CHAPTER EIGHT

NO SOLUTION IN SIGHT

Since the crisis of September 2008, our defenses against economic warfare and financial terrorism have not improved much. In fact, in many ways, we’re worse off, as the vulnerabilities that the attackers exploited have grown even more dire.

First off, oil prices can still be manipulated. Yes, in small ways federal regulators have begun to crack down on manipulation. For example, in May 2011, the Commodities Futures Trading Commission (CFTC) sued traders James Dyer of Oklahoma’s Parnon Energy and Nick Wildgoose of European company Arcadia Energy. Dyer and Wildgoose bought large quantities of physical oil to create the impression that oil supplies were tight. Later, after prices rose, they shorted oil and then dumped their own crude onto the market to drive prices down and profit from their shorts. “Defendants conducted a manipulative cycle, driving the price of [crude] to artificial highs and then back down, to make unlawful profits,” according to the lawsuit. The two traders allegedly reeled in $50 million in excess profits. Senator Maria Cantwell cheered the lawsuit, stating, “This is exactly what we expect the CFTC to be doing.... I expect the CFTC to be aggressive in policing these markets and standing up for consumers who are getting gouged at the pump.”¹

This relatively minor crackdown, however, is offset by the CFTC’s continuing softness on commodities speculation. In September 2011, the New York Times reported that the CFTC’s rules on ownership of commodities contracts actually help speculators. According to Senator Bill Nelson, “Despite a clear directive from Congress to rein in excessive speculation, regulators still are listening too much to Wall Street and not acting quickly enough to protect American consumers.” Nelson cited statistics showing that speculators add between $21 and $27 to each barrel of oil.²

Keep in mind, these are just the piggybackers. When it comes to true oil price manipulation, the OPEC nations are still kings of the hill. Able to control prices by adjusting supply levels or by using back channel markets, the cartel could easily squeeze America as it has in the past, throwing our economy back into recession or even into a full-blown depression.

Likewise, credit default swaps are still a problem, while the regulation of derivatives generally remains ineffective. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010, twenty different regulatory agencies were charged with creating 387 different rules. But we can’t expect much improvement under Dodd-Frank because the powerful ten-member Financial Stability Oversight Council is made up of the same regulators who failed in 2008. Dodd-Frank was supposed to crack down on non-transparent derivatives trading, forcing them onto the visible markets, but Treasury Secretary Tim Geithner wants foreign exchange derivatives to be “exempted from the requirement that derivatives trade on exchanges.” Senators Chuck Schumer and Kirsten Gillibrand have also tried to stop the regulation. So has the SEC.³

Just as important, Dodd-Frank has done nothing to end “too big to fail,” the policy by which the federal government bails out large firms that have taken on too much debt. To the contrary, Dodd-Frank creates “orderly liquidation,” i.e., the government-managed seizure of financial institutions. There is no judicial review of this process. By the same token, the bailout authority provides additional moral hazard for firms that want to risk their clients’ money. Meanwhile, due to Dodd-Frank regulations that force banks to keep a certain cash reserve, banks have been pocketing government cash to shore up their accounts rather than lending it out to spur the economy.

The housing bubble also remains a problem. The Obama administration’s efforts to keep the housing market from bottoming out have prevented the market from clearing effectively, meaning bad assets remain as a potential cancer on bank balance sheets. This keeps potential buyers on the sidelines waiting out the deflation. In essence, says Mike Larson of Weiss Research, “You are making a bet with taxpayer money that house prices are going to rebound [and] that if that person goes from [an interest rate of] 6.5 percent to 6 percent, they are never going to default and that everything will be hunky-dory. That’s a big bet to be making with taxpayer dollars, considering Fannie and Freddie are in conservatorship.”⁴

The Obama administration has further destabilized the market by trying to secure the judicial power to modify loans retroactively in bankruptcy settlements. Says Richard Moody, chief economist at Mission Residential, “Anyone who is going to be either lending or investing under these conditions is going to demand more protection in the form of higher fees or higher interest rates.”⁵ Mortgage rates have come down but only due to extraordinary Federal Reserve activity that will have unintended consequences. And despite the Fed’s activism, those who need the lower rates the most have been unable to access them.

Meanwhile, Fannie and Freddie continue to bleed money while the government continues to prop them up. Since the 2008 government takeover of the companies, taxpayers have eaten a $160 million bill just for legal fees to protect the heads of Fannie and Freddie from fraud lawsuits. The total losses from the takeover to January 2011 are estimated at $150 billion.⁶

Glass-Steagall isn’t being reinstated, either. Under Dodd-Frank, banks are still allowed to invest up to 3 percent of their cash in private equity and hedge funds.⁷ The so-called Volcker Rule, a part of the Dodd-Frank bill endorsed by President Obama, is essentially a far weaker version of Glass-Steagall. But a new proposal to reform the Volcker Rule would render it completely toothless. Now being debated by regulators, the rule would allow banks to hedge their risk on a “portfolio basis,” which includes the “aggregate risk of one or more trading desks.” In other words, banks can trade. “If you can do portfolio hedging, that gives you a license to do pretty much anything,” says Robert Litan, a former Clinton administration official.⁸

As Nouriel Roubini, the so-called doomsayer of the current down market, said, “The Volcker Rule goes in the right direction, but in my view, the model of the financial supermarket where within one institution you have commercial banking, investment banking, underwriting of securities, market-making and dealing, proprietary trading, hedge fund activity, private equity activity, asset management, insurance—this model has been a disaster. The institution becomes too big to fail and too big to manage. It also creates massive conflicts of interest.”⁹

