Mark Pine

Thanks once again to C-SPAN. There are times when a program is priceless, as the call-in show, Washington Journal, was this morning. The first 45 minutes were devoted to calls from residents of this country here illegally. The stories were what one would expect—hardships, catch-22s, and heartbreaking separations—engrossing and enlightening, nonetheless. The callers were mostly from Africa, the Caribbean, and Mexico.

One young man of 24 had been in the US since the age of two. This is his home country in every way but the law, yet he could not get citizenship. One man came to this country holding onto the bottom of a rail car; his wife, who called in, told his story. Another wife described her husband arrested in front of her and their two-year old in her arms. He was handcuffed by the law officers and led away. The first of the callers was from Cuba. He reminded us that his people—the indigenous of North America—were here first; although he is illegal in our nation, in the long eye of eternity, we are the interlopers not he.

What are we afraid of? Is it overpopulation? China, a nation about the size of the US in terms of land area, is home to more than a billion people; and it is China with whom we now compete, China we worry will overtake us, China who may someday be the world’s most powerful superpower. Isn’t it all those people—the huge numbers of diverse, creative, energetic souls—that will propel that nation to its future dominance? Why are we Americans worried about gaining a few more millions?

The biggest challenge America faces today is not from global military or economic competition. It is not even from climate change. It is from our own population: People growing old in the tens of millions. How will we care for them? How will we pay for their health care? Many countries of the world, like Japan and some in Europe, worry that they won’t have enough young people to support their old.

But America has immigration! Multitudes of the world’s poor but ambitious, vigorous people want to come here to work, to pay taxes, to contribute to this country. Why in Heaven’s name don’t we take advantage of this human wealth seeking to join us and put itself to our use?

A hundred years ago my grandparents came to America at the height of the immigration from eastern and southern Europe. It was a time when the Statue of Liberty shone a beacon true and clear. I’ve often marveled that America tolerated, often welcomed, all those folks. I’m so thankful that America’s openness a century ago permitted them to come then and, and as a result, me to be here today!

But it is not so today. We are no longer the nation we were back then, I fear.

In March the American Journal of Clinical Nutrition, one of the leading scientific voices on diet and health, published a meta-analysis of studies on the relationship of cardiovascular disease (including heart attacks and strokes) and saturated fat in the diet. Twenty-one studies were included, comprising almost 350,000 individuals and 11,000 cases of disease. Comparing the relative risk of the diseases between the people in the highest quintile of saturated fat consumption and those in lowest yielded a ratio of 1.07 with a 95%-confidence interval of (0.96-1.22)—i.e., no difference in risk between the two quintiles.

Consistent with that result, in 2006 the New England Journal of Medicine published a report on heart disease and low-carbohydrate diets, which usually include more saturated fat. The researchers analyzed a cohort of 83,000 nurses participating in the long-term observational Nurses Health Study, which compiles data on medical events and many factors, including diet. During 20 years of observation, comparing the highest carbohydrate-consuming nurses with the lowest, the relative risk of heart disease was almost double (1.9) in the highest group, a highly statistically significant result.

Both these studies, as well as others, strongly indicate that fat in the diet is not the problem it was once thought to be. But does that mean its OK to slather the butter on the bread and potatoes, eat plenty of steak, and have lots of ice cream for desert?

Sounds delicious! Unfortunately it’s not so.

The first thing to consider is that an ounce of fat contains 250 calories, more than double the calories in sugar or flour. So it’s easier to get fat eating fat than carbohydrates.

And in an editorial in the American Journal of Clinical Nutrition, which accompanied the meta-analysis, the authors explained why people should avoid diets with either high levels of carbohydrate or more than a little saturated fat. They wrote:

Clinical trials that replaced saturated fat with polyunsaturated fat have generally shown a reduction in [cardiovascular disease] events. … However, replacement with a higher carbohydrate intake, particularly refined carbohydrate, can exacerbate the [abnormalities of blood fat] associated with insulin resistance and obesity that includes increased triglycerides, small LDL particles, and reduced HDL cholesterol.

In other words, it’s not OK to consume a lot of saturated fat (which comes mostly from dairy products and animal meat). Health problems arise because people tend to replace fat calories with sugar calories. For example, when people stop eating creamy ice cream, they may replace it with the high-sugar non-fat kind. Doing that actually increases the risks of heart disease and strokes.

