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The Global Bust-Out Series (Chapter 4): The BCCI Enterprise: Prelude to Our Present Predicament

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The Global Bust-Out Series (Chapter 4): The BCCI Enterprise: Prelude to Our Present Predicament


This is Chapter 4 of a multi-chapter series. On your right is a Table of Contents to all chapters so far published.

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Henry Kissinger, who served the Nixon administration as national security advisor and secretary of state, has commented that the 1973 oil embargo was “one of the pivotal events in the history of the [twentieth] century.”

Kissinger did not refer specifically to the Bank of Credit and Commerce International (BCCI) in that statement, but there is no doubt that one of the most important outcomes of the oil embargo was to fill the coffers of BCCI, making it one of the more powerful financial institutions in the world. There is also no doubt that the idea for the oil embargo was hatched by the ruler of Abu Dhabi (then one of BCCI’s controlling shareholders) in consultation with other BCCI principals, including BCCI founder Agha Hasan Abedi. Also playing a role in implementing the oil embargo was BCCI principal Sheikh Kamal Adham (who served concurrently as chief of Saudi intelligence) and the Saudi royal family, which had involvement with the BCCI enterprise.

Others who helped implement the oil embargo included Sheikh Ahmad Turki Yamani, then the Saudi minister of petroleum; and Sheikh Abdel Hadir Taher, then governor of the Saudi state oil company Petromin, both of whom we met in chapter 2 of this series, wherein it was noted that Sheikh Yamani and Sheikh Taher were among the select few billionaires (another being Sheikh Khalid bin Mahfouz, BCCI’s largest shareholder in the 1980s) whom Osama bin Laden referred to as his “Golden Chain.”

All of those sheikhs also had close ties to the Muslim Brotherhood, and the ruler of Abu Dhabi (who masterminded the oil embargo) was one of the leading sponsors of the Muslim Brotherhood. In addition, we know, BCCI had close ties to the Muslim Brotherhood, and we might consider the founding of BCCI in 1972 and the enforcement of the oil embargo a year later to have marked the beginning of what Muslim Brotherhood leaders now (see earlier chapters of this series) describe as “The Financial Jihad.”

As noted in an earlier chapter of this series, Muslim Brotherhood leaders say that the manipulation of oil prices are an important component of the “Financial Jihad.Muslim Brotherhood leader Yussuf al Qardawi, for one, has spoken often of the imperative to deploy  Silah al Naft – i.e. “the weapon of oil” – against the U.S. economy. This was precisely in line with the thinking of Osama bin Laden, who stressed  “the absolute necessity to use the oil weapon.”  And according to a report that was prepared for the Department of Defense, the oil weapon was deployed against the U.S. economy in the years leading up to the great meltdown of 2008.

Indeed, the report for the Defense Department (see chapter 1 of this series) concluded that while a variety of financial weapons have been deployed against the U.S. economy, much of the destruction of 2008 could be attributed to two particularly effective financial weapons: 1) the manipulation of the oil markets that caused oil prices to nearly quadruple in the five years leading to 2008; and 2) the manipulative short selling that was one (though not the only) component of the “bust-outs” (i.e. destruction) of some major financial institutions, including Bear Stearns, Lehman Brothers, and others.

Similarly, the oil embargo of the 1970s quadrupled the price oil, and a few years later, the BCCI enterprise helped “bust out” some of America’s largest savings and loan banks, contributing to the savings an loan crisis that began in the late 1980s, eventually costing U.S. tax-payers billions of dollars (a mighty sum at the time) in bailouts.

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The 1973 oil embargo was an act of economic warfare against the United States, said to be retaliation for America’s support of Israel in the 1973 Arab-Israeli war. Henry Kissinger was no doubt justified in describing this economic warfare as “one of the pivotal events in the history of the [twentieth] century,” but what Kissinger failed to mention was that he and then President Richard Nixon opted to do nothing in response to the economic warfare that was waged against our nation.

This might have been partly because higher oil prices benefited U.S. oil companies and partly because the Gulf states had agreed to use some of the new oil wealth that they were to acquire as a result of the oil embargo to support the U.S. dollar. Nixon would also have been aware that the oil embargo was transforming BCCI into a global powerhouse, and that BCCI and its owners would become important business partners for certain elements of the American establishment, including America’s leading weapons manufacturers, and some of the most powerful people on Wall Street.

In addition, BCCI and/or its partners effectively “captured” Washington. One famous story describes a BCCI partner named Adnan Khashoggi visiting Nixon in the Oval Office, and “accidentally” leaving behind his briefcase, which was found to contain $1 million in cash. The story might be apocryphal, but there is no question that Khashoggi was one of the largest financiers of Nixon’s political war chest. Khashoggi would also later establish himself as one of history’s most destructive financial criminals, but he would remain on close terms with officials in Washington, including multiple U.S. presidents.

Not long after Nixon left power, BCCI employed (as a consultant) a man named Bert Lance, who would soon be appointed director of the office of management and budget in the administration of President Jimmy Carter. Lance brokered BCCI’s secret acquisition of a prominent financial institution called National Georgia Bank, and that acquisition likely had something to do with the fact that National Georgia Bank was the principal financier to Carter’s family peanut business.

After Carter left office, the former president traveled the world with BCCI founder Aga Hasan Abedi. BCCI was also the largest donor to the Carter Presidential Library. The major U.S. news organizations, however, found nothing untoward about this relationship, and after BCCI was revealed to be (in the words of Manhattan District Attorney Robert Morgenthau) “the largest banking fraud in world financial history,” the major U.S. news organizations (and some books on the BCCI scandal) suggested that Carter was oblivious to the fact that BCCI was a criminal enterprise. Some reports also maintained the party line that one of BCCI’s missions was to end global poverty, and so it was natural that Carter, who also desired to help the poor, would join forces with BCCI in this philanthropic endeavor.

Anyone who believes this party line is either dangerously innocent, or guilty of the sort of apathy and lack of inquisitiveness that poses a threat to our democracy. It is possible that Carter genuinely believed that BCCI (which had helped kleptocratic government leaders  “bust out” the economies of poverty stricken nations in the non-developing world) was on a “philanthropic” mission to end global poverty, but that is beside the point. Or, rather, it is  precisely the point. Because if you genuinely believe that the perpetrators of the “largest banking fraud in world financial history” are engaged in a philanthropic mission, you are, by definition, so friendly with those perpetrators as to be wholly incapacitated.

This is the essence of what we call “deep capture.”