As for reforms that would crack down on accounting trickery, those too have gone by the wayside. Off-balance sheet assets are only to be calculated with regard to maintaining capital requirements—otherwise, they need not show up on the balance sheets.¹⁰ Mark-to-market still prevails in the marketplace, although the SEC can suspend it by authority the agency received under the Emergency Economic Stabilization Act of 2008. But in December 2008, the SEC specifically recommended that Congress not suspend mark-to-market. According to the commission’s press release, “The report notes that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. The report also observes that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008.”¹¹

A few months later, Fed Chairman Ben Bernanke endorsed mark-to-market as well, declaring he “would not support any suspension of mark-to-market” even as he admitted that when the markets are stressed, “the numbers that come out can be misleading or not very informative.”¹² But that’s precisely the problem; mark-to-market works fine until markets are under duress. In the case of a financial attack, terrorists can exploit the otherwise helpful rule to force a downward spiral.

Bear raids remain an enormous threat, too. The uptick rule really has not been re-instituted even though the SEC may claim it has. The new rule allows individual stocks to fall 10 percent before a weakened rule kicks in. But by that point, the fuse has been lit and panic selling can force the share price much lower. Even if the shares rebound, the volatility will scare investors away over time, damaging share prices further. Distressingly, rules against naked short selling are still unenforced, while double- and triple-short ETFs remain a market mainstay with the potential to wreak havoc. Simply look at the unprecedented volatility in the last hour of daily trading to see how powerful these instruments can be.

Just who is trading in our capital markets remains murky. Sovereign wealth funds continue to grow in power and scope; dark pools and dark markets continue to spread. On May 6, 2011, the Dow lost nearly 1,000 points in about six minutes, erasing $900 billion from the market in the so-called “flash crash.” Yet, despite multi-million-dollar investigations, we really don’t know what or who caused the crash.¹³ Most observers blame high-frequency, algorithm-based computerized trading. This indeed seems to be a growing problem. When the markets staged a mini-crash, losing $2.2 trillion in value in the first eight trading sessions of August 2011, high-frequency trading activity tripled. As of early August 2011, computer-driven trading had jumped from about a quarter of all trading in 2006 to around three-quarters.¹⁴ The reality is that despite a great deal of talk, relatively little has been done to address the risk of algorithmic trading, let alone the possibility that the algorithms themselves could be manipulated or co-opted by terrorists. Quite simply, we can’t verify who is trading or why.

The two firms identified in the “Red Flags” report as having been instrumental in the 2008 attack—Penson Financial Services and Wedbush Morgan Securities—are still finding new ways to dominate market action. Both are extremely active in high-frequency trading and always seem near the top of trading data in one respect or another, especially when the markets are most volatile. Both are leaders in providing market bids and offers that rush the market and then are cancelled. Some argue that this adds liquidity, but regulators aren’t sure. In fact, according to an August 2011 Bloomberg article, authorities are beginning to recognize the potential for manipulation: “U.S. prosecutors have joined a regulatory investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said in April. Justice Department investigators are working with the SEC to review practices ‘that are potentially manipulative,’ according to Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York.”¹⁵

Whether it’s a result of manipulation or not, the markets are unquestionably volatile. Citing various academic studies, some argue that the benefits of liquidity outweigh the problems of hyper-trading. The problem with academic studies is that they hold a crucial assumption: “all other things being equal.” The reality is that all other things are not equal—heightened volatility scares traditional investors out of the markets and that is detrimental overall.¹⁶ The problem is that high volatility creates investor fatigue even if share prices bounce back after sharp declines. This is the emotional version of metal fatigue, a process in which a continual back-and-forth bending of a metal results in weakening and eventually failure.

THE REAL PROBLEM: PHASE THREE

Believe it or not, we have even bigger problems than those described above. The biggest problem is our mounting national debt and the monetary policy adopted to deal with it.

While Phases One and Two of the 2008 attack were deeply troubling, the U.S. economy eventually stabilized, at least in part, and the stock market has substantially recovered. But the response itself saddled the U.S. Treasury with massive new debts even as the Federal Reserve increased the money supply. In total, the U.S. government and monetary authorities put an estimated $12.8 trillion of economic stimulus into the pipeline by mid-2009, and more since then.

For context, $12.8 trillion is roughly in line with total U.S. GDP and is comparable to the value of all U.S. stocks in recent years. It is also about equivalent to the decline suffered by all American assets, peak to trough, as a result of the financial crisis. This effort will produce immense annual federal budget deficits over the next ten years that dwarf anything we’ve seen before. Meanwhile, the government’s monetary response to the crisis risks stoking inflation; from the crisis of 2008 to April 2009, the annual percentage change in the monetary base was so high that at one point it even exceeded 100 percent.¹⁷

Economists continue to argue over the effects of the stimulus; one analysis showed it cost $500,000 per job created,¹⁸ while other research purports to show that it prevented a second Great Depression. Either way, we have strong reason to believe that the cost of our recovery thus far has been far higher than normal recoveries because of financial terrorism. This is another major hit to United States finances, as it was when the government spent trillions of dollars on homeland security after a few box cutters and plane tickets took out the World Trade Center towers.

The Phase Three concern is that the response itself to the recent collapse has strained economic resources, creating large budget deficits and high inflation risks. And the situation will deteriorate dramatically in the event of another economic attack. In fact, we are watching this play out in Europe right now.

The European turmoil that began in Greece and spread across the continent undoubtedly stems partly from financial terrorism and economic warfare. As with our own collapse in 2008, Europe had serious economic vulnerabilities including structural weaknesses in its currency. Exploiting those problems, terrorists used credit default swaps and naked short selling as the same match to ignite the gasoline of economic chaos.

