How Wall Street and Hedge Funds Created An Alternative Banking System
Location: Blogs Bob O'Brien's Sanity Check Blog
Posted by: bobo 5/15/2006 7:00 AM
Interested in laundering money? Want to evade taxes? Don’t want to be on the radar when large sums are being moved around? Tired of the annoyances of draconian banking regulations cutting into your fun?
Use a hedge fund.
I had a moment of epiphany over the last week. It all crystallized in a discussion with a friend of mine. Here’s the revelation:
Anti-terrorist legislation, anti-mony-laundering regulations, “know your customer” rules, demonization of “tax havens” (ignoring that the US is the world’s largest for non-citizens) – none of them have any meaningful bearing in the new economy. Those are for sissies and rubes. For the masses. Not for those breathing rarified air.
Remember when Bank of NY got caught money laundering for the Russian mob? That was so old-fashioned. Almost embarrassing. And so hard to cover-up.
Why use banks when you can move your money around the globe, using hedge funds, free from prying eyes, and with whatever jurisdictional protections or freedoms suit your fancy?
Here’s how it works. Russian mobster A puts $100 million into 5 hedge funds, all in the BVI. Those 5 hedge funds then invest in whatever they feel like. Maybe they invest in call options, sold by 3 other hedge funds. Maybe those calls are very expensive, and effectively transfer that $100 million to the writer of the calls. The stocks those calls are written in are not particularly good companies, and have virtually no chance of being called away, thus that $100 million is now the property of those 3 other, related hedge funds, and the 5 hedge funds have “lost” the money.
And now the money is clean. To be invested however the new hedge funds see fit.
Or how about US-based terrorist funding conduit A, who wants to get his brethren in Saudi Arabia and Yemen a few hundred million to mount the next terrorist attacks against us?
Same mechanism. Sympathetic parties can invest in some hedge funds here, who then make disastrous investment decisions, a la purchasing calls in dog companies A-D – conveniently offered for sale by hedge funds located in Malaysia or Austria or Dubai, who then redeem some cash to their clients, who are conduits for the terrorist activity. The money is effectively transferred, and derivatives make it even easier to mask – they were just bad bets, and those happen every day. Maybe spice it up a little and become a market maker in the companies, too, or an options market maker. Whatever. It’s only limited by your imagination.
Or how about they get leverage on their laundering, and manipulate some prices up, to make the calls that much more expensive, and then some of the money is used to buy puts in other companies, who are targeted for massive naked short selling? Then you not only have a transference of money from A to B, but you can double or triple the money in the process.
There are a million variations. But the simple truth is that this has created a secondary banking system, where large sums can easily be moved and laundered, profits or losses can be seamlessly transferred wherever one wants, and it all occurs outside the banking system where the safeguards and regs are in place to stop this.
It is like Wall Street has set up a one-world banking system outside of the rules that govern the banking systems of the respective countries.
There are two banking systems now. The one where a guy with a few hundred grand has to report if he deposits over $3K in cash, and is audited should his return look even slightly suspicious. One where every dime of his income is tracked by a government on the lookout for tax cheats and miscreants. And then there is the other, where the rich, via criminal behavior, or honest wealth building, can move many millions with the stroke of a few keys, and nobody is the wiser.
Wall Street facilitates this, as it doesn’t have nearly the safeguards in place. Hedge funds open accounts, and nobody asks where the money comes from – it is from investors, dumbass. Don’t want the hundreds of millions? Fine, I’ll find a broker who does.
The light went off in my head this week, and I finally understood why governments don’t want to regulate these entities – this helps everyone with money and power move their funds around outside of the system that so restrictively controls the rank and file.
If hedge funds had been really active back in the late 80’s and early 90’s there would have been no need for something as clumsy as Iran Contra, where factions of our own intelligence community were selling arms to Iran in order to raise funding for the rebels we supported. No, instead, the transactions would have been seamless, with no trails left, and with a little naked short selling the money could have dwarfed what the sale of a few missiles brought in. That is so old school and clumsy. Iran invests in hedge fund A, who invests in puts sold by investor B, the Nicaraguan hedge fund. Bam. Money transferred upon receipt of goods.
Or they could have just agreed to target a vulnerable biotech firm or two, and naked short sold them from $15 to a few pennies, and pocketed all the proceeds for their “cause” – and no messy banking trail to follow. Even better, they could have picked a company with options trading, and gotten even more bang for their buck – sell calls and buy puts in that company, and then naked short it into the ground, creating huge wealth from the options, and still pocketing the proceeds from the naked short sales. Pretty soon the “rebels” are driving benzes and funding themselves – as are sympathetic governments, who have been let in on the secret. Want to fund a country off the radar? Same mechanism – their clandestine agencies fund some hedge funds, which then engage in the aforementioned money-making behavior while regulators turn a blind eye…and presto! Suddenly that country has been taught to fish, and is self-sufficient in its ability to fund itself.
