Conventional Wisdom says the economic meltdown of the U.S. and most of the rest of the world was a self-inflicted wound, caused by greedy Wall Street types creating toxic assets from sub-prime mortgages, short sellers who wanted to maximize their profits, people buying overpriced houses they couldn’t possibly afford, lack of regulation by the federal government, etc. etc.
This is the message of the HBO movie “Too Big to Fail,” as well as the 2011 “The Financial Crisis Inquiry Report,” the final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, published for the trade by PublicAffairs ( I’m reprinting my review of this document below the review of Kevin Freeman’s book).
What if there was a more sinister cause for the worst recession since the Great Depression, asks Kevin D. Freeman in “Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and Why It Can Happen Again” (Regnery Publishing Inc., 256 pages, $27.95).
The meltdown, which ended up with half of the world’s wealth disappearing (Page 189), was caused by foreign enemies: China, the sovereign wealth funds of Arab nations — including many which are considered friendly — an embittered Russia getting back at the U.S. for ending its superpower status, says financial expert Freeman, a disciple of the legendary Sir John Templeton (think Franklin Templeton Investment Services, the widely respected worldwide sponsors of the Australian Open).
“Secret Weapon” grew out of a report (link:http://av.r.ftdata.co.uk/files/2011/03/49755779-Economic-Warfare-Risks-and-Responses-by-Kevin-D-Freeman.pdf) Freeman wrote in for the Defense Department in June 2009. The conclusions of the report were rejected by supporters of conventional wisdom, a phrase popularized by economist John Kenneth Galbraith, who used it in a pejorative sense in his 1958 book “The Affluent Society.” Previous authors had used the phrase “conventional wisdom” as a synonym for commonly accepted knowledge, but Galbraith appended “The” to the phrase to emphasize its uniqueness, and “sharpened its meaning to narrow it to those commonplace beliefs that are also acceptable comfortable to society, thus enhancing their ability to resist facts that might diminish them,” according to the Wikipedia entry.
Galbraith wrote: “It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that emphasizes this predictability. I shall refer to these ideas henceforth as the conventional wisdom.” (my emphasis).
Freeman says when it comes to America’s flailing economy, everyone is quick to assign blame, with liberals blaming corporate greed (there’s plenty of that to go around!) and conservatives blaming federal regulations or regulators (I ask what regulators, with the SEC asleep at the switch and short sales basically unregulated in the Clinton and Bush II administrations and continuing in the Obama one); with both sides denying the existence of financial terrorism, which dates back to early history and was used by the Nazis during World War II in the form of counterfeit U.S. dollars created by concentration camp inmates producing bills so perfect that they passed the scrutiny of the experts. We used economic warfare against the Japanese in the months preceding Pearl Harbor, when we cut off scrap metal and oil shipments to the Japanese, Freeman notes on pages 20-23. The Germans first used counterfeiting against Britain in Operation Bernhard (pages 23-25) and later branched out to counterfeiting U.S. currency. The Nazis used skilled Jewish inmates for the work and rewarded the inmates with better conditions.
Is it a coincidence that the meltdown came in September 2008, at a time when GOP presidential candidate John McCain was leading Obama in the public opinion polls, Freeman asks, suggesting that the economic terrorists wanted Barack Hussein Obama to win in November. So far, he writes, the Obama administration and its commissions (see above report) have ignored the possibility of financial terrorism, mostly out of politically correct motives.
One of the elements in “Too Big to Fail” was the rejection by British financial regulators of a takeover by London-based Barclays Bank of Lehman Brothers in the summer of 2008. On Page 157 Freeman writes that in the summer of 2008 Barclays was “heavily dependent on capital from the Middle East and China.” Neither the Middle East or China was interested in rescuing Lehman Brothers.
About those short sales, which Freeman talks about throughout this book, their lack of transparency — and oversight by the Securities and Exchange Commission (SEC); on Page 153 he writes that two firms — Wedbush Morgan Securities of Los Angeles and Penson Financial Services Inc. of Dallas — were responsible for much of the naked short selling that was used as a financial weapon of mass destruction, in the words of investing icon Warren Buffett. “These two firms were both pioneers in developing naked sponsored access prior to the 2008 crash, and both lobbied heavily to keep the practice legal,” Freeman says (Pages 153-4). The name Wedbush struck a chord with me: I worked briefly in financial public relations in L.A. in 2000 and one of the clients of the firm for which I worked was Wedbush Morgan Securities, 1000 Wilshire Blvd. overlooking the Harbor Freeway in downtown L.A.!