We know this for four reasons. First, in February 2010, a group of hedge funds—including Soros funds—met in New York to discuss how to exploit Greek vulnerability to press the euro. This was before Greek debt costs and CDSs rose to untenable levels.¹⁹ Second, European spy agencies have acknowledged that European markets were attacked by financial terrorists.²⁰ Third, the German regulatory authorities recognized the problems and responded by banning naked credit default swaps and naked short selling.²¹ Finally, the press reported that upon searching the bin Laden compound following his death, authorities discovered documents indicating he was planning an economic attack on Europe.²² In short, the crisis across the Atlantic is Europe’s 2008 with the twist that the attack is directed toward sovereign credit as well as the banking structure. In that respect, the attack on Europe is akin to a hybrid between our Phase Two and our coming Phase Three.

While it would be comforting to think the European crisis is self-contained, in fact it is already affecting our stock market and banking system. Morgan Stanley, one of the stronger survivors of 2008, has seen its CDS rates spike to levels untouched since the worst of the market collapse.²³ Much of this was attributed to rumors about the firm’s European debt exposure that now appear false considering Morgan Stanley had a fully-hedged position.²⁴ This, of course, is reminiscent of the bear raids that brought down Lehman Brothers.

The one seemingly positive trend for us has been the relative strengthening of the U.S. dollar—as investors have dumped euros, they have turned to the greenback. The strong dollar, in turn, has benefited U.S. Treasury instruments, as the dollar is the world’s primary reserve currency and the preferred way to hold dollars is in Treasury bonds. All this merely provides the illusion of security, however. Our research clearly indicates that the dollar and Treasury bonds will be nothing more than a temporary beneficiary. As the saying goes, “A one-eyed man is king in the land of the blind.”

Make no mistake: the Phase Three attack will involve the dumping of U.S. Treasuries and the trashing of the dollar, ultimately removing it from reserve currency status. This is a foreseeable risk that is increasingly being discussed as an inevitable denouement. The S&P rating agency downgraded U.S. debt in early August 2011 based on its understanding of the U.S. fiscal situation. It understood that current rates of government spending and borrowing are unsustainable.²⁵ Announcement of the downgrade increased volatility on the stock markets, as if the downgrade was unexpected. Yet, our research provided to the Defense Department more than two years earlier had predicted the downgrade. We knew then that implementing the massive stimulus without equally impressive economic growth would ratchet up the deficit and the debt. You simply can’t spend $1 million for every two jobs and make the economy healthy, especially when we allow financial terrorists to act without response. Ultimately, the combination of excessive domestic sovereign debt combined with the required monetary expansion seriously weakens the dollar and threatens the reserve currency status.

The implications are extremely serious. If the dollar lost its status as the reserve currency, foreign holders would dump their Treasuries en masse. This would hinder the government’s ability to raise debt and drastically increase Treasury interest rates, further worsening the annual deficits due to sharply higher interest payments on expanding debts. Higher interest rates would further increase the deficit, and this in turn would force the government to raise taxes dramatically, further dampening growth—or alternatively, the Federal Reserve would be forced to monetize the debt, worsening inflation concerns. Pushed to the limit, our currency could experience the kind of hyperinflation that plagued Weimar Germany. These problems would surely infect Europe and elsewhere, which is why foreign leaders such as German Chancellor Angela Merkel have criticized U.S. monetary policies.²⁶

Merkel isn’t alone. Politicians around the globe are scared stiff by what the U.S. is doing with its currency. Others are positioning themselves to exploit the coming chaos. The answer in Europe, according to George Soros and others, is to create a Eurobond that would replace debt from individual currencies. That could give global investors a credible alternative to the U.S. bond market.

All these concerns will be sharply elevated if a concerted, planned attack is undertaken by holders of dollar-based instruments. As already explained, the largest holders of U.S. reserves, dollars, and Treasury debt include China, Russia, and the oil producing states. As financial threat expert James Rickards observes:

The number one vulnerability is the dollar itself. We’re printing them and shoving them out the door, and the Fed is basically out of bullets. So why hasn’t the dollar collapsed? The short answer is, global investors don’t have any other choice. That is, there simply aren’t enough Euro- or Yen-backed securities for investors to shift their money out of dollars and into some other currency. But what if some kind of global coalition—say a trillion-dollar sovereign wealth fund allied with several countries around the world—banded together to create a gold-backed alternative to the dollar?

Rickards details the consequences: “That’s the end of the dollar. You’d have high unemployment, deflation, and interest rates would go up. It would take what already looks like a strong recession and make it a Great Depression or worse.’”²⁷ He further explains, “The U.S. would reimport the hyperinflation which it has been happily exporting the past several years. U.S. interest rates would skyrocket to levels last seen in the Civil War, in order to preserve some value in new dollar investments.’”²⁸

All the factors cited by Rickards are heightened today. Other analysts, such as Porter Stansberry, have called this scenario the “end of America.”²⁹ As we have described, if allowed to happen, it will not be death by natural causes but rather murder by secret weapons.

THE CONTINUING ISLAMIC THREAT

A decade after the 9/11 attacks, America’s leaders still refuse to acknowledge that our enemies would exploit all these loopholes and weaknesses throughout our economy—even though our enemies themselves are quite open about their efforts to do so.

