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September 30, 2008
By William Irwin Thompson
“We Irish think otherwise” Bishop Berkeley
The
Economic Crisis from a Cultural Historical Point of View, 9/30/2008
I will let my colleague at the Wild
River Review
Fred Young explain the financial world of shorts and derivatives, CMOs and
CDOs, what I would like to do here is to shift our perspective. Imagine you are on Google Maps, and you click
on “Terrain” so that Fred can map the terrain with long term memory
and the streets with short term memory. Then you click on “Satellite” and I come in to try to look at
the terrain from the outer space of the poet and the cultural historian.
The greatest
cultural historian of the twentieth century was the Frenchman, Fernand Braudel.
When he looked at the Great Depression he saw it as a sign of the shift of the
world economy from London to New York. (If we don’t play our blue chips and greenbacks well in this
crisis, it may well snap back to London.) In the new sciences of complex dynamical systems, the accumulation of
“noise” draws a system to a new attractor, a new basin of attraction
in the adaptive landscape of peaks and sinks. The truly rich, whose wealth is not based on secondary and
tertiary level assets and huge debt, look upon depressions as opportunities to
come in to buy up on the cheap all the assets of the indebted and overextended
capitalists in the middle of capitalist food chain. In the Great Depression, Dupont bought up General
Motors. Notice in this nanosecond
depression, Warren Buffet has just bought into Goldman Sachs with five billion
dollars. It would appear that Mr. Buffet is betting that a few big players are
going to come out of this in the bout of Last Man Standing.
Recall that
once upon a time there was an American auto industry with Studebakers and
American Motors. Now, effectively,
there is an American industry of only GM and Ford. These companies sell old products for old mass markets. All innovation for new markets and
emerging niches is coming from Toyota and Honda. Recall also that once upon a time there were hundreds of
mass product beers like Schlitz and Rheingold. And then there were only two, Coors and Budweiser. They, of course, did not produce real
beer but merely a well advertized form of industrialized water, but the rank
inferiority of their products soon stimulated the national growth of fine
microbreweries, and even on the spot pub breweries. Personally, I am a devoted fan of Portland’s microbrew,
Geary’s Pale Alle.
Whether it is
Pepsi or Coke, GM or Ford, Republican or Democrat, America is a land for
couples. But speed dating has made
the marketplace a land of rapidly changing couples – gay and straight. We may even see Sarah Palin disappear
this week if she embarrassingly flubs up on her speed date in the debates. So after this economic crisis is over,
we may see a new adaptive landscape of the twin peaks of BankAmerica and
Citicorp, and Goldman Sachs and Morgan Stanley, with a few other little bumps
about to become sink holes. Warren
Buffet is betting that Goldman Sachs will be one of the standing peaks.
As for the
crisis itself, this is the blowback of the neocons “Shock and Awe”
doctrine. Just as Rumsfeld came
into Iraq with two few troops to invade and hold the country, so did the
investment banks come to play with too little true capital. Recall that after neocon Rumsfeld and
Wolfowitz made a mess of things militarily, neocon Jay Brenner came to Baghdad
to use Shock and Awe to modernize the Bath socialist economy. His first act was to fire all the
soldiers in the army, who then, knowing where the explosives were buried,
crossed the aisle to become insurgents and use the armaments we had left
unguarded to create improvised explosive devices. The neocons cared little for the economic sufferings of the
Iraqi people, anymore than they had cared for the economic sufferings of the
Polish or Russian people in the transition from socialism to fundamentalist
market capitalism. They simple
wrote it all off as the growing pains of modernization, and no one came to
their economic rescue.
Ah!, but now
that the suffering has come in the blowback of the false perceptions of culture
in their ideologies of deregulation and free markets, all the investment
bankers are screaming and calling for a rescue from the very taxpayers who paid
the taxes the upper 2% never did because of all the tax cuts they had been
given by Bush. The neocons have
become like the Somali pirates and have taken the country hostage and are now
calling out for ransom.
