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Al Giordano

Opening Statement, April 18, 2000
¡Bienvenidos en Español!
Bem Vindos em Português!

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Dillon, Read & Co. Inc. and the Aristocracy of Prison Profits: Part III

Graft Makes HUD Under George H.W. Bush “A Sewer”; also, as Dillon Read Goes Into Business with Cornell Corrections, the Prison Contractor’s Dirty Secrets Begin to Come to Light

By Catherine Austin Fitts
A Six-Part Series for The Narco News Bulletin

March 3, 2006

This is Part III of Catherine Austin Fitts’ six-part series on the hidden system of money laundering, drug trafficking and rigged stock market riches inside the financial world, government agencies and their private contractors. To read the introduction and Part I of this series, with a table of contents linking to other installments, click here.

“HUD is a Sewer”

From the New York Times: “C. Austin Fitts, Assistant Housing Secretary, conferring with assistants during a break in her testimony before a Senate subcommittee. She was seeking higher limits on Government -backed loans. From left, Russ Davis, Peter Monroe, and Steve Britt.”
The New York Times / Andrea Mohin
As Assistant Secretary for Housing-Federal Housing Commissioner, I was responsible for the operations of the Federal Housing Administration (FHA), which was the largest mortgage insurance fund in the world. FHA at that time had annual originations of $50-100 billion of mortgage insurance and an outstanding portfolio of $320 billion of mortgage insurance, mortgages and properties. Leading the FHA necessitated significant understanding of how homes are built, how mortgages finance thousands of communities throughout America and how investors finance the process by buying securities in pools of mortgages. My responsibilities included the production and management of assisted private housing; management of an organization of 7,000 employees in 80 offices nationwide; and development of network information systems and tools. In addition, I served as advisor to the Secretary of HUD on financial markets regulatory responsibilities, including the RTC Oversight Board, Federal Housing Finance Board and Home Loan Bank Board System, Fannie Mae and Freddie Mac.

When I told Nick Brady in 1989 that I was going to work at HUD, he said, “You can’t go to HUD — HUD is a sewer.” While my experience as Assistant Secretary cleaning up significant mortgage fraud that lost the government billions during the 1980s confirmed that HUD’s financial reputation was deserved, leading the FHA provided invaluable insight into how government management of the economy one neighborhood at a time really harms communities. Hence, access to the “real deal” on real estate and the mortgage markets was an opportunity. If you want to see the real economy in a place, you absolutely want an accurate map of the financial flows in that system — starting with the land and real estate. My favorite description of HUD was to come many years later from staff to the Chairman of the Senate HUD appropriation subcommittee — Senator Kit Bond. When asked what was going on at HUD, the Congressional staffer said, “HUD is being run as a criminal enterprise.”[1]

Catherine Austin Fitts being sworn in as Assistant Secretary of Housing in April 1989 by Jack Kemp, the Secretary of HUD. Catherine’s childhood friend, Georgie LaRue, is holding the Bible.
Photo courtesy Catherine Austin Fitts
Shortly after arriving at HUD in April 1989, I began to learn about the FHA Coinsurance program. Since 1984, HUD/FHA had allowed private mortgage bankers to issue federal credit to guarantee multi-family apartment projects. After issuing $9 billion in mortgage guarantees, HUD/FHA was to lose something approaching 50% of the value of the portfolio — a level of losses hard to explain with mortal logic. When my staff approached me with a proposal to bail out a mortgage company so they could continue to lose money for us, I asked why we should spend money to lose more money in a way that would harm communities. After a long silence during which 30 staff members intently studied their feet, one brave soul explained to me that the mortgage bank was owned and run by a major Republican donor. Shocked, I said. “I am a major Republican donor,” and pointing to my presidential cufflinks that were adorning my French cuffs, “I got a pair of cuff links. You get cuff links. You don’t get $400 million of federal credit to throw down the drain.” My staff looked at me like I was so naïve and clueless that there was no point in trying to communicate with me — better to let me learn the hard way.

George H.W. Bush and Catherine Austin Fitts, raising money for the Bush campaign in 1988 — Catherine got a pair of Presidential cuff links.
Photo courtesy Catherine Austin Fitts
Within minutes, a screaming Jack Kemp, furious that I had not provided illegal subsidy to keep the mortgage banking company going (despite his orders to stop anything corrupt or illegal), called me on the carpet.[2] After many dirty tricks and much ranting and raving, HUD was to turn the defaulted portfolio over to a private contractor named Ervin & Associates, a newly created company founded by John Ervin, a former employee of Harvard’s HUD property management company, NHP.

In the process of cleaning up the coinsurance portfolio, I got a chance to learn more about some of the tax-exempt housing bond deals that involved FHA mortgage insurance. Examples of these deals were those done through one of the Connecticut state housing authorities by a Dillon Read banker, Jewelle Bickford, during the 1980s. Bickford had a lot of support from two of the largest future Dillon Read investors in Cornell Corrections — Ken Schmidt and Birkelund — which was hard for me to fathom. Bickford was one for shortcuts and what sounded to me like more than little white lies. Schmidt shared an intelligence background with Birkelund. He served with Air Force Intelligence early in his career as Birkelund had served in the Office of Naval Intelligence (ONI). When I later realized the role of the intelligence agencies in the HUD portfolio their comfort with HUD deals in Connecticut with high default rates seemed somehow more logical.

