Behind Vancouver’s Housing Bubble: How Canadian Casinos Are Use To Launder Millions In Chinese Drug Money

Nearly two years after we first observed that Vancouver‘s soaring real estate market is nothing but a bubbling melange of criminal Chinese oligarch “hot money”, desperate to get parked offshore in any piece of real estate, but mostly in British Columbia regardless of price, a new multi-year investigation has uncovered extensive links – including money laundering and underground banking – between China’s criminal underworld and British Columbia drug and casino cash and VIPs, and their connections to China, Macau and the norotious triads.

Here is Postmedia’s real estate reporter Sam Cooper reporting on and explaining how British Columbia casinos are used to launder millions in drug cash.

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On Oct. 15, 2015, a Mountie burst through the front door of an office in Richmond, carrying a battering ram and with a rifle slung on his back. The door swung shut behind him, locking him inside. He was in the lobby of Silver International Investment, a high-end money transfer business, surrounded by bulletproof glass. Behind a second glass door, a woman rushed to make a call while hiding several cellphones. Under her desk was a safe stuffed with bundles of cash. The Mountie, a large man, counted seconds anxiously, wondering if the woman would unlock the interior door.

It was one of 10 police raids in Richmond that day — part of a major investigation that has uncovered massive money laundering and underground banking networks with links to Mainland China, Macau and B.C. casinos, allege the RCMP’s federal organized crime unit and China’s national police service.

Postmedia has spent six months looking into the case, involving freedom of information requests for thousands of documents and dozens of interviews with government and law enforcement sources that were not authorized to be identified. Now, the inside story can be told of the investigations that led B.C.’s attorney general last week to order an independent review of casinos overseen by the B.C. Lottery Corp.

In late August, at a Vancouver conference attended by U.S. and Canadian law enforcement officials, RCMP Insp. Bruce Ward outlined the details of E-Pirate, the investigation into Silver International, Asian organized crime groups, and an alleged $500-million-plus international money laundering service run from Richmond. Central to the money laundering probe, allege B.C. government documents, is suspect Paul King Jin, a 50-year-old Richmond spa owner.


Paul King Jin, from a 2011 CTV News Vancouver video

BCLC and B.C. gaming policy enforcement branch documents say that information revealed by the RCMP’s investigation into Jin and Silver led them to suspect the funds are tied to “transnational drug trafficking … (that) could have a potentially devastating impact on the casino industry.” Jin allegedly helped ultra-wealthy Mainland China “whale” gamblers, recruited in Macau, to gamble in B.C., the investigation documents allege.

The Macau whales were able to gamble with suspected drug cash supplied by Jin’s network, especially at River Rock Casino, the investigation documents allege. With those funds borrowed from Jin and “private lenders,” they were not only able to gamble, but to develop real estate in B.C.

Without naming names, a paragraph in the confidential MNP LLP audit of B.C. Lottery Corp. that the attorney general released last week describes underground banking channels that allowed “Chinese nationals” to evade China’s tight capital controls and transfer wealth into B.C.

Investigators learned the Chinese whale gamblers were “provided with a contact in Vancouver, either locally or prior to arriving in Vancouver,” the MNP report says. Next, the gamblers would “contact the person via phone for cash delivery,” which they use to buy chips at a casino. The gamblers would repay these funds “through cash holdings in China.” When the gamblers cash out, they are left with money available for use in Canada.

At the anti-money-laundering conference in late August, the RCMP’s Ward used security videos seized from Silver International’s office, in a multi-storey business complex in the 5800-block of Cooney Road, to explain Silver’s operations. Ward walked conference attendees through a security video that showed the Mountie attempting to enter Silver’s office.

“This lady is the primary target, she returns to her desk, she is hiding her three cellphones and calls someone,” Ward said. “Meanwhile there is a very anxious police officer counting the seconds, waiting to be let in.”

The woman allowed the Mountie and additional officers to enter Silver’s inner sanctum, and what they found could lead to one of the most significant money laundering cases ever in Canada, police say. Ward said Silver was so diligent in recording transactions, and its security system videos are so revealing that Mounties believe they are able to clear a difficult hurdle for Canadian law enforcement: proving that laundered money is directly connected to a “predicate” crime, in this case, drug-trafficking.

In the E-Pirate raids, RCMP seized 132 computers and cellphones, yielding 30 terabytes in data. If all that digital evidence were printed on paper, it would fill almost three million thick telephone books. And ledgers suggest that in only one year, Silver laundered $220 million in cash in B.C., and sent over $300 million offshore, according to Ward.

“This is huge,” one police officer, who was not authorized to be identified, said of the case’s expected impact. “This could change money laundering in B.C.”

In the raid on Silver International’s office on Cooney Road, civil forfeiture documents allege, Mounties seized over $2 million in mostly $20 bills, plus ledgers and daily transaction records. The claim also alleges that two people identified entering the Silver office were later stopped by Mounties on Highway 5 in Merritt, driving a car with $1 million in suspected drug cash stuffed into two suitcases in the trunk.

On Wednesday, Zachary Ng, a lawyer for Jin, told Postmedia he would “convey” requests for comment on E-Pirate allegations to Jin. But Ng said he could not immediately comment. Matthew Nathanson, lawyer for Silver International Investments, said: “I don’t have any comment on this matter.”

To understand Silver’s network, law enforcement had to understand the nature of organized crime in Richmond and Mainland China, which operates “parallel” to the Chinese business community, according to Ward.

“Any given gangster, if you want to call them that, businessman, will have many schemes and thus many networks, and this networking is what facilitated the business,” Ward said. “Because they were able to start a profession of money laundering … to all their friends in drug dealing, who needed the service of converting cash into bankable instruments.”

Ward said Silver International and Jin’s alleged network had many facets, but the main business stemmed from funding the “whale” gamblers, who gambled both in B.C. legal casinos, and illegal gaming houses set up in rural Richmond.

“Part of what we found, is they had two ongoing illegal casinos where the same businessmen who are part of the conspiracy were able to provide non-legal gambling for these offshore gamblers,” Ward told conference attendees. Describing the unimaginable wealth of these Chinese gamblers, Ward said that each man typically gambled between $100,000 and $1 million on a weekend visit to the Lower Mainland. The RCMP’s investigation started with surveillance of gambling and cash drops at River Rock Casino, which led to Silver International’s cash house.

“The primary target that led us there, was a person that is involved in generating ‘whales’ … these high-end gamblers,” Ward said. “His expertise is going over and working in Macau, identifying rich Chinese businessmen that would go to Macau, and he was attracting them to Canada, to gamble. He would use Silver International as a bank account.”

Describing a typical delivery, Ward said: “They would put $100,000 into a hockey bag, show up at the casino, and give (the VIP gambler) $100,000 … the loaning out would go to Chinese offshore gamblers coming into Canada.” Ward said Canadian residents were also loaned cash from Silver in “loan sharking” operations. And Lower Mainland wire transfer businesses were also funded with suspected drug money.

“The extra cash they had would end up in money exchanges, to wire money around the world.”

According to B.C. Lottery Corp. documents, anti-money-laundering investigators identified Paul King Jin in 2012, and these investigators collaborated with B.C. law enforcement to identify Jin’s alleged network, and about 36 gamblers believed to have received criminal cash to buy chips in B.C. casinos.

A suspicious-transaction report filed in 2014 by B.C. Lottery Corp. to Fintrac, Canada’s anti-money laundering agency, says Jin “has been identified as one of the main cash facilitators in the Lower Mainland for casino VIP patrons.” From 2012 to 2014 Jin logged 50 large cash transactions and at least $1.24 million in cash buy-ins, the report says. Jin has been banned from all B.C. casinos for five years, according to the Fintrac report, because of an “extensive history of suspicious incidents.”

BCLC investigators found that Jin and “numerous other people” believed to be working for him were discovered delivering “large amounts of bundled $20 bills” to “known VIP players with … considerable wealth with mostly Asian-based businesses.”

When Jin was barred from casino properties, he continued delivering cash to VIPs, but in parking lots outside or nearby casinos, the Fintrac report alleges.

“Jin was also recently brought to the attention of BCLC by law enforcement agencies that are working with BCLC to identify patrons that are involved in known criminal organizations in B.C.,” the 2014 Fintrac report says. “BCLC is actively working with the RCMP gang unit.”

Jin does not have a criminal record, but has been found guilty of a number of city bylaw infractions. In 2011, Richmond cancelled the licence for Jin’s spa, The Water Club, after RCMP visits. Directors of the club were from Mainland China, Mayor Malcolm Brodie’s council was told. Brodie’s council had access to a report from a Richmond RCMP officer, who noted that in police visits to Jin’s club: “Members later confirmed that high level drug traffickers were inside getting ‘foot massages’ … it is suspected that Jin was meeting with members who are associated to drugs and violence.”

In his E-Pirate presentation in late August, Ward said RCMP surveillance identified 40 different organizations linked to Asian organized groups dealing cocaine, heroin and methamphetamine. Gangsters or their couriers were delivering “suitcases laden with cash” to Silver International’s cash house, allegedly at an average rate of $1.5 million a day.

At Silver, dealers could drop off $100,000 in cash in a suitcase, Ward said, and within minutes a credit for $95,000 would appear in a Chinese bank, after a five per cent fee taken for the laundering and transfer service. Using an alleged transaction from Silver’s security tapes as an example, Ward explained.

