By

Catherine Austin Fitts

Carolyn A. Betts, Esq.

~ February 18, 2019 ~

“There can be no time, no state of things, in which Credit is not essential to a Nation…” ~Alexander Hamilton, “Report on a Plan for the Further Support of Public Credit,” 1795

Table of Contents

I. INTRODUCTION

Investors have experienced challenging times since the change in U.S. Presidential administrations in 2017 initiated a period of reverse globalization with continuous changes in tax, trade, and other U.S. federal policies. Unnoticed in the fray is the October 2018 adoption by the U.S. Congress and Administration of an obscure federal accounting policy that signifies the most important change in the balance of power between the public and private sectors, between overt and covert operations, and between the democratic and fascistic aspects of the American political system: Federal Accounting Standards Advisory Board Statement of Financial Standards 56 (“FASAB 56” or “Statement 56”).

In simple terms, FASAB 56 claims to override the last 230 years of U.S. Constitution and financial management laws and accounting conventions established by the American Institute of Certified Public Accountants (AICPA). The policy allows approximately 170 federal reporting entities to shift amounts from line item to line item, and sometimes even omit spending entries altogether, in their financial statements if “national security” purposes make it necessary to avoid revealing classified information.

Essentially, the federal government has adopted an accounting and public reporting policy that allows a small group of unelected individuals with security clearances and “need to know” access to information to engage in secret processes to establish and maintain separate sets of classified secret books in most federal agencies and “component” entities. It also allows members of this group to purge from the publicly available financial statements anything the group deems to be worthy of national security protection. With the implementation of FASAB 56, when added to existing disclosure exemptions for national security and classified information that apply to the U.S. Treasury, federal agencies, banks, and companies doing business with the federal government and making a market in their securities, the greater part of the U.S. securities market has now effectively gone dark. This development, taken together with the growth of index funds, means that almost no one is “watching the store.”

In our opinion, FASAB 56 is particularly sobering in light of the events of the thirteen months leading up to its issuance. The extent to which mandatory market disclosure has been reduced by Statement 56 and the events that inspired its issuance constitute “material facts” within the meaning of SEC’s Rule 10b-51 to which investors surely are entitled. Consequently, these changes call for global and domestic investors—both individual and institutional—to exercise a new and greater level of due diligence in reaching an understanding of the U.S. Federal credit and its risks.

We believe the changes brought about by Statement 56 will materially affect the accuracy of current methodologies applied in both credit evaluation of issuers and valuations of their securities. Since current market pricing and credit evaluations do not reflect the new risks inherent in non-disclosure of key information to the investment decision, the prudent investor, with this new information in hand, may be embarking upon a lonely journey for some period of time.

In this article, we explain, with reference to other materials available on The Solari Report site, that it is no longer prudent for the investor to rely solely upon primary and secondary securities dealers, the U.S. rating agencies, and mandatory disclosure by issuers to accurately assess the risks and values of certain securities. While we encourage investors to do their own due diligence, we also recognize that FASAB 56 eliminates any hope that the investor will be able to obtain sufficient information to accurately assess the credit and value of his or her holdings of U.S. Treasury and other securities whose values are affected by Statement 56 (i.e., a meaningful percentage of U.S. public and private equity and debt securities).

The central-banking warfare model that has been the basis of the success of the Western world for 500 years is undergoing significant stress. The Bretton Woods system that has formed the structure for global trade since World War II is also unraveling. In this process, the secrecy and conflicts of interest that thread throughout the governance and management of the U.S. federal credit—whether by the government or the related financial institutions, market makers, investors, and contractors—have reached a point where the ancient rule of caveat emptor (“buyer beware”) applies.

You are responsible for doing your own due diligence. We hope the materials that we have assembled in this article and in the 2018 Annual Wrap Up: The Real Game of Missing Money will help you do so.

II. WHICH SECURITIES AND FINANCIAL ASSETS ARE AFFECTED BY FASAB 56?

What securities and other financial assets are affected directly or indirectly by the credit of the U.S. government and market values of its securities? Here is a preliminary list to help investors determine which of their holdings may be affected by a material fact or change like FASAB 56.

U.S. Treasury Bills, Bonds, and Notes

Full faith and credit securities issued directly by the U.S. government that have been recorded on the official books and records, whether in terms of the payment of interest or to “roll over” or pay off at maturity. This category includes short-term T-bills and notes, medium- and long-term Treasury securities, savings bonds, and similar securities.

Official statistics indicate that the following are the holders of the officially outstanding $21.21 trillion of National Debt as of June 30, 2018:

U.S. investors: $6.89 trillion—32.5%

Federal Reserve: $2.38 trillion—11.2%

U.S. government: $5.73 trillion—27%

Foreign investors: $6.21 trillion—29.3%

See here: [https://hudmissingmoney.solari.com/us-debt-holders/] for more on U.S. debt holdings. Note that U.S. government securities (together with, in some cases, full faith and credit securities and Government-Sponsored Enterprise [GSE] securities) are the only securities that can be used for various purposes by certain other entities, e.g., to support bank and broker-dealer reserve requirements and for corporate and municipal bond sinking funds. If any downgrade of these reserve securities were to occur, there could be an automatic bond default or default by banks or broker-dealers in satisfying their statutory reserve requirements, resulting in a cascade of defaults and margin calls throughout the investment economy.

Other U.S. Full Faith and Credit Securities

Full faith and credit securities issued or guaranteed by a government agency and backed by the full faith and credit of the U.S. government. This category includes other securities, including securities guaranteed by Ginnie Mae, for which the U.S. government guarantees unconditional and timely payment of principal and interest. FHA issues debentures that carry the full faith and credit of the U.S.

Mortgage Securities Backed by Secured U.S Insured/Guaranteed Loans

Mortgage-backed securities comprising mortgages guaranteed or insured (usually not 100%) by FHA, VA, and the Rural Housing Administration. These securities are not “full faith and credit” because they are not unconditionally guaranteed (there being conditions to payment and delays in payment), and the guarantees and insurance do not cover 100% of outstanding principal and interest. Their collateral involves, however, direct insurance or guarantees by the U.S. government.

Pools of Unsecured U.S. Guaranteed Loans

Interests in pools of student loans and other similar unsecured federal government-guaranteed loans. These securities are subject to certain risks that are not guaranteed by the federal government, including a lack of collateral and administrator and similar risks (e.g., that the loans have not been serviced or originated properly), but the underlying loans are federally guaranteed if all conditions are satisfied.

Money Market Funds—U.S. Government Only

Units in money market mutual funds that hold Treasury securities, federally secured certificates of deposit, and other short-term securities that are dependent upon federal government credit. These securities have outside, issuer-related risks as well and, therefore, trade at greater discounts than do the underlying securities.

U.S. Government-Sponsored Enterprise (GSE) Securities

Securities issued by traditional government-sponsored entities:

Freddie Mac and Fannie Mae securities

Connie Lee securities (college loans)

Federal Home Loan bank securities (backed by residential loans)

Federal Agricultural Mortgage Corporation (Farmer Mac) (backed by farm loans)

Securities issued by Federal Farm Credit Banks Funding Corporation (Farm Credit)

GSEs are private companies operating under government charters. Their securities (except to the extent risk has been transferred elsewhere) carry only an “implicit” guarantee of the U.S. government and have relatively high ratings because it is assumed (as was the case during the Financial Crisis for Fannie Mae and Freddie Mac securities and for Farm Credit Program securities during the 1988 bailout) that the U.S. government will make good on the agency guarantee if the agency is unable to do so. In case of a significant U.S. government credit downgrade, it is unlikely that investors in these securities could depend upon the government for payment.

U.S. Insured Deposits

Bank, savings and loan, and credit union deposits guaranteed by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). Both FDIC and NCUA have funding through user fees payable by the banks, savings and loans, and credit unions whose deposits they back, but the funding is not sufficient to cover all deposits and, therefore, there is a risk that the U.S. government will be called upon to fund any shortfall in claims by depositors.

Corporate Contractor Bonds and Stocks

Equity and debt securities issued by government contractors reliant for their business upon contracts with the federal government. The largest U.S. government contractors include the typical defense contractors like Lockheed Martin, General Dynamics, Boeing, Raytheon, BAE Systems, Bechtel, and Northrup Grumman; IT and service contractors like L3 Technologies, Hewlett-Packard, Leidos, Booz Allen Hamilton, and CACI; and other companies that are not as associated with defense contracting but for which a large percentage of business involves government contracting, like UnitedHealth, Humana, Verizon, McKesson, General Electric, Accenture, Deloitte, Merck, Corrections Corporation of America, FedEx, AT&T, Berkshire Hathaway, and the State of California.2

Fed Member Bank Bonds, Stocks, and Derivatives

Equity and debt securities of Federal Reserve Bank members, whose capital positions and profits depend upon favorable borrowing rates from the Federal Reserve, which in turn borrows at favorable rates from the federal government. This includes members of the New York Fed and others of the twelve federal reserve banks that provide depository functions for the U.S. government and may be legally liable for any illegalities in the management of and transaction in federal funds and assets.

This category also includes securities of banks and securities dealers whose capitalization depends upon their holdings of brokered deposits or repo agreements backed by Treasury securities.