After Bickford’s housing bonds were embroiled in the coinsurance crash and burn, Jewelle somehow managed to get promoted up — landing at Birkelund’s old firm, Rothschild Inc. Which always made me wonder exactly whose bank accounts ended up with the $4 billion emptied out of the FHA mutual funds at HUD as a result of coinsurance, not to mention the billions more lost in the single family FHA programs. Over $2 billion was lost by FHA/HUD in the Texas region in fiscal 1989 alone. The Texas region had included Arkansas, where the state agency, ADFA was so bad they had been disqualified at one point according to the HUD Fort Worth regional leadership. It was this state agency which was alleged to have laundered the local profit share of the arms and drug trafficking channeled through Mena, Arkansas.

For comparisons sake, $4 billion is about the amount of money that would buy you a controlling lead position in taking over one of the world’s premiere money laundering networks. When KKR raised the war chest in 1987 that gave them the wherewithal to bid and win RJR Nabisco, it amounted to $5.6 billion.

Money is like the Pillsbury Doughboy. When you squeeze down on one part, it pops up someplace else.

Wall Street Lessons: Dillon Read’s James Forrestal

James Forrestal’s oil portrait always hung prominently in one of the private Dillon Read dining rooms for the eleven years that I worked at the firm. Forrestal, a highly regarded Dillon partner and President of the firm, had gone to Washington, D.C. in 1940 to lead the Navy during WWII and then played a critical role in creating the National Security Act of 1947. He then became Secretary of War (later termed Secretary of Defense) in September 1947 and served until March 28, 1949. Given the central banking-warfare investment model that rules our planet, it was appropriate that Dillon partners at various times lead both the Treasury Department and the Defense Department.

James Forrestal, President of Dillon Read & Secretary of Navy and Secretary of War
Photo: Wikipedia
Shortly after resigning from government, Forrestal died falling out of a window of the Bethesda Naval Hospital outside of Washington, D.C. on May 22, 1949. There is some controversy around the official explanation of his death — ruled a suicide. Some insist he had a nervous breakdown. Others say that he argued for transparency and accountability in government, and against the provisions instituted at this time to create a secrete “black budget.”[3] He lost and was pretty upset about it — and the loss was a violent one. Since the professional killers who operate inside the Washington beltway have numerous techniques to get perfectly sane people to kill themselves, I am not sure it makes a big difference.

Approximately a month later, the CIA Act of 1949 was passed. The Act created the CIA and endowed it with the statutory authority that became one of the chief components of financing the “black” budget — the power to claw monies from other agencies for the benefit of secretly funding the intelligence communities and their corporate contractors. This was to turn out to be a devastating development for the forces of transparency, without which there can be no rule of law, free markets or democracy.

I studied Forrestal’s oil painting with his solemn stare during many a private lunch — each time reminded that government service was an important duty and honor in the Dillon tradition but it was a dangerous business. Congressional Committees had roughed up Clarence Dillon. Forestall had died. Douglas Dillon was Secretary of the Treasury when Kennedy was assassinated.

Because I wanted to understand how the world really worked, I listened carefully. Over years of private lunches and dinners and conversations I watched and listened to hundreds of lessons on how to be careful — the tricks of predator evasion in Wall Street and Washington. In the midst of many knowledgeable teachers, Forrestal’s leadership was a guiding light that was to serve me well in the years ahead.

Wall Street Lessons: The Power of the People

Another thing I learned on Wall Street is the extent to which those who appear to have little material power can have significant power when they organize to do so. My rise to partnership at Dillon Read was fueled by a steady stream of intelligence from loyal secretaries, print shop personnel, drivers and staff whose generosity, street smarts and hard work was a constant reminder that the rise to Wall Street’s board rooms was not necessarily based on performance as opposed to privilege. One of the greatest challenges as an associate at Dillon Read was knowing where to invest our time when multiple partners were pressing us to give priorities to their projects. Hence, a heads up from someone’s secretary that they were trashing me in the year-end reviews was insider intelligence worth its weight in gold. Giving first priority to those who supported us in year-end reviews and compensation could be the difference between failure and success.

Right after I became a partner, I got a call from a personnel department director who was looking for a new secretary for me. The person who called said they were interviewing someone who has been with a Canadian Broadcasting office in New York for seventeen years. This was her first interview since they shut the office down. She was absolutely excellent and if we wanted to recruit her we needed to make her an offer right away. The personnel director said, “The only problem is that she is Jamaican (of African descent), but she is very light skinned.” I was stunned and said something to the effect of “Who cares?” The personnel person said, “If I sent a black person to be interviewed with most of the partners in this firm, I would be fired.” And so I hired Pat Phillips to work for me and was the beneficiary of her extraordinarily overqualified talent until her death twelve years later, by which time she was a Hamilton shareholder and Secretary of our board.

Many years later, after I had started my own investment bank in Washington, D.C., I got a call from a driver at one of the car services that we used to use when I was at Dillon. He said, “Are you doing a deal with Ken Schmidt?” I explained that, yes, I had proposed working together on a fairly large complex transaction. It would take a lot of work but if successful would be great business for both firms. The driver said, “He was in the car last night. He was bragging about how he was going to screw you. Here is what he is going to do.” This was the same Ken Schmidt who had confessed the Dillon partners conversations with my ex-husband. Ken was still blubbering indiscretely about his bad deeds. And so the driver saved me from my mistake of attempting to partner with my old firm.

