Nick Baumann

Nick Baumann

Senior Editor

Nick is based in our DC bureau, where he covers national politics and civil liberties issues. Nick has also written for The Economist, The Atlantic, The Washington Monthly, and Commonweal. Email tips and insights to nbaumann [at] motherjones [dot] com. You can also follow him on Facebook.

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The Trouble With the SEC's "Cars"

| Mon Feb. 4, 2013 8:23 AM PST

On Monday, we posted my story on high-speed trading from the January/February print issue of Mother Jones. (Read it!) Here's the nut:

As technology has ushered in a brave new world on Wall Street, the nation's watchdogs remain behind the curve, unable to effectively monitor, much less regulate, today's markets. As in 2008, when regulators only seemed to realize after the fact the threat posed by the toxic stew of securitization, the financial whiz kids are again one step—or leap—ahead...

...[Knight Capital's big loss on August 1] wasn't the worst-case scenario. Not even close. A lot of high-frequency trading is done by small proprietary trading firms, subject to less oversight than brand name financial institutions. But big banks have also tried to get in on the act. Imagine a runaway algorithm at a too-big-to-fail company like Bank of America, which manages trillions, not billions, in assets. Or, says Bill Black, a former federal regulator who helped investigate the S&L crisis of the '80s and '90s, imagine trading algorithms causing "a series of cascade failures"—like the domino effect that followed Lehman's collapse. "If enough of these bad things occur at the same time," he says, "financial institutions can begin to fail, even very large ones." It's not a question of whether this will happen, Black warns. "It is a question of when."

Years of mistakes and bad decisions led to the 2008 collapse. But when the next crisis happens, it may not develop over months, weeks, or even days. It could take seconds.

One quote I couldn't fit in the final story illuminates the point that the nation's watchdogs are behind the curve. When I asked Gregg Berman, the Securities and Exchange Commission expert who headed the agency's inquiry into the flash crash, how he'd describe the SEC's role, he responded with an extended metaphor:

Berman compares the agency's role in the marketplace to how traffic laws are created and enforced. A town can pass rules setting speed limits that take into account traffic flow and safety, and patrol officers can use radar guns to measure the speed of individual cars, issuing tickets when violations occur. But the officer is not actually in the car and cannot step on the brake pedal as soon as the driver begins to violate the speed limit. Similarly, the SEC is not generally an active market participant "steering the car" in real time. Instead, it acts through policies that do act in real time. For example, the single-stock circuit breakers, put in place after the flash crash, are designed to automatically hit the brakes and halt trading under disorderly market conditions, akin to programing the car to hit the brakes automatically when a potential collision is detected.

That the SEC isn't "in the car," steering in real time, is obvious to anyone who works in finance—as Berman notes, the agency is limited to accident-avoidance technologies that are programmed in advance. It's obvious why this is: Giving the SEC the ability to monitor and shut down trading in real time would be enormously expensive and would likely slow down trading considerably. (Imagine if someone sitting in the passenger seat while you drive, with their own wheel and set of brakes. You probably wouldn't like it.)

To the uninitiated, though, this point might seem pretty scary. The SEC is relying on automatic measures—designed in response to the last disaster—to slam on the brakes if a potential collision is detected. But the "cars" (trading firms) are hurtling down highways faster than ever before, and many of them are being "driven" by robots—sophisticated trading algorithms that buy and sell securities automatically, without human intervention.

One crash, and the demise of one trading firm, isn't such a big deal. But what about a chain-reaction crash? What about a multi-car pileup?

Here's the bottom line: If the SEC's automatic measures fail, it won't be able to react in time to avert a crisis. It will only be able to come in after the fact and try to clean up the mess. We accept this sort of thing when it comes to cars. But even the largest of car crashes can't wreak the kind of economic havoc that a series of cascade failures in the market could.

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Paul Ryan Changes His Story on "Makers and Takers"

| Tue Jan. 22, 2013 1:55 PM PST

Rep. Paul Ryan (R-Wis.) is taking back what he said about "takers"—well, kind of.