“This is a typical event, of a drug dealer bringing in cash. She receives a call, and she goes out to receive a trusted customer … the vast majority is $20s,” Ward said. “The relationship is such, and trusted, that the phone call is made, ‘I’m coming in with $1.4 million,’ and the staff will wire transfer the credit for that in China, before the cash even comes in the door.”

Ward alleged Silver got so sophisticated that it evolved into an operation that could wire funds to Mexico and Peru, allowing drug dealers to buy narcotics without carrying cash outside Canada, and cover up the international money transfers with fake trade invoices from China.

“They facilitated drug trafficking and moved money from it around the world,” Ward said, pointing to slides of transaction records captured in the E-Pirate raids. “This is a typical request, a direction from Silver International to move money from their own account to a drug dealer’s account. We saw evidence of over 600 (bank) accounts in China that were controlled or fed by Silver International. Chinese police have followed up, and they have labelled this a massive underground banking system.” RCMP seized over $9 million, including millions in cash during E-Pirate, and are trying to seize about $4 million in assets, Ward said.

Mountie lab technicians considered themselves lucky the cash seizures in 2015 took place before B.C.’s deadly fentanyl crisis hit, Ward said, since drug cash handled in Vancouver now is often dangerous, covered in traces of fentanyl dust.

Sources in B.C. government and federal law enforcement say it is believed Jin’s network and the Chinese VIP gamblers allegedly funded by Silver International own many luxury properties in the Lower Mainland. But it’s difficult for Canadian governments to seize assets believed to be directly connected to crime.

“It is very difficult nowadays to say, ‘OK, that house that is being used as a casino is an illegal residence, so let’s seize it,” Ward said. “But who owns it? We are finding now, not only one layer of nominees, but two, three and four. And some of those nominees live in China. And they are either related to you, or they don’t even know they are owners. So for many of the properties, we just had to walk away.”

CIVIL ACTION LAUNCHED

A civil forfeiture action against Silver International Investment and two men, Andy Kai Wai Cheung and Yong Li Chen, was launched in August 2015. The action states the men were witnessed by RCMP surveillance among a number of the people entering Silver’s office with suitcases.

RCMP later stopped a rented Chevrolet Malibu with Alberta plates on Highway 5 in Merritt. In the car were Cheung, who has a criminal record in the United States for conspiring to import ecstasy, and Chen. In the trunk, the claim alleges, was a black suitcase holding $349,950 split into 35 bundles of $10,000. And in a hard shell suitcase was $649,560 in vacuum-sealed bags. The cash indicated ‘positive’ for drug residue, the claim states, and was “bundled in elastic bands and shrink-wrapped in a manner consistent with drug trafficking.”

Silver International has stated it has no connection to the cash, and Cheung and Chen deny any wrongdoing. The action continues.

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Visualizing America’s Disappearing Workforce

In his September 2017 paper entitled 'Where Have All the Workers Gone? An Inquiry into the Decline of the U.S. Labor Force Participation Rate', Alan B. Krueger of Princeton University explores the dramatic fall in labor force participation in the U.S. from 1997 to 2017.

As Statista's Martin Armstrong shows in the infographic below, over the last twenty years, the rate has fallen the most for the under 20's, with the share of 16 to 17 year olds in work dropping by 18.4 and 16.2 percentage points for men and women, respectively.

Infographic: America's Disappearing Workforce | Statista

You will find more statistics at Statista

As Krueger reports, last year, Italy was the only OECD country which had a lower participation rate of prime age men than the United States. One of the reasons posited by the research is the opioid crisis currently ravaging the country. Labor force participation rates have fallen more in areas where more opioid pain medication is prescribed. According to the Centers for Disease Control and Prevention, the amount of opioids prescribed in 2015 was three times higher than it was in 1999.

As noted in the paper, while the direction of causality is not clear, a 2017 report by David Mericle entitled 'The Opioid Epidemic and the U.S. Economy' states that “the opioid epidemic is intertwined with the story of declining prime-age participation, especially for men, and this reinforces our doubts about a rebound in the participation rate.”

But as we pointed out previously, after spending months, or maybe even years, running very complicated regressions that your simple mind could never possibly understand, Krueger would like for you to believe that it's the growing opioid epidemic that is forcing men to sit on their couches all day rather than look for work.  Here's a summary of his findings from the Brookings Institute:

The increase in opioid prescriptions from 1999 to 2015 could account for about 20 percent of the observed decline in men’s labor force participation (LFP) during that same period.

 

In “Where have all the workers gone? An inquiry into the decline of the U.S. labor force participation rate” (PDF), Princeton University’s Alan Krueger examines the labor force implications of the opioid epidemic on a local and national level.

 

Among other findings, the research suggests that:

 

  • Regional variation in opioid prescription rates across the U.S. is due in large part to differences in medical practices, rather than varying health conditions. Pain medication is more widely used in counties where health care professionals prescribe greater quantities of opioid medication, with a 10 percent increase in opioid prescriptions per capita is associated with a 2 percent increase in the share of individuals who report taking a pain medication on any given day. When accounting for individuals’ disability status, self-reported health, and demographic characteristics, the effect is cut roughly in half, but remains statistically significant.

 

  • Over the last 15 years, LFP fell more in counties where more opioids were prescribed. Krueger reaches this conclusion by linking 2015 county-level opioid prescription rates to individual level labor force data in 1999-2001 and 2014-16. For more on the relationship between prescription rates and labor force participation rate on the county-level.

Krueger also provided this very helpful map proving that opioid abuse is highly correlated to unemployment.  Of course, it couldn't possibly be the case that opioid abuse is the result of high unemployment and the associated depression that goes along with it…no, the opioid abuse definitely came first.

 

So, what is Krueger's solution to help reverse the seemingly perpetual decline in labor force participation rates?  If you guessed 'Obamacare' then you're absolutely right…and unfortunately, no, that is not a joke…here is the excerpt from page 38 of Krueger's paper:

Third, addressing the decades-long slide in labor force participation by prime age men should be a national priority. This group expresses low levels of SWB and reports finding relatively little meaning in their daily activities. Because nearly half of this group reported being in poor health, it may be possible for expanded health insurance coverage and preventative care under the Affordable Care Act to positively affect the health of prime age men going forward.

And while we would never presume to be smart enough to question the very thorough, impartial research of a Princeton economist, we do wonder whether it's in any way relevant that labor force participation rates seemingly started to decline in 1965…

 

…at exactly the same time that welfare spending started to surge?

 

It's probably just a coincidence.

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Futures Saunter Higher In Careless Jaunt Towards Dissipation

Fascism has been rearing its ugly head all weekend in Spain and has delighted investors to no end. S&P futures are heading up now, +3 in early trade. Over in Europe, the optimism born in Spanish law and order has become somewhat infectious, delighting traders there to no end, sending DAX futs higher by 0.45%.

Gleaning from the good news in Europe, Asian markets are soon gearing up to rip ahead.

The copper trade is improving, as we speak, up by more than 0.8%.

Quite literally, nothing can stop the charge of higher indices that now posses both the gusto and fervor to envelope the bears who gambol about in search of malevolent detail. The accrual of gains, and the insipid rise of valuations, haven’t deterred markets from undergoing extreme bouts of hedonistic exploits — engrossed with endless abundances of hard liquor, narcotics, and interminable torrents of legal marijuana.

I am here to inform and educate all reading this treatise that equities shall rise forever, an ephemeral dream of psychdelic green mist and lavender splashes on top of soft mountains of ivory powder — fastidiously driven through hand crafted platinum cylinders into the nasal cavities of all of the finest people in America — the very smartest and wealthiest amongst us.

NASDAQ futures just upticked again, now +10. Enjoy the balance of your evening.

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Robert Gore: “The US Has Become An Infantile Nation”

Authored by Robert Gore via Straight Line Logic,

Looking for a good laugh? Consider the United States.

Football is a tedious game that fills three-and-a-half hours of airtime with 30 minutes of action, commercials, commentary, instant replays, more instant replays, closeups of pretty cheerleaders, and halftime pageantry. The players are paid great gobs of money but run the risk of rendering themselves concussive basket cases. The super rich owners hold up municipalities for taxpayer-funded stadiums while keeping the TV, ticket, merchandising, and concessions revenues. They’ve also climbed into bed with the federal government, accepting taxpayer money for promoting patriotism. Among other things, this requires players, who until 2009 could stay in the locker room while the National Anthem was played, to be on the field, presumably standing at respectful attention.

Presumably—aye, there’s the rub. Last season, quarterback Colin Kaepernick expressed his disagreement with certain governmental policies and practices by kneeling during the Star Spangled Banner. Since then, other players have done the same, to the consternation of many fans, including President Trump. Ratings and attendance are tanking and the crony socialist owners are caught between the rock of their payrolls’ politics and the hard place of their fans’ disgust. To borrow from Oscar Wilde, one must have a heart of stone to ponder their plight without laughing. It couldn’t have happened to a nicer group of guys and gals.

Last year’s losing presidential candidate has written a book blaming virtually everyone for her loss…except the one person who was responsible. A cottage industry has sprung up to feed this self-exculpatory fantasy, affixing on Russia as the author of Hillary’s woes. Russia “hacked” DNC computers, except technically they couldn’t have been hacked, they were downloaded, an inside job (LINK to INTel Vets Challenge ‘Russia Hack’ Evidence). The materials Russia couldn’t have hacked were given by someone, presumably whomever downloaded them, to WikiLeaks, which disclosed them. Doing so, it committed the cardinal sin in contemporary American governance: disclosing the truth. In classic Clinton fashion, Hillary and team never contested the authenticity or veracity of the disclosures, instead concocting the Russian story.