Dillon’s Investment in Cornell

On February 21, 1991, after I had left the Bush Administration and remained in Washington D.C. to invest in my own start up, Hamilton Securities, Dillon Read’s Venture group invested in Cornell Corrections — essentially bankrolling the creation of quite a different startup in the newly emerging private prison industry. Cornell was founded with David M. Cornell, who was Operations Manager — Special Projects of Bechtel and Chief Financial Officer of its subsidiary Becon Construction from 1983-1990.[4] Cornell Corrections was created to take advantage of plans to privatize the government’s prison operations. The War on Drugs and its related mandatory sentencing were fueling an explosion in the U.S. prison population. The construction and management of new prison facilities was potentially big business for the construction industry — firms like Brown & Root who Cornell used to build their first detention center — and those who financed them — like Dillon Read.

Did Barings, Dillon’s lead investor when it bankrolled Cornell Corrections, have historical ties to the drug trade?
According to a later Harvard case study on Cornell’s facility,[5] David Cornell was pursuing the prison business while at Becon in partnership with Dillon Read — presumably the part of the firm that helps to create and sell the types of local government bonds that finance many prisons. When Becon decided not to pursue the prison business, Cornell decided to leave and start his own private prison company. With Bechtel out of the business, Cornell and Dillon then decided to use Brown & Root to construct the first prison. Brown & Root was a subsidiary of Halliburton, both based in Houston like Cornell Corrections.

According to Cornell’s filings with the SEC and other corporate reports, Dillon used funds from three of its venture funds, Concord, Concord II and Concord Japan to make these initial investments. Dillon Read’s April 1997 SEC filing described Concord and Concord II as limited partnerships organized under the laws of New York and Delaware.

Yoh Kurosaw, Chairman of the Industrial Bank of Japan, seen here at the Harvard Dinner at Davos, Switzerland was a director of Concord Japan, a Dillon venture Fund that invested in Cornell Corrections
Photo courtesy Harvard Business School
To understand Dillon’s investments in Cornell it is essential to understand who governed Dillon Read, who at Dillon invested personally as well as who at Dillon along with outside directors helped to govern the Dillon venture funds that invested in Cornell. These are the people who are responsible for the investment decisions and who would have benefited in various forms.

As provided in Dillon’s Cornell SEC filings, Dillon, Read Holding Inc.,[6] Dillon, Read Inc.[7] and Dillon, Read & Co. Inc.[8] listed their officers and directors as including John P. Birkelund, David W. Niemiec, Franklin W. Hobbs, IV, Francois de Saint Phalle as well as senior leadership from Barings, the British bank that was now an investor in Dillon and ING, the Dutch financial conglomerate that acquired Barings when it failed in 1995.[9]

The presence of Barings in Dillon’s governance structure is noteworthy. Barings, the oldest merchant bank in England and said to be a financial leader in the 1800s China opium trade, collapsed in February 1995 as a result of a trading scandal in Asia and was taken over by ING. Barings became the lead outside investor in Dillon Read in late 1991, when they effectively financed Dillon’s management buying out Travelers. This was the same year that Dillon bankrolled Cornell Corrections. Barings’ difficulties in 1995 may have increased the pressure on Dillon to generate revenues, particularly before it was sold to Swiss Bank Corporation (now part of UBS) in the summer of 1997, changing its name to SBC Warburg Dillon Read.

Peter A. Liedel, a Dillon Senior Vice President joined the board of Cornell and had a Cornell facility contracted by the Federal Bureau of Prisons in Houston in 1996 named after him.
Photo courtesy Willbros Group, Inc.
In the April 1997 Dillon Cornell SEC filing, the Concord Japan venture fund invested in Cornell is described as a corporation organized under the laws of the Bahamas, whose principal office and business address was c/o Roy West Trust Corporation, (Bahamas) Limited, West Bay Street, Nassau, Bahamas. Hence, Concord and Concord II were “onshore” funds and Concord Japan was an “offshore” fund. The officers and directors of Concord Japan include representatives of some of the largest most prestigious Japanese corporations as well as Amerex SA which listed its address as the Coutts Bank office in the Bahamas. Coutts is considered one of the most prestigious private banks in the world.[10]

In May 1991, Dillon invested additional funds from one of the Lexington Funds.[11] The Lexington Funds were created to invest money for Dillon officers and directors. Dillon then made additional investments with these various funds in September and November 1991. By the time of Cornell’s initial public offering of stock in October 1996, Dillon Read and the funds it managed and its officers and directors had accumulated approximately 44% of the outstanding common stock. This meant that they were the controlling shareholders.

Along the way, Dillon officers and directors had personally purchased significant shares of Cornell stock. Investors included Chairman John Birkelund, Vice Chairman Dave Niemiec who signed many of the documents on behalf of Dillon and Lexington, President and CEO Franklin “Fritz” W. Hobbs, IV as well as numerous other senior partners, including Ken Schmidt. Dillon officer Peter A. Liedel, who signed on behalf of Concord, had joined the board of Cornell. Cornell named one of its facilities after him — the Liedel Community Correctional Center, a pre-release facility in Houston.

Seven Largest Dillon Holders of Personal Positions in Cornell:

John P. Birkelund39,5793,736$96,990.16
John H. F. Haskell, Jr.36,7303,505$85,382.75
David W. Niemiec35,0183,270$76,989.51
Franklin W. Hobbs, Iv30,4552,803$56,986.04
Peter Flanigan28,1782,687$48,781.40
George A. Wiegers28,1762,571$44,988.85
Kenneth M. Schmidt24,7782,454$35,622.38

Source: Cornell Corrections, Inc. April 1997 13-D Filing by Dillon Read.