Like I said, there are so many permutations. One only has to have the creativity to imagine…
And you wonder why everyone in a position of power is against any meaningful regulation of hedge funds?
Please. I mean really. Please. The same folks that brought you BCCI and the SEC crisis and the last 20 years of Wall Street malfeasance are making fortunes, and have solved the problems of oversight and restrictions on their behavior.
The only ones to lose are the populations of the countries restricted to the other banking system, and who invest in markets where the miscreants prey with impunity.
But nobody ever said life was fair, and someone has to pay into the system for them to get money out – at the end of the day, it’s a zero sum game. And if you don’t own the casino, where the cards are marked and the die loaded, then you lose.
Sorry.
Any questions?
Copyright ©2006 Bob O'Brien
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Comments (37) Add Comment
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By ROME is burning on 5/15/2006 7:19 AM
this country needs help fast
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Legal Shorts Are Helping Too By Jake Wolf on 5/15/2006 7:26 AM
What about all the people who are legitimately shorting stocks? If it weren't for them, naked shorting wouldn't be possible. Is the average Joe culpable here too?
compound1000.blogspot.com
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By clearthinker on 5/15/2006 7:31 AM
I had that "epiphany" a while back.....When the dice are loaded (by the house), it's very hard to win...but it's even harder when the State Gaming Commission is providing the weights
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By bobo on 5/15/2006 7:32 AM
It isn't naked short selling or legal short selling that is the culprit in this column today. It is the realization that any sort of market manipulation is conducted with ease, and that money laundering has never been so simple. Leagal short selling? Whatever. Just another investment tactic. Market manipulation? Illegal, but rarely pursued.
No, I finally got it - there is this entire industry that profits from trading, but secondarily that benefits by attracting the maximum amount of capital. One good way to do that is to create a completely unregulated mechanism for wealth transference. It's seamless, and creates a trillion dollar industry that chips away at the margins of it.
Where do you imagine the hundreds of billions in drug trafficking profits go? Or the fortunes from illegal mob profits? Or the petro-profits that flow to terrorist groups? How is all that money moving around so easily?
Bin Laden at one point said that "I know the cracks in the US financial system better than I know the cracks in my hand."
He wasn't kidding.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By cynabear on 5/15/2006 7:46 AM
you got it Bunny et al. and where are the FBI,CIA,NSA,homeland security types..........hmmmmmm....compiling all the phone numbers of US citizens........sure beats having to learn about complicated market manipulation or learning arabic or going undercover when the President and his cronies might out you any time, or being a whistleblower and being acused of treason and losing your pension or being tried for treason.....yeah...lets just sit back and collate phone numbers......sounds good to me....not...........
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By clearthinker on 5/15/2006 7:51 AM
Don't worry...you can always count on the regulators, legislators etc.. for a token act of bravado to try to convince the average working stiff that they really care.....
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By anon on 5/15/2006 7:53 AM
Have you been reading about this CIA money laundering scandel.
IMO both parties are equally entrenched in these machinations.
pacificviews.org
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By bobo on 5/15/2006 8:38 AM
SEC Commissioner Announces Departure:
sec.gov
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By tbs_theman on 5/15/2006 8:49 AM
BobO
I came up with a similar thought after seeing the FTD ratios after 9/11. There is a lot more going on here than just a few miscreant hedge funds and rouge banks. The US Financial system has been comprised. The regulators / senators who have looked the other way and been bought off are guilty of far more than just fraud. They are guilty of treason.
Somebody needs to stop this soon. Very soon.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By bbhindyou on 5/15/2006 9:06 AM
WOO HOO FINALLY people noticing the barn door has been open.To bad it's after the horses have all gone and it took the barn being on fire to get any attention!
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By old duffer on 5/15/2006 9:40 AM
No one gets away with anything in the end.
Justice is coming. The only thing that makes this bearable.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By crstphr2 on 5/15/2006 10:36 AM
The best thing is to allow the systemic failure. The only way to fix this is to destroy it first. Then the "head" will figure out that there's a problem.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By bobo on 5/15/2006 10:57 AM
crstphr2: The problem is that it is not in the best interests of the government to allow a systemic collapse of the equities market. It would appear that they are willing to tolerate fraud and larceny on an unprecedented scale in order to ensure liquidity. As Donaldson replied to Greenspan, "How much fraud would you like to tolerate for liquidity" - or words to that effect.
