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Freeport's Congo Operations

September 2 2009 at 7:27 AM
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Anonymous 

Dan Rather Reports
Episode Number: 330
Episode Title: All Mine
Description: When an American company bought a massive copper mine from the
government of Congo, it also took control of part of the impoverished country's economic
future. Critics say the contract for the billion-dollar mine left the war-torn African nation
with little in return, and that the U.S. government played a part in what many are
describing as a modern day land grab. Also, economist Gary Shilling on Wall Street
woes.
DAN RATHER (ON CAMERA)
GOOD EVENING. TONIGHT WE COME TO YOU FROM WALL STREET. ITS A
SHORT STREET, WALL STREET, JUST A FEW BLOCKS BETWEEN A SUBWAY
STOP AND A FERRY DOCK IN LOWER MANHATTAN. BUT IN RECENT
MONTHS, THIS HAS BEEN THE CENTER OF FEAR, BLAME, AND CHAOS IN
THE WORLD ECONOMY, AS THE MORTGAGE CRISIS EXPLODES INTO THE
CREDIT CRISIS, THE CREDIT CRISIS INTO THE LIQUIDITY CRISIS. FOR NOW,
THE TRADERS HAVE GONE HOME AND THE TRAFFICS THINNED OUT,
RATHER (VOICE OVER)
BUT EVEN WHEN THE STREETS WERE FILLED WITH LAID-OFF BANKERS IT
WAS NOTHING COMPARED TO THE BEDLAM HIDDEN INSIDE BOTH ON THE
TRADING FLOOR, AND WHERE CAMERAS WERENT ALLOWED, INSIDE
THOSE CORNER OFFICES AND THE HALLS UPSTAIRS, WHERE DEALS ARE
HASHED OUT AND DECISIONS MADE.
RATHER (ON CAMERA)
A YEAR AGO, AS THE MORTGAGE CRISIS STARTED, FORMER FED
CHAIRMAN ALAN GREENSPAN SAID THIS LOOKED LIKE JUST ONE OF
HISTORYS LITTLE BUMPS IN THE ROAD. THE SAVINGS & LOAN DEBACLE
OF THE LATE 1980S, FOR EXAMPLE, NOT THE GREAT DEPRESSION OF THE
1930. THAT WORDS BEEN BANDIED ABOUT A LOT OF LATE, BUT EVEN
THOSE OF US WHO GREW UP IN THE DEPRESSION CAN BARELY CONJURE
UP THE SCALE OF THE DEVASTATION IT WROUGHT.
RATHER (VOICE OVER)
BETWEEN 1929 AND 1932, INDUSTRIAL PRODUCTION IN THIS COUNTRY
FELL 50%; PRICES FELL 20%; INCOMES FELL 35%; THE STOCK MARKET WAS
DOWN 75%.
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RATHER (ON CAMERA)
SINCE THEN, ECONOMISTS THINK THEYVE LEARNED A LOT, CREATING
INSTITUTIONS LIKE THE FDIC TO PREVENT BANKS FROM GOING UNDER.
IN THE 1920S, WED NEVER HAVE COORDINATED ACROSS THE ATLANTIC
TO FLOOD MARKETS WITH MONEY TO KEEP LOANS FROM FREEZING UP.
AND WEVE CREATED A SOCIAL SAFETY NET SO MASS MIGRATIONS AND
WIDESPREAD MALNUTRITION ARE UNLIKELY.
RATHER (VOICE OVER)
ALTHOUGH THE MOST RECENT EVENTS ARE THE BIGGEST TEST YET, BY
CONVENTIONAL MEASURES, OUR ECONOMIC SAFEGUARDS IN MANY
IMPORTANT WAYS ARE WORKING. THE NUMBERS WE NORMALLY LOOK
AT TO FIGURE OUT THE STATE OF THE ECONOMY ARENT BAD IN A LOT OF
KEY WAYS. THE ECONOMY ACTUALLY GREW AT 3.3% LAST QUARTER
ABOUT AVERAGE SINCE WORLD WAR II. EXPORTS ARE BOOMING. BUT
ARE THESE THE RIGHT NUMBERS ANYMORE, AND WHY DOES IT FEEL SO
BAD? THREE QUARTERS OF AMERICANS THINK THE CURRENT CRISIS IS
ONLY GOING TO GET WORSE. NINE OUT OF TEN THINK THE FAILURE OF
LEHMAN BROTHERS AND THE FIRE SALE OF MERRILL LYNCH IS GOING TO
HAVE A BAD EFFECT ON THE ECONOMY DOWN THE ROAD, AND THE
MEDIA CANT GET ENOUGH OF THE FALL OF THE TITANS. TWO THIRDS OF
AMERICANS DONT TRUST THE GOVERNMENTS INTERVENTIONS TO
WORK. WE AS A NATION, AS A PEOPLE ARE FEELING INSECURE.
RATHER (ON CAMERA)
LATER IN THE PROGRAM, ILL TALK TO AN ECONOMIST WHOLL EXPLAIN
WHATS REALLY GOING ON AND WHAT IT MEANS FOR THE WORLD AND
WHAT IT MEANS FOR YOU HELL TALK WITHOUT THE JARGON, HES A
STRAIGHT-TALKER. BUT RIGHT NOW, WHEN WE COME BACK, WELL ZOOM
OUT FROM WALL STREET TILL WE CAN SEE THE CONTINENT OF AFRICA,
AND THE DESPERATELY POOR NATION OF CONGO, WHERE A MINING
COMPANY ON THE NEW YORK STOCK EXCHANGE IS AFFECTING THE LIVES
OF MILLIONS OF PEOPLE ALL WITH THE HELP OF THE UNITED STATES
GOVERNMENT.
ALL MINE:
RATHER (ON CAMERA)
AND NOW THE STORY OF HOW AN AMERICAN COMPANY DOES BUSINESS
WHERE NO ONES WATCHING. OUR SEVEN MONTH INVESTIGATION WILL
BRING YOU HALFWAY AROUND THE GLOBE TO THE DEMOCRATIC
REPUBLIC OF CONGO, ONCE KNOWN AS ZAIRE, AND WELL SHOW YOU
HOW HUNDREDS OF MILLIONS OF U.S. GOVERNMENT DOLLARS ARE
HELPING A POLITICALLY CONNECTED AMERICAN MINING COMPANY
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TAKE AWAY A BIG CHUNK OF CONGOS ECONOMIC FUTURE. WHILE THE
PEOPLE OF CONGO ARE SOME OF THE POOREST ON EARTH, THE LAND
HOLDS SOME OF THE RICHEST RESERVES OF MINERALS ANYWHERE.
WERE TALKING ABOUT DIAMONDS, GOLD, AND THESE DAYS...COPPER. A
METAL BEST KNOWN FOR COVERING THE PENNY IS WORTH A LOT NOW.
BECAUSE OF ITS USES IN CONSTRUCTION AND ELECTRONICS, FOR PIPES
AND WIRES, THE DEMAND FOR COPPER IN BOOMING ECONOMIES LIKE
CHINA AND INDIA HAS SHOT UP...AND SO HAVE THE PRICES. COPPER IS
NOW WORTH MORE THAN FOUR TIMES WHAT IT WAS JUST FIVE YEARS
AGO...BUT THE PEOPLE OF CONGO HAVE VERY LITTLE TO SHOW FOR IT.
