and literature. It is in every sense human to be irrational or at least to experience emotion. To argue that humans are rational actors is at a minimum to simplify things, but really it is not a valid assumption.

Modeling also suffers from faulty assumptions about the ability of human participants to gather, assimilate and react to information. Most models are sensitive to information. Information causes the rational actor in a model to act a certain way, presumably in a way that will maximize that actor's interests. In the real world, information is not perfect. There is misinformation. Rumors, false tips, erroneous analyst reports are example of misinformation. Some information that is available to a rational actor is false information. Even if we assumed that all the information available to market participants was correct and no false or misinformation was available, market participants would process and assimilate the information differently and at different rates. One example of misinformation and information assimilated at different times is the discovery of a report in 2008 on the internet that United Airlines was facing bankruptcy. This report was over a year old but it caused the price of the stock to drop by over 40% in a single day, before it was discovered that the report was old. In the real world, individually and collectively, we have different intellectual and ideological frameworks, we also have different levels of intelligence, among other factors that allow us to reach very different conclusions when faced with the same information. My neighbor may react to rising gasoline prices years faster than I would by immediately cutting down on his driving or purchasing a hybrid vehicle. Market participants react to identical information at various rates. One person may react quickly to too little information and another may wait much longer accumulating much more information. Sometimes waiting to act while accumulating and digesting information is not a good thing like waiting to liquidate a losing position before your losses wipe you out when acting sooner would have allowed you to cut your loss without going broke.

Another problem with financial models is that they do not account for insider information or conflicts of interest. A good idea for anyone with a year to spare would be to write a volume chronicling conflict of interest in the financial world. One of the inherent conflicts in investment banks has been the Chinese wall that is supposed to separate the investment banking and sales functions of the investment house from the research and analysis side. Some have argued that this Chinese wall did not always exist. There is an inherent conflict between the need to sell the investment banking services of a bank to the same customer who is being covered by the bank's analysts. There is an enormous and still unresolved conflict of interest in the functions of credit ratings agencies. The credit ratings agencies are paid by the issuers (their clients) of the securities they were supposed to evaluate, creating an inherent conflict of interest. If the analysts or agencies are too harsh in their coverage, then the ability of the bank to sell its investment banking services may suffer or the agencies will lose their clients.

What about the potentially insider information that the analysts obtained in covering a company and the danger that this information would travel across the room to the trading floor of the investment bank? Another conflict of interest certainly, but it is also an example of a market participant having insider information or simply information that other market participants do not have, before they have it.

Another fallacy with financial modeling is that models are required to isolate a fixed amount of causal variables. In other words, a financial model that was designed to predict the risk of an investment portfolio would be comprised of say twenty factors or variables, each of which or a certain number of which would affect a change in measure of risk to the investment portfolio. What if in reality, it was one hundred or ten thousand different variables or things that would change the riskiness of the portfolio?

The financial models of investment bank analysts and traders assign likelihood to the possibility of certain events occurring. Financial models assume a normal distribution (a bell curve) of asset returns or risk. Using a normal distribution, events that diverge from the mean or center of the bell curve, by five or more standard deviations, known as a five-sigma event, are very rare and ten-sigma events are nearly impossible. However, the 1987 market crash represents a change of 22 standard deviations. The odds of such a 22 standard deviation event occurring are so low as to deemed impossible.

In the real financial markets, events considered nearly impossible by financial models assuming normal distributions of events, not only are possible, they are occurring frequently. There have been multiple fluctuations greater than five standard deviations in our most recent past. Events that according to a Gaussian Bell Curve are supposed to occur only once every one hundred thousand years, if at all, are occurring in certain cases, several times in a decade. Dramatic market events or fat tails do occur in a greater frequency than is possible assuming normal distributions suggesting distributions are not normal. Since the 1998 Russian debt crisis, the global financial markets have experienced at least 10 events, none of which were supposed to occur more than once every few billion years.

The financial services industry is full of at least two generations of analysts, investment bankers, statisticians and of course economists, who have been indoctrinated through college, their masters and MBA programs to believe in the bell curve and normal distributions-it is beyond time that they learned to think outside the box. Alternatively, to the extent that any regulations are enacted, they should seek to once more separate investment banking from commercial banking so that as long as Wall Street relies on one VaR number, they are allowed to fail and their losses are never again shared by the public. @
R. Tamara de Silva

May 14, 2012
Chicago, Illinois

R. Tamara de Silva is an independent trader and lawyer

Federal Judge in Health Care Case Orders Executive Branch to Explain Speech

April 4, 2012

Federal Judge in Health Care Case Orders Executive Branch to Explain Speech

By R Tamara de Silva
April 4, 2012

It not typical in the course of oral arguments for a Federal Judge to assign the Department of Justice and the Attorney General a homework assignment. Yesterday, the Court of Appeals for the Fifth Circuit heard oral arguments involving the Patient Protection and Affordable Care Act ("ACA" or "Obamacare") when something extraordinary happened. The Court was hearing oral arguments on an appeal by the Physicians Hospitals of America and Texas Spine & Joint Hospital, Lts, for the dismissal of an action they had filed for declaratory and injunctive relief against Kathleen Sebelius, as Secretary of the United States Department of Health and Human Services to prevent enforcement of Section 6001 of the ACA. During the Appellee's arguments, Judge Jerry Smith, interrupted the Department of Justice's lawyer, Dana Lydia Kaersvang to ask her whether the Department of Justice, an arm of the Executive Branch, agreed with statements made by President Obama that seemed to indicate that the Executive Branch did not believe the Judicial Branch had the power to overturn laws it found violated the Constitution.

"Judge Smith: Does the Department of Justice recognize that federal courts have the authority in appropriate circumstances to strike federal statutes because of one or more constitutional infirmities?
Ms. Kaersvang: Yes, your honor. Of course, there would need to be a severability analysis, but yes.
Judge Smith: I'm referring to statements by the president in the past few days to the effect...that it is somehow inappropriate for what he termed "unelected" judges to strike acts of Congress that have enjoyed -- he was referring, of course, to Obamacare -- what he termed broad consensus in majorities in both houses of Congress.
That has troubled a number of people who have read it as somehow a challenge to the federal courts or to their authority or to the appropriateness of the concept of judicial review. And that's not a small matter. So I want to be sure that you're telling us that the attorney general and the Department of Justice do recognize the authority of the federal courts through unelected judges to strike acts of Congress or portions thereof in appropriate cases.
Ms. Kaersvang: Marbury v. Madison is the law, your honor, but it would not make sense in this circumstance to strike down this statute, because there's no...
Judge Smith: I would like to have from you by noon on Thursday...a letter stating what is the position of the attorney general and the Department of Justice, in regard to the recent statements by the president, stating specifically and in detail in reference to those statements what the authority is of the federal courts in this regard in terms of judicial review. That letter needs to be at least three pages single spaced, no less, and it needs to be specific. It needs to make specific reference to the president's statements and again to the position of the attorney general and the Department of Justice." [1]

On Monday President Obama stated that, "I am confident the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress." The President's statement is false in that he discounts over two hundred years of the Federal Court exercising its power of judicial review to do just that.

The Judicial Branch's power of judicial review arises out of Marbury v. Madison, 5 U.S. 137 (1803), wherein Chief Justice John Marshall established the United States Supreme Court's power of judicial review. In this case, Justice Marshall pointed out that the Constitution is "the fundamental and paramount law of the nation" and that "an act of the legislature repugnant to the constitution is void."[2] The Constitution is the nation's highest law and when an act of Congress conflicts with it, that act is to be held invalid.

