A Caliphate of Toxic Assets

by Alyssa A. Lappen
Frontpage Magazine | Jun. 29, 2009

When a pro-terrorist organization announces its intention to launch a financial jihad against the West, it is well worth learning their methods — especially when they promote a religious pseudo-financial scheme through largely unregulated practices purported to be safer than the conventional. But ultimately, the new brand of assets are constructed with as little, and perhaps considerably less, transparency than the last wave of toxic assets that hit the economy, with catastrophic results.

The Muslim organization Hizb Ut Tahrir capitalizes on Muslim Brotherhood founder Hassan al-Banna’s 20th century derivative, encouraging followers to build a parallel financial structure. Al-Banna envisioned the resultant shari’a-compliant finance as a “back door” into Western financial markets and institutions through which to supplant liberty and prosperity with Islam. Muslim clerics including MB spiritual leader Yusuf al-Qaradawi promote Shari’a finance as generally safer than Western investments, a diversification method to steady personal assets—and a stable economic system that should replace capitalism. Call it “financial replacement theology,” if you wish.

In July, Hizb Ut Tahrir plans to launch its U.S. arm with a huge Chicago “Khalifah conference” heralding the coming Caliphate and global Islamic supremacism. After 9/11, Germany and Sweden outlawed Hizb Ut Tahrir. In July 2005, Pakistan’s then-president Pervez Musharaf warned Britain not to tolerate its continued U.K. presence. But in the U.S., Hizb Ut Tahrir has proudly announced intentions to replace Capitalism with Islam.

Founded in 1953 — five years into Jordan’s illegal occupation of East Jerusalem — Hizb Ut Tahrir labels itself “peaceful,” but strategically objects to violence only for the time being. The group sympathizes with the Muslim Brotherhood, considers Europe’s democracies “a farce”—and the U.S., U.K. and Israel, works of “the devil“—and seeks to impose Islamic law (shari’a) worldwide.

Major banks from Citigroup, HSBC, Chase, Bank of America and Lloyds TSB — probably unaware of the etymology of Islamic finance — established subsidiaries offering shari’a-compliant products. Mutual funds at Principal Financial Group, UBS, Amana Funds and SEI Investments, among others, followed suit. Especially late last year as the devastating toll of sub-prime mortgage lending mounted, clients were assured that Islamic banking — in many respects a dangerous financial fad — was much safer than other banks and investment houses.

Yet bad economic news has not escaped the supposedly secure Islamic investing sector. Islamic securities can also (like all other asset classes) go into default, moreover. Holders of East Cameron Partners LP’s “safe,” asset-backed Islamic bonds (sukuk) now line up before a Louisiana bankruptcy judge with all the other hapless creditors of the Texas-based Easter Cameron Oil and Gas Co. that filed for Chapter 11 reorganization last October.

The East Cameron default was no one-time Islamic finance anomaly, either. In May, Kuwait’s Investment Dar Co. — 50% owner of the Aston Martin Lagonda luxury car manufacturer — defaulted on a $100 million sukuk. And in June Saad Group Islamic bonds traded at a quarter of their “face” value — that is, the the roughly $650 billion price at which issued by Saudi billionaire Maan al-Sanea’s company. The Saad Trading Contracting & Financial Services subsidiary, like East Cameron, went into financial restructuring, aka bankruptcy, after the Saudi Central bank froze the al-Sanea family accounts.

As I’ve often previously warned, events now show that shari’a banking may prove more susceptible to market dislocations than other financial sectors.

Islamic bonds employ “some of the most complex” Western structured finance tools ever created. They transform liquid, traceable cash flows from interest-bearing debt into illiquid assets — that cannot be easily unwound. In the 1980s, bond sponsors transformed trillions of dollars in cash flow claims on illiquid real assets into liquid, traceable mortgage-backed “pass-throughs” and “collateralized debt obligations” (CDOs).

The Muslim Brotherhood quickly re-branded the “special purpose entities” (SPEs) — that kind that, coincidentally, sank Enron — as Islamic “special-purpose vehicles (SPVs)” Sharia banks use these vehicles to “restructure interest-bearing debt, collecting interest [as] rent or [a] price mark-up.” Issuers of sukuk al-ijara—shari’a bonds like those now in default—sell hard assets to SPVs, which sell share certificates to fund their investment and in turn lease the purchased assets back to the sukuk issuers, collecting the principal plus interest that they then pass to sukuk investors as “rent.” But now, sukuk issuers are defaulting on “rent,” implying that SPVs can’t sell or return property to issuers when their sukuks mature.