One of BCCI’s most important business partners in the 1980s was a leading oligarch named Jackson Stephens, who was one of the largest contributors to both the Democratic and Republican parties. Stephens was also one of Bill Clinton’s closest associates, and Stephens would later figure in some of the scandals that plagued the Clinton presidency. One of the more famous Clinton scandals saw a Chinese spy donating large sums to Clinton campaign coffers and stealing U.S. nuclear weapons secrets, all the while working in some capacity for a brokerage called Stephens, Inc., which had been founded by Jackson Stephens, and which, in the 1980s, had maintained a close business relationship with BCCI. Stephens had, in the 1980s, also been among those who brokered BCCI’s “secret” acquisition of a financial institution called First General Bankshares, later renamed First American Bankshares.

First American Bankshares was the most prominent financial institution in Washington, DC, and it counted among its clients a large number of America’s leading politicians. In addition, First American Bankshares had extensive ties to the U.S. national security community, and it was no accident that BCCI principals controlled First American in partnership with a man named Clark Clifford, whom BCCI also appointed to run the day-to-day operations of First American and its affiiliates. Clifford, a former Secretary of Defense, was, at the time, one of the most influential people in Washington, and he was the eminence gris of the Democratic Party.

After BCCI collapsed in 1991, the major U.S. news organizations focused almost exclusively on BCCI’s “secret” acquisition of First American Bankshares as being the most salient feature of the BCCI scandal, though the major U.S. news organizations seemed to find nothing more scandalous about it than the fact that the acquisition was “secret,” and therefore illegal. Many earnest U.S. government investigators (including Manhattan District Attorney Robert Morgenthau), meanwhile, had determined that there was nothing particularly “secret” about it. Top officials in Washington were aware that BCCI had acquired First American Bankshares, and it is likely they were also aware (as even the whitewashed Congressional report on the BCCI scandal would suggest) that BCCI principals (including the chief of Saudi intelligence) had acquired First Commerce as a way to peddle influence in Washington.

Meanwhile, of course, the BCCI enterprise was carrying out other missions, one of which was to provide a full package of services to leading jihadi terrorist organizations, another of which was to wage the “Financial Jihad” against the American economy. But, of course, captured regulators  in Washington allowed BCCI and its partners to “bust-out” the American economy, and the major U.S. news organizations published not a word about it.

Noteably, the Congressional report into the BCCI scandal also revealed that a BCCI subsidiary called Capcom Financial (whose principals included Saudi intelligence official Sheikh Kamal Adham) had formed business relationships with leading American telecommunications and media companies, including CNN, likely for the purposes of influencing (through the media organizations) American public opinion. Unsurprisingly, the major U.S. news organizations, including CNN, did not report on this aspect of the BCCI scandal. Nor, for some reason, did the major U.S. news organizations report the Congressional finding that Capcom Financial had meanwhile transacted around $90 billion (an astounding sum in those days) in illegal “wash” trades through the trading desk of Michael Milken, who was then the most prominent and powerful financial operator on Wall Street.

Such “wash trades” are usually accompanied by manipulative short selling, and they do extensive damage to the markets. In addition, “wash” trades are usually a component of larger money laundering schemes (hence the term “wash”), and it should be stressed that nearly every serious investigator of the BCCI scandal (including the Manhattan District Attorney; the director of the Senate committee tasked with investigating BCCI; the director of the House Task Force on Terorrism; and others) has reported that one of BCCI’s principal lines of business was to launder money not for the world’s leading terrorist organizations, but also for leading transnational organized crime syndicates. Some of BCCI’s executives, including  Ziuddin Ali Akbar, who served as BCCI’s treasurer and as director of Capcom Financial, were indicted for laundering money that belonged to Colombian drug cartels.

Aside from Milken, another of BCCI’s most important business partners in the 1980s was Bank of America, which was, in fact, among BCCI’s founding shareholders. According to the party line delivered to the public by the major U.S. news organizations (and by some books on BCCI), Bank of America sold its shares in BCCI in the 1970s because Bank of America had concluded at that early date that BCCI was a criminal enterprise. But this failed to explain why Bank of America did not report the criminality. And more recently, in 2007, Morgenthau (who was still district attorney) concluded that Bank of America had laundered huge sums for drug dealers in Latin America who had ties to Hezbollah and Al Qaeda. Most of the major U.S. news organizations failed to report this news.

Meanwhile, the major U.S. news organizations seemed to believe that people like Jackson Stephens and Michael Milken (i.e. one of history’s most destructive financial criminals) were prominent figures of the American establishment, deserving of our respect and admiration. Thus,we are left to contemplate the state of the republic.

To be continued…Click here to read Chapter 5

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Europe Comes to Terms With Market Manipulation; the SEC and the American Media Bury Heads in the Sand

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Europe Comes to Terms With Market Manipulation; the SEC and the American Media Bury Heads in the Sand


Well, the current state of the global financial markets is certainly interesting. I mean, you have to be a bit sick in the head, but if you think about it the right way, it really is “interesting” — sort of like, oo-wee, look, the girl in the cute leotard is falling off the tightrope, there’s no net, and she’s going to go “splat” when she hits that pavement. How interesting! And check it out, the circus animals have gone berserk — the tigers are tearing the trainer into bloody shreds, the elephants are stampeding, the tent might very well collapse, maybe we’re doomed, and look at those clowns – they’re still smiling. How deliciously interesting!

Actually, I take it back — it is not in the least bit interesting. It is terrifying. Despite early attempts by the smiling clowns of the nation’s media and regulatory apparatus to portray the dramatic market collapse of May 6 as mere happenstance, it is now clear that this unprecedented event was no “fat finger” accident. It was not a “black swan” that appeared out of nowhere. And more than likely, it was not some anomalous but innocent trade that triggered a run-of-the-mill panic. What it was, exactly, nobody seems able to say – and that is what makes it all the more scary.

But we can venture some educated guesses, and my best guess is that this was an orchestrated attack on the stock market – an attack that shaved 1,000 points off the Dow Jones industrial average in a few minutes, and caused some stocks worth nearly $50 to drop to a penny in matter of seconds. I have been trying hard, but I simply cannot imagine any natural confluence of events that would cause this. I can, however, think of a number of criminal market manipulators who have caused similar, though less dramatic, events in the past. And I know that these manipulators would get a kick out of triggering a full-blown market cataclysm. They wouldn’t just get a thrill — they would also make a boatload of money.

At any rate, this much is clear: our financial system is seriously broken and the nation is vulnerable. If the May 6 “anomaly” was not an attack, there is every reason to believe that something worse can happen. It can happen because the Securities and Exchange Commission has done nothing to prevent it from happening. Despite overwhelming evidence that market manipulators contributed to the financial turmoil of 2008, not a single criminal has been apprehended. And not only does the SEC let the miscreants run loose, but it also stubbornly refuses to close gaping loopholes that enable market manipulation to occur.

