Not a Partisan Issue

by Kevin D. Freeman on October 13, 2012

From the beginning, we have said that all Americans should be concerned about Economic Warfare and Financial Terrorism, whether it emanates from Sovereign Wealth Funds in the Middle East or corruption on Wall Street. Frankly, this non-partisan approach has hurt us in Washington. Many Republicans blame Democrats based on their support of the Community Reinvestment Act (a point to which the Democrats vociferously disagree). Many Democrats blame Bush and greedy Wall Street (something Republicans dispute). Wall Street was a great deal of the funding for the Obama 2008 victory. Now, they are funding Republicans. Yet, despite the back-and-forth, no one seems willing to look for the truth. Reality Check:  There is room for plenty of blame to go around. Yet, because our message of truth doesn’t fit the Narrative of either side, we’ve faced an uphill battle.

We are very clear that manipulations of trading activity, naked short selling, and Credit Default Swaps are all weapons that can and were used against our economy in 2008. That is a fact that should not be ignored regardless of your politics. [There are other weapons. of course, and we discuss them both in the book and in this Blog.]

As proof that the issue is not a partisan one, we continue to point out the good work that has been done by Matt Taibbi on the role that Naked Short Selling played in the demise of Lehman Brothers. Taibbi has also done good work showing how Goldman Sachs and other Wall Street firms created a culture that may have allowed manipulative Naked Short SellingOur view is that he’s right about this and that it set the stage for others to take advantage. Interestingly, The Economist and Bloomberg have also taken notice, representing (along with Rolling Stone) various hues of the political spectrum. In context, consider these excerpts from Barry Ritholz in a Blog post written at  “ground zero” of the financial collapse in 2008:

Terror Attack on US Financials? Details of SEC Short Ban 

Friday, September 19, 2008

Last night, we discussed the absurdity of banning all short sales. The details of the SEC action have been released (see below). The specifics are a “temporary halt in short selling in 799 financial institutions” until October 2nd.

I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management . . .

He  raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion’s share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Joe asked the question: Is anyone investigating whether this is a case of financial terrorism? He wanted to know if someone was at least looking into this question (Joe is buds with Jim Cramer, and mentioned it to him, who then omitted to cite in his column that this was Joe’s theory, not his own).

Anyway, its an interesting theory, one that seemed kinda out there — until last night’s emergency action. Nothing else really explains the insanity of banning short sales — except for Joe Besecker’s questions . . .

The grand irony of all this is that Naked Shorting has been very profitable for the big broker dealers, like Morgan And Goldman and Merrill and Lehman. They have looked the other way for years, and the SEC has been AWOL on this issue.

Short sales require a locate (shares to borrow) and then a subsequent delivery. It should take less than 3 days to deliver the borrowed shares, but instead, delivery is often delayed indefinitely. Failure to deliver leads to a margin charge, which can be as high as 9-15%.

If you want to know who to blame for the past 5 years of naked shorting, you only have two places to look: The Financial brokers themselves, and the nonfeasance of a feckless SEC.

Sadly, despite the seriousness of the risk, many in our defense and intelligence communities have chosen to dismiss the issue rather than thoroughly investigate it. Our work on the subject was conclusive enough to demand a full formal investigation. It has resulted in a best-selling book, Secret Weapon, requests for information at all levels of government, and support from top defense and intelligence experts. Yet, for political reasons it continues to be suppressed. The good news is that some continue to pursue it as noted in the following from Bill Gertz’s Inside the Ring column this week, found at The Gertz Files and also The Washington Times. Gertz is the best-selling author of The Failure Factory and other books. He also initially broke the story on our DoD report and exposed efforts to suppress it.

New WMD threats

by Bill Gertz  October 10, 2012

A Pentagon-sponsored report warns that the United States faces new threats from mass destruction weapons in the form of cyber, electronic and financial attacks, in addition to more well-known dangers from nuclear, chemical and biological WMD arms.

“In addition to the prolific conventional [weapons of mass destruction] threats posed by a vast network of state and non-state actors, the U.S. must also contend with emerging threats that are not conventionally recognized as WMD,” said the report produced last month for the office of the Undersecretary of Defense for Intelligence.

“Very few of America’s adversaries will attempt to challenge the unmatched strength of the U.S. military in a traditional conflict, but they may employ alternative asymmetric approaches.

“It is therefore necessary to consider emergent, nontraditional threats, such as cyber, electromagnetic pulse (EMP), and economic attacks, in a comprehensive discussion of WMD threats.”

On financial warfare, the report mentions the 1999 Chinese military book, “Unrestricted Warfare,” which advocates that China’s military utilize stock-market crashes, computer viruses and currency manipulations.

“Essentially, any threat to the U.S. economy is a threat to the country as a whole, and the potential impact of an economic attack is considered increasingly significant,” the report said.

The new Pentagon report appears to build on one produced for the Pentagon in 2009 by financial consultant Kevin Freeman, who stated that the United States’ 2008 financial crash may have been deliberate sabotage by terrorists or foreign states.