As part of the
terms of the hostage exchange, the Secretary of the Treasury is to be made an
absolute monarch with no congressional review, no tax cuts are to be repealed,
and no regulations are to be set in place. Bush, McCain, and Gramm are calling for a continuation of
the policies that created the crisis in the first place. Just as they tried to rule us through
fear in the terrorists attacks, they are now trying to rule us through fear in
their predictions of economic collapse, and telling us not to think but to sign
over the seven hundred billion by tomorrow or the hostages will die. If all their demands are met, it won’t
matter if McCain screws up and Obama is elected, because the neocons will still
have the world economy under their control with an even smaller board of
directors of Earth, Inc – observe that Phil Gramm is on the board of the Swiss
bank UBS–because all the other little players will be gone.
You have to
hand it to them: the bad people who rule the world are pretty clever and they
didn’t get to their off-shore humanity by being as dumb as the masses who voted for Bush and would
now vote for McCain.
Cultural
Historian William Irwin Thompson writes
regularly for Wild River Review.
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By Fred Young
The
financial collapse of the world markets goes beyond the madness of a crowd.
I
am one of those people that believe folks selected or elected to positions of
responsibility are operating with more information than I have. Secondly, I
believe that when you have access to this higher understanding it is the duty
of those in elected positions to review information and make accountable
decisions that include a Plan B.
Accountable,
because if decision-makers act imprudently, then they need to step off. The
bailout plan seems to be a bold plan, but the lack of details led our
representatives in government to reject the plan, much to the market’s surprise. So much of a surprise that shortly before 2 p.m. on Monday the
bailout plan failed in the house and the stock market fell off the cliff.
I
was asked why the market didn’t halt trading. The thought of a deep breath is
great, but not so simple when we are engaged in a global stock and bond market.
I can recall the world stock markets coordinating a halt for a few days post
9/11. While the latest market crash may be a world dilemma, had the US halted
trading, world panic would have been ignited.
Still,
while these matters are sorted out, maybe a worldwide halt of trading should be
considered. Secondly, a plan to support the banks needs to be executed quickly
and without earmarks (or as some like to call them – pork) and with limitations
on executive compensation. If there are profits to be made by this fiasco those
need to land back in the taxpayers hands first.
I
ask for quick resolution for the small businesses in the US not the fat cats on
Wall Street. I have seen credit squeezes in the past and the losers are always
the small business owners, homeowners and first-time home buyers. I am all for
a prudent process when granting credit, but I fear that prudence can sometimes
be just too severe.
Now for the word
of the day – Collateralized Mortgage Obligations (CMOs) and Collateralized Debt
Obligations (CDOs).
Let’s start with mortgages.
For a long time, banks have been bundling (aka grouping) mortgages and selling
them to other banks or investment banks (and passed on to the public via
brokers). This is one way that banks make profits.
Those who buy the bundled
mortgages repackage them and sell them to individuals, pension funds, etc.. act
as a broker and this repackaging is another opportunity for so profit.
The third buyers of
these bundles like them because by bundling you spread out risk. Think of it. Would
you rather have $100 in 10 mortgages or $1000 in just one. So, a Collateralized
Mortgage Obligation (CMO) is a bundle of loans that are sold as an investment.
Many people think they are just like bonds because they pay interest and the
principal is paid back as well. Remember the investment is collateralized by
mortgages (a loan collateralized by a loan).
So far so good. But
like a bushel of apples, not every one is perfect. The banks that make the
original mortgage know that not every mortgage is A+. So they then bundle up
mortgages that have similar risk characteristics and put them into piles and
rate the piles from high to low. So there are grades of CMOs and the last pile
is known as sub prime. There is no change to the interest on the mortgage but
the first pile might pay 98 cents for a dollar’s worth of mortgage and the last
pile might pay 70 cents for every dollar. If all works out they get the
interest, the whole dollar back as the loan is repaid (2 cents or 30 cents gain
depending on the bundle).
Now get this. They
then take the last bundle (sub prime) and slice those mortgages again by degree
of risk usually into six more piles with the first pile called “Triple A” rated sub-prime, and the
last pile as “toxic waste,” (because it is so high- risk). In the
past, investment banks kept these toxic loans on their own books.
Ah, in the past … you see the bankers and investment firms heard the insatiable appetite of the
investing public and thought – why not take these toxic deals and rate these
and re-brand the best waste as “Triple A”. Are you reading the fine print? Do you see the pattern??