To its immense peril, much of America seems disinclined to discuss market manipulation. I don’t know if it is indolence, incuriosity, or simple complacency, but the discourse in this country stands in stark contrast to the one taking place in Europe, where politicians and the mass media have declared unequivocally that the markets are under attack, with consequences that could be quite dire, to say the least.

According to BaFin, the German financial regulator, “massive” illegal short selling attacks have led to excessive price movements that “could endanger the stability of the entire financial system.” After beholding the drama in the American markets on May 6, and seeing its own market tumble precipitously, the German government finally took on the manipulators, banning naked short selling of stock in its largest financial institutions and restricting the trading of naked credit default swaps, which are often deployed in manipulative attacks.

Not all of the discourse in Europe has been helpful, however. German Chancellor Angela Merkel declared that “speculators are our enemies,” confusing law-abiding traders who passively speculate on price movements with criminal manipulators who actively seek to inflict harm on the markets. Chancellor Merkel only made things worse when she said that this is a “battle of the politicians against the markets” – a proclamation that reinforced the notion that Europe’s politicians harbor a disdain for the free market system. Our enemies are criminals, not market freedoms.

The European response has also been characterized by a certain degree of ineptitude. Germany had already banned naked short selling in 2008, and foolishly lifted the ban last January. Having given the market bullies the green light to attack, Germany’s politicians now appear like the playground dweebs, panicky and weak, hurling nothing more than small stones. It is presumed that the naked short selling and other manipulation will simply move to exchanges in London, where officialdom seems less inclined to fight. But Germany’s ban on naked short selling — though too little, too late — is perfectly sensible.

Which makes the American media coverage all the more inexplicable. The Wall Street Journal, which has for many years seemed incapable of even uttering the words “market manipulation”, reported that the German ban on naked short selling “sparked uneasiness” and actually caused markets to fall further. Sparked uneasiness? Only criminals could possibly be “uneasy” about a policy designed to prevent a crime. Perhaps some “uneasy” criminals are members of the hedge fund lobby, whose talking points tend to find their way into stories published by The Wall Street Journal.

As for the notion that a ban on naked short selling would cause markets to lose value – well, we’ve heard something similar before. It was back in 2008, when the SEC issued an emergency order banning naked short selling of stock in 19 big financial companies, only to have the hedge fund lobby (and The Wall Street Journal) holler that preventing crime would “reduce liquidity” and put downward pressure on markets.

This, of course, is precisely the opposite of what happened. While the emergency order was in place, the stock market surged. Then, on August 12, 2008, the SEC, for reasons that cannot be fathomed, lifted its emergency ban, allowing the manipulation to resume. The stock market duly tanked, and continued to spiral downwards until September, when market manipulators wiped out a large swathe of the American financial system.

It is not just me saying this. Respected economists, famous hedge fund managers, former government officials, and current U.S. Senators such as Ted Kaufman of Delaware have all studied the events of 2008, and the consensus is that illegal naked short selling and other forms of short-side manipulation contributed to the demise of Bear Stearns, Lehman Brothers, Washington Mutual, and countless smaller companies. In the months leading up to September 2008, criminal naked short sellers flooded the market with more than $8 billion worth of phantom stock every day.

As further evidence that The Wall Street Journal just doesn’t get it, consider that the newspaper reported this week that “under naked short selling, investors can sell securities before they have borrowed them. The practice is already banned in the U.S…” This, unfortunately, is patently false. Although the SEC took some half-hearted steps to prevent naked short selling in the aftermath of the 2008 carnage, it did not ban naked short selling outright — traders are still permitted to sell shares before they have borrowed them.

The SEC’s current rules state only that traders have to deliver stock within three days, or in some cases, six days after they have sold it. This means that market manipulators can flood the market with phantom stock for three to six days, inflicting serious damage on prices. When it comes time to deliver the stock they have sold, the manipulators buy stock (at the newly damaged price) on the open market and hand it over. Then they do it all over again – flooding the market with phantom stock for another three to six days.

In nearly every case, such naked short selling is designed to manipulate prices, which is blatantly illegal. But the SEC turns a blind eye to the manipulation so long as the manipulators deliver stock before the three or six-day deadline. In fact, the SEC often turns a blind eye even when the manipulators don’t deliver the stock. Every day, more than 100 million shares go undelivered before the anointed deadline, and that is in just one part of the system monitored by the Depository Trust and Clearing Corporation. Far more phantom stock is processed ex-clearing, and in other shadowy regions of the financial system.

The SEC would do well to investigate these shadowy regions in its attempt to identify the roots of the “freak accident” that took place on May 6. But, alas, the officials of that agency have been too busy picking buggers out of their noses. Ok, not just buggers – they also wrote a 100-plus page report on their investigation into the “market events” of May 6, and this report is filled with all sorts of statistics and enough head-in-the-clouds hypothesizing to bring a smile to the face of any university economist (or SEC report-writer) looking for a job at a market manipulating hedge fund.

What the report does not contain is the names of any culprits, or any evidence that the SEC is trying to identify specific culprits. The report does not even contain a plausible explanation for what happened. If the SEC were charged with writing a report on the causes of the New Orleans flood, it would provide a hundred pages telling us how many cubic meters of water there were, how many molecules of oxygen and hydrogen the water contained, and plenty of assurances that water is usually good for the health, but it would forget to mention hurricane Katrina and the broken levy.

Bottom line: the SEC’s report was designed to make it seem like the bureaucrats have been busy investigating, when in fact they have been counting beans and picking buggers out of their noses. Meanwhile, the madness of the market circus continues, and we look up at that teetering tent with great trepidation.

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The Markit Group: A Black-Box Company that Devastated Markets

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The Markit Group: A Black-Box Company that Devastated Markets


Although much attention has been directed at the contribution made by credit default swaps  to the financial crisis, most discussion has focused on the companies, such as American International Group, that posted big losses because they sold these instruments without sufficient due diligence.

Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps to enhance their bear raids on public companies.

If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated.  The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).

Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.

Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages.  In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue  that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.

It should therefore be a matter of some concern that credit default swap “prices” and the indexes derived from them are determined almost entirely by a little company with zero transparency and, it appears probable, a high exposure to influence from market manipulators. The company is called Markit Group, and there is every reason to believe that its CDS-driven indices (the CMBX, the ABX, and several others) are inaccurate, while the credit default swap “prices” that they publish  and which rock the market are in fact  nowhere close to the prices at which credit default swaps actually trade.

Last year, the media reported that New York Attorney General Andrew Cuomo had sent subpoenas to Markit Group as part of an investigation into possible manipulation of credit default swap prices by short sellers. This investigation, like Mr. Cuomo’s other investigations into market manipulation, have yielded no prosecutions.