Efforts to keep this fabrication going are a source of endless amusement. There have been evidence-free “assessments” from the intelligence agencies, a special counsel probing the tax returns of a Trump campaign manager who served all of two months, and now there are stories that “Russian-aligned” groups and RT bought a drop-in-the-bucket worth of ads on Facebook and Twitter during a campaign in which billions of dollars were spent on advertising, not counting the unpaid “donations” to Hillary from the mainstream media, pollsters, Google, and Facebook.

The purveyors of the Russian concoction are those desperately lonely schmucks who take the ugliest girls in the bar home at closing time because they’re the only ones left. The concoction is all they have. Let’s hope they have the decency to hate themselves in the morning.

America is like that high school all-everything – sports star, class president, valedictorian – who can’t accept that at the university, she’s just another student. For a brief shining moment after World War II it had an uncontested empire, but empires are notoriously hard to hang on to. Seventy years later the US has a string of “inconclusive” (never “losing”) wars, a lot of promises to its own citizens that aren’t going to be kept, and an empire that’s slipping away.

Its chief adversaries—Russia, China, and Iran—are going about their business, consolidating economic and political power in the Eurasian center of the world.

They’ve been helped immeasurably by the comedy of errors that has been US policy in Syria. The same people who championed disastrous regime changes in Iraq and Libya set their sights on Bashar al-Assad, Syria’s duly elected leader. That this entailed crawling into bed with ISIS, an offshoot of al Qaeda, the outfit that reportedly attacked the twin towers and the Pentagon, seemed not to bother anyone. Neither did the fact that while we were supporting ISIS’s rebellion in Syria, we were also supporting the Iraqi government’s effort to quell ISIS’s rebellion in Iraq. Why is it that the butt of all the jokes often ends up picking up the tab? The US wasted tons of blood and treasury, accomplished none of its stated goals, and was humiliated when, at the request of Assad, Russia, Iran, and Hezbollah came in and routed ISIS. You can’t make this stuff up.

Even the US’s supposed friends can’t stifle their schadenfreude, having been under its domination for so long. Derisive joy is tempered by justified concern: in its arrogance and desperation to maintain its untenable position, those zany Americans might blow up the world. The president recently stood before the United Nations, an organization ostensibly devoted to peace, and said he’d destroy North Korea. Maybe it was all just posturing and hyperbole in good fun, but the North Koreans, and their next-door neighbors China and Russia, weren’t laughing.

The US has become an infantile nation. Not playing well with others, it demands the world conform to its dictates…or else. That or else is basically holding its breath until it turns blue, as it self-destructively plunges further into debt and wreaks havoc globally, instilling fear and hate, prompting vengeance. Fealty to a failing government and its symbols has become the sine qua non of a ritual, insecure patriotism. Real patriotism, loyalty to America’s founding ideals, demands opposing at every turn the government’s mindless, unprincipled, and voracious quest for power, treasure, and empire. If the flag and the National Anthem mean anything at all, they stand for the proposition that liberty must be defended and fought for, particularly against that which has always been its chief nemesis—government. Now, they only serve as sad markers of how much has been lost.

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Pax Syriana: Neither Vanquished, Nor All-Conquering

Submitted by Kamal Alam, military analyst and Fellow for Syrian Affairs at The Institute for Statecraft, and updated exclusively for Zero Hedge

Former British spy and diplomat Alastaire Crooke, writing in Consortium News over the weekend, correctly outlines a new Middle East trajectory based on Syria having weathered the storm of a six year long proxy war while remaining largely in-tact: "Plainly, Syria’s success – notwithstanding the caution of President Bashar al-Assad in saying that signs of success are not success itself – in resisting, against the odds, all attempts to fell the state suggest that a tipping point in the geopolitics of the region has occurred." At the same time, Foreign Policy predicts in its latest Syria analysis, headlined Israel Is Going to War in Syria to Fight Iran, that Israel will continue ramping up hostile actions against Syria as "Israeli officials aren't shying from confronting Tehran's forces – since no one else will."

Such desperation has increased due to the entirely new geopolitical order which has emerged as a result the Syrian state's perseverance and which runs directly counter to Israeli plans in the region. As Crooke explains further, "But, aside from the geopolitics, the Syria outcome has created a physical connectivity and contiguity that has not existed for some years: the border between Iraq and Iran is open; the border between Syria and Iraq is opening; and the border between Lebanon and Syria, too, is open. This constitutes a critical mass both of land, resources and population of real weight." Crooke also assesses that Western officials have been "wrong on almost everything pertaining to Syria." Failed predictions, miscalculations, and an underestimation of the Syrian state's resolve has defined much of both Israel's and West's approach to Syria throughout the war.

This is perhaps because missing in nearly all commentary from professional analysts and the so-called 'experts' over the past years has been a thorough and systematic attempt to understand the nature of the Syrian Army and its relationship to the state, as well as the pre-2011 experience which forged the army over a period of decades facing insurgencies inside and outside of Syria (especially in Lebanon).

The Syrian Army has fought on now for more than six years without disintegrating as had been predicted by many commentators. Indeed it is the Army of the Syrian Arab Republic (al-Jaysh al-Arabi as-Suri) which has kept the state intact. The Syrian state institutions of which the Army is the foremost guarantor have held firm in the onslaught of all the non-state actors as well as regional neighbors. But how is it that the Syrian Arab Army has held together?

Contrary to what most observers say, the overwhelming factor in this has not been because this was an Alawite army. Had this been the case, it would not have been able to hang on for so long. The most prominent Chiefs of Staff and General Staff officers have been a combination of Sunni, Christian and Alawite. Nor was the army constructed along sectarian or ethnic lines. To take its three major contemporary personalitiesMustafa Tlass, Fahd Jassem Frejj and the late Daoud Rajihathey are respectively Sunni and Greek Orthodox. The elder Tlass is now retired, but he was the man who shaped the Syrian armed forces with Hafez al Assad in the 1970s.

History, ethnicity and structure of the Syrian Army

However to understand how the Syria Army became what it is today one has to delve into the history of the Syrian state since independence and how the military shaped the state. Since March 1949, Syria has experienced sixteen army coups – nine of which were successful in overthrowing the incumbent rulers. The army had never really gone back to barracks before the arrival of Hafez al Assad.

After independence from the French, Syria had eight years of parliamentary rule (1945-1949) and (1954-1958).  After March 1963 members of the armed forces who were sympathetic to the Arab Socialist Party acted to bring in their version of parliamentary rule, backed by a strong military presence. This Army-Baath faction that has ruled Syria now for the last four decades was not an all-out dictatorship. Far from it: it has been a combination of a balance between rural and urban Syria, mercantile and tribal Syria, and the political families that have urged the army to intervene one way or another from Syria’s inception, whether these families were leftists, Nasserites, pan-Arabists or business-focused. These divergent business interests and feudal family politics converged on the armed forces, with the aim of ensuring that a strong stable Syria had some leverage over Iraq, Lebanon and Jordan.

While the French had only encouraged non-Arabs and non-Muslims to join the army in mandate-Syria, with the departure of the French came a change of policy. The Homs and Hama military academies took Sunnis of all backgrounds and it was Sunnis that made up the majority of the army elite in the 1970s and 1980s, and into today. According to the late scholar and historian of modern Syria Patrick Seale, the Syrian Army under Adib Shishakli, became an "unashamedly political instrument". However, it had done away with its mostly French policies of sectarian divisions within the army. Under Hafez this policy continued and a mixture of all classes and sects continued to join the army. Hafez did however begin the process of depoliticizing the Syrian army.

Bridging the gap

The Syrian Army has consistently bridged the gap and eased the friction between the rural and urban centers of Syria and the rich and the poor. It is first necessary to take a closer look at some of the ethnicity and religious affiliations of key figures that have shaped the Syrian Army in the run up to the takeover by Hafez al Assad. Colonel Haydar al Kuzbari was a Sunni who played a key role in ending the union between Egypt and Syria. General Abdel Karim Zahareddine was a Druze Chief of Staff of the military and took over after affairs settled once Syria had firmly established itself, out from under Egypt’s grasp. Ziad al Harriri was a Sunni head of the army and defense minister in 1963. Amin al Hafez was another Sunni head of army and presided when the Baathists crushed a Sunni uprising in Hama in 1964 through aerial bombing, including mosques.

Here, it should be noted, almost twenty years before Hafez al Assad’s raid on Hama (1982), is a Sunni head of army and state crushing an Islamist uprising. Furthermore in 1952 a prior Hama rebellion was crushed by Sunni officers under a Sunni from Hama, Adib Shishakli. Mustafa Tlass also testified to the non-sectarian nature of the crushing of three Hama rebellions by the Syrian Army spread over three decades. Abdel Karim al Nahlwai, who was also an officer in the army and instrumental in its decision to draw Syria out of Egypt’s clutches, was also a Sunni.

The Baathists took on the mantle of educating the army officers throughout the 1970s. The Syrian military ruled through a praetorian-patrimonial model rather than as an outright parliamentary executive power. The army had to adapt itself from not just being a military force to becoming the political guardian of the country. Assad turned the army into a unified force and set about professionalizing it. Ironically, it was also him who oversaw the chaos of Lebanon which was completely riven along sectarian fault lines. There were as many inter-Alawi intrigues as non-Alawi. The Syrian army lost political power during the regime of President Hafiz al-Assad, as he himself was a former officer and knew how to control the armed forces. 