It’s important to note that short selling has been banned by Germany and most other countries, Freeman writes, noting (pages169-70) that our fast and loose fiscal mismanagement have caused German Chancellor Angela Merkel and other politicians around the world to be “scared stiff by what the U.S. is doing with its currency. Others are positioning themselves to exploit the coming crisis. The answer in Europe, according to George Soros and others, is to create a Eurobond that would replace debt from individual currencies. That would give global investors a credible alternative to the U.S. bond market.”
Following this passage, Freeman writes about what would happen if this “Eurobond” came into being, as well as “The Continuing Islamic Threat” (pages 171-4), “A Failure of Imagination” (pages 177-9), and “The BRIC Danger” (pages 174-177). BRIC refers to Brazil, Russia, India and China and now is called BRICS, with the addition of South Africa, a nation with “around half the world’s gold resources” (page 176). Freeman’s book turns Galbraith’s “The Conventional Wisdom” on its head, and so does Freeman’s 2009 report referenced above. Because of this, the passage that follows is quoted directly from the 2009 report’s “executive summary”:
Serious risks to the global economic system were exposed by the crisis of 2008, raising legitimate questions regarding the cause of the turmoil. An estimated $50 trillion of global wealth evaporated in the crisis with more than a quarter of that loss suffered by the United States and her citizens.
A number of potential causative factors exist, including sub-prime real estate loans, ahousing bubble, excessive leverage, and a failed regulatory system. Beyond these, however, the risks of financial terrorism and/or economic warfare also must be considered. The stakes are simply too high for these potential triggers to be ignored. The Obama administration‘s recent call for greater financial regulation stipulates to the facts that hedge fund activity has been virtually unregulated and that dark-pool trading,Credit Default Swaps, and naked short selling provide tremendous vulnerabilities in the system. This report concurs with these concerns as recently outlined by the heads of the SEC, US Treasury, and Federal Reserve and provides supporting data.
Beyond that, this report exposes the fact that these vulnerabilities are subject to exploitation not only by greedy capitalists seeking profit but also by financial terrorists, intent on destroying the American financial system.
From a historical perspective, there are numerous examples of financial attacks on specific companies and industries both for economic and non-economic reasons. In addition, there are other examples of financial attacks conducted against individual nations both for economic and non-economic reasons. Based on this awareness, the economic collapse of 2008 must be critically examined to determine the possibility that a financial attack took place as well as an assessment of future risks. The purpose of this report is to consider the implications of financial terrorism and/or economic warfare and to identify and realistically list prospective threats to U.S. economic security from a means, motive, and opportunity perspective.
The preliminary conclusions of the research suggest that, without question, there were actors who had the motive to harm the U.S. economy. These motives can be categorized as both economic and non-economic. In addition, these same actors have clearly demonstrated the means to carry out such an attack. Finally, the opportunity was clearly present given the existing economic condition and regulatory framework in operation. The hypothesis under consideration is that a three-phased attack is underway with two of those phases completed to date. The first phase was a speculative run-up in oil prices that generated as much as $2 trillion of excess wealth for oil-producing nations, filling the coffers of Sovereign Wealth Funds, especially those that follow Shariah Compliant Finance. This phase appears to have begun in 2007 and lasted through June 2008.
The rapid run-up in oil prices made the value of OPEC oil in the ground roughly$137 trillion (based on $125/barrel oil) virtually equal to the value of all other world financial assets, including every share of stock, every bond, every private company, all government and corporate debt, and the entire world‘s bank deposits. That means that the proven OPEC reserves were valued at almost threetimes the total market capitalization of every company on the planet traded in all 27 global stock markets. The second phase appears to have begun in 2008 with a series of bear raids targeting U.S. financial services firms that appeared to be systemically significant. An initial bear raid against Bear Stearns was successful in forcing the firm to near bankruptcy. It was acquired by JP Morgan Chase and the systemic risk was averted briefly.
Similar bear raids were conducted against various other firms during the summer, each ending in an acquisition. The attacks continued until the outright failure of Lehman Brothers in mid-September. This created a system-wide crisis, caused the collapse of the credit markets, and nearly collapsed the global financial system. The bear raids were perpetrated by naked short selling and manipulation of credit default swaps, both of which were virtually unregulated. The short selling was actually enhanced by recent regulatory changes including rescission of the uptick rule and loopholes such as ―the Madoff exemption.