U.S. Primary Dealer and Exchange Stabilization Fund Agent Bonds, Stocks, and Derivatives

Securities of banks that manage the sales of Treasury securities (primary dealers) and that assist in the New York Fed agent function for the Exchange Stabilization Fund for the Federal Reserve acting as agent for the U.S. Treasury (JPMorgan Chase, UBS, Goldman Sachs). Note that if illegal transactions were conducted over the years following World War II through the Exchange Stabilization Fund, or if there were questionable gold transactions by these same “bullion banks” on behalf of the Federal Reserve, the liabilities of the banks that implemented these transactions could be material. See here: [https://hudmissingmoney.solari.com/primary-dealers-of-u-s-government-securities/] for a list of the primary dealers in U.S. government securities and here [https://hudmissingmoney.solari.com/top-broker-dealers/] for a list of the top fifteen broker dealers based on their assets under management in 2018.

U.S. State and Local Government Municipal Bonds and Notes and Municipal Money Market Securities

State and local governments, particularly those with significant unfunded liabilities, that are highly dependent on funding from the federal budget in amounts in excess of the related federal taxes paid from their jurisdictions and municipal money markets using these notes and bonds.

Corporations and Financial Institutions with Fixed Income Investments—Stocks, Bonds, and Related Insurance Contracts

Any companies with large investment portfolios or pension funds with large holdings of any of the foregoing securities or financial assets.

Cash

Clearly, deterioration in the U.S. federal credit continues to debase the spending power of the U.S. dollar.

III. THE RATING AGENCIES

There are three major U.S. nationally recognized statistical rating organizations (NRSROs) according to standards promulgated by the Securities and Exchange Commission:3

Standard & Poor’s (S&P)

Moody’s

Fitch Group (which is dual-headquartered in New York and London and controlled by Hearst)

These three agencies are responsible for rating approximately 95% of rated securities globally.4,5

The SEC permits issuers of bonds with high NRSRO ratings to use short-form prospectuses and permits money-market mutual funds to purchase only securities with high NRSRO ratings. NRSRO ratings also are used in satisfying net capital requirements by banks; broker-dealers and insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.

Due to the reliance of regulators upon NRSRO ratings, such ratings have become a requirement for many private-sector transactions (e.g., for pension funds and banks) and are the basis for favorable analyst reports in the fixed-income market. Unfortunately, investors have a tendency to rely solely upon ratings rather than also doing their own due diligence in making purchase decisions.

The reputations of the ratings agencies suffered significantly as a result of their failure to do proper due diligence in rating mortgage-backed securities leading up to the 2008-2012 Financial Crisis. The rating agencies earn fees from the issuers. They had clearly bowed to the practices and wishes of the issuers and—no doubt—the wishes of the Fed, the U.S. Treasury, and other federal agencies that engineered the mortgage bubble.

One might rely on their failure to rate outliers whose securities present obviously unacceptable risks (and therefore have “junk” status), but if an entire sector faces the same risk (e.g., reliance on U.S. credit) that has been, traditionally, de minimis, the likelihood that the rating agencies will downgrade a whole class of securities is minimal.

In the words of the Conclusions of the Financial Crisis Inquiry Commission6 (January 2011):

The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies.

To demonstrate the likelihood that rating agencies are no longer able to withstand political pressure, notwithstanding post-Financial Crisis attempts to become more independent, witness what happened when, in August 2011, for the first time in history, Standard & Poor’s downgraded the U.S. credit from AAA to AA+. A furor ensued. In order to mend its relationship with the U.S. government, eighteen days after the U.S. debt was downgraded, S&P asked its then-CEO, Devin Sharma, to step down. Think about this for a minute. The CEO of a rating agency was fired for allowing his rating analysts to issue a perfectly reasonable rating change on the U.S. government’s credit.

Subsequently, the Department of Justice (DOJ) initiated an investigation into S&P’s role in the rating of several mortgage-backed securities that played a role in the 2008 Financial Crisis. In February 2013, DOJ and nineteen states’ attorneys general and the DC U.S. Attorney filed a $5 billion lawsuit against S&P and its parent company, McGraw-Hill, based upon the findings in the investigation, which was settled two years later for $1.375 billion. Neither of the other major rating agencies, which had not downgraded the U.S. credit but had joined S&P in the Financial Crisis debacle, was subject to such a lawsuit. This was a clear warning shot fired to prevent any rating agency from considering any future such downgrades.

In our opinion, no U.S. rating agency can downgrade the U.S. government or issue a watch-list warning on the U.S. federal credit without jeopardizing its existence as well as that of its holding company. Such a rating action could also threaten the physical, financial, or legal security of its executives or board members.

In short, a “prudent man” in the U.S. should not rely solely on the U.S. rating agencies with respect to ratings of U.S. Treasury and related securities.

IV. LAWS RELATED TO U.S. MONETARY AND FISCAL POLICY

To understand FASAB 56 and the immediate events leading to its issuance, it is essential to understand the U.S. laws related to U.S. monetary and fiscal policy.

Learning the law related to U.S. federal finances is challenging if you have not gone to law school. To ease the task, The Solari Report commissioned attorneys Michele Ferri and Jonathan Lurie to prepare briefing papers to summarize the legal infrastructure of the U.S. federal financial system.

These papers, including one on FASAB 56, are available in the 2018 Annual Wrap Up: The Real Game of Missing Money at https://hudmissingmoney.solari.com/us-federal-finances-the-law/ and are available to the public at https://constitution.solari.com.

Monetary: Federal Reserve

Fiscal: U.S. Treasury

We hope these assist you in understanding the legal infrastructure created by the federal government budget, management, and reporting laws.

V. FASAB 56: RECENT EVENTS LEADING UP TO FASAB 56

Catherine Austin Fitts served as Assistant Secretary of Housing-Federal Housing Commissioner in the Bush I Administration from 1989-1990. At the time, the Federal Housing Administration (FHA) at the Department of Housing and Urban Development (HUD) had a $320 billion portfolio of mortgage insurance-in-force and was originating $50-$100 billion in mortgage insurance annually.

During that period, Catherine led the reform of the FHA financial and reporting operations, working closely with the Government Accountability Office (GAO) and the Office of Management and Budget (OMB). These efforts included designing the relevant titles in the HUD Reform Act of 1989. In creating a new financial model for FHA’s and HUD’s financial operations, the FHA was returned to a financially sound basis during that period. The Administration adopted the model on a government-wide basis under subsequent financial management laws. (See “The U.S. Statutes Creating Modern Constitutional Financial Management and Reporting Requirements and the Government’s Failure to Follow Them” here: [https://hudmissingmoney.solari.com/the-u-s-statutes-creating-modern-constitutional-financial-management-and-reporting-requirements-and-the-governments-failure-to-follow-them/].) In implementing these changes, Catherine became knowledgeable regarding financial management and reporting practices in the U.S. mortgage programs, at HUD, and in federal agencies in general.

After leaving the Administration, Catherine started an investment bank and financial software developer, The Hamilton Securities Group. In 1993, Hamilton won a competitive-bid contract to serve as the lead financial advisor and portfolio strategist for the FHA and served in that capacity until 1997—leading $10 billion of highly successful sales of defaulted mortgage loans from the FHA-“held” mortgage portfolio (i.e., loans as to which FHA had paid off insurance claims by lenders and then taken title to the loans). Hamilton was able to more than double FHA’s recovery rates on these loans and generate $2 billion of increased returns to the FHA Funds. Hamilton’s assigned tasks involved developing significant software tools and databases to make FHA’s portfolio, originations, and markets transparent to decision-makers. Hamilton also developed software that used geographic information system (GIS) applications to map federal resources in counties and Congressional districts.

The highly political termination of Hamilton’s relationship with FHA in 1997 and the seizure, destruction, and ultimate theft of Hamilton’s software tools and databases was followed by a decade of bill-collecting litigation, with Hamilton emerging as the winner and finally settling with the Department of Justice in 2006. Carolyn Betts had been an investment banker with Hamilton, served as general counsel to Hamilton, and continues to serve as general counsel to Hamilton’s successor corporation, Solari, Inc. These events have been described in Catherine’s online book Dillon Read & Co. Inc. & the Aristocracy of Stock Profits [https://dillonreadandco.com], which includes, in the Resources section, an extensive litigation section and supporting documentation. This case study is one of the best documented examples of the extent to which the federal government and supporting media, financial institutions, and private interests will go, no matter the expense, to destroy efforts to bring transparency to the federal credit—in this instance in the mortgage and securities markets.

In 2000, during the litigation period, Carolyn was reviewing HUD-related documents posted on the GAO website and found the testimony of HUD Inspector General Susan Gaffney before the House Committee on Government Reform, Subcommittee on Government Management, Information and Technology on the “Status of Financial Management at HUD” in which Gaffney explained her refusal to certify HUD’s financial statements for FY 1999 as required by law. She described unaccountable voucher adjustments in FY 1998 and FY 1999 of $17 billion and $59 billion, respectively, along with failure of the installation of new computer systems (HUDCAPS) and unsupervised access to accounting systems and information by HUD contractors. Given the financial controls and resources that Catherine had seen put in place, these discrepancies should not have been possible. Her conclusion: the only logical explanation was significant fraud and illegal transactions.