To be fair, the words of the President, keeping in mind he is the head of the Executive Branch, attacking the power of a co-equal branch of government, in this instance the Judicial Branch, are not unprecedented nor constrained to one political party. President George W. Bush criticized "unelected judges" and their power to go against the will of the people. Both conservatives and liberals reliably point to the hand of judicial activism when things do not go their way. Some so-called Supreme Court experts go so far as to assert that a Supreme Court justice will ever only view any given issue of law through either a Democratic or Republican prism-ruling out any allegiance or oath to the Constitution or the complexity of Constitutional law-of course to many of these experts, there is no complexity to the law or other matters, other than what falls between bold ideological demarcations.

Perhaps the most famous Supreme Court skeptic was President Franklin D. Roosevelt. President Roosevelt displayed a contempt for the Supreme Court calling it the Court of "Nine Old Men" because in 1937, six of the justices were age 70 or more and the youngest one a mere 61. When the Supreme Court held the Railroad Retirement Act of 1934, and the Agricultural Adjustment Act of 1933 un-Constitutional, President Roosevelt famously complained that the plainly archaic court had applied "the horse-and-buggy definition of interstate commerce." In order to remedy their apparent senility or his belief that they would only continue to strike down several parts of the New Deal, he came up with a plan in the form of a bill that would require all Supreme Court Justices to retire at 70 or have the President appoint a younger justice to serve alongside them.

Since Roosevelt, Presidential candidates from George Wallace to Newt Gingrich have run on platforms promising to rein in the Judiciary in the way they think appropriate.

Somehow, the Founding Fathers managed a design that would anticipate even the hyper-politicization of the present day. A powerful reason for the Constitution's establishment of three equal and separate branches of government was to ensure that each branch would serve as a check and balance on the others-in theory not permitting one to become too powerful. Unelected judges were intended to be removed from shifting political tides and ensure that political mobs and their demagogues would not overrun the basic protections of freedom guaranteed by the United States Constitution. The law of the land would not be held hostage to it's the shifting agendas of political parties or vain ideology. To anyone but an ideologue, the unelected nature of Supreme Court judges and the lifetime tenure of Federal Court judges are not bad things.

Judge Smith's asking the Department of Justice to clarify whether the words of its boss were those of the Attorney General and the posture of the Department of Justice is extraordinary. Many would argue that Congress, politicians of every stripe and Presidents violate a respect and regard for the other branch of the government by routinely criticizing the Judiciary and politicizing everything. All pretense of a kinder gentler discourse on matters of public policy may have gone the way of the Dodo to be replaced by discourse at the lowest common denominator. So perhaps Federal judges should be above the fray and not get sullied by stepping into political brawls. A counter-argument might be that if I make one legal argument to the Seventh Circuit Court of Appeals during oral arguments and the moment I walk outside the building contradict what I have just said by making another legal argument, the Court of Appeals would have a right to inquire what my position really is. Perhaps because President Obama is essentially a litigant in the appeal and his suggestion of judicial review being unprecedented, radical enough a legal posture, Judge Smith's query of the Department of Justice is reasonable.@
R. Tamara de Silva

April 4, 2012
Chicago, Illinois

R. Tamara de Silva is an independent trader and lawyer

2. 5 U.S. 137 (1803)

Update- Department of Justice Responds to the Court:
April 5, 2012: Attorney General Eric Holder responds to Judge Jerry Smith-the full text of his letter is here: AG letter to 5th Circuit .pdf
Mr. Holder states that his letter should not be taken as a supplemental brief and does not concern the arguments before the Court but points to the presumptive Constitutionality of Federal statutes and quotes two Federal judges who did not find Obamacare to be violative of the Constitution.

Difficult Legal Issues in the Healthcare Case Before the Supreme Court

March 27, 2012
Difficult Legal Issues in the Healthcare Case Before the Supreme Court

By R Tamara de Silva
March 27, 2012

Arguments began yesterday before the United States Supreme Court on the future of President Obama's healthcare bill, the Patient Protection and Affordable Care Act ("ACA" or "Obamacare"). The question of whether President Obama's national health care plan would withstand the Constitutional challenges brought by the Attorneys General in twenty-six states was destined to be determined by the Supreme Court when after August 2011, the Court of Appeals for the Eleventh Circuit issued a 304 page opinion that the ACA would violate the powers of Congress under the Commerce Clause. After the Eleventh Circuit's ruling there were two conflicting Circuit Court opinions on the law because the Sixth Circuit had upheld the ACA as not violative of the Constitution in June of 2011. The Supreme Court will decide upon the Constitutionality of the ACA based upon three criteria, the Commerce Clause, the Taxing Clause and the Necessary and Proper Clauses within the United States Constitution. None of the arguments are quite as clear cut, however as many people believe.

The Supreme Court's ultimate decision is of monumental importance to either keeping the Government's powers under the Commerce Clause checked, or allowing them to be let upon this nation, unbounded, limitless and absolute. The future of this decision will affect nothing less than whether Congress is ever again, held back from regulating absolutely everything in America under its ability to regulate commerce or what are called its Commerce powers.

In Marbury v. Madison, 5 U.S. 137 (1803), Chief Justice John Marshall established the United States Supreme Court's power of judicial review. In this case, Justice Marshall pointed out words that are still forceful today- that the Constitution was "the fundamental and paramount law of the nation" and that "an act of the legislature repugnant to the constitution is void."[1] The Constitution is the nation's highest law and when an act of Congress conflicts with it, that act is to be held invalid. The Supreme Court examines President Obama's healthcare law under the authority of this old and venerable case.

Commerce Clause

Chief Justice John Marshall wrote almost two hundred years ago in Gibbons v. Ogden, 22 U.S. 1 (1824), that Congress' power under the Commerce Clause is the power, "to prescribe the rule by which commerce is to be governed. This power, like all others vested in Congress, is complete in itself, may be exercised to its utmost extent, and acknowledges no limitations, other than are prescribed in the Constitution."[2] Congress has long had the power to regulate insurance and as such, health insurance.[3]

Perhaps the most helpful discussion of the Commerce Clause arguments is within the Eleventh Circuit case. In that case, twenty-six states sued the Government for using the Commerce Clause to have Congress require by law that Americans must buy health insurance from "birth to death" from a private company or pay a penalty-in effect legislate that every American buy a product from a private vendor whether they want it or not.

The Government has argued that those who do not have health insurance and use the emergency room or public hospitals when sick (what are called "cost-shifters" in the court opinion) affect interstate commerce and fall within the ambit of the Commerce Clause because they shift an economic cost on those who have health insurance and the insurance industry as a whole.[4]

President Obama's defense before the Eleventh Circuit asserts that by merely breathing, individuals affect interstate commerce, "and therefore Congress may regulate them at every point of their life." This argument would seek to expand Congress' powers under the Commerce Clause beyond current law and give the Federal Government absolute unfettered power to regulate any activity that had but the most tenuous connection to interstate commerce.

There are two questions the Supreme Court must decide: 1) whether the decision not to purchase health insurance is an economic one; and 2) whether not purchasing health insurance is an activity or an inactivity. These questions are important in deciding whether the decision not to purchase health insurance is an economic decision. Some would consider that my decision not to buy health insurance is an act of economic inactivity-not an activity at all. The proponents of the ACA would differ and argue that the decision to not purchase health insurance is an economic decision to self-insure and discount the future risks of ill health. In other words, is an inactivity (not buying insurance) tantamount to an activity (buying health insurance) for purposes of the Commerce Clause? Are the two the same if when measured in the aggregate, they have a substantial enough impact on economic activity? The strongest defense of the ACA would be the argument that for the purposes of the Commerce Clause, there is no distinction between activity and inactivity. The decision not to buy health insurance (an inactivity) is arguably an economic decision for purposes of the Commerce Clause if when you take the aggregate of all people that make this economic decision, there is a substantial effect on inter-state commerce.

