– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.

But most interesting of all is a plan to buy whole loans, dubbed “legacy loans”, from banks but this time the private-public subsidized vehicle will get its leverage courtesy of Federal Deposit Insurance Corporation-guaranteed debt.

Notice that the ground has shifted subtly and the government is now talking not just about “toxic” assets but “legacy” ones. A legacy asset is, more or less, everything real estate related now on bank balance sheets.

These loans are not marked to market they are held to maturity, so no blaming the market here. They are nothing more than doubtful loans in the process of going bad as the economy implodes and the real estate they are collateralized with drops in value.

There is an almighty bust in the U.S. real estate market and it is blowing holes in bank balance sheets having nothing to do with securitizations.

It rather undercuts the argument that was advanced about earlier subsidy plans, that there was a “market failure” leading to hard-to-value complex securities being priced by the market at too little, below their fair “held-to-maturity” value.

The only uncertainty around a whole loan is whether the debtor will pay back the loan and, if not, what the collateral is worth. So there is no more deception about liquidity, market failure or anything else, only a naked subsidy to the banking industry, using the private sector as a pricing mechanism and cutting them in on the deal in exchange.

DEFINITION OF PRIVILEGE
So, will it work, and if it does how will this step influence the way banking functions down the road? Depends on what you mean by work, but it will doubtless take a tranche of lousy assets off of banks.

But as for creating confidence, I can’t see it. Firstly, investors will twig to the idea that the balance sheet issues are deep, and secondly, now that we are talking whole loans I think it’s clear that the $1 trillion is only a down payment.

That means the administration will need Congress to play along and fund another wodge of subsidy. That may be a tough sell, especially considering that the administration has bent over backward to keep Congress out of the funding loop, using the Federal Reserve and FDIC as funding mechanisms and thereby effectively arrogating the funding powers Congress is supposed to hold.

The plan also hugely encourages moral hazard, as it leaves too big and too failed companies, boards and executives in place while providing them with a chance to climb out of the holes they have dug themselves. Not much of a lesson in accountability.

Writing in the Wall Street Journal, Secretary Geithner said the U.S. must strike a balance between promoting public trust and spending taxpayer cash to get the banking system functioning.

“This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders,” he wrote.

It is just astounding that he even sees the need to remind us that free government money is not a right, and reveals much about the balance of power between him and those seeking handouts. And you simply can’t give a subsidy without enriching executives or shareholders, you can only hope not to do it too obviously.

Finally, don’t even begin to believe that concerns about government interference will leave the U.S. with few well qualified asset managers willing to commit their capital to the plan. New York and Connecticut are stuffed to the gills with asset managers who would crawl naked over hot coals to get access to cheap, non-recourse, long-term funding from the government.

That there are suggestions to the contrary is simply an attempt to try and influence the debate about government control over compensation at firms which accept taxpayer largess. A smokescreen within a smokescreen.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –

Michael Barrett is the Chief Information Security Officer at PayPal. He is on the advisory board of StopBadware.org, an anti-malware “neighborhood watch” led by Harvard University’s Berkman Center for Internet & Society.

In less than five years, Internet crime has changed from an anomaly of teenage vandals into a multi-billion dollar industry. Just one form of cyber crime, “phishing,” where criminals masquerade as trustworthy entities in e-mails and instant messages to steal private data, reportedly amassed $3.2 billion last year.  Another form, spyware, where software surreptitiously monitors a victim’s online activity, prompted 850,000 U.S. households to replace their computers and inflicted damages totaling $1.7 billion, reported the Consumer Reports National Research Center State of the Net Survey.

At the same time, Internet usage has skyrocketed worldwide with 20 percent of the world’s population, or about one billion people, online today. It’s not hard to understand why the Internet’s popularity has continued to grow in the face of its threats. Could you get through your workday without e-mail or search? Could your kids make it to dinner without checking Facebook or sending a text? If you’re like most people I know, the answer is likely, “no way.”

We are socially and economically dependent on the Internet - a fact that makes us vulnerable in tough financial times. So, it may surprise you to know that no single entity is responsible for regulating the Internet or keeping its users safe.

