DIVERSIONS

By Chris Temple, Editor

            (NOTE:  The following commentary is taken from Chris’ Special Report entitled “Understanding the Game.”  In that provocative report, he teaches readers how our financial and monetary system work in such a way as to help them understand why the economy and various markets have behaved in the past—and are likely to in the future.  In addition, he lays out for investors a sober yet POSITIVE game plan for the future!

            To get your complete copy and MUCH MORE, order Chris’ Bear Market Survival Package today!)

            By now, you know the mechanics of our fractional reserve system.  You can now see how, over time, our economy and financial structure have become stretched…increasingly speculative…and ultimately doomed to a very nasty outcome.

            The Powers that Be do not want the average American to have such an understanding.  It suits them to have the odds remain as long against the citizenry really beginning to understand The Game as what Lord Keynes once identified.  Perish the thought—as the reformer Nehemiah once did—that blame would be affixed precisely where it belongs; on the “rulers and nobles” who have enslaved the population through debt, as well as on our debt-money system itself.

            Thus, we are going through a sometimes entertaining but completely off-point game of playing “pin the tail” on who’s responsible for the unwinding that began back in 2000.  Of course, the answer never comes; instead, Republicans blame Democrats, Democrats blame Republicans, and so on.

            The investing natives are restless, though.  Few are willing to admit that they were irresponsible in the first place for chasing the stock market bubble.  The financial services industry by and large also does not want to admit that they ignorantly led millions of sheep to a shearing.  They want and need some “red meat” thrown to them by the same system that has created this mess; and the system is only too happy to oblige to help keep attention diverted from the real issues.

            Thus, we’ve recently been treated to much the same type of environment as once existed during and immediately after the French Revolution.   The guillotine has not been employed; at least, not yet.  Instead, the masses have been treated to a number of high-profile prosecutions of “aristocrats” intended to humiliate and punish 1) those who allegedly benefited disproportionately from the stock market bubble, 2) caused other investors to lose money in their brokerage accounts and retirement plans and 3) were otherwise inviting targets for a system intent on proving to the public that it is “doing something.”

            The culprit that has provided the most fodder has been Enron.  Many have particularly enjoyed beating President Bush over the head with his ties to the company and its former head Kenneth Lay (on of several past executives who have been indicted for various crimes,) ignoring as they do that the former energy trading giant was also a major benefactor of former President Bill Clinton. 

            Virtually everyone, though, misses the most critical fact about Enron’s collapse.  As I pointed out in my January, 2002 issue immediately following the company’s bankruptcy filing (“The Real Reason Behind Enron’s Collapse,” archived on my web site under “Essays and Articles,”) it was not because the company had engaged in price gouging for natural gas in California, nor that the company’s officials were inherently crooked. 

Instead, Enron collapsed because it had been transformed into a giant hedge fund.  To boost its assets (which at the company’s peak involved an interesting array of derivative contracts in areas far removed from energy) and share price the company entered into a variety of financial market dealings which—for as long as the overall bubble was still inflating—were fine and dandy.  Complicit in all of this were the company’s various enablers; many of the leading banks and brokerage firms on Wall Street who made it possible for Enron to become a derivatives-laden house of cards.  These enablers racked up many millions of dollars worth of fees in the process of making both themselves and Enron’s management seem like financial geniuses.

All you hear now, though, is how it was Enron’s management that is to blame for the company’s implosion; and that of the retirement savings of many of the company’s employees and others.  Seldom if ever do you hear anything about how it was the very casino-like financial system created and presided over by Alan Greenspan which not only allowed Enron to do what it did, but encouraged and profited from it.  In fact, a few of us contend that Enron was one of the vehicles by which the financial system kept the bubble from losing air any sooner or faster than it did, as Enron’s various multi-billion dollar derivatives transactions for a time kept the prices of certain financial assets even more artificially inflated than they were already.

I for one am eagerly awaiting the upcoming trial of former C.E.O. Lay, in the hope that at least some of the system’s own culpability—up to and including the Federal Reserve itself—comes out.  I can’t say I’ll be holding my breath, though.

MARTHA ANTOINNETTE

            This brings us to Martha Stewart, whose recent prosecution brought back memories of Leona Helmsley.  You may remember her; the woman dubbed New York’s “hotel queen” who was convicted and jailed a number of years ago on various tax charges.  A key part of her “prosecution,” much of which was slickly conducted in the media, painted a very disparaging picture of Mrs. Helmsley as arrogant, a snob and all the rest who deserved to be brought down a couple notches if for no other reasons than…well…because she was arrogant, a snob (and rich.)

            In much the same way, “Martha Antoinette” was painted in the news media as arrogant, a snob (and, we all know, even wealthier than Mrs. Helmsley.)  This was intended to turn public opinion against the domestic diva though, refreshingly, it did not have nearly the success that the personal insults and demonization directed against Mrs. Helmsley did.

            In the grand scheme of things, Ms. Stewart’s allegedly having sold a few shares of Imclone stock on a tip from an insider via her broker would hardly have been worthy of a mention in the press, let alone a federal prosecution.  Had such an incident happened during the late bull market, I don’t believe anything would have come of it.  Here again, though, the system needs to offer up an “aristo” here and there as millions of investors either look for scapegoats supposedly responsible for their brokerage account balances having shrunk or—in Martha’s case—as they want to see someone “privileged” punished for, arguably, benefiting from the kind of advice from her broker that everyone else wishes they had.

            The selective prosecution of Martha Stewart and the incredible hypocrisy of the system (as evidenced specifically by the U.S. Securities and Exchange Commission) was eloquently laid out in the October, 2003 issue of Reason magazine in a lengthy commentary by Michael McMenamin.  In a great piece of outside-the-box investigative journalism—the kind you never find these days in the controlled Establishment press—the writer discussed many of the intricacies and contradictions in Ms. Stewart’s prosecution. Where the supposed harm done to the markets or other investors by such “insider trading” as she was accused of is concerned, McMenamin compared Stewart’s actions to those of one-time financial market kingpin Ivan Boesky.  He wrote:

“In its heart of hearts, even the S.E.C. knows insider trading doesn’t hurt the markets.  Remember the financier Ivan Boesky?  Back in the 1980s, Boesky agreed to pay a record $100 million in penalties for trading on inside information purchased from the Drexel Burnham Lambert investment banker Dennis Levine.  The Wall Street Journal estimated that Boesky had made more than $200 million in profit from Levine’s information.  By cutting a deal, the S.E.C. let Boesky keep half of his illicit profits.

            “But wait, it gets better.  Before the S.E.C. announced the settlement, it allowed Boesky to cut his trading partnership’s liabilities by $1.3 billion through a series of government-sanctioned insider trades.  S.E.C. Chairman John Shad later told a House committee that the market wasn’t hurt by those trades because it bounced back after a one-day loss.  So keeping $100 million in ill-gotten gains and executing insider trades totaling more than $1 billion are both OK if the S.E.C. says so.

            “Yet Martha Stewart got nailed for saving $45,000 without breaching a fiduciary duty to anyone . . .”

            Now, none of the above is to suggest that there have not been misdeeds, or even crimes, committed by some who gamed the system.  My argument instead is that this type of activity has, in reality, gone on all the time.  During the long bull market, it was either covered up or forgotten about.  Now, it’s an issue in a few hand-picked cases not because the government wants to punish a few people here and there, but because it needs to divert attention from the real issues. 

            Will The Game—fractional reserve banking and all its excesses—ever be pointed out as the cause and enabler of all the above, let alone of the carnage in the U.S. economy and markets that is still to come?

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