RATHER (VOICE OVER)
AND THAT BRINGS US TO THESE MINERAL RICH HILLS IN SOUTHERN
CONGO... AND A PLACE CALLED TENKE FUNGURUME, BELIEVED TO HOLD
THE LARGEST UNTAPPED COPPER MINE IN THE WORLD. ITS ALSO HOME
TO MORE THAN 50,000 VILLAGERS WHO HAVE FOUND THEMSELVES ON
THE FRONT LINE OF A CONFLICT BETWEEN A POWERFUL AMERICAN
COMPANY AND CONGOS VOICELESS POOR. THE MINE IS OWNED BY
ARIZONAS FREEPORT MCMORAN...AND THIS FRONT GATE IS AS CLOSE AS
THEY WOULD LET US GET. THESE IMAGES WERE SHOT BY A CONGOLESE
JOURNALIST ON A COMPANY TOUR. WHEN ITS COMPLETE, TENKE
ANNUALLY WILL PRODUCE MORE THAN 250 MILLION POUNDS OF VERY
PURE ORE. AND AT PRICES APPROACHING FOUR DOLLARS A POUND, THIS
RED DIRT COULD GENERATE HUNDREDS OF MILLIONS OF DOLLARS A
YEAR. THAT COULD HAVE BEEN GOOD NEWS FOR CONGO. BUT IT HASNT
BEEN. THATS BECAUSE MOST OF THE WEALTH PULLED FROM THIS MINE
WONT GO TO THE PEOPLE OF CONGO. INSTEAD, IT WILL GO TO FREEPORT,
THE WORLDS LARGEST PUBLICLY TRADED COPPER COMPANY, WHOSE
HEADQUARTERS IS THOUSANDS OF MILES AWAY IN PHOENIX, ARIZONA.
THE AMERICAN COMPANY BOUGHT A MAJORITY SHARE OF THE MINE
FROM THE CONGOLESE GOVERNMENT IN A BACK ROOM DEAL THAT
MANY ARE NOW CALLING DIRTY AND UNFAIR...ESPECIALLY FOR THE
THOUSANDS OF DISPLACED VILLAGERS WHOSE ANCESTRAL LAND WILL
SOON BECOME A VAST OPEN PIT MINE.
GUARD (TRANSLATED FROM FRENCH)
Theres strong resistance here...theyre filming.
RATHER (VOICE OVER)
WE ASKED FREEPORT TO LET US SPEAK TO THESE VILLAGERS, BUT THE
AMERICAN COMPANY ONCE MORE DENIED US ACCESS TO ITS
PROPERTY...AND LOCAL POLICE PAID BY FREEPORT WERE TOLD TO
BLOCK US FROM ENTERING. OUR PRODUCER AND CAMERAMAN
REPORTING TEAM TRIED ANYWAY...AND WERE PLACED UNDER ARREST.
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GUARD (TRANSLATED FROM FRENCH)
Dont film anything.
RATHER (VOICE OVER)
BUT A LOCAL JOURNALIST WE HIRED WAS ALLOWED IN...AND HE
BROUGHT ALONG A CAMERA TO GET THE VILLAGERS STORY...A STORY
FREEPORT DOESNT WANT YOU TO HEAR. AND THIS IS WHY. THESE
PEOPLE HAVE BEEN WAITING FOR MORE THAN NINE MONTHS IN TENTS
OR IN THE OPEN AIR FOR FREEPORT TO BUILD THEM NEW HOMES...YOU
WONT HEAR FROM THEM IN SHAREHOLDER MEETINGS, BUT THEY TOLD
US THE COMPANY MADE THEM MANY PROMISES THAT IT HAS FAILED TO
KEEP.
CAMERAMAN (TRANSLATED FROM SWAHILI)
Since they moved you out of your village, have they paid you anything?
VILLAGER (TRANSLATED FROM SWAHILI)
Since they moved me they gave me very little.
CAMERAMAN (TRANSLATED FROM SWAHILI)
How much did they give you?
VILLAGER (TRANSLATED FROM SWAHILI)
Everything they gave me is gone.
VILLAGER (TRANSLATED FROM FRENCH)
Tenke Fungurume Mining said they would pay us and support us for food, for medical
care, for the education of our children, but they havent done anything.
RATHER (VOICE OVER)
THE VILLAGERS SAID THE COMPANY FORCED THEM OFF LAND WHERE
FOR GENERATIONS THEY HAD GROWN CROPS TO EAT AND SELL AT
MARKET THEIR ONLY SOURCE OF FOOD AND INCOME. THE HARD,
ROCKY SOIL IN THEIR NEW HOME HAS PROVEN USELESS.
VILLAGER 2 (TRANSLATED FROM FRENCH)
The land isnt fertile. We cultivated it the first year, but it didnt work out. Theres
nothing to eat. We dont have good drinking water here. We suffer a lot.
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RATHER (VOICE OVER)
THOSE, LIKE CHIEF NIKOLA BAYUMIA MBULA, WHO HAVE TRIED TO PUSH
THE AMERICAN COMPANY TO HOLD UP ITS END OF THE BARGAIN, ARE
GROWING IMPATIENT. CHIEF BAYUMIA SPEAKS FOR THOUSANDS OF
VILLAGERS WHO SAY LIFE HAS GOTTEN WORSE.
NIKOLA BAYUMIA MBULA, VILLAGE CHIEF (TRANSLATED FROM SWAHILI)
Of course we are angry, because they work in our land and they do not give us work.
They do not want to help us. We should be angered.
RATHER (VOICE OVER)
CHIEF BAYUMIAS FAMILY HAS RULED THIS LAND FOR SEVEN
GENERATIONS... BUT HE TOLD US FREEPORT HAS IGNORED THE
CONCERNS OF HIS PEOPLE. HE SAYS THEY WILL RESORT TO VIOLENCE IF
NEEDED...AND ITS NOT AN IDLE THREAT. IN JANUARY, THOUSANDS OF
LOCAL PROTESTORS DEMANDING JOBS AT THE MINE, INCLUDING SOME
FROM THIS VILLAGE, CLASHED WITH LOCAL POLICE.
MBULA (TRANSLATED FROM SWAHILI)
Voice is not enough, they do not listen to our voice. But if you say revolt, they may
listen. We may need to revolt so that they can listen.
RATHER (VOICE OVER)
BUT FREEPORT SAYS IT IS LISTENING, IN THIS PROMOTIONAL VIDEO.
FREEPORT VIDEO
The people of Freeport McMoRan Copper and Gold are engaged with the community
building relationships and programs to support health, education and economic
development.
RATHER (VOICE OVER)
SO WHY SHOULD AMERICANS CARE ABOUT THE SUFFERING OF THESE
VILLAGERS ON THE OTHER SIDE OF THE GLOBE? WE WILL SHOW YOU
TONIGHT THAT THE U.S. GOVERNMENT IS PARTLY TO BLAME. WE SPOKE
TO ONE AMERICAN WHO IS TRYING TO HELP CONGO PUSH BACK AGAINST
THE FOREIGN COMPANIESCOLUMBIA UNIVERSITY LAW PROFESSOR
PETER ROSENBLUM.
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RATHER
You agree or disagree that the Congo has perhaps among the world's richest resources in
such things as copper?
PETER ROSENBLUM, PROFESSOR, COLUMBIA UNIVERSITY
It's the place where the danger in digging in your backyard is that you'll break the shovel
on something else that has just become the-- the world's most precious and-- and-- and
searched-for mineral in some new industry.
RATHER (VOICE OVER)
PROFESSOR PETER ROSENBLUM HAS TRAVELLED TO CONGO FOR YEARS
TO RESEARCH THE COUNTRYS SALE OF ITS VALUABLE MINES TO
WESTERN COMPANIES...DEALS HE SAYS WERE BASED ON SHADY
TRANSACTIONS...OVERT BRIBERY...AND IN SOME CASES, ILLEGAL
PROFITEERING. THESE IMAGES WERE SHOT AT A FOREIGN-OWNED COPPER
MINE NOT FAR FROM TENKE.
