**Note: We are republishing each of the 22 challenges from Catherine’s fiscal cliff article – one a week. Helps to digest them bit by bit!**
Challenge #3 Operations
By Catherine Austin Fitts
A significant portion of governmental accounting functions, payment systems, and financial operations have been outsourced to private banks and corporations. Indeed, the government has become so dependent on outside corporations, that government officials do not have the knowledge or operational capacity and independence to assert control. And worse yet, the same private contractors and banks that control the government’s data and financial operations also control access to the bond markets that finance the government’s operations? So who is really in charge?
It is critical to understand that government officials who are technically responsible for financial operations do not have control, nor can they necessarily rely on the government for “protection.” So how can they fulfill their fiduciary responsibility to the citizenry?
The NY Fed member banks serve as depository for the U.S. federal accounts and manage the U.S. Treasury Exchange Stabilization Fund. The Treasury is also dependent on them for an enormous number of servicing functions, such as for processing bonds, mortgages and foreclosures. Finally, the NY Fed member banks and the other primary dealers market Treasury and agency debt to fund ongoing deficits.
Within the agencies, private defense contractors provide the primary information and payment systems. Hence, the largest contractor at DOD, where over $3.3 trillion has gone missing, runs many of their accounting and payments systems while it is also selling large weapons systems to DOD. The DOD’s supplier of accounting software and systems is also their largest supplier of weaponry and services, as well as the manager of numerous highly classified and secret weapons programs.
As agents, these banks and contractors are the custodians of vast amounts of data from scores of federal agencies, including military and intelligence agencies, and in turn have access to the full range of confidential data about citizens, their taxes and transactions. In effect, the sovereignty of the United States Government and its citizens has been transferred to those who control the data and
telecommunication systems. There has been a financial coup d’etat.
The largest defense contractor at HUD on several occasions refused to give senior government officials or me access to data on HUD subsidies that they were managing and for which they operated the payment systems. In essence, the defense contractor was in control and the government officials were subservient to them. I assume this was because the HUD subsidies were being run in a manner that was very different from the budget and financial statements described.
In March 2000, the HUD Inspector General testified that HUD would not publish financial statements for fiscal 1999 and that the undocumentable adjustments made so far to balance the books was $59 billion. A close reading of the undecipherable preliminary audit indicated that, in fact, the number was $17 billion in fiscal 1998 and $70 billion on the asset side and $59 billion on the liability side in fiscal 1999. As a practical matter, since HUD was assuring us that their systems did not work and that they had simply not bothered to check their accounts and cash balances in the old fashioned way using paper and pencil, we had no numbers of any meaning. In fact, anything was possible. Worse yet, GAO reports of the Treasury accounting systems both as to their reliability and control by private contractors are also disturbing. With little or no information sovereignty, the internal controls are insufficient to assure that cash balance reconciliation between an agency such as HUD and Treasury are accurate.
When an agency can issue government guarantees and not record what they have issued correctly and then write checks that are not recorded correctly, then one or more of the players that handle the money, namely the US Treasury, the Federal Reserve Bank of New York, AMS and Lockheed, may be in a position to steal literally hundreds of billions of dollars with no one the wiser except those enjoying the fruits.
Such a thought seemed far-fetched not that long ago. Indeed, in 1994 after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government’s published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure. I assumed that the guy was crazy. If what he said were true, then the US Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud. This was inconceivable. To this day, I regret not accepting a copy of the printouts from his databases. I wonder if they might have illuminated what our [Community] Wizard and other portfolio tools were about to find. They might have helped explain why our efforts to distribute information on the HUD outstanding mortgage and defaulted mortgage portfolios inspired such opposition and distress.
The indications are growing that Treasury and OMB are engaging in fraudulent transactions and that the key financing, accounting and payments systems are run by contractors who are either in on the deal or turn a blind eye. What this means is that the financial disclosure provided by the federal government may be essentially meaningless. It does not take long to realize that in a world with no financial controls with the fox in control of the chicken coop anything is possible. Life in the federal government is an endless series of shortcuts under impossible political stress and risk. With no internal financial controls, things can go far off course with no way for reasonable people to stop it.
There are several other issues regarding government contracts that present challenges to anyone wanting to reengineer the federal budgetary process.
The first is that much of defense contracting has been organized and priced on a “cost plus basis.” That is, contractors are reimbursed for their stated costs plus a set mark up. Experts familiar with the defense procurement process believe that this has resulted in ballooning expenses, poor performance and less innovation.