A better course of action is to replace saturated fats and extra carbs, particularly refined carbs, with unsaturated fats and oils, like olive oil and peanut butter. And also keep total calories equal to energy expenditures.

The findings in the article on the Nurses Health Study support that advice. For nurses who at the most animal fat and protein (with more saturated fat), the risk of heart disease was not significantly different between the highest and lowest carb consumers. But for nurses who at the most vegetable fat and protein (with more unsaturated fat), the relative risk of heart disease for the lowest carb consumers was 70% of that of the highest carb consumers, a statistically significantly result.

The take home messages: Cut BOTH excess carbs and saturated fats. Replace refined carbs with unprocessed carbs. Replace some calories from carbs and animal fats with calories from vegetable fats and proteins.

At the National Institutes of Health this morning, scientists studying Alzheimer’s disease (AD) presented a consensus statement on preventing AD and cognitive decline. The statement and the presentation were the products of a two-day state-of-the-science conference on Monday and Tuesday. Their answer about what works: Not much.

Summarizing the consensus of the attending scientists and experts, the document said:

There is currently no evidence considered to be of even moderate scientific quality supporting the association of any modifiable factor (nutritional supplements, herbal preparations, dietary factors, prescription or nonprescription drugs, social or economic factor, medical condition, toxins, environmental exposures) with reduced risk of Alzheimer’s disease.

The scientists were strict and rigorous in deciding what might qualify as good evidence. They gave most weight to well-designed, randomized clinical trials, which provide the highest quality of medical evidence. And they also considered some evidence from studies of lesser quality, if the results of several such trials were consistent.

Although the gloomy statement did not provide much hope for people trying to take measures to reduce their risk of these dementias, it did indicate some factors shown to be associated with the disease, which point to potential risk-reduction approaches.

High blood pressure, diabetes, elevated blood cholesterol, and mid-life mental depression are medical conditions associated with developing AD, the scientists agreed. Current smoking has also shown association. These findings suggest, at least, that people might take measures to treat these conditions to reduce their risk.

The statement also pointed to a number of “relatively benign” measures involving diet, lifestyle and medication that might, in the statement’s words, “allow individuals to feel more in control of their risk for AD.” These included avoiding folate deficiency, adhering to a diet low in saturated fat and high in fruits, vegetables, grains, nuts, fish and olive oil. And people might also consume one or two drinks of alcohol each day.

One of the conference’s most pessimistic judgments was that no medications and no dietary supplements have been proved to prevent AD or cognitive decline. That conclusion includes the cholinesterase inhibitors that are currently approved to improve cognitive functioning. Nor are antihypertensive drugs effective, except when used to treat hypertension. Hormone replacement treatments not effective, according to studies. Gingko biloba and vitamin E have not been shown to be helpful.

Some medications may increase risk. These include non-steroidal anti-inflammatory drugs (NSAIDS, e.g., naproxen and celicoxib) and estrogens.

The scientists made a number of recommendations on how to improve the current state of knowledge and investigate preventive and therapeutic measures. They asked for researchers to develop and employ consistent definitions of the disease and the outcomes of treatment. More large, prospective clinical trials should be done. Ongoing, long-term population and patient databases should be investigated, such as those maintained by academic investigators and large healthcare organizations.

The occurrence of AD and cognitive decline is most strongly predicted by factors that cannot be changed, the conference concluded. Age is the strongest predictor, and the disease increases in frequency beyond age 60. Another strong predictor is inheritance of a form of the apolipoprotein E gene. But it is not presently possible to go beyond these unavoidable risks and try to prevent AD using measures based on good evidence. Scientists currently know of nothing that we may do with certainty to avoid the disease.

“Exercise Fights Anxiety and Depression,” USA Today headlined yesterday. The article cited scientific studies of exercise treatment of depression and quoted a psychologist, who has co-authored a guidebook on treatment, urging therapists to write actual prescriptions of exercise for their patients.

A new meta-analysis of exercise therapy by researchers at Arizona State University featured prominently in the USA Today report. The authors of the study pooled the results of 58 clinical trials of depression with 3000 patients. They found an overall effect size of an 80% reduction in depression scores from exercise therapy.

In my personal experience, the effect of exercise on mood is a powerful one. I tend to worry and obsess about many things, and although I’m not clinically depressed, I easily get feeling stressed and gloomy. But I also exercise 5-6 days a week by jogging, cycling or swimming. Beforehand I might feel like a wet washrag, saturated with filthy, scummy water. But after the intense aerobic activity, followed by a cleaning shower, I feel laundered, wrung clean, and set to dry in sunshine and fresh air. It’s great!