ROSENBLUM
Billions of dollars of value have been create on stock markets that havent benefited the
people of the Congo. And thats a depressing thought.
RATHER (VOICE OVER)
WE JOINED PROFESSOR ROSENBLUM IN CONGO IN MAY. HE WAS THERE TO
SHARE HIS FINDINGS WITH CONGOLESE LAWYERS, ACTIVISTS AND
ACADEMICS. ROSENBLUM CITES TENKE FUNGURUME AS JUST ONE
MULTIBILLION-DOLLAR EXAMPLE OF HOW COMPANIES FROM AROUND
THE WORLD TOOK ADVANTAGE OF CONGOS VIOLENT AND POLITICALLY
UNSTABLE PAST.
ROSENBLUM
There were so many elements to that deal at the time that it was signed that should have
sent off, that sent the red flags.
RATHER (VOICE OVER)
THIRTY YEARS OF RULE BY THE CORRUPT U.S. BACKED DICTATOR
MOBUTU SESE SEKO LEFT CONGO DESPERATE FOR CASH... MOBUTUS
NOTORIOUSLY EXTRAVAGANT SPENDING ON HIMSELF AND HIS CRONIES
HAD BLED THE COUNTRY DRY. MOBUTUS FALL LED TO A FIVE-YEAR
CIVIL WAR... THE WORLDS DEADLIEST CONFLICT SINCE WORLD WAR II,
WHICH LEFT MORE THAN FOUR MILLION DEAD BY THE TIME IT
OFFICIALLY ENDED IN 2003. DURING THIS CHAOTIC PERIOD, THE CORRUPT
AND CASH-STRAPPED CONGOLESE GOVERNMENT SIGNED SOME 60
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CONTRACTS WITH THE WORLDS LARGEST MINING COMPANIES, SELLING
OUT THE COUNTRYS FUTURE FOR QUICK MONEY. AND THATS WHY A
CONGOLOESE GOVERNMENT COMMISSION AND SOME IN PARLIAMENT
HAVE NOW CALLED FOR RENEGOTIATING OR NULLIFYING ALL 60
CONTRACTS...DEALS THAT HEAVILY FAVORED THE WESTERN
COMPANIES. NEXT WEEK, THE CONGOLESE GOVERNMENT IS SCHEDULED
TO LAY OUT ITS DEMANDS TO THESE FOREIGN COMPANIES, INCLUDING
FREEPORT MCMORAN.
ROSENBLUM
The feeling of waking up at the end of the war and finding that much of this was-- was
apparently gone in some way or another has been a-- a big depressive factor.
RATHER (VOICE OVER)
BUT FREEPORT, AGAIN IN ITS PROMOTIONAL VIDEO, SAYS ITS
INVESTMENT WILL IMPROVE CONGO'S ECONOMY.
FREEPORT VIDEO
Minerals providing a shiny future...Metals for a global economy...An investment in the
future of the Democratic Republic of Congo...
RATHER (VOICE OVER)
ROSENBLUM TOLD US THAT DESPITE FREEPORTS ASSERTIONS, CONGOS
SALE OF TENKE TO THE AMERICAN COMPANY IS A PARTICULARLY
SHAMEFUL CASE...FOR BOTH CONGO, AND THE UNITED STATES
GOVERNMENT, WHICH BACKED THE DEAL.
RATHER (ON CAMERA)
ROSENBLUM PLACES A GREAT DEAL OF BLAME ON ONE INDIVIDUAL A
HIGH-RANKING DIPLOMAT INSIDE THE U.S. EMBASSY IN CONGO NAMED
MELISSA SANDERSON. HE SAYS SANDERSON USED HER POSITION OF
POWER TO PUSH THE DEAL THROUGH. SHE THEN TOOK A JOB WITH THE
AMERICAN COMPANY LESS THAN A YEAR LATER AS VICE PRESIDENT IN
CHARGE OF GOVERNMENT RELATIONS. WE TRIED REPEATEDLY TO
CONTACT SANDERSON IN CONGO AND WHEN SHE RECENTLY VISITED THE
U.S. BUT SHE DECLINED OUR INITIAL REQUEST FOR AN INTERVIEW AND
NEVER RESPONDED TO FOLLOW UP EMAILS. SANDERSON, HOWEVER, HAD
NO RELCUTANCE TO APPEAR ON CONGO STATE TELEVISION IN EARLY
SEPTEMBER AFTER A MEETING WITH FREEPORT C.E.O. RICHARD
ADKERSON, AND CONGOS PRESIDENT JOSEPH KABILA.
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ROSENBLUM
Melissa Sanderson, who was the political officer at the embassy, and-- and also acted as
chargé d'affaires, was-- by all-- by reports from people in the president's office, that I
consider to be credible, was instrumental in-- in convincing the president-- Kabila, to sign
off on the deal.
RATHER (VOICE OVER)
ITS AN EXAMPLE OF HOW MUCH PULL SANDERSON HAS IN CONGOS
GOVERNMENT, PROFESSOR ROSENBLUM TOLD US WHEN WE SPOKE TO
HIM IN NEW YORK.
RATHER
How well connected was this lady?
ROSENBLUM
She's certainly well connected when it-- when it comes to the government circles in the
Congo. She had access to everyone from top to bottom. I've been in meetings with
ministers while she's called. She's got people's phone numbers. She's got people's
addresses. She's in their offices. She's calling. She's present.
RATHER (VOICE OVER)
WITHOUT SPECIFICALLY ADDRESSING SANDERSONS CASE, A STATE
DEPARTMENT SPOKESMAN SAID A MOVE FROM THE PUBLIC TO PRIVATE
SECTOR COULD VIOLATE THE DEPARTMENTS ETHICS POLICY...
ESPECIALLY IF THE EMPLOYEE USED HIS OR HER GOVERNMENT
CONTACTS TO BENEFIT THE COMPANY. SANDERSONS RELENTLESS
ADVOCACY FOR THE COMPANY FROM THIS EMBASSY BUILDING LED
MANY IN CONGO TO BELIEVE IT HAD THE OFFICIAL BACKING OF THE U.S.
GOVERNMENT... EVEN PRESIDENT BUSH, SHOWN HERE MEETING WITH
CONGO PRESIDENT JOSEPH KABILA...A POWERFUL MISCONCEPTION IN A
COUNTRY DESPERATE FOR FOREIGN AID. THE U.S. EMBASSY EVEN THREW
A PARTY TO CELEBRATE THE ANNOUNCEMENT OF THE SALE OF TENKE IN
OCTOBER 2005... JUST THREE MONTHS BEFORE THE COMPANY SAYS IT
BEGAN RECRUITING SANDERSON.
RATHER
So what's wrong with that?
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ROSENBLUM
Whats wrong with it - is the appearance of impropriety. To see this shift from
government into private enterprise and the-- and the assumption as well-- that she-- she
probably benefited from that, because chances are, her salary went up, too.
RATHER (VOICE OVER)
ROSENBLUM TOLD US SANDERSONS MOVE STRAIGHT FROM
GOVERNMENT TO THE PRIVATE SECTOR MADE WHAT HE CALLED A
MOCKERY OF AMERICAS ROLE AS AN ADVOCATE OF GOOD
GOVERNMENT IN CONGO.
ROSENBLUM
My friends inside the Congo said, "The United States pushing for good governance here?
Are you kidding? Look at what they've just done. They-- they-- they pushed us to sign a
contract when we shouldn't have signed it. And then the lady who pushed now shes
making money off that contract. And youre trying to tell us that we should come clean
about problems in our contracts?"
