In light of recent events, I am republishing.]
By Catherine Austin Fitts
In the fall of 2001 I attended a private investment conference in London to give a paper, The Myth of the Rule of Law or How the Money Works: The Destruction of Hamilton Securities Group.
The presentation documented my experience with a Washington-Wall Street partnership that had:
- Engineered a fraudulent housing and debt bubble;
- Illegally shifted vast amounts of capital out of the U.S.;
- Used “privitization” as a form of piracy – a pretext to move government assets to private investors at below-market prices and then shift private liabilities back to government at no cost to the private liability holder.
Other presenters at the conference included distinguished reporters covering privatization in Eastern Europe and Russia. As the portraits of British ancestors stared down upon us, we listened to story after story of global privatization throughout the 1990s in the Americas, Europe, and Asia.
Slowly, as the pieces fit together, we shared a horrifying epiphany: the banks, corporations and investors acting in each global region were the exact same players. They were a relatively small group that reappeared again and again in Russia, Eastern Europe, and Asia accompanied by the same well-known accounting firms and law firms.
Clearly, there was a global financial coup d’etat underway.
The magnitude of what was happening was overwhelming. In the 1990’s, millions of people in Russia had woken up to find their bank accounts and pension funds simply gone – eradicated by a falling currency or stolen by mobsters who laundered money back into big New York Fed member banks for reinvestment to fuel the debt bubble.
Reports of politicians, government officials, academics, and intelligence agencies facilitating the racketeering and theft were compelling. One lawyer in Russia, living without electricity and growing food to prevent starvation, was quoted as saying, “We are being de-modernized.”
Several years earlier, I listened to three peasant women describe the War on Drugs in their respective countries: Colombia, Peru, and Bolivia. I asked them, “After they sweep you into camps, who gets your land and at what price?” My question opened a magic door. They poured out how the real economics worked on the War on Drugs, including the stealing of land and government contracts to build housing for the people who are displaced.
At one point, suspicious of my understanding of how this game worked, one of the women said, “You say you have never been to our countries, yet you understand exactly how the money works. How is this so?” I replied that I had served as Assistant Secretary of Housing at the US Department of Housing and Urban Development (HUD) in the United States where I oversaw billions of government investment in US communities. Apparently, it worked the same way in their countries as it worked in mine.
I later found out that the government contractor leading the War on Drugs strategy for U.S. aid to Peru, Colombia and Bolivia was the same contractor in charge of knowledge management for HUD enforcement. This Washington-Wall Street game was a global game. The peasant women of Latin America were up against the same financial pirates and business model as the people in South Central Los Angeles, West Philadelphia, Baltimore and the South Bronx.
Later, courageous reporting by several independent investigative reporters confirmed in detail that the privatization and economic warfare model I discussed in London had deep roots in Latin America.
We were experiencing a global “heist”: capital was being sucked out of country after country. The presentation I gave in London revealed a piece of the puzzle that was difficult for the audience to fathom. This was not simply happening in the emerging markets. It was happening in America, too.
I described a meeting that had occurred in April 1997, more than four years before that day in London. I had given a presentation to a distinguished group of U.S. pension fund leaders on the extraordinary opportunity to re-engineer the U.S. federal budget. I presented our estimate that the prior year’s federal investment in the Philadelphia, Pennsylvania area had a negative return on investment.
We presented that it was possible to finance places with private equity and re-engineer the government investment to a positive return and, as a result, generate significant capital gains. Hence, it was possible to use U.S. pension funds to significantly increase retirees’ retirement security by successfully investing in American communities, small business and farms — all in a manner that would reduce debt, improve skills, and create jobs.
The response from the pension fund investors to this analysis was quite positive until the President of the CalPERS pension fund — the largest in the country — said, “You don’t understand. It’s too late. They have given up on the country. They are moving all the money out in the fall [of 1997]. They are moving it to Asia.”
Sure enough, that fall, significant amounts of moneys started leaving the US, including illegally. Over $4 trillion went missing from the US government. No one seemed to notice. Misled into thinking we were in a boom economy by a fraudulent debt bubble engineered with force and intention from the highest levels of the financial system, Americans were engaging in an orgy of consumption that was liquidating the real financial equity we needed urgently to reposition ourselves for the times ahead.