Syria´s president Hafez al-Asad and Defense Minister Mustapha Tlass, during the Arab-Israeli War of 1973, at the Golan front. Wikimedia/The Online Museum of Syrian History. 

In his book, The Policy of Social Change in the Middle East and North Africa, Manfred Halpern presented the officers' corps as representing the new salaried middle class that emerged in the Arab world as the result of the modernization process. This class also includes teachers, administrators in the civil service and government apparatus, technicians, high school and university professors, journalists, lawyers and others. This explanation helps, at least in part, in understanding the Baath Revolution.

The Baath Party has continued to provide all the forces which play a role in Syrian politics with a common ideological and organizational base: the bureaucrats of the party, government and civil service, as well as senior army officers. It has branches in the army units and security forces, which send representatives to the senior Party institutions. Senior army officers are members of such institutions as the Central Committee al Lajna al-Markaziyya) and Regional Command (al-Qiyada al-Qutriyya), alongside party bureaucrats.

To further demonstrate the non-sectarian nature of the Syrian military high command, it is worth looking at a pivotal moment which defines the Syrian military to this day in the midst of the civil war in 2014. Throughout the 1950s and 1960s there was tremendous external pressure on Syria, none more so than from Iraq, Israel and Egypt. All three threats were different: Egypt wanted to subdue Syria through the guise of the Arab Union Republic. Iraq and its Ba’th wing were supporting several different factions within Syria. Israel was and still remains in a state of war with Syria. Amidst all this there were the coups and counter coups within the military and government. Hafez al Assad and Mustafa Tlass decided that given the external threats, the army above all must have a nationalist agenda and an institution devoid of politics. It was this ideological agreement between Tlass and Assad that led to the complete purging of politics from the military and a separation of powers not seen before in Syria.

Hafez al Assad also brought senior members of the Syrian Air Force into the military high command. Naji Jamil (Sunni) served as Air Force commander from 1970 to 1978 and was promoted to General Staff committee overseeing defences on the Iraq border. Another Air Force commander was Muhammad al-Khuli who till 1993 held onto coveted logistic positions between Damascus and Lebanon. These commanders, at the peak of their careers at the time of Hafez al Assad’s death, included the Air Force Security Administration headed by Ibrahim Huwayji and non-airforce commanders Hasan Khalil, Ali Duba, Ali Mamlouk and Hikmat Shihabi. Other prominent officers above the rank of Brigadier in military and civil defence positions post-2000 were Sunnis, and include Rustum Ghazaleh, Hazem al Khadra and Deeb Zaytoun. Since 1973, the strategic tank battalions of the 70th armoured brigade stationed near al-Kiswah near Damascus have had rank and file Alawis under the command of Sunni officers.


Mustafa Tlass and Gamal Abdel Nasser in Cairo

By the time Hafez al Assad passed on the army to his son Bashar, the Syrian Army had firmly erased its sectarian beginnings, which were very much a legacy of French colonial rule. The deft play between rural and urban, tribal and religious sects was evened out through an education system played along on party lines rather than those of religion. The stage had also been set for the removal of army officers from mainstream politics. Instead the family structure of Syria would be co-opted into the Party while the army would remain stable and neutral.

Few Arab countries have armies based on professionalism. Most are based on a tribal structure, given the importance of family lineage and religion. In Syria however the last forty years have shown that the Army is not a sectarian army. Most of the internal politics within the army has been rooted in power, promotion and performance on the field. Even during the most critical time of the late 1960s and early 1970s there was a good balance of Sunni and Alawi officers. Not all the Alawis supported Salah Jadid whilst prominent Sunni officers such as Lietuenal Colonel Ahmad Suwaydani from Houran supported Jadid. The most revealing test came when Hafez al Assad lay sick and his brother tried to make a move for power. Hafez categorically left day to day affairs in the hands of an all-Sunni cast, with Mustafa Tlass, Abdallah Al Ahmar, Hikmat Shihabi, Abd al Rauf al Kasm and Zuhayr Mashariqah. And prominent Alawis at the time, such as Ali Hayder, Ibrahim Safi and Ali Douba, decided not to take sides with Rifaat al Assad, despite his offers of shared power.

Syria's counter-insurgency lessons

As we saw the Syrian Army battle its way to victory in key towns such as Qusayr and Yabroud in 2014, along with this year's major strategic victories in Aleppo and the suburbs of Damascus, it is once again important to look at how and where the Syrian Army honed its fighting skills.

The Syrian Army along with its military and civilian intelligence have mastered the art of dividing its opponents (insurgents) unlike any other Army. Syria dominated Lebanon for decades not through brute force but cunning real politics and with an understanding of geography and history.  Take into account three important 2014 battles of Qusayr, Yabroud and Maloula. All three held their strategic and symbolic values. Two were the supply route towards Lebanon and the Mediterranean as well as being great vantage points, while the other was the most important Christian town for Arabs along with Bethlehem. In Maloula, the local residents joined in the fighting on the side of the Syrian Army against the rebels. This meant clearing the area of foreign insurgents.

This was a tactic straight out of the Syrian Army’s days of operating in Lebanon, where they cleared areas with the tacit approval of local people, whether they were Christian, Sunni or Shi’a. In Qusayr, despite the presence of Hezbollah, it was the Syrian Army that did the bulk of the fighting. Hezbollah were only there to protect the Shi’a villages on the Lebanese side, and then they crossed into Syria where there were Shi’a civilians. This again demonstrated how the Syrian Army units are always embedding locals into their operations. But the roots of these modern battles lay in the Syrian Army’s performance in Lebanon in the 1980s.

Lessons from Lebanon: fighting the Israelis

Israel’s main political objective for going into Lebanon was to crush the PLO. In that it succeeded, with overwhelming odds and with ease. However its second objective – to remove the Syrian military presence in the Bekaa Valley and reduce its influence in Lebanon – was its greatest and only failure since its inception in 1948.

The Israeli plan for Lebanon to combat Syria called for the seizing of Lebanese territory up to and including Beirut, which would be taken in a coordinated operation with the Phalange  forces; an advance beyond the Beirut-Damascus highway, which would cut off Beirut from the main Syrian forces;  and the expulsion of Syrian units from the Bekaa  valley. One would expect such a plan to entail deep penetrations, landings north of Beirut and the Beirut-Damascus  highway, and other tactical maneuvers of the type espoused in IDF doctrine.

The careful study of key strategic battles that then took place between the Israelis and the Syrians will help us understand the Syrian Army’s performance over the past years in the current war.

In 1982 the Syrian presence in Lebanon had diminished from three divisions in 1976 to one division and one mixed brigade which amounted to 30,000 men.  The 1st Armored Division in the Bekaa, commanded by Rifaat al Assad (the brother of Syrian President Hafez al Assad), was deployed in defensive positions in depth.  Both Syrian formations and doctrine followed the Soviet model, and defensive doctrine called for combined-arms operations, combat teams whose structure was fixed in advance, and a defence based on massive firepower.

To provide that firepower, the Syrians depended on air defense in depth from various SAM sites reinforced by anti-aircraft guns, and a ground defence characterized by a profusion of anti-tank weapons and units. The defense would depend on intensive fortifications and the exploitation of natural obstacles to a depth of 20-30 kilometers. The 85th Brigade was deployed in the Beirut area in the role of an armed presence, with the additional task of guaranteeing the security of the Beirut-Damascus highway.

In addition to the main armies of Syria and Israel, Lebanese militias would become involved in the fighting. The Israelis expected the Christian Lebanese Forces, some 10,000 strong, to fight as allies against the PLO. As war approached, the opponents consisted of some seven divisions and two independent brigades of the IDF, 60,000-78,000 strong, arrayed against 15,000 PLO fighters, one Syrian armoured division, and one Syrian brigade. The outcome of the main battle at the end of the war depended on how well the Syrians and Israelis would manage their allies in the form of irregular forces.

The main battles of 10 June, 1982 were fought in the Eastern Sector, between the IDF and the Syrian 1st Armoured Division. On the ground, Syrian resistance had been stiff. The Syrians defended a series of strong points along the winding roads. Each strong point conducted a separate, integrated defense with obstacles, mines, tanks, and commandos using Saggers and RPG's; at times, such as in the defense of the crossroads near Lake Qaraoun, the defense was supported by artillery and by Gazelle helicopters using HOT missiles.

At dawn, Syrian commandos attacked. APC's and tanks were hit and caught fire. Men were killed trying to rescue the wounded from burning vehicles. Finally, Brigadier Menachem Einan ordered a cessation of rescue attempts and the column retreated in reverse gear. Around 2300 hours,  this  force approached  Ein Zhalta, some eight kilometers from the Beirut-Damascus highway but more than twenty by road. Unknown to the Israelis, the area around Ein Zhalta was defended by a brigade-strength Syrian force consisting of a few dozen tanks and commando units. After passing through the villages, the Israelis started descending a steep slope with tanks in the lead when the Syrians opened fire with tanks from the opposite ridge and RPG’s and Saggers from the surrounding wadis.

The Israeli attacks on Syrian positions in the Bekaa brought Syrian reaction in the west. There, Syrian forces had remained in Beirut and out of the fighting, but now the 85th Brigade began to deploy tank and commando teams south and east of Beirut, around Khalde and the hills south of Beirut and along the Shemlan ridge area.