However, Eleventh Circuit Justices Joel Dubina and Frank Hull questioned whether the Commerce Clause subjects those outside of the stream of commerce to Congress' authority over commerce. People that do not buy health insurance are, "not making a voluntary decision to enter the stream of commerce, but this choice is being imposed on them by the Federal Government." [5]

The Eleventh Circuit Court of Appeals points out the instances of when Congress has actually mandated personal action on United States citizens solely because they are American are relatively few: serving on juries, registering for the draft, filing tax returns and responding to the census. Before the ACA, Congress has not been able to compel Americans to engage in an activity, even one with substantial economic consequences-for example, no one is required by law to purchase flood insurance even if they live in a flood plain or for that matter stop building homes in flood plains. Congress has not yet required that people abandon New Orleans, nor hurricane prone areas or other geographic areas proven to attract recurring and costly natural disasters.

There is absolutely no precedent for Congress using the Commerce Clause to enforce a purely economic mandate. All previous government mandates of individual behavior that have an economic consequence primarily affect an American's responsibilities as a citizen with the United States. The government's mandate of a draft, filing a tax return and serving on a jury, all affect a citizen's interaction with the government itself and affect how government defends itself and operates. However, mandated health care would affect and mandate that every citizen interact with a private company-a requirement never before asked by the Government under the Commerce Clause.

President Obama's lawyers will make the argument in favor of mandating that an individual purchase a good or service just because the decision not to purchase a good or service, if taken in the aggregate of all person who similarly made this decision, have a substantial impact on interstate commerce. However, the Eleventh Circuit cited Lopez v. United States, which held that the a Congressional finding of the aggregate effect of economic activity was not sufficient to hold legislation a valid exercise of the Commerce Clause, "Simply because Congress may conclude that a particular activity substantially affects interstate commerce does not necessarily make it so."[6]

Proponents of the ACA would point to the very same the Lopez case which hold that Congress can regulate intrastate "economic activity" when that activity, "viewed in the aggregate, substantially affects" commerce between borders.[7]

Were the Supreme Court to find the Administration's arguments persuasive, their reasoning would mean that Congress might use the Commerce Clause to mandate every conceivable economic decision, even decision lacking what the courts have historically required, "a nexus" or connection or a regulated economic activity. Even areas that have historically been under the jurisdiction of the states such as marriage, divorce, child custody, choice of education and all have substantial economic effects in the aggregate and would theoretically be candidates for regulation under the Commerce Clause. Health care has historically been regulated by the states.

If the Government can mandate the purchase of private health insurance, it can mandate every other private purchase. The Eleventh Circuit's opinion points out the Constitutionally untenable nature of the defendants' position,

"In sum, the individual mandate is breathtaking in its expansive scope. It regulates those who have not entered the health care market at all. It regulates those who have entered the health care market, but have not entered the insurance market (and have no intention of doing so). It is overinclusive in when it regulates: it conflates those who presently consume health care with those who will not consume health care for many years into the future. The government's position amounts to an argument that the mere fact of an individual's existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life. This theory affords no limiting principles in which to confine Congress's enumerated powers."

Consider the case of a famous Molotov cocktail in which it was held that Congress' power under the Commerce Clause did not extend to holding the arson of a private residence a Federal crime. In 1998, in Fort Wayne, Indiana, a certain Dewey Jones from Detroit decided the best way to dispose of a Molotov cocktail was to throw it into his cousin, James Walker, Jr's house. Predictably, Jones was convicted in U.S. District Court of violating 18 U.S.C. section 844(i), which holds that it is Federal crime to "maliciously damage or destroy, means of fire or an explosive, any building... used in interstate or foreign commerce or in any activity affecting interstate or foreign commerce." Jones' lawyers unsuccessfully argued that section 844(i), when applied to the arson of a private residence, exceeds the authority vested in Congress under the Commerce Clause of the Constitution.

The Supreme Court in a unanimous opinion, delivered by Justice Ruth Bader Ginsburg, agreed. The Court ruled that an owner-occupied private residence not used for any commercial purpose does not qualify as property "used in" commerce or commerce-affecting activity, such that arson of such a dwelling is not subject to federal prosecution under section 844(i). Justice Ruth Bader Ginsburg wrote for the Court that "[w]ere we to adopt the Government's expansive interpretation of section 844(i), hardly a building in the land would fall outside the federal statute's domain." [9]

What is most interesting about the Jones case is that in it the Supreme Court Justices asked the Government's lawyer what if anything he thought would not be included in the Government's suggested reading of the Commerce Clause--he could not seem to come up with limitation.

Taxing Clause

Proponents of the ACA will argue that the Congressional mandate of the ACA was a tax under the Taxing and Spending Clause. The Eleventh Circuit Court declined to see it thus pointing out how many times, Congress describes the mandate not as a tax but as a penalty and in its legislative history makes clear the ACA was intended as a penalty and not exclusively a revenue-raising mechanism. This is arguably the weakest defense of the ACA because only one court has even considered this a valid defense and bipartisan judges who have upheld the Constitutionality of the ACA have not found the Taxing Clause defense of the ACA persuasive.

Necessary and Proper Clause

Article I, Section 8 of the Constitution grants Congress the power, "to make all laws which shall be necessary and proper for carrying into execution" it's other Federal powers. This language is the basis of the Necessary and Proper Clause and in my opinion, perhaps what may constitute the strongest defense of the ACA. One of the reasons being is the Necessary and Proper Clause is simply not perfectly clear what powers are given to the Federal Government and not the states to effectuate Federal laws and the powers of the Legislative and Executive Branches. Also, it is the Commerce Clause that has been invoked far more than the Necessary and Proper Clause, giving all a clearer sense of the latter's meaning.

Looking at original intent for hints on its intended scope is not exactly helpful either as it was the subject of heated debate between Alexander Hamilton, who believed it to authorize many implied and un-enumerated powers and Thomas Jefferson, who believed that necessary meant actually "necessary." The problem with Hamilton's meaning is that it would seem to justify so many recent laws and executive orders many in this country would argue are neither necessary or Constitutional. Necessary is in the eye of the beholder and would be capable of being used indiscriminately. What is more, the Necessary and Proper Clause can be invoked on matters that do not have an economic effect.

The most famous case fleshing out the meaning of the Necessary and Proper Clause was McCulloch v. Maryland, in which the Supreme Court ruled that,

The Government of the Union, though limited in its powers, is supreme within its sphere of action, and its laws, when made in pursuance of the Constitution, form the supreme law of the land. There is nothing in the Constitution which excludes incidental or implied powers. If the end be legitimate, and within the scope of the Constitution, all the means which are appropriate and plainly adapted to that end, and which are not prohibited, may be employed to carry it into effect pursuant to the Necessary and Proper clause.