The mood that afternoon in London was quite sober. The question hung in the air, unspoken: once the bubble was over, was the time coming when we, too, would be “de-modernized?”
In 2009 — more than seven years later — this is a question that many of us are asking ourselves.
Part II: Rethinking Diversification
Related Reading:
Dillon, Read & Co. Inc. and the Aristocracy of Stock Profits
Is there really a conspiracy? As Catherine says, I couldn’t prove or disprove it, either. This is a big subject – we all know how it is the favorite tactic of those who don’t like us to label us “conspiracy theory wackos”. It’s an easy and effective tactic against us and I have a solution to it. It’s effective because there are some simple minded wackos who are into conspiracy theories and it’s the easiest way to discredit someone. Example: I myself was at the home of an old, fat, emotional, unintelligent person on her last leg when the news flashed across the TV screen of an earthquake in California. She points to the TV and says “Boy, there isn’t any doubt about it, you know that Al Queda is behind that.” “Huh, you mean you think they caused the earthquake?” I replied incredulously. “Well of course!”, she replied emotionally, her voice rising. “Can’t you see where it is? Right in the MIDDLE of the the state! You think that’s just a COINCIDENCE?!!” I smiled, rolled my eyes to myself and soon left. “Conspiracy Wacko” is such an easy smear to make.
I used to laugh at Conspiracy Theories but now find myself believing many of them (though not all). Are there really conspiracies? Here’s the great news: It doesn’t matter! The only thing that matters is that events are unfolding AS IF THERE WERE CONSPIRACIES. Example: In high school I was a staunch conservative and got on the school newspaper to combat the paper’s liberal bias. I found out that nobody was giving orders to the other student writers. They all wrote liberal articles because liberal kids were attracted to being writers on the school newspaper. What about the charge that dark, evil committees send out orders to all the major media about what to cover and not to cover? True? I don’t know. But it could be that the same types of people who own, control, and write in the media have the same kind of human bias to talk about some subjects in cetain ways and avoid mentioning other subjects. Or there may be a real conspiracy in which any reporter who strays into the truth gets fired and they know it and want to keep their jobs.
Is the stuff that is going on now in the financial world a giant conspiracy of the CFR, the bankers, the Builderbergers, perhaps in league with some evil UFO forces? I don’t know. It might be just the natural result of what happens in human nature when a giant economic bubble forms and then pops. But it really doesn’t matter. What is happening is that the real world is performing AS IF there really was a conspiracy. The conspiracy might be a dark, sinister group of elitists pulling the levers to create economic chaos that enriches themselves while depopulating the world. Or it might be the natural progression of events as human nature interacts with the physical world.
Bottom line – don’t be obsessed with a possible conspiracy pulling the levers forming a calamity coming toward us. The calamity might be caused by evil geniuses and their minions or it might be caused by natural economic forces. Maybe some of each. Maybe caused by some criminal higher ups and the result of their crimes on the economy (most likely). But don’t give detractors ammunition to shoot at you. It’s enough to know that the calamity is coming, caused by whatever, and prepare for it. Make sure you and your loved ones come through it OK.
Folks. They have the reigns. It will be a bumpy ride. Follow the money. Right before your eyes. Does it get any more cliche. They count on you continuing your incurious way.
I missed iting the author in the above piece. 19 Nov 2008 Alan Kohler, A tsunami of hope or terror?
Chris,
Which goes to the essential flaw in Capitalism. Saving money, i.e. value on paper, is like saving electricity. Either it has to be used as it’s generated, (thus the effectiveness of Social Security), it can be stored in the process of circulation, or small amounts can be packaged.
The banks were simply fulfilling our desire for lifetime security by creating the illusion of stored value, but was an enormous bubble of circulation. Now we are going to have to go back to the real world and store value in things like personal relationships and a healthy environment. Is it too late? The ones in charge can’t admit they cooked their own golden goose.
A synthetic CDO is a collateralised debt obligation that is based on credit default swaps rather than physical debt securities.
CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the late 1980s as a way to bundle asset backed securities into tranches with the same rating, so that investors could focus simply on the rating rather than the issuer of the bond.
About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal, and at the same time were prevented from being regulated, by the Commodity Futures Modernization Act, which specifies that products offered by banking institutions could not be regulated as futures contracts.
This bill, by the way, was 11,000 pages long, was never debated by Congress and was signed into law by President Clinton a week after it was passed. It lies at the root of America’s failure to regulate the debt derivatives that are now threatening the global economy.