RATHER (VOICE OVER)
MANY OBSERVERS OF THE TENKE MINE DEAL WERE DISTURBED BY HOW
SUCCECPTIBLE CONGOS GOVERNMENT WAS TO SANDERSONS
PUSH...AND HOW RECKLESS IT WAS IN ITS RUSH TO SELL THE MINES TO
WESTERN COMPANIES, GUARANTEEING SO LITTLE FOR THE PEOPLE OF
CONGO. IN THIS INTERNAL WORLD BANK MEMO WE OBTAINED, ONE BANK
OFFICIAL EXPRESSES QUOTE- SERIOUS CONCERNS ABOUT TENKES
AMERICAN SUITORS...AND THIS WAS AN AGENCY, THE WORLD BANK,
THAT WAS TRYING TO HELP CONGO BAIL OUT ITS DISMAL POST-WAR
ECONOMY BY SELLING ITS STATE-OWNED MINES. THE BANKS CHIEF
MINING SPECIALIST CRAIG ANDREWS SAID THE PROCESS WAS SO FLAWED
THAT THE GOVERNMENT OF CONGO QUOTE-MAY NOT HAVE RECEIVED
THE FULL VALUE OF THE MINES. AND HE CRITICIZED THE QUOTE
COMPLETE LACK OF TRANSPARENCY WITH RESPECT TO THE
NEGOTIATIONS AND APPROVAL OF THESE CONTRACTS. STILL, IN 2005
CLOSED-DOOR NEGOTIATIONS CONTINUED BETWEEN THE AMERICAN
COMPANY, SANDERSON, CONGOLESE OFFICIALS AND A SWEDISH
COMPANY THAT HAD BOUGHT A MAJORITY SHARE OF TENKE 10 YEARS
EARLIER. ONLY THOSE WHO WERE PRESENT AT THE MEETINGS KNOW
HOW IT WAS THAT THE AMERICAN COMPANY EMERGED WITH WHAT
MANY DESCRIBE AS A SWEETHEART DEAL-A CONTROLLING STAKE IN
TENKE THAT INEXPLICABLY REDUCED CONGOS SHARE IN THE MINE
FROM 45 TO JUST 17 PERCENT. A DEAL THAT PROMISED CONGO LITTLE IN
THE WAY OF FUTURE REVENUES THAT COULD BE USED FOR ROADS,
SCHOOLS AND OTHER DEVELOPMENT.
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RATHER (ON CAMERA)
WHY DID CONGO AGREE TO SUCH UNFAVORABLE TERMS? THE MOST
CHARITABLE EXPLANATION IS THAT THE POST-WAR GOVERNMENT WAS
FILLED WITH INEXPERIENCED AND OUTMATCHED NEGOTIATORS. IN
ADDITION TO SANDERSON, U.S. EMBASSY OFFICIALS ALSO DECLINED OUR
REQUEST FOR AN INTERVIEW, AS DID FREEPORT...BUT IN AN EMAILED
RESPONSE TO OUR QUESTIONS A COMPANY SPOKESMAN DENIED
SANDERSON EVER HAD ANY CONFLICT OF INTEREST WHILE HOLDING HER
EMBASSY POST. THE SPOKESMAN WILLIAM COLLIER SAID AFTER THE
COMPANY OFFERED SANDERSON HER JOB, SHE QUOTE IMMEDIATELY
NOTIFIED HER SUPERIORS AND RECUSED HERSELF FROM HER ALREADY
LIMITED INVOLVEMENT WITH THE COMPANY. FREEPORTS HELP FROM
THE U-S GOVERNMENT DIDNT STOP AT SANDERSON. THE COMPANYS
POLITICALLY-CONNECTED BOARD WAS ABLE TO SECURE ASSISTANCE
FROM AMERICAN OFFICIALS AT HOME AS WELL.
ROSENBLUM
Freeport McMoRan is a company that is famous for its use of political leverage when
necessary.
RATHER
Big lobbying operations?
ROSENBLUM
Big lobbying operation. I mean, people at the U.S. Embassy in Kinshasa eventually let us
know that the Embassy was-- was scared to do anything for fear of-- of-- of getting up on
the wrong side of Freeport McMoRan. The story of Africa and-- and now the story of the
Congo again is that American investors can disrupt the rest of American interests in the
country. Because they're loud, they're organized, they're targeted at a time when other
interests like democracy or anticorruption are viewed as being much more amorphous
and don't have the same kind of allies.
RATHER (VOICE OVER)
A KEY ALLY OF FREEPORT IN ITS CONGO DEAL IS A LITTLE KNOWN U.S.
GOVERNMENT AGENCY ...ITS CALLED THE OVERSEAS PRIVATE
INVESTMENT CORPORATION, OR OPIC. AND FROM THIS NONDESCRIPT
WASHINGTON OFFICE, THE AGENCY CHANNELS BILLIONS IN U.S.
GOVERNMENT MONEY TO AMERICAN COMPANIES WILLING TO INVEST IN
POOR COUNTRIES.
ROBERT MOSBACHER, CHAIRMAN, OPIC
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As a developmental organization, OPIC approved the project because of our priority to
foster economic development in Sub-Saharan Africa.
RATHER (VOICE OVER)
THE PRESIDENT OF OPIC IS ROBERT MOSBACHER JR., A TEXAS OILMAN
AND BUSH FAMILY FRIEND AND FUNDRAISER...AND DESPITE COMPLAINTS
ABOUT FREEPORTS WORK IN CONGO, HE AND OPICS BOARD AGREED TO
PROVIDE THE COMPANY WITH 400 MILLION GOVERNMENT DOLLARS TO
DEVELOP THE MINE. AT THIS PUBLIC OPIC HEARING IN JULY, MOSBACHER
CITED FREEPORTS WORK AT TENKE AS EXEMPLARY.
MOSBACHER
The project supports continuing efforts to carry forward political, economic and social
transformation following the first Democratic election in 40 years in that country.
RATHER (VOICE OVER)
AT THE HEARING, KRISTIN HITE, A LAWYER FOR THE ENVIRONMENTAL
DEFENSE FUND, CHALLENGED THE NOTION THAT FREEPORTS PROJECT
MET OPICS GOAL OF IMPROVING DEVELOPMENT.
KRISTIN HITE, LAWYER, ENVIRONMENTAL DEFENSE FUND
Local residents do not appreciate that the mine is slated to employ less than two percent
of the local population, or that the company does not intended to make education and
healthcare as much of a priority as mining.
RATHER (VOICE OVER)
HITE COLLECTED THIS INFORMATION FIRST HAND. WE FIRST MET UP WITH
HER WHEN SHE TRAVELED WITH COLUMBIA PROFESSOR ROSENBLUM TO
INVESTIGATE THE IMPACT OF THE MINE ON CONGO. SHE SAID SHE HAD
WARNED OPIC ABOUT FINANCING A PROJECT WITH SO MANY POTENTIAL
ENVIRONMENTAL AND SOCIAL PROBLEMS...EVERYTHING FROM THE
DESTRUCTION OF RARE BIRDS HABITATS TO THE CONTAMINATION OF
DRINKING WATER.
HITE
Risks of heavy metals- lead, cadmium, also, arsenic - OPIC even sited potential for
radioactive waste. All of these raise concerns about whats the-- what is the impact to the
drinking water, to the ground water, to the surface water, to the soil, to folks that grow
plants-- live off the land.