To check out the science further, I searched for clinical trials of exercise as therapy for depression on the PubMed website of the National Library of Medicine. The query yielded more than 50 reports, which described positive effects in groups of women, including those with post-partum depression, in men, in the elderly, in stroke patients, and in patients with hypertension, cancer and other diseases.

One of the better studies was conducted at the Cooper Institute in Golden, CO, in 80 young to middle-age patients with mild or moderate major depressive disorder. The protocol used a dose-response design, with four groups assigned randomly (without blinding) to no exercise or supervised aerobic exercise 3 or 5 days per week at a low-dose level of 7.0 kcal/kg/wk (about 450 calories a week for an average-weight person) or a “public health dose” level of 17.5 kcal/kg/wk (about 1100 calories a week for an average-weight person). After 12 weeks (the usual duration of clinical trials of depression), depression scores in the high-exercise group decreased by 47% on average and those in the no-exercise or low-exercise groups decreased by 29%-30%. The frequency of exercise (3 or 5 days per week) did not matter. The result was statistically significant.

Exercise as therapy for depression ought to be prescribed much more often than it is, in my view. While drug therapy is effective, there are many negative effects, and a very common one is weight gain, a long-term adverse effect, associated with deterioration of physical health. In contrast, exercise therapy improves physical fitness and can aid in weight loss, while it helps to treat depressed mood.

Magnitude 7 or larger earthquakes have occurred frequently in this year: Haiti 7.0 in January, Chile 8.8 in February, and two just this month—7.2 in Baja California on April 4 and 7.8 in Sumatra, Indonesia two days later. And those were the ones that made the headlines. There were two more in Pacific islands—in the Ryukyus and the Solomons in January and February. They are listed here on the US Geological Survey website.

The USGS also provides a list of earthquakes of magnitude 6 or greater on its website. I used a spreadsheet to count the number of quakes per decade since 1970. In the 1970s and 1980s big quakes averaged 3-4 per year. In the 1990s, the average was about 5. Since 2000, big quakes averaged 30 per year. Extrapolating from today, this year there may be 20-25.

There has also been the eruption of the Iceland Volcano [pix] Eyjafjallajökull (pronounced EYE-a-fyat-la-jo-kutl), which news reports say could last for months. It has shut down a great deal of air transportation over northern Europe.

It all makes one wonder whether the planet has been behaving extraordinarily, and though it seems improbable, I’ve asked myself whether such increases in geological activity could be connected to global warming. According to the Royal Society that might be true!

The May issue of the Philosophical Transactions of the Royal Society (the UK’s counterpart of the US National Academy of Sciences) explores the scientific basis for such a connection. The fourteen reports in the journal are based on presentations at an international symposium last September on climate change and geological hazards. The papers discuss mechanisms whereby climate warming could drive volcanic and seismic activity.

In the introduction, Bill McGuire, a geologist at University College, London details several mechanisms described in the papers that operated during past eras of climate change and which could result in catastrophic geological events today through effects on the earth’s crust. Through one effect, large landslides could occur “in temperature-sensitive high mountains [as] primarily a function of reduced slope strength due to increased production of meltwater from snow and ice and from rapid thaw processes,” he writes.

Three of the papers consider how crustal disturbances could occur in response to “load changes, either as a consequence of unloading at high latitudes and high altitudes due to ice-mass wastage, or as a result of the loading of ocean basins and continental margins in response to a 100m or more rise in global sea level.” One of the three presents a statistical correlation of water temperature in the eastern Pacific due to the El Nino oscillation with the frequency of earthquakes in that region, possibly caused by “reductions in bottom pressure” of the ocean.

Tsunamis could also increase as a result of climate warming, according to another report. Higher temperatures could liberate underground deposits of gases, causing “submarine slope failure and consequent tsunami generation.” And when warming liberates methane, itself a warming gas, that could further accelerate warming as the result of positive feedback cycle.

Climate-caused changes in masses of ice and water could affect slippage of earthquake prone faults, according to one of the articles. The authors provide evidence for seismic activity in the past in response to loss of ice sheets and glacial lakes.