Justice Scalia has suggested in Gonzales v. Raich that the question of whether an intrastate activity has a "substantial effect" on interstate commerce could alternatively be seen as a matter under the Necessary and Proper Clause. [11]

In Raich, the Supreme Court upheld the use of the Controlled Substances Act (a Federal law) to regulate and interfere with the wholly intrastate production of locally grown, medical marijuana as a valid exercise of the Government's powers under the Commerce Clause and the "cumulative effect" of intrastate activity. Intrastate activity could be regulated if it were to touch on a broader Federal regulatory framework affecting interstate commerce. The Supreme Court's decision in Raich may herald a judicial approval in the present healthcare case of the Federal Government's regulation of purely instrastate activity. Justice Scalia in his concurring opinion set the stage for prospectively using the Necessary and Proper Clause to allow the Federal Government to regulate intrastate activity that would affect a larger system of regulation of interstate commerce through the Commerce Clause.[12]

Complexity of Implications

The Constitution creates a limited federal government with powers that are not enumerated belonging to the people and the individual states. Yet every expanded use of the Government power through the mandate of Federal law, for the purposes of this writing, the Commerce Clause, is one less power to be held by the states or retained by the individual in determining how to live.

How to live has been a fundamental question posed by philosophers from the time of Plato and Aristotle and arguably earlier in ancient Buddhist texts. Today concerns about individual liberty are so often dismissed as the political diatribe of the libertarians or Ron Paul supporters. It is as if popular political discourse rendered in simple ideological terms has hijacked the need for meaningful analysis or discourse. What is lost is that every power surrendered to the Federal government through the Commerce Clause is one less that the individual states and the individual may retain in deciding how to live.

One of the grave implications of a Supreme Court decision upholding the ACA would be that if everything that affects interstate commerce (which, by the reasoning of President Obama's lawyers in defending the ACA, is every imaginable activity) then the states and the individual American are merely custodians or temporary repositories of power, powers, affecting every aspect of American life and powers that may be reclaimed by the Federal government at any time.

This would mean that there are few powers left exclusively to the states. The Federal government would discover its political reach, one power at a time.

The Commerce Clause simply states that Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." The Commerce Clause was intended to facilitate interstate commerce by allowing Congress to prevent states from passing discriminatory restrictions on the free-flow of interstate commerce.[13] To allow Congress to regulate all manner of activities far removed from that end, is to turn our system of a government of limited and enumerated powers on its head. Justice Marshall would find the ACA unconstitutional.

However, if the Supreme Court does not strike down the ACA as unconstitutional, and find the ACA to not violate the Commerce Clause, it would seem to be allowing for the very first time, Congress to use the Commerce Claus to mandate an activity on the part of an American and therefore open the flood gates to mandating any private action.@
R. Tamara de Silva

March 27, 2012 Chicago, Illinois

R. Tamara de Silva is an independent trader and lawyer

1. 11. 5 U.S. 137 (1803)

2. Id. at pp. 196
3. Think of ERISA, CORBRA, HIPAA, et. al.
4. Interestingly, under the ACA, the largest cost-shifters-illegal aliens that account of $8.1 billion in health care costs and low-income persons that will be covered by an expansion of Medicaid (currently costing $15 billion in costs to health care system) will be exempt from the mandated health care regime of ACA. Shifting the purchasing mandate of the ACA to healthy and voluntarily uninsured individuals-requiring that this group and not the costliest cost-shifters purchase private insurance. See pp. 140 of Eleventh Circuit Opinion
5. Eleventh Circuit opinion at pp. 123
6. 514 U.S. at 557 n.2, 115 S. Ct. at 1629 n.2
7. Id. at 561
8. Eleventh Circuit Opinion at pp. 130-131
9. Jones v. United States, 529 U.S. 848 (2000)
10. 17 U.S. 316, 4 Wheat. 316, 4 L. Ed. 579 (1819)
11. "The regulation of an intrastate activity may be essential to a comprehensive regulation of interstate commerce even though the intrastate activity does not itself "substantially affect" interstate commerce. Moreover, as the passage from Lopez quoted above suggests, Congress may regulate even noneconomic local activity if that regulation is a necessary part of a more general regulation of interstate commerce." Gonzales v. Raich, 545 U.S. !, 33-55 (2005) (Justice Scalia concurring)
12. Id.
13. United States v. Lopez, 514 U.S. 549 (1995) and see also, United States v. Morrison, 529 U.S. 598 (2000)

MF Global Bankuptcy Revisited: Gary Gensler's Conflicted Role

February 3, 2012

MF Global Bankuptcy Revisited: Gary Gensler's Conflicted Role

By R. Tamara de Silva

February 3, 2012

Does anyone police the regulators? Are more regulators needed to police regulators for conflicts of interest that at least superficially would seem to affect their judgment? And why must we as a society perpetually add to a body of existing regulations just because we seem unable to effectively enforce the ones we already have? I ask all this in thinking about Gary Gensler, the current Chairman of the Commodity Futures Trading Commission ("CFTC"). There is a legal standard for causality, the "but for" rule. Under this legal standard, had Mr. Gensler not been involved with Jon Corzine, $1.2 billion in customer funds may not have gone missing. In hindsight, Mr. Gensler's conflicts of interest regarding MF Global required policing.

MF Global filed for bankruptcy in the amount of $41 billion on October 31, 2011 after a loss of confidence over the firm's $6.3 billion bet on European sovereign debt. Since then, while most of the missing $1.2 billion in customer funds has been located, in excess of $600 million in customer money remains missing. There are no guarantees, the commodity customers from whom most of the money was lost, will regain their money. As of this writing, it is still not known what happened to the lost money nor why it has remained unaccounted for three months.

I suggest a possible conflict of interest between Jon Corzine and Mr. Gensler based upon their friendship, and a common political and professional involvement. What follows is a laundry list of connections-the applicability to MF Global comes later. For starters, Jon Corzine was the Chairman of Goldman Sachs during part of the eighteen years that Gary Gensler worked at Goldman Sachs. Mr. Gensler donated $10,000 to Corzine's campaign for governor of New Jersey. They worked together in Congress when Corzine was a Senator and Mr. Gensler a Senate aide. They worked closely together drafting large portions of the investor protection act, Sarbanes Oxley, while Corzine served on the Senate Banking Committee. In 2010, Corzine invited Gensler to lecture at Princeton about financial regulation and Gensler also spoke to the audience assembled about his friendship with Corzine. Gensler donated $300,000 to the prominent Democratic candidates including President Obama and Hillary Clinton. Corzine has been one of President Obama's elite bundlers, this past April 2011, alone holding an exclusive fundraiser from his Manhattan apartment where he was able to pass the hat around for more than $500,000. Gensler authored much of the Dodd-Frank Act and analysts like Sandler and O'Neill Partners wrote that they expected Corzine's contacts in Washington as he took over as CEO of MF Global in 2010 to help him "navigates a shifting regulatory environment."[ 1]

Conflicts of interest are ubiquitous on Wall Street and deserving a voluminous treatment. The tension between principal and agent is entrenched and accepted.

But is not just on Wall Street and not just between the principal and agent that conflicts of interest reside-they are everywhere-in politics, between the State and the governed, the employee and the employer, at credit ratings agencies, really at some level in every aspect of our public and personal life. It seems that government agencies are inclined to grow and expand seemingly without limit, an interest or will to power, entirely distinct from merely serving the governed well. I am conflicted between my love for pizza and bikinis. What is problematic about conflicts of interests are that among competing interests, something has to give and what usually does is the fiduciary duty of either the agent of the principal. No public figure and no investment bank can be all things to all competing interests- there is often a tension between shareholder profits, trader profits and a customer's best interests. Contrary to the silly ideas that many belch out, there is no simple cure either. What is the evidence of a conflict of interest, if any, in Mr. Gensler's role as Chairman of the CFTC and the fall of MF Global?

Bankruptcy proceedings under conflicting regulatory regimes.

