|Dear Reader,Two years ago I became convinced we were standing at the edge of an economic crisis perhaps comparable to the 1929 market collapse, due primarily to the SEC having become a “captured regulator” which turned a blind eye to the fraud it was created to suppress. The proximate cause of systemic failure, I argued, was that our financial system was building up latent derivative risk (in the form of unsettled trades in our settlement system) among a vast network of hedge funds and their prime brokers. But the conditions for collapse were created, I argued, by an indolent SEC.In an attempt to force action before there was a systemic crisis, I tried to open the eyes of the financial media to these conditions, and drew nothing but vilification that was, in the words of one professional media observer, “like nothing we’ve seen in America since the 19th century.” They uniformly refused to report on the substance of my claims, instead stretching (often quite ridiculously) to portray it all as just a CEO ticked about his own stock price. I organized a fairly extensive effort to bring relevant information to those senators who provide political oversight to the SEC, but was stymied in these efforts by Senator Richard Shelby of Alabama, a politician known in DC for his penchant for milking maximal dollars from all sides of every issue, then voting for whatever serves the interests of Wall Street (even at the obvious and profound expense of the citizenry). In a somewhat desperate measure, I encouraged legislation at the state level: reformist legislation passed the Utah legislature almost unanimously, but was then blocked by Wall Street through a series of threats, legal action, and (I am informed) cash dispensed to some state legislators who obediently flip-flopped.Through these efforts the SEC was not only 0 help, they actually aided those whom I was hoping to expose before a systemic meltdown became inevitable. SEC Commission Annette Nazareth, who has a vested interest (through marriage) in continuing the cover-up, was quoted as being dismissive of my claims (though they were already supported by hard, uncontestable data, much of it in published economic research). SEC Commission Campos also personally opposed me, telling an associate of mine in a public forum, “Imperfect regulation does not justify vigilantism by Patrick Byrne or Overstock.com” (actually it does, when the stakes are as high as they are proving to be, the form of the “imperfection” is corruption, and the “vigilantism” is simply exposure). I pushed hard on the SEC, even writing and narrating a presentation that explains the situation in fair detail, and which has been downloaded 500,000 times, but drew no response from the SEC beyond becoming the target of their federal investigation.One man came forward to support my claims: former SEC investigator Gary Aguirre. Recognizing that the Senate’s oversight of the SEC was fundamentally broken, he went to the Senate Judiciary Committee, sending letters that supported my view of rampant fraud within Wall Street protected by a co-opted regulator (and, it turns out, delivering boxes of evidence in support of these contentions). Naturally, the same journalists who had obediently clogged, cluttered, distorted and dismissed my claims, also went to work on Aguirre. Both The New York Times and The Wall Street Journal published articles and editorials so derogatory, inaccurate, and insulting about Mr. Aguirre, that when the smoke clears they will stand for ages as examples of yellow journalism at its worst, and the costs it can impose on our society. However, in the Senate Judiciary Committee the irresistible forces of fraud and money met the immovable objects of Senators Grassley and Specter. They held hearings and dug into Aguirre’s claims. In an unbelievable display of hubris, the SEC had the gall to subpoena the United States Senate Judiciary Committee, which told them to get stuffed: Senator Grassley’s two letters (since made public) lecturing the SEC on the meaning of “congressional oversight” within the framework of the US Constitution are remarkable both in content and in the simple fact of their necessity. Senators Grassley (from Iowa) and Specter (a former prosecutor) refused to be bullied, and instigated an investigation by the Government Accounting Office.
Seven months ago the wig began to slip. The GAO issued a preliminary report that confirmed “the whiff of a cover-up,” as Senator Specter summarized it in January. Last Friday, the Senate Judiciary Committee and General Accounting Office released their final report thoroughly vindicating Gary Aguirre (and in the process, my own long-standing criticisms of the SEC). It makes it clear that those on Wall Street with “juice” (as one higher-up called it while killing an investigtion) are considered untouchable by our regulators, who turn out to be negotiating for $1 million jobs with the same firms for whom they are derailing investigations. The report excoriates the SEC’s Office of the Inspector General (OIG) in particular as having taken part in the corruption and cover-up.
This week, SEC Inspector General Walter Stachnik (who has held that position since the SEC OIG was created in 1989), announced his retirement. Commissioner Roel Campos followed suit and, according to today’s newspapers, Commission Annette Nazareth is leaving soon as well.
When a corrupt Sheriff turns a blind eye to thuggery from his patrons, self-defense is justified but not obligatory. However, when that sheriff’s indolence leaves not just oneself but also innocent strangers to be mugged by the bullies, a civilized person takes it as his duty to get up in their grills. The corrupt sheriff will naturally denounce as “vigilantism” this decision by another to do that job for which he, the sheriff, is paid, but at which he is so abjectly failing.
When the Securities and Exchange Commission was created in 1934, it was given the daunting mandate of restoring investor confidence in what was left of America’s battered capital markets. In recent years they and the New York financial media have degenerated into cronies of Wall Street. As a result, our global financial system is now teetering on precisely the kind of systemic event of which I have been warning, brought about by precisely the kind of deep, latent derivative risk we were told could not exist, but which came to exist under the noses of the See-No-Evil Twins of the SEC and the New York Financial Media. Sadly, I predict that in the weeks and months to come we’ll learn that Aguirre was just the footnote to what has been covered up. And, regrettably, our nation will suffer deeply for it.
Patrick M. Byrne
PS Regarding the federal investigation: I have no beef with it, actually. Everything I have done has always been legal and ethical, but I do recognize that my actions have been somewhat irregular and, coloring outside the lines as far as I have, I do not begrudge the attention I have received from the Federals. In addition, I have no desire to express disrespect for, nor hurt the feelings of, those hundreds of honest, hard-working government employees who come to work each day wanting to do a good job regulating the capital markets. I simply think that a fair share of their bosses, the brass at the SEC, have been corrupted in one way or another. The departure of the OIG, and especially Annette Nazareth, is a first step in fixing this most vital of regulatory bodies.
PPS In all fairness I should exclude a small number of the Wall Street financial media from the charge of being hand-puppets for financial elites. Barron’s is nothing but marketing literature for about 8 hedge funds, the Wall Street Journal is to Wall Street as Sports Illustrated is to sports, Fortune is People Magazine for capitalists, and The New York Post is for folks who move their lips when they read People Magazine. But the same New York Times which employs Establishment-defending hacks like Floyd Norris and Joe Nocera also employs Gretchen Morgenson, who has integrity. Forbes reporters doing highly-credible jobs on these and related issues include Liz Moyer and Nathan Vardi, while Bloomberg has explored it through the superb investigative stories of Bob Drummond, and broadcast a shocking 25 minute Bloomberg Special Report by Gary Matsumoto. In addition, PBS gave fair treatment to Aguirre. In the same vein, I believe there are honest SEC Commissions (e.g., Cox and Atkins), and that the rank-and-file of the SEC are straight-shooters as well: it is the upper echelons that have lost track of for whom they work. In short, these systems are not monolithic.
PPPS TO GET YOUR COUPON please click here. It will take you to Overstock. When you checkout you will find the coupon deducted from your order. The coupon expires on Monday, August 13, 2007. It will take 10% off (not applicable to Entertainment products, and limited to $250 of benefit, so do not buy more than $2,500 with it!) If you have more than one coupon in your account, our checkout process will apply the one that gives you the biggest discount on the order.Last edited by patrickbyrne on Tue Sep 18, 2007 11:14 am; edited 33 times in total