Note: For the full list of 32 Dillon officers with personal positions, see footnote #12.[12]

Total Estimated Dillon Investment in Cornell Corrections Stock : [12.1]

Concord (Est.)$630,000
Concord II$2,120,459.83
Concord Japan$338,734.26
Lexington III$70,000.65
Lexington IV$9,541.14
Dillon Read Officers and Directors$652,999.99
TOTAL (Est.) $3,821,736

Source: Cornell Corrections, Inc. October 1996 Prospectus and April 1997 13-D Filing by Dillon Read.

Dillon’s investments in Cornell represent an extraordinary firm-wide commitment to starting up one company. This was not a common occurence, but as we will see, this was not the first time that Dillon Read had backed a Houston business involved in privitization in an extraordinary way. The decision for an officer and director to buy shares would have been an individual decision — whether they used their own funds or if the firm helped arrange credit or other funds for them to finance their purchases. Hence, this meant that a significant number of Dillon’s leadership decided that investing was something they actively wanted to do and for which they chose to be financially and ethically liable. One can only wonder what the Dillon leadership had been led to believe about the future of the private prison business, let alone what it implied about the future of the country.

Cornell Corrections

Based on company SEC filings, Houston-based Cornell Corrections started off with correctional facilities in Massachusetts and Rhode Island in 1991 and then in 1994 acquired Eclectic Communications, the operator of 11 pre-release facilities in California with an aggregate design capacity of 979 beds. An important relationship for Cornell from the start was the U.S. Marshals Service, an agency of DOJ, who was Cornell’s primary client for its Donald W. Wyatt Federal Detention Facility in Central Falls, Rhode Island, a facility with a capacity of 302 beds.

The U.S. Marshals Service is the oldest U.S. enforcement agency. Among other duties, the U.S. Marshals Service houses and transports prisoners prior to sentencing and provides protection for the federal court system. According to the Marshals Service’s website, they are also:

“Responsible for managing and disposing seized and forfeited properties acquired by criminals through illegal activities. Under the auspices of the Department of Justice Asset Forfeiture Program, the Marshals Service currently manages more than $964 million worth of property, and it promptly disposes of assets seized by all DOJ agencies. The goal of the program is to maximize the net return from seized property and then to use the property and proceeds for law enforcement purposes.”

An article by Jeff Gerth and Stephen Labaton in the New York Times in November 1995, “Prisons for Profit: A Special Report; Jail Business Shows Its Weaknesses” describes the problems that Cornell ran into with its Rhode Island facility. This facility had been financed with municipal bonds issued through the Rhode Island Port Authority in the summer of 1992 and underwritten by Dillon Read. The article states:

“Two years ago, the owners of the red cinder-block prison in this poor mill town threw a lavish party to celebrate the prison’s opening and show off its computer monitoring system, its modern cells holding 300 beds and a newly hired cadre of guards.

“But one important element was in short supply: Federal prisoners.

“It was more than an embarrassing detail. The new prison, the Donald W. Wyatt Detention Facility, is run by a private company and financed by investors. The Federal Government had agreed to pay the prison $83 a day for each prisoner it housed. Without a full complement of inmates, it could not hope to survive.

“So the prison’s financial backers began a sweeping lobbying effort to divert inmates from other institutions. Rhode Island’s political leaders pressed Vice President Al Gore while he was visiting the state as well as top officials at the Justice Department to send more prisoners. Facing angry bondholders and insolvency, the company, Cornell Corrections, also turned to a lawyer who was then brokering prisoners for privately run institutions in search of inmates.

“The lawyer, Richard Crane, has done legal work for private corrections companies and Government penal agencies. He put the Wyatt managers in touch with North Carolina officials. Soon afterward, 232 prisoners were moved to Rhode Island from North Carolina, and Mr. Crane was paid an undisclosed sum by Cornell Corrections.”

The Donald W. Wyatt Facility in Rhode Island was Cornell’s first facility, constructed by Halliburton and financed by Dillon Read with tax-exempt municipal bonds.
Photo courtesy Cornell Companies
Cornell’s Donald C. Wyatt facility later became a case study at the Harvard Design School’s Center for Design Informatics. This was an indication of the wave of business and investment opportunities that prisons and enforcement presented to everyone from architects to construction companies to real estate and tax-exempt bond investors.[13] Harvard’s case study mentions that Cornell arranged for the facility to be constructed by Brown & Root of Houston, Texas, a subsidiary of Halliburton. (Brown & Root is now known as KBR and remains a subsidiary of Halliburton.) Brown & Root/KBR’s construction of prison facilities was to become more visible many years later after its construction of detention facilities at Guantanamo Bay, prisoner of war camps in Iraq and its winning of contracts to build detention centers for the Department of Homeland Security. A request to Cornell for information regarding companies used for prison construction subsequent to the Wyatt facility has been made, but no response has yet been received.

Dillon Read had long standing relationships with Brown & Root and the Houston banking and business leadership as a result of the firm’s historical role in underwriting oil and gas companies, including pipelines. In 1947, Herman and George Brown, the founders and owners of Brown & Root, were part of a group of Texas businessmen banked by Dillon Read as investor and underwriter (in a manner very similar to Dillon’s backing of Houston-based Cornell many years later) to form the Texas Eastern Transmission Co. to buy the “Big Inch” and “Little Big Inch” pipelines in a privitization by the U.S. government.