RATHER (VOICE OVER)
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HITE SAID THAT DESPITE HER WARNINGS TO OPIC, THE AGENCY WROTE
TO TELL HER THAT IT HAD APPROVED FINANCING FOR TENKE... AND
WITHOUT HARD PROVISIONS IN PLACE THAT WOULD HOLD FREEPORT
ACCOUNTABLE FOR ANY DAMAGE CAUSED BY THE PROJECT. OPIC
LAWYERS CONCLUDED THE FREEPORT DEAL WITH CONGO HAD BEEN
FAIR...AND MOSBACHER AT THE HEARING DEFENDED HIS AGENCYS
FINANCING OF THE PROJECT.
MOSBACHER
Our due diligence conducted with local and international counsel concluded that the
Tenke projects contracts were executed and amended in accordance with the law.
RATHER (VOICE OVER)
BUT CONGOS GOVERNMENT REACHED THE OPPOSITE CONCLUSION. IN
MARCH, A COMISSION FORMED BY PRESIDENT JOSEPH KABILA CALLED
FOR THE COUNTRY TO VOID AND RENEGOTIATE THE FREEPORT DEAL...
FREEPORT HAS REFUSED TO BUDGE.
HITE
So, now were in a case where we have U.S. backed investment of a contract for a
project-- whose underlining contract has been determined illegal by the government in
which the project is located. This is quite problematic.
MOSSBACHER
Having no other speakers--I see no other--the meeting is closed. Thank you.
RATHER (VOICE OVER)
MOSBACHER, THROUGH OPICS PRESS OFFICE, DECLINED OUR REQUEST
FOR AN INTERVIEW. AT THE HEARING, MOSBACHER SAID THAT OPIC
WOULD WITHHOLD FREEPORTS MONEY UNTIL THE COMPANY MET
UNSPECIFIED PRECONDITIONS...DIGGING AND COPPER PRODUCTION ARE
SET TO BEGIN AT TENKE IN 2009. THANKS IN PART TO ANTICIPATED
REVENUES FROM THE MINE, FREEPORT SHARES SHOT UP AFTER THE DEAL
WAS SIGNED... AND THE COMPANYS CEO RICHARD ADKERSON WAS THE
U.S.A.s THIRD HIGHEST PAID EXECUTIVE LAST YEAR, EARNING MORE
THAN $65 MILLION, ACCORDING TO THE ASSOCIATED PRESS. ADKERSON
TOLD CONGOS STATE-RUN NEWS CHANNEL IN EARLY SEPTEMBER THAT
THE PROJECT WOULD ALSO BENEFIT THE PEOPLE OF CONGO.
RICHARD ADKERSON, C.E.O. FREEPORT MCMORAN
12
Were planning on investing roughly two billion U.S. dollars in the project for the initial
phase and we see the opportunity for further significant investments in the future as we
expand the operations.
RATHER (VOICE OVER)
FREEPORT SAYS IT WILL SPEND $9.5 MILLION ON NEW HOMES FOR SOME
OF THE DISPLACED FAMILIES AT TENKE...HOMES THAT REMAINED
UNFINISHED AND EMPTY WHEN WE VISITED IN MAY...THE COMPANYS
SPOKESMAN WILLIAM COLLIER WROTE US IN AN EMAIL THE QUOTE
TEMPORARY TENTS WE HAVE DONATED ARE CONSIDERED AN
IMPROVEMENT TO THE TRADITIONAL STRUCTURE. BUT THE MORE THAN
A THOUSAND PEOPLE WHO HAVE LIVED IN THOSE TENTS FOR MONTHS
STRONGLY DISAGREE.
VILLAGER (TRANSLATED FROM FRENCH)
Life here is truly sad.
RATHER (VOICE OVER)
DESPERATE FOR MONEY, SOME DISPLACED VILLAGERS HAVE RESORTED
TO ILLEGALLY DIGGING UP COPPER FROM NEARBY DEPOSITS WITH THEIR
HANDS...GRUELING WORK THAT THESE MEN FROM ANOTHER VILLAGE
SAY BRINGS JUST A FEW DOLLARS A DAY.
VILLAGER (TRANSLATED FROM FRENCH)
Ive been here for two months and I havent made much money. Just enough to eat.
RATHER (VOICE OVER)
THESE MINERS ARE HARDLY AN EXCEPTION... FEW PEOPLE LIVING IN
CONGOS MINERAL RICH COPPER REGION HAVE SEEN THEIR LIVES
IMPROVE. SO IT ONLY SEEMS LOGICAL THAT MANY IN CONGOS
GOVERNMENT HAVE NOW CALLED FOR GETTING MORE OUT OF FREEPORT
AND OTHER COMPANIES THAT GOBBLED UP THE COUNTRYS MINERAL
ASSETS IN WHAT THE RECORD AND MANY CRITICS INDICATE ARE
CORRUPT AND ONE-SIDED DEALS. WE SPOKE TO BELGIAN JOURNALIST
RAF CUSTERS, WHO BROUGHT THE ORIGINS OF THE TENKE CONTRACT TO
THE WORLDS ATTENTION IN A REPORT PUBLISHED EARLIER THIS YEAR.
RAF CUSTERS, RESEARCHER, IPIS
Bad things have-- have been happening on both sides. I mean-- with the government--
as-- as with the-- the private companies.
RATHER (VOICE OVER)
13
AFTER PORING OVER REAMS OF INTERNAL DOCUMENTS AND
INTERVIEWING DOZENS OF INSIDERS, CUSTERS SAYS HE WAS SHOCKED
AT WHAT HE FOUND... THAT A DECADE BEFORE GOING INTO BUSINESS
WITH FREEPORT, A SWEDISH MINING COMPANY GAINED CONTROL OF THE
MINE USING WHAT HE CALLS DECEPTION, THE CHAOS OF A BLOODY CIVIL
WAR, AND WELL-PLACED PAYOFFS TO GOVERNMENT OFFICIALS.
CUSTERS
Everybody got $1,000-- because they said, well, if you don't pay these people, they will
not show up and we have to do the signing of the agreements.
RATHER (VOICE OVER)
SWEDISH MINING GIANT LUNDIN NEVER GOT WORK GOING AT THE MINE.
INSTEAD, IT WAITED NEARLY A DECADE UNTIL COPPER PRICES WERE
SOARING, AND THEN SOLD THE CONTROLLING INTERST TO THE
AMERICAN COMPANY.
RATHER
Do you know the phrase "sweetheart deal"?
CUSTERS
I'm not familiar with that-- with that phrase.
RATHER
Let me note that your native tongue is Dutch. Well, the sweetheart deal would be one in
which corruption was part of the process to create a very advantageous situation for one
party. So my question is: Does this meet that definition?
CUSTERS
It certainly was a sweetheart deal. They didn't consider the interests of the Congolese
people and the Congolese nation.
RATHER (VOICE OVER)
WE SPOKE TO ONE FORMER GOVERNMENT MINISTER, NOW A TEACHER,
WHO HAD A CLOSEUP VIEW OF HOW FOREIGN MINING COMPANIES WERE
DOING BUSINESS AT THE TIME.
FLORENT KAMBALE MUTUTULO, FORMER MINING MINISTER
Certainly, certainly people got bribed.
14
RATHER (VOICE OVER)
FLORENT KAMBALE MUTUTULO WAS NAMED CONGOS MINING MINISTER
IN 1997, AFTER THE FALL OF THE U.S. BACKED DICTATOR MOBUTU. IT
WASNT LONG BEFORE A FOREIGN BUSINESSMAN APPROACHED
MUTUTULO WITH A SUITCASE FULL OF CASH.
MUTUTULO
A million dollars for me, for the minister, not for the government. A million dollar. I said
what for sir, you just fill in your papers, and pay the fees you - that are required by the
government and everything will be alright.