Anyway, moving right along – some time after that an unknown bright spark within one of the investment banks came up with the idea of putting CDOs and CDSs together to create the synthetic CDO.
Here’s how it works: a bank will set up a shelf company in Cayman Islands or somewhere with $2 of capital and shareholders other than the bank itself. They are usually charities that could use a little cash, and when some nice banker in a suit shows up and offers them money to sign some documents, they do.
That allows the so-called special purpose vehicle (SPV) to have “deniability”, as in “it’s nothing to do with us” – an idea the banks would have picked up from the Godfather movies.
The bank then creates a CDS between itself and the SPV. Usually credit default swaps reference a single third party, but for the purpose of the synthetic CDOs, they reference at least 100 companies.
The CDS contracts between the SPV can be $US500 million to $US1 billion, or sometimes more. They have a variety of twists and turns, but it usually goes something like this: if seven of the 100 reference entities default, the SPV has to pay the bank a third of the money; if eight default, it’s two-thirds; and if nine default, the whole amount is repayable.
For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the contracted sum.
Finally the SPV is taken along to Moody’s, Standard and Poor’s and Fitch’s and the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach.
The bank’s sales people then hit the road to sell this SPV to investors. It’s presented as the bank’s product, and the sales staff pretend that the bank is fully behind it, but of course it’s actually a $2 Cayman Islands company with one or two unknowing charities as shareholders.
It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable.
Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders.
In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too.
They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were.
As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like “Lloyds Names” – the 1500 or so individuals who back the London reinsurance giant.
Except in this case very few of the “names” knew what they were buying. And nobody has any idea how many were sold, or with what total face value.
Chris,
I am of a mind that the deregulation and failure to curtail the power of the black pool hedge funds created an opportunity for parties to sell fraudulent paper. If you follow the latest article by Mark Mitchell http://www.deepcapture.com/bernard-madoff-the-mafia-and-the-friends-of-michael-milken/ the same names keep coming up.
Who more likely to sell worthless paper than someone who was the king of selling worthless paper? Wall Street knew that these instruments were worthless and supported the market in them until they got scared. The market collapsed when those selling the bonds didn’t want to hold them. These criminals and those they put in office all need to be held accountable.
More bonds (or something like bonds) were sold than assets to support them. Had these been regulated, they would have never been approved for sale because they are frauds. Here is the comparison:
Imagine a creative fellow who is a property manager and sells a rental property to 10 different parties with fraudulent documents. The prudent buyers, to protect their investment, buy insurance on the house. The insurer sold insurance to all these folks without noticing that it was all on the same property. The seller knew that the property couldn’t support 10 owners and his plan was to burn the house down all along. Being a property manager, he pays back “the rent” from the proceeds of the sales until he runs out of buyers. He also bought insurance on the house. The loss of one house is magnified for the insurer 11 fold.. and the insurer is insolvent. Would it be prudent for the government to bail out the insurer so that the fraud can go undetected? If you were in charge of the government agency that decided to bail out the insurer, as well as being the one who perpetrated the fraud, that is exactly what you would do. Not only would you get to keep all the money from the sale of the property, you would get to keep the insurance money. Where is the loss? All the buyers got compensated and the property manager is way ahead.. but the taxpayer is taking it in the teeth. The shareholders of the insurer now have negative equity as they owe the government. If the insurer folds, the taxpayer eats it all and the shareholders lose everything. With inflation from the deficit that the government acquired, the taxpayer, the shareholders, and the buyers of the house all watch as there living standards decline… but not the property manager.. He is still living high on the hog. He’s moved his money to the Caymans.. and is giving money to the Nature Conservancy. He’s a well-respected benefactor.
I found this a very chilling but highly informative article. It kind of creates a meaninful context for all the incidentals that have happened over the last 20-30 years. However, I was disappointed not to see specific individuals and entities named. These crooks have names and addresses. Which banks, corporations, investors, politicians, government officials, academics, intelligence agencies, government contractors are involved or guilty? Who ultimately received the money and what was done with it? Also, I liked the quote in the article by the President of the CalPERS fund, where s/he says, “They have given up the country and are moving the money to Asia.” Who are “THEY” and which Asian countries or entities/individuals in Asia received these stolen funds?