Historically, Internet safety has relied on the goodwill of a few small actors such as non-profits like StopBadware.org, an anti-malware neighborhood watch led by Harvard’s Berkman Center for Internet & Society. Within the federal government, the Federal Trade Commission monitors Internet fraud and the Department of Homeland Security oversees a national cyberspace response system. The private sector, offering a host of cyber-security products and tools, and consumers also play a powerful role in keeping us all safe online. Companies such as my own employer, PayPal, invest substantially in the security of our own applications and infrastructure; we have state of the art fraud management systems; we work with law enforcement to catch, prosecute, and convict criminals whenever possible. But the persistence of the cyber-crime industry continues.

Although this deregulated approach to Internet safety has largely served us well over the past 15 years, some question whether it’s enough to tackle today’s burgeoning Internet crime industry. Indeed, what’s distressing is there is no reason to believe that Internet crime is under any effective control. This is not due to inertia or lack of interest. All of the trend lines reported by private industry and government continue to show growth “up and to the right.”

President Obama has said that he’ll make cyber security a top priority in his administration and appoint a National Cyber Advisor who will report directly to him.  In a speech at Purdue University last July, Obama said: “We’ll coordinate efforts across the federal government, implement a truly national cyber-security policy, and tighten standards to secure information - from the networks that power the federal government, to the networks that you use in your personal lives.”

Obama’s desire to administer a national cyber-security policy will surely open one or two Pandora’s boxes in the worlds of Washington and business, where many would prefer for the Internet to remain untouched by government. In the longer term, I predict we will start to see Internet governance follow the same legislative paths as automobiles and airplanes.

The Ford Model T’s introduction in 1908 revolutionized the way Americans viewed cars, and innovations in the speed of manufacturing put an unprecedented number of vehicles on the road, followed by an unprecedented number of safety concerns. Out of a need to prevent accidents, the federal and state governments initiated road regulation with speed limits, traffic lights and signage.

Aviation followed a similar history. The Wright Flyer of 1903 set forth a wave of government regulations of airspace and the aviation industry, with the National Advisory Committee for Aeronautics in 1915, the Airmail Act in 1925, and the Air Commerce Act in 1926. Less than 25 years after the Wright brothers’ first flight, the U.S. government had put in place an extensive regulatory infrastructure. Why? To prevent accidents.

The forcing function that accidents represented for road and air transportation has not existed for the Internet - until perhaps now. As cyber-crime continues to rise, I believe that citizens will increasingly request that their elected representatives do something to “make the Internet safe.” It was citizens’ complaints in the early 20th century that forced initial regulation of roads and aviation - they didn’t like carnage on the roads, and bodies and aluminum raining from the sky. The same pressures are starting to rise again for the Internet.

Internet safety should be a shared responsibility among government, private industry and consumers. But almost none of these regulatory elements are in place today. The rise of cyber-crime, with billions in damages to our economy and consumers, should motivate us to make some changes in the same way accidents catapulted new standards for road and airways. We need to develop a model framework for Internet governance, and we need to do it soon.

- Bernd Debusmann is a Reuters columnist. The opinions expressed are his own -

Albert Einstein defined insanity as doing the same thing repeatedly and expecting different results. His definition fits America’s war on drugs, a multi-billion dollar, four-decade exercise in futility.

The war on drugs has helped turn the United States into the country with the world’s largest prison population. (Noteworthy statistic: The U.S. has 5 percent of the world’s population and around 25 percent of the world’s prisoners). Keen demand for illicit drugs in America, the world’s biggest market, helped spawn global criminal enterprises that use extreme violence in the pursuit of equally extreme profits.

Over the years, the war on drugs has spurred repeated calls from social scientists and economists (including three Nobel prize winners) to seriously rethink a strategy that ignores the laws of supply and demand.

Under the headline “The Failed War on Drugs,” Washington’s respected, middle-of-the-road Brookings Institution said in a November report that drug use had not declined significantly over the years and that “falling retail drug prices reflect the failure of efforts to reduce the supply of drugs.”

Cocaine production in South America stands at historic highs, the report noted.