That means, in essence, shari’a finance is a sham.
“There is no such thing as interest free investment,” warns New York University MBA Joy Brighton, echoing Rice University Islamic economics and finance chairman Mahmoud el-Gamal. “All Islamic finance today is interest based,” the latter complained in the Financial Times two years ago. Furthermore, Islamic finance features a few other unique “complexities”—namely that

*”Shari’a regulations can override commercial decisions.
*Documentation is not standardized
*Inter-creditor agreements can be complex

As U.S. financial institutions crumble, rattling markets, Congress has focused on regulating the opaque, previously unregulated securities called credit default swaps that Brighton describes as guaranteed boxes of counter-party risks. “One party pays a premium, the second guarantees payment, and a third guarantees the guarantor.” AIG, for example, guaranteed payment on billions of dollars worth of sub-prime mortgage loans. “The credit default swap is the guarantee, and AIG bore the default risk burden in exchange for upfront fees on maybe trillions of dollars in loans.”

But credit default swaps are old news, Brighton says. “A new generation of toxic assets has not yet hit anyone’s radar.” While touted as such, Islamic securities aren’t immune to default. Many more Islamic issues are likely to succumb as the global economy worsens.

“Islamic banking is in the toxic derivatives genre,” says Brighton. Each counter-party agreement within its complex “boxes” of interwoven counter-party risks, is a contract for “payment” and “delivery/receipt of funds.” Issuers create derivatives when they “peel off and resell pieces” from individual securities containing multiple counter-party contracts. One default by a party to any of the interwoven contracts in a “box” can cause its whole structure to collapse.

Moreover, Islamic finance is doubly toxic. Many banking corporations have created Islamic subsidiaries, says Brighton — segregated oil wealth managed by “outside money managers” and Islamic radicals who don’t circulate money globally, but keep it “within the Islamic community, as a charity—and jihad-funding mechanism.” They’re just another economic time bomb that financiers have blindly bought.

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Should the U.S. nationalize banks?

There may be a simpler solution to the credit crunch.

By Alyssa A. Lappen
Front Page Magazine | March 2, 2009

Well, it’s official.

Last Friday, the U.S. came within a hair of nationalizing a sick major bank. The government will receive up to 36% of Citigroup common shares—what financial markets would call control—for up to $25 billion in preferred stock bought in a failed October attempt to shore up the bank’s ailing capitalization.

For U.S. taxpayers, this could be a lose-lose proposition: As President Barack Obama’s newly named National Economic Council director Lawrence Summers observed last July, government sponsored enterprises (GSEs) tend to privatize profits and socialize losses. But the outcome will depend on Treasury Secretary Timothy Geithner’s next step, which he has not yet specified.

Yet pumping new capital into sick banks hasn’t worked. Hundreds of billions in taxpayer funds barely dented the problem. At least Uncle Sam won’t commit ad infinitum to back Citi’s liabilities without control, dramatic policy changes and a total dividend moratorium. Common shareholders stand to see their 100% Citigroup stake tumble to 26%, but have little choice. The alternative could be total loss. Perhaps $27.5 billion in preferred and special stock may also be converted in the potential $52.5 billion deal if owners like Saudi Prince Alwaleed bin Talal, Singapore’s Government Investment Corp., Capital Research Global Investors and Capital World Investors and Abu Dhabi Investment Authority agree.

“This does something critical for the common good,” says Albert Romano, a former money center bank senior manager and trader, adding banks are but one industry affected by multiple converging crises. “We face widespread systemic risk. The overarching challenge goes beyond political views and philosophical differences.”

Even some die hard capitalists believe circumstances so grave that the U.S. must nationalize its banking system. Besides $1.2 trillion in subprime mortgages, New York University economics professors Matthew Richardson and Nouriel Roubini contend, $7 trillion in commercial real estate loans, consumer credit card debt, high-yield bonds and other loans could lose much of its value. The International Monetary Fund and Goldman Sachs predict bank loan write downs, now above $1 trillion, could exceed $2 trillion. Combined U.S. bank loan and portfolio losses could reach $3.6 trillion, with banks absorbing $1.8 trillion, the professors project. Banking industry capital, after U.S. government assistance, was only $1.4 trillion last fall—“about $400 billion in the hole.” Based largely on Sweden’s 1992 example, they argue, only nationalization, system-wide “receivership,” would stop “the death spiral,” resolve “toxic assets in an orderly fashion” and finally let lending resume.

Others disagree.