While substantial, unusual trading activity can be identified, the source of the bear raids has not been traceable to date due to serious transparency gaps for hedgefunds, trading pools, sponsored access, and sovereign wealth funds. What can bedemonstrated, however, is that two relatively small broker dealers emergedvirtually overnight to trade ―trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value. The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar. Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of U.S. debt forcing rapidly rising interest rates and a collapse of the American economy. In short, a bear raid against the U.S.financial system remains possible and may even be likely. Phase Two may have concluded with the brief market rebound that was supported by an emerging regulatory response calling for greater transparency across the board. Efforts including regulation of credit default swaps and proposed oversight of previously unmonitored trading activity, as well as Federal support of systemically vital institutions. But, we remain left with the critical unanswered questions of who and how? The recent seizure of $134 billion face value in supposedly counterfeit U.S. Federal Reserve bonds underscores the reality of the economic threat. This may be assignificant as the Japanese radio intercepts were before December 1941. Immediate consideration of the issues outlined in this report is vital. Further study is essential and prospective responses must be crafted to address future risks.Finally, there are legitimate questions about the performance of the regulatory regime and Wall Street institutions. Implications that these parties have beencomplicit or otherwise co-opted cannot be ruled out. Therefore, it is strongly recommended that this study and any task-force response be conducted outside of traditional Washington and Wall Street circles.
Again, I can’t stress too strongly the need to read and digest both Freeman’s book and his 2009 report. They’re vital documents to understanding the meltdown.
About the Author:
Kevin D. Freeman, a Certified Financial Adviser (CFA) and registered investment adviser, is Chief Executive Officer of Freeman Global Investment Counsel, an investment advisory firm founded in 2004 operating under Cross Consulting Services LLC, where he serves as President. He is also Chief Investment Officer of Capitalist Publishing Co., Inc. Formerly he was Chairman of Separate Account Services, Inc and held several offices at Franklin Templeton Investment Services. He holds a B.S. in business administration from University of Tulsa, Tulsa, Oklahoma.Freeman was also Chairman of Separate Solutions, Inc., which he co-founded. He has consulted for congressional members as well as past and present CIA, FBI, SEC, Homeland Security, and government department officials.
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February 3, 2011
BOOK REVIEW: ‘The Financial Crisis Inquiry Report’: Plenty of villains, Few Good Guys/Gals in This Tale of Woe
Take all of Stephen King’s horror novels: “The Shining,” “Dolores Claiborne”, “Christine,” etc. add H.P. Lovecraft and Peter Straub and you still won’t have the sheer horror contained within the paperback covers of “The Financial Crisis Inquiry Report”, the final report of the National Commission on the Causes of the Financial and Economic Crisis in the U.S. (PublicAffairs Books, $14.99). The index is not included in the book I received, but can be accessed at: http://www.publicaffairsbooks.com/fcicindex.pdf.
What horrifies me more than almost anything after I plowed through this dismal record of malfeasance, misfeasance and general screwing up is that most the people who are responsible for the biggest financial crisis since the Great Depression — some say it’s even bigger and it certainly is in terms of wealth loss and maybe even lives ruined — are walking around free and rich beyond the dreams of average Americans. I know of a few federal prisons, including one in Bastrop, Texas, that I’d like to see populated by the criminal class that created this crisis.
I’m talking about people — among many others — like former Federal Reserve Board chairman Alan Greenspan, former Fannie Mae CEO Daniel Mudd, Angelo Mozilo (more about his penalty: last October the Securities and Exchange Commission announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company. Mozilo’s financial penalty is the largest ever paid by a public company’s senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.) and a host of financial “geniuses” that got us into the mess. Daniel Mudd, the son of TV anchorman Roger Mudd, walked away with tens of millions of dollars in compensation for running what one regulator called “the worst run financial institution” he had seen in his 30 years as a bank examiner. Fannie Mae and its fellow partner in the secondary mortgage market Freddie Mac were taken over by the government in 2008.
The sad saga of Fannie and Freddie is chronicled in Chapter 17, one of 22 chapters in the majority accepted part of the report (as I noted, three of the minority party commissioners dissented, and one, Peter J. Wallison, went further and issued a lengthy statement of dissent that is included in the report.). Essentially, the dissenters criticized the report as a simplistic chronological narrative of the events leading up to the crash and beyond. The dissenters also said that the majority commissioners put forth simplistic sole causes for the crisis, including the lack of a firewall that existed from 1933 until 1999 when the Clinton Administration obliterated the Glass-Steagall firewall separating investment and commercial banking. I tend to be on the side of those who would like to see an end to the Gramm-Leach-Bliley Act that replaced Glass-Steagall and a return to measures separating risky investment banks from more conservative commercial banks, but that’s probably not in the cards. Absent that, I’d like to see one powerful regulator keeping an eagle eye on bankers, rather than the multitude of non-regulating regulators, asleep at the switch.