Three more reports discuss the relation of volcanism and warming-driven ice loading and unloading. In one, these scientists consider these effects in Iceland. They predict that “ice wastage will result in additional magma generation beneath Iceland” although it may take decades and centuries until the magma reaches the surface. But a second paper explains how melting ice caps could influence volcanic hazards in this century. A third considers rain and volcanism, and the authors point to increased precipitation “as one possible driver of future lateral collapse at ice-capped volcanoes.”

As a group the papers in this issue of the journal lay out several possible mechanisms, some supported by evidence from past eras, which show how global warming could increase disruptive geologic activity. It appears that my suspicions could have a scientific basis, after all. Thus, that’s one more kind of danger that we humans must evaluate—in addition to the perils of more powerful storms, flooding, draughts, and crop failures—as we decide whether or not to cut our energy use and greenhouse gas emissions.

Democratic members of Congress are preparing to fight large health insurance premium increases, which are expected in the aftermath of the health care reform legislation, the NY Times reported Tuesday. A bill introduced in the Senate by Dianne Feinstein (D-Cal) would grant the Secretary of HHS authority to investigate and bar increases “found to be unreasonable.”

Starting in 2014, the recently enacted reform law will prohibit insurance companies from raising rates on the basis of their customers’ medical conditions, but the law doesn’t prevent them from jacking up those rates between now and then. On Wednesday, one Congresswoman who has joined the effort to prevent rate increases, Rep. Jan Schakowsky (D-Ill), told the LA Times,“People say, ‘Great, you passed this big bill. But we are seeing these giant rate increases. What are you going to do about it?’”

A health insurance rate increase in California played a prominent role in the debate leading to passage of the reform law. In February, Anthem Blue Cross of California raised premiums on individual policyholders by up to 39%. But the company appeared to undermined its own interest, as the hike gave impetus to the legislation. In response to public outrage and actions by the California insurance commissioner, Anthem decided to postpone the increase.

Also, in what are turning out to be ill-timed, provocative actions to bolster profits, Wellpoint, the nation’s largest health insurer and the owner of Anthem Blue Cross subsidiaries in California and several other states, has been canceling the health insurance policies of women who develop breast cancer, Reuters reported yesterday. The practice added over $100 million to the company’s profits by enabling it to escape paying numerous expensive medical claims.

One could not imagine a more sensitive issue to appear in a news report or a more glaring light to cast on a health insurer’s practices than the subject of this Reuters article. Breast cancer is one of the most high-profile of all cancers, the focus of massive public concern and publicity campaigns, especially among women’s groups and patient advocacy organizations.

Nancy Pelosi, the first woman Speaker of the House of Representatives, responded to the Reuters report immediately, saying the practice is “exactly the kind of insurance company abuse our new health care law prohibits.” But Reuters also reported that some health experts and state regulators doubt that the new law would indeed curb such “rescissions,” as these policy cancellations are called in the insurance industry, because the law lacks adequate regulatory and enforcement provisions.

Also yesterday, the HHS Secretary, Kathleen Sibelius, released a letter to Wellpoint, advising the company:

WellPoint should not wait to end the unconscionable practice of deliberately working to deny health insurance coverage to women diagnosed with breast cancer. I urge you to immediately cease these practices and abandon your efforts to rescind health insurance coverage from patients who need it most.

In a speech to health journalists, Reuters reported, Sibelius threatened insurers with “hand to hand combat” if they attempt to “drive patients out of plans.”

In the 1960s and 1970s, psychedelic drugs were legal and their ingestion was fashionable. But psychologically vulnerable individuals got badly hurt. Psychosis, addiction, isolation, suicide were among the consequences for some users. The naïve, too-enthusiastic promotion of drugs and embrace of the drug culture by Timothy Leary, Allen Ginsberg and others was followed by a counter-reaction. Psychedelic drugs were scheduled and prohibited, and all uses, even for research and therapy, ceased for years afterward.

The situation has changed a little bit today. The use of marijuana by cancer patients for nausea and loss of appetite has been scientifically investigated.Drugs derived from marijuana’s active ingredient, THC, have been approved, and marijuana itself has been legalized in 14 states for medical use.

On Tuesday, Scientific American reported on a scientific conference in San José last weekend on the use of other psychedelic drugs for therapeutic purposes. One investigator described the treatment of post-traumatic stress disorder (PTSD) with MDMA (“ecstasy”). Another discussed the use of psilocybin, a hallucinogen derived from mushrooms, for anxiety in patients with terminal cancer.

