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Collateralized Debt Obligations : The Financial "Love Canal" of the Twenty-First Century

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Published : July 11th, 2007
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For those of you too young to remember, or those of you who have forgotten the salient issues of the Love Canal debacle and would like a quick refresher, here is a summary of what happened over thirty years ago. All this information is courtesy of Wikipedia

Early history

The name Love Canal came from the last name of William T. Love, who in the early 1890s envisioned a canal connecting the two levels of Niagara River separated by the Niagara Falls. He believed it would serve the area's burgeoning industries with much needed hydroelectricity. After 1892, Love's plan changed to incorporate a shipping lane that would bypass the Niagara Falls. At that time, the only means of delivering electricity was by using direct current. This method ultimately failed as its practicality was no longer valid. Only one mile (1.6 km) of the canal, about fifteen feet wide and ten feet deep, stretching northward from the Niagara River, was ever dug. (For one solution to the falls trans-shipment problem, see Welland Canal.)

Use as toxic waste disposal site

In 1920, Love's land was sold in public auction to the City of Niagara Falls, who began using the undeveloped area as a landfill for chemical waste disposal. The canal was at the time an ideal site for development as a chemical landfill; the ground was largely impermeable clay, and the surrounding area was sparsely populated, if populated at all. The city disposed of the waste from its thriving petrochemical industry into Love Canal and later the United States Army allegedly began using the site as well, burying waste from its experiments in chemical warfare.

In 1942, Hooker Chemical and Plastics Corporation (a subsidiary of Occidental Petroleum) expanded use of the site, and, by 1947, acquired the land for its own private use. In the subsequent five year period, the company buried about 22,000 tons of toxic waste in the area. Once the site had been filled to capacity in 1952, Hooker closed the site to further disposal, back-filled the canal and covered it over with four feet of supposedly impermeable clay. At the time of the closure, Niagara Falls' population was expanding rapidly. The local school board was desperate for land, and attempted to purchase expensive property from Hooker Chemical. The board wanted to build a new elementary school in an area of the property that had not yet been used to bury toxic waste. The corporation refused to sell on the grounds of safety, and took members of the School Board to the canal and drilled several bore holes through the clay, showing that there were toxic chemicals below the surface; however the board refused to capitulate. Eventually, faced with the property being condemned and/or expropriated, Hooker Chemical relented, and sold on the condition that the board buy the entire property for a dollar. In the agreement, Hooker included a seventeen line caveat that explained the dangers of building on the site:

Prior to the delivery of this instrument of conveyance, the grantee herein has been advised by the grantor that the premises above described have been filled, in whole or in part, to the present grade level thereof with waste products resulting from the manufacturing of chemicals by the grantor at its plant in the City of Niagara Falls, New York, and the grantee assumes all risk and liability incident to the use thereof. It is therefore understood and agreed that, as a part of the consideration for this conveyance and as a condition thereof, no claim, suit, action or demand of any nature whatsoever shall ever be made by the grantee, its successors or assigns, against the grantor, its successors or assigns, for injury to a person or persons, including death resulting therefrom, or loss of or damage to property caused by, in connection with or by reason of the presence of said industrial wastes. It is further agreed as a condition hereof that each subsequent conveyance of the aforesaid lands shall be made subject to the foregoing provisions and conditions.”

Shortly thereafter, the board began construction on the 99th Street School in its originally intended location. The building site was forced to relocate when contractors discovered two pits filled with chemicals. The new location was directly on top of the former chemical landfill. During construction, the clay seal which Hooker had put in to stop the chemicals seeping out was broken through.

In 1957, the City of Niagara Falls constructed sewers for a mixture of low-income and single family residences to be built on lands adjacent to the landfill site. The sewer beds were constructed of gravel, the clay cap over the chemical pit was broken again and the walls of the canal were breached; all of these allowed chemicals to seep from the canal. The construction of the LaSalle Expressway restricted groundwater from flowing to the Niagara River. Following the wet winter and spring of 1977, the elevated expressway turned the breached canal into a virtual overflowing bathtub.

Health problems, activism, and site cleanup

In the following years, residents began making repeated complaints of strange odors and "substances" that surfaced in their yards. City officials were brought to investigate the area, but did not act to solve the problem. Beginning in 1978, Lois Gibbs, the president of the Love Canal Homeowners' Association, led an effort to investigate community concerns about the health of its residents. The neighborhood had an extremely high rate of cancer, and an alarming number of birth defects. Mrs. Lobosco at the 99th Street School was constantly ill. With further investigation, Gibbs discovered the chemical danger of the adjacent canal. This began her organization's three year fight to prove that the toxins buried by Hooker Chemical were responsible for the health problems of local residents. Throughout the ordeal, the homeowners were opposed not only by Hooker Chemical (now Occidental Petroleum), but also government of many levels. These opponents argued the area's endemic health problems were unrelated to the toxic chemicals buried in the canal. They believed the chemicals had been successfully contained within the former landfill. Since the residents could not prove the chemicals on their property had come from Hooker's disposal site, they could not prove liability. Mrs. Lobosco continued to be ill throughout the legal battle, unable to sell her property and move away.

The 99th Street School, on the other hand, was located within the former boundary of the Hooker Chemical landfill site. While it was successfully closed and demolished, neither the school board nor the chemical company was willing to accept liability. This complicated matters for the homeowners' association, which was now battling with two organizations spending vast amounts of money to disprove negligence.