In June 1982 the Israeli Air Force had jammed and destroyed the Syrian radar and bombed the surface-to-air missiles (SAM) sites in the Bekaa Valley. However despite the overwhelming odds, the Syrian Army fought bravely. The Israeli charge from the south was checked with ferocity when the IDF came into contact with Syrian positions. The IDF reported heavy obstacles inch for inch. An IDF armored column was halted in a fierce tank battle in the village of Sultan Yacoub. This prevented the Israelis from taking the vitally strategic Beirut-Damascus highway that cut across the Bekaa Valley. The IDF were also halted towards the southern approach to Beirut at Khalde. The Syrian Army backed different groups to obstruct the Israeli advance east of Beirut. Al Saiqa fighters and other Shia-Sunni groups backed by regular units from the Syrian Army fought the IDF to a standstill in 1983. The Israelis retreated to the Litani River and from then on wanted to avoid the Syrians at all cost.

These battles have been forgotten in western military literature. But for Syrians today and their General Staff officers they formed the basis to prepare for the next war with Israel through the use of irregular forces. Hence the performance of the Syrians during the current war was a culmination of the study of 1980s battles which joined irregulars and the main Syrian Army. Syria never suffered from lack of courage or the will to fight on. Even though they knew they could not stand up to IAF in 1982 they flew near-suicide missions with great valor and skill.

The American appraisal of Syrian troops summarized that the Syrians had returned to Beirut after the withdrawal of the Israelis, but had been no more able to establish order there than were the Americans and Israelis before them. In fact, however, it may be that Syrian power in Lebanon will be the one thing which prevents any radical change to Lebanon's form of government. For despite Syrian support for Iran in its conflict with Iraq, Syria had no interest in seeing a Shiite Islamic government in Lebanon but preferred to maintain some form of  the status quo. The Americans saw Syria as the only party with whom they could deal concerning Lebanon and that situation was better served than having factional anarchy, for the Israelis as well as for the Lebanese.

The Syrian Army as a non-conventional force: the best in the region? 

The Israeli assessment of the Syrian Army's control of Lebanon was similar to that of the Americans. The Israelis came to the early conclusion that they had nothing to gain in destabilizing Syria under Assad (in the 1980s); it would bring a Sunni Islamic government to power. It would only prolong a war in which there would be no zero sum option but rather one in which both sides lost relative ground and ability to operate. After being outdone in Lebanon by Syrian forces and its proxies, the Israelis then saw the wisdom of letting Syria have hegemony to maintain the status quo of the Golan Heights. This doctrine was further entrenched after the 2006 war in Lebanon.

In the aftermath of the 33 day war in 2006, Syria sent commandos and artillery units to the border and the IDF raised its level of alertness to the maximum in ten years and doubled its deployment on Mount Hermon. Syria had also doubled its commando units in 2007 and started preparing for urban guerrilla warfare training. One of the 12 divisions of the Syrian army was made up of 10,000 elite commandos and the same unit doubled its number of rockets.

The Israeli view was that though the Syrian forces achieved surprising advances against the Israelis in the Golan in 1973 and resisted the Israeli advance in 1982, their power had subsequently been corrupted preventing them from mounting any sort of fighting force. However their helicopters would prove to have significant proficiency and their commando units have thrown back all that has been waged at them. The remarkable success gained by Hezbollah in 2006 confirmed the transition of Syrian forces from a conventional fighting force to asymmetric warfare and irregular forces, which were aimed at compensating for the conventional superiority of the IDF and its vulnerability to irregular warfare techniques.

The Israeli strategic expert Ephraim Inbar has remarked, on ‘the recent strategic acumen of the Syrian military’ saying that since, "Israel has absolute superiority in several fields in warfare, so Syria is investing in fields where it can have an edge. It has invested in recent years in anti-aircraft weapons, rockets missiles and bunkers. The war in Lebanon proved to the Syrians that they were right to do so."

The grudging respect the Israelis have had for the Syrian armed forces trumps all other armies in the region with respect to threats to Israel. The Israelis not only saw the irregular forces that Syria could unleash but also the negative consequence of removing the Syrian state and army. When Silvan Shalom, the Israeli Foreign Minister in 2004, suggested to Ariel Sharon that they destabilize Syria, Sharon replied by saying “No way” as that would mean either an extremist Sunni government in Syria, or an unstable democracy, both of which were a threat to Israel.

Upon the death of Hafez al Assad, Vice President `Abd-al Halim Khaddam, serving as temporary acting president, promulgated two decrees, announcing the appointment of Bashar al-Assad, the late president's son, as the general commander of the Syrian Army in addition to his being promoted to the rank of Fariq, the most senior rank in the army, which his father had held. Several hours later, Bashar received members of the senior officers’ corps, headed by Defense Minister Mustafa Tlass and Chief of the General Staff (CGS) Ali Aslan. They had come to offer their condolences on the death of his father, and to pledge their loyalty and complete support. Had the Syrian Armed Forces been a sectarian unit, you might have expected the Sunni Tlass to provoke trouble. However it was precisely the two main Sunnis in the regime i.e. Khaddam and Tlass, who oversaw the smooth transition to Bashar al-Assad.

Conclusion

"If a Lebanese woman gets pregnant they say the Syrians did it, if a bird falls out from the sky over Beirut it is said to have been attacked by the Syrian eagle" (saying from Mustafa Tlass' The Mirror of My Life, 1991).

Of course the eagle and the lion have come to symbolize the Levant for the last four decades in the shape of the Syrian state built by Hafez al Assad, and the one being kept alive by his son Bashar.

What has furnished the Syrian Army and the State with a motive to resist all that has been thrown at it in the last six years? For this the answer lies in the formidable network built by Hafez’s army in Lebanon, Palestine and Iraq, the very same network we have seen at play in Iraq post 2003 and in Lebanon post 1976. It is worth lingering over Henry Kissinger’s famous words, you can't make war in the Middle East without Egypt and you can't make peace without Syria.’

As commentators continue to struggle to become experts on Syria and its regime, few have bothered to look at the performance of the Syrians in Lebanon post 1976. It was a great relief to the Americans and the Israelis that the Syrian Army sanctioned by the Arab League marched into Lebanon in 1976 on behalf of the Christian community there to fight the Palestinians who had earlier destabilized Jordan and were perceived to be doing the same in Lebanon.

It was the Syrian Army that along with Israel had a tacit agreement that anything north of the Litani River belonged to the Syrian sphere of influence and the rest to Israel. So we move on to the 80s and 90s and Syria becomes the guarantor of peace not just in Lebanon but also the greater region.

Next we see how the Syrian Army and intelligence skilfully played off one group against the other in Lebanon to bring about their mastery over the country and then replayed the same in Iraq post 2003. In Iraq, Syria’s Army and intelligence successfully outwitted the coalition forces and indeed Iran in backing both the Sunni insurgents who came to fight from the North and East of Syria. At the same time, the Syrians maintained excellent relations with the Shi’a Sadr brigades of Southern Iraq.

This was the same Syrian Army that throughout the 1970s and 1980s kept a precarious balance between the different Lebanese Christian families of Chamoun, Gemayael and Frangieh. It was the same Syrian Army that actually ideologically supported the Amal party of the Shia’as, and not Hezbollah. The greatest Christian general of Lebanon, Michel Aoun, who was the quintessential anti-Syrian of the 1990s, became the Syrians’ biggest ally post 2005. So the dexterity displayed at deflecting all allegations of assassinations and being the root cause for all problems in Lebanon and Iraq have served the Syrian Army well in the ongoing conflict in Syria. When Aoun bothered the Syrians, they simply backed other Christian warlords in Mount Lebanon and thus fragmented the Lebanese Christians, and as a result came out on top.

In analysing all this, we can begin to understand the Syrian Army’s policy of ‘neither  vanquished, nor all-conquering.’ As we saw the drift of the Syrian rebels in the current war into splinter groups of hundreds of factions, and even saw other reports of how the Syrian Army paid al Nusra for the flow of oil, these are lessons all too familiar for those who have watched the Machiavellian politics of the Syrian Army at work. The chess game played out in the Levant, first termed the ‘Syrian Belt’ by Seymour Hersh, is one whose actors primarily include the Syrian security forces. From Mount Lebanon to Damascus, there is a history of Syrian state and army engaged in real politics on the ground. Hafez bequeathed this military legacy to his son and his wily commander.

Alan George in his book on Syria under the al Assads concludes that although the hopes of reform invested in the young President Assad were probably exaggerated, "he might yet succeed in launching a program of limited political reform if the west, through support for an aggressive Israel and swaggering threats against Syria, does not perpetuate the conditions that allowed the most anti-democratic wing of the Syrian regime to prevail over the pro-democracy activists."

With the onslaught of the 2011 war in Syria, Bashar al Assad never had time to continue what he started in 2000 i.e. the gradual reform of a system that many western experts witnessed up close between 2000 and 2010. The Syrian Army has evolved into a unified non-sectarian army over the last four decades. As most observers point to the undoubted prowess of Hezbollah in the battlefield, it is worth noting as I argue here, that Syria’s army has been fighting the Israelis and other actors long before Hezbollah came into being. All the major battles in Lebanon were fought before 1985 and the coming of Hezbollah.

The Syrian Army remains a formidable force as witnessed by its greatest foe: the IDF. It has evolved as an institution to outlast sectarian faultlines and negative foreign influences. But it is almost as if, since this conflict began, outsiders have wanted to portray this as a sectarian army from the minute the first shot was fired. One of the best Syrian experts (Nikolas Van Dam, author of The Struggle for Power in Syria) has himself acknowledged that foreigners are always eager to look at the divisive issues and highlight them, rather than look at the Syrians themselves.