The Texas Eastern pipelines were critical to bringing natural gas from Texas and the Southwest to Eastern markets. For most Americans, Houston and New York seem far apart. However, the intimacy of their connection is better understood when you study the investment syndicates that controlled the railroad, canals, pipelines and other transportation systems that have connected these markets and helped to determine control of the local retail businesses for both goods and capital along the way. For example, Texas Eastern’s Big Inch pipeline went from east Texas to Linden, New Jersey, some 30 miles away from the Dillon and Brady estates in New Jersey and approximately 20 miles from the Dillon Read offices on Wall Street.

According to investigative journalist Dan Briody in The Halliburton Agenda: The Politics of Oil and Money, the Brown brothers netted $2.7 million in profits on their shares in their initial public offering right after the company was formed and won the bid to buy the pipelines from the government in the late 1940s. That, however, was not the real payoff. According to Briody, Brown & Root subsequently worked on 88 different jobs for Texas Eastern, and generated revenues of $1.3 billion from Texas Eastern between 1947 and 1984. [13.1]

According to Robert Sobel in The Life and Times of Dillon Read, under August Belmont’s personal leadership of the transaction, Dillon Read also made a profit on the Texas Eastern shares. “Nothing is known of Dillon Read’s profits on the underwriting, but it was a sizeable owner of TETCO [Texas Eastern] common, acquired at 14 cents a share, which rose to $9.50.” [13.2] While figures for Dillon Read revenues from underwriting and other investment banking services over the years comparable to Brown & Root’s construction contracts are not available, my recollection was that Dillon continued to maintain a profitable relationship with Texas Eastern when I worked at the firm in the 1980s many decades later. Interestingly enough, Briody also describes in detail the McCarthyist efforts that were made to destroy Federal Power Commission chairman Leland Olds, an honest government official, in the late 1940s because his ethical regulatory decisions threatened the richness of the Texas Eastern profits. The clear implication is that the pattern of generating financial windfalls from government privitizations combined with dirty tricks against honest government officials is nothing new. [13.3]

The closeness of the Brown & Root relationship with Dillon Read is also underscored by Briody’s description of the head of Brown & Root’s frustration with Lyndon Johnson’s decision to serve as John Kennedy’s running mate. He quotes August Belmont, by then a leader of Dillon Read, who was with Brown in Houston in his private hotel suite listening to the radio coverage of Johnson’s announcement. According to Belmont, “Herman Brown….jumped up from his seat and said, ‘Who told him he could do that?’ and ran out of the room.” [13.4]

What Briody does not mention is allegations regarding Brown & Root’s involvement in narcotics trafficking. Former LAPD narcotics investigator Mike Ruppert once described his break up with fiancé Teddy — an agent dealing narcotics and weapons for the CIA while working with Brown & Root — as follows:

“Arriving in New Orleans in early July, 1977 I found her living in an apartment across the river in Gretna. Equipped with scrambler phones, night vision devices and working from sealed communiqués delivered by naval and air force personnel from nearby Belle Chasse Naval Air Station, Teddy was involved in something truly ugly. She was arranging for large quantities of weapons to be loaded onto ships leaving for Iran. At the same time she was working with Mafia associates of New Orleans Mafia boss Carlos Marcello to coordinate the movement of service boats that were bringing large quantities of heroin into the city. The boats arrived at Marcello controlled docks, unmolested by even the New Orleans police she introduced me to, along with divers, military men, former Green Berets and CIA personnel.

“The service boats were retrieving the heroin from oil rigs in the Gulf of Mexico, oil rigs in international waters, oil rigs built and serviced by Brown and Root. The guns that Teddy monitored, apparently Vietnam era surplus AK 47s and M16s, were being loaded onto ships also owned or leased by Brown and Root. And more than once during the eight days I spent in New Orleans I met and ate at restaurants with Brown and Root employees who were boarding those ships and leaving for Iran within days. Once, while leaving a bar and apparently having asked the wrong question, I was shot at in an attempt to scare me off.”[14]

Source: “Halliburton’s Brown and Root is One of the Major Components of the Bush-Cheney Drug Empire” by Michael Ruppert, From the Wilderness

Another important relationship for the Houston-based Cornell Corrections was the California Department of Corrections. Whether this reflected that California was home base for David Cornell’s former employer, Bechtel, is not clear. When Cornell Corrections got started, California had the largest prison population of any U.S. governmental entity. In part due to extraordinary growth in incarcerations of non-violent drug users as a result of the War on Drugs, the federal prison population managed by the Federal Bureau of Prisons at the Department of Justice has become the largest with 186,560 based on their September 8, 2005 weekly update.[15] California is close behind with 168,000 youths and adults incarcerated in California prisons and 116,000 subject to parole.

Cornell’s early years of business were not financially profitable. The private prison industry faced significant resistance and legal and operational challenges to privatizing federal, state and local prison capacity. Within the private prison industry, Cornell faced competition for new contracts and acquisitions from two larger, more experienced companies, CCA and Wackenhut. By 1995, compared to industry leaders, Florida-based Wackenhut and Tennessee based Corrections Corporation of America (CCA), Cornell Corrections appeared to be lagging in government contract growth. As of mid 1996, Cornell was carrying $8 million of cumulative losses on its balance sheet.

