By Jeff Lukens
Hedge fund traders had a great year in 2008. That year, hedge fund short sellers were instrumental in the spike in fuel prices, the bankruptcy of Lehman Brothers, the banking crisis, and the stock market collapse. While extremely wealthy hedge fund traders engineered each of these calamities, and made billions of more dollars short selling each one, the American people collectively lost trillions of dollars in the value of their homes and savings.
And, as amazing as it is, no one went to jail. Why? Well, perhaps it is because in 2007 the perpetrators had some laws changed to their liking. And perhaps it is because these people are politically connected to the Obama Administration and Congressional liberals. Our government is protecting them, and there needs to be a public investigation into this matter.
The hedge fund short sellers who were at the root of the mayhem are found primarily at the Managed Funds Association (MFA), the so-called "voice of global alternative investment community." MFA members include George Soros, John Paulson, Jim Chanos, James Harris Simons, and others.
When Democrats took control of Congress in January 2007, MFA lobbyists soon began pressuring Securities and Exchange Commission Chairman Christopher Cox to remove safeguard regulations that provided the conditions for stable markets. Such regulations had been in place since 1938. Cox eventually yielded to their requests to repeal the uptick rule, circuit breakers, and trading curbs. The Federal Accounting Standards Board also instituted mark-to-market accounting. Short ETFs (Exchange Traded Funds) were introduced that year as well. Collectively, these changes fomented the resulting financial disaster.
The next year was a tumultuous one for investors. Early in 2008, the stock market was trending lower as news of the subprime mortgage crisis began to unfold. In July, oil prices spiked to $147 per barrel sending ripples through the economy. One of those ripples was to hit Lehman Brothers. The double whammy of subprime mortgages and soaring oil prices put them under.
On Monday, Sept 15, Lehman filed for Chapter 11 bankruptcy while other lending institutions lined up like dominoes teetering on the edge of bankruptcy. On Thursday of that week, a $550 billion electronic run on banks occurred within an hour or two, going mostly to offshore accounts. Instantly, there became a liquidity crisis within the banking industry. In an unprecedented move, the Treasury and the Federal Reserve had to act together to stop what had become a full-fledged panic. No one has ever investigated who withdrew the money or to where it went.
Up to that week, John McCain was ahead of Barack Obama in some polls by about 3 percent. By Oct. 10, the S&P 500 Index had lost 25 percent of its value from what it had been a month before and the McCain campaign was doomed. Hedge fund short sellers effectively handed the election to Barack Obama.
Declining markets occur all the time. Hypothetically speaking, it would be an outrage to the American people if someone were to induce a market panic in the midst of a presidential campaign. Could this be what happened in 2008? We may never know. The evidence is admittedly lacking, and is at best circumstantial. This could possibly be the perfect crime of all time. The question we need to ask ourselves now is whether we are exposed for this to happen in 2012?
Among MFA members, George Soros is the most well known. He has made his fortune by short selling and then pouring his private wealth into shadow organizations to subvert various nations. Hastening a market meltdown to give the election to Barack Obama would fit with his pattern of profiting while destroying the social order of his target country. His financing of the Democrat Party and hundreds of 527 organizations collectively has become a "Shadow Party" unto themselves. While profit and control motivate most hedge fund executives, Soros also has an ulterior motive to hasten a New World Order.
Another Soros associate is John Paulson. Paulson has contributed financially to both major political parties. He too has made billions by shorting collateralized mortgage debt securities, and then waiting for the financial institutions to collapse a few months later.
In his book, Wizards of Wall Street, Jubi Diamond detailed how the hedge fund short sellers operate in private. According to Diamond, the hedge fund short sellers are predators who feast on companies and economic sectors that can be pummeled "by market manipulations through collusion and unrestricted short selling." Hedge fund traders, Diamond notes, can drive prices down and then drive them back up, all within a 15-minute period. Unlike mutual funds, this is an unregulated industry with many traders located offshore, outside the jurisdiction of the United States.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, which did little about regulating the hedge fund short sellers.
The only financial reform needed today is to regulate and monitor the hedge funds and the hedge fund short sellers, some of them which are registered off-shore to avoid scrutiny. These global operators, with investors who remain mostly anonymous, must be compelled to register with the Securities and Exchange Commission (SEC), publicly disclose their positions in the markets, and maintain accounting and trading records for a period of 10 years so their activities can be monitored and scrutinized. Just like mutual funds, they must be prohibited from engaging in day trading activities.
Much of the financial damage happened because of the mark-to-market rule, and because there was no uptick rule, no circuit breakers, and no trading curbs. They changed these regulations in 2007, meaning that the risk of investing has been borne by common investors "as the hedge fund short sellers operate with impunity looting the invested capital of American families."
On March 9, 2009, the mark-to-market accounting rule was reversed, and (perhaps not so coincidentally) the S&P 500 Index happened to hit a low that same day, and more than doubled over the next two years.
The MFA's short selling in 2008 was mostly legal because few laws were in place to stop them. And in the high-speed world of electronic trading, little evidence exists to convict them. The ways of hedge fund traders will not change until there is a public investigation, and we return regulations at least to what they were in 2006.
Perhaps we should consider the recent market volatility as the start of the 2012 campaign. Expect a wild ride as we count down to the election.