Initially, the organization had been frustrated by the lack of a public entity that could advise and defend them. Gibbs has said that at the beginning, she also met considerable public resistance to her community organizing and doors slammed in her face. The mostly middle-class families did not have the resources necessary to protect themselves, but many did not see any alternative to leaving their homes and were resistant to the idea.

By 1978, Love Canal became a national media event with articles referring to the neighborhood as "a public health time bomb." On August 7, 1978, United States President Jimmy Carter declared a federal emergency at Love Canal, and those living closest to the site were relocated. Scientific studies were not able to prove conclusively that the chemicals were responsible for the ill health of residents. Some scientists thought the chemicals were responsible. Other scientists thought that the evidence was inconclusive, although there was a possibility that the residents could be harmed but would be unable to prove it. There were eleven known or suspected carcinogens identified, one of the most prevalent being benzene. Geologists were recruited to prove that underground swales were responsible for carrying the chemicals to the surrounding residential areas. Once there, they explained, chemicals leached into basements and evaporated into household air. On May 17, 1980, the EPA announced the result of blood tests that showed chromosome damage in Love Canal residents. Residents were told that this meant they were at increased risk of cancer, reproductive problems and genetic damage. Other studies were unable to find harm.

With the growing evidence and two years of effort by Lois Gibbs and other residents, President Carter declared a state of emergency at Love Canal on May 21, 1980 and the EPA agreed to evacuate Mrs. Lobosco and 700 other families temporarily. Eventually, the government relocated more than 800 families and reimbursed them for their homes, and Congress passed the Superfund law holding polluters accountable. Occidental Petroleum was sued by the EPA and in 1995 agreed to pay $129 million. The cleanup of the site was investigated, designed, and overseen by the environmental consulting firm Conestoga-Rovers & Associates, based in Waterloo, Ontario, Canada.

Aftermath

Today, houses in the residential areas on the east and west sides of the canal have been demolished. All that is left on the west side are abandoned residential streets. Some older east side residents, whose houses stand alone in the demolished neighborhood, chose to stay.

Though the containment area is still enforced, new development began in the early 1990s. Recreational buildings have been built against a thin, chain-link fence that keeps the toxic area separated from the safe one. The neighborhood has been renamed Black Creek Village, and many families now live there.

Love Canal, along with Times Beach, Missouri, share a special place in United States environmental history as the two sites that in large part led to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). CERCLA is much more commonly referred to as "Superfund" because of the fund established within the act to help the clean-up of locations like Love Canal.

 * * * * * * * * * * * *

As the title of this essay states, the financial equivalent of that arrived on our doorstep when two of Bear Stearns’ hedge funds blew up just a few weeks ago. There are many stories about this floating around the Internet, so I’m not going to dwell on it here. However, I must include a link to a least one recent story of the expected fall-out from all of this. Here’s Ambrose Evans-Pritchard at his best in this July 5th story from The Daily Telegraph in the U.K….Credit Crunch Will 'shred investment portfolios to ribbons'

The cow pie that BS (love the way that fits!!!) stepped in was Collateralized Debt Obligations (CDOs), Synthetic CDOs and Credit Default Swaps (CDS) associated with sub-prime mortgages. This is not just a Bear Stearns phenomenon, as this mortgage problem infects most Wall Street firms…plus pension, hedge and mutual funds…plus a lot of banks, both in North America and overseas.

Right now the problem is only with the sub-prime tranches, but the ABX Index shows that this problem also infects the Alt-A tranches as well. So far, the AA and AAA tranches are still holding their own. However, as the real estate implosion gathers steam this year, even these tranches will bow to the pressure of the market. Actually they should be valued at less than what they show right now, as when Merrill Lynch tried to sell some of these ‘prime’ mortgage tranches, they were offered only 85 cents on the dollar. That’s 15 percentage points below what the ABX Index has got them priced at right now!

But I digress…

I have a bit of working knowledge about these financial instruments, but as they say, a little knowledge can be a dangerous thing. That all changed on July 5, 2007.

A URL of a pdf file submitted by Jesse in Bill Murphy’s MIDAS commentary over at www.lemetropolecafe.com made me think back to the Love Canal incident.

The rather catchy title of "Investment Landfill: How professionals dump their toxic waste on you" got my undivided attention. This is the first "CDO/CDS for Dummies" yet published. As mentioned in a previous paragraph, CDO stands for Collateralized Debt Obligation and CDS is the shorthand for Credit Default Swap.


The author has a keen grasp of the whole sordid mess and explains it in plain English. Now anyone can understand it. I had...what I thought…was a pretty good grasp of the whole thing, but realized that I didn't by the time I was half way through. From one end to the other, it is recommended reading by all and sundry. This is the sort of article that you can pass along to your semi-financially illiterate friends rather than trying to explain it yourself.


However, to save a lot of time, if you already know (or think that you already know) what this is all about, the real 'meat' on the current situation starts on page seven under the heading "Out of Bonds and into the Ether". And, finally, here is the URL…


http://goldnews.bullionvault.com/files/Investment_Landfill.pdf
A Tip of the Hat goes to the writer...Director Paul Tustain over at www.bullionvault.com



Ed Steer

Director

Gold Anti-Trust Action Committee

www.GATA.org



GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at www.GATA.org. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.








 







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Ed Steer is a director of GATA (Gold Anti-Trust Action Committee). He lives in Edmonton, Canada.
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