Sweden‘s emergency bank authority resembled the Federal Deposit Insurance Corporation, writes former Stockholm School of Economics professor Anders Aslund, a senior fellow at Peterson Institute for International Economics. “It is sheer waste to try to recapitalize a damaged bank,” as the U.S. did with Citibank and others. Like “a worm in an apple,” toxic debts left alone “will devour the whole apple.” Sweden categorized banks as obviously bankrupt, under-capitalized but salvageable, or private but in “rude health.” It reviled private-public partnerships like the “telling and repulsive” Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac). Only Sweden’s bankrupt Gota Bank was nationalized and merged into the government’s own bankrupt Nordbanken, which was reconstituted as Nordea, revitalized and privatized. Private banks created private bad banks, through which they discounted or sold non-performing loans.

Already under government control, Fannie Mae and Freddie Mac remain prone to privatize gains and socialize losses. Respectively founded in 1938 and 1970 to fill mortgage lending gaps, both benefit from U.S. government debt guarantees. In the early 1980s they “fed off the carcasses of the thrift industry,” enabling troubled savings and loans “to liquidate mortgage portfolios without recognizing losses.” Later, their easy lending policies fueled the current crisis: In 2003, they together held over half America’s outstanding mortgage debt. The Bush administration last year nationalized both bankrupt agencies. Yet they remain guarantors of the American dream—making home ownership universally available—a goal the Obama administration hasn’t relinquished.

Of most immediate concern is the banking industry’s terrible capitalization. Bank regulators require at least 6% of overall bank capitalization to be Tier 1—i.e. “intangible” preferred and special securities that ordinarily measure an institution’s health. For huge “money center” banks like Citi, U.S. economic cornerstones, regulators expect much higher Tier 1 capital ratios. But markets currently hate Tier 1 capital still more than bank common stock.

Thus the U.S. devised the new Citigroup rescue plan largely to sooth markets by creating up to $81 billion in tangible capital. Taxpayers lose out: The U.S. has collected only a quarter of $2.25 billion in annual dividends originally expected on $25 billion in preferred stock since October, although besides the control block, the U.S. would retain $27 billion in two other preferred “rescue” issues to convert into “separate trust preferred securities” paying 8% annually.

Unfortunately, markets disapprove. Citigroup shares fell 39% Friday, and further in after hours trading. Other banks were also pummeled. “The dose of intervention and its intended objectives will ultimately determine the validity of this temporary model,” says Romano. But as to whether political animus or President Obama’s social agenda will prevent an orderly resolution of the mess, the jury remains out.

Disgraced Merrill Lynch managing director Henry Blodget calls Geithner a “weird reverse Robin Hood,” shoveling money from regular guys “into banks that vaporize it.” The U.S. should force Citi to write down its assets and convert the company’s debt to common stock. Blodget understands balance sheet toxic assets have to go.

Unfortunately, “mark-to-market” accounting rules, intended to forestall managers from doctoring true asset values to disadvantage shareholders, are self-defeating in the current market. Panic has virtually eliminated normal markets, slashing bank balance sheet values for some of the most troubled assets to far less than the “near expected rate” cash flows that they currently produce.

Thus the obvious, best and simplest solution, also possibly closest to Sweden’s successful model, might be removing “bad” assets from bank balance sheets at “net realizable value,” argues American Enterprise Institute senior fellow Peter J. Wallison. Translation: paying a normal market price, if there were a normal market to realistically assess. Normal prices generally approximate current cash flows “discounted by expected credit losses over time.” Bank balance sheet losses are temporary “liquidity losses,” not indicative of whether banks are sufficiently financed to continue “until liquidity returns to the asset-backed market.” Banks aren’t insolvent, and “nationalization would be a huge mistake.” The U.S. could and should simply buy assets at independently-verified net realizable values, thus significantly improving bank industry capitalization—and U.S. economic health. Ultimately, taxpayers would lose little, since the government could sell the “toxic” assets for their true value, like Sweden’s private banks eventually did.

In any case, delaying puts the U.S. at risk of tumbling into something akin to Japan’s 1990s, decade-long banking crisis, Swedish economist Aslund warns. The Obama administration must “act fast” to identify, write off, and remove bad debts from normal banks—especially since assets at those banks equal at least $1 trillion, or 7 percent of America’s gross domestic product (GDP).

Investing in Jihad

The hidden perils of shari’a finance

By Alyssa A. Lappen
FrontPageMagazine | Feb. 4, 2009

Indonesian sukuk buyers may sink in the same ship with the dupes heeding Western headlines and Islamic gurus since the Bernard Madoff scandal broke last December. These financial product pushers have increasingly exaggerated the “safety” of Islamic finance securities to offset “the cancer of interest-bearing debt.” Investors are now snapping up three-year Indonesian bonds that will supposedly hold their full value and make money—an astronomical 12%—while paradoxically avoiding speculation, alcohol, gambling, interest, and other “haram” activities forbidden under shari’a law.