That study was criticized by senior Obama administration officials, including the Pentagon’s special operations policymaker, Michael Vickers, who is currently undersecretary of defense for intelligence. U.S. officials said Mr. Vickers blocked further study into possible financial warfare behind the economic crisis. Mr. Freeman wrote a book on the issue called “Secret Weapon.”

The new Pentagon report said the May 6, 2010 “flash crash” when markets fell by 10 percent “may have been caused by an economic attack by one or a combination of methods,” including the manipulation of computer algorithms that control trading or exchange traded funds that allow traders to short sell mass quantities of stock quickly and anonymously. It also could have been the result of covert currency-manipulation by the holder of a significant U.S. debt — such as China — designed to intentionally weaken the value of the dollar by preventing the United States from selling its debt to others.

On cyber-WMD, the report said that in an age when 2 billion people use the Internet, “a coordinated cyberattack could compromise national security, shut down commerce and destroy the U.S. power grid.”

According to the report, China currently has some 180,000 cyberspies; and, during attacks in 2007 and 2009, they hacked into Pentagon networks and “stole several terabytes of data, including the blueprints for U.S. F-35 and F-32 joint-strike fighter planes, essentially compromising America’s defense technology.”

Russia conducted cyberattacks in 2008 against the Republic of Georgia prior to its military strikes. The cyberattacks disabled Georgia’s national network “effectively eliminating the chance to mount an appropriate response to the attack.”

Another emerging WMD threat is an electromagnetic pulse, or EMP, attack — the up to 1,000-mile-wide disruption of all electronics produced by a nuclear burst or a high-tech EMP weapon.

“The detonation of an EMP weapon would cause the disruption or destruction of electrical-based systems, which would lead to chaos by impoverishing or neutralizing a society, rather than annihilating it outright,” the report said.

The United States’ heavy reliance on electronics means an EMP attack would be devastating.

The report concludes that economic vitality is key to U.S. national security; but, with the global economy, the country is facing significant vulnerabilities.

The report urged the U.S. government to develop a national strategy and capability to defend the U.S. economy from every form of economic attack.

The September report, “Weapons of Mass Destruction: An Evolving Threat,” was produced by contractor Universal Strategy Group, Inc., for the undersecretary of defense for intelligence and its Combating Terrorism Support Office.

Pentagon on Financial threat

Chinese military and Communist Party officials have threatened to “dump” some of China’s holding of $1.17 trillion in U.S. Treasury securities to punish the United States and wage financial war in response to arms sales to Taiwan, according to a Pentagon report to Congress.

The July report plays down the prospect of what has been termed the financial “nuclear option” by Beijing against the United States.

“Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” says the five-page report entitled, “Assessment of the National Security Risks Posed to the United States as a Result of the U.S. Federal Debt Owed to China as a Creditor of the U.S. Government.”

“As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war.”

If China sold off its U.S. debt holdings suddenly and significantly, short-term disruptions in markets would result, along with an increase in the interest rate for Treasury securities.

However, the report said doing so would impose significant costs on China, such as causing direct financial losses because of the fall in value of China’s holdings. It would also call into question China’s participation as a “reliable and respected economic and financial partner.”

The report said that in 2010 Chinese Gens. Luo Yuan and Zhu Chenghu and Col. Ke Chunxiao urged China to sell off U.S. debt holdings in response to the latest announced arms sale to Taiwan, which China opposes as undermining its effort to reunite the island nation with the mainland. It also quoted Ding Ging, editor of a state-run news outlet, as saying China should “use its financial weapon to teach the United States a lesson if it moves forward with a plan to [sell] arms to Taiwan.”

China so far has not acted on the plans, and China has continued to buy large quantities of U.S. Treasury securities, which Beijing sees as a safe place to park its money, said the report written to comply with recent congressional legislation.

Mr. Freeman, the financial security specialist, took issue with the report. He said that former Treasury Secretary Henry Paulson revealed in a 2010 book that Russia dumped American bonds in 2008 and urged the Chinese to do the same.

“The Chinese did not at that time but this does not mean they won’t,” Mr. Freeman said in an email.

He said the Pentagon report was “naive” and provided a “politically correct answer” that failed to address what he said were very real risks from Chinese financial warfare.

A number of scenarios exist that would involve China’s government taking coercive action to dump or threaten to sell off U.S. bonds, Mr. Freeman said.

“If they perceive us as wounded, they might be willing to suffer in the short term to accomplish larger goals,” he said.

Also, the report’s assertion that dumping U.S. securities would be inflicting harm on China “assumes a domestic economic stability [in China] that may not exist ,” he said. “The situation is much more complex than that.”

Interestingly enough, our message has been embraced by a number of tea parties and grass-roots conservative groups unconnected to Wall Street. [As we have pointed out, Wall Street is pretty fickle in their financial support based primarily on their own special interests rather than any larger principle.] At the same time, Matt Taibbi is no fan of Republicans as shown by his most recent Blog Post. I doubt that Taibbi and Tea Parties have very much in common politically. Yet, they both have recognized a serious vulnerability that must be addressed.

The bottom line is that truth is not partisan. But it can be inconvenient to political agendas, especially when it does not fit the narrative.

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