Cornell’s Chief Financial Officer, Treasurer and Secretary was Steven W. Logan, who had served as an experienced manager in Arthur Anderson’s Houston office. This was the same office of Arthur Anderson that had served as Enron’s auditor until the Enron bankruptcy brought about the indictment and conviction of Arthur Andersen.[16] Arthur Andersen was Cornell’s auditor, having first served as a consultant to create market studies which helped support the approvals for and financing of the building of the Rhode Island facility for the U.S. Marshals Service. Logan was later forced out of Cornell after an off-balance sheet deal[17]engineered with the help of a former Dillon Read banker Joseph H. Torrence, like those done for Enron was called into question and significant stock value declines triggered litigation from shareholders.

Cornell’s Reported Revenues and Net Income for 1992-1996:

Net Income (Loss).9(.9)(.6)(1.0)(2.4)
Beds in Operation-2821,1551,1352,899
(MM = In millions)

Source: Cornell Corrections, Inc., Selected Consolidated Financial Data, Form 10-K For Fiscal Year Ended 1996

Most venture capital investors prefer to exit their investment within 5 years. That means that Dillon Read would have likely wanted to establish or start their exit from Cornell by 1996. The stock market was hungry for Initial Pubic Offerings (IPOs) where a new company sells its stock to the public for the first time. Venture capitalists typically make their profit from financing a company and then selling their equity when a public market can been established for the company’s stock. However, by the end of 1995, Cornell’s story was not an exciting one. It was not a market leader, its growth was slow and it had no profits. If the calf was going to be taken to market, it would need fattening.

A Note on “Prison Pop”

The “pop” is a word I learned on Wall Street to describe the multiple of income at which a stock is valued by the stock market. So if a stock like Cornell Corrections trades at 15 times its income, that means for every $1 million of net income it makes, its stock goes up $15 million. The company may make $1 million, but its “pop” is $15 million. Folks make money in the stock market from the stock going up. On Wall Street, it’s all about “pop.”

Prison stocks also are valued on a “per bed” basis — which is based on the number of beds provided and the profit per bed. “Per bed” is really a euphemism for people who are sentenced to be housed in their prison.

For example, in 1996, when Cornell went public, based on the financial information provided in the offering document provided to investors, its stock was valued at $24,241 per bed. This means that for every contract Cornell got to house one prisoner, at that time, their stock went up in value by an average of $24,261. According to prevailing business school philosophy, this is the stock market’s current present value of the future flow of profit flows generated through the management of each prisoner. This, for example, is why longer mandatory sentences are worth so much to private prison stocks. A prisoner in jail for twenty years has a twenty-year cash flow associated with his incarceration, as opposed to one with a shorter sentence or one eligible for an early parole.[18] This means that we have created a significant number of private interests — investment firms, banks, attorneys, auditors, architects, construction firms, real estate developers, bankers, academics, investors among them — who have a vested interest in increasing the prison population and keeping people behind bars as long as possible.

When you invest in stock, you make money if and when you sell the stock at a higher price than you paid for it. This would be true for the people who invested in Cornell stock, including Dillon Read and its venture funds. Cornell was run by a board of directors that represented the shareholders, particularly the controlling shareholders — in this case Dillon Read. The board is the group of people who decides what goes. Senior management officials, such as the founder and Chairman David Cornell, who run the company day to day, are also on the board. Most of the money they make comes from stock options that they get to encourage them to get the stock to go up for the investors. That means that what everyone who runs the company wants is for the stock to go up.

There are two ways to make the stock go up. First, you can increase net income by increasing capacity — the number of “beds” — or profitability — “profits per bed.” Second, you can increase the multiple at which the stock trades by increasing the markets’ expectations of how many beds or what your profit per bed will be and by being very accessible to the widest group of investors. So, for example, passing laws regarding mandatory sentencing or other rules that will increase the needs for prison capacity can increase the value of private prison company stock without those companies getting additional contracts or business. The passage of — or anticipation of — a law that will increase the demand for private prisons is a “stock play” in and of itself.

The winner in the global corporate game is the guy who has the most income running through the highest multiple stocks. He is the winning “pop player.” Like the guy who wins at monopoly because he buys up all the properties on the board, he can buy up the other companies. So the private prison company that wins is the one that gets the most contracts that guarantee it the most prisons and prisoners that generate the most income for the longest period with the smallest amount of risk.

The way that Cornell could become a winner quickly was to get lots of government contracts to house lots of prisoners and acquire other companies with government contracts to house lots of prisoners and do it quickly.[19] And that was exactly what happened.

Catherine Austin Fitts is the author of the Narco News series “Narco-Dollars for Beginners: How the Money Works in the Illicit Drug Trade.” She is a former managing director and member of the board of directors of Dillon Read & Co, Inc, a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, and the former president of The Hamilton Securities Group, Inc. She is currenly president of Solari, Inc., an investment advisory firm (in formation) based in Hickory Valley, Tennessee.

Previously in Part II: Narco Dollars in Mena and LA. Also, Catherine leaves Dillon to avoid participating in fraud and is appointed as President Bush’s Assistant Secretary of Housing… only to find massive mortgage fraud in HUD related to Iran-Contra.

Next in Part IV: Prison privatization is expanded under the Clinton administration and its pro-business “progressives,” HUD and businesses close to the government continue to put profits ahead of communities, and thoughts on that companies will go through to protect their public images.