Granted, Bernie Madoff’s “hedge fund” investors did not expect to be robbed blind. But they knowingly exchanged high risk for high returns. Indeed, alternative funds are so risky that U.S. securities laws limit their sale to investors with at least $2 million in financial assets—in other words, enough to protect them against being totally wiped out.

But even folks who should know better don’t grasp the risks of Islamic finance. London’s Financial Times, for example, touted the Amana Trust “Islamic” Income fund, based in Washington state, for “losing only 25.8 per cent” in 2008… half [sic] the average 44% loss for US stock funds.” Likewise, an SEI Investments company analyst recommended Islamic mutual funds as protection from the stock and bond markets’ “extreme ups and downs,” despite their substantial losses in the last quarter of 2008.

Odds are, the average Muslim “Mohammed Sixpack” doesn’t understand the financial risks of 12% Indonesian sukuk bonds either. High yields—for example 12%, when the U.S. Federal Reserve lends “overnight” to banks at rates close to zero—are usually called “junk.”

Unfortunately, these bonds are also backed by “assets” carved up like pie and “securitized.” Meaning: they can head south in a hurry, just like the sub-prime mortgages that sank the U.S. economy, which were also also backed by assets and securitized, not to mention the mortgage-backed issues that unraveled dozens of huge bond, pension and public institutional funds in 1994. In 1637, Dutch tulip bulb contracts sold for over 20 times the annual wages of a skilled craftsman—until their “solid” value withered overnight in the first financial crash in recorded history. [1]

Islamic finance carries many other risks besides.

The Thomas More Law Center in Ann Arbor, Mich. in December sued former Treasury Secretary Henry Paulson and the Federal Reserve Board to stop $40 billion in U.S. bail out aid from reaching American International Group (AIG). The insurance giant devotes an entire division to shari’a finance products, which Thomas More considers unsafe, unconstitutional and anti-American.

The suit zeros in on statutes fundamental to shari’a law, such as funding jihad warfare. It also focuses on AIG’s “supervisory committee” members—Bahraini Sheikh Nizam Yaquby, Saudi Mohammed Ali Elgari and Pakistani Muhammed Imran Ashraf Usmani, a “devoted disciple” of his father Mufti Taqi Usmani. The latter Shari’a-compliant finance authority directs Western Muslims to aggressively pursue violent jihad against the their governments.

AIG is not alone.

As I’ve often previously noted, the shari’a finance boards setting “Islamic banking” standards themselves employ highly objectionable “authorities.” Both the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), for example, include many representatives of nations, banks, and organizations implicated in terror-funding.

Atlas Shrugs recently comprised a more inclusive list of hot shot shari’a personalities. Apart from Taqi Usmani—a Pakistani shari’a court justice since 1982, shari’a director of the Saudi Al Baraka Investment Corp. implicated in 9/11 financing and until recently an advisor to Dow Jones Islamic Indexes—shari’a boards include other graduates of the most radical Saudi and Pakistani Islamic universities and madrassas that duplicate Usmani’s wish to impose shari’a law globally.

Shari’a finance still retains Western adherents. A Jan. 16, 2009 Hedge Funds Review article for example advises forlorn, out-of-work money managers, “Don’t forget Islamic finance.”

Several readers disagree. “Forget Islamic finance…. It won’t make it through the crisis,” a private equity venture capitalist comments. Islamic finance itself is “flawed in principle,” since “charging more than you loaned is called ‘interest’,” adds an investor relations man. As these Hedge Funds Review subscribers avow, the industry cannot possibly elude the financial risks that now face every other bank and investment house in the world.

Notably, Stern School economics professor and former Treasury Department and White House advisor Nouriel Roubini, the publisher of Roubini Global Economics Monitor (RGE Monitor), also considers Islamic finance to be risky. The Islamic finance reliance on debt issues backed by assets exposes the business and investors both to “devaluation” of underlying assets (hyperbolically speaking, like wilting tulips) and the overall freeze in normal capital flows, or liquidity. The level of new Islamic bond issues worldwide fell 60% from January through October 2008, to only $15.2 billion, against that of the first 10 months in 2007. Low oil prices and Middle East liquidity troubles could also hurt demand for shari’a finance instruments throughout 2009, Roubini posits, according to the Asian Energy blog.