Second, government contractors are rarely disqualified despite criminal behavior or corporate malfeasance or even criminal conviction. One of the more infamous cases, concerned a government contractor that was sued on multiple occasions for sex slave trafficking, including by the project contract manager – accusations confirmed by defense department criminal investigators. The contractor in question continued on as the largest contractor at the U.S. State Department, was protected by senior state officials and then awarded a sole source contract to manage the criminal justice system in Iraq.
Third, there is often no more carefully hoarded information within a federal agency than the agency contract budgets. If our government is going to be run by government contractors, then we need to know who they are, what they are responsible for and how that relates to any financial reporting and accounting problems we are having.
David Walker was head of the GAO, chief auditor to the U.S. Congress, while the U.S. government consistently failed to comply with laws requiring audited financial statements and over $4 trillion went missing. One reporter with whom I was working was promised by Walker that he would publish the names of government contractors associated with these losses. This was after petitions under the Freedom of Information Act to the agencies failed to result in even basic disclosure of the relevant contractors and their contracts. Mr. Walker failed to ever honor that commitment. Today, with the names of those contractors still invisible, Mr. Walker serves as the CEO of the Pete Peterson Foundation, where he pontificates on fiscal accountability and the need for American’s to tighten their belts.
Fourth, perhaps the greatest risk of all is the outsourcing of our military capacity. Overall, federal employment has declined in recent decades. One reason for this is the increased dependency of the military on outside contractors. Given the importance of the U.S. active and reserve military for national defense, the idea that these functions are dependent on private corporations whose investors also control governmental purse strings, is truly frightening to contemplate.
Fifth, private contractors often operate without legal liability, creating governmental and military operations for which no one is liable. One famous example of this “nether world” came out when Gary Webb published his Dark Alliance news series and book on government narcotics trafficking in South Central Los Angeles.
In response to citizen concern inspired by Webb’s story, then Director of the CIA, John Deutsch, agreed to attend a town hall meeting in South Central Los Angeles with local Congressional representatives in November 1996. Confronted by allegations in support of Webb’s story, Deutsch promised that the CIA Inspector General would investigate the “Dark Alliance” allegations.
This resulted in a two volume report published by the CIA in March and October of 1998 that included disclosure of one of the most important legal documents of the 1980s — a Memorandum of Understanding (MOU) between the Department of Justice (DOJ) and the CIA dated February 11, 1982 in effect until August 1995….
No history of the 1980s is complete without an understanding of the lawyers and legal mechanisms used to legitimize drug dealing and money laundering under the protection of National Security law. Through the MOU, the DOJ relieved the CIA of any legal obligation to report information of drug trafficking and drug law violations with respect to CIA agents, assets, non-staff employees and contractors. Presumably, this included the corporate contractors who, by executive order, were now allowed to handle sensitive intelligence and national security outsourcing.
With the DOJ-CIA Memorandum of Understanding, in effect from 1982 until rescinded in August 1995, a crack cocaine epidemic ravaged the poorer communities of America and disenfranchised hundreds of thousands of poor people into prison who, now classified as felons, were safely off of the voting roles. Meantime, the U.S. financial system gorged on what had grown to an estimated $500 billion-$1 trillion a year of money laundering by the end of the 1990s. Not surprisingly, the rich got richer as corporate power and the concentration of investment capital skyrocketed on the rich margins of state sanctioned criminal enterprise.
Catherine Austin Fitts, Dillon Read & Co. Inc. & the Aristocracy of Stock Profits
Sixth, there are numerous reports that government contractors are being allowed to use tax avoidance mechanisms that reduce their tax liability substantially. So while taxpayers provide their revenues these contractors avoid their fair share of taxes.
Finally, while the government is becoming more dependent on corporate America, corporations are becoming more dependent on government subsidies, contracts and purchases – thus radically increasing the dependency of the commodities, bond, mortgage, stock and derivatives markets on the federal budget. The financial markets have become a “proprietary” for various government agencies (i.e. a business secretly owned by and run as a cover for an intelligence organization). Hence, it is not surprising in the second Bush Administration that the National Security Council invented their right to exempt corporations that they specify from obligations to comply with SEC disclosure laws. Very few investors are aware of this, let alone that their retirement savings and personal assets are deeply dependent on ever increasing government borrowings because the corporations and banks in which they or their pension funds are investing are primarily U.S. government contractors.