One of the reasons we picked up on this so dramatically was that we had been told in April 1997 by the President of CalPERS, the largest U.S. pension fund, that “we” were going to be moving all the money out of the country in the fall (which was the beginning of federal fiscal 1998). Originally, we assumed that this meant the pension funds and large institutional investors were increasing their allocations to offshore investments, particularly to Asia. After we learned about the $17B and $59B in undocumentable adjustments at HUD, Catherine’s view of the CalPERS President’s statement changed. See the full story here: [https://dillonreadandco.com/financial-coup-detat-1998/]

Thus began an effort spanning two decades in which Catherine and her companies have worked steadily to bring transparency regarding U.S. federal government financial statements and publicize the government’s refusal, or inability, to comply with the laws that mandate responsible financial management and reporting. The total amounts uncovered and publicly available, yet infrequently reported, are now $21 trillion of undocumentable adjustments in the accounts in the Department of Defense (DOD) and HUD.7 This “missing money,” together with the financial bailouts, are what Catherine has referred to as the “financial coup d’état.”

For a full description of the history of Catherine’s efforts to reform the U.S. federal finances, see “Missing Money: A Personal History—1989 to 2019” in the 2018 Annual Wrap Up: The Real Game of Missing Money [https://hudmissingmoney.solari.com/2019/04/07/missing-money-a-personal-history-1989-to-2019/].

In 2016, Catherine began writing and speaking about the latest and largest addition to annual undocumentable adjustments at DOD in fiscal 2015: $6.5 trillion. Dr. Mark Skidmore, Morris Chair of State and Local Government and Policy at Michigan State University, heard her and assumed that she was mistaken—no doubt she meant $6.5 billion, he thought. Dr. Skidmore accessed the DOD financial reports and discovered that Catherine was correct. The undocumentable adjustments at DOD for FY 2015 were, in fact, $6.5 trillion. Working with his graduate students, Dr. Skidmore offered to do a survey of financial reports at HUD and DOD for the fiscal years 1998-2015 to identify all reports of undocumentable adjustments. At the time, Catherine had identified $12.5 trillion of such adjustments.

After a thorough review, Dr. Skidmore and his students identified a total amount of undocumentable adjustments of $21 trillion, roughly equivalent to the official outstanding U.S. Treasury debt.

In September 2017, The Solari Report launched a dedicated website at https://missingmoney.solari.com to publish Dr. Skidmore’s report on the survey results and all of the underlying documentation from DOD and HUD. The site also includes current and past media coverage of the “missing money” and ongoing report updates and radio and Internet interviews by Catherine and Dr. Skidmore. Dr. Skidmore’s report is available in the 2018 Annual Wrap Up: The Real Game of Missing Money here [https://hudmissingmoney.solari.com/the-real-game-of-missing-money-ii-summary-report-on-unsupported-journal-voucher-adjustments-in-the-financial-statements-of-the-office-of-the-inspector-general-for-the-department-of/] and is available to the public at the Missing Money site here [https://missingmoney.solari.com/wp-content/uploads/2018/08/Unsupported_Adjustments_Report_Final_4.pdf].

On October 5, 2017, Dr. Skidmore’s team discovered that both the HUD and DOD Offices of Inspector General (OIG) had taken down their financial reports from the Internet. After this fact was highlighted in public interviews with Catherine and Dr. Skidmore, the financial reports were discovered in early December republished at different URLS. By way of explanation, the DOD OIG insisted that the reason for the new URLs was that DOD was reorganizing its website. Because The Solari Report had downloaded the reports before publishing its Missing Money website, readers had uninterrupted access.

Although OIG audit reports in previous years had always been made available online without formal restrictions or evident censorship, a DOD OIG report on a U.S. Navy financial statement for FY 2017 then appeared in heavily redacted form—not just the numbers it contained, but even its title! Only bureaucratic sloppiness enabled the readers to see that the report concerned Navy finances (because the censors had missed some of the references to the Navy in the body of the report). A request to the OIG for an uncensored copy was met with the response, “[i]t was the Navy’s decision to censor it, and we can’t do anything about that.” Senator Chuck Grassley also requested that the OIG uncensor the report. Again, the OIG refused.

As explained in more detail in “FASAB Statement 56: Understanding New Government Financial Accounting Loopholes” [https://constitution.solari.com/fasab-statement-56-understanding-new-government-financial-accounting-loopholes/], FASAB 56 came about just as the Department of Defense was about to announce that after almost 28 years of failing to produce audited financial statements (notwithstanding legal requirements to do so) and the revelations of approximately $21 trillion in unsupported journal voucher adjustments against Treasury, the 2018 fiscal- year clean audit under generally accepted accounting procedures (GAAP) DOD had been promising (again—this was one of a number of successive promises) was not to be. Ernst & Young and other independent public accounting firm auditors announced that the task was hopeless because DOD’s financial records were “riddled with so many bookkeeping deficiencies, irregularities, and errors that a reliable audit was simply impossible.”8

To help the investor better understand the events leading up to the issuance of FASAB 56, The Solari Report has provided a chronology available in flexible table form for the 2018 Annual Wrap Up: The Real Game of Missing Money: [https://hudmissingmoney.solari.com/missing-money-chronology/].

The process of issuing FASAB 56 consisted of the following:

(1) FASAB issued the exposure draft of Statement 56 proposed language (“Exposure Draft”) on December 14, 2017, with comments requested by March 16, 2018.

(2) Upon release of the Exposure Draft, FASAB provided notices and press release to the FASAB email listserv, the Federal Register, FASAB News, the Journal of Accountancy, Association of Government Accountants (AGA) Topics, the CPA Journal, Government Executive, the CPA Letter, the Chief Financial Officers Council, the Council of the Inspectors General on Integrity and Efficiency, the Financial Statement Audit Network, and committees of professional associations generally commenting on exposure drafts in the past (for example, the Greater Washington Society of CPAs and the Association of Government Accountants Financial Management Standards Board).

(3) FASAB followed up this broad announcement with direct mailings of the Exposure Draft to the following relevant congressional committees: House Homeland Security Committee: Full Committee; House Homeland Security Committee: Subcommittee on Oversight and Management Efficiency; House Homeland Security Committee: Subcommittee on Counterterrorism and Intelligence; Senate Select Committee on Intelligence; House Permanent Select Committee on Intelligence; Senate Armed Services Committee; House Armed Services Committee; House Oversight and Government Reform Committee; Senate Homeland Security and Governmental Affairs Committee; Senate Appropriations Committee; and House Appropriations Committee.

(4) FASAB issued a classified exposure draft of the first Statement 56 Interpretation: “Interpretation of Federal Financial Accounting Standards 56: Classified Activities, July 12, 2018, with comments due by August 13, 2018.”

(5) FASAB held two “reading sessions” of the Interpretation exposure draft in a secure room for those it deemed had the appropriate “need to know” and security clearances for two hours on July 18, 2018 (Session One) and for two hours on August 1, 2018 (Session Two). Who attended these sessions? We do not know.

(6) The final version of FASAB 56 was made available to the public on October 4, 2018 (the day that the FBI report on its investigation of Justice Brett Kavanaugh took up the public’s attention9) and is largely unchanged from the Exposure Draft upon which comments were received from various federal agencies and accounting firms.

In a piece on FASAB 56 for Rolling Stone (“Has the government legalized secret defense spending?”), Matt Taibbi captured the timing well in his subtitle: “While a noisy Supreme Court fight captivated America last fall, an obscure federal accounting body quietly approved a system of classified money-moving.” Because the adoption of FASAB 56 required the approval of both sides of the aisle in Congress and the White House, the intimate bipartisan cooperation on the adoption of FASAB 56 contradicts the divisiveness portrayed during this period by the media.

While the initial distribution of the Exposure Draft was wide within the accounting community and Congress, and it appeared in the Federal Register, it garnered no attention from mainstream press that we have been able to identify. The final version of FASAB 56 does not differ greatly from the Exposure Draft.

VI. FASAB 56: THE FINAL STATEMENT

The adoption of the new permitted accounting treatment or “standard” by FASAB in FASAB 56 would alter the rules for auditing the books of federal agencies, without any approval of Congress, thereby effectively changing the mandates previously enacted by Congress in various statutes that required first 24 agencies—and then all components (or “reporting entities”) of the federal government—to produce unqualified independent financial statement audits.

FASAB 56 could provide a back-door, secret remedy to eliminate the need for reporting unsupported journal voucher adjustments against Treasury in order to balance the books of government agencies: it could allow an agency, under the auspices of “national security,” to make unexplained financial statement adjustments in order to achieve an unqualified audit under FASAB standards. And not only can the adjustments be “unaccountable” in terms of purpose, but they can be secret (i.e., classified) and unlimited in amount. By the time we know for sure what the problems with FASAB 56 might be (given the failure of the government to address the previous $21 trillion of undocumentable adjustments), it could be too late to do anything about them.

In reliance upon FASAB 56, in the future, an agency could not only make secret expenditures or liquidations of assets, but, for “national security” purposes, it could go without explaining (except within a small group of “properly cleared” individuals) why the expenditures or asset transfers were made; it also would not have to report to most of Congress or the public how much such expenditures cost taxpayers or the value of the transferred assets. Presumably, the agency could, in the future, achieve an unqualified audit in which only a selected few unelected officials with top security clearances would view the underlying (and classified) support. We concede that these actions might be illegal and not in accordance with the spirit of Statement 56, but in light of past efforts to hide the truth from taxpayers, is it any wonder we suspect a nefarious purpose?