The MDMA study, an uncontrolled, unblinded case series involving 21 patients, began in 2004 under the sponsorship of the Multidisciplinary Association for Psychedelic Studies. At the conference, the lead investigator, psychotherapist Michael Mithoefer, reported long-lasting relief of symptoms in nearly all patients following 2 or 3 supervised sessions of therapeutic MDMA administration, according to the article.

Like all clinical trials, the MDMA study had to be reviewed and approved by the FDA, and the SciAm article reported that this month the agency approved the addition of 16 more patients to the study. I’m acquainted with the FDA offices that handle this type of investigational application, and I’m confident that the results of the study so far had to be sufficiently suggestive of positive outcomes for the agency to permit it to continue.

MDMA acts in the brain to release dopamine, serotonin, and oxytocin, and it increases blood levels of oxytocin, according to the article. Oxytocin is known to reduce stress, enhance positive emotions, and promote nurturing and bonding behaviors. During the MDMA sessions, the therapist leads the patient to remember and re-experience the traumatic event that precipitated PTSD. Perhaps the re-experience of the trauma, occurring in the context of a drug-induced, intensely positive state, might help to extinguish the fear associated with it.

In this connection, it’s noteworthy that one of the most effective PTSD treatments, Prolonged Exposure Therapy, involves the re-experiencing of trauma-associated thoughts, feelings and situations in contexts that are nurturing and safe.

It’s worth investigating these medicines, I think, but the risks have to be balanced against the potential benefits. Contrary to the unsubstantiated beliefs of many ingenuous people four decades ago (myself included), the drugs aren’t always benign. They can cause severe adverse effects.

The Food and Drug Administration is responsible for ensuring drugs are safe and effective. Its work protects Americans’ lives and health. So you might think that the agency would have rules about falsifying drug-related information. In fact, not so much.

The FDA requires pharmaceutical companies to submit all sorts of voluminous and detailed information on their drugs: Data on effectiveness and safety, adverse reactions, marketing, formulations, research studies, etc., but apparently not on known or suspected instances of data falsification. Under a new proposed rule, that would change.

Data falsification has always occurred, and it probably happens more often than supposed. I’m personally aware of several instances as far back as 1989—cases of misrepresenting serious adverse reactions, failing to report unfavorable data, and replacing negative with positive data.

In recent years, the drug companies Merck and GlaxoSmithKline have been criticized for misrepresenting data and misreporting information, in regard to Vioxx, Merck’s pain-reliever, and Avandia, GSK’s anti-diabetes drug. Both drugs were discovered to increase the risk of heart attacks, particularly for vulnerable patients. And in both cases, the companies’ actions—in all likelihood related to concerns about sales—are reasonably presumed to have contributed to thousands of cases of death and heart disease associated with these drugs.

Under the proposed rule, published in the February 19, 2010 number of the Federal Register, FDA would direct pharmaceutical companies to submit information that any person may have falsified data in reporting research results, or in “proposing, designing, performing, recording, supervising, or reviewing studies” involving humans or animals. Such research would include all that the company either conducted or relied upon. And “any person” would clearly include both officers and employees of the company, as well as individuals hired under contract.

A company would have to submit such information promptly, but no later than 45 days from the time of learning of it. The rule does not require that the company learn with certainty that falsification occurred, but only that it may have happened. Failure to report could be considered a violation of the Food, Drug, and Cosmetic Act or the U.S. Code, section 1001, submission of false statements to the federal government.

In the background section of the proposed rule, the FDA explained,

Each year, FDA discovers falsification of data at study sites and in application submissions. … FDA’s proposal to amend the regulations has its origins in events that occurred in the mid- to late-1990s, when complaints to FDA and followup through FDA’s bioresearch monitoring program revealed some particularly egregious cases of falsification of data by clinical investigators. For example, in one case, an investigator falsified data that extended across studies in 91 applications submitted to FDA by 47 different sponsors.

The new rule reflects increasing activism to protect public health in regard to foods and drugs. The new policy of the Obama administration and the Department of Health and Human Services under Secretary Kathleen Sibelius contrasts with a laissez-faire attitude toward regulation during the previous Bush administration.