The Department of Justice is reportedly investigating Markit Group for anti-trust violations. This investigation (which is reportedly focused on how Markit Group packages and sells its information) seems to acknowledge that Market Group has near-monopolistic control of information about credit default swap prices. However, if the press reports are correct, the DOJ has not considered the possible appeal of this monopolistic control to market manipulators.

Meanwhile, Henry Hu, the director of the Securities and Exchange Commission’s division of risk, has said that it has been nearly impossible for the SEC to conduct investigations into any matter concerning credit default swaps because the commission does not have access to any data on the trading of CDSs. In itself, this is a shocking admission.  It is all the more shocking when one considers that the necessary data exists and might be in the hands of the Markit Group – a black box company based in London.

A thorough investigation of Markit Group is urgently required.

Here is what we know so far:

  • Markit Group was co-founded by Rony Grushka, Lance Uggla, and Kevin Gould. Prior to founding Markit Group, Mr. Grushka’s main line of business was investing in Bulgarian property developments. He recently resigned from the board of Orchid Developments Group, an Israeli-invested company based in Sophia, Bulgaria. Messrs. Uggla and Gould formerly worked for Toronto-Dominion Bank in Canada.
  • Markit Group’s founders also include four hedge funds. However, Markit Group refuses to disclose the names of those hedge funds. In response to an inquiry, a Markit Group spokesman said it was “corporate policy” to keep the names of the hedge funds secret, but he would not say why Markit Group had such a policy. It seems worth knowing whether those hedge funds have any influence over Markit Group’s published information or indexes, and whether those hedge funds are trading on that information. It would also be worth knowing whether those hedge funds or affiliated hedge funds have engaged in short selling of public companies whose debt and stock prices were profoundly affected by the information that Markit Group published.
  • Goldman Sachs, JP Morgan and several other investment banks also have ownership stakes in Markit Group. The investment banks received their stakes in exchange for providing trading data to Markit Group. It would be worth knowing whether these investment banks engaged in short selling ahead of Markit Group’s published indexes and price quotations.
  • Markit Group is secretive about how it creates its indexes. In early 2008, the Wall Street Journal noted that the CMBX simply “doesn’t make sense” and that Markit Group’s indexes “might be exaggerating the amount of distress” in the home and commercial mortgage markets. In 2008, the average prediction for defaults on commercial mortgages was 2%. The CMBX implied that the default rate could be four times that level.
  • When short seller David Einhorn initiated his famous public attack on Lehman Brothers, one of his central arguments was that the CMBX (the index that was likely “exaggerating the amount of distress”) proved that Lehman had overvalued the commercial mortgages on its books.
  • In March 2008, the Commercial Mortgage Securities Association sent a letter to Markit Group asking it disclose basic information about how the CMBX index is created and its daily trading volume. “The volatility in the CMBX index, caused by short sellers, distorts the true picture of the value of commercial-mortgage-backed securities,” the group said in a statement.
  • Markit Group is equally secretive about how it derives its “prices” for credit default swaps. A spokesman for the company spent close to one hour talking to Deep Capture. He did his job well and sounded like he was trying to be helpful. But he told us as little as possible.
  • However, in the course of this conversation, we did learn that Markit Group’s “prices” are not actual, traded prices. They are mere quotations. The Markit Group has what it calls “contributors” – hedge funds and broker-dealers that provide it with information. Markit Group has a grand total of 22 “contributors.” Deep Capture asked Markit Group’s spokesman for the names of these “contributors.” The spokesman said he would try to find out the names and call back later. He never called back.
  • The 22 “contributors” provide Markit Group with quotations, and these quotations become the Markit Group’s “price.” In other words, the “contributors” can quote any price for a CDS that they choose, regardless of whether anyone is actually willing to buy the CDS at that price. Markit Group looks at these quotations. Then it somehow decides which quotations make the most sense. Then it publishes information that purports to represent the actual market price of that CDS. This process is certainly unscientific. And it is ripe for abuse.
  • Consider, for example, the Markit Group “price” for CDSs insuring the debt of company X.  The Markit Group price strongly suggests that company X is going to default on its debt in the immediate future. Short sellers eagerly point to the Markit Group CDS “price” as evidence that company X is doomed. Panic ensues, and suddenly, company X really is doomed. But the fact is, nobody ever bought a company X CDS at the price quoted by Markit Group. Rather, that panic-inducing “price” was, in effect, pulled out of a hat. Who pulled it out of a hat? That is matter of immense importance. There are two possible scenarios:
  • The first possible scenario is that the 22 “contributors” report their quotations in good faith. They should be sending the actual traded price, not just a quotation, but assume they are just doing what was asked of them. From these quotations, Markit Group somehow decides what the “price” should be. It is possible that this decision is based on some secret formula (which would be worrisome); or it is possible that Markit Group executives sit around a table debating what the price should be and take a shot in the dark (which would be even more worrisome); or it is possible that Markit Group deliberately chooses the most horrifying price possible in order to assist the short sellers who are affiliated with its owners (which would be a matter for the authorities).
  • The second possible scenario is that Markit Group acts in good faith (if not scientifically), but one or more of the 22 “contributors” or their affiliates has an interest in seeing company X fail. If just one of those “contributors” sends in an astronomically high quotation, that could be enough. Markit Group factors the absurd quotation into its posted “price” and it suddenly becomes possible to convince the world that company X is about to default on its debt.  Panic ensues, the firm’s layer of debt dries up, the stock price plunges, and perhaps the “contributor” or its affiliate make a lot of money.
  • As Deep Capture understands it, CDS quotations suggested by the 22 “contributors” also help determine the movement of the CMBX and ABX indexes. The movement of these indexes did serious damage to the American economy in multiple ways. The  indexes prompted write downs at most of the major banks and mortgage companies. They were ammunition for short sellers, like David Einhorn, who claimed that companies had cooked their books by not writing down to the rock bottom prices suggested by the Markit Group indexes. They helped precipitate the decline in prices of mortgage securities, and contributed mightily to the panic that spread across the markets.  A lot of people made a lot of money as result of those indexes moving downward. So, it is rather important to know more about how those indexes are formulated, and if they can be driven by the same people who are making directional bets on their movements.

Conclusion: Ten years ago, there was no such thing as a credit default swap. Six years ago, a very small number of investors traded credit default swaps as hedges against the long-shot possibility of corporate defaults. Nobody looked to credit default swaps as reliable indicators of corporate well-being.

Then, suddenly, there were over $60 trillion in credit default swaps outstanding. That is, over the course of a few years, somebody had made over $60 trillion (many times the gross domestic product) in long shot bets that borrowers would default on their debt. As this derivative risk marbled through the system, the trading in credit default swaps was completely opaque. Nobody knew who bought them, who sold them, or at what price.