Like other think tanks, Brookings stopped short of recommending a radical departure from past policies with a proven track record of failure such as spending billions on crop eradication in Latin America and Asia while allotting paltry sums in comparison to rehabilitating addicts.

Enter Law Enforcement Against Prohibition (LEAP), an organization started in 2002 by police officers, judges, narcotics agents, prison wardens and others with first-hand experience of implementing policies that echo the prohibition of alcohol. Prohibition, now widely regarded a dismal and costly failure of social engineering, came to an end 75 years ago this week.

As LEAP sees it, the best way to fight drug crime and violence is to legalize drugs and regulate them the same way alcohol and tobacco is now regulated. “We repealed prohibition once and we can do it again,” one of the group’s co-founders, Terry Nelson, told a Washington news conference on December 2. “We cannot arrest our way out of this problem.”

FROM AL CAPONE TO DRUG CARTELS

“In the 20s and 30s, we had Al Capone and his gangsters getting rich and shooting up our streets,” said Nelson, who spent a 32-year government career fighting drugs in the U.S. and Latin America. “Today we have criminal gangs, cartels, Taliban and al-Qaeda profiting from the prohibition of drug sales and wreaking havoc all over the world. The correlation is obvious.”

The before-and-after sequence is so obvious that the U.S. Congress passed a resolution in September noting that the 1933 repeal of alcohol prohibition had replaced a “dramatic increase” in organized crime with “a transparent and accountable system of distribution and sales” that generated billions of dollars in tax revenues and boosted the sick economy.

That’s where advocates of drug legalization want to go now, and some of them hope that the similarities between today’s deep economic crisis and the Great Depression will result in a more receptive audience for their pro-legalization arguments among lawmakers and government leaders.

The budgetary impact of legalizing drugs would be enormous, according to a study prepared to coincide with the 75th anniversary of prohibition’s end by Harvard economist Jeffrey A. Miron. He estimates that legalizing drugs would inject $76.8 billion a year into the U.S. economy — $44.1 billion through savings on law enforcement and at least $32.7 billion in tax revenues from regulated sales.

Miron published a similar study in 2005 looking only at the budgetary effect of legalizing marijuana, the most widely used illicit drug in the United States. That study was endorsed by more than 500 economists, including Nobel laureates Milton Friedman of Stanford University, George Akerlof of the University of California and Vernon Smith of George Mason University.

“We urge…the country to commence an open and honest debate about marijuana prohibition,” the economists said in an open letter to President George W. Bush, congress, governors and state legislators. “At a minimum, this debate will force advocates of current policy to show that prohibition has benefits sufficient to justify the cost to taxpayers, foregone tax revenues and numerous ancillary consequences that result from marijuana prohibition.”

The advocates of current policy, led by outgoing President George W. Bush’s drug czar, John Walters, never took up the challenge to discuss cost-benefit equations. His Office of National Drug Control Policy has focused, with the single-minded determination of a moral crusader, on doing the same thing over and over again.

But the United States is not alone in pursuing drug strategies that are based more on wishful thinking than on sober analysis. If you put faith in declarations by the United Nations, a “drug-free world” is an attainable goal and the war on drugs all but over.

In 1998, a special session of the U.N. General Assembly forecast that the illicit cultivation of the coca bush, the cannabis plant and the opium poppy would be eliminated or significantly reduced by the year 2008, a deadline that also applied to “significant and measurable results in the field of demand reduction.”

The clock is ticking towards midnight, December 31, 2008.

— You can contact the author at Debusmann@Reuters.com. For more columns by Bernd Debusmann, click here. —

Want to debate? Send in your written submissions to debate@thomsonreuters.com.

World leaders vowed to work together in overhauling the global financial system as they headed to Washington for a summit on wresting the global economy from recession and avoiding future meltdowns.

Far from the confines of Washington, Reuters readers launched into a lively debate, sparked by Reuters columnists and experts, on what this means for the global financial crisis.

