behind the curtain--the full monty

8/14/2019 Behind The Curtain--The Full Monty

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Behind TheCurtain

The FullMontyby: Martin A. Armstrong

Former Chairman of Princeton Ecjonomics International, Ltd.and the Foundation For The Study Of Cycles

I S GOLDMAN SACHS THE EVIL EMPIRE? That seems to be the question that alot of people have on their minds. There is far too many coincidenceswith ex-Goldman people in strategic political-appointed posts to justbe overlooked. Congress and the nation are mad as hell at the FederalReserve and at the very minimum, it will be stripped of its so calledconsumer-protection power that it never took very seriously anyway.Yet through all of thisf remains a growing resentment outside of the professionalcommunity as well as inside, that wants to storm the castle walls of GoldmanSachs and destroy everything it stands for as if it were the creator of an evilFrankenstien. In the very least, this particular turn in the economy was centereddirectly within the finance industry that has been giving the rest < of the morestandard investment community a very bad name. For no matter who writes tfhat, thewhole lot is being thrown into the same bath-tub and labeled "Wall Street" as if itwas pure evil. The Rolling Stone Magazine called it the Great American Bubble Machinearguing that Goldman Sachs has been behind every major bubble since the Great Depression. I have called it the "Club" that what has evolved is a persistent desire to justmanipulate markets to create the perfect trade. It is time we explore this in detailfor what has been going on Behind the Curtain is threatening everyone and even thefuture of our children. But make no mistake, it was NOT the Federal Reserve who wasto regulate the Investment Banks, that was the Securities & Exchange Coomission ("SECand the Conitodity Futures Trading Commission ("CFTC"). The Fed regulated commercialbanks, rot investment banks. They got involved in the bailout, but let us lay blamewhere it really lies - the SEC and CFTC who have wiped out your future.

You cannot fix something that is brokenunless you understand what is broken. I haveoften warned of the Pardox of Solution thatI have named a fascinating trend whereby theevil seen to create a economic event is thenattacked and the solution created therebyestablishes the cause of the next event andso the next solution is to go back to whatpreviously existed creating a pendulum move1

that becomes a natural cyclical swing bacand forth between these two solutions. ThI have called this cyclical trend the plaParadox of Solution. The solution for theGreat Depression, was to create a seperatbetween investment/speculation and bankinThus, Investment Banks were regulated by tSEC and Commerical Banks by the Fed. Thissolution was -reversed in this crisis.


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EVER in my wildest dreams did I ever expect to stumbleupon such a inherent corruption that evolved without anytrue understanding of what it was evolving into. Thereexisted this desire to rig the game of chance and toensure that every trade would be a winner. Losses andspeculation; well that was for the little guy. Yet inwhat I have witnessed over decades, began to bubble-upinto the surface during the Asian Currency Crisis of1997. I found myself in a position BEHIND THE CURTAINwhere foreign governments were starting to notice andit was starting to appear that the United States had beeneither sublimely blind, or completely ignorant of its own manipulation. My deep concernis that the vast majority of what people call ''Wall Street" is getting a very bad namebecause of a small group of very sophisticated specialists in market manipulations. Mypurpose here is to bring to light what I, and others, had been watching progress fornearly two decades. I personally believe in the "Free Markets" and by that I mean asystem that is also not rigged and manipulated by private or public interests. Russiaand China tried their hand at Communism. That failed of its own inherent fallacies ana

that was the result of "Free Markets" that will always triumph. Nothing, public or evenprivate, will ever prevent the natural course of events to unfold. Man can pass ail tnelaws and regulation he desires, but he cannot change human nature by decree. No law willprevent a murder, nor a war, nor taking a drink, trying drugs, or engaging in premaritalsex. Human nature cannot be changed no matter what. It can be suppressed by sheer tyrannyand force, but it cannot be altered. We cannot progress as a society until we understandwhat our true nature is, how it will always gravitate to self-interest be it governmentseeking power against its own citizens, or private self-interest to rig the game. We mustunderstand that it is not "Wall Street" as a whole that is the problem. We can regulatethem to extreme, but the ones who created this mess control the real strings of powerand will never be touched no matter what the propaganda claims. I am concerned about ourfuture and do not wish to see my children and grand children lose their future for tnereal corruption of rigging the game will lead to the only resolution possible - war. itthe US courts and government are now so corrupt and only care about the moment, tnen merare plenty of people around the world who are mad-as-hell at the United States and willreach that point of no return. It is time we face our demons and bring real reform.The Age of Enlightenment

We cannot begin to fairly review whathas taken place without understanding thatthe Financial Industry that is unfortunatelyjust called "Wall Street" is far from onegiant industry. Today, we have prolificindustry that has truly evolved since 1 9 7 1in a dynamic way that has on one hand builtthe status of the United States, and on theother, has contributed to its diminishedrespect internationally. We have no choicebut to take a phlegmatic approach and stopthe name calling in order to step back andlook at the industry that has emerged.