But starting in 2001, we knew the “prices” of CDSs. We knew the “prices” because two Canadians, a developer of Bulgarian real estate, and four mysterious hedge funds had founded a small, black-box company in London. That company, the Markit Group, achieved near-monopolistic power to publicize the “prices” through its magic process of aggregating quotation information provided by 22 hedge funds and broker-dealers who could well have been betting on the downstream effects of sudden price changes.

These “prices” were not prices in any meaningful sense of the term.  But, suddenly, these “prices” became perhaps the single most important indicator of corporate well-being. Assuming that those four hedge funds and the 22 “contributors” (or hedge funds affiliated with them) bet against public companies, it seems more than possible that short-sellers got to run the craps table, call the dice, and place bets, all at the same time.

So perhaps it is not surprising that a lot of long-shot rolls paid off quite nicely.

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The Week the World Said “Naked Short Selling”


Make no mistake: what you witnessed this week was not some natural process – an economy “souring,” a bubble “bursting.” This was not the “invisible hand” at work. This was not even capitalism.

This was the premeditated, systematic destruction of market value by an elite crowd of Wall Street cronies who no doubt cackled with delight in the cleverness of their mischief-making. This was criminal behavior on an ungodly scale – the unprecedented looting of America.

Do you think I’m overstating this? Consider that the hedge funds who did this employed precisely the same tactics that precipitated the stock market crash of 1929 and the Great Depression that followed.

One of these tactics, as almost everybody now finally realizes, is called “naked short selling.” It involves hedge funds and their brokers selling stock that they do not possess – phantom stock – to dilute supply and drive down prices.

Often, the short-selling saboteurs engage in other shenanigans – whispering scurrilous rumors, oozing innuendo, orchestrating bogus class action lawsuits, deploying armies of Internet message boards to foment negativity, paying seedy “independent” financial research shops to publish distorted analysis, hiring thugs to harass executives and their families, conducting corporate espionage, and instructing government cronies to launch dead-end investigations.

You never heard about this from the mainstream financial media. You never heard it because the market saboteurs were writing the media’s talking points. Some reporters were merely addicts, dependent on the dealers of distortion for negative stories. Other reporters were genuinely corrupt. They thought the market machinations were good fun. “I wanna play, too,” they said. They reveled in taking down companies, and then they asked their short-selling accomplices for jobs.

Our nation’s most influential financial journalists knew that naked short selling was rife. They knew that hundreds of companies had been victimized. They had all the data and they had every reason to believe that billions of phantom shares floating around the system could not be good. But they said naked short selling never happens. They said only bad CEOs and crazy people complain about short seller crimes. They whitewashed the biggest scandal of our lifetimes, and then our markets crumbled.

It was the darkest moment in the history of American journalism.

* * * * * * * *

In July, the SEC issued an “emergency order” to prevent naked short selling from destroying the financial system. The order required short sellers of stock in 19 financial companies to actually obtain real stock before selling it.

This was hardly intrusive, but the media, copying straight from the hedge fund lobby’s script, said that the SEC should leave the short sellers alone. The emergency order had hurt “market efficiency,” the journalists wrote, though common sense would suggest that a market cannot efficiently set prices when it is bloated by phantom supply. The emergency order decreased “liquidity,” the reporters wrote, though they provided no credible data to support this claim, and failed to explain how a liquid market in phantom stock benefits anyone other than a few hedge fund billionaires.

Even worse, some reporters argued that the SEC should not crack down on naked short selling because short sellers are “vital” sources of negative information to the media. What if some of these “vital” sources are manipulating markets? Criminals, apparently, are untouchable, so long as they dish dirt to reporters. The abomination riles all the more when you know (as I do, having studied thousands of these dirt-strewn stories) that the majority of them contain insinuation, omissions, and outright falsehoods.

At any rate, the financial media convinced the SEC to let its emergency order expire. Even as the markets nosedived, journalists, including CNBC’s Charlie Gasparino, were calling the emergency order “ridiculous,” and the SEC cowered. Within a few weeks Lehman Brothers was gone, Merrill Lynch was gone, Fannie Mae and Freddie Mac were nationalized, and American International Group, a company with a trillion dollars in assets, was trading for a dollar a share and soliciting handouts from the Fed.

On Wednesday of this week, the SEC rushed out new rules that purported “zero tolerance” for naked short selling. According to the SEC, there would now be a “hard” close out rule, requiring hedge funds to deliver real stock within three days of selling it.

Even if the SEC were to enforce a three day settlement, it wouldn’t do much, because the manipulators work like this: A hedge fund tells his broker to sell a million shares of XYZ. The broker doesn’t have any shares, but he sells them anyway. That is phantom stock and for three days it dilutes supply, and eats away at the financial system. When settlement day comes, the broker asks a second broker to sell him a million shares of XYX. The second broker doesn’t have any shares, but he sells a million shares of XYZ (the price now much lower) to the first broker, who uses the phantom stock to settle his initial sale of phantom stock.

When the second broker has to settle, he calls the first broker…and the phantom stock shuffle continues until the falling price makes it impossible for the company to raise capital. Then it’s bankruptcy, the stock is zero, and nobody has to deliver anything.

In any case, “Oooh, weee…‘zero tolerance.’ Really scary.” For years, hedge funds have habitually violated stock delivery requirements, and the SEC has done nothing. Big words didn’t scare anybody. When the SEC announced its new rules, the hedge fund lobby cheered, the media reported the cheers, and the manipulators went hog wild.

By Thursday afternoon, it was looking like Goldman Sachs, Morgan Stanley, and countless smaller banks were on death row. Call this “liquidity.” Call it “market efficiency.” Call it what you like, but it wasn’t good. The meltdown was so severe that traders on Wall Street genuinely believed that Al Queda was taking down the financial system.

More likely, it was the small clique of terrorist hedge fund managers who are most beloved by our financial media. Alas, the SEC panicked. To forestall the end of the world, it decided on Thursday night to ban all short selling of stocks in 700-plus financial companies.

It is a shame that it had to come to that. Short-selling is a legitimate practice, and lots of people do it the legal way. Proper short selling probably keeps the markets honest. If the SEC had cracked down on illegal short selling long ago, the cataclysm would have been averted.

At any rate, maybe now would be a good time for the media to take a closer look at the naked short selling scandal. Stephen Moore, who works for the Wall Street Journal editorial page, said on CNBC that naked short selling caused this week’s turmoil. Why has the Journal not published an editorial expressing outrage?

The Journal’s editorial page, the finest in the country, rightly abhors government interventions, but this is not about free markets. It is about preserving property rights – the basic capitalist tenet that people must own what they sell. It is about stopping criminals.