Yet the greatest, albeit hidden, risks of shari’a finance are unseen by even the most astute economists. By investing alone, non-Muslims actively participate in what former Malaysian Prime Minister Mahathir Mohamed calls “a jihad worth supporting,” namely an effort to impose “universal Islamic banking.” Islamic banking is not an ancient religious tradition, but a 20th century invention of the Muslim Brotherhood and their spiritual chief Yusuf Qaradawi. It was developed to subsume capitalism with Islamic finance—a prospect neither safe nor mere fantasy.

Furthermore, shari’a investors may also inadvertently support economic jihad, as mandated by Qur’an 49:15: “Strive with their wealth and their lives for the cause of Allah,” and reiterated in 61:10-11: “Shall I show you a commerce that will save you from a painful doom? …strive for the cause of Allah with your wealth and your lives.”

Shari’a funds collect at least 2.5% of income, wealth and profits, plus arbitrarily determined “purification” levies on profits derived from those Islamically forbidden, or “haram,” activities. The Standard & Poor’s Islamic indexes do list some companies that get revenues from “non-compliant activities” totaling under 5% of their gross corporate sales. In those instances, S&P applies what it calls a “dividend purification ratio,” dividing “non-compliant” revenues by the total revenues of the index. The thing is, S&P doesn’t specify exactly what activities or other attributes constitute “non-compliant,” much less how or to whom it distributes zakat and purification levies. [2] Continue reading “Investing in Jihad” →

Hugging Shari’a finance at the Fed

How tough is Obama’s new economic tough guy?

by Alyssa A. Lappen
Frontpage Magazine | Dec. 10, 2008

The first market day after President-elect Obama announced plans to appoint Federal Reserve Bank of New York president Timothy Geithner as Secretary of the U.S. Treasury, U.S. equities rose 6.5%. Pundits praised his experience handling crises and understanding of the troubled economy. But possibly, the market hoopla was premature, or even unwarranted. Some analysts seek his retirement.

As turmoil built, Geithner criticized Wall Street’s self-regulatory system, negative incentives and market forces, sought tighter supervision and berated insufficient “derivative securities” regulation and “credit-default” swaps allowing investors to “insure” against loses—only to fail. The Treasury Department’s former attache to the International Monetary Fund had overseen U.S. responses to the 1990s Mexican, Indonesian and Korean bailouts. But at the Fed, Geithner did not use regulatory powers to check abuses, or advocate for more regulation, impartial supervision or new laws. He even concluded that markets were improving—and after Bear Stearns’ collapse confessed, nobody “understands [the causes] yet.”

Worst of all, since Nov. 2003, Geithner let dangerous new Islamic and shari’a-based securities, markets and financial institutions gain business currency—despite the Fed’s role in U.S. monetary policy, currency distribution, government securities markets, legal supervision, regulatory enforcement, bank and capital markets investigation, foreign accounts and a payments mechanism handling over $4 trillion daily in funds and securities transfers. Not to mention Fed officials’ admitted lack of understanding.

On July 1, 2004, eight months after Geithner assumed command, the New York Fed hosted Asim Ghanfoor (sic), AG Group founder and managing director, to address its Seventh Annual Global Economic Forum on “ABCs of Islamic Financing” and Islam’s increasing global financial role. A month later, Senators Charles Grassley and John Kyl identified Ghafoor as a representative of Boston’s terror-funding Boston’s Care International, the Global Relief Foundation (GRF) and the Al Harimain Islamic Foundation, which the U.S. Treasury specially designated a terrorist organization in September 2004 and again in June 2008.

In fairness, the New York Fed began authorizing obscure shari’a banking institutions, structured shari’a issues, and opaque trading of the cottage industry’s myriad novel securities long before Geithner arrived. “Islamic bankers have been quite ingenious in developing financial transactions that suit their needs,” New York Fed first vice president Ernest T. Patrikis told an Islamic Finance conference in May 1996. “We bank supervisors, too, can be ingenious and will want to work with any of you should you decide that you want to engage in Islamic banking” in the U.S.

The dangers of Islamic finance should have been apparent. From 1996 on, all 12 Federal Reserve banks received, and were charged to enforce many Treasury Department Office of Foreign Assets Control circulars designating Islamic groups and banks as terrorist-financing institutions, organizations and individuals. In 1998, OFAC warned the Fed against transactions with Osama bin Laden and his affiliates, in 1999 froze Taliban assets, in 2002 reminded banks to check customers against known terrorist lists and in 2003 warned against trading with any unnamed counter-party.