Dissenters also said that regulation or lack of it per se wasn’t the cause of the meltdown. I didn’t see the majority conclusions, contained in text boxes at the end of each of the chapters, say that regulation or lack of it was the SOLE cause; rather the multiplicity of regulators and the ability of financial institutions to pick and choose the least onerous regulator helped fuel the increase in toxic assets. (Probably the best-ever oxymoron: “Toxic Assets.”).
The report was accepted by the six Democratic party members of the commission — and rejected for the most part by the three GOP members, vice-chairman Bill Thomas, Keith Hennessey and Douglas Holtz-Eakin — and by a fourth minority party member Peter J. Wallison, who contributed a dissenting statement. Remember, the commission was established in 2009, when the Democrats still controlled the House of Representatives, before last fall’s election which saw the GOP take over the House.
The six majority party members of the commission are chairman Phil Angelides, a former California state treasurer and gubernatorial candidate; Brooksley Born; Sen. Bob Graham, D-FL; Heather F. Murren; John W. Thompson, and Byron Georgiou.
Brooksley Born, a native of San Francisco, comes across as one of the few good people in the financial mess. She was appointed in 1996 by Bill Clinton to head the Commodity Futures Trading Commission (CFTC) to regulate derivatives, one of the biggest single triggers of the meltdown. She served for three years, a prophet without honor in an administration that laughed at her warnings about proliferating derivatives (read pages 45-51 to learn more about derivatives and their role in the meltdown).
Born, a 1964 graduate of Stanford University Law School at a time when only a handful of women attended prestigious law schools, tells (on Page 47-48) how she wanted the CFTC to re-examine the way it regulated the over the counter derivatives market, “given the market’s rapid evolution and the string of major losses since 1993.” Born says the CFTC requested comments and got them, including negative — to say the least — comments from Treasury Secretary Robert Rubin, Fed Chairman Alan Greenspan and Securities and Exchange Commission (SEC) chairman Arthur Levitt who issued a joint statement blasting Born’s action: “We have grave concerns about this action and its possible consequences….We are very concerned about reports that the CFTC’s action may increase the legal uncertainty concerning certain types of OTC derivatives.” The three men proposed a moratorium on the CFTC’s ability to regulate OTC derivatives. A decade later Born’s fears were realized; it’s no wonder that in 2009 she, along with Sheila Bair of the FDIC, was awarded the John F. Kennedy Profiles in courage Award in recognition of the “political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis.”
During the hearings that led to the report, on April 7, 2010, Born tugged the tail of the sainted Greenspan, declared that “The Maestro’s” running of the Fed was an unmitigated failure…and she said it to his face, according to a news report I found on Google. Born, who pushed to strictly regulate derivatives under the Clinton Administration, but lost the battle to, among other people, Greenspan, told the former Federal Reserve chairman that his agency “failed to prevent housing bubble, failed to prevent the predatory lending scandal, failed to prevent the activities that would bring the financial system to the verge of collapse.”
You failed to prevent many of our banks from consolidating and growing to a size that are now too big or too interconnected to fail,” Born added. She added that Greenspan’s views on deregulation, which he took as an article of faith, contributed to the Federal Reserve’s failure in delivering on its mandate. Looking as angry as he could at his advanced age, Greenspan replied, “The flaw in the system I acknowledged was an ability to fully understand the state of potential risks that were fully untested… That means we were under-capitalizing the banking system for 40 or 50 years.”
As a chronicle of the events leading to the meltdown, the book is very useful; even the dissenters agree with that. The report concisely covers the bailouts, the creation of TARP, the bankruptcy of Lehman Brothers and the rescue of AIG, Merrill Lynch and Bear Stearns. There is a succinct section on the horrendous foreclosure problem and the decline and fall of housing, with particular emphasis on the stress both the Clinton and George W. Bush administrations placed on homeownership. There’s even a discussion of the collapse of commercial real estate. As a reporter who has covered real estate for 40 years and who has read and reviewed many books on aspects of the financial meltdown, I recommend this “Report” to a reader seeking a one-volume discussion. Publisher’s web site: www.publicaffairsbooks.com