In January 2011, Inspire, the English-language online magazine published by al Qaeda in the Arabian Peninsula, posted an article instructing jihadists to steal wealth from Western financial centers in general and from U.S. citizens in particular. The FBI quickly briefed Wall Street firms about the threat. FBI spokesman Jim Margolin declared, “In a post-9/11 world we routinely give security briefings to security personnel in various parts of the private sector. This was in the course of a periodic update in the evolving threat stream. I would stress that it’s our belief that the information that was discussed was not imminent, not specific.” CNBC Senior Editor John Carney commented, “What I think has probably caught the eyes of security officials are the articles advocating financing jihad with money stolen or embezzled from American banks, corporations, governments, and wealthy individuals.”³⁰

Carney further noted that the article’s author, recently killed al Qaeda terrorist Anwar al-Awlaki, provided detailed guidelines for redistributing wealth stolen from the West: “Wealth taken from non-Muslims would have to be distributed according to how it was taken. When wealth is taken by force, it is divided up so that 4/5ths of it goes to the Muslim soldier who took it and 1/5 goes to either funding more jihad, spending for the poor or funding scholars and judges. Wealth that is [not taken] by force—basically, taxes imposed on non-Muslims—however, goes entirely to ‘the Muslim treasury.’ Money taken by theft or embezzlement is a special case.... There’s no 4/5^th rule—which means the thief gets to keep his wealth.”³¹

As this book has detailed, Muslims wishing to follow al-Awlaki’s instructions could use sharia-compliant finance to attack Western targets without breaking Islamic religious commandments. Instead of taking this threat seriously, however, the U.S. government appears to be complicit in it. When the government bailed out American Insurance Group (AIG), it also took over AIG’s massive sharia-compliant insurance business. Andrew McCarthy of National Review explains, “Companies that practice SCF, including AIG, retain advisory boards of sharia experts. These boards, which often include Islamist ideologues, tell the companies which investments are permissible (halal) and which are not (haram). AIG’s ‘Shariah Supervisory Committee’ includes a Pakistani named Imran Ashraf Usmani, who is the son and student of Taqi Usmani, a top cleric (a ‘mufti’) and a globally renowned sharia-finance authority. The mufti is author of a book that features a chapter urging Muslims to engage in jihad against the countries in which they live.” For firms like AIG, this means that all the interest accrued through its SCF operations gets siphoned off to Islamic charities—many of which may be fronts for terrorism. In brief, says McCarthy, “An American company that practices SCF is, wittingly or not, advancing the jihadist agenda.... [With the takeover of AIG, you] get to fund the jihad, while the jihad gets to target you.”³²

AIG is not the only U.S. corporation involved in SCF. Citigroup, Dow Jones, HSBC, UBS, Visa, and Mastercard all have SCF branches. To ensure the probity of their SCF operations, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Finance Standards Board (IFSB) oversee branches of major Western institutions. Citibank’s Islamic Investment Bank is a member of the AAOIFI, as is the law firm DLA Piper, Ernst & Young, HSBC, and PricewaterhouseCoopers. IFSB covers BNP Paribas, HSBC, and others.

This is problematic because the primary “scholars” who sit on these Islamic boards and guide companies’ SCF activities have personal histories, relationships, and connections that some view as problematic.³³ For example, the AAOIFI board harbors Sheikh Yusuf al-Qaradawi, the charming fellow who celebrated Palestinian-style suicide bombing. Mufti Muhammad Taqi Usmani, chairman of AAOIFI and board member of HSBC, Dow Jones, Citigroup, and Guidance Financial, is another figure who raises concern. As Gadi Adelman and Joy Brighton report, Usmani told the Times of London that “aggressive military jihad should be waged by Muslims ‘to establish the supremacy of Islam’ worldwide.” His son, Imran Ashraf Usmani, sits on the boards of AAOIFI, AIG, HSBC, Citigroup, Lloyds TSB Bank, and Credit Suisse. Sheikh Yusef Tala DeLorenzo, a board member of AAOIFI, IFSB, Barclays, Dow Jones, and Blackrock, was an advisor to the Pakistan government during the period the Taliban was established.³⁴ We can hope that these individuals would view SCF as merely a religious accommodation for Muslims to lawfully participate in the capital markets—and not as “jihad with money.”

Far more attention needs to be paid to the activities of these “scholars,” especially since the U.S. government now holds a stake in various firms involved in SCF. With $1 trillion in managed SCF assets, at least $10 billion or so is going to “charity” every year—and these charities have a strange tendency of acting as fronts for terrorism. In fact, Chubb, Ace, and Allstate have all sued various Islamic charities for their alleged complicity in funding the 9/11 attacks. Islamic banks comprise a big chunk of the suit.³⁵

All this is not to say that everyone who follows SCF seeks to harm the West; but the system was created specifically for that purpose, and many of those who control it still subscribe to that mission. Out of political correctness, the U.S. government has been willfully blind to the dangers of SCF and has unwittingly propped up the entire system. For example, several years ago, the U.S. Federal Reserve provided seventy-three loans totaling more than $5 billion to the Libyan-owned Arab Banking Corporation. During that same time period, the Libya Investment Authority bought up banks like they were going out of style. Gary Johnson Jr. of Family Security Matters explained the implications: “The TARP bailouts and discount windows designed to buoy U.S. banking interests, then, were used by the Libya Investment Authority CEO Mohammad Hussain Layas to bail out failed European banks and to invest in First Energy Bank in Bahrain. The treasurer of ABC’s New York branch, David Siegel, declined to comment because U.S. taxpayers footed the bill for a bailout of the Sharia Compliant Finance industry.”³⁶