In his second inaugural address Monday, President Barack Obama told Americans, "The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great." My colleague David Corn called that line a slap in the face of the tea party, but it was targeted at one person in particular—Ryan, Mitt Romney's ticket-mate, who has a long habit of decrying the gap between the "makers and the takers" in America.

On Tuesday, Ryan took the president's bait during an appearance on Laura Ingraham's radio show. When guest host Raymond Arroyo played a tape of one of Ryan's "makers and takers" comments and asked Ryan about Obama "implicitly" attacking him, Ryan responded that Obama had set up a "straw man." He insisted that he believes Social Security and Medicare are "not taker programs."

One problem: These assertions contradict what Ryan has said in the past about "makers" and "takers." When my colleague Brett Brownell and I reported on Ryan's "makers and takers" comments in October, we reviewed multiple examples of Ryan's use of the phrase. Here's how he used it in a 2011 interview with conservative Star Parker [emphasis added]:

Right now, according to the Tax Foundation, between 60 and 70 percent of Americans get more benefits from the government than they pay back in taxes. So, we're getting towards a society where we have a net majority of takers versus makers.

The Tax Foundation study that Ryan is referring to includes government benefits "from all sources," including Medicare, Social Security, and even national defense. This covers many benefits that go beyond actual checks—the Tax Foundation study derives its "60 to 70 percent" figure in part by assigning Pentagon spending as a "benefit" to each American family proportional to that family's income. If the Tax Foundation hadn't included Medicare and Social Security (and national defense, which Ryan might also hesistate to categorize as a "taker program"), the "between 60 and 70 percent" statistic Ryan cited would be significantly lower. Ryan can't claim that 60 to 70 percent of Americans are "takers" and assert that Social Security and Medicare don't count as taking. 

The Parker interview wasn't the only time Ryan talked about makers and takers in a way that suggested he thinks Social Security and Medicare recipients are takers. Here's another example, from Ryan's June 2010 appearance on "Washington Watch" with Rep. Walter Jones (R-N.C.)—a clip that's on Ryan's official YouTube page:

Right now about 60 percent of the American people get more benefits in dollar value from the federal government than they pay back in taxes. So we're going to a majority of takers versus makers in America.

Again, the only way to claim that 60 percent of Americans are "takers" is by including Social Security and Medicare in your calculations. Clearly Ryan, who is a potential 2016 presidential candidate, now doesn't want to deride those pillars of the social safety net as "taker programs." But he can't remake his record.

Obama Administration Interrogating Terror Suspects Locked Up Abroad (Again)

| Tue Jan. 8, 2013 4:01 AM PST

Remember rendition? Many people believe the practice of having terrorism suspects interrogated overseas was supposed to end when George W. Bush left office. But President Barack Obama said he'd end torture, not renditions—and last week, the Washington Post reported that they're still happening. That's true in some sense, but as Mother Jones and others have reported, the Obama administration's use of foreign regimes to detain and interrogate terrorism suspects has avoided Bush-style renditions in favor of a different practice known as proxy detention.

Law professor and national security expert Steve Vladeck explained the difference between the Bush and Obama renditions on the Lawfare blog last week. The two most famous cases of Bush-era extraordinary rendition are those of Maher Arar and Khaled El-Masri, two men whom, as Vladeck noted, "were illegally sent by the United States to third-party countries where they could be interrogated (and tortured) in a manner that would have been unlawful if conducted by U.S. officials." The case in the Post story is different, in that it involves arrests by local authorites who later transferred the detainees to the United States, and that there's no torture alleged. This case indeed involves prisoner transfers from one country to another, but the details are completely different. The Post story, Vladeck argued, "is equating apples to oranges in a context in which nuance matters."

Here's the meat of the Post's story:

The three European men with Somali roots were arrested on a murky pretext in August as they passed through the small African country of Djibouti. But the reason soon became clear when they were visited in their jail cells by a succession of American interrogators.

U.S. agents accused the men — two of them Swedes, the other a longtime resident of Britain — of supporting al-Shabab, an Islamist militia in Somalia that Washington considers a terrorist group. Two months after their arrest, the prisoners were secretly indicted by a federal grand jury in New York, then clandestinely taken into custody by the FBI and flown to the United States to face trial....