As if things have not been bad for MF Global's customers since October 2011, they became much worse when two days ago on February 1, 2012, Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York ruled that the commodity customers of MF Global (the majority of people whose money was lost) do not have any priority over other creditors in the firm's bankruptcy proceedings. Had the customers with segregated accounts at MF Global been given priority status, they would be assured of receiving all of their missing money, before any other creditors, like JP Morgan Chase were paid.

There are two dueling regimes under which MF Global's assets in bankruptcy could have been adjudicated-one for securities broker dealers and one for commodity brokers. MF Global was both a broker-dealer and a commodity broker. Broker dealers are liquidated in accordance with the provisions of the Securities Investor Protection Act ("SIPA"), and a SIPC-appointed trustee oversees the liquidation.

MF Global was also a commodities broker or futures commission merchant ('FCM"). Commodity brokers are liquidated in accordance with the provisions of Subchapter IV of Chapter 7 of the U.S. Bankruptcy Code.[2 ] According to this bankruptcy regime, customer funds must be identified, kept separate and are not made available to pay for a firm's obligations to other creditors of the FCM. Under this second regulatory regime, a trustee overseeing the liquidation in bankruptcy of an FCM must apply the CFTC's Regulation part 190 (CFTC derives its authority to make this rule under the Commodity Exchange Act or CEA), which holds that commodity customer must receive priority over all other creditors of an FCM in the event of bankruptcy.[ 3]

Judge Glenn wrongly decided that the operative bankruptcy regime for MF Global should be that used for a broker-dealer rather than a commodities broker. Judge Glenn was able to disregard or may not have been presented with the fact that most of MF Global's business was in commodities and not securities. According to one of my sources, MF Global had 50,000 futures customer accounts and 400 customer accounts in securities.

This ruling is made worse when one considers that many of the customers whose missing money totaled $1.2 billion were small traders who invested with MF Global perhaps because they were not able to open accounts with larger institutions.

Did Gary Gensler play a role in deciding upon an SIPA bankruptcy a decision that would harm thousands of commodity account holders and forever damage investor confidence in the commodity markets- in lieu of choosing a bankruptcy regime based upon the CEA and CFTC's Regulation part 190? There are those like the blog, "MFGFACTS," who would argue that he did just that but the evidence cited appears to be invisible.[ 4 ]

Before Gensler recused himself from the CFTC's investigation of MF Global, he had participated in two closed-door CFTC meetings on October 31, 2011 and November 2, 2011-the purpose of both meetings was according to Bloomberg News, MF Global's bankruptcy.[5 ] Senator Pat Roberts sent Gensler a letter on November 10, 2011 demanding to know what was discussed between Gensler and his staff regarding MF Global's bankruptcy during these meetings.[6 ]

But to be fair, no one has yet presented any actual proof that Gensler believed the appointment of a SIPC trustee (an automatic occurrence I think in the event of the broker dealer going bankrupt) would preclude the utilization of a CEA based bankruptcy proceeding. If some deal was struck as a favor to institutional creditors like Goldman Sachs or JP Morgan Chase over small farmers in Iowa, no proof has come to light.

The CFTC to its credit, filed a reply brief on January 18, 2012 urging the bankruptcy court to apply the bankruptcy provisions of the CEA and CFTC that would give MF Global's commodity customers priority over all other creditors and warning that a prior filing by MF Global's bankruptcy Trustee Louis Freeh contained, "errors and misstatements of law that, if accepted, may inhibit commodity customers from recovering their property."[ 7]

Gensler differs to Corzine's lobbying and MF Global allowed to make bets on European debt

The stage was set for MF Global on February 3, 2005, when the CFTC published proposed amendments to its Rule 1.25, which governed what types of investments an FCM may make of customer segregated funds. Before 2000, FCMs and designated clearing organizations ("DCOs") were only permitted to invest in United States debt (including municipal and state debt). On May 17, 2005, the CFTC published final rules that further amended Rule 1.25 to allow for the practice of FCMs using repurchase agreements called "repos" with customer funds. The size of the repo market in the United States alone is $1.6 trillion.

A repo is simply the sale of a security (typically a government debt) tied to an agreement to buy the securities back later. A reverse-repo is the purchase of a security tied to an agreement to sell back later. Repos are essentially loans secured against a security. The interest rate received is called the repo rate. The party that sells a security agreeing to buy it back in the future at a higher price later is engaging in a repurchase agreement. The party that agrees to buy the security and sell it back in the future is engaging in a reverse repo.

Corzine took over as CEO of MF Global around March 2010. According to its former risk manager, Michael Roseman in his testimony yesterday before the House Oversight Committee, by October 2010, MF Global bets on European debt were $4 billion. The use of repos by MF Global would have permitted the firm to leverage customer deposits, although it is unknown that they did. However, leverage of 30:1 or greater, through the use of repos would have resulted in larger losses if the repos were in sovereign European debt. This does not mean that repos are per se instruments of financial destruction.

Repos are part of what is the shadow banking system. I would define shadow banking as simply the collection of unregulated activities (repos, credit default sways and collateralized debt obligations, etc) engaged in by regulated and unregulated entities. Shadow banking like is very like traditional banking (other than existing regulations do not address it) and it provides a very important supply of short-term credit.

CFTC Rule 1.25 governs the investment of customer funds by an FCM.

(a) Permitted investments. (1) Subject to the terms and conditions set forth in this section, a futures commission merchant or a derivatives clearing organization may invest customer money in the following instruments (permitted investments):
(i) Obligations of the United States and obligations fully guaranteed as to principal and interest by the United States (U.S. government securities);
(ii) General obligations of any State or of any political subdivision thereof (municipal securities);
(iii) General obligations issued by any enterprise sponsored by the United States (government sponsored enterprise securities);
(iv) Certificates of deposit issued by a bank (certificates of deposit) as defined in section 3(a)(6) of the Securities Exchange Act of 1934, or a domestic branch of a foreign bank that carries deposits insured by the Federal Deposit Insurance Corporation;
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign nation [emphasis added]; and

In late 2010, the Commodity Futures Trading Commission -- one of MF Global's regulators -- proposed changing one of its regulations, known as rule 1.25, to limit the kinds of investments that firms like MF Global could make using their customers' idle funds, including risky debt of sovereign nations. It was Corzine himself who lobbied for the change in Rule 1.25 to allow for customer-segregated funds to be held in foreign debt instruments.

On July 20, 2011, Corzine said, he "took part" in a conference call with CFTC Chairman Gary Gensler in which MF Global executives made clear their opposition to any changes in rule 1.25. On the call, Corzine said, he argued that the repo transactions with other broker-dealers should be permitted "because such transactions could be beneficial to" firms like MF Global.

Later that same afternoon, Corzine and his General Counsel at MF Global again called the CFTC and again reiterated their view that rule 1.25 should be left alone. Gensler complied.

Had Mr. Gensler changed CFTC Rule 1.25 as he was supposed to do after the passage of Dodd-Frank and not given into lobbying by Corzine, I would not be writing this and $600 million in customer money would not still and inexplicably be lost.

In an irony almost too much to bear, Commissioner Gensler told Reuters this past Wednesday that he, "has ordered an extensive review of how futures brokerages are regulated, following the collapse of MF Global three months ago." Is this like his recusal this past November anything other than a belated grasp at having clean hands or another smokescreen?