FASAB 56 applies to otherwise-unclassified financial statements of federal agencies and their components—General Purpose Federal Financial Reports (GPFFR). It provides that, in order to protect classified information from disclosure:

(1) An entity may modify information required by other FASAB standards if the effect of the modification does not affect the net results of operations or net position.

(2) A component reporting entity may be excluded from one reporting entity and consolidated into another reporting entity. The effect of this modification may be to change the net results of operations and/or net position.

(3) An entity may apply Interpretations of FASAB 56 that allow other modifications to information required by other FASAB standards, and the effect may be to change the net results of operations and/or net position.

FASAB 56 also allows modifications to be made to unclassified disclosures, required supplementary information (RSI), and required supplementary stewardship information (RSSI) required by other FASAB statements to prevent the disclosure of classified information. This would include financial statement footnotes, for example.

In other words, any modification may be made if it does not change the net results of operations or net position (#1 above). However, a modification may affect the net results of operations or net position if it results from excluding a component from one reporting entity and consolidating it into another (#2 above) or if it results from applying an Interpretation allowing the modification (#3 above). For example, a modification can be a change in one line item (e.g., a subtraction from the amount of the line item) and a corresponding change in another line item (e.g., the addition of the same amount to another line item), resulting in no net change (#1 above); this would have the effect of mischaracterizing the subject of an expenditure, with no explanation or disclosure of the modification.

The second type of permitted modification is a consolidation modification, which results when a component of a reporting entity is moved out of that reporting entity and consolidated into a different reporting entity (#2 above). As an example, the finances of a division of the Navy (which is a reporting entity) could be deleted from the Navy’s financial statements and moved (consolidated) into the Army’s financial statements. Or, presumably, part of the Army’s finances could be moved into (and consolidated with) the operations of HUD or NASA or any other reporting entity.

It appears that the only permitted modification that has the effect of changing the entire federal net results of operations (as opposed to moving money from one part of the government to another part) is when the modification is pursuant to an Interpretation issued by the FASAB that affects statements other than FASAB 56. Thus, an unlimited number of classified Interpretations not available to the public may be issued by FASAB that have the effect of permitting modifications to federal financial statements that misstate bottom-line numbers, and such misstatements may have a material effect on the reporting entities’ financial statements. Already, one Interpretation applicable to Statement 56 was issued before Statement 56 became final. Was this to ensure a publicly acceptable level of undocumentable adjustments when the inability to complete the new audit was announced? There is no way to know.

Does this mean that FASAB 56 necessarily will result in no net change in federal government balance sheets (i.e., assets and liabilities) and income statements on a government-wide basis unless some future Interpretation expressly provides for an exception? What damage can be done even if there is no net change, government-wide?

In theory and at first blush, it may appear that, in the absence of an Interpretation to the contrary, there would be no net change and therefore no “harm.” However, that would be the case only if no one cares whether a government asset is listed as, for example, gold or land or a claim against a foreign government—or whether an expenditure is listed as a loss on FHA insurance on an apartment complex or an expenditure for food stamps or a bribe to a foreign dictator. There are also fact patterns under which the net position can remain unchanged notwithstanding manipulation of accounts for purposes like the funding of secret mercenary armies.

But if there is no requirement that Congress or the public be informed of the number or amount of modifications or the nature of the expenditures or assets modified, how can anyone know whether even FASAB 56 requirements are being followed? And we wonder whether FASAB 56, in limiting modifications (except those pursuant to Interpretations) to those that do not have the effect of changing results of operations, would nevertheless permit modifications within the same reporting year that, if reported on a date other than the end of the fiscal year, would have the effect of changing net results of operations.

In other words, suppose that in October a reporting entity (e.g., the Department of the Army) were to transfer the title to a $10B satellite to a government contractor, creating an undocumentable journal voucher adjustment against Treasury in the form of a $10B debit against U.S. government assets. As long as, before September 30 of the following calendar year, there is a $10B undocumentable journal voucher adjustment against Treasury in the form of a credit to the balance sheet of the Army or any other reporting entity, there is no year-end net effect on the overall government’s results of operations.

Will the government’s independent accountants—who, in the future, are to issue unqualified audit letters as a result of permitted and undisclosed modifications pursuant to FASAB 56 and future, potentially classified, Interpretations—have access to classified information so that they can certify that the requirements of both FASAB 56 and future Interpretations and their professional obligations under SAS 122 have been satisfied? (See Kearney comments on the Exposure Draft in Appendix B.) It appears maybe not.10 The only reference to this subject in the final Statement (other than disclosure of the six-step process for the issuance of Interpretations) is this:

“[D]uring the audit, the preparer [i.e., governmental reporting entity] would inform the properly cleared auditor whether and how this Statement and related Interpretations were applied. GPFFR modified pursuant to this Statement and related Interpretations would be considered in accordance with generally accepted accounting principles.”

The six-step process as outlined in the FASAB Memorandum of Understanding (MOU) provides for “proper clearance,” including execution of a non-disclosure agreement and demonstration of a “need to know” regarding the classified information. Whether and how many independent public accountants providing audit opinions will be granted the “proper clearance” is left unstated, leaving the reader with only a reference to standard procedures for classified information.

Those who have not experienced the procedures for an independent audit of financial statements by an independent public accounting firm may not know that such a firm depends to a great extent upon various certifications by officers of the audited reporting entity, and the audit opinion is qualified to the extent of such assurances. Therefore, it may be that future auditors of government financial statements will place even greater reliance upon managerial certifications than they ordinarily would because support in the form of records is not made available to them. If auditors do not have access to all classified information taken out of the GPFFR unclassified statement, it seems a fair question how government agencies can be said to have satisfied statutory requirements that they produce audited financial statements. How will independent auditors of such financial statements issue “clean” audit opinions if they cannot follow the procedures required by the AICPA under SAS 122?

Reference to the various comments received by FASAB on the Exposure Draft of FASAB 56 are instructive. See Appendix B for a detailed description of the seventeen comment letters from accounting firms and organizations and federal agencies.

VII. FASAB 56: WHAT IS THE “NATIONAL SECURITY” INFORMATION THAT MAY BE THE SUBJECT OF MODIFICATIONS?

Executive Order 12356, “National security information,” was issued by President Ronald Reagan, on April 2, 1982. According to Executive Order 12356, which set forth U.S. classification policy, information is considered classified if it concerns:

Military plans, weapons, or operations

The vulnerabilities or capabilities of systems, installations, projects, or plans relating to the national security

Foreign government information

Intelligence activities (including special activities), or intelligence sources or methods

Foreign relations or foreign activities of the United States

Scientific, technological, or economic matters relating to the national security

United States government programs for safeguarding nuclear materials or facilities

Cryptology

A confidential source

Or other categories of information that are related to the national security and that require protection against unauthorized disclosure as determined by the President or by agency heads or other officials who have been delegated original classification authority by the President.

Any determination made under this subsection must be reported promptly to the Director of the Information Security Oversight Office (ISOO). The ISOO is a component of the National Archives and Records Administration. It receives policy and program guidance from the National Security Council. ISOO is responsible to the President for policy and oversight of the government-wide security classification system and the National Industrial Security Program.

Those with original classification authority are the President, agency heads, and those to whom agency heads delegate this authority. Under Executive Order 13526, which was issued by President Barack Obama in 2009, government contractors and others may play a role in classifying information. Thus, the Order provides:

“[W]hen an employee, government contractor, licensee, certificate holder, or grantee of an agency who does not have original classification authority originates information believed by that person to require classification, the information shall be protected in a manner consistent with this order and its implementing directives. The information shall be transmitted promptly as provided under this order or its implementing directives to the agency that has appropriate subject matter interest and classification authority with respect to this information. That agency shall decide within 30 days whether to classify this information.”

Under Executive Order 13526, automatic declassification is the declassification of information based upon the occurrence of a specific date or event as determined by the original classification authority; or if the original classification authority was unable to specify a date, the expiration of a minimum of ten years from the classification date (unless the original classification authority determines the sensitivity of the information requires classification for a maximum time frame of 25 years).

Only 25-year-old or older records that have been determined to have “permanent historical value” in accordance with title 44, U.S. Code are subject to automatic declassification. Agency heads may exempt 25-year-old, permanently valuable classified records from automatic declassification only when the information contained in them has been determined to satisfy one or more of the exemption categories in section 3.3(b) of Executive Order 13526. Information exempted from automatic declassification under this section remains subject to the mandatory and systematic declassification review provisions of the Order; no information may be classified indefinitely.