These are the worst of the worst loans and they are given not just a single A,
they’re given Triple A. So you don’t call this last pile pile “toxic waste” now
they go by a fancier term known as Collateralized Debt Obligations (CDOs).
Don’t forget, there is AAA rated CDOs – doesn’t that make you feel good.
Ready for this? The
issuance of global CDOs rose to $503 billion in 2007 from $157 billion in 2004.
So that $700 billion they are talking about wasn’t just pulled from thin
air.
Fred Young is a Wharton-educated banking executive with
over 25 years in financial services and he is president of the Wild
River Review advisory board. He encourages dialogue,
questions and contributions and can be reached at:Fyoung@wildriverreview.com
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Obama
Holds His Own Against McCain
by Bill Gaston Politics Editor–Wild River Review
I agree with Pierre that the
format of the debate did make for an entertaining contest. It brought out both
Obama and McCain’s “A” game. For
that, we should credit the moderator Jim Lehrer who had the good sense – unlike
most cable TV yakkers — to pose a sensible question, step back and allow the
candidates to give measured, thoughtful responses. Thankfully we were spared the indignity of a litany of “gotcha” questions and attention-stealing antics from moderators. (I’m thinking of Charlie Gibson of ABC
News, whose bloviations on the capital gains tax during the infamous April 17th
Obama-Clinton Democratic primary debate elicited catcalls from the studio
audience).
After a catastrophic couple of
weeks on the campaign trail, John McCain struck me as surprisingly
vigorous. He looked fresh and
rested, and his points were crisply delivered. But his body language spoke volumes. Weirdly, throughout the debate, he refused at any point to make eye contact with Obama. (Was McCain afraid of Obama? Contemptuous?) Pierre may disagree with me, but I thought McCain’s attitude of condescension made him look small and angry, hardly endearing characteristics to undecided voters just forming emotional impressions of who they can imagine as President for the next four years. The grouchy old man
act is likely not a winning recipe for success.
For his part, Obama appeared
steady, knowledgeable, and effective in linking the current financial turmoil
to the demonstrably failed deregulatory policies and free market idolatry of
the GOP. He held firm on the need
to push forward with health care reform, energy independence, infrastructure
repair, and more investment in science and technology, but soberly added that “there
are a range of things we may have to delay,”given the state of the
economy. Pierre views this as “close to a real blunder” but I viewed it as a bit of straight talk. (Isn’t that
supposed to be McCain’s strength?)
However, one rhetorical miscue on Obama’s part (probably a product of his university training that prizes
fair-mindedness) deserves scrutiny, and that was his repeated refrain “John is right.” I’m sure he won’t use that phrase again on the campaign trail.
As Pierre says, McCain’s call for
large cuts in government spending probably played well with the public, but I
though Obama effectively countered that the “orgy in spending” over the past
eight years has taken place largely under the watch of a Republican-controlled
legislature and President. Obama was spot on in questioning where McCain’s fiscal discipline was
all those years as he voted in favor of one budget-busting bill after another.
In the foreign policy portion of
the debate, McCain pounded away at Obama’s naivete and inexperience, but in my estimation, Obama stood his ground, unrattled. I agree with Pierre that Obama’s newfound hawkishness on Pakistan and Afghanistan did sound somewhat off-key. Overall, however, I think Obama held his own, especially as
he skewered McCain’s long record of “wrong” statements on the Iraq War, the
surge notwithstanding. Particularly amusing to me was McCain’s repeated and belligerent
insistence on the importance of attaching diplomatic preconditions to meeting
with Iran and North Korea. Obama
demolished McCain’s argument by noting that none other than Henry Kissinger – who serves as a McCain foreign policy adviser –had called for direct talks
with Iran, which spiraled off into a confusing mini-debate on what Kissinger
may or may not have meant.
Indeed, McCain faces a tough road
ahead, and if this debate was any indication, he did himself no favors. This election remains Obama’s to lose.
Bill Gaston is an
analyst with the New York City government, a former editor at Institutional
Investor Magazine, and a freelance writer on political and economic affairs. Bill
received his BA from George Washington University, and MA from Columbia
University’s School of International and Public Affairs.
