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Hugging Shari'a Finance at the Fed

By Alyssa A. Lappen
FrontPageMagazine.com | 12/10/2008

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 ÎéÎíderivative securitiesÎéÎí
regulation and ÎéÎícredit-defaultÎéÎí swaps allowing investors to ÎéÎíinsureÎéÎí
against loses---only to fail. The Treasury Department's former attachÎáÎéÎÝ
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 ÎéÎíunderstands [the causes] yet.ÎéÎí


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 ÎéÎíABCs
of Islamic FinancingÎéÎí 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. Given
Ghafoor's connections, how could the Fed have featured him, much less
warmly accepted Islamic finance?


In fairness, the New York Fed began authorizing obscure shari'a
banking institutions, structured shari'a issues, and opaque Islamic
securities trading long before Geithner arrived. ÎéÎíIslamic bankers have
been quite ingenious in developing financial transactions that suit
their needs,ÎéÎí New York Fed first vice president Ernest T. Patrikis
told an Islamic Finance conference in May 1996. ÎéÎíWe 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 bankingÎéÎí 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 ÎéÎícure the ills of
contemporary finance,ÎéÎí ÎéÎícreate a safer, saner financial world,ÎéÎí
incorporate the ÎéÎíinstitution of waqf [Islamic trust]ÎéÎí in economics and
create ÎéÎímorally inspiredÎéÎí behavior. In 2001, Siddiqi openly labeled
shari'a finance a revolution-driver---an ÎéÎíuniversal endeavorÎéÎí to
replace ÎéÎíexcesses of capitalism.ÎéÎí


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 as ÎéÎíPeace through submission to Allah (God), however,
ÎéÎírevelation-based [the Qur'an, Hadith] ... complete way of lifeÎéÎí ---
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
ÎéÎíownerÎéÎí of all material things, and that ÎéÎíindividualsÎéÎí may not possess
ÎéÎínatural resources important to society.ÎéÎí as ÎéÎíalternative financing
for MuslimsÎéÎí and others recognizing individual ownership rights.


True, most of that happened before Geithner ran the New York Fed. But
after he 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 ÎéÎíregulatory capital frameworkÎéÎí 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 ÎéÎíheavyÎéÎí collateral and
ÎéÎíexceptionalÎéÎí economic conditions to eliminate risks.


Islamic institutions had manufactured ÎéÎíspecial purpose
entitiesÎéÎí (SPEs)---renamed, ÎéÎíspecial-purpose vehicles (SPVs)ÎéÎí--- such
as coincidentally helped destroy Enron. These legal devices
restructured ÎéÎíinterest-bearing debt, collecting interest [as] rent or
[a] price mark-up,ÎéÎí Rice University Islamic economics chairman Mahmoud
el-Gamal warned in May 2007. ÎéÎíInterest-basedÎéÎí Islamic finance equaled
ÎéÎíshari'a arbitrage,ÎéÎí concerned only ÎéÎíreligious identityÎéÎí 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 ÎéÎíportfolio insuranceÎéÎí
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 ÎéÎíoverride commercial decisions;ÎéÎí
didn't ÎéÎístandardizeÎéÎí documentation; and used complex ÎéÎíinter-creditor
agreementsÎéÎí and ÎéÎíoff-balance sheet financing.ÎéÎí


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 ÎéÎíwall of separation between church and
stateÎéÎí Thomas Jefferson had described was ÎéÎínot absolute.ÎéÎí Chief
Justice Warren Burger had in 1984 suggested that the Constitution
ÎéÎíaffirmatively mandates accommodation, not merely tolerance, of all
religions,ÎéÎí Baxter told an Islamic financial industry ÎéÎíLegal IssuesÎéÎí
seminar. ÎéÎí[S]ecular law should ... accommodate differing religious
practices,ÎéÎí 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 ÎéÎíin no position to take a stance on shari'a
interpretation.ÎéÎí He also claimed the bank would hold Islamic finance
to ÎéÎíthe same high licensing and supervision standardsÎéÎí 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 ÎéÎítraditionÎéÎí 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
ÎéÎíinfidelsÎéÎí 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 ÎéÎírevenge,ÎéÎí wrote
jurist Abul Hasan al Mawardi (d. 1058). Qur'an 57:2 argued, ÎéÎíTo Him
belongs all dominions of the heavens and earth.ÎéÎí Qur'an 59:7 echoed,
ÎéÎíThat which Allah giveth as spoil [war booty] unto his MessengerÎíÎõÎéÎí
Allah authorized 2nd Islamic Caliph, Umar Ibn Khattab, to confiscate
property by force, fulfilling an Islamic trust, or ruling under
AllahÎéÎ÷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-QaÎéÎ÷ida
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 ÎéÎía universal Islamic banking systemÎéÎí and ÎéÎía jihad worth
pursuingÎíÎõ.ÎéÎí 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 ÎéÎímartyr
operations.ÎéÎí A large shareholder of Al Taqwa Bank, Qaradawi also
chairs the recently designated terrorist-funding Union of Good
ÎéÎícharity,ÎéÎí 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
ÎéÎístringent and publishedÎéÎí methods to determine ÎéÎícompliance of index-
eligible companies.ÎéÎí But its industry screens, financial ratios and
biographies omit advisorsÎéÎ÷ affiliations or beliefs. Dow Jones
Citigroup Sukuk Index (DJCSI)ÎéÎ÷s shari'a board certifies Islamic asset-
backed bonds if structures meet ÎéÎíAAOIFI standardsÎéÎí 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 PakistanÎéÎ÷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 ÎéÎíunderpricedÎéÎí) bank from 4% to
5%. On March 20, 2006, the Saudi Kingdom Holding Co. CEO was ÎéÎíhonored
for humanitarian contribution to IslamÎéÎí at a ÎéÎíglittering gala to
celebrate excellence in Islamic FinanceÎéÎí that also featured terror-
financier and Dallah al-Baraka founder and president Saleh Abdullah
Kamel.