RATHER (VOICE OVER)
MUTUTULO SAYS HE NEVER ACCEPTED MONEY. BUT YOU HAVE TO LOOK
NO FURTHER THAN THE LUXORIOUS HOME OF A LATE MINING OFFICIAL
TO SEE HOW SOME IN CONGOS GOVERNMENT MADE IT RICH. THE MANS
WIDOW IS ABLE TO LIVE SO WELL, IN PART, BECAUSE TENKES FOREIGN
INVESTORS HAVE BEEN RENTING THESE PROPERTIES FROM THE FAMILY
SINCE HE SIGNED OFF ON THE DEAL - A NICE BIT OF EXTRA CASH FOR THE
FAMILY OF A GOVERNMENT FUNCTIONARY. SHE STILL RECEIVES A
MONTHLY CHECK FROM FREEPORT.
JUSTINE UMBA, WIDOW OF CONGOLESE GOVERNMENT OFFICIAL
(TRANSLATED FROM FRENCH)
Its nothing exceptional. They are there, they are tenants, like they could be tenants in any
building in town.
RATHER (VOICE OVER)
PROFESSOR ROSENBLUM SAID THAT EVEN IF FREEPORT DIDNT OFFER
BRIBES, THE COMPANY CANT CLAIM COMPLETE INNOCENCE.
ROSENBLUM
What should they have known at that point about corruption that went into the deal in the
first place, about is this-- this the equivalent of-- of sale of stolen goods? What-- kind of-
- of-- of cleansing did it go through?
RATHER (VOICE OVER)
THANKS TO THE WORK OF ROSENBLUM AND OTHERS, NEWS OF HOW
FREEPORT TOOK CONTROL OF TENKE HAS TRAVELLED TO WASHINGTON.
IN RESPONSE, REPRESENTATIVE GWEN MOORE, A DEMOCRAT FROM
WISCONSIN, HAS CO-AUTHORED A BILL THAT WOULD FORCE AMERICAN
15
MINING COMPANIES TO REPORT PAYMENTS TO FOREIGN COUNTRIES
WHERE THEY DO BUSINESS.
GWEN MOORE, CONGRESSWOMAN
When you look at the Tenke mine and see the absolute - uh inequality - uh between the
mining companys interests and the interests of the community, uh you have to wonder
about the propriety of this relationship.
RATHER (VOICE OVER)
BUT DESPITE CALLS TO REOPEN DOZENS OF MINING CONTRACTS, THERE
ARE SIGNS THAT BUSINESS WILL CONTINUE AS USUAL FOR OVERSEAS
MINING COMPANIES LIKE FREEPORT MCMORAN. SOME IN CONGOS
GOVERNMENT ARE AFRAID THAT VOIDING THE LOPSIDED MINING DEALS
WOULD SCARE AWAY OTHER POTENTIAL INVESTORS. THE MOST LIKELY
ALTERNATIVE WOULD BE TO LEAVE THESE DEALS IN PLACE ALLOWING
FOREIGN COMPANIES TO KEEP GETTING RICHER FROM CONGOS
MINERALS...AND TAKING AWAY CONGOS MOST PROMISING
OPPORTUNITY TO CLIMB FROM THE RANKS OF THE WORLDS POOREST
COUNTRIES.
ROSENBLUM
And the tragedy is the obvious tragedy that the opportunities are there, the possibilities to
make new deals with the worlds investors are there. And instead, were likely to see
those investors walk off with the money along with a few wealthy Congolese and the
situation of the country will remain as it was before.
RATHER (ON CAMERA)
COMING UP...UNDERSTANDING WHATS GOING ON HERE ON WALL
STREET. WELL TALK TO ONE OF THE VERY BEST, ONE OF THE MOST
RESPECTED PEOPLE IN THE ANALYSIS FIELD, YOULL WANT TO HEAR
WHAT HE HAS TO SAY.
SHILLING ON THE ECONOMY:
RATHER (ON CAMERA)
AND NOW TO THE CRISIS RIGHT HERE ON WALL STREET. IF YOURE A
FINANCIAL EXPERT, THE NEWS HERE IN RECENT WEEKS HAS BEEN
DISTURBING, TO SAY THE LEAST. BUT FOR MOST AMERICANS THE NEWS
FROM HERE IS COMPLICATED AND CONFUSING. AND ITS EASY TO BE
ALARMED WHEN YOU DONT UNDERSTAND WHATS GOING ON AND WHAT
IT MEANS TO YOU AND YOUR INVESTMENTS. NOW TO GET SOME
PERSPECTIVE AND GIVE YOU SOME CONTEXT, WEVE ASKED ONE OF THE
BEST, MOST RESPECTED PEOPLE IN THE BUSINESS TO BREAK IT DOWN FOR
16
YOU. GARY SHILLING IS A FORMER CHIEF ECONOMIST FOR MERRILL
LYNCH FOR A LONG TIME AND NOW RUNS HIS OWN INVESTMENT FIRM.
RATHER
What's the single most important thing for people to know about what's happening just
now?
GARY SHILLING, ECONOMIST
I think what they ought to know is that the reaction by the government, by the Federal
Reserve and the Treasury is obviously because they think there are some very, very
serious problems there. Government by nature does not go out and get ahead of
situations very often. Now, maybe the Secretary of the Treasury, Hank Paulson, with his
Wall Street background, is an exception to that rule. But by in large, government actions
come after the fact, and being 'too little, too late' is a pretty common expression in the
way they react. You look back and just really since March, Bear Sterns basically was
carried out. And then we had Fannie Mae and Freddie Mac, which are now in effect
taken over by the government. And Lehman was allowed to go bankrupt. And American
International Group, AIG was bailed out. The question is getting to be, "Who's next?"
And Merrill Lynch, really forced into a shotgun marriage. But I think when you look at
government reaction, you've gotta conclude that at least in the eyes of those people in the
beltway, they think there's some very, very serious problems.
RATHER
Let's talk to-- with those people who are in the living room. They're not bankers.
They're-- they make a living, sometimes they have a little difficulty meeting the bills, but
have been okay. Are we at or near the end of these problems? Are we somewhere in the
middle? Or do we still have a long way to go?
SHILLING
I say we're about in the middle. This recession in our view has four phases. Two of 'em
are underway, two of 'em are-- are just commencing. The first phase was the big
difficulties in the housing area-- precipitated by what we call the sub-prime slime. This
was all these loans to people who really couldn't afford chicken coops, but because of
very loose lending practices, low interest rates, securitization and the fact that they took
these mortgages, packaged 'em, sold 'em off to somebody else so they didn't really care.
All these factors. You ended up with people who couldn't afford chicken coops who
ended up in four-bedroom houses. And that started to come unglued early last year, early
'07.
RATHER
And that was phase one.
SHILLING
17
That was phase one. Phase two was when this spread to Wall Street and was kicked off
in June when two very large hedge funds run by Bear Stearns basically were declared
worthless. And then we had a freezing-up of many of these markets. The Federal
Reserve started to step in. And the Federal Reserve had to in effect substitute for the
banks. What the banks normally do, lending to each other, and then lending to the rest of
us, that started to dry up. And those two phases are still continuing. We think that we're
only about halfway down in terms of the decline in house prices. And house prices are
down 18 percent from their peak on average nation-wide. We think they're gonna end up
down 35 or 40 percent. And Wall Street's problems now will-- will-- will-- it depends on
how this bail-out attempt works, of course. But Wall Street's problems are still very
much unraveling. Those two phases though are financial. They have not been reflected
as yet in a very big way in terms of lay-offs and in terms of peoples incomes going
down. Consumers have been actually spending at a rising rate, much more rapidly
growing than their incomes, for 25 years. Their saving rate has declined, which means
their spending on average has grown a half a percent per year faster than their after-tax
income. They financed that in the '80s and '90s by borrowing against their stocks. More
recently, they borrowed against their houses. But that house appreciation is gone. So,
consumers have run out of money. And phase three is a huge retrenchment in consumer
spending. We're already seeing that. People are cutting out discretionary items. People
are brown-bagging lunch rather than go to a deli or restaurant. They're buying generics
or house brands rather than national brands when they go to the supermarket.