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September 29, 2008
by Pierre H. Canu
The format made
this far more entertaining and combative than other recent presidential
debates. There were missed opportunities but no particularly embarrassing
gaffes for either candidate. And, unlike many debates in the past, it produced
no particularly striking sound bites likely to provide titillating fodder for campaign
ads.
Although foreign
policy was to be the focus, much of the time was hijacked by discussion of the
current financial crisis and plans for a bail out. That was a break for Barak
Obama as he was effective in driving home the Democrat mantras of being for the
working man and woman and against providing tax and other bonanzas for the very
richest Americans.
John McCain was not
particularly effective in forcing Obama to give specifics and allowed him
without challenge to make the patently mendacious claim that he would cut the
taxes of all but the top 5% of income earners, the by now infamous $250,000 and
up fat cat. I would like to think most voters will see through that but fear
that the times will cause many to remember and, worse, support Obama’s soak the
rich class warfare promises. Aside from being divisive and downright immoral,
such an approach can only assure reduced prosperity for all.
Moderator Jim
Lehrer was notably unsuccessful in getting either candidate to level about what
cutbacks would be necessary to pay for the proposed bail out of financial
institutions. But, McCain’s oft repeated assertions that large cuts must be
made in many government programs was at least responsive and played well, I
believe, with much of the public. Obama’s grudging admission that he might have
to slow down or delay efforts to make the nation less dependent on oil was
probably about as close to a real blunder as we saw in this debate.
Once the subject
matter turned more specifically to foreign policy and security matters, John
McCain seemed to gain the upper hand. He was persistent if not particularly
subtle in hammering home Obama’s inexperience and alleged naivete. To my
surprise, Obama did not take the opportunity to back off his silly and
ungenerous position that, despite its success, he would still, in retrospect,
have opposed the “surge” in Iraq.
McCain succeeded in
getting under Obama’s skin with his repeated [and, I believe, accurate]
assertions that General Petreus strongly opposes Obama’s plans for Iraq.
Senator Obama was visibly irritated but did not lose his cool in a big way.
It was reported
that Obama would make an effort to goad his opponent into showing temper, but
he had no success in doing that. The Illinois senator made an obviously rehearsed
effort to camouflage his less aggressive approach to fighting terrorism by
sounding the trumpet for stepped up military action in Afghanistan and
Pakistan, including promising to capture or kill Osama bin Laden. It was well
carried off but did not seem very credible. McCain is a much more believable
tough guy.
Overall, both
candidates projected confidence and competence but McCain seemed the most in
charge. Obama made progress in shedding his pedantic often irritatingly
professorial manner but McCain probably connected better with most viewers. He
was particularly effective in his final two perorations that drove home again
and again his contention that Obama is weak and too naive to be trusted to
protect the nation’s interest against its enemies and troublemakers such as Russia’s Putin.
Still, there was no
knockout punch and, in the end, Barak Obama held his own. In my judgment, that
makes this debate, on John McCain’s perceived strong point of foreign and
security policy, a success for Obama. Obama went in ahead in the horse race and
nothing happened to change that.
With 40 some days
to go before the election, the very inexperienced [and very liberal] junior
senator from Illinois appears poised to be elected President of the United
States. That would be frightening to me.
But, the short time
remaining before the election is a lifetime in politics. Still, “early voting” is now the norm in almost half the states and many, myself included, will vote
(in North Carolina) in just a little more than a week. And Senator Obama will
outspend Senator McCain at least 2 to 1.
It is not over until it is over but it is a very steep hill for John McCain to climb and he probably
gained no traction in this debate.
Pierre
Canu is a 1964 graduate of Yale.
He was on the college debating team, chairman of the Conservative Party and
President of the Yale Political Union, president of the Yale Young Republicans,
chairman of the New England College Young Republicans and chairman of the
Conservative Coalition at Yale. He was an aide to William E. Miller, the
Republican vice presidential candidate, in the 1964 election and served as a
naval officer from 1964 to 1968. He got his law degree from the University of
Virginia in 1971. He recently retired after a career in both private law
practice and the legal departments of two large multinational corporations. He
and Victoria, his wife of 40 years, are currently moving from Greenwich CT to
Boone in the mountains of North Carolina.