Meanwhile, had the Fed only noticed, there were warning signs elsewhere too. In 1999, Saudi scholar Mohammad Nejatullah Siddiqi proposed at Harvard that banning interest would “cure the ills of contemporary finance,” “create a safer, saner financial world,” incorporate the “institution of waqf [Islamic trust]” in economics and create “morally inspired” behavior. In 2001, Siddiqi openly labeled shari’a finance a revolution-driver—an “universal endeavor” to replace “excesses of capitalism.”

Alarm bells should have gone off at a New York Fed event on Nov. 21, 2002, furthermore, where shari’a banking proponent Wafiq Fannoun described Islam [not only] as “Peace through submission to Allah (God),” however, “revelation-based [the Qur’an, Hadith] … complete way of life” — that is, a system of religious law proscribed by the U.S. Constitution from inclusion in secular legislation or regulatory systems. Equally at odds with Constitutional law and Western capitalism are other Islamic notions he described—namely that Allah is both creator and “owner” of all material things, and that “individuals” may not possess “natural resources important to society.” as “alternative financing for Muslims” and others recognizing individual ownership rights.

True enough, most of that happened before Geithner ran the New York Fed. But after Geithner took the helm in November 2003, the bank missed several still more critical red flags on Islamic banking.

First came Basel II Capital Accord, supposedly designed to strengthen the “regulatory capital framework” for big international banks. Authorities increasingly expected to trust banks to internally assess their own credit and operational risks. However, in July 2004 Switzerland’s Bank for International Settlements (BIS) reported, 53% of Middle Eastern bank supervisory staffs lacked the necessary training to meet Basel II’s December 2007 deadline. Middle Eastern banks originated and still predominate in Islamic banking. Nevertheless, by 2007, they still needed historical data to fashion reliable risk models but instead counted on “heavy” collateral and “exceptional” economic conditions to eliminate risks.

Islamic institutions had manufactured “special purpose entities” (SPEs)—renamed, “special-purpose vehicles (SPVs)”—such as coincidentally helped destroy Enron. These legal devices restructured “interest-bearing debt, collecting interest [as] rent or [a] price mark-up,” Rice University Islamic economics chairman Mahmoud el-Gamal warned in May 2007. “Interest-based” Islamic finance equaled “shari’a arbitrage,” concerned only “religious identity” and merely employed Western securitization methods to transform liquid, traceable cash flows from interest-bearing debt into illiquid, opaque assets.

Shari’a banking, though, had far fewer regulatory and accounting protections than sub-prime mortgages—and like “portfolio insurance” in 1987, mortgage-backed bonds in 1994, and sub-prime mortgages in 2008, could also cause huge market declines. Islamic banking purveyors admitted shari’a regulations could “override commercial decisions;” didn’t “standardize” documentation; and used complex “inter-creditor agreements” and “off-balance sheet financing.”

Even hosting hosting Islamic financier Asim Ghafoor, a representative to three terror-funding organizations, on July 1, 2004 apparently gave no one inside Geithner’s Fed reason to pause from its rush to further accommodate shari’a banking.

In March 2005, New York Fed general counsel Thomas C. Baxter Jr. asserted the Constitutional “wall of separation between church and state” Thomas Jefferson had described was “not absolute.” Chief Justice Warren Burger had in 1984 suggested that the Constitution “affirmatively mandates accommodation, not merely tolerance, of all religions,” Baxter told an Islamic financial industry “Legal Issues” seminar. “[S]ecular law should … accommodate differing religious practices,” he indicated, apparently even if that meant specially excepting Islamic banking from secular laws and regulations.

In April 2005, New York Fed executive vice president William Rutledge admitted that the bank was “in no position to take a stance on shari’a interpretation.” He also claimed the bank would hold Islamic finance to “the same high licensing and supervision standards” as conventional banks.

Despite the New York Fed’s role as a legal supervisor of Islamic banking, neither Rutledge nor Geithner noticed, however, that shari’a banking, a 20th century “tradition” invented by the Muslim Brotherhood, can’t be severed from Islamic law—statutes that Mohammed initiated, which caliphs, scholars and jurists developed over the last 1,400 years. They hold that shari’a grants Muslims (the ummah) supremacy over all others—along with all land and property to hold in trust for Allah. Thus as Fannoun effectively told the Fed in Nov. 2002, land or property, once conquered or acquired by Muslims (or for Allah), can’t generally revert to their original owners. Shari’a commands Muslims to wage jihad warfare until they subdue all “infidels” under universal Muslim rule, as Ibn Khaldun avowed in the Muqaddimah (trans., Franz Rosenthal, Princeton Univ. Press, 9th printing, 1989, p. 183).