Clearly, our enemies will exploit any vulnerabilities they can find—and they’re adept at finding them. Walid Phares has reported that Ayman Zawahiri, the current leader of al Qaeda, recently

called expressly and repetitively on the public to sell their US dollars and buy gold instead (Be’u al dullar washtaru al zahab). These were stunning statements ignored by most analysts at the time but that are making sense today. He predicted a collapse in the infidels’ economy, starting from American markets. Was he a part of the lobbying effort in the OPEC game? Most likely not, but he seems to have been privy to the game, having insiders in the Wahhabi radical circles in the Peninsula: in the end there are too many political signs to dismiss and the analysis of price warfare is too evident to ignore.³⁷

Apparently, Zawahiri’s advice is being taken by the NASDAQ Dubai. In March 2009, that exchange created the first SCF tradable security “backed by gold to satisfy a growing demand for the precious metal as a safe haven in the global recession.” Jeffrey Singer, chief executive of NASDAQ Dubai, proclaimed, “There is a huge demand for Sharia-compliant products in the region. You can use this product to diversify your portfolio. We are the gateway . . . and just made it very easy to buy gold.” Marcus Grubb, managing director at the World Gold Council, noted—unsurprisingly—that “the product could also become interesting for the region’s sovereign wealth funds.”³⁸

THE BRIC DANGER

The BRIC countries (Brazil, Russia, India, and China) are often at the forefront of international calls for a new reserve currency. These nations are all large holders of dollars and are looking to diversify in order to reduce their risk. Like the oil producers, the BRIC group has considerable clout due to its above-average long-term growth rates. Goldman Sachs chief economist Jim O’Neill finds that during the current economic downturn, the BRIC nations have grown even stronger vis-à-vis the West. Predicting that China and the other BRIC countries would overtake the world’s developed economies in short order, O’Neill argues, “Their relative rise appears to be stronger despite the rather pitifully thought out views by some a few months ago that the BRIC ‘dream’ could be shattered by the crisis.” O’Neill describes as “fascinating” a proposal by the governor of China’s central bank that the International Monetary Fund create a new supranational currency that includes the Chinese yuan.³⁹

Recently, the BRIC nations became the BRICS with the addition of South Africa. At an April 2011 summit, the quintet was not shy about announcing its goal of replacing the dollar as the world’s reserve currency. The Jakarta Globe reported, “In a statement released at a summit on the southern island of Hainan, the leaders of Brazil, Russia, India, China and South Africa said the recent financial crisis had exposed the inadequacies and deficiencies of the current monetary order, which has the dollar as its linchpin. ‘The era demands that the BRICS countries strengthen dialogue and cooperation,’ Chinese President Hu Jintao said.”⁴⁰

Without perspective, this may all seem unremarkable. After all, the dollar is at risk and, in comparison with most of the BRICS, the debt-laden U.S. economy is moribund. Take a step back, however, and examine some key facts: the excessive U.S. government debt now totals about $15 trillion. Of that amount, however, about $5 trillion was accumulated after the financial collapse in 2008. Prior to that, the rate of debt growth was substantially lower. Contrary to the conventional wisdom, the dollar performed well during the crisis. In addition, the U.S. government and Federal Reserve made serious efforts to bail out many foreign banks, supporting the global economy at U.S. taxpayer expense. As we have demonstrated, much of the swing in commodity prices has been the result of foreign speculation. We have documented where sovereign wealth funds were active in the energy markets, and that oil speculation created much of the weakness leading up to the 2008 economic collapse. Much of the U.S. debt has gone directly to China, yet the Chinese have artificially pegged the yuan to the dollar, resulting in huge trade surpluses. What’s important to recognize is that this BRICS summit is following precisely what we predicted in 2009 as a Phase Three attack on the U.S. dollar. The summit confirms our concerns.

The addition of South Africa to the group is a clear signal of intentions. South Africa is an unlikely BRIC member, with a long-term economic growth rate less than half that of the BRIC average. So why include it? Here’s why: according to estimates from the U.S. Geological Survey, South Africa has around half the world’s gold resources. If you were planning to replace the dollar, it couldn’t hurt to have the world’s top gold resource holder on your side.

According to popular belief, the BRIC concept arose spontaneously when certain people and groups began grouping the four nations together due to their high economic growth rates, and then the global investment community took notice with the aid of Goldman Sachs. The reality, however, is different. According to ISN Security Watch,

A “strategic triangle” between Russia, India and China was first suggested by former Russian prime minister Yevgeny Primakov in 1998. Initially, the “strategic triangle” concept was dismissed by Beijing, while New Delhi’s response was muted. Subsequently, the RIC foreign ministers have met five times in the past: twice on the sidelines of the UN General Assembly in 2002 and 2003; in Almaty in 2004; in Vladivostok in June 2006; and in Harbin in October 2007. However, repeated meetings of RIC top diplomats have brought very limited practical results. In the wake of the Yekaterinburg meeting, Russian officials reportedly argued that BRIC could have the potential to provide a new global leadership. Brazil’s Amorim, likewise, reportedly said that the BRIC nations were “changing the world order.”⁴¹

This implies BRIC was created for geopolitical reasons as much as economic ones. There are even hints that the Russians have adopted these alliances as well as their overall economic system in retribution for U.S. economic warfare initiatives undertaken during the Reagan years to bring down the Soviet Union.⁴²

So, we have further evidence of planning for a three-phased attack as described in the 2009 Defense Department report. It appears that the elements are in place for this to begin in earnest following a resolution in Europe. If we are right, this will be one of the most dramatic attacks on our way of life in history. The worst part is that the global PR machine has been quite successful in convincing most of America that we have done this completely to ourselves. Unfortunately, these “checkmate” scenarios are entirely possible after nearly two decades as the world’s sole superpower. It is clear that the American economy is under siege, endangering our military power and our very way of life.