Aside from the Journal’s editorial page, there is a world of media that has not been compromised by short sellers – a world of good reporters who live far from Wall Street and could be covering this scandal from multiple angles. They need to do so quickly. The SEC will lift its current ban. And if it doesn’t start prosecuting people – if we don’t get a permanent, market-wide, and properly enforced rule requiring short sellers to pre-borrow real stock – then it will once again be open season for hedge fund terrorism, and where our towering financial system once stood, there will be nothing but a gaping, smoldering hole.

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The Week the World Said "Naked Short Selling"


Make no mistake: what you witnessed this week was not some natural process – an economy “souring,” a bubble “bursting.” This was not the “invisible hand” at work. This was not even capitalism.

This was the premeditated, systematic destruction of market value by an elite crowd of Wall Street cronies who no doubt cackled with delight in the cleverness of their mischief-making. This was criminal behavior on an ungodly scale – the unprecedented looting of America.

Do you think I’m overstating this? Consider that the hedge funds who did this employed precisely the same tactics that precipitated the stock market crash of 1929 and the Great Depression that followed.

One of these tactics, as almost everybody now finally realizes, is called “naked short selling.” It involves hedge funds and their brokers selling stock that they do not possess – phantom stock – to dilute supply and drive down prices.

Often, the short-selling saboteurs engage in other shenanigans – whispering scurrilous rumors, oozing innuendo, orchestrating bogus class action lawsuits, deploying armies of Internet message boards to foment negativity, paying seedy “independent” financial research shops to publish distorted analysis, hiring thugs to harass executives and their families, conducting corporate espionage, and instructing government cronies to launch dead-end investigations.

You never heard about this from the mainstream financial media. You never heard it because the market saboteurs were writing the media’s talking points. Some reporters were merely addicts, dependent on the dealers of distortion for negative stories. Other reporters were genuinely corrupt. They thought the market machinations were good fun. “I wanna play, too,” they said. They reveled in taking down companies, and then they asked their short-selling accomplices for jobs.

Our nation’s most influential financial journalists knew that naked short selling was rife. They knew that hundreds of companies had been victimized. They had all the data and they had every reason to believe that billions of phantom shares floating around the system could not be good. But they said naked short selling never happens. They said only bad CEOs and crazy people complain about short seller crimes. They whitewashed the biggest scandal of our lifetimes, and then our markets crumbled.

It was the darkest moment in the history of American journalism.

* * * * * * * *

In July, the SEC issued an “emergency order” to prevent naked short selling from destroying the financial system. The order required short sellers of stock in 19 financial companies to actually obtain real stock before selling it.

This was hardly intrusive, but the media, copying straight from the hedge fund lobby’s script, said that the SEC should leave the short sellers alone. The emergency order had hurt “market efficiency,” the journalists wrote, though common sense would suggest that a market cannot efficiently set prices when it is bloated by phantom supply. The emergency order decreased “liquidity,” the reporters wrote, though they provided no credible data to support this claim, and failed to explain how a liquid market in phantom stock benefits anyone other than a few hedge fund billionaires.

Even worse, some reporters argued that the SEC should not crack down on naked short selling because short sellers are “vital” sources of negative information to the media. What if some of these “vital” sources are manipulating markets? Criminals, apparently, are untouchable, so long as they dish dirt to reporters. The abomination riles all the more when you know (as I do, having studied thousands of these dirt-strewn stories) that the majority of them contain insinuation, omissions, and outright falsehoods.

At any rate, the financial media convinced the SEC to let its emergency order expire. Even as the markets nosedived, journalists, including CNBC’s Charlie Gasparino, were calling the emergency order “ridiculous,” and the SEC cowered. Within a few weeks Lehman Brothers was gone, Merrill Lynch was gone, Fannie Mae and Freddie Mac were nationalized, and American International Group, a company with a trillion dollars in assets, was trading for a dollar a share and soliciting handouts from the Fed.

On Wednesday of this week, the SEC rushed out new rules that purported “zero tolerance” for naked short selling. According to the SEC, there would now be a “hard” close out rule, requiring hedge funds to deliver real stock within three days of selling it.

Even if the SEC were to enforce a three day settlement, it wouldn’t do much, because the manipulators work like this: A hedge fund tells his broker to sell a million shares of XYZ. The broker doesn’t have any shares, but he sells them anyway. That is phantom stock and for three days it dilutes supply, and eats away at the financial system. When settlement day comes, the broker asks a second broker to sell him a million shares of XYX. The second broker doesn’t have any shares, but he sells a million shares of XYZ (the price now much lower) to the first broker, who uses the phantom stock to settle his initial sale of phantom stock.

When the second broker has to settle, he calls the first broker…and the phantom stock shuffle continues until the falling price makes it impossible for the company to raise capital. Then it’s bankruptcy, the stock is zero, and nobody has to deliver anything.

In any case, “Oooh, weee…‘zero tolerance.’ Really scary.” For years, hedge funds have habitually violated stock delivery requirements, and the SEC has done nothing. Big words didn’t scare anybody. When the SEC announced its new rules, the hedge fund lobby cheered, the media reported the cheers, and the manipulators went hog wild.

By Thursday afternoon, it was looking like Goldman Sachs, Morgan Stanley, and countless smaller banks were on death row. Call this “liquidity.” Call it “market efficiency.” Call it what you like, but it wasn’t good. The meltdown was so severe that traders on Wall Street genuinely believed that Al Queda was taking down the financial system.

More likely, it was the small clique of terrorist hedge fund managers who are most beloved by our financial media. Alas, the SEC panicked. To forestall the end of the world, it decided on Thursday night to ban all short selling of stocks in 700-plus financial companies.

It is a shame that it had to come to that. Short-selling is a legitimate practice, and lots of people do it the legal way. Proper short selling probably keeps the markets honest. If the SEC had cracked down on illegal short selling long ago, the cataclysm would have been averted.

At any rate, maybe now would be a good time for the media to take a closer look at the naked short selling scandal. Stephen Moore, who works for the Wall Street Journal editorial page, said on CNBC that naked short selling caused this week’s turmoil. Why has the Journal not published an editorial expressing outrage?

The Journal’s editorial page, the finest in the country, rightly abhors government interventions, but this is not about free markets. It is about preserving property rights – the basic capitalist tenet that people must own what they sell. It is about stopping criminals.

Aside from the Journal’s editorial page, there is a world of media that has not been compromised by short sellers – a world of good reporters who live far from Wall Street and could be covering this scandal from multiple angles. They need to do so quickly. The SEC will lift its current ban. And if it doesn’t start prosecuting people – if we don’t get a permanent, market-wide, and properly enforced rule requiring short sellers to pre-borrow real stock – then it will once again be open season for hedge fund terrorism, and where our towering financial system once stood, there will be nothing but a gaping, smoldering hole.