One of the more lively discussions arose from a column theorizing the financial crisis is the greatest threat to international security. Paul Rogers, Professor of Peace Studies at Bradford University and Global Security Consultant to Oxford Research Group argues:

Unless global responses are made to the current economic crisis, the biggest threat to international security will be the impoverishment of hundreds of millions of people, leading to radical and violent social movements that will be met with force, resulting in still greater conflict.

Reader Jonathan Cole contends:

When the “me” impulse overcomes the “we” impulse to the point that it creates a dysfunctional, unjust concentration of wealth and comfort in the hands of a minority, while consigning the rest to poverty, bad health, and early death, it is only a matter of time before the anger bubbles up from the masses.

Reader James Harris counters:

Maybe it is time for better thinking and not these emotional reactions, that are ultimately an innate desire for finger pointing at U.S. Leadership in causing the financial crisis.

While reader Michael Anderson comments:

I think it would be very beneficial if we had leadership which could promote a mindset whereby we didn’t think of it as us versus them. When underdeveloped nations begin sharing in the wealth to a larger degree we all win.

“Move over America! Make space Europe!”

Reuters columnist Paul Taylor writes that this summit of 20 nations sets a precedent for a new international order. Emerging economies such as China, India, Brazil, South Africa and Mexico are invited to share responsibility for the economic fate of the planet with the established Group of Eight industrialized nations.

No longer mere appendages invited for lunch at the end of the annual G8 summit, the rising powers are in demand because they have either mountains of cash, vital natural resources, fast-growing economies or regional security responsibilities.

Reader RC comments:

India constitutes around 17% of the world population whereas the whole of Europe constitutes only around 5% of the world population. Europe have 3 permanent UN security council members with veto power, which India does not have. What kind of democratic world is this?

“Risk-taking is the engine of economic innovation”

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor puts forth the argument that the U.S. won’t stomach a new Bretton Woods. She writes:

Whatever the wisdom of more far-reaching international financial regulations, many Americans don’t want binding rules administered by a bureaucracy unaccountable to the public. They prefer to do the job themselves. They want sovereignty over their own affairs, and are suspicious of international organizations.

What are your thoughts on the issues world leaders face as they tackle the financial crisis?

Sudan's President Omar Hassan al-Bashir was in a jubilant mood when he announced to crowds of supporters that he was declaring a ceasefire in Darfur.

From his body language, you might have thought he had already ended the crisis and achieved his goal of avoiding a possible indictment by the International Criminal Court for alleged war crimes in Darfur.

In the build-up to his speech, supporters surged to the front of the crowd waving sticks and punching the air with their fists to show their support for the army officer who came to power in Sudan in a coup in 1989. There was almost a party atmosphere.

Tanzania's foreign minister Bernard Kamillius Membe was greeted with cheers as he announced that Sudan had shown that African countries could look after their own crises.

"The International Criminal Court is an irrelevance," said the Tanzanian minister. "You are masters of your own destiny. Africa does not need outsiders to resolve its conflicts."

But after the celebrations were over, serious questions remained as to what impact the ceasefire and other new measures would have on the festering Darfur conflict and the ICC prosecutor’s hope of putting Bashir on trial.

Diplomats quickly spotted loopholes in the text of Bashir’s speech.

Bashir promised an "unconditional" ceasefire in Darfur – but in the same sentence added that it would come into force "provided an effective monitoring mechanism be put into action and observed by all involved parties."

That amounted to "a pretty big caveat" given the difficulty of establishing ceasefire mechanisms in Darfur in the past, one diplomat told me, speaking on condition of anonymity.

Analysts also questioned why Bashir had not announced any freeing of political prisoners from Darfur, another of the recommendations of the government-backed forum that came up with the proposal to call a ceasefire.

Even some officials appeared sceptical.

“Peace in Darfur will not come until the two sides sit down together and agree the issue,” said one, who declined to be named.

Past ceasefires in Darfur have come and gone bringing little change for the estimated 2.5 million Darfuris driven from their homes by more than five years of fighting.

Will this one be any different, particularly since Darfur rebel groups have said they will continue to fight and have dismissed Bashir’s ceasefire as a public relations sham? What difference could it make in a region increasingly at the prey of bandits? Could it be enough to convince sceptical Western countries to agree to postpone any indictment of Bashir?