A FAILURE OF IMAGINATION

If there is good news, it is that we are making progress in educating both the national security/intelligence community and also economists and market experts. That’s a big change from just three years ago.

When we started this process, defense folks would tell me, “This isn’t my area.” They would then call a friend in the investment community who would refuse to even consider the feasibility of financial terrorism. The only way to overcome these objections was to go to back to the officials and educate them personally. The problem is that economists operate in the world of ceteris paribus (Latin, roughly translated as “all other things held constant”), while investors tend to believe in the efficient market hypothesis (holding that markets are rational and reflect all available information) and assume Homo Economicus (that people tend to act in an economically rational way). Underlying some prominent economic and investment theories, these assumptions work pretty well under certain circumstances. If you hold to the assumptions, the market decline in 2008–2009 simply reflected the bad economy and poor future prospects for stocks and bonds. After all, the primary motive for each investor is to get the best possible return, right? But when you introduce the concept of non-economic motivations, the theories tend to break down, including the explanations of the 2008 crash.

Financial terrorism upsets established views on finance the same way suicide bombers once shook up our national security doctrine. Until 9/11, the prevailing view was that no hijacker would deliberately crash a plane because it would kill him. Thus, standard procedures focused on negotiations—but that changed with the suicide attacks of 2001. It goes to show that even well-worn doctrines need to be reconsidered in light of changing circumstances.

I have worked hard to educate national security officials about financial markets and the investment community about national security. The arduous task is made even more difficult by the planned secrecy of the financial attack and the purposed opacity of the financial markets. For years, free-market theorists at the SEC had allowed hedge funds and others to operate in the dark, assuming that as rational economic actors, the funds would be increasing market efficiency as long as they did not access inside information. So, to protect the market, officials focused on cracking down on insider trading. Unfortunately, financial terrorists who are motivated by malice, not by profit-seeking, fall well outside of these parameters.

Thus, to this day, measures are woefully inadequate for keeping financial terrorists from working through hedge funds. If you’re wondering how opaque these funds really are, consider the disclosure statement from J. P. Morgan, which states, “Investing in hedge funds involves increased risk which include the following: leveraging, short-selling, lack of transparency and lack of regulation. Hedge funds are not subject to as much oversight from financial regulators as regulated funds, and therefore some may carry undisclosed structural risks.”⁴³

All this is to say that our inability to stop the 9/11 attacks stemmed from the same shortcoming as did our failure to stop the 2008 financial attack: a failure of imagination.

We learned our lesson quickly after 9/11; the same can’t be said about the 2008 financial attack, which has not even been widely recognized as having occurred. After the market collapsed, pundits looked inward, assuming we brought this debacle upon ourselves through greed or bad government policy. Those explanations provided a convenient political narrative for Democrats and Republicans, respectively. Each side saw its view as a path to political victory. In that climate, the suggestion that it was financial terrorism disrupted each side’s story and was rejected by all. That’s how you get a failure of imagination.

THE STRUGGLE

When I first sent my report on the 2008 financial attack to the group at Irregular Warfare/SOLIC (Special Operations, Low-Intensity Conflict) in the Department of Defense, the initial positive response was short-lived. For one thing, the project was conceived in the waning days of the Bush presidency, meaning there may have been some knee-jerk opposition to it once Obama’s team took charge. There was also the typical institutional reluctance to think outside the box and challenge long-held beliefs. Never mind that the financial terror hypothesis matched precisely with credible warnings starting as early as 2004 from sources in the Middle East and North Africa of planned economic attacks—I was simply told that my report had “too many assumptions.” So I went page by page, listed each assumption, and provided supporting documentation, to the point that the objections required far more assumptions than the report did.

I had demonstrated motive, means, and opportunity, but in the end I could not overcome the failure of imagination. One would think national security officials would be obligated to consider all plausible theories in line with the 1 percent doctrine toward terrorism articulated by former Vice President Dick Cheney: “Even if there’s just a 1 percent chance of the unimaginable coming due, act as if it is a certainty.”⁴⁴ But even my simple requests for further study were too much for the establishment to handle.

Some officials, in fact, seemed anxious to suppress my work, including a threat to classify it. I tried to explain that my work was completely “open source”—presumably anyone could find the same information from publicly available sources. I was told that while the source data was public, my analysis was not. If classified, I could be put in jail for even discussing it, I was told.

So, if my analysis was so full of assumptions, why would it need to be classified? Wouldn’t it simply be laughed off by the more enlightened? Or, perhaps the powers that be feared that my work would start a market panic? Only later did one official tell me the truth: no one wanted the report to surface because it “did not fit the narrative.”

I called Patrick Maloy, who had been an indispensable guide to the Pentagon. He was a former executive for Morgan Stanley, interacting with great economists like Art Laffer. As a former Marine officer stationed in Iraq and throughout the Middle East, he also deeply understood the Islamic terrorist mindset. Maloy was indignant at the attempts to suppress my report. I discovered later he immediately gave my report to Jim Woolsey, CIA Director under Clinton, for safekeeping. In turn, Woolsey sent copies to three prominent senators. Maloy then told the officials who threatened to classify my report that if they did so, it might be read publicly from the Senate floor. At that point the group backed down. One of them even told Maloy they were only considering classifying my report for my own protection—from whom, they didn’t say.