Only information that reveals one of the following is exempt from automatic declassification:

The identity of a confidential human source

Information that would assist in the development, production, or use of weapons of mass destruction

Information that would impair U.S. cryptologic systems or activities

Information that would impair the application of state-of-the-art technology within a U.S. weapon system

Formally named or numbered U.S. military war plans that remain in effect, or operational or tactical elements of prior plans that are contained in such active plans

Information, including foreign government information, that would cause serious harm to relations between the United States and a foreign government, or to ongoing diplomatic activities of the United States

Information that would impair the current ability of United States Government officials to protect the President, Vice President, and other protectees for whom protection services, in the interest of the national security, are authorized

Information that would seriously impair current national security emergency preparedness plans or current vulnerabilities of systems, installations, or infrastructures relating to the national security

Information that would violate a statute, treaty, or international agreement that does not permit the automatic or unilateral declassification of information at 25 years

In other words, classification, or the rendering as secret from the public, of information known to the U.S. government is largely within the control of the Executive Branch, with little oversight by the Judiciary or Congress, although we have no way of knowing what, if any, disclosure is voluntarily made to members of Congress (who, as we see below, are not required to obtain security clearances) and their staff members or to members of the Judiciary to the extent necessary for the Judiciary or Congress to carry out their respective Constitutionally-mandated responsibilities.

What about Congressional members? According to the CIA website, all members of Congress have access to intelligence by virtue of their elected positions. They do not receive security clearances per se. Congressional staffers who require access to intelligence in connection with their official duties receive security clearances based on background investigations conducted by the FBI. As a general rule, only committee staffers receive clearances; those in members’ personal offices do not.

While it may be true that members of Congress theoretically have access to classified budget information, classified intelligence reports are routinely provided only to the committees that have responsibilities in the national security area. Members of these committees receive preference from the intelligence community in satisfying their requests on an individual basis. Among the national security committees, the intelligence committees and their members are accorded “preferential treatment.” Committees that do not have national security responsibilities and individual members who do not serve on national security committees may request intelligence support but are typically given a “lower priority.” As for legislation involving national security matters, the intelligence community usually is asked to provide briefings that are open to the entire body. These are ordinarily arranged at the request of the leadership in either house and are held in a secure briefing room on the fourth floor of the U.S. Capitol.

The National Security Act states that Congress must be kept “fully informed” of significant intelligence activities, but many presidents have interpreted this clause to mean they only need to notify the “Gang of Eight” rather than the full membership of the congressional intelligence committees. The Gang of Eight consists of the Senate and House majority and minority leaders, and the chairs and ranking members of the House and Senate intelligence committees.

The leadership in each chamber—the majority and minority leaders of the Senate and the speaker and minority leader of the House of Representatives—are ex officio members of their respective intelligence committees and have access to intelligence held by the committees. Typically, a member of each leader’s staff serves as liaison to the intelligence committee, keeping up with the committee’s activities and serving as a conduit for information to his or her boss. Each of these Congressional leaders also has staff responsible for national security issues who can make independent requests to the intelligence community for support—which may include briefings and/or written analysis.

The two intelligence committees (House Permanent Select Committee on Intelligence and Senate Select Committee on Intelligence) are the repositories of most intelligence shared with Congress. Their offices and hearing rooms are physically located in vaulted areas that meet the CIA standards for storage and discussion of information relating to intelligence sources and methods. They review the annual intelligence budget submitted by the President, oversee the operations of intelligence agencies, and prepare legislation for appropriations to them.

Rep. Adam Schiff (D-CA) is the Chairman of the House Permanent Select Committee on Intelligence, and Rep. Devin Nunes (R-CA) is its Ranking Member. There are twenty-four members on this House committee—fourteen Democrats and ten Republicans. Senator Richard Burr (R-NC) is the Chairman and Senator Mark Warner (D-VA) the Vice Chairman of the Senate Select Committee on Intelligence. Nineteen members serve on this committee—ten Republicans and nine Democrats. As of February 2019, members on one of these two committees and Steny Hoyer (D-MD), as House Minority Leader and member of the Gang of Eight, represented eighteen states and districts in an additional nine states.11 Thus, more than half of the country and all of the largest states are represented by a Member of Congress with access to classified information (if they so choose).

Most national security appropriations appear as a single lump sum in the defense budget. Each appropriations committee (i.e., House and Senate) has a defense subcommittee that holds most of the control over the intelligence budget. Rep. Pete Visclosky (D-IN) in the House and Richard Shelby (R-AL) in the Senate are chairmen of these committees, which have a total of eleven members each.

What does the information in this section tell us?

First, a lot of members of Congress representing investors in many, if not most, states have access to and power to obtain information and exercise oversight or spending authority over intelligence matters and, presumably, classified financial information or financial information involving classified projects and programs. These representatives, particularly the relevant committee chairmen and House and Senate leadership, know the issues involved and the type of information that is behind the “national security” shield and have the wherewithal, if they wanted, to stop an FASAB standard that would mislead the American people.

Given the refusal of Congress to enforce the Constitution and financial management and reporting laws to date, we see no reason why they would start now, other than through the intercession of significant political or investor pressure. It should be noted that the primary source of campaign contributions is increases in capital gains from real estate and stock market value of major corporate and wealthy contributors. Consequently, the conflict of interest between the interests of Members of Congress in raising campaign contributions and any dedication they may have to transparency in the financial statements of major government agencies, contractors, and banks is clear. See the case study involving private prison stock profits in Catherine’s Dillon Read & Co. Inc. & the Aristocracy of Stock Profits here: [https://dillonreadandco.com/] for a detailed description of how privatization can increase government costs in a manner that generates enormous amounts of stock profits and campaign contributions.

Catherine learned while serving as Assistant Secretary of Housing that through FHA’s General Fund, HUD had what amounts to a put on the Treasury: at the end of each year, since the General Fund was not expected to be operated on a self-supporting basis (i.e., with mortgage insurance premiums covering claims and expenses), HUD merely sent a bill to Congress for the net deficit, with no obligation to account to Congress or provide a breakdown of the losses. Carolyn Betts learned while employed at Hamilton Securities, then FHA’s lead financial adviser, that FHA’s complete second mortgage portfolio was available only on a Lotus spreadsheet kept on a single HUD employee’s hard drive. These observations form just the tip of the iceberg of financial management loopholes available, at least at that time, for hanky-panky by those having an interest in manipulating numbers for the benefit of third-party interests. Catherine has provided links for those who wish to learn more about HUD hanky-panky as an example of the numerous loopholes in the federal system at “Missing Money: A Personal History—1989 to 2019.”

Second, there are a lot of subject matter areas that could, arguably and with some stretch of the imagination, be lumped into “classified” or “national security” or “intelligence” information, particularly in the catch-all category of “other categories of information that are related to the national security and that require protection against unauthorized disclosure as determined by the President or by agency heads or other officials who have been delegated original classification authority by the President.”12 And even government contractors have a shot at seeing to it that information they generate may become classified. On the other hand, at least in theory, most classified information is automatically declassified within ten years; only a select few categories of classified information can remain classified for ten to twenty-five years, and virtually no classified information that a typical investor would consider important in everyday life may remain legally secret for more than twenty-five years.

Third, given the complexity of the workings and finances of the many intelligence agencies, House and Senate intelligence committee staffers, with their required security clearances, have a great deal of power to influence appropriations for intelligence programs and projects and to keep key intelligence committee members informed about relevant issues.

Fourth, the President of the United States, or those who control him or her and the information he or she is given, and the Director of National Intelligence13 exercise virtually complete control over what the public can know or find out about anything the President determines in his or her sole and complete discretion, without any oversight, to be a matter of “national security.”

Finally, with reference to the history of HUD’s hundreds of billions in undocumentable adjustments since FY 1998 and its inability to produce audited financial statements, it is difficult to imagine what “national security interest” could be served by making modifications to HUD and FHA financial statements under FASAB 56. However, such authority has been provided.

Oliver North’s statement alleged by one whistleblower that “HUD is the candy store of covert operations” and the statement by the chief of staff of Senator Kit Bond (chairman of the Senate HUD appropriations committee at the time of HUD’s first undocumentable adjustments and audit failure) that “HUD is being run as a criminal enterprise” come to mind. In light of Catherine’s experience while serving as HUD’s Assistant Secretary-FHA Commissioner that the FHA portfolio included properties for which insurance claims had been paid after no debt service whatsoever had been received from day one (at least once capitalized interest had been used up), is there any reason to believe that HUD’s books, with many billions of dollars of credit and other assets, could not have been used to launder secret and illegal government cash flows? After all, in order to hide a billion dollars in illegal expenditures or the transfer of billions of dollars of assets out of the government, one would have to find a government agency with billions of dollars on its books. HUD’s FHA Fund is just such a potential hiding place.

VIII. EXISTING SECURITIES LAWS THAT HAVE THE EFFECT OF REDUCING TRANSPARENCY FOR NATIONAL SECURITY PURPOSES

The U.S. government agency responsible for integrity and full disclosure in the U.S. securities markets is the Securities and Exchange Commission (SEC). The four primary post-Depression laws enforced by the SEC are the Securities Act of 1933 (“Securities Act”) governing the issuance of securities; the Securities Exchange Act of 1934 (“Exchange Act”) governing secondary sales of securities and regulation of public companies; the Investment Company Act of 1940 (“Investment Company Act”) regulating mutual funds; and the Investment Advisers Act of 1940 (“Advisers Act”) regulating investment advisers. Historically, the emphasis of most SEC laws and the rules and regulations promulgated under these acts is one of complete disclosure of material information about securities, the securities markets, and the market participants (advisers, primary and secondary market dealers, and issuers). It is, therefore, a major development in the regulation of the issuance and sale of U.S. securities when the primary enforcer of transparency in the markets promulgates exemptions from disclosure requirements for the stated purpose of protecting U.S. government classified information.