Last year, under the newly appointed FDA Commissioner Margaret Hamburg, the agency beefed up enforcement actions. It established deadlines for companies to respond to problems found during inspections of their facilities, and it speeded up the issuance of warning letters about violations. Earlier this year, the agency exercised its authority under new legislation to require companies to conduct postmarketing studies. That research investigates drug-related safety and efficacy concerns after a drug has already been approved and marketed. In the past, companies sometimes delayed or defrayed conducting such studies, since the drugs were already on the market, and there would be little to gain by looking for possible problems.

Research on Alzheimer’s disease (AD) is progressing rapidly. New findings and possible therapies seem to emerge almost weekly. One of the most promising discoveries to date was announced last week by researchers at New York Presbyterian Hospital and Weill Cornell Medical Center at the American Academy of Neurology conference in Toronto.

The scientists reported the results of a phase 2 clinical trial of intravenous immune globulin (IGIV), a product long available and made from concentrating and purifying human antibodies from donor blood. Such trials are small, preliminary investigations in patients (20 in this case), which are performed to look for the first evidence of efficacy and safety of a new treatment. The exciting, hopeful outcome was that loss of brain tissue, the inevitable consequence of AD, was reduced by half by the treatment.

In the study, brain tissue loss was assessed by MRI scan, as reflected in the size of ventricles. These are fluid-filled spaces normally present in the center of the brain, which are part of the circulatory system of cerebrospinal fluid (CSF). The CSF supplies the brain as the blood supplies the rest of the body. Because of the loss of neurons and the consequent shrinkage of brain tissue in AD, the size of the ventricles expands as the disease progresses.

The subjects of this study were patients with mild to moderate AD randomly assigned to treatment with infusions of IGIV (2/3 of the patients) or a placebo infusion (1/3 of the patients), given once or twice a month for up to 18 months. The ventricles of the patients who received IGIV enlarged by 6.7% per year on average, compared to 12.7% in the patients who received the placebo. Moreover, the scans showed that the brain as a whole shrank 1.6% in the active-treatment group compared to 2.2% in the placebo group. The results of cognitive testing of the patients showed that those on the active treatment fared better, as well.

IGIV, which is mainly gamma globulin, a particular kind of antibody, is a therapeutic product used for treatment of immune deficiencies, other immune disorders, and some infections. Among numerous species of antibodies, it contains those that bind to ß-amyloid, the abnormal protein that forms plaques in the brains of Alzheimer’s patients and accumulates during the course of the diseases. The presence of amyloid in the brains of Alzheimer’s patients is diagnostic of the disease and thought to be the possible cause of the brain degeneration.

Once antibodies bind to an abnormal substance, or a foreign organism, scavenger white cells will attack it, digest it and dispose of it. The new therapy might possibly work by clearing amyloid from the brain in this way.

Dr. Normal Relkin, the principle investigator, commented that it was “the first trial in which long-term clinical benefits in Alzheimer’s patients were accompanied by objective signs of reduced brain degeneration. The dramatic discovery was widely reported in the press last week. An article in the Wall Street Journal noted that about 8 million Americans older than 65 are expected to be suffering from AD by 2030.

The Cornell scientists are now in the process of recruiting patients for a larger phase 3 clinical trial. Such investigations provide more definitive evidence of efficacy, and they are also better capable of testing the safety of the treatment, particularly in regard to less common adverse effects. One of the main safety questions, in my view, would be whether IGIV antibodies directed at a substance in the brain could provoke an inflammatory immune reaction, perhaps causing a kind of encephalitis.

Research reported last month in the journal of the Foundation of American Societies for Experimental Biology (FASEB journal) described a new a test to diagnose AD at an early stage. The test is based on antibodies against components of amyloid protein called amyloid-ß oligomers (A^ß). The scientists took samples of CSF from 25 patients with AD or mild cognitive impairment, an early sign of the disease, and 25 age-matched normal controls. Using the antibody-containing probe, they found significantly higher levels of A^ß in the patients as compared to the controls. Thus, if things work out as promising developments suggest, amyloid antibodies could play prominent roles in both diagnosing and treating the disease.

Con artists and conjurers have duped gullible folks since the dawn of history, but financial wizards at Goldman Sachs pulled off an amazing transformation—turning huge potential losses into gains—by cheating their own investors, if allegations by the government and reports in the press are true.

Not since the Enron debacle have I been so fascinated by the intricacies of arcane financial transactions. After hours this weekend puzzling out the workings of Goldman operations, I post here my take on the details of the apparent deception. I’m less interested in which individuals did what than how they did it. I acknowledge I’m no financial expert, and what follows includes a lot of my guesswork. But I draw my inferences from several articles appearing in the NY Times and Bloomberg News in recent days.