Unexpectedly, at this point the Pentagon seemed to warm up to my research. I was told the higher-ups were impressed and that they were considering commissioning a second study, this time in cooperation with one of the architects of Reagan’s economic warfare strategy. But then I encountered a months-long series of delays, receiving around a dozen explanations ranging from personnel changes to funding problems. With each excuse, I was told not to undertake any major commitments because the follow-up study would be exhaustive. Eventually, a SOLIC official admitted I was being strung along, and that there was no intention to conduct another study. Worse, the purpose of keeping me “on the hook” was to prevent me from moving forward on my own or pursuing other funding.

By that point we had formed a solid team intent on getting this information disseminated. Between my contacts and Maloy’s, we had a “who’s who” list of national security officials interested in our project. Jim Woolsey, who became a key supporter of our efforts, set up a meeting with the legendary Robert Morganthau, long-serving District Attorney of New York. Maloy and I went to New York to meet Morgenthau, who was fresh from his big bust of major banks that had been money-laundering for the Iranian government. (As a side note, Morganthau’s father had been FDR’s Treasury Secretary and even assisted in planning U.S. economic warfare activities during World War II.) Morgenthau seemed convinced by our work; having experience both with terrorists and with Wall Street, he understood that financial terrorism was not only possible but inevitable. Unfortunately, as he noted, we’d need a forensic study to definitively prove criminality, and he was set to retire. “If I were ten years younger,” he sighed.

Morgenthau did share some valuable advice; this was a national security matter, he noted, and thus best handled by the defense/intelligence community. Criminal justice is slow and the requirements of evidence complicated. The only problem, we all agreed, was that the relevant agencies and congressional committees were now controlled by the Obama administration and its supporters, who seemingly had zero interest in addressing the situation.

Over the next two years, our team held dozens of briefings with senators, congressmen, national security officials, and many others across the country, all at our own expense. The plan was to establish a base of understanding so that when a favorable political change occurred, we’d be ready to act against the threat. We just hoped it wouldn’t be too late.

David Hemenway and his wife Ducky were instrumental in opening doors for us in Washington, as were Rachel Ehrenfeld, Frank Gaffney, E. J. Kimball, Marilyn Britten, Larry Arnn, Michael Del Rosso, and many others. David has been an ongoing part of the team, chauffeuring me around D.C. and attending many of the critical meetings. Eventually, we met with two former Attorneys General, Ed Meese and Michael Mukasey, who separately confirmed that this was a matter of national security meriting further study at a minimum. They both warned, however, that the issue could only be addressed by executive authority, meaning it would need White House support.

We met with at least a half dozen current and former generals. Half of them had three stars, including former head of the Defense Intelligence Agency Harry (Ed) Soyster and former Deputy Undersecretary of Defense for Intelligence William (Jerry) Boykin. Maloy also got us briefly in front of former Secretary of Defense Rumsfeld. Overall, the group has been very supportive, especially Lieutenant General Boykin, Brigadier General David Reist (USMC), and former CIA Director James Woolsey, though they all warned us that we could encounter a lot of resistance due to the political sensitivity of our findings.

We met with dozens of members and staff from the House and Senate. We met with the permanent staff from the key committees, including Armed Services and Intelligence. On Capitol Hill, as we had been warned, we often ran into political resistance. Republicans wanted to blame the 2008 crash on the Community Reinvestment Act, Democrat-backed subprime loans, and on Democrats who sold out to Fannie Mae and Freddie Mac lobbyists. In turn, Democrats pointed the finger at Republican-backed tax cuts for the rich, Wall Street greed, and George W. Bush. Undoubtedly, we did get through to many responsible people genuinely interested in protecting our country. But too often we met with the arrogant claim, “If this were a problem, we would already know about it.”

Maloy continued to add to the team with great contacts like Steve Zidek, a cyber-intelligence expert who was a former Deputy National Intelligence Officer with extensive experience at State and at the DoD. Steve also led the team charged with following Saddam’s money that uncovered the Iraqi Oil for Food Scandal. Zidek remains a Lieutenant Colonel in the Marine Reserves and is well connected in the intelligence community. He has accompanied me on a variety of briefings as has his former colleague from the State Department, Paul Janiczek.

Special Agent Nancy Duncan arranged briefings for the FBI. We also presented our research to representatives of the DIA, DEA, FDIC, SEC, and CIA. We met with heads of policy groups and think-tanks, among whom Frank Gaffney at the Center for Security Policy became a particularly energetic supporter of our work. Similarly, Dr. John Lenczowski of the Institute for World Politics, Clifford May of the Foundation for Defense of Democracy, and Rachel Ehrenfeld of the Economic Warfare Institute have been supportive. Dr. Larry Arnn, President of Hillsdale College, has been a friend for many years and was an early supporter.

But inside government, we constantly heard that our theory “doesn’t fit in our lane.” Our response consisted of two prongs. First, we sent a copy of the report to the Financial Crisis Inquiry Commission (FCIC), which was established to investigate the causes of the financial collapse. If there ever were a “lane” for our research, this was it. Ann Canfield, whose firm publishes the GSE Report and has a “who’s who” list of contacts in the financial markets and government, first recommended and then facilitated getting a copy to the FCIC. Ultimately, the commission seemed to appreciate getting the report but required an “official” copy straight from the Pentagon with a fully-pedigreed chain of custody. We directed them to formally request a copy from SOLIC, via the Office of the Secretary of Defense, which they did.