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Rickards On “The Fragility Of The North Korean Nuclear Showdown”

Amid today's contradictory statements from President Trump that Secretary of State Rex Tillerson "is wasting his time trying to negotiate with Little Rocket Man… Save your energy Rex, we'll do what has to be done!" and The State Department's statement that "The White House is still committed to a diplomatic approach" on North Korea, it appears the fragility of the North Korean nuclear showdown is a great as ever.

As James Rickards writes in The Daily Reckoning, right now, there’s no doubt that the greatest threat to world peace in general, and the U.S., in particular is coming from the Democratic People’s Republic of Korea, DPRK, commonly referred to as “North Korea.”

North Korea has made great strides in short-range and intermediate-range missiles, and is working rapidly toward an intercontinental ballistic missile (ICBM), that could reach Los Angeles and much of the rest of the United States from their territory.

North Korea has a store of plutonium and highly-enriched uranium (HEU) that can be converted into nuclear weapons. It has also made progress in the miniaturization and ruggedization of those weapons so they can be converted to warheads and placed on the missiles.

North Korea has also reached another important nuclear milestone…

North Korea detonated a nuclear weapon earlier this month on Sunday, Sept. 3. This was the sixth time they had done so, but the first time since their ICBM missile tests and the first time under President Trump’s administration.

This test was different in another important way. It is estimated to be a hydrogen bomb instead of an atomic bomb. The difference is significant.

Both types of nuclear weapons work by releasing neutrons in critical-state radioactive material, either highly enriched uranium or plutonium. The difference is that the atomic bomb works by fission, literally “splitting” an atom, so that a neutron is emitted, collides with other atoms and causes a chain reaction with an enormous release of energy.

The hydrogen bomb works by fusion. Atomic particles are “fused,” or pushed together, in a way that destabilizes the atom and also releases a neutron.

Both methods start a chain reaction. But the fusion method in a hydrogen bomb is orders of magnitude more powerful. The destructive force can be 100 or even 1,000 times greater than that of an atomic bomb.

This gives North Korea many more options in their attack scenarios.

They can put more destructive force in a smaller space, thereby achieving the warhead miniaturization needed to fit on an ICBM.

They do not have to worry as much about accuracy. An atomic weapon has to hit the target to destroy it. A hydrogen bomb just has to come close. This means that North Korea can pose an existential threat to U.S. cities even if its missile guidance systems are not quite perfected.

Close is good enough.

Finally, a hydrogen bomb gives North Korea the ability to unleash an electromagnetic pulse (EMP). In this scenario, the hydrogen bomb does not even strike the Earth; it is detonated near the edge of space. The resulting electromagnetic wave from the release of energy could knock out the entire U.S. power grid. Good luck with your bitcoins in that scenario.

This is one of the reasons I recommend gold. It is not dependent at all on the power grid.

When these technologies are perfected and merged, North Korea will be able to kill one million residents of Los Angeles with the push of a button or  take down the U.S. power grid. This nightmare reality is probably just three years away.

And North Korea has threatened to test a hydrogen bomb in the Pacific Ocean in response to new U.S. sanctions. That could have serious environmental consequences, in addition to the geopolitical consequences. In 1963, the U.S. and the Soviet Union agreed to stop testing nuclear weapons in the atmosphere, underwater, or in space. A North Korean H-bomb test would be a major event.

The only remaining element of the nightmare scenario is intent.

On that score, North Korea has left no doubt. Not long ago the North Korean government released a propaganda film that displayed missile attacks on U.S. bases and military targets. The film also displayed the North Korean leader, Kim Jong-un, celebrating successful missile tests with his military leadership.

NK Propaganda

This image is taken from a North Korean propaganda film. It purports to show a direct hit by a North Korean missile on a U.S. aircraft carrier. Of course, this is propaganda only. U.S. aircraft carriers have extensive defensive perimeters and are unlikely to fall prey to enemy attack based on existing capabilities. However, the film and image are revealing with regard to North Korean belligerence and long-term intentions.

And just a few days ago North Korea released another propaganda film showing its missiles taking out U.S. planes and an aircraft carrier. Kim Jong-un has also threatened to reduce the United States “to ashes” with nuclear attacks.

The U.S. has taken none of this lying down. Diplomatic efforts to contain North Korean ambitions over the course of the Clinton, Bush 43, and Obama administrations have failed, and the time for diplomacy is past.

Leading officials have made it clear that the U.S. would engage in pre-emptive warfare with North Korea to stop their nuclear program if necessary. Secretary of State Tillerson also refused to rule out supplying nuclear weapons to U.S. allies including Japan and South Korea in order to deter North Korea on a regional basis.

And Trump’s recent comments about North Korea at the U.N. did little to bring U.S. resolve into question. Calling Kim Jong-un “Rocket Man” certainly didn’t ratchet down the rhetoric.

Zhang Liangui, a professor of international strategic research at a major Chinese university, recently expressed his belief that the risk of a U.S. war with North Korea over its nuclear program has significantly increased:

“[North Korea] has already touched the red line of the U.S. and it seems that the U.S. does not have other choices. The possibility of military action is increasing.”

There is no doubt that North Korea and the U.S. are on a collision course and headed for war unless North Korea relents, which seems unlikely, or the U.S. can develop a superior technology to neutralize the North Korean threat.

These threats are existential from a U.S. perspective. Deterrence does not work when the opponent has so little to lose. Kim Jong Un tortures and starves his own people on a good day. At times the North Korean people have been reduced to eating bark from trees.

Why should Kim Jong Un be deterred by U.S. threats to attack if he and his ruling elite are secure in their bomb-proof bunkers?

It’s almost certainly too late for negotiation or diplomacy. That conclusion is based on what is called “breakout” behavior.

It’s one thing to develop these weapons in baby steps and back off when the major powers confront you. Then you negotiate some concessions, wait a few years and break your promises. Wash, rinse and repeat.

That’s what Iran has been doing for 20 years.

Breakout is different. It’s more like football when you’re in the red zone and decide to throw a pass into the end zone. You just go for it.

Kim will not be deterred now. He believes the U.S. is bluffing. He believes he’s safer with nuclear weapons than without them. He’s going for it.

The U.S. only has two choices now.

The first is to do nothing and learn to live with nuclear blackmail from North Korea.

 

The second is to attack, probably in the next three–six months, to destroy the Kim regime and its weapons programs.

Trump will go for the attack option. As he already made clear…

You don’t even need to ask what will happen to gold prices in that scenario. They’ll skyrocket and then much higher from there as the repercussions begin.

The time to acquire physical gold and gold mining stocks if you don’t already have them is now.

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Catalan Leader: “We Have Earned The Right To Form An Independent State”

Though the results of today's referendum have yet to be announced, separatists in Catalonia are urging the government to declare independence from Spain, citing today's violent crackdown as the reason. In a rousing speech following the close of voting, Carles Puigdemont, the leader of the Catalan government, said his citizens have earned the right to form an independent state and that the results of the referendum, to be announced shortly, will be sent to the local parliament for ratification.

Though the central government in Spain declared the refendum illegal, and sent federal Civil Guard and National Police forces to try and suppress the vote in a dramatic crackdown that sent shockwaves around the globe, police only managed to shut down a small sliver of polling stations, allowing many in the region of more than 7 million people which has a larger economy than Portugal, to cast ballots.

In his public remarks, delivered shortly after a speech from Spanish Prime Minister Mariano Rajoy, Puigdemont also said that "with this day of hope and suffering, the citizens of Catalonia have won the right to an independent state in the form a republic." He also said that the EU could no longer “continue to look the other way” from human rights violations around the referendum, according to a translation in the Guardian.

"The Spanish government has today written a shameful page in its relationship with Catalonia," adding that there had been abuses of human rights committed by Spanish police.

Puigdemont added that he will keep his pledge to declare independence unilaterally if the "Yes" side wins. A law passed by the Catalan parliament says a win of more than 50% for the "Yes" side will trigger a declaration of independence within 48 hours of the vote regardless of the turnout. He appealed to European leaders, saying the Catalan crisis was "no longer an internal Spanish matter".

"The Catalan government will transmit to the Catalan Parliament, the seat and expression of the sovereignty of our people, the results of the referendum, so that it can act according to that laid out in the referendum law", he said.

Spain's Constitutional Court suspended the regional law governing the independence referendum, but Puigdemont's government pushed ahead with the vote anyway, as the Associated Press noted. So far, 844 people and 33 police have been injured in the day's demonstrations.

Meanwhile, Barcelona Mayor Ada Colaucalled for Spanish Prime Minister Mariano Rajoy to resign after the shocking brutality that federal police sent by the government in Madrid demonstrated. Police attacked peaceful demonstrators, punched and kicked voters and dragged some from polling places.

Mayor Ada Colau told a local television station that "Rajoy has been a coward, hiding behind the prosecutors and courts. Today he crossed all the red lines with the police actions against normal people, old people, families who were defending their fundamental rights."

"It seems obvious to me that Mariano Rajoy should resign."

Mirroring Puigdemont's comments, Colau said that Catalans had "earned the right to demand" a proper vote on independence from Spain, adding that "the European Union must take a stand on what has happened in Catalonia.

Rajoy in a speech earlier in the evening declared that the referendum was illegitimate, and that no vote had even taken place, eliciting calls for his resignation from local officials. Government officials from across Europe criticized Rajoy for the violent crackdown.