Why now impose more regulation on an industry that he and Corzine single-handedly played a role in damaging perhaps (though I hope not) beyond complete repair. MF Global would not have gone bankrupt but for Gensler and Corzine choosing not to amend Rule 1.25, an amendment that would have wholly prohibited MF Global's European bets. Congress should think clearly and focus on Corzine and Gensler's conflict of interest instead of inviting C-Span to broadcast itself yet again, as it did today, chasing a stream of red herrings for causation in the form of credit ratings agencies, credible risk officers and the exchanges.@
R. Tamara de Silva

Chicago, Illinois
February 3, 2012

R. Tamara de Silva is an independent trader and securities lawyer

Any questions about this article should be directed to


Comparing the Incomparable- Credit Ratings Agencies Revisited

January 17, 2012
Comparing the Incomparable- Credit Ratings Agencies Revisited

By R. Tamara de Silva
January 17, 2011

Yesterday, Standard & Poor's relieved the Eurozone's bail-out fund, the European Financial Stability Facility ("EFSF") of its AAA credit rating, possibly hampering the fund's ability to contain the European debt crisis. This comes on the heel's of the S&P stripping both France and Austria of their triple-A rating in favor of a rating of AA+.[1] The effect of the S&P downgrade may be negative. Ratings agencies exist to level asymmetries in information and evaluate risk but one of their inherent oddities is that they seek to compare things whose differences in scale make them incomparable. Ratings agencies also have conflicts of interests, they often evaluate financial products (like collateralized debt obligations) that they do not understand, they seem to lack fixed ways to measure absolute risk, and they are at times, catastrophically wrong.

Elephants and aardvarks

Downgrades should not be considered in a vacuum. When the ratings agencies equate economies based upon ability to repay debt, they artificially equate countries disregarding factors such as size, geo-political risk and political infrastructure that make their comparisons odd.

S&P announced on August 5, 2011 that it would downgrade the credit rating of the United States. Interestingly it announced during the last day of this same month that while the world's only superpower and largest economy would now get only a AA+ rating, securities backed by sub-prime home loans, the same type of investments that led to the worst financial debacle since the Depression (and one from which we have not yet arguably recovered) would receive its once coveted triple AAA rating...unlike the United States.

There is no question that the United States will be able to repay its debts, we will continue to print more money-the larger issue is the continual erosion in the Dollar over time. Although a currency cannot be devalued ad infinitum without catastrophic results, at least for the time being, there is no credible replacement for the Dollar continuing to be the world's reserve currency. No other nation has the assets to back up being the world's reserve currency.

Looking at the S&P's downgrade of the United States in a vacuum, one would think that it is more prudent (according to all three ratings agencies), to prefer Austria, Denmark, Norway, France, Germany, Singapore, Luxemburg, the Swiss or even Finland. There is no consensus by all three agencies on countries like Hong Kong, Australia and the Isle of Mann. Yet other than ratings, the similarity ends there. Comparing the United States, the largest and most analyzed economy in the world with relatively petite nations like Luxemburg and Finland are like comparing the teeth of an otter and an elephant-one is so remarkably larger than the other that a comparison seems problematic. Admittedly both animals have teeth. Or like comparing the speed of an elephant and an aardvark.

To put the utility of comparison between the United States, which has a GDP of $14.657 trillion, in perspective, here are the GDPs of some of the remaining triple AAA rated countries in 2010 according to the IMF [2] :

• Luxemburg has a GDP of $52.43 billion,
• Germany's GDP is $3.314 trillion (largest in the EU)
• France $ 2.582 trillion,
• United Kingdom $2.172 trillion
• Lichtenstein $4.83 billion
• China $10 trillion (largest behind United States)

Comparing the largest most innovate, most scrutinized economy in the world to a nation like China is humorous because in terms of actual accounting standards, any meaningful transparency, the complete absence of a stable democracy or political freedoms-China is a peasant country. When the United States is downgraded, there is no other United States to compare it to, so to some extent, the rating downgrade may not be absolutely everything the media proclaims it to be.

Effect of downgrade on United States so far

When the markets opened on the first Monday after S&P's downgrade of the United States, the benchmark 10-year Treasury bond's yield dropped to 2.5%. Price, which is inverse to yield in bonds, has continued to increase even approaching all-time historic levels. This past August, the 10-year yield dropped almost 60 basis points, piercing below 2% (lower than their historic all-time low in 2008 when Lehman Brothers collapsed). The demand for United States' Treasuries has increased dramatically immediately following the S&P downgrade.

If the United States were deemed less credit worthy (less likely to pay its creditors), then investors and bond holders would demand higher returns for buying any U.S. debt/bonds. The very ability of the United States to borrow money by issuing bonds would be jeopardized. The market has ruled against this logic and to a large extent against S&P-justifiably so.

Remember a government bond is a debt instrument issued by a national government denominated in that government's currency. United States Treasury securities are valued in US dollars-their price is in United States Dollars.

A risk-free interest rate is the nominal rate of return for an investment with no risk (no credit risk) [3] of financial loss. The risk-free rate of return for almost all this century was the yield of United States Treasuries.


Why would the market seemingly disregard the opinion of S&P? Perhaps because many people remembered that during the housing bubble, sketchy loans (once again I proffer this as a new legal term of art) were repackaged by investment banks into investment pools and other mortgage backed securities and received the gold standard of financial ratings, the coveted and in theory elusive, AAA rating by the largest credit ratings agencies, including S&P and Moody's. S&P's granting of triple AAA ratings to companies and investment vehicles that turned into junk ratings caused $2 trillion in losses to everyone that relied on them-basically, everyone. No one else seemed to find it ironic that this same agency told the United States by how much it thought its debt should be lowered.

Conflicts of interest and fraud

But back to the credit ratings agencies... Not that long ago, in August 2010 and again in July of 2010, the SEC threatened to charge all three ratings agencies with fraud. Some would say better late than never. During the housing bubble, sketchy loans (I use this as a new legal term of art) were repackaged by investment banks into investment pools and other mortgage backed securities and received the gold standard of financial ratings, the coveted and in theory elusive, AAA rating by the largest credit ratings agencies, including S&P and Moody's. The agencies' granting of triple AAA ratings to companies and investment vehicles that turned into junk ratings caused billions if not trillions of dollars in losses to everyone that relied on them-basically, everyone. The credit ratings agencies are paid by the issuers (their clients) of the securities they were supposed to evaluate, creating an inherent conflict of interest. They were the game's referee and one of its players at the same time.

The SEC report on Credit Ratings Agencies from June 2007 identified another problem other than having the referee in a match being paid by one of the sides, (not the investors or the public's side mind you), that prevented the agencies from giving accurate ratings. The agencies could not give accurate ratings of many of the instruments involved in the housing bubble and credit crisis because of the complexity of the transactions involved and the inability of agencies to understand what they were analyzing.

One could argue that the agencies were not engaging in a deliberate (alright not a horribly deliberate) fraud, that is having a public position of trust, being paid and knowing they cannot do what they are assigned to do but pretending to do it anyway. Mind you, if anyone else had engaged in this behavior, they would have likely been indicted for fraud and possibly RICO.

What may let the agencies off the hook is that they relied on the issuers' (the clients again, usually investment banks) audit committees. Audit committees cannot seem to be comprised of Chia Pets in human dimension. The fact that these committees represented having signed off on the financial instruments in question should mean something-if not, why have these corporate committees?!

Furthermore, one could argue that the credit ratings agencies must not be held responsible for their ratings because they did not and could not have understood the trading transactions taking place at the investment banks because they had to rely on the information they were given which was not itself transparent.

