Four Horsemen of Economic Apocalypse
Collapses occurring in U. S. financial markets have causes involving perpetrators and enablers. The causes are not simply flaws in capitalism or bad business judgment. These financial collapses would not have happened without crucial roles played by institutions of federal government, roles that enabled private parties to profit enormously by perpetrating frauds against the investing public.
By Wayne Jett
© September 19, 2008
Four entities brought on this destruction. They are (1) the Federal Reserve System; (2) the Securities & Exchange Commission; (3) the Commodities Futures Trading Commission; and (4) the U. S. Treasury. Actions and failures of Congress and the White House are put aside for the present.
The Federal Reserve caused the 2000-2002 crash of U. S. stocks by increasing the dollar’s value so sharply in 1996-2000 that corporate profits were crushed. By 2003, the Fed brought the dollar back to proper value and interest rates were normal. But in 2004, the Fed began inverting the yield curve, causing bank loan rates to be hiked above reasonable market rates. Small business was shut off from bank credit, as thousands of individual minds concluded interest rates were too high to allow profit. Still, the Fed separately injected liquidity, and banks used it unwisely. Banks bought home mortgage derivatives and made loans to investment banks and to hedge funds, which leveraged undisclosed investment tactics at 30-to-40-to-one. Absent the Fed’s opaque monetary policy that diverted bank credit from small business to high finance, these outrageously ill-advised actions would not have occurred.
In 2004, the SEC issued exemptions from its normal capital rule for investment banks, permitting Morgan Stanley, Bear Stearns, Merrill Lynch, Lehman Bros. and Goldman Sachs to increase investment leverage. Instead of 12-to-1 leverage, those firms were permitted 40-to-1 borrowing. Worse, the SEC had already stopped enforcing anti-fraud rules that required prompt borrowing and delivery of shares sold short. That same year, 2004, SEC adopted Regulation SHO tacitly green-lighting intentional failure to deliver shares sold short – a fancy Wall Street description of selling and getting money for shares of stock that do not exist – sometimes called naked short selling. By March 31, 2008, the total value of undelivered shares on the books of NYSE brokers was $258 billion. Even that shocking figure is understated, as it is marked down to the share prices driven down by the share counterfeiting.
Treasury Secretary Paulson
In that outlandishly corrupt regulatory environment, the stage was set for the destruction of investment bank Bear Stearns in mid-March. Its share price was driven from above $60 to $32 within four days by naked short selling of its shares. Treasury Secretary Henry Paulson delighted the naked short sellers by driving a stake through Bear Stearns the following Sunday at $2 per share, enabling the illicit gains to be taken from the market the next morning before options expired at market close that day. In May, naked shorting target IndyMac, a major mortgage bank, was seized by federal authorities after Senator Charles Schumer of New York started a run on the bank by alarming depositors – again profiting naked short sellers enormously.
The takedowns of Fannie Mae and Freddie Mac by Treasury secretary Paulson were next. Naked short selling drove down the share prices, and Paulson used the low prices to justify seizure of both entities. In the process, Paulson imposed terms for a “loan” that seized 79.9% of their value, destroying their share prices and, again, delighting naked short sellers. Illicit gains to those wrong-doers are estimated as high as $500 billion. This was followed by similar takedowns of Lehman Bros., Merrill Lynch and American Insurance Group, the largest insurance firm in the world. Each of these actions drained billions in capital into the accounts of fraudulent traders whose identities are not presently known.
All this was piled atop the billions taken by defrauding investors in hundreds of companies in all industries since 2000, as the SEC has utterly failed its responsibilities to police fair trading conditions in U. S. financial markets.
Only after all this damage was done, when Morgan Stanley and Goldman Sachs complained that their own corporate shares were under attack, did SEC act effectively on September 18 to bar naked short selling. SEC had every reason to do as much in 2000 and in 2004, but permitted all the fraud to proceed without objection or penalty.
The CFTC has performed no better. In 2000, Congress passed a law that allowed Morgan Stanley and Goldman Sachs to create Intercontinental Exchange (ICE), a “dark” market for trading crude oil futures without reporting to or monitoring by CFTC. By mid-2006, the U. S. Senate Permanent Subcommittee on Investigations investigated and found nearly three-quarters of all crude oil futures were traded without reporting to CFTC, and the historic relationship of price to supply and demand had been broken. The Senate committee report exhorted CFTC to investigate ICE’s effects on crude oil prices, and to exert jurisdiction.
CFTC ignored the Senate views, did nothing except advise Congress to pass legislation if action was desired. The agency insisted in 2008 that no evidence of manipulation was apparent, although the crude oil price doubled within a year with no different fundamental conditions. In May and June, 2008, Congress heard testimony of experts that oil market fundamentals were unchanged from two years earlier when the price was $45 per barrel, yet the 2008 price rose as high as $147.
In July and in September, as some in Congress attempted to legislate against oil price manipulation, investment banks and hedge funds filled Capitol Hill with lobbyists to prevent action. Paulson called the shots for the Bush administration, insisting prices were determined by supply and demand, and that more “regulation” would burden the “free market.” Democratic leaders drew the line on more domestic drilling for energy, and Republican leaders demanded more production in lieu of all else. As so often occurs, Wall Street won the inaction desired, and crude oil rose from near $90 above $104 within the week ending September 19.
The Federal Reserve is owned by private banks and dominated by Wall Street through that ownership structure. The SEC and CFTC are dominated by Wall Street and hedge funds through overbearing influence of money and power. Treasury secretary Paulson from Goldman Sachs was accepted by President Bush as “economic czar” to gain Democratic cooperation in Congress. Since mid-2006, Paulson has done more to consolidate pecuniary interests of Wall Street and hedge funds than any cabinet officer since the Great Depression.
These are four horsemen of economic apocalypse. Americans face daunting tasks in unseating them, in bringing them to account and in reforming defective systems that empower them. Despite the financial losses they have already brought on Americans, Congress is considering Paulson’s proposal that he be given open-ended authority to buy financial assets from private firms, and that the Federal Reserve be empowered to “stabilize” financial markets. Now we must not shirk from our own responsibilities. Survival of Western Civilization is in the balance. ~