The Defense Department, however, dragged its feet in providing an official copy to the commission. DoD said they needed a “copyright free” version from me—an odd request, since they had contractual permission to use it for any government purpose, and the FCIC clearly qualified. I turned it around immediately but by the time it was finally delivered to the FCIC, about two months after the request, the commission had collapsed into partisan bickering, splitting along the dividing line of the political narrative.⁴⁵ As Commissioners Peter Wallison and Arthur Burns sum up the problem in their dissenting statement, “Accordingly, the Commission majority’s report ignores hypotheses about the causes of the financial crisis that any objective investigation would have considered, while focusing solely on theories that have political currency but far less plausibility.”⁴⁶

Recall that the 9/11 Commission had seriously investigated the possibility that Osama bin Laden had been short-selling stocks ahead of the 9/11 attacks.⁴⁷ Yet inexplicably, when the locus of devastation was the financial markets themselves, the Financial Crisis Inquiry Commission, charged with investigating the causes of the economic collapse, did not even consider the possibility of financial terrorism. Don’t forget that the 9/11 Commission ultimately ruled out al Qaeda trading due to market transparency—and there was a lot less transparency in 2008 and even less today.

Our other strategy was to force a federal agency to address the issue of financial terrorism via congressional mandate in the Dodd-Frank bill. On that track, a senator added language requiring that the Treasury Department be made responsible for issues of financial terrorism. Unsurprisingly, the White House struck the language. We were told that the task didn’t belong at DoD, That Treasury didn’t want it, and that the FCIC and SEC seemed unable to address the problem. Week after week the team continued to visit Washington for briefings, hoping to draw some attention somewhere, somehow.

THE BREAKTHROUGH

We knew we had to broadcast our message to a wider audience. We received some international publicity when Alexandra Frean covered our report for the Times of London, but the U.S. media mostly ignored the story.⁴⁸ Then, we had a breakthrough when some people we’d briefed passed our report to Bill Gertz of the Washington Times. Gertz is perhaps America’s premier defense/intelligence reporter, with innumerable contacts in the DoD, CIA, and across Washington. Finding our report credible, Gertz wrote a front-page story about it in which he asked key questions that remain unanswered: If there is even a small possibility that my report is right, why hasn’t there at least been a second study? The answer he received was that the Deputy Assistant Secretary over SOLIC wanted to spike the report. That official has since been promoted to the Undersecretary of Defense for Intelligence.⁴⁹ Amazingly, his wife was on the FCIC Commission staff, suggesting a reason why it took so long for the DoD to get the report to them.⁵⁰

Gertz’s article sparked extensive news coverage, including a front and center link on the Drudge Report. Drudge draws extraordinary attention, so any mention there makes an issue nuclear. Soon, reporters from CNBC, Fox News, and MSNBC were calling me to ask if the Pentagon had really commissioned a study of financial terrorism and what were the risks of a future attack. I spoke on the air with Megyn Kelly from Fox News and Maria Bartiromo from CNBC’s The Closing Bell, and had the satisfaction of watching Glenn Beck read parts of my report on the air.

My research garnered a lot of attention on the blogosphere, with some praising my work and others denouncing me as everything from an Obama shill to a Wall Street stooge to a Muslim-hater. Someone uploaded the report on the Internet and overnight more than 30,000 copies were downloaded.

Shortly thereafter, bloggers began noting how the 2008 financial attacks coincided with the U.S. presidential race, and how the downfall of Lehman Brothers had erased John McCain’s lead in the polls, paving the way for Obama’s election. Noting al Qaeda’s successful attempt to change the Spanish government by bombing the Madrid train system just before Spain’s 2004 elections, bloggers asked whether al Qaeda may have reprised the tactic in Washington using a financial attack instead of a bombing.

I was on national radio with Ron Insana, Steve Malzberg, Doug Urbanski, and Ray Dunaway, among others. Hundreds of blog postings and articles kept the discussion going. As a result, I received tips about financial terrorist activities from around the world. Tellingly, several representatives from foreign governments contacted me because they wanted to hold discussions with their U.S. counterparts but could not identify who in our bureaucracy was responsible for monitoring financial terrorism.

Eventually some FBI agents began showing an interest. One is now heading a project for the Director of National Intelligence that is seeking innovative firms to devise a program that would monitor potentially malicious trading activity. Another has moved from a traditional counterterrorist role to studying global financial markets—that agent told me he used to fear suicide bombers coming to America, but now stays up at night worrying that our financial markets could be attacked again. A third is a forensic accountant with the Bureau, drilling down on the data. My friend Nancy was promoted to D.C. and now works in policy on the Director’s floor.

We’ve made progress in the research community as well. I sat in on a development stage “war game” built around economic threats. In fact, financial terrorism has become something of a trendy topic of study, propelled by rising interest among Europe’s intelligence community. We’ve also received support from people we term “fallen angels”—CEOs or former CEOs whose companies were victims of bear raids. Dr. Kevin Hassett, who heads the economics study at the American Enterprise Institute, graciously took several hours to dig into the research. He also brought me before top economists from the Fed, Wall Street, academia, and even FCIC commissioners. In the end, the consensus was that this risk was much higher than the 1 percent threshold and at a minimum worthy of further study.

One of the biggest breakthroughs came through our efforts in Congress. Congressman Mac Thornberry had language added to the defense bill requiring that the Pentagon’s think-tank review my research and report back to the House Armed Services Committee. Congressman Thornberry even went on CNBC to explain the importance of the effort. Congressman Posey has introduced similar language for the House Financial Services Committee. We are also developing a multi-jurisdictional task force to study and respond to the economic warfare threat.

Overall, despite the challenges, our team has made measurable progress—and none too soon. Phase Three has already begun, and our enemies are playing to win.