RATHER
Taking the bus instead of a taxi or-
SHILLING
Right! Right.
RATHER
Car-pooling instead of driving it alone.
SHILLING
Yeah. They're-- they're-- they're-- they're taking water out of the tap rather than buy
bottled water. And then, by the way, there's a phase four, which is also getting underway,
which is a global recession. We're already seeing weakness-- particularly in the second
quarter, declines in economic activity of both Japan and the Euro zone. And it looks like
it is a global recession. So, those are the phases three and four. So, we're really about
halfway through this process.
RATHER
18
A couple of questions to follow up on what you said. You said in terms of housing,
housing's down about 18 percent. You think it'll go down before it bottoms out about 35
percent or thereabouts?
SHILLING
Correct.
RATHER
Now, for someone who's sitting at home and saying, "Whew. Weve got this house, we
stretched to buy it, maybe paid a little more than we'd like to pay, but we're meeting our
mortgage pay-- payments right now." Are you or are you not telling them that if you
think it's been trending bad, it's gonna get worse on the housing before it gets better
because we're only halfway through?
SHILLING
I'm afraid it's going -- I'm afraid it's gonna get worse.
RATHER
Noting that some of the housing is regional. A lot of it's regional.
SHILLING
Oh, yes. It's-- it's-- it's-- the-- the weakness is much more intense, quite understandably,
in the places that previously were the strongest. Namely, Arizona, Nevada, California
and Florida. But it is-- it is nation-wide. There isn't one metropolitan area in the country
that is not seeing declines in prices-- so far. And we think that they will intensify.
RATHER
If I'm in a house, and I gave $250,000 for it, stretched to get it, and it went up to 315 in
the estimate of what I might be able to sell it for, and it's back down now to 260, are you
saying in general, well, hold onto your hat? Because if you think you can get 260 for it
now, that's $250,000 house, you may not be able to get $235,000 or $240,000 fairly soon.
SHILLING
That's right. And the real risk, Dan, is not in the price of the house per se. It's what kind
of mortgage you have on that house. Let's say when you bought that house at 250, you
had a $220,000 mortgage on it. But the price went up to the 315. And lenders were
throwing money at you, and you're getting ads every day in the mail that said, "Oh, you--
'cause you tap, unlock that wealth." Remember all those wonderful expressions? So, you
said, "Why not? You know, we-- we're gonna take some extra vacations and-- I like to
buy a new car. So, I'll re-finance at $300,000." Okay, so now you got a $300,000
mortgage. The house now is back to 265 and the price is going down. Now what do you
do? Do you say, "Well, it'll come back eventually. I'll continue to make the mortgage
19
payments. I'm under water. The mortgage is bigger than the value of the house. That's
temporary, I'll live with it." Or do you do what people are increasingly do-- doing now.
They're saying, "I'm walkin' away from this house. And-- and that's what increasingly
people are doing. Now, it's a small number so far. But it is increasing, and it's
worrisome. Because if-- if-- if we're right-- if we're right that prices do end up down
about 35 percent nation-wide, pig to trough, then we will see a huge number of people.
We will see about half the people with mortgages who are under water. In other words,
their house'll be worth less-- worth less than the mortgage. Forty-five percent of houses
are owned free and clear. So, if you work this out, it means about a third of total
homeowners will be under water-- on a mortgage. And-- and the amount of money it
would take to bring them up to even, to reduce the mortgages down to the level of the
values of their houses at that point would be a little over a trillion dollars.
RATHER
That's with a T.
SHILLING
That-- that's with a T. Thats a trillion dollars. But my feeling is that that's gonna be very
hard for any politicians in Washington to resist some kind of bailout. In other words, you
destroy the American dream of home ownership for that many people -- I don't think it
matters whether they're the left or the right, in the Congress or the administration, I think
I-- something-- something I think is gonna have to-- is gonna come out of that.
RATHER
Well, I've asked you this before, when we've had our conversations, but now, given-- you
wake up and the newspaper, full page double headlines about financial difficulties. For
the average family, what can they do that will help them get through this?
SHILLING
Well, ironically, what the average family should do is what you would hope that
collectively they don't do. Which is save more money and spend less. Obviously, if
everybody does that, and that's what I'm suggesting is about to happen, the consumers are
gonna retrench. And that's gonna be very negative for the economy. But, still, it's very
much in the self interest of individuals. And my recommendation to people is that they
ought to save like crazy. And they ought to avoid incurring additional debt. And they
ought to pay down debt wherever possible. And do all these things which are very
prudent for them. But, say, collectively, that's what happens-- in terms of depressing the
economy, when consumers retrench. If you look at the American consumers, that has
been one of the serious problems in-- in recent decades, in my view, is that people do not
have any kind of financial reserves. I mean, we all are gonna have setbacks in life. Were
all gonna have auto accidents. We're gonna have-- illness. We're gonna have job loss.
Even for a brief time. But amazingly few Americans are-- are prepared for that. And--
and that's one of the problems. When you have so many people who are constantly living
on the edge. They simply do not have the ability to withstand any kind of setbacks. Even
though setbacks are a normal part of life.
20
RATHER
How long before the economy comes back? Are we talking about 12, 15 months? We
talking about two or three years?
SHILLING
It depends a great deal on how widespread these financial problems are. Now, again,
Washington is doing yeoman work to try to contain these. And if they-- if they do, then I
think we probably see the recession run its course next year. Uh, 2009. And by 2010 we
start to see-- we start to see recovery. But if the financial problems-- really continue to
spread, and, again, as we get into the phases three and four of the recession-- we're gonna
have complete new tests. I mean, for example, consumers are looking for ways to cut
back. Are people gonna say, "Payments on my credit cards, my home equity loans, my
student loans, my auto loans, those are discretionary"? You get to the end of the month
and people are really pressed and it's a question of putting bread on the table or meeting
their credit card payment, okay. Let's say they decide bread on the table, which is my bet.
Then that means there are delinquencies and charge offs in credit card loans. And a lot of
that has been securitized through Wall Street. So this thing-- this thing has further
ramifications. And that's-- that's-- really, is the whole question as to how long this thing
could-- could get stretched out. So I would say if things, optimistically, I think you're
looking at a recession running through next year.
RATHER
The next president, whether it be John McCain or Barack Obama, he calls you in. Says,
"Look, I need help, the country needs help." Give me three things that the new president
could do, your judgment, should do, and perhaps must do, to at least cushion what we're
going to go through.
SHILLING
Certainly, one thing is to ensure the American public that their-- their funds are safe.
We've seen, lately-- some problems with money market funds. And they are-- they are
moving-- swiftly to-- make sure that nobody has concern about that. And they don't
really say, "Hey, I want that money in currency," and it is going under the mattress. But I
think that's one thing that needs to-- needs to be absolutely clear.
RATHER
So the first thing you say to people, "Listen, we're going to ensure--
SHILLING
Right.
RATHER
21
With the full credit of the United States government
SHILLING
Yes.
RATHER
That your money market fund is gonna be okay?
SHILLING
Right.
RATHER
Your stocks and bonds--
SHILLING
And--
RATHER
That's another matter. But your money market fund is gonna be okay.
GARY SHILLING
You need to- I think you need to make sure that people feel that their- their money is-
their money is- is safe.
