Our current economic crisis: Could part be a terror attack on U.S. financials?

On this year’s anniversary of the 9/11 attacks, there was a sudden surge in the activity of U.S. hedge funds originating from overseas… like Dubai. There was a sharp rise in “short selling” of stocks, similar to the suspicious trades in the days preceding September 11, 2001. According to one well-known economist, the same institutions attacked on 9/11 are those suffering now. Coincidence?

By Douglas J. Hagmann, Director

26 September 2008: A week ago, the Securities and Exchange Commission (SEC) took the unprecedented step of temporarily banning the fairly common practice of “short selling” securities in response to the widening economic crisis in the U.S. The essence of the ban is that the SEC has placed a hold on “short selling” in 799 financial institutions until October 2, 2008, in tandem with the FSA, which is the British counterpart of the SEC.

In a press release issued September 19, 2008, the SEC made the following announcement (excerpt):

The Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The U.K. FSA took similar action yesterday.

In its most basic definition, short selling (or selling short) is the act of a person or entity selling a security instrument, such as a stock, expecting, for whatever reason, that the price of the security will decline. For example, a person sells the stock today to a buyer at the current price, buying the stock back later at the anticipated reduced price, keeping the difference as profit. Because a person does not actually own the stock they are selling, such transactions are conducted through securities lenders, such as Goldman Sachs, for example.

The concept of short selling is rather simple: the greater the decline of the particular stock, the more money the seller stands to make in pure profit. The inverse is also true: should the value of the stock rise, the seller would then lose money on the transaction. Perhaps the biggest factor that one must keep in mind about selling short is this: the profit is limited but the loss is unlimited. Therefore, the short seller is taking an exceptional risk when engaging in such transactions -an important fact as you read on.

Short selling of stocks: Sound familiar?

At least in part, short selling transactions have been identified as contributing to the demise or imminent demise of a number of longstanding and historically revered investment firms, including but not limited to Lehman Brothers. According to analysts and experts in the financial markets, there has been a very sharp upsurge in market transactions of this type, ultimately causing a portion of the market woes that we are presently experiencing within our financial markets.

Many might recall one of the murkier aspects of 9/11 conspiracy theories involves the speculation of airline stocks in the weeks before the attacks. It has been proven that the options market for United and American Airlines, two of the airlines involved in the attacks, was unusually busy in the days before 9/11 with an extremely heavy volume of “put options,” or selling the stocks “short.” The activity was unusual enough that both the Chicago Board Options Exchange (CBOE) and the Securities and Exchange Commission (SEC) initiated investigations into the unusual trading activity.

Concurrent with the publication of the 9/11 commission report, the Securities and Exchange Commission stated that they found no evidence of U.S. trading based on inside information related to the September 11, 2001 terrorist attack that resulted in wide price swings in some options contracts.

It is important to note that investigation conducted by the SEC and their counterparts was narrowly focused. I am making this statement from my professional opinion as an investigator, and with full knowledge that such a statement will undoubtedly come under attack, citing the fact that the investigation encompassed a review of 103 companies, trading in seven markets, and involved numerous other domestic and foreign oversight and law enforcement agencies.

Consider, however, that the primary focus of the investigation was to determine whether this activity could have been the result of advance knowledge of the attacks, with the trades made for the sole purpose of profiting from the attacks. The focus, as a matter of practicality and necessity, appears to have been rather limited in its scope. But what if those suspicious transactions were not done to merely profit from the attacks, but were part of a larger attack on Wall Street - and the U.S. economy - involving more than those trades?

I’m no economist, so I will defer to the recent statements attributed to Joe Besecker of Emerald Asset Management Company. He was the subject of an article titled Terror Attack on US Financials? Details of SEC Short Ban.

The following is excerpted from that article, referencing the musings of Mr. Besecker:

“He [Joe Besecker] raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion’s share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Joe asked the question: Is anyone investigating whether this is a case of financial terrorism?

Obviously, I believe that the majority of the blame for our current financial crisis lies with unethical CEOs of various financial organizations, the lack of oversight of government subsidized entities such as Fannie Mae and Freddie Mac, white collar criminals, and some members of Congress. With the countless threats made before and since 9/11 against the U.S. economy, however, isn’t it possible that some aspects of our recent economic woes has been - or is being caused by our enemies? Were the threats posted against Wall Street by Islamic terrorists, some with financial backing from the Saudi’s, interpreted too literally?

I’m not entirely convinced that the SEC investigation into the whole aspect of trading activity concurrent with the 9/11 attacks was performed honestly or adequately. Considering we are now being asked to contribute to a bailout of unfathomable proportions, aren’t we entitled to get some real answers to legitimate questions?