A possible longer term solution to the conflict of interest driven nature of the credit ratings agencies is to take away the compensation structure of the credit ratings agencies and deregulate them completely in-order to discourage inherent conflict of interest or use the Credit Spread Market-problem solved! Take away what is essentially a government-sponsored monopoly of credit ratings agencies and allow investor paid credit ratings agencies, which could open up the market and privatize the ratings industry. Without credit ratings agencies, the market will determine value more efficiently than the analysts at the agencies. A problem with this approach is that there might be variance between the ratings of twenty agencies as opposed to just three, causing the rating on any one agency to mean less and to make more work for risk managers.

No liability

S&P has somehow avoided to this very day, all criminal and civil liability for its part in the most recent financial crisis. If the agencies had some liability for their ratings, they may have a better incentive for assuring that they got them right. Neither the Justice Department nor the SEC (which has itself managed to miss all the major financial debacles of the past five years) has ever charged S&P with criminal conflict of interest (as they in practice do and would do to any number of much smaller economic participants with a much smaller fields of damage). Neither the Justice Department nor the SEC has gone after S&P for admitting before Congress in 2008 and 2009, that their being paid by the issuers (their clients) of the securities they were supposed to evaluate, created an inherent conflict of interest and did in fact wrongly influence their ratings.

Nobody has charged the S&P with criminal fraud or fraud on the marketplace for taking money from issuers in simple bad faith (playing the part of the referee and judge in a boxing match after being paid by one of the boxers) for rating securities, they admitted in sworn testimony they did not understand!

This sordid tale has no end. According to Bloomberg, S&P is giving its self-coveted triple AAA rating to junk,

"Standard & Poor's is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.
S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties."

A spokesperson for S&P when asked about why it would give its higher rating of triple AAA yet again to subprime securities repackaged by many of the scions of AIG and Goldman that participated in causing the Credit Crisis and profited from its bailout simply stated, "We believe our ultimate success will be driven by the value investors derive from our ratings and analysis."
However, it is not honest, however much one is paid, to issue a triple AAA rating to what Bloomberg calls,

"More than 14,000 securitized bonds in the U.S. are rated AAA by S&P, backed by everything from houses and malls to auto- dealer loans and farm-equipment leases, according to data compiled by Bloomberg,"

and not the United States of America.

Relatively speaking

Size matters. Pension funds and many of the largest institutional investors have rules about what investments they may invest in and these rules are based on the ratings given to investments by the credit ratings agencies. Consider that Australia, Andorra, Bermuda, Canada, Cook Islands, Denmark, Estonia, Finland, Germany, Hong Kong, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom retain their triple-A ratings.[5] These countries represent less than 21% of the world's collective math may be slightly off. If investment funds were limited to investing in triple-A products, it would be preposterous to think that less than 21% of the economy of the world would fund the remaining 79%.

Another weakness of the credit ratings agencies is that there is no set standard employed for measuring absolute risk. What I mean by absolute risk is the measure in gambling parlance, of the risk of ruin. Wall Street and regulators have, in the example of a bank lets say, no better way other than asking for capital ratios to ascertain a bank's risk or ruin. Other factors, like the value of assets and counterparty transactions lack still, even in 2012, transparency.

Because the credit ratings agencies share this problem of being unable to objectively ascertain absolute risk, they lag the markets' own detections of absolute and relative risk. For example, the agencies did not foresee the Latin American debt crises, the European debt crisis, AIG, the Credit Crisis, Enron, Worldcom, or even MF Global. In this sense, credit ratings agencies look backwards better than they can look ahead. Arguably, there are extremely few economists or market participants that can look ahead-this may be a wholly unfair criticism...except this is part of the reason for having the ratings agencies.

The most obvious problems with the existing regulatorily instituted regime of three credit ratings agencies is that they have no competition, no real accountability because they have to be utilized even when wrong, and no liability. This oligopoly ought to be dismantled and the private sector should be allowed to get into the ratings game in the same way that analysts exists in the financial markets for every other type of investment. Doing so would eliminate the existing conflicts of interests within the credit ratings agencies and allow investors to pay the private ratings agencies for their research. Competition will have to drive the caliber of research and ratings upward.

Sadly, nothing in the gargantuan 2,300 page Dodd-Frank Act or that has been discussed in the Senate Committee on Banking, Housing and Urban Affairs addresses the problems with the credit ratings agencies...the same ones that contributed to our recent financial crisis.@

R. Tamara de Silva

Chicago, Illinois
January 17, 2012

R. Tamara de Silva is an independent trader and securities lawyer

1. The EFSF's ratings are derived from its backers and France and Austria were two of the largest guarantors behind Germany. S&P's downgrade of the EFSF will mean the fund has 440 billion less in Euros than before the downgrade.
2. These numbers are adjusted by PPP (purchasing power parity), basis-this takes into account, relative cost of living and inflation rates, rather than just exchange rates.
3. There are other risks like inflation risk (the principal returned on a debt instrument upon maturity would have less purchasing power) and currency risk (the Dollar could as it has, decline in value relative to other currencies).

In Defense of Private Capital and Capitalism

January 14, 2012

In Defense of Private Capital and Capitalism

By R. Tamara de Silva
January 14, 2012

Is Mitt Romney guilty of capitalism? His opponents in the race for presidential nominee of the Republican Party have converged in their rhetoric and ideology with the Democratic Party and President Obama to decry that Romney's actions at Bain Capital and the private equity model in particular, are wrong, so extremely wrong that they make him wholly unworthy of consideration of President of the United States. Whether or not the latter conclusion is true or false, their argument is not evidence of either conclusion. I have read that a majority of Americans tune out politicians unless they stand to benefit from a specific government program or benefit-this would be a rational instance of when to tune them out.[1 ] The Democrats and accusing Republicans are in error about private equity and capitalism. What is worse they are placing populism above this country's core principles.

"If someone who is very wealthy comes in and takes over your company and takes out all the cash and leaves behind the unemployment? I don't think any conservative wants to get caught defending that kind of model." This quotation, which could have been from David Axelrod or President Obama, was actually from Newt Gingrich. In other words, conservatives cannot defend capitalism if it means that people will lose jobs.

Some history is helpful. Job creation and job retention are not the primary motivations for innovation and industry in the United States, they have never been. Job creation gained traction in the public discourse when it used as a justification for the government spending TARP funds-the rationale being that the government's spending would create a soft landing for the economy, lessen the economic impact of the recession and Credit Crisis and create (albeit often temporary and expensive) jobs. Yet it is not job creation that has motivated this country's most celebrated capitalists but profit motive or sometimes the pursuit of excellence expressed as an idea. Henry Ford did not start building his own self-propelled vehicles that ran on gasoline in order to create jobs any more than Steve Jobs began building personal computers to create jobs.

Hard Edges

We may not be in an economic crisis but a period of economic change. Capitalism has hard edges, especially in periods of extremely rapid economic change. Failure and obsolescence are the sina qua non of capitalism. What Mr. Gingrich's statement is missing is the possibility that America and the rest of the developed world are in the midst of period of rapid flux.

Almost without exception, most neo-classical economic theory holds that crises do not persist indefinitely, because economic systems revert to some equilibrium or balance. Perhaps, America and Western Europe as seen by the possible collapse of the European monetary union, may by in as much a period of economic change as it is in crisis. The distinction is important because if we are in a period of rapid economic change, things may not get better exactly as we expect them to-they will change.[ 2 ]

We may be in the midst of another economic revolution akin to that of the Industrial Revolution. Alternatively, we may be seeing disruptive technologies change the world and create economic upheaval (the hard edges) in the form of extreme wealth and extreme poverty as we saw in the close aftermath of the steam engine, the internal combustion engine, the railway and the utilization of electricity.