RATHER
Second thing the new president should do.
SHILLING
Probably to institute a very thorough audit of financial institutions. And to ensure
transparency. One of the big problems has been that nobody knows for sure what's going
on within these institutions. AIG is a classic case. A very, very complex company,
insurance company, yes, but a lot of other activities.
And one of the problems there-- for analysts in-- in Wall Street, who are very good at
tearing these things apart, is a lot of people didn't know what-- what was going on in
there. A third thing I would do is I would change the structure of financial institutions so
that they cannot, in effect, create what's called systemic risk. Risk to the whole system. I
think what-- what the-- a new administration could do would be to try to keep-- financial
institutions in a size and a complexity, with a transparency, as I mentioned earlier, such
that if one of them got into trouble it wasn't going to threaten to sink the whole ship.
That's been the problem lately. Is that, when you get Fannie and Freddie in trouble, it
22
sink-- it promi-- it-- it threatens to sink the whole mortgage market. The whole economy
as a result.
RATHER
It's a little-- little bit off the point, but only a little bit. I hear so many people now saying,
the leader of one of these big investment outfits, whether it's Freddie Mac or Fannie Mae
or Bear Stearns - you name it, they're paid tremendous sums of money to make profit.
The whole system's built on risk and reward. You risk, you win, you get a reward. You
risk and you lose, you lose. But these people, by in large, the thing goes to hell in a hat,
and they get a parachute of $50 million, $100 million. How can this be? Why is this?
And it can't be good for us. Or can it?
SHILLING
Well, I-- no, I-- I tend to agree with you on-- if you look back in the 19th century-- the
people involved-- the Carnegies, the-- the Rockefellers-- of the world, they owned those
companies. They owned them personally. They were the guys that took the risks. And if
they won, boy, they won fabulous. If they lost, no-- no-- no-- no wet eyes. Jay Gould,
big speculator in railroads, he died penniless. A number of these guys did. I mean, they--
they-- when they-- when they went out, they carried them out. Today you have these
people who are really, they're managers. Hired hands. Not in a deprecating sense. But
they don't own the company. They own a very-- very minor part of it. But they make
tremendous money. Richard Fuld, the-- the head of Lehman-- I saw a tabulation that,
over the last ten years or so, he has personally taken half a billion dollars out of Lehman-
RATHER
Half a billion?
SHILLING
Half a billion dollars. And the whole thing ends up bust. As a matter of fact, when--
when-- when Lehman announced its first quarter results-- back in June-- Fuld made--
made a statement. And he said, "These results are unacceptable. And I am responsible."
And my response to that is what does that mean? Does that mean that he is going to work
for a dollar a year until profits are restored? Does that mean he's gonna give back all that
money he made when they were doing all the securitization and-- and, literally, making
money hand over fist?
RATHER
Well, clearly, none of the above.
SHILLING
No. I think what-- what it really takes, and we're probably gonna get-- get coming out of
this-- we're gonna get much more of a stockholder reaction. And stockholders are gonna
23
hold management's feet to the fire. There aren't gonna be these big-- walk away kind of
bonuses. Where Fannie and Freddie CEOs fired in disgrace and walk away with $100
million or whatever.
RATHER
One last question, if you have someone in the audience that has $10,000 to invest, or
maybe $5,000. They inherited the money, or won it at the racetrack, or what have you.
In this confused and confusing time, where should they put it?
SHILLING
I-- I still like- U.S. treasuries. And-- and it's not only the safety-- but if I'm right, that we
continue to see a recession-- that the Federal Reserve actually cuts interest rates in
response, and I think they will, that the U.S. and Treasury-- obligations become a safe
haven. Which theyre increasingly are. I still like the 30 year treasury bonds.
RATHER
Thirty year treasury bond. Reason I-- I check with you from time to time. 'Cause these
things can change. Gary, thank you very much.
SHILLING
You're most welcome.
RATHER (ON CAMERA)
RESPECTED ECONOMIST GARY SHILLING. UNDERSTANDING AS BEST WE
CAN WHATS GOING ON HERE ON WALL STREET IS CRUCIAL TO
UNDERSTANDING THE GLOBAL ECONOMY, BECAUSE WALL STREET IS
NOTHING WITHOUT THE INTERNATIONAL WEB OF RESOURCES AND
PEOPLE, THE BUYING AND SELLING THAT MAKE THE ECONOMIC ENGINE
GO. OUR STORY ABOUT COPPER IN THE CONGO SHOWED HOW THE
ACTIONS OF AN ARIZONA COMPANY TRADED HERE IN NEW YORK CAN
HAVE PROFOUND EFFECTS EVERYWHERE FROM WASHINGTON TO
KINSHASA. OUR REPORT TONIGHT IS A FITTING COMPANION TO OUR
EARLIER RECENT REPORT ABOUT THE FUTURE OF THE UNITED STATES
MILITARY AND WHAT THAT MEANS FOR OUR INFLUENCE WORLDWIDE.
TONIGHTS PROGRAM IS REALLY PART OF THE SAME CONVERSATION
BECAUSE GLOBAL POWER IS BUILT ON ECONOMIC POWER. MILITARY
POWER IS BUILT ON ECONOMIC POWER. WHEN ANALYSTS LOOK AT WHAT
FACTORS, HISTORICALLY, HAVE ACCOMPANIED THE DECLINE OF GREAT
POWERS, MANY OF THOSE FACTORS ARE ECONOMIC. A WIDE GAP
BETWEEN RICH AND POOR, HIGH DEBT LOADS, AND, CRUCIALLY, THE RISE
OF HIGH FINANCE AS THE ECONOMYS MAIN ENGINE. THAT SHOULD GIVE
EVERY AMERICAN PAUSE. GAP BETWEEN RICH AND POOR? U.S. CEOS
24
NOW MAKE 400 TIMES AS MUCH AS THE AVERAGE WORKER; THATS 20
TIMES WHAT IT WAS IN 1965. DEBT? IT IS UNPRECEDENTED. TOTAL DEBT
IN THIS COUNTRY HAS QUADRUPLED IN JUST 20 YEARS. AND THE
FINANCIAL SERVICES INDUSTRY IS NO LONGER A CREATION OF
ECONOMIC GROWTH, BUT THE CREATOR OF IT. AND FINANCE TODAY --
MONEY PEOPLE PAY TO MOVE MONEY FROM ONE PLACE TO ANOTHER --
REPRESENTING OVER ONE OUT OF EVERY FIVE DOLLARS EARNED.
SO WHAT DOES IT ALL MEAN? SENATOR JOHN MCCAIN CONCLUDED THAT
OUR ECONOMIC FUNDAMENTALS WERE STRONG. AND IN MANY
IMPORTANT WAYS THEY ARE, IF WE LOOK AT THE SAME FUNDAMENTALS
WE ALWAYS HAVE. YET THE AMERICAN PEOPLE MOST WITH ALMOST
AS LITTLE FINANCE EXPERTISE AS OUR TWO PRESIDENTIAL CANDIDATES
THINK THE FUNDAMENTALS JUST ARENT CAPTURING THE STATE OF
THE ECONOMY AS THEY FEEL IT. AND SOME ECONOMISTS AGREE. THE
MAN CHOSEN TO MAKE DECISIONS ABOUT WAR AND PEACE, CULTURE
AND LAW MAY WELL BE THE ONE WHO CAN BEST CONVINCE VOTERS HE
UNDERSTANDS THAT SENSE OF UNEASE, NO MATTER WHAT THE
NUMBERS SAY. AND THATS OUR PROGRAM FOR TONIGHT. FOR HDNET,
FROM WALL STREET, DAN RATHER REPORTING, GOOD NIGHT.
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