But perhaps the most amusing criticism came from Venezuelan President Nicolas Maduro who on Sunday slammed Rajoy for trying to halt the referendum, saying the conservative leader was a hypocrite for supporting Venezuela’s opposition while cracking down on dissent at home.

“Who is the dictator?” said Maduro at the start of his hours-long Sunday television show. “Mariano Rajoy has chosen blood, sticks, blows, and repression against a noble people. Our hand goes out to the people of Catalonia. Resist, Catalonia! Latin America admires you,” added Maduro.

Spain has been a vocal critic of Maduro's regime, accusing him of undermining Venezuela’s democracy and plunging the country’s 30 million people into the direst poverty because of his government's economic mismanagement. Maduro seized on the images of Spanish riot police bursting into polling stations across Catalonia on Sunday, confiscating ballot boxes and voting papers, as evidence that it is Rajoy who lacks democratic credentials. Venezuela’s opposition responded by accusing Maduro of hypocrisy, saying the Venezuelan leader violently clamped down on four months of protests demanding humanitarian aid, early elections, and respect for the opposition-led Congress.

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Mnuchin Insists “The Rich Won’t Benefit” From Trump’s Tax-Reform Plan

Two days after the nonpartisan Tax Policy Center announced that the White House’s tax reform plan would raise taxes on about 12% of taxpayers, Treasury Secretary Steven Mnuchin took to the Sunday talk shows to defend the Trump tax plan, which was unveiled Wednesday in a nine-page document.

And in characteristic Trump Administration fashion, In an appearance on “This Week” with George Stephanopoulos, Mnuchin repeatedly countered questions about the plan's impact on Trump's tax rate, or if it would raise taxes on middle-class Americans to fund large cuts for the rich, by noting that the details of the legislation had not yet been worked out, before prommising that all of Stephanopoulos's complaints would be rectified when the bill is written in committee.

During the interview, Stephanopoulos pressed Mnuchin about research showing that 80% of the financial benefits from the plan would accrue to the top 1%, and other details of the TPC’s analysis – including claims that Trump and his family would benefit financially from the repeal of the estate tax, the repeal of the AMT, and cuts to the pass-through rate, among other provisions.

Earlier in the week, NEC Chief Gary Cohn raised hackles among Trump critics by saying he couldn't guarantee that the bill wouldn't raise taxes on some members of the middle class.

With President Trump unwilling to release his tax returns, how will the American people ever know whether or not Trump benefits from his own tax plan? Stephanopoulos asked, before bringing up the president’s promise during a speech introducing the plan in Indiana earlier this week that he wouldn’t benefit from the plan.

Mnuchin responded that he was certain the president would provide whatever information necessary to prove that he wouldn’t benefit.

“It’s very important that we have guardrails around those rules. This isn’t about creating a tax cut for the rich. We’re going to make sure that that’s not a way for the rich to pay lower taxes than they should, whether it’s the president or anyone else.”

When pressed about the plan’s lowering of the top tax brackets, Mnuchin responded that these changes would be more than offset by eliminating deductions.

“Changes in the top bracket are offset with elimination of almost every type of deduction other than charitable giving and the mortgage interest deduction. This has impacted different people in different states but again we will go through all the details as we go through the congressional process in the House and the Senate. Like I said, this is about creating jobs. A huge percentage of the businesses in the country are pass-throughs.”

When pressed again about how Trump would verify that he wouldn’t benefit, Mnuchin again insisted that Trump would provide total transparency.

“The American public will be comfortable with the information they have. We’re going to make sure there’s the proper rules and full transparency as we go through the legislative process to make sure that rich people can’t benefit from it.”

Moving on, Stephanopoulos brought up the TPC’s analysis showing that 60% of Americans making $150,000 and $300,000 would pay higher taxes thanks to provisions like the repeal of the state and local tax deductions. About 3 million people in New York will see taxes rise because of the elimination of the SALT deduction, Stephanopoulos said.

Mnuchin said that he’s sympathetic, but at the same time, the plan eliminates what he characterized as federal subsidies for the states with high property values – a creative interpretation of the SALT deduction.

“I’m sympathetic to people in New York and California…but I don’t think it’s fair that other states are subsidizing New Yorkers and California.

We’re trying to create certain adjustments so the middle class in New York and California don’t get hit hard by this, but there are issues, like you’ve said, when we change a system, when we eliminate the subsidies in certain states, we face certain issues.”

Mnuchin then insisted that it’s the administration’s goal to lower taxes on everybody – an outcome that would presumably rule out the notion of making the cuts even close to deficit neutral.

“No, it is our objective that the entire middle class does get a tax cut but that’s something we’re working on the details.”

 

That’s our objective. That’s what we’re working toward.”

But would the president veto a bill if it has some middle-class tax increases in it?

“The president is setting any criteria up front about what he is going to veto or not going to veto. What he is doing is working with Congress…it’s been over 30 years since we’ve had tax reform. We have a broken system…we’ve got to make a system that works for all Americans and all American businesses.”

We’ve already seen Sen. Bob Corker say he’s not going to vote for any tax bill that widens the deficit, Stephanopoulos noted. How will the administration’s reform bill win over deficit hawks like Corker?

Mnuchin repeated the administration’s line that a combination of eliminating deductions and an expected acceleration in GDP growth would help close the gap, eventually leading to smaller deficits.  

“I’ve had the opportunity to meet with Senator Corker and others and walk them through the math. Here’s the math, George so you understand it. Our plan on a static basis will increase the deficit by a trillion and a half dollars. That will be offset by a half a trillion dollars difference between what we call the baseline in policy which is rolled over, so that’s addressed down to a trillion, and we believe there will be two trillion dollars of additional growth. So, under our plan we believe this will cut the deficit by a trillion dollars and that’s what we’re forecasting. And that’s with a conservative 2.9% annual GDP increase.”

Based on what we already know about the proposed Trump tax reform, which can be summarized as follows:

  • collapse the seven individual income tax rates to three (12, 25, and 35 percent),
  • increase the standard deduction,
  • eliminate personal exemptions,
  • increase the child tax credit,
  • eliminate most itemized deductions,
  • repeal the individual and corporate alternative minimum taxes,
  • repeal the estate tax,
  • reduce the corporate tax rate from 35 to 20 percent, tax pass-through business income at a top rate of 25 percent,
  • allow businesses to fully expense investment in equipment and machinery for at least five years,
  • adopt a territorial tax system that would exempt the foreign earnings of US corporations from US tax

The TPC’s analysis showed the Trump plan will cost $2.4 trillion over the first decade and $3.2 trillion over the second decade, on a static basis.

While many Americans will benefit, the biggest gains will go to the 1%, whose after-tax income would increase by over 8%.

Fast forward to 2027, when the overall average tax cut would be smaller than in 2018, increasing after-tax incomes 1.7 percent. Taxpayer groups in the bottom 80 percent of the income distribution—those making less than about $150,000—would receive average tax cuts of 0.5% or less of after-tax income. However, taxpayers making between about $150,000 and $300,000 would on average pay about $800 more in taxes than under current law. Meanwhile, about 80% of the total benefit would accrue to taxpayers in the top 1 percent, whose after-tax income would increase 8.7 percent.

And by 2027, taxes would rise for roughly one-quarter of taxpayers, including nearly 30% of those with incomes between about $50,000 and $150,000 and 60 percent of those making between about $150,000 and $300,000.

But like Mnuchin has insisted, we’re sure the administration will work all of this out in committee.
 

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Chris Whalen On The CDO-Redux & Inevitable “Catastrophic Systemic Risk Event”

Authored by Chris Whalen via The Institutional Risk Analyst,

“The great wheel of circulation is altogether different from the goods which are circulated by means of it. The revenue of the society consists altogether in those goods, and not in the wheel which circulates them”

 

Adam Smith, 1811

This week in The Institutional Risk Analyst, we return to one of our favorite topics – namely credit spreads – as we consider the most recent statement from the Federal Open Market Committee.  Fed Chair Janet Yellen made a presentation last week to the National Association of Business Economists illustrating that while she is puzzled by low inflation, Yellen is entirely clueless as to the workings of the financial markets

For some time now, we have been concerned that the FOMC’s overt manipulation of credit spreads has embedded future credit losses on the balance sheets of US banks.  But now we are starting to see even greater signs of stress as the large Wall Street banks again return to derivatives in order to manufacture the appearance of profitability.

The leader of this effort is none other than Citigroup (NYSE:C), which has surpassed JPMorganChase (NYSE:JPM) to become the largest derivatives shop in the world.  Citi has embraced the most notorious product of the roaring 2000s, the synthetic collateralized debt obligation or “CDO” security, a product that fraudulently leverages the real world and literally caused the bank to fail a decade ago.

It’s an astonishing comeback for the roughly $70 billion market for synthetic CDOs, which rose to infamy during the crisis and then faded into obscurity after nearly destroying the financial system,” reports Bloomberg.

 

“But perhaps the most surprising twist is Citigroup itself. Less than a decade ago, the bank was forced into a taxpayer bailout after suffering huge losses on similar types of securities tied to mortgages.  

 

Now, many in the industry say Citigroup is responsible for over half the deals that come to market, though precise numbers are hard to come by.

As we note in a new working paper appropriately entitled “Good Banks, Bad Banks,” large financial institutions are not particularly profitable.  In times of tight credit spreads, the pressure on these banks to “cheat” when it comes to risk taking and disclosure becomes irresistible.