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Did a CNBC Reporter Help Destroy Bear Stearns?


Let’s pick up “The Story of Deep Capture where it left off – with the demise of Bear Stearns and the near collapse of the American financial system.

It’s April 2, 2008, and CNBC reporter Charlie Gasparino has just reported that Lehman Brothers CEO Richard Fuld claims to have evidence that short-sellers, who profit from falling stock prices, actively colluded to bring down Bear Stearns.

Indeed, the SEC is already investigating precisely this possibility. The regulator has said that it would like to know whether short-sellers circulated false rumors about Bear Stearns’ liquidity and credit risk in order to spark a run on the bank. And it has announced that it is investigating allegations that hedge funds engaged in “naked short selling” to drive down Bear Stearns’ stock. This isn’t surprising considering that SEC numbers show, for example, that in the week of Bear Stearns’ destruction, up to 13 million of its shares were shorted naked – ie. sold and not yet delivered. That’s 13 million shares of phantom stock — and most experts assume there was much more of it, perhaps 100 millions fake shares, in parts of the system that the SEC doesn’t monitor.

Live on CNBC with Gasparino is reporter Herb Greenberg. Herb is a dishonest journalist. He has quite literally made a career out of taking dictation from a small group of closely affiliated short-selling hedge funds. Virtually every story he has ever written or broadcast has come from these people. He protects his hedge fund friends by repeatedly denying that phantom stock is a problem. And a former employee of a financial research shop called Gradient Analytics claims to have witnessed Herb conspiring with at least one short-seller, David Rocker, to hold his negative stories until Rocker could establish short positions. This is called front-running a jailable offense.

CNBC is not concerned about this. Nor is it concerned that, in addition to his duties as a “journalist,” Herb is now also running his own financial research shop that caters to short-sellers. Yes, after years of denying that he has too-cozy relationships with short-sellers, Herb is now seeking to profit from those very relationships. His new company’s slogan is “bridging financial journalism and forensic analysis.” Anybody who believes that media and money don’t mix should be appalled.

Anyway, it is unsurprising that Herb is live on CNBC reporting that short-sellers had nothing to do with the demise of Bear Stearns. Instead, Herb says, Bear Stearns was taken down by a “crisis of confidence.” Could short-sellers have caused the “crisis of confidence?” Herb thinks not.

Herb says, “….if you take a look at [fellow CNBC reporter] David Faber’s reporting which was very interesting…”

* * * * * * * *

Good idea, Herb. Let us take a look at David Faber’s reporting. It was not just interesting. It was jaw-dropping – an utterly grotesque display of journalistic malfeasance.

Indeed, Faber’s reporting probably contributed a great deal to the precipitous collapse of Bear Stearns – an event so potentially calamitous that the Federal Reserve had to meddle in the investment banking sector for the first time since the great stock market crash of 1929.

On Tuesday, March 11, rumors were circulating around Wall Street that Bear Stearns was out of cash and that other banks were no longer accepting its credit risk. If anybody were to think these rumors were true, there would be panic – a run on the bank. If the rumors were false, as they quite demonstrably were, it was the job of the media to quash them.

CNBC’s Charlie Gasparino did his job. On that afternoon, he noted that there were “serious doubts” about Bear Stearns business model. He said that Bear Stearns was a “mediocre bank.” But he also noted that the rumors on Wall Street were suggesting something far worse –imminent bankruptcy–and that there was not a scrap of evidence suggesting that these rumors were true.

Gasparino quoted Bear Stearns CFO Sam Malinaro as saying “Why is this happening? I don’t know how to characterize it. If I knew why this was happening I would do something to address it. I spent all day trying to track down the sources of the rumors, but they are false. There is no liquidity crisis, no margin calls. It’s all nonsense.”

Gasparino stressed that there was no reason to doubt Bear Stearns’ claims. “I know Sam Malinaro pretty well,” he said. “He’s one of the best straight shooters in the markets.”

If Gasparino had stayed on the case, the uncertainty surrounding Bear Stearns’ liquidity and credit risk might have subsided, and the bank might have survived. But the next day, for some reason, Gasparino was taken off the Bear Stearns story, and David Faber took over.

A few rumors – even doctored memos falsely claiming that big banks had refused to accept Bear’s credit — were still circulating around Wall Street. Early that morning — Wednesday, March 12 — Faber interviewed Bear Stearns’ CEO, Alan Schwartz.

Actually, it was more like a prison interrogation than an interview. Faber demanded that Schwartz explain the rumors. Schwartz said the rumors were not true. Quite in contrast to Gasparino, Faber made it clear from his tone that viewers shouldn’t trust Bear’s executives.

Then Faber delivered this whopper: “…I’m told by a hedge fund that I know well…I’m told that [last night] Goldman would not accept the counterparty risk of Bear Stearns.”

Bang! The beginning of the end.

Understand how important this is. Previously, most people assumed that the rumors about Bear’s access to leverage were nothing more than…rumors. No reporter had suggested otherwise.

Now, for the first time – live on CNBC, in the middle of a mission-critical interview with Bear’s CEO — a prominent journalist was reporting that the rumors were true. He stated — as if it were fact that Goldman Sachs, one of the biggest investment banks in the world, had refused to take Bear Stearns’ credit.

Faber was generous enough to note that this information came from a hedge fund “friend,” and it wouldn’t take a genius to see that this hedge fund “friend” was probably some skeezy short-seller of Bear Stearns’ stock – but still, Faber’s comment was nuclear explosive.

Soon after Faber’s comment, Schwartz is about to provide details proving that Bear Stearns is not at all illiquid – that it has ample cash (and is therefore hardly a credit risk). He says: “…none of the speculations are true, but….”

Just then, a woman’s voice interrupts: “I’m sorry! I’m sorry!”

What? Can this possibly be happening? The CEO of a giant investment bank is about to provide evidence that the bank is not insolvent – that the American financial system is therefore not on the brink of collapse. This is perhaps the most important financial news moment of the past ten years, and now CNBC has cut off the CEO in mid-sentence!

“I’m sorry,” the CNBC woman says. “David, I’m sorry breaking news, I just want you to know that we have New York state officials confirming that New York governor Elliot Spitzer will resign today. Formal resignation, we don’t have it, but it is now confirmed that the governor of New York will resign today.”

“Thanks for that not unexpected news,” says David Faber.