The first SEC exemption for classified information occurred when, on May 24, 1968, SEC promulgated Rule 0-6 under the Exchange Act (17 CFR § 240.0-6), entitled “Disclosure detrimental to the national defense or foreign policy.” Rule 0-6 provides in pertinent part:

(a) Any requirement to the contrary notwithstanding, no registration statement, report, proxy statement or other document filed with the [Securities Exchange] Commission or any securities exchange shall contain any document or information which, pursuant to Executive order, has been classified by an appropriate department or agency of the United States for protection in the interests of national defense or foreign policy. (b) Where a document or information is omitted pursuant to paragraph (a) of this section, there shall be filed, in lieu of such document or information, a statement from an appropriate department or agency of the United States to the effect that such document or information has been classified or that the status thereof is awaiting determination…. A registrant may rely upon any such statement in filing or omitting any document or information to which the statement relates.

This rule operates as an exemption from SEC rules and regulations that would otherwise require the disclosure in a public filing of material classified information or documents in connection with the public offering of a security (by, for example, a government contractor working on a classified project) and reporting requirements under the Exchange Act applicable to public reporting companies, which require, among other things, the filing of annual financial statements certified by an independent accounting firm (i.e., so-called “audited” financial statements).

To date, the SEC has provided no publicly available guidance on whether this rule prohibiting the public disclosure of information might render a securities prospectus misleading for purposes of the antifraud provisions of Rule 10b-5 (17 C.F.R. 240.10b-5), which states in pertinent part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, * * * * (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading * * * * in connection with the purchase or sale of any security.

Rule 10b-5 and several similar rules permit potential recovery of losses by a purchaser or seller of any security (public or private) who later experiences a loss attributable to a misrepresentation of the counterparty (i.e., seller or purchaser, respectively) or failure of the counterparty to disclose information that—if disclosed or disclosed accurately—would have affected the aggrieved party’s decision to purchase or sell the security. In other words, if the issuer of a security, say, a government contractor that builds weapons systems, fails to provide material information about a key project or provides misleading information about the project that might cause a potential investor in the security not to purchase or sell the security—and the potential investor purchases or sells the security on the basis of the false, misleading, or omitted information, the security value drops, and the holder of the security sells it at a loss—the aggrieved purchaser of the security may be able to recover his or her losses from the issuer under Rule 10b-5.

Query whether, if this government contractor had filed with the SEC under Rule 0-6 a statement from the Department of Defense that omitted materially important information from the contractor’s prospectus, the contractor could use compliance with Rule 0-6 as a defense to the investor’s Rule 10b-5 claim, in reliance on the Rule 0-6 statement that “[a] registrant may rely upon any such statement in filing or omitting any document or information to which the statement relates.” We know of no reported cases on this issue and doubt that there are any, but we can imagine circumstances (e.g., the failure of a company due to the cancellation of a classified production contract involving a major secret military vehicle) under which certain risks are known by the contractor but are classified (whether properly or improperly) and, therefore, cannot be disclosed.

The next SEC rule that comes into play in connection with classified information in the context of private-sector securities is the Exchange Act § 13(b)(3) exemption from requirements that public companies (i.e., companies with securities registered under the Exchange Act that are required to satisfy public reporting requirements under Sections 13 and 15(d) of the Exchange Act)14 keep detailed and accurate accounting records and systems. Specifically, such companies are required under 15 U.S.C. §78m(b)(2) (Section 13(b)(1) of the Exchange Act) to:

[M]ake and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Included in the next paragraph of this statutory provision, however, is the following exemption § 13(b)(3):

With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.

This exemption (about which, we think, few securities analysts and attorneys outside the defense establishment are aware) appears to provide for a get-out-of-jail-free card to allow government contractors, in particular, to keep secret accounting records and file financial statements that fail to include all information that would otherwise be required in annual and quarterly reports, proxy statements, and other SEC filings. The only catch, it seems, is the administrative hassle of annually renewing the federal department or agency directive.

In February 2006, President George W. Bush delegated the exemption authority under Section 13(b)(3) of the Exchange Act to the Director of National Intelligence (then John Negroponte), thereby shrouding the government defense establishment in further secrecy. Now, in light of the issuance of FASAB 56, the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation seem far from reach.

It is not clear, however, how a public company could make material alterations of its financial records in accordance with Exchange Act § 13(b)(3) or Exchange Act Rule 0-6 and still (in the absence of a private-sector policy analogous to SFFAS 56 in the federal government sector) fulfill its Exchange Act obligations to file annual audited financial statements. It is possible that, as suggested in the Kearney & Company comment letter on the SFFAS 56 Exposure Draft (see Appendix B), the public accounting firm issuing a clean audit opinion on such a contractor’s financial statements does so through the application of AICPA’s AU-C Section 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement with reference to Statement on Auditing Standards (SAS) No. 122, “Preface to Codification of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards.”

SAS 122 was issued in October 2011, effective for financial statements after December 15, 2012.15 AU-C No. 240 is entitled “Considerations of Fraud in a Financial Statement Audit.” The scope of this standard is stated as follows:

This section addresses the auditor’s responsibilities relating to fraud in an audit of financial statements. Specifically, it expands on how section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, are to be applied regarding risks of material misstatement due to fraud.

IX. THE POST-FASAB 56 WORLD: WHO CAN HELP ASSESS CREDIT, RISKS, AND PRICE?

As we stated in Section III, we do not believe a “prudent man” would rely solely on the U.S. rating agencies regarding the U.S. federal credit. We should also explain why a “prudent man” would not rely on the media, issuers, dealers, or financial institutions either.

We have seen that FASAB 56 was first proposed in the Federal Register in December 2017. Yet, with the exception of ongoing coverage by The Solari Report, a special report and update from Dr. Skidmore, an article by Steven Aftergood of the Union of Concerned Scientists, and Matt Taibbi’s Rolling Stone article in December 2018, there has been nary a peep from those who should have an interest in an accounting standard that could have the effect of making material misstatements of the financial operations and position of every agency of the federal government. That fact, in itself, should be a warning that investors are on their own in doing due diligence on their investments where risks of financial solvency and stability of the federal government are concerned—that is, for many, if not most, of the equity and particularly debt securities and derivatives available in the market.

We have also seen that the traditional SEC-required disclosure, in public securities offerings as well as annual and quarterly reports and proxy statements of public companies, should be viewed with a degree of caution where securities issued by federal government contractors and banks are concerned, because classified information relevant to the investment decision may have been excluded with the blessing of the SEC under Exchange Act Section 13(b)(3) and Rule 0-6. Federal contractors, however, may include more than the obvious military-industrial complex contractors like Lockheed Martin and SAIC. This also includes the banks (like JPMorgan Chase, Goldman Sachs, and others) that, largely without wide disclosure of the fact, act as agents of the U.S. government in the gold markets, with respect to the Exchange Stabilization Fund, and otherwise in government financial market interventions.

From the 2008-2012 Financial Crisis, we learned that the investment banks (like Goldman Sachs) traded in mortgage-backed securities to benefit their own private interests, even to the detriment of their investor clients who were counterparties in the same transactions.16

With all the fanfare accompanying legislation purportedly addressing the “too big to fail” phenomenon witnessed during the Financial Crisis, since that time, the big banks have only gotten bigger. Several investment banks (Merrill Lynch and Goldman Sachs, in particular) have become banks, thereby being able to borrow at the Fed’s window and take advantage of FDIC insurance while engaging in proprietary transactions for their own accounts. We see no sign of a “come to Jesus” moment in the financial sector that would lead us to believe that the major financial institutions are now generally dedicated to integrity and transparency, let alone when it is contradictory to their self-interest.

Threats to the dominance of the U.S. dollar as the world’s reserve currency make it more likely that the U.S. making good on its guarantees will require the Federal Reserve to print more money, leading to a significant debasement of the U.S. dollar. U.S. military dominance is a major factor in holding up the value of the U.S. dollar, but this is not a politically correct factor for a primary or secondary dealer to incorporate in its analyses of credits of either direct U.S. obligations or obligations dependent on the U.S. credit, especially when such military dominance depends on secret weaponry and covert operations.

Consequently, the investor is advised to rely on his or her own due diligence as opposed to the assessments of third parties, be they media, dealers, rating agencies, or issuers.

X. THE POST-FASAB 56 WORLD: WHAT IS THE FEDERAL CREDIT?

What Is Sovereign?

According to Wikipedia, the word “sovereign” is borrowed from the Old French soverain, which is ultimately derived from the Latin superānus, meaning “above.”

“The roles of a sovereign vary from Monarch or Head of state to head of municipal government or head of a chivalric order. As a result, the word sovereign has more recently also come to mean independence or autonomy…. The sovereign is the autonomous head of the state.” “Sovereignty is the full right and power of a governing body over itself, without any interference from outside sources or bodies. In political theory, sovereignty is a substantive term designating supreme authority over some polity.”

A government or sovereign bond is a bond issued by a national government. Government bonds are typically denominated in the issuing country’s currency. Consequently, the government can never be forced to default, because it can simply create more currency to fund payment of principal and interest.

One of the important characteristics of state sovereignty has been Westphalian sovereignty—the principle that each state has exclusive sovereignty over its territory. Established by the Peace of Westphalia in 1648, this principle means that a sovereign government has a monopoly on the use and exercise of physical force within its jurisdiction.