The men are the latest example of how the Obama administration has embraced rendition — the practice of holding and interrogating terrorism suspects in other countries without due process — despite widespread condemnation of the tactic in the years after the Sept. 11, 2001, attacks.

In the September/October 2011 issue of Mother Jones, I reported on several cases of suspected proxy detention of American citizens, and confirmed, via multiple FBI sources, that the bureau does in fact share information with foreign security services that leads to the arrests and detentions of both foreigners and Americans abroad—and that US officials interrogate American and foreign-born terrorism suspects in foreign custody.

The practice may not be as bad as grabbing Abu Omar from the streets of Milan and whisking him away to Egypt for torture. But proxy detention still raises civil liberties groups' hackles, because proxy detainees are granted fewer rights, and subjected to harsher interrogations (and sometimes abuse, allegedly) under foreign custody than they would be if they were arrested in the United States. Today, instead of imprisoning terrorism suspects in Guantanamo Bay, as we did during the Bush administration, we're either blowing them up with drones or having our allies abroad pick them up and do the detaining (and sometimes the interrogating) for us. So the revelation in the Post story wasn't necessarily surprising: If US government officials are willing to have nasty foreign regimes pick up American citizens, they likely wouldn't think twice about nudging Djibouti to arrest a few Swedes.

Civil libertarians worry that proxy detention is a way for the US government to avoid granting terrorist suspects due process rights they would have if they were in US custody. But the FBI's justification for sharing information that leads nasty regimes to arrest terrorist suspects is simple, as one FBI source explained to me in 2011: If the Saudis knew one of their citizens who they believed to be a terrorist was coming to the United States, we'd want them to tell us about it. Shouldn't we be willing to tip them off if Americans—or, in this case, two Swedes and a Brit*—we believe are involved with terrorism are traveling in their country?

The answer the FBI source was looking for was "yes, we should tip off the Saudis if we think an American-born terrorist is in their country, even if we think that person might be tortured"—and there's legal documentation that this has happened at least once. While I was researching my 2011 proxy detention story, I read a series of depositions given by FBI officials in an FBI agent's whistleblowing lawsuit against the FBI. They indicated that in 2002, the United States revealed the identity of an American under FBI investigation to the Saudi secret police, despite fears that the American, who was unnamed in the depositions, might be tortured in Saudi custody.

Not long after, in June 2003, the Saudi secret police arrested and interrogated Ahmed Omar Abu Ali, an American suspected of involvement with Al Qaeda. (There is reason to suspect that Abu Ali was the American whose identity was shared with the Saudis, but since his name wasn't mentioned in the depositions, there's no proof.) Civil rights groups and Abu Ali's legal team sued in federal court, saying Abu Ali had been detained at the behest of the United States. A federal judge ordered the government to release more details about Abu Ali's case, but before that could happen, the Saudis extradicted Abu Ali to the US, where he was tried and convicted of material support for terrorism. Abu Ali would later claim he had been tortured in Saudi custody.

Today, years after Abu Ali's conviction, allegations of proxy detention continue to pop up. I've devoted special attention to covering reports involving Americans detained abroad, since American citizens have rights under US law that foreigners do not. (The most recent report surfaced in April 2012, when Yonas Fikre, an American Muslim now living in Sweden, claimed he, too, was a victim of proxy detention, and that he was tortured.) But any case in which someone is detained abroad allegedly at the request of the US government deserves our attention, because if the government is tapping allies' security forces to skirt due process rules overseas, how long before it decides due process is also too burdensome at home?

Matthew Waxman, also a law professor who blogs at Lawfare, wrote last week that he thinks these sorts of proxy detentions are "going on — at least indirectly — more than we know publicly." The problem for the FBI, though, is that if it chooses to take formal custody of proxy detainees, and return them to the US for trial, it's likely that more of these sorts of stories will come out, potentially exposing sensitive intelligence cooperation with foreign regimes—and those regimes' misbehavior.

*Correction: It was two Swedes and a Brit, not three Swedes.

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