This was probably straight-forward idiocy – nothing more sinister than that. But you’d think CNBC could have waited a few minutes for this “not unexpected” news. And anybody with a healthy sense of irony might chuckle and point out that Jim Cramer, the former hedge fund manager who is now CNBC’s top-rated personality and basically runs the place, was Elliot Spitzer’s best friend and college roommate. The irony is all the richer when you consider that Elliot Spitzer’s career was built almost entirely on the funding and machinations of a small group of short selling hedge fund managers – including Dan Loeb, David Einhorn, and Jim Chanos (owner of the beach house where Spitzer’s favorite hooker lived rent free), and that these very same hedge fund managers are the ones who are quite aggressively attacking Bear Stearns.

Schwartz looked mighty pissed off. After the interruption, he tried to continue: “We put out a statement that our liquidity and balance sheet are strong. Maybe I should expand on that a little bit…”

“Well, yeah,” Faber interrupts. “Why don’t you.”

The reporter’s tone again suggests that the CEO is not to be trusted. Tone aside, Faber doesn’t let Schwartz answer. Instead, he launches into a long and completely irrelevant monologue about the markets generally being in bad shape.

“Well, the markets have certainly gotten worse,” says Schwartz, clearly baffled by all of this.

Then, finally, the CEO manages to provide the salient information – the information that Bear Stearns customers and traders around the world have been waiting to hear. He says, “Our balance sheet has not changed at all. So let me just talk about that for a second….When we finished the year we reported that we had $17 billion of cash sitting at the parent company as a liquidity cushion…Since year end, that liquidity cushion has virtually been unchanged. So we still have many many billions of excess cash…we don’t see any pressure on our liquidity let alone a liquidity crisis.”

That certainly should have calmed the waters. There was no evidence that Schwartz was being disingenuous about having that $17 billion. Bear Stearns might have been the crappiest bank on Wall Street, but as long as customers knew that Bear Stearns had that $17 billion in cash, there was unlikely to be a run on the bank.

Unless, that is, a “reputable” media source was to suggest that, say, Goldman Sachs, had cut off credit.

Astonishingly, in the ensuing 24 hours, CNBC never once repeats the news that Bear Stearns has $17 billion in cash. And though it repeatedly references the interview with Schwartz, the network does not once replay the CEO’s strongest comment: “We don’t see any pressure on our liquidity, let alone a liquidity crisis.”

But Faber does repeat the startling “news” about Goldman.

At 8:48 AM on Wednesday, he says, “There are a lot of concerns out there…about counterparty risk. Frankly, I’ve been hearing from people whom I trust that there are some firms out there unwilling to put on new – new — counterparty risk with Bear Stearns…You had it at Goldman…Goldman said no we’re not taking Bear’s counterparty risk – this was yesterday.”

The hedge fund manager whom Faber “trusts” was lying. Goldman was not turning down Bear’s credit. We know this because some minutes later in the broadcast, Faber says so. He says it very quickly, just as an aside, as if it doesn’t matter at all. He says, by the way, “I have heard that that trade did actually go through—Goldman did say alright, now we will accept Bear as a counterparty.”

So Faber has just admitted, in an off-handed kind of way, that he was lied to by the hedge fund he “trusts.” In other words, up until this point, there is no evidence at all that rumors being circulated by hedge funds have any merit whatsoever.

Despite this, Faber proceeds to unleash this gobbledygook: “At the end of the day, while they say over and over they have plenty of liquidity, and in fact they may, it all comes down to confidence. They need to have access to capital, access to leverage. Otherwise, they’re dead! And it can happen very quickly.”

With this, Faber looks at his computer, and says, “Let’s see where the stock is.” Then he declares with glee: “Oops! It’s down!”

So now Faber has just pronounced that Bear Stearns might be “dead!” Why might Bear Stearns be “dead?” Because, Faber says, Bear needs “access to capital” – this in the same sentence where he says “in fact they may” have plenty of liquidity (ie. access to capital). Perhaps by “may” he meant to suggest that Bear “may not” have access to capital. Either way, he carefully omits the fact that the bank has told him it has $17 billion in cash.

The other reason Bear is “dead” is because it needs “access to leverage.” Is there any evidence that it does not have access to leverage? So far, there is none other than the Goldman news, which Faber has just admitted to be a complete fabrication delivered to him by a hedge fund “friend” whom he “trusts.”

Meanwhile, in an effort to send Bear Stearns’ share price spiraling downward, hedge funds are selling tens of millions of dollars worth of phantom stock. SEC data shows that more than 1.2 million shares sold that Wednesday were not delivered on time.

It only gets worse. The next morning — Thursday, March 13 — there is still no evidence that anybody is turning away Bear’s credit or pulling out money. CNBC still has yet to repeat the all important $17 billion figure. And now, Faber is back on television, fanning the flames, and repeating the bogus Goldman news.

He says, “I talked [yesterday] about a particular trade I was aware of where Goldman Sachs did not want to stand up as a counterparty and face Bear on new counterparty risk.”

Yes, David, you did talk about Goldman – and you admitted that your information was false. Why are you repeating this?

In a stuttering attempt to explain himself, Faber says to his television audience, “Now ultimately that trade did take place [ie. Goldman did accept Bear’s credit] after my interview with Mr. Schwartz concluded, but the day prior, Goldman did not want to. I have incontrovertible proof of that.”

Right. Whatever. The SEC should subpoena Faber to find out which market-manipulating hedge fund fed him the false information about Goldman.

Of course, if the SEC were to do this, the Media Mob would go berserk and start waving the First Amendment right to protect hedge funds who take down public companies by feeding journalists false information. Remember that the SEC once tried to subpoena Herb Greenberg and Jim Cramer, only to back down after Cramer vandalized his government subpoena live on CNBC and a bunch of Herb and Cramer’s media pals rose up in their defense.

But enough of this, already. These journalists are not protecting whistleblowers or freedom of speech. These journalists cannot even properly be called “journalists.” They are, or at least aspire to be, market players. They are helping slippery hedge fund managers who are destroying public companies for profit, and putting the American financial system at risk. I’m all for real reporters standing up to federal agencies, but these “journalists” are special cases. The SEC should not allow itself to be intimidated by them.

Alas, it’s too late for Bear Stearns. On the morning of March 13, there was still no evidence that anybody had pulled money out of Bear Stearns or denied its credit, but after repeating the Goldman falsehood, Faber reported: “I remember when Drexel Burnham went down [the smarmy inference being that Bear Stearns is a crooked company similar to Drexel]…It happens fast, very fast. It happens because those who do business with a firm such as that [read: `a crooked firm’] lose confidence.”

“And when they lose confidence,” Faber continued, “they pull their lines, and that’s it. It’s done. Pack your bags. Go home. It can end in an hour.”

About an hour later, a hedge fund called Renaissance Technologies Corp., shifted $5 billion out of Bear Stearns. That was the first client to “pull its lines.” Many others followed suit.

With Faber blowing taps, panic ensued.

And by that evening, Bear was, indeed, “dead.”

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