Editor’s Note: We are experiencing a
technical difficulty in receiving comments if you pressed the comment button at
the bottom of each entry. Your comments are vital to the dialogue intended via
this blog so I encourage direct comments to fyoung@wildriverreview.com. Feel free to press the
address since it has been hyperlinked.
Your comments will be promptly attached to the intended entry and
properly attributed. Thank you.
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September 26, 2008
by Fred Young
For the past 20+ years, I have been
advising individuals and non-profits in how best to structure their businesses
and invest their money in a style consistent with their goals and willingness
to take risk. One of the troubling aspects of managing and investing money in
the last 8 years was a lack of transparency. That will be the word of the day.
Transparency in financial terms means
the ability for investors to have ready access to any and all required
financial information about a company, such as outstanding debt, executive
compensation and audited financial reports. Pretty obvious that this is a
cornerstone of any free and efficient stock/bond market. Sure, there are annual statements
and information on executive pay, but companies are not disclosing their
exposure to swap instruments – interest rate and credit defaults.
Swap is just a term to describe moving risk around. Think
of your car insurance company willing to pay for your accident if you pay them
a fee (in this case an insurance premium). You swap your money and they take
you risk of accident. Insurance companies are guessing that more people will
not have accidents (which cost money to fix) than people who do have accidents.
If the insurance company is right, it gets to keep the profits from all the
premiums people pay them. Now for our examples on swaps:
- Company
A wants to borrow $1 million.
- Bank X lends Company A $ million at current interest rates.
Interest Rate Swap: Company
A gets concerned about interest rate fluctuations and hedges their bet by
buying a swap from the bank or another bank. The swap has a fee associated with
it, and if all goes well the bank keeps the fee and everyone is happy. If rates
go against the bank (and they have) you can see how losses add up.
Credit Default Swap:Bank X is concerned that maybe the
loan to Company A is not so good. They buy a swap for a fee from another
institution for a fee and again if all goes well the second bank keeps the fee.
Ah, but if the loan goes bad …
You can see how these feel like
insurance and for the most part the deals go just fine. But consider this; if
less that 1% of these deals goes sour, that number is over $500 billion. The
exposures to these risks are not normally disclosed on the financial
institutions balance sheets.
I
applaud David Paterson (Gov of NY) for trying to legislate this exposure by
calling it what it is: insurance. If banks want to engage in swaps, he is
demanding that insurance regulators oversee these activities.
If these companies and financial institutions are
moving loans, debts, etc. around without letting the public know, it makes it
very difficult for the stock market to get a real handle on what is going on.
Exposing these risks increases transparency and reduces price volatility (the
crazy swings) because all the market participants can base their decisions
on the same data.
Another great podcast on mortgages, in fact probably the best
from this past summer, was Fresh Air story on July 8th with Paul Muolo, senior editor of National Mortgage News: Is Wall Street At Fault For Mortgage
Meltdown? His explanation of the mortgage and sub-prime world will stay in
my files for a very long time.
Fred Young is a Wharton-educated
banking executive with over 25 years in financial services. He is currently on sabbatical
and president of the Wild
River Review advisory board. He encourages dialogue,
questions and contributions and can be reached at:Fyoung@wildriverreview.com
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September 25, 2008
by Fred Young
I just finished listening to Gretchen
Morgenson on NPR’s Fresh Air show,The Wall Street Bailout: A
Conflict Of Interest? and I would encourage you all to take a listen. Descriptions of credit
default swaps, investment banks and an overview of the bailout plan are all
done in an accessible style.
She raises excellent points and
among them are:
1.Who is going to review these loans
that the government is buying?
2.How does this affect the US
dollar?
3.Why do we have to make a
lightening quick decision?
The first question is many-fold,
but at the core is the question of what organization is going to review these
toxic loans? Think how huge that bureaucracy might be. Behind that is gauging
the value of the various loans.
For instance, a mortgage on a
house where the owner has defaulted (meaning they can’t pay the mortgage), but
the house is worth more than the loan has got to be a better value than a mortgage that is bigger than the worth of the house.
These are the simple loans. They
get more complex quckly, and the concern is about the process for determining
the value for each loan the government is going to buy from troubled banks. The key word is buy, so you can only imagine the conflict over valuations.