• What went on at Goldman before the housing market crashed?

Until then, house prices were soaring. Like other banks and investment firms, Goldman was accumulating securities called CDOs, formed from bundles of risky subprime mortgages. The securities were paying high rates of return.

• What went wrong with Goldman’s strategy?

If many homeowners providing the income stream to the holders of CDOs defaulted in large numbers, then Goldman (and other institutions) might suffer huge losses and bankruptcies. In 2006, top executives at Goldman Sachs managers decided that many mortgage-backed securities were too risky and likely to default.

• What did Goldman do to reduce its potential losses?

Goldman implemented an ingenious strategy to hedge against potential losses. Beginning in 2004 and continuing through 2008, traders at Goldman created 25 mortgage securities deals called Abacus, worth in total around $11 billion. But some of these financial instruments—particularly one of them designated ABACUS 2007-AC1—did not actually consist of groups of mortgages. These were called synthetic CDOs. According to both the NY Times and Bloomberg they comprised financial derivatives called credit-default swaps (CDS). It’s the way the CDS work and what Goldman did with them that are so fascinating.

• What are credit-default swaps and what havoc did they cause?

CDS are a form of insurance purchased by an investor to protect against losses related to a loan or debt-related investment, such as a mortgage-backed security. The issuer of the CDS (usually a large company like a bank, an investment house, a mutual fund, or an insurance company) contracts to pay the investor if the security loses value or fails. The name CDS means in return for premium payments, the issuer insures the investor (who is a provider of credit) against default by the borrower by agreeing to pay if the investor loses the value or income of the debt-related investment.

In the midst of the housing bubble, when home prices were skyrocketing, issuers of CDS thought they were wonderful for making big profits. Few expected many homeowners to default on mortgages, because if they got into trouble, most homeowners could sell to buyers and realize gains.

But that changed when the bubble burst and housing prices fell. Homeowners having trouble making payments had no one to sell to, so many stopped paying the mortgages. Issuers of CDS lost lots of money due to having to pay off. Some of these unfortunate payers included the insurance company AIG and probably also the investment houses Lehman Brothers and Bear Stearns, which got bailed out by the government, went bankrupt or were forced to merge.

• What was Goldman’s ingenious solution to its problem?

Like other investment houses that owned securities based on risky mortgages, Goldman was at risk of huge losses. Their way out was to make use of the fact that synthetic CDOs comprised of CDS could be sold as equivalents to regular CDOs.

At the time Goldman began to implement the strategy, the housing market was still bubbling away, and many investors were clamoring for more high-return mortgage-backed CDOs. Indeed, there weren’t enough of them to satisfy the demand. Moreover, investors continued to believe that CDS issuers faced little risk of having to pay off. Since holders of CDS could earn a good return in the form of premiums on the insurance they provided to the holders of CDOs, and since investors believed that the CDOs wouldn’t fail, many were willing to buy synthetic CDOs comprised of bundled CDS, in lieu of buying regular CDOs.

In that environment, traders at Goldman created the Abacus securities, apparently as substitutes for CDOs and sold them to investors. But instead of issuing the CDS in line with the usual practice, Goldman reversed the procedure and packaged the CDS into synthetic CDOs in Abacus. In this arrangement, apparently, Goldman was the insured party and the investors would have to pay off to Goldman if the CDOs lost value, as they did in the following years. According to Bloomberg:

Abacus deals were filled with default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn’t pay as promised, in return for regular premiums from the bank.

This morning the NY Times made this similar point:

Their Abacus deals included insurancelike protection that would pay out if certain mortgage bonds soured. Such credit-default swaps were not worth much in 2005, when housing was flying high, but became highly valuable once the market sputtered.

Goldman’s activity seems reprehensible. The investors who dealt with Goldman expected to be sold securities in an ethical manner. Instead, it appears that Goldman used its investors to escape from its financial problems. It used them to insure its own potential losses in the housing market. Again, however, I emphasize that I’m no expert in these matters. This is just how it seems to me.

In testimony before the Congressionally-created Financial Crisis Inquiry Commission, Goldman CEO Lloyd Blankfein pointed out that it dealt with the most sophisticated investors. That seems to be true. Here are a couple of links describing the financial drubbing taken by Goldman’s trading partners and counterparties, like AIG.

Even the experts can sometimes be gullible fools.