Confiscating possessions from non-believers exacts “revenge,” wrote jurist Abul Hasan al Mawardi (d. 1058). Qur’an 57:2 argued, “To Him belongs all dominions of the heavens and earth.” Qur’an 59:7 echoed, “That which Allah giveth as spoil [war booty] unto his Messenger…,” Allah authorized 2nd Islamic Caliph, Umar Ibn Khattab, to confiscate property by force, fulfilling an Islamic trust, or ruling under Allah’s law. It was thereby just to take anything from nonbelievers, (The Laws of Islamic Governance, Taha Publishing, 1996, pp. 207-251) including all territories Islam ever controlled.

Apparently, Fed officials also neglected to investigate the alliances and beliefs of shari’a advisors and their affiliates in the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) standards agencies.

The shari’a-based Islamic Development Bank established the AAOIFI in 1990 to set Islamic finance standards. Its trustees include executives of Kuwait Finance House, Saudi Arabia’s Dallah al Baraka Group and al-Rajhi Banking & Investment Corporation—all implicated in al-Qaeda and other terror-funding—and Sudanese (and until recently Iranian) officials, both U.S. Treasury-sanctioned countries.

Former Malaysian Prime Minister Mohamed Mahathir in 2002 christened IFSB “a universal Islamic banking system” and “a jihad worth pursuing….” Its board members include the terror-funding Iranian, Sudanese and Syrian central banks and Palestinian Monetary Authority.

Yusuf Qaradawi, an U.S.-designated foreign terrorist barred entry since 1999 for example, supports wife-beating, suicide bombings, murder of American military forces and female suicide “martyr operations.” A large shareholder of Al Taqwa Bank, Qaradawi also chairs the recently designated terrorist-funding Union of Good “charity,” Qatar National Bank, its al-Islami subsidiary, Qatar Islamic Bank, and Qatar International Islamic Bank—and follows AAOIFI standards he helped create.

Similarly, Dow Jones Islamic Market Indexes (DJIM) shari’a board uses “stringent and published” methods to determine “compliance of index-eligible companies.” But its industry screens, financial ratios and biographies omit advisors’ affiliations or beliefs. Dow Jones Citigroup Sukuk Index (DJCSI’s shari’a board certifies Islamic asset-backed bonds if structures meet “AAOIFI standards” and shari’a principles, but don’t mention AAOIFI history or governance.

Until July 2008, shari’a banks, the Dow Jones Islamic Index board and an North American Islamic Trust (NAIT) fund also employed a 20-year veteran of Pakistan’s Shari’a Supreme Court, former judge Taqi Usmani, who taught at the Taliban spawning ground, Jamia Darul Uloom Karachi, headed the AAOIFI religious board, endorsed suicide bombing, and in 2007 advised U.K. Muslims to impose shari’a when their numbers suffice.

Shari’a finance advisor Muslim Brother Yusuf Talal DeLorenzo advised Pakistan’s tyrannical Zia ul-Haq from 1981 to 1984, and ran the Virginia Islamic Saudi Academy educational program cited in 2008 for using hateful Islamic texts. Trained at Karachi’s terror-espousing Jamia Al Alomia Al Islamia, he served the Muslim Brotherhood International Institute of Islamic Thought (IIIT) and from 1989, was secretary to the MB’s Fiqh Council of North America.

Perhaps Treasury Secretary-designate Geithner seriously meant to keep Rutledge’s promise to grant Islamic financiers no special favors. But allowing shari’a finance to exist at all is itself a special favor.

Moreover, on November 23, 2008 Geithner, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke agreed to add another $20 billion taxpayer-gilded bailout to Citibank’s previous $25 billion bailout—and offer $306 billion in new loans to cover Citi’s losses on soured real estate debts and securities.

Only three days earlier Citigroup uber-shareolder Prince Alwaleed bin Talal, a godfather of Islamic finance, had announced plans to up his stake in America’s largest (failing and “underpriced”) bank from 4% to 5%. On March 20, 2006, the Saudi Kingdom Holding Co. CEO was “honored for humanitarian contribution to Islam” at a “glittering gala to celebrate excellence in Islamic Finance” that also featured terror-financier and Dallah al-Baraka founder and president Saleh Abdullah Kamel.

Congress should outlaw shari’a finance

By Alyssa A. Lappen
Washington Examiner | June 2, 2008

A spate of conferences in the U.S. recently on Islamic banking — i.e. shari’a finance — signals a worrisome American blindness to the budding industry’s inherent dangers.

Among the perils of shari’a finance, according to a January analysis by Moody’s Investors Service are: A central role in investment decisions for shari’a scholars who are actually Islamic clerics; investors being forced to accept weak positions; short track records of major investors; multiple complex asset types; risky interest rates and new ventures; plus a lack of transparency combined with corporate management and risk control in the hosting Third World countries.