The dilemma large banks face when credit spreads are very low is similar to retailers that cannot compete, for example, with the efficiency of Amazon (NASDAQ:AMZN).  Low cost competitors compel other retailers to match prices, even if that forces them to lose money on each sale.  Trying to “make up” the loss by increasing sale volume is the obvious path to retailer insolvency.

In banking, high spreads eventually force borrowers to default and must be cured before the economy fails.  Low spreads force banks to “match or lose customers” by cutting prices.  When a “matching” bank’s costs are greater than the spread borrowers pay, the correct result is to shrink the number of deals done, eventually causing spreads to rise.  But that’s disastrous for bank managers.  As in retail, therefore, the initial reaction of bank managers is to make up for the “low yield” on each transaction by writing more deals.

As long as government is willing to “insure” deposits of banks that speculate in this manner, it creates an obvious condition of “heads managers win” and “tails shareholders and taxpayers lose.” The most obvious use for a “synthetic CDO” is to generate a lot of fictional (“synthetic”) transactions that increase the bank’s “deal flow” without need to find actual customers that want “real” loans.

Bad banks generate a capacity to make up for the low yield on each “real” transaction by creating “synthetic” transactions.  Synthetic derivatives are an obvious source for permitting fraud that necessarily harms the perpetrating bank and, ultimately, the markets as a whole.

“Bottom line,” notes our colleague Fred Feldkamp, “it is ‘impossible’ to convert ABS securities into a ‘risk free’ 20% return.  As Goldman Sachs (NYSE:GS) proved in 1970 with bankrupt Penn Central's commercial paper, one cannot sell bad assets to customers that you want to keep.”

Feldkamp observes that for a while now credit spreads have been too low for rational credit expansion.  Banks are now forced to create and hide leverage off balance sheet (e. g. new "synthetic CDO" frauds and leveraged buyouts (LBOs) with outrageously high EBITDA ratios) in order to generate returns sufficient to pay employees when that is not available in the spreads associated with well-balanced bond sales.  Again Feldkamp:

“When I do my spread charts, I consider the upper and lower limits to define Adam Smith's concept of a ‘Complete Market.’  Above that range of spread, there is a cushion between equilibrium and a ‘crisis zone’ because experience tells me that the ‘drag’ of high spreads can be tolerated for a while as leaders ponder what to fix.  Affected firms refinance when spreads fall.”

He continues:

“BELOW that equilibrium, however, I think there's only ‘irrational exuberance’ because (as Smith noted) ‘the Great Wheel of Circulation’ lacks the ‘grease’ of adequate net-interest margin (NIM) needed to keep it rolling and starts to wear out. 

 

The damage starts immediately and only the extent of the necessary ultimate repair is debatable. When banks die over dumb deals, we have no choice except to rescue depositors–thus it becomes ‘HEADS I WIN; TAILS TAXPAYERS LOSE’ at US-insured banks.”

Feldkamp reminds us that had regulators stopped the losses generated by thrifts in the 1980s after Congress passed  the ill-fated 1982 Garn-St Germain law, the cost might have been contained at a hundred billion.

“By waiting seven years, however, we were just a few years away from creating a Weimar Republic collapse.  Having enjoyed an eight year recovery today, the US markets are now FAR more leveraged and are therefore far more capable of a rapid descent into oblivion than 30 years ago.

We do not need to look back 30 years, however.  Synthetic CDOs were a key source for the excessive and unreported “off balance sheet” leverage at Citigroup that exploded to create the Great Financial Crisis of 2008.  Starting mid-September of  2007, the Fed successfully led markets back from a “mini-crisis” that began when Bear Stearns followed the path Goldman Sachs chose decades before when Penn Central went bankrupt.  Bear abandoned support for two mortgage investment funds into which it had invested customers’ money.

In mid-October, US Treasury Secretary Hank Paulson announced an intent to create a “Super SIV” (to be backed by the US government) that would “rescue” Citi from losses suffered in off balance sheet ”commercial paper conduits” that Citibank supported with standby liquidity facilities. Thankfully Hank’s ill-considered proposal never materialized.  His announcement kicked off the Great Financial Crisis (that peaked thirteen months later).  Within days, credit spreads for US corporate bonds leaped from “euphoric” lows to “crisis zone” highs.  Credit markets required more than three years to regain spread levels observed before Paulson’s October 2007 announcement.  

To get a sense of just how tight lending spreads are for the major banks, the tables below shows the gross loan spread, and the percentage of loans and total assets, for each loan type at Citi and JPM.

Source: FDIC/Total Bank Solutions

The table above illustrates the great dependence of Citi on its credit card portfolio when it comes to yield, while more that half of its loan portfolio is generating less than 3% gross yields.  Citi is clearly the weaker competitor compared to JPM.  And as we noted last week, Citi’s dependence on offshore institutional funding sources gives it a cost of funds almost 2x JPM and other large banks.

The moral of the story with Citi and other large banks is that there is no free lunch, but sadly no one on the FOMC seems to appreciate this subtlety. 

When the Fed pushes down interest rates and then manipulates credit spreads to achieve some illusory goal in terms of monetary policy, the result is a change in the behavior of investors and lenders that is profound.

The fact that Citi, JPM and GS are now pushing back into the dangerous world of off-balance sheet (OBS) derivatives just illustrates the fact that the large banks cannot survive without cheating customers, creditors and shareholders.

And just as retailers cannot compete with AMZN, Citi and GS certainly cannot compete against the monopoly power of the House of Morgan.

In the case both of Citi and JPM, just half of the banks’ operating business comes from lending, while the remainder comes from risk bearing investments and trading.  With some $50 trillion in off-balance sheet (OBS) derivatives, which is almost six standard deviations above the $1.8 trillion peer average for large banks, Citi and JPM are now the outliers on Wall Street in terms of derivatives exposure. A move of 30bp in the OBS derivatives book of either bank would wipe out their capital.  The chart below shows the OBS derivatives exposure of Citi, JPM, GS and the other major banks.

Source: FDIC/Total Bank Solutions

Notice that all three of the leading derivatives dealers have been increasing exposures since last year.  Note too that the relatively small GS has a notional OBS derivatives book of more than $41 trillion, almost as large as that of Citi and JPM.  More alarming, a move of just 7bp in the smaller bank’s OBS derivatives exposures would wipe out the capital of Goldman’s subsidiary bank. This gives GS an effective leverage ratio vs its notional OBS derivatives exposures of 8,800 to 1.  And all three banks are clearly outliers compared to the rest of the large US banks, which generally eschew OBS derivatives as the tiny peer average suggests.

So ask not whether President Donald Trump should reappoint Janet Yellen to another term as Fed Chair.  Rather, ask yourself why Yellen wants to stick around Washington at all given the accumulation of risk inside the major US banks as a result of the FOMC’s manipulation of credit spreads.  The combination of a lack of profitability and a huge derivatives book makes another financial collapse increasingly likely despite the apparent solidity of the US banking system.

As with the S&Ls in the 1980s, Yellen and other regulators have an opportunity to throttle-back risk taking by Citi, JPM and GS now and avoid a calamity.  But Buy Side investors would never tolerate such a move by regulators. 

As we note in "Good Banks, Bad Banks," larger institutions suffer from a fatal lack of profitability that ultimately dooms them to commit fraud and, eventually, suffer a catastrophic systemic risk event.  As Fred Feldkamp never tires of reminding us: "The only thing worse than “excessive” leverage is 'excessive off balance sheet' leverage."

 

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BUSTED: Librarian Who Rejected Melania’s ‘Racist’ Dr. Seuss Gift Outed As Total Hypocrite

Content originally published at iBankCoin.com

A snarky elitist librarian from Cambridge, Mass. responded to First Lady Melania Trump’s gift of Dr. Seuss books with a condescending screed about how Dr. Seuss is racist – recommending Mrs. Trump should instead gift the (racist) books to underprivileged children.

Liz Phipps Soeiro turned down the collection of nearly a dozen books, telling the First Lady that her elementary school was ‘award-winning’ and ‘well-funded,’ before adding ‘You may not be aware of this, but Dr Seuss is a bit of a cliché, a tired and worn ambassador for children’s literature. 

‘Another fact that many people are unaware of is that Dr Seuss’s illustrations are steeped in racist propaganda, caricatures, and harmful stereotypes.


‘Open one of his books (If I Ran a Zoo or And to Think That I Saw it On Mulberry Street, for example), and you’ll see the racist mockery in his art.’

Oh no she didn’t…

Within hours of Soeiro’s statements, internet sleuths dug up photos of the rabid liberal educator decked out as the Cat in the Hat in 2015 to celebrate Dr. Seuss’ birthday, leading some to speculate it’s the reason she deleted her Twitter account, @reflectlibrary.

 

 

Melania responds

In response to Soeiro’s rejection and letter, Melania Trump said the librarian’s response was ‘unfortunate,’ adding that she wanted to use her platform ‘to help as many children as she can.’

‘To turn the gesture of sending young students some books into something divisive is unfortunate.’ –First lady Melania Trump’s office

Racist Michelle Obama

People were also quick to point out that first lady Michelle Obama has read the ‘racist’ books to children for years.

 

Last but not least – looks like professor hypocrite is also the creator of an anti-Trump t-shirt which says “Read Write Resist,” who says she designed the shirt “in response to our current political climate as a reminder of the power of information and the power of the people.”

 

 

Goodnight alt retard.

 

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