The world has never been, not at any time since mastery of the seas meant dominance in trade-not even during the silk trade--as interconnected as it is now. Technologies like the Internet and information technology have been both disruptive and creative at once, and at a breathtaking pace. The face of manufacturing, as we have recognized it for most of the twentieth century has itself changed, so has its importance as a percentage and engine of economic growth. It has been replaced by other sectors including and perhaps infamously, the financial services sector described by the term financialization. Just as what happened one hundred years ago, politicians lobbied for groups that were nearing obsolescence, but were unable to stop change itself. We see changes in the countless examples of relatively lower skilled, high paying jobs that have been erased and may never return. In periods of rapid economic change, settled patterns of work are upended. Another factor is the creation of disparate wealth between wealthy superclasses (robber barons) and everyone else, including the newly displaced.

Bain Capital, Private Equity and Venture Capital

It is easiest to extol the virtues of free markets and capitalism when able to toss in Steve Jobs, Bill Gates, Thomas Edison or Henry Ford as stunning examples of its success- but to be fair, these people are eight sigma events. Most capitalists are hardly this glamorous, they never make magazine covers, and their stories and personages are decidedly more bland if not just boring-fitting very well into the fat middle of a normal bell curve. Mitt Romney has been roundly accused of being unpardonably bland but this is not an economic transgression. Attacks on his career at Bain Capital are misplaced because both the private and venture capital business models provide extremely important social and economic functions.

Romney and Bain Capital are charged with making too much money, having businesses fail and alternatively, causing some of the most sympathetic people in North America to lose their jobs. The fallacy of these arguments are legion.

Bain Capital is primarily a private equity firm that also has a venture capital arm. Private equity firms invest by buying ownership of companies where they see the potential for a return for themselves, a return they capture by later selling the company at a profit to another party or parties either in the private or public markets (they sometimes retain acquired companies). Private equity investors can be more sophisticated than other corporate governors and in theory be better managers- thereby using their unique vantage point and experience to create wealth for investors.

Venture capitalists take a lot of risk, often investing their own money in start-ups and the new companies of entrepreneurs in the hopes of finding the next Google, or Apple. Both private equity and venture capitalists are rewarded for being able to recognize the best entrepreneurs, the best ideas, and helping to bring them to market by financing them, so that the world profits from the next iPhone, the next life-saving technology or Google.

No one in either industry risks their own or their investors' money expecting to fail. They would not stay in business if they did.

Sometimes, as the bi-partisan critics point out, people in companies acquired by private equity lose their jobs. One of the reasons for this is that private equity turns companies around by making them more efficient. This is often accomplished by getting rid of excess layers of management, unnecessary employees and generally, "bloat." It is important to remember that what is considered "excessive" in layers of management or how "bloated" a company may look-is largely subjective. Profit motive is the engine of capitalism, not job retention.[3 ]

When we introduce terms like "looting" which is a loaded term it is important to keep in mind that this is also a subjective term. Romney's critics are looking at Bain in hindsight...with some not insubstantial measure of bias. Also consider, that the world may be changing at a rapid place and some degree of job displacement may be the norm.

Investing in companies and trying to turn them around is not as easy it is sounds. It also involves an appetite for risk that most people do not have. A majority of businesses fail within two years of sooner after their inception (even if they are not distressed to start before being acquired by a Bain Capital).

Taking risk is nonetheless commendable. Taking huge risks can lead to catastrophic failure or success. I read somewhere that Thomas Edison failed well over 1,000 times before successfully creating the lightbulb. But he made in well in excess of 1,000 attempts and had the stomach to endure that much defeat-this is not common. Facebook, and Google were not guaranteed to successes. There is only one Mark Zuckerberg and only one Steve Jobs. If a high failure rate did not come with taking significant risks, there would be a 100,000 Bill Gates as opposed to just one. Looking at Bain's record, I am reminded of the Pareto Principle or 80/20 rule--that 80 percent of the effects are the result of 20 percent of the causes.

Overall, venture capitalists do well and their importance to the economy cannot be disputed. Venture capital is responsible for 12.1 million private sector jobs or about 11% of total private sector jobs that collectively generate $2.9 trillion in revenue.[4 ] Private and venture capital firms are responsible for most jobs in the software, telecom and semiconductor industries.[ 5]

Slavery and Principles in Opposition

The Founders has a very odd notion for their time, the idea that people were born with natural rights-not granted by a monarch or a government but actually born with rights, rights inherent to all individuals. This was a radical idea!

While there is no pure form or capitalism, capitalism is more conducive to individual freedom and human rights than any other system.[6 ] It simply trumps all alternatives. Capitalism promotes the opposite of slavery and is conducive a core principle deeply held by the Founding Fathers - that human beings have human rights. Self-ownership, the opposite of slavery is one of them.

This also comes with the harsh reality that some people will not succeed and must fail in a capitalist system. Because in a larger sense, it really makes no difference whether capitalism works perfectly or not-it is the legally instituted economic system most opposite of slavery.

Candidates for the Presidency, including the incumbent, like all politicians crave power so much that they must feed populist tendencies which, are based on emotion regardless of whether they cannibalize this country's core principles. All of the arguments against Bain Capital are populist ones designed to enrage, and excite anger and envy. They seek to alter the capitalist system by selectively identifying what parts of a free market are acceptable at a moment in time and what are not--and to suggest improper conduct where there is no evidence of any illegality (other than profit) by imposing the same arbitrary values-envy not being a great value by the way.

Some principles have to be above populist tendencies or we will have no principles standing. Steve Jobs and Henry Ford are good examples against these populist arguments-their motivations were never job creation or job retention but their economic enrichment-in pursuing these narrow goals they changed the world. Insisting that job creation or retention trump the motive of wealth creation, is something entirely other than capitalism.

Adam Smith's first great work before The Wealth of Nations was The Theory of Moral Sentiments, which made the case for sympathy as a foundation for human relationships in a civil society. Politics plays a large role in human relationships especially when it is used as lever to ignite class warfare and to institutionalize envy. Populism must never be used as a political campaign, however convenient or effective, because it ultimately enrages and divides a nation at its core, and sometimes these divisions cannot be healed.

Instead of attacking Bain Capital, all the candidates from both parties ought to address what harms capitalism (other than themselves obviously). If it were just Adam Smith's animal spirits competing and the fiercest winning, we would not have government subsidies, tax breaks and bailouts--all selectively doled out for a few-not all. Not even a Fed giving free money to some (a preferred very few)-not all. Or maybe we would because many of those that succeeded the most would always use their resources to create cartels, monopolies and buy political influence. Bribery and policy for vote getting- have no place in a purely capitalist system and their presence least this is my guess-given capitalism a bad name.@
R. Tamara de Silva
Chicago, Illinois
January 14, 2012

R. Tamara de Silva is an independent trader and securities lawyer

1. Class War? What Americans Really Think About Economic Inequality, Lawrence Jacobs.
2. Of course economists that guess correctly and point out a plausible causal variable will appear brilliant but there again, only in hindsight. We cannot really know if we are in a crisis or in a period of dramatic change but it cannot hurt to be aware of the possibility of the latter.
3. The profit motive cannot be selectively excised from capitalism in favor of job retention, as many of Romney's critics suggest. It was not that long ago that the USSR boasted of full-employment but could never match the sheer volume of innovation produced by its arch rival.
5. Id.
6. There is no purely capitalist system and may have never been-in the sense of a laissez-faire system because the State is always and in some manner involved.