[1] For my documentation as to the HUD systems ability to reject repeated efforts to ensure that its programs were run according to the law, see Personal Experience with FHA-HUD at http://www.solari.com/gideon/fhalist.htm

[2] For a complete history of my experiences working for Jack Kemp at HUD, see The Kemp Tapes.

[3] See The Negative Return on Investment Economy — A Discourse on America’s Black Budget by Chris Sanders and Catherine Austin Fitts

[4] Prior to joining Bechtel, Cornell was President of Tenneco Financial Services from 1981 to 1982. Prior to that time, he served as an Executive Vice President of Philadelphia Life Insurance Co. and President of Philadelphia Life Asset Management Company from 1972-1981.

[5] Harvard Design School Case Study

[6] Executive Officers and Directors of Dillon, Read Holding, Inc. are listed as:

  • John P. Birkelund, Chairman, Director and Managing Director of Dillon Read & Co. Inc.
  • David W. Niemiec, Vice Chairman, Director, Managing Director, Treasurer and Secretary of Dillon Read & Co. Inc.
  • Francois de Saint Phalle, Vice Chairman, Director and Managing Director of Dillon Read & Co. Inc.
  • Franklin W. Hobbs IV, President, Chief Executive Officer, Managing Director of Dillon, Read & Co. Inc.
  • Leendert C. Grijns, Chairman, Internationale Nederlanden Capital Corporation, 135 East 57th St. NY, NY 10022 (Dutch Citizen)
  • Jan Hessel Lindenbergh, Director, ING Bank, The Netherlands (Holland Citizenship)

[7] Executive Officers and Directors listed for Dillon, Read Inc. were Birkelund, Niemiec, Saint Phalle and Hobbs and representatives of Dillon investors ING and Barings.

[8] Executive Officers and Directors of Dillon, Read & Co. Inc. were Birkelund, Niemic, Saint Phalle and Hobbs, Simon A. Borrows, Baring Brothers International Limited, 60 London Wall, London, EC2M 5TQ, Director (UK Citizen) Leendert C. Grijins, Chairman, International Nederlanden (U.S.) Capital Corporation, 135 East 57th Street, NY, NY 10022 (Dutch Citizen) James R.C. Lupton, Executive Director, Baring Brothers International Limited, 60 London Wall, London (UK Citizen) Michael D.G. Ross, Managing Director, Baring Brothers International Limited, (UK Citizen)

Also listed were 52 additional Dillon Read Managing Directors as follows:

  • Barbara Alexander, Director and Managing Director
  • Sharyar Aziz, Director and Managing Director
  • Tamara A. Bush, Director and Managing Director
  • James H. Brandi, Director and Managing Director
  • William S. Brenizer, Director and Managing Director
  • James C. Brennan, Director and Managing Director
  • John G. Brim, Director and Managing Director
  • Michael A. Cilia, Director and Managing Director
  • Frank V. Colombo, Director and Managing Director
  • Kenneth S. Crews, Director and Managing Director (Dallas Office—3950 Trammel Crow Lane, 2001 Ross Avenue, Dallas TX 75201)
  • David M. Dickson, Jr. Director and Managing Director
  • Charles P. Durkin, Jr., Director and Managing Director
  • Blair W. Effron, Director and Managing Director
  • Raul P. Esquivel, Director and Managing Director
  • Peter Flannigan, Director
  • Thomas J. Hartfield, Director and Managing Director
  • John H. F. Haskell, Jr., Director and Managing Director
  • Anthony B. Helfet, Director and Managing Director (San Francisco Office — 555 California Street, Suite 4950, San Francisco, CA 94104)
  • William O. Hiltz, Director and Managing Director
  • Robert H. Hotz, Director and Managing Director
  • James W. Hunt, Director and Managing Director (Dallas Office)
  • Peter H. Imhoff, Director and Managing Director
  • Yerger Johnstone, Director and Managing Director (London Office — 60 London Wall, London EC2M 5TQ) (UK Citizen)
  • Craig A.T. Jones, Director and Managing Director
  • Kenjiro Kawaguchi, Director and Managing Director (Tokyo Office—Imperial Tower, 6th Floor, 1-1-11 Uschisaiwai-cho, Chiyoda-ku, Tokyo, Japan)
  • (Japanese Citizen)
  • Patrick J. Landers, Director and Managing Director
  • Bryan H.Lawrence, Director and Managing Director
  • J. Richard Leaman, III, Director and Managing Director
  • Richard R. Macek, Controller, Director and Managing Director, 120 Wall Street, New York, NY 10005
  • Daniel F. Marciano, Director and Managing Director
  • Cynthia Melcher, Director and Managing Director
  • Richard J. Milligan, Director and Managing Director
  • Richard H. Montague, Director and Managing Director
  • Robert Moulton-Ely, Director and Managing Director
  • John H. Mullin, III, Shade Tree Farmer,
  • Ridgeway Farm Inc. Route 2, Box 380, Brookneal, VA 24528
  • Christian L. Oberbeck, Director and Managing Director
  • Victor A. Pelson, Director
  • Robert A. Pilkington, Director and Managing Director
  • Thomas L. Piper, III, Director and Managing Director
  • Jerome H. Powell, Director and Managing Director
  • William P. Powell, Director and Managing Director
  • Eric W. Roberts, Director and Managing Director
  • Kenneth M. Schmidt, Director and Managing Director
  • HC. Bowen Smith, Director and Managing Director
  • Richard R. S. Smith, Director and Managing Director
  • Danforth H. Starr, Director
  • Jason D. Sweet, Director and Managing Director (Dallas Office)
  • F. Davis Terry, Jr., Director and Managing Director
  • Lorenzo D. Weisman, Director and Managing Director (French Citizen)
  • Edward B. Whitney, Director and Managing Director
  • George A. Wiegers, Director
  • John E. Wilson, Director and Managing Director
  • Robert A. Young, Director and Managing Director