Like other financial rating agencies, Moody’s currently profits from assessing Islamic financial instruments.

But it missed the biggest risk of all—the ideological risks of shari’a, or Islamic law. Even Islamic banking promotions admit that the industry’s documentation is not standardized, its inter-creditor agreements can be complex and it frequently employs off-balance sheet financing.

Moreover, shari’a regulations override commercial decisions. Citibank, for example, launched Saudi American Bank (SAB) in Jeddah and its Riyadh branch in 1955 and 1966 respectively, apparently without considering business risks under shari’a. The Saudis abruptly seized SAB in 1980, denied Citi all future profits, and ordered the bank to train Saudi staffers. Why? Because under shari’a, the bank was judged insufficiently Muslim.

Secular laws alone don’t govern shari’a finance. Although a 20th century Muslim Brotherhood (MB) invention, it cannot be severed from the body of Islamic statutes that Mohammed initiated and caliphs, scholars and jurists developed over 1,400 years.

Shari’a also underlies Muslim Brotherhood economic reforms. Police discovered the group’s central plan, “Towards a Worldwide Strategy for Islamic Policy,” or “The Project” in the Lugano villa of MB chief financial officer Yusef Nada in November 2001.

Muslim Brotherhood spiritual leader Yusef Qaradawi based the 12-point handbook on shari’a interpretations of MB founder Hassan al-Banna, who in 1928 envisioned a caliphate (Islamic state) to impose shari’a law worldwide.

The Project orders Muslims to do “parallel work to control local power centers”—and create “special Islamic economic, social and other institutions” and “necessary economic institutions” to fund spreading fundamentalist Islam. Shari’a finance builds such “parallel” Islamic economic institutions.

Consider the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). Both write global shari’a finance regulations (fatwas).

AAOIFI members include the central banks of designated terrorist states Iran and Sudan—and the Saudi Dallah al Baraka Group, al-Rajhi Banking & Investment Corporation, Kuwait Finance House, all implicated in funding al Qaeda, according to former U.S. counter-terror official Richard Clarke in testimony before the National Commission on Terrorist Attacks upon the U.S.

IFSB members include the central banks of Iran, Sudan, Syria, and the terror-funding Palestinian Monetary Authority (PMA).

Worse, Shari’a laws grant the Islamic ummah (Muslim nation) supremacy over all others—along with all land and property, to hold in trust for Allah. Under shari’a, land or property conquered or acquired by Muslims cannot generally revert to its original owners.

Possessions confiscated from non-believers are “a way of exacting revenge,” writes 11th century jurist Abul Hasan al Mawardi whose Laws of Islamic Governance many Muslims still consider valid. In other words, classical Islamic jurisprudence and Qur’anic passages alike, reflect the thinking evidenced in the MB’s 20th century Project.

According to Al-Mawardi, Allah authorized Second Caliph Umar Ibn Khattab to confiscate property in three ways—by fulfilling a trust to Islam, by force, or by ruling under Allah’s law. Thus, it is “just” to take anything from nonbelievers.

Far from benefiting mankind, as Islamic banking proponents claim, shari’a advocates a supremacist ideology commanding Muslims to wage jihad war until they subdue all “infidels” and “unbelievers.” Muslims must “convert everybody to Islam either by persuasion or force” and “gain power over other nations,” writes 14th century Tunisian jurist Ibn Khaldun in “The Muqaddimah.”

And economic jihad fulfills the mandate of Qur’an 49:15: “Strive for the cause of Allah with your wealth and your lives,” reiterated in 61:10-11.

Congress should thoroughly investigate shari’a finance, declare it unconstitutional and therefore illegal.

Alyssa A. Lappen, a senior fellow at the American Center for Democracy, is a former senior editor of Institutional Investor, Working Woman and Corporate Finance. Her website is https://www.alyssaalappen.org.

Shari’a Financing and the Coming Ummah

“Chapter 28: Shari’a Financing and the Coming Ummah“
By Rachel Ehrenfeld and Alyssa A. Lappen

Shari’a finance is a new weapon in the arsenal of what might be termed fifth-generation warfare (5GW). The perpetrators include both states and organizations, advancing a global totalitarian ideology disguised as a religion. The end goal is to impose that ideology worldwide, making the Islamic “nation,” or ummah, supreme.

Excerpted from: Armed Groups: Studies in National Security, Counterterrorism, and Counterinsurgency; Edited by Jeffrey Norwitz; U.S. Naval War College, June 2008.