There is an important question that investors must ask: What does it mean to the credit of U.S. Treasury securities that the U.S. has been privatizing parts of its military and intelligence function? It means that the U.S. military and enforcement authorities no longer maintain a monopoly on force within the U.S. jurisdiction. Rather, in our opinion, the number of parties that can and do kill with impunity on behalf of both governmental and non-governmental agencies and parties has been growing faster over recent decades than the U.S. GDP—and there is certainly a relationship between these two trends.17 Economic performance is driven increasingly by force. With the development and implementation of drone and robotics weaponry, the potential impact will be far-reaching.

Who Hires and Fires the Deputy Assistant Secretary of Housing-Single Family at the U.S. Department of Housing and Urban Development?

As described earlier, the FHA, an agency within HUD, is a mortgage insurance operation, generally divided into two funds. The first is the Mutual Mortgage Insurance (MMI) Fund, which funds the single-family residential mortgage insurance originated by FHA. Officially outstanding mortgage insurance in force in the MMI Fund as of fiscal 2018 was approximately $1.1 trillion, with the fiscal 2018 budget requesting authority to issue $400 billion in new mortgage insurance.

The management of the single-family operations at FHA is traditionally undertaken by the Deputy Assistant Secretary of Housing-Single Family who reports to the Assistant Secretary of Housing-Federal Housing Commissioner who reports to the Secretary of HUD. Both the Secretary of HUD and the Assistant Secretary of Housing-Federal Housing Commissioner are Presidential appointees. They are nominated by the President and approved by Senate confirmation after an extensive FBI background check.

The Deputy Assistant Secretary (DAS) of Housing is traditionally recommended for appointment to the Secretary by the Assistant Secretary of Housing, reviewed and approved by the White House, and then appointed by the Secretary after a background check.

When Catherine became Assistant Secretary of Housing in 1989, one of her first jobs was to review and recommend the people for four main deputy positions, including the Deputy Assistant Secretary of Housing-Single Family. One of the resumes forwarded to her by the transition team was for Ronnie Rosenfeld.

Catherine knew Ronnie from her time serving on one of the boards at The Wharton School. After an initial interview, she invited Ronnie to lunch and asked him the most important question. Why was someone with such a successful career in real estate and finance interested in serving as Deputy Assistant Secretary to reform what was at the time a very troubled operation? Although required by law to be financially self-sustaining, the FHA single-family fund was instead losing $11 million a day—a significant amount at a time when the officially reported single-family mortgage insurance in force was approximately $300 billion.

To this day, Catherine remembers Ronnie’s answer. He spoke about how his family had come to America—and thanks to the opportunities we enjoy here—had done very well. Now he wanted to give back. The next day, Catherine forwarded a recommendation to then HUD Secretary Jack Kemp for Ronnie Rosenfeld to be appointed the DAS-Single Family.

Shortly thereafter, Catherine received a call from the executive director of the National Association of Homebuilders (NAHB). The message said it was urgent. Could he and the president of NAHB meet with her as soon as possible? Soon enough, Catherine found herself in a small temporary office (she had not been sworn in yet, having just arrived at FHA) with the executive director and president of NAHB.

The NAHB president was quite upset. It seemed, she said, that Catherine had made a terrible error. She had nominated Ronnie Rosenfeld to be DAS for Single Family. That appointment, the president said, was in fact the NAHB president’s to make—the DAS for Single Family essentially reported to her. She did not seem to be aware that the growing HUD scandals that were part of the savings and loan (S&L) crisis and the Iran-Contra scandal signaled a new day at HUD. In the meantime, Catherine was beginning to understand how the MMI Fund had arrived at the point of losing $11 million a day and not being in compliance with existing federal financial management laws.

Catherine explained that the new administration was planning on running things by the book and that the DAS for Single Family was going to be appointed by the HUD Secretary with approval of the White House. Catherine was only going to recommend to the Secretary candidates qualified to do an excellent job based on merit. Washington lobbyists needed to understand that the line management of a $320-plus billion government insurance program would report to government officials—not to the president of the National Association of Homebuilders.

The president stood up, pointed her finger closely at Catherine’s face and, using the F-word liberally, explained, “I will have you fired.” Catherine looked her in the eye and said, “You know you probably can, but it will take you a while. In the meantime, I am going to get this place on a sound financial footing.” Catherine then picked up the phone, called security, and requested a security guard to physically evict the NAHB president from the building. Inspired by the call, the executive director quickly hustled the president, spitting and yelling, out of the office and down the hall to the elevators.

Before Ronnie arrived, Catherine bounced the fellow who was processing land development deals with the company owned by the president of NAHB from the Single Family office and, with the assistance of now-Deputy Assistant Secretary of Housing Ronnie Rosenfeld, shut down the program. Catherine was fired approximately eighteen months later, in part for a refusal to respect or implement illegal orders, but by that time FHA was on a sound financial footing—which was not to last.

Catherine had experienced some of the basic truths of sovereignty.

For a government to have sovereignty, it must have information sovereignty. The President of the United States must be able to call the Prime Minister of England and have a conversation without eighteen intelligence agencies and telecommunications companies recording and sharing it with numerous banks, private companies, and media outlets. A sovereign government’s information and payments systems need to be controlled by loyal government officials rather than private corporations and banks that can profit from funds being moved illegally out of or laundered through the information systems or securities being issued without being recorded on the government books.18

For a government to have sovereignty, it also must have financial sovereignty. If no one accepts its currency or will buy its bonds, a government cannot provide the basic operational capacity it needs to run and maintain control within its borders. If a country practices deficit spending and becomes highly leveraged, it is ultimately controlled by the owners of its central bank, its creditors, and the dealers who manage its bond markets rather than by its citizens.

The president of the NAHB and Catherine disagreed in 1989 regarding whether FHA was part of sovereign government or simply a rich trough for the feeding of insiders. The reason the FHA Single-Family Fund was losing $11 million a day, although required to be run on a self-sustaining basis, was because it had lost its sovereignty.

Indeed, some of Catherine’s greatest struggles involved getting basic financial data about the operations, including from the defense contractors19 who ran HUD’s IT and payments systems and would refuse requests for basic financial data. Certainly, FASAB 56 has great potential to allow such contractors even greater protection with respect to their control of agency resources and their financial relationship with both the government and shareholders.

In 2000, Catherine met with the chief of staff to the Chairman of the Senate Subcommittee that oversees HUD appropriations. The mortgage bubble was in full bubble mode. The staff member asked Catherine what she thought was going on at HUD. Catherine deferred and asked what the chief of staff thought was going on. The response was, “HUD is being run as a criminal enterprise.” This was after billions of dollars started to disappear from HUD, with $17 billion and $59 billion of undocumentable adjustments in fiscal 1998 and 1999.

HUD is run on a matrix structure with the majority of operations handled by large defense contractors, New York Fed member banks, the U.S. Treasury, and the Department of Justice. HUD was indeed being run as a criminal enterprise—and those entities were intentionally running it as a criminal enterprise. Further outsourcing and privatization can only be expected to make things worse, not better.

The bailouts during the 2008-2012 Financial Crisis were in amounts that were several multiples of what would have been needed to pay off all the residential single-family mortgages in the country. How could that happen, you might ask? Among other things, it could happen because the federal agency responsible to lead policy and regulation for the United States was not run as a sovereign government agency and was handing out credit and booking undocumentable adjustments with abandon.

In 2003, Catherine challenged a retired senior civil servant who had held a senior position at HUD to find an existing member of the civil service at HUD who understood how the financial operations then worked. He accepted the challenge and had to buy Catherine dinner when he lost. It turned out that the banks and corporations were in complete control, he said. There was no government official or employee who understood the operations or finances, let alone was in a position to govern or manage the private banks and contractors at their tasks. He was stunned. HUD had achieved a full privatization operationally without anyone knowing it. Not surprisingly, the housing bubble continued to expand while HUD finances and financial systems remained—perhaps not so mysteriously—a complex, near-impossible-to-understand mess.

Indeed, as you read this, we are being regaled by media reminding us how government is inefficient and telling us that we should let corporations run more government operations.

As you read the 2018 Annual Wrap Up, we encourage you to step back and see the big picture of where we are. The more power private banks and corporations get to run the U.S. government, the more money goes missing, and the larger and more secretive the National Security State grows.

In essence, the U.S. government is like a large double-decker bus. The friendly driver wears a hat and has a big steering wheel. That steering wheel, however, does not connect to the bus wheels. On the lower level, there is another driver with another steering wheel that does indeed connect. That wheel is controlled firmly by the private banks, corporations, and contractors who run the federal government and fund the campaign contributions for Congressional and presidential campaigns.

The passengers get angry at the friendly driver every four or eight years and vote in a new friendly driver. And nothing changes. The situation could change—but that would require cutting off the funding to the real driver, which, of course, threatens the real system and the existing cash flows that generate “fees for your friends” and levitate the corporate profits on U.S. equity markets.

FASAB 56

The collapse of U.S. sovereignty that was under way when Catherine threw the president of the NAHB out of FHA is now complete with the issuance of FASAB 56. This is a material event in the context of investor and citizen risk.