[9] For a description of Barings and ING, see http://en.wikipedia.org/wiki/Barings

[10] The officers and directors of Concord Japan included:

  • Kenjiro Kawaguchi, Director and Managing Director Dillon Read & Co., Tokyo
  • Amerex SA, Coutts & Company (Bahamas) Ltd, West Bay Street, Nassau Bahamas
  • Takashi Imai, Nippon Steel Corporation, Tokyo
  • Yoh Kurosaw, The Industrial Bank of Japan, Ltd
  • Heiichi Hamaoka, Nissan Motor Co. Ltd, Tokyo
  • Gentaro Kawase, Nippon Life Insurance Company

[11] I was an investor in the first Lexington Fund.

[12] Personal Investments of Dillon Read Officers and Directors
in Cornell Corrections in Dillon’s April 1997 13-D Filings were:

Name Shares Options Included Amount of Funds ($)
Charles Ballard 5,870 569 5,848.82
John P. Birkelund 39,579 3,736 96,990.16
J. Robert Burton, III 2,387 228 2,448.38
James P. Connelly 697 47 2,576.55
Douglas Darby 5,424 517 13,512.39
Sally Dean 2,379 228 2,425.62
Peter Flanigan 28,178 2,687 48,781.40
Felice Gelman 488 47 2,087.17
Harry Hagerty 684 70 1,498.53
John H. F. Haskell, Jr 36,730 3,505 85,382.75
E. Terri Herman (1) 368 23 1,396.40
Franklin W. Hobbs, IV 30,455 2,803 56,986.04
Robert H. Hotz 1,260 116 5,340.13
Peter H. Imhoff 8,353 853 7,500.00
Craig A. T. Jones 12,671 1,141 18,248.65
W. Howard Keenan, Jr. 5,819 548 9,274.77
Peter A. Leidel (2) 1,839 116 6,972.91
Nathan Leight 1,221 116 5,230.15
Richard H. Montague 1,291 116 5,427.55
Robert Moulton-Ely 1,002 93 4,253.93
John Murabito 367 35 1,570.06
David W. Niemiec 35,018 3,270 76,989.51
James F. Reilly 1,140 116 5,001.73
Bret Russell 5,720569 5,425.82
Kenneth M. Schmidt 24,778 2,454 35,622.38
H. C. Bowen Smith 22,111 2,105 22,746.92
Michael I. Somers 11,929 1,137 12,223.44
F. Davis Terry, Jr. 2,460 232 10,507.61
Wayne Thornbrough 6,107 582 26,147.30
George H. Weiler, III (3) 1,103 70 4,180.11
George A. Wiegers 28,176 2,571 44,988.85
Richard C. Yancey 9,629 918 21,803.72

(1) (2) (3) Does not include 1,000 shares each purchased in the open market.

[12.1] In the October 1996 Prospectus, Dillon Read and its funds as shareholders are listed as owning 1,359,863 shares. As of the April 1997 filing, Dillon lists shareholdings of 1,191,864. The difference of 168,000 shares is assumed to be distribution of shares to partners by Concord prior to the April 1997 filing. The original cost of these shares has been estimated at $2.75 per share described by valuations in the October 1996 Prospectus.

[13] See: http://www.cdi.gsd.harvard.edu/research.cfm?id=57

[13.1] See pages 103 and 112, The Halliburton Agenda: The Politics of Oil and Money, Dan Briody, John Wiley & Sons, 2004.

[13.2] See page 234, The Life and Times of Dillon Read, Robert Sobel, Penguin Books, 1991.

[13.3] See Chapter 5: Collateral Damage: The Leland Olds Story, Page 93-114, The Halliburton Agenda: The Politics of Oil and Money, Dan Briody, John Wiley & Sons, 2004.

[13.4] See page 150, The Halliburton Agenda: The Politics of Oil and Money, Dan Briody, John Wiley & Sons, 2004. For description of Suite 8f (Brown’s private hotel suite) and the “Suite 8F Crowd,” see pages 132-141.

[14] See Halliburton’s Brown and Root is One of the Major Components of the Bush-Cheney Drug Empire by Michael Ruppert

See also, Opening Remarks of Michael Ruppert for the Senate Select Intelligence Committee.

See Brown and Root and Halliburton entries from Wikipedia.

[15] See Federal Bureau of Prisons Weekly Report

[16] See Anderson Guilty

[17]Charity Lends a Hand to Prisons With Murky Off-the-Books Deals” by Joseph T. Hallinan, Wall Street Journal, May 1, 2002,

[18] Allegations have been made that the prison system works on a bonding system that bonds each prisoner. The author does not know if such a system exists and, if it does exist, how it works.

[19] For more on public subsidies for private prisons see Jail Breaks, Economic Subsidies Given to Private Prisons, and The Real Costs of Prison Project.

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