If I am correct and the intersection of hedge funds and Wall Street has created the ultimate money laundering/international banking regulation skirting system, then the answer is, "Virtually unlimited amounts of fraud."
I haven't heard a single objection to the scenario I posit - a hedge fund is a marvelous vehicle for anonymous money laundering, tax evasion, disguised payments, you name it. Wall Street provides the vehicle - stocks and derivatives. Wall Street gets paid to facilitate, and the party rolls on.
I am NOT saying that all hedge funds, or even most, or many, hedge funds are engaging in this sort of behavior - just as all airlines, or even most, or many, are NOT fronts for the CIA - but Air America was.
It is ludicrous to believe that smart, aggressive money wouldn't have figured this out and be maximizing it.
And I see absolutely nothing to stop these anonymous pools of funds from doing whatever they like.
The domestic registration requirements are a joke. All they do is serve to punish the funds who don't circumvent the registration rules (easy to do) by potentially loading them up with additional, and likely unecessary, oversight.
No, I've looked at this from a number of different angles, and I think I have called this one right.
Think of the market as nothing more than a multi-national clearing system for money laundering, and think of hedge funds as anonymous black boxes wherein dirty money goes in, and clean money comes out, and you pretty much have it nailed.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By ginger on 5/15/2006 11:20 AM
They're beginning to show up ...
tinyurl.com
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By anon on 5/15/2006 12:13 PM
The domestic registration requirements do not punish hedge funds; they are beneficial. The filing requirements with SEC wrt when a fund must update its holdings are more relaxed if registered.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By totalknowledge2006 on 5/15/2006 12:35 PM
The SEC Nasdaq NYSE and DTCC regulators should all be tried for TREASON.. These guys have no spine and are ripping off the American Public to benefit terrorist..Does the IRS realize when you short stocks make 100s of millions and bankrupt companies no one pays them a dime in taxes.. When Enron and Worldcom when Bankrupt all the guys short didnt pay the U.S.Goverment one dime in taxes.. Stu Goldstein should be tried for TREASON so should Anette Nazrette for aiding and abetting terrorist.. This is disgraceful hope they all get tried for TREASON and put in jail..
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By Rtway1 on 5/15/2006 12:36 PM
I have been saying this for over a year and it went right over the heads of the populace because it was printed on the sports page or comics section. I pleaded with anyone from homeland security that might read this blog to look into it. This is the same MO that the mob used to launder money by giving away free junkets to Vegas as long as you gambled $10,000. They didn,t care if you won or lost, the money got hosed clean and back in the system that they controlled. We have a big problem and it gets worse every day because of the self fulfilling wants and wishes of our elected officials and their glaring stupidity. Watching our regulators is like watching a scene from the Pink Panther and Inspector Clousteau.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By rtway1 on 5/15/2006 12:49 PM
How much suffering did the company and shareholders have to go through to get to this conclusionhttp://phx.corporate-ir.net/phoenix.zhtml?c=129937&p=irol-news Taser has been vindicated entirely by the SEC after about a year of investigations, bashers, bogus law suits and most important REG SHO. Nice job SEC maybe this company can claw back after you damn near killed it.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By bbhindyou on 5/15/2006 1:00 PM
What taser went through and possibly what overstock will go through in their contact with the S.E.C. reminds me of a old ,old method of judgement called trial by ordeal .If the accused lives through the ordeal they must be innocent if they die ,well then they must have been guilty of something.We are talking inquisition type of ordeals.Subjecting everthing overstock has done in the last five years to the 'misunderstandings' the S.E.C.'s investigators will have with the simplest practices, Byrne may be better off with boiling oil.
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Re: How Wall Street and Hedge Funds Created An Alternative Banking System By bryedge on 5/15/2006 1:11 PM
BobO,
The idea of making money off of others hardships has always put a bad taste in my mouth, and I have always thought hedge funds were the worst of the worst.
I think your "theory" is probably more akin to "reality".
Now make the scenario a little scarier.
Can you honestly believe that the CIA, NSA, or any of the other two dozen intelligence agencies JUST IN THE USA, do not know this is happening?
Given that the SEC and Congress are doing nothing to regulate the hedgies, why then should we not suspect that they are involved as well.
Why go to all the trouble to "steal" drugs to buy guns to outfit a revolution, when you can more easily steal money and finance all the covert operations you want without the worries of an information trail.
Think of all the time and trouble that is being saved on bogus Congressional hearings.
I am not certain systemic failure would even cleanup this mess.
Gold and bullets are looking more and more like the best investments.
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