The U.S. government is maintaining secret books through a secret process without any independent verification that those with proper clearances are following the rules that supposedly authorize this secrecy. The people making these decisions are, for the most part, secret. An obscure accounting policy overrides the U.S. Constitution and federal financial management and securities laws. Since the banks and corporations that have run the U.S. government outside those laws for twenty years now have even more power, it is not clear on what basis we would presume they will follow the new set of rules issued to institutionalize their refusal to follow the old set of rules.

There is a simple way to cut through the complexity of what is happening. The U.S. government is not a sovereign government. It does not have information sovereignty. It does not have financial sovereignty. It does not have operational sovereignty. And it has accumulated undocumentable transactions from fiscal 1998 to 2015 at two of its 24 agencies equal to the amount of its officially reported outstanding debt: $21 trillion.

Sovereign Bonds

This brings us to the question of the outstanding U.S. debt. The official amount of outstanding U.S. Treasury debt is now $22 trillion and rising quickly.

U.S. Treasury debt grew by 6% in 2018. It is expected to grow by 8% in 2019. That is despite many years of what is being called an “economic recovery.” If the economy slows or goes into recession, as it inevitably will, the debt growth will accelerate. If unfunded liabilities are added, the picture deteriorates further.

One important question is, who will buy this debt? As described in Section II and at our tables at “Contractors, Investors, and Dealers” in the 2018 Annual Wrap Up, U.S. investors own 33% of the debt, the Federal Reserve Bank owns 11%, and the U.S. government owns 27%—for a total of 71% that is owned domestically. That leaves 29% owned by foreign investors, who are currently net sellers. In addition, the next two years will also see a significant volume of corporate bond maturities, significantly increasing corporate refinancings. Given high global government debt levels, the competition for capital is fierce.

Another question facing investors is, what exactly are they buying? If the U.S. government is no longer a sovereign government (and indeed, aggressive plans for further privatization underscore the fact that there is no possibility of that changing in the near and intermediate future—quite the contrary), what does it mean?

It means that a U.S. Treasury bond is not a sovereign bond. It is something else. The term “sovereign” no longer applies.

So, what is it? It is a bond issued by a governmental shell that is secret and whose operations are run by private corporations and banks that fund—or whose investors, lawyers, and lobbyists fund—the campaign contributions that elect the politicians who serve in Congress and the White House.

We have no way of knowing for sure whether the assets financed by bonds issued by this government continue to be owned by the government, thus providing some form of collateral as a credit matter. We cannot say whether the assets financed by government bonds are being laundered out to private corporations in a manner that supports a high U.S. domestic stock market and the resulting campaign contributions. That possibility would certainly help to explain the dramatic outperformance of the U.S. stock market relative to world markets, however.

Is the U.S. government a government, or rather a tax collection operation that is also a marketing shell for the U.S. Treasury financing operation?

In New York State, when Catherine was on Wall Street, they used to call a certain class of bonds “moral obligations.” That was because it was considered essentially a political fait accompli that the New York State legislature would vote appropriations to pay debt service. But the State did not have a legally binding obligation to do so—the debt was a “moral obligation,” subject to the future will of the legislature. Presumably, the legislature could be expected to appropriate the necessary funds because members did not want the State’s bond market access to come to an end.

For twenty years, Catherine has steadily referred to unaccountable adjustments by HUD and DOD and bailouts—$21 trillion in missing money combined with $24-plus trillion in bailouts—as “the financial coup d’état.” Now, the financial coup d’état period is coming to a close.

With the squeeze in the bond market upon us, as the amount of outstanding debt grows at an accelerating rate, the U.S. and global investors are entering a new phase. Think of this as a leveraged buyout. The investors who can afford the biggest positions in Treasury bonds and can afford to buy new ones are likely the very groups that engineered the financial coup.

This means governmental control is likely being purchased with the money stolen from and through the government. As Catherine always says, “crime that pays, is crime that stays.” So now, investors have a “moral obligation” bond secured by a secret government being run as a criminal enterprise.

There are two reasons most investors assume that such a Treasury bond has financial value. The first is that the U.S. military is considered the strongest in the world. Consequently, a nuclear arsenal should count for something on the global chessboard, despite the unraveling of the global trade system. Second, U.S. Treasury and related debt is denominated in dollars, and the Federal Reserve and, if necessary, the U.S. Treasury can simply create as many dollars as they want—there is no need to default.

The problem is that nowhere in this system are there internal controls that would require economic optimization or fundamental productivity. It has been cheaper to buy people’s political loyalties on a pay-as-you-go basis, using, among other tools, control files made economic by digital technology and media control. The price of secrecy and privilege, however, is that, over long periods of time, they subject the system to ever greater rates of entropy. The more uneconomic and entitled the system becomes, the more it depends on force rather than trust. The result is the downward spiral in performance that is now happening concurrently with an upward spiral in debt.

Secret Funding for Secret Armies

This brings us back to our last condition of sovereignty—Westphalian sovereignty. With very little fanfare, over the last three decades, the United States of America has made a significant investment through its intelligence and defense budgets in building private mercenary armies. Those private armies have been lobbying aggressively to be allowed to replace the U.S. Army in the Middle East and in hot spots around the globe.

Private armies are now a financial constituency that lobbies for profitable opportunities to use force that generate U.S. corporate and bank profits and capital gains and the resulting campaign contributions.

If you look at the covert operations happening around the United States—including shootings, assassinations, false flag events, and likely weather warfare—it is clear that United States military and federal enforcement and state and local governmental subdivisions no longer maintain a monopoly on the use of force within U.S. borders.

Here is what Catherine wrote to one reporter after FASAB 56 was adopted quietly while the country was in an uproar over the Kavanaugh Supreme Court confirmation hearings:

“The story is simple and obvious. What is it about secret financing for secret armies that you do not understand? The U.S. government just officially changed its governance model from a constitutional republic to fascism through an obscure accounting policy. No need to bother with a Constitutional convention. The U.S. Treasury is free to tax and then borrow from our pension funds and global and domestic investors and then transfer the money and assets financed and technology found or created without limit, compensation, or oversight to private corporations and investors. This is privatization by the ‘just do it’ method. Think of this as the extension of the bailouts to a permanent open bailout structure. The White House and Congress just opened a pipeline into the back of the U.S. Treasury and announced to every private army, mercenary, and thug in the world that we are open for business. Every mercenary on the planet is now generating proposed schemes to create business for themselves that pumps up U.S. corporate profits and campaign contributions. Why do you think Mattis is suddenly out, and ads are suddenly running that ‘Blackwater is Coming’? My advice? Ask now-former DOD Secretary Mattis—who opposed mercenary armies—how he feels about using his credibility to arrange significant increases in DOD appropriations and then getting the boot as soon as the mechanism to finance secret private armies goes into place.”

Catherine should have added General Kelly as well. With large appropriations achieved, he was replaced as White House Chief of Staff by the head of OMB, who himself had led the Administration approvals for FASAB 56.

So, not only are the U.S. sovereign bonds no longer sovereign, but the U.S. military that has heretofore served as the backbone of the U.S. financial strength is no longer a sovereign military—it is increasingly being privatized or replaced by private armies, free to roam in U.S. territory as well.

This state of affairs is not unrelated to the fact that an increasing number of the senior officials and legislators in the U.S. government are reported to have dual citizenship. Unfortunately, an accurate account of the number of dual citizenships is also secret.20 Where do these officials’ and legislators’ loyalties lie?

Where does that leave us? If we have a “moral obligation” bond in a governmental financial mechanism operating under the cloak of secrecy in a jurisdiction with multiple secret intelligence agencies, and private armies are operating on behalf of private investment syndicates, who is really in charge, where are they going, and what does it mean to investors?

Honestly, we don’t know. If there is no law, and there is no coherent understanding of how resource management works and who is in control and how that control operates, then we are approaching a system where fiat currency has little or no meaning. We suppose that if you are a member of the secret societies that now run everything, and you trust your secret decoder ring, then you have a way of understanding this.

Essentially, to continue to finance such an operation, we have to trust the “moral obligation”; we have to trust a secret group of people, and we have to trust that assets are not being transferred out the door—although $21 trillion in undocumentable adjustments clearly would suggest otherwise. And, given the rate of entropy in the economics and the many indications that it is accelerating, we have to depend on the military mechanism and, increasingly, private armies to keep the harvesting machinery fed.

Even from the point of view of one who is a member of the committee that runs the secret government, how is anything this big and this secret supposed to work?

Given where we are, U.S. Treasury bonds are not just “moral obligation” bonds. Rather, they may represent a new mechanism for financing disaster capitalism—how about “Benghazi bonds”?

Our challenge is, as we look around the world, that there is a planet full of warlords, oligarchs, and bullies who clearly offer no practical alternative for our capital. This is a powerful argument for challenging the United States to rebuild a sovereign government, rather than accelerating the growth of corporate and bank control. Some investors believe that diversifying their capital into the banks and corporations that have been successful at engineering these rolling coups and “piratization” is the way to go. Given the underlying economics and lawlessness, we are not as confident in that as a strategy. Whatever happens, creditors will be better protected if we reduce operational and political dependency on privileged secrecy and a bloated National Security State.

XI. CONCLUSION

The U.S. is reversing two decades of globalization by “reshoring” significant operations and capital. The decision to do this is logic