This additional burden will cause
the value of the dollar to go down. Now a cheap dollar means that US Goods
become cheaper to the foreign market. But what do we make anymore? So this is a
thin argument.
The third question is the
$700,000,000,000 question. Many loans are owned by foreign banks operating in
the US like HSBC (Hongkong and Shanghai Banking Corp) , RBS (Royal Bank of Scotland), TD North (Toronto Dominion)…The devil certainly is in the details, and time never helps when trying to sort
through them.
There are good aspects to this
proposal, such as limiting executive pay for the banks that sell their toxic
loans. Overall, like sitting at the table after your little brother spilled his
milk, someone has to stop looking at the mess and do something. The
government’s proposal is a good step, but we really ought to know a bit more.
Heck, I listened to the House hearings yesterday and they were asking the same questions.
Fred Young is a Wharton-educated
banking executive with over 25 years in financial services and he is president of the Wild
River Review advisory board. He encourages dialogue,
questions and contributions and can be reached at Fyoung@wildriverreview.com
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September 23, 2008
This morning’s breakfast conversation revolved around
the most recent spike up in the price of oil futures.
I was asked, “You mean the price of oil just went up
again?”
Yeah, sorta. What the news is talking
about is that it was the futures that shot up. I could see the confusion and
realized that the term “futures” was another one of those tricky, “what are
they talking about?” phrases.
Stepping back from the oil conversation, I will
explain “futures” with something familiar to most of us – farming.
Think of
the new farmer who wants to plant a field of corn. She/he has spent all their
money buying the land but has no money for seeds and she/he won’t have money
until the crop comes in. So, the farmer goes down to the mill and tells them
that when the crop comes in it will yield 1000 bushels of corn. The mill
figures that the price per bushel is $5 so they “lend” $5,000 to the farmer and
expect that in the fall the farmer will deliver 1000 bushels or the comparable
price of corn. Another way of saying this, the farmer sells a “futures contract”
to deliver 1000 bushels at harvest time. The price of the contract is $5,000.
The farmer takes the $5,000 and buys seeds and
proceeds to plant corn. Now 1 of three things will happen:
1. Everything works just
perfectly and the farmer delivers 1000 bushels.
2. The farmer actually grows
1500 bushels and is able to sell the mill his additional 500 bushels. There is
a profit but if every farmer had a bumper crop then the price per bushel might
only be $2. There is happiness for the bounty but sadness because the extra
corn made only 40% of the other 1000 bushels on a per bushel basis.
3. There is a drought and
the farmer delivers 500 bushels and now either has to find 500 bushels from
someone else and you can imagine that the price of corn is pretty high when it
is scarce.
This sounds a lot like short selling, doesn’t it? The
farmer sold something she/he did not have for a promise to deliver later. You
can probably imagine the person at the mill giving a lower price per bushel if
the rookie farmer promised to deliver 1 million bushels.
So, the term “futures” aka “futures contract” is a
contractual agreement to buy or sell a particular commodity or financial
instrument at a pre-determine price in the future. Futures contracts
detail the what, when and how much. The mill system is still in place but as
the world got ore complex, taking futures got more complex. You hear about the
commodities markets and the futures exchanges. These are the modern mills for
things ranging from oil to gold to US dollar. All based on the concept that
asset; they are standardized to facilitate trading on a futures exchange. Next
time you are in Chicago, take a side trip to the Mercantile Exchange and watch
the bees buzzing as they trade the contracts all day long.
So, back to oil: If you are following this… In
simple terms before the oil company drills for oil, they are selling the
barrels in a futures contract. So you can see what happens when a hurricane
hits the Gulf, or OPEC increases their drilling or people stop driving cars.
All these things impact the demand for oil and the market is trying to predict
what usage and supply will be like in the future. What was yesterdays story
with the spike up? All things I mentioned plus the September delivery date
(remember the “when” in the contract) required folks to scramble.
Fred Young is a Wharton-educated
banking executive with over 25 years in financial services and he is president of the Wild
River Review advisory board. He encourages dialogue,
questions and contributions and can be reached at:Fyoung@wildriverreview.com
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