The socialists point to "Wall Street"as the paragon of capitalism. It is a thingthat must be tempered and controlled, ifnot destroyed and subordinated. There is no

doubt that Goldman Sachs is at the centerof this storm and is the image that is nobecoming the most hated symbol of the fulscale economic decline. But we must lookeven Goldman Sachs within the context ofthe whole.

What I have never seen explained in abook or newspaper article, is the strategdifference that emerges from a trader whois nursed on commodity volatility compareto stock trading and banking.There are THREE areas that are verydistinct within the financial industry tha

are far too often all lumped together andcalled "Wall Street" where the ethics andthinking is substantially different.


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(1) Banking (Commercial)(2) Stock broker/Investment Banks(3) Commodity broker-dealersThese are the three areas of primarydivisions that the press and public oftenlump into one giant category known as "Wall

Street." There are naturally subdivisionswithin each. One significant subdivision ineach category is FUNDS MANAGEMENT that canrange from estate trust management in bankingto mutual funds with a host of divisions frombonds, tax-free bondsf stocks, with anothermultitude of smaller divisions thanks to theregulation that makes no sense. Then thereis the commodity fund that can trade in fut-ures that span the whole spectrum, arid thenthere is a fourth international category.(4) Off-Shore Hedge Funds.In this offshore world, there can bethe freedom to cover all three primary areasthat is illegal domestically thanks to over-regulation. For you see, there is no just oneregulatory body covering these three primaryareas, but three, Federal Reserve, SEC andCFTC. It does not end there. When you startto get into things like mortgages, there areabout 7 regulators that now get involved. Itcannot be forgotten that each state also nowhas a host of regulations and agencies. There

are so many regulators, that the recent hugecollapse demonstrates it is not the LACK ofregulation, but the inability of regulatorsto even work together.Then there is a fifth category that hasemerged as also a player thanks to evolutionof the entire industry - INSURANCE. Now wehave the evolution of insurance that is infact taking on the mantle of options and hasmimics the derivatives until they became thederivatives CDS that collapsed the house ofcards.The knowledge base that emerges fromeach sector is very different. I was oncea board-member of a state bank and that isreally just administrative looking at loans.Stock brokers are immersed in fundamentalanalysis of PE ratios & Fed watching so wehave "insider trading" emerging from theassumption of information creates winningtrades.

It has been this idea that markets aredriven by fundamental analysis that can bereduced to a single cause and effect, thatdominates the stock industry and has led tothe criminalization of possessing informa-tion that someone else does not have. Yet,I have seen so called inside informationhave no effect and at times they still losemoney. Inside Trading was indeed;turned on head by Guilliani in order to prosecute MikMilken. The real theory of "insider tradingemerged from the Great Depression. It wasbased upon a director who knew the companywas bankrupt, sold his stock withholdingthat news, and after he was out, he thenpublicly announced the stock was worthless.To prosecute Milken, the theory was reverseclaiming he had some advantage and wouldmake a fortune taking over a company. Butthe fraud in the 1930s was that the peoplelost money while the director did not. Tobecome famous and destroy a major competitoof New York Investment Banks, Drexel, thenew theory was that Milken defrauded peopleout of the same opportunity to make money!The Southern District of New York FederalCourt clicks their heels before walking totheir bench and salutes the Attorney Generalgiving him whatever he wants, even when itwill destroy the very fabric of our societyJudge Kimba Woods, accepted Milkenfs pleaknowing he was coerced by threatening hisfamily including a 90-year-old grandfather. Bjudges do not care any more about the peoplor the country. They only further the goalsof the political state no matter what. Thusthanks to Kimba Wood, insider trading is nowmaking money based upon some info they claino one else has. Yet, there is no empiricalevidence that even with such info, there isa 100% guaranteed trade.

The third area is Gomnodity Tradingthat includes currencies, bonds, stock indexmetals, energy, agriculturals, and buildingmaterials such as lumber. Here we have atraining ground for real experience. Theseare markets that trade globally and forcesone to look outward rather than take a verymyopic view of the economy. Where stock brokers are focused on domestic issues both inrespect to the individual company as well aFed watching, the commodity broker must beable to walk, talk, and chew gum while readiheadlines globally to stay in touch with thpulse of the world. If he can't; he'3 histor


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The banking, stock, and political areasfeed upon themselves. They live in a bubblethus each of these booms and busts, indeedthe same mistakes each time, just thatinstrument they are hawking may change. Icalled in far too many times by bothand stock brokerage houses around therld to help fix some disaster and it is justys the same MO. The instrument changes,the effects never change. This I noticedFrom the Middle-East, Europe,thing. Professionals buying the highry time. Why? I concluded they lacked theto "smell11 a top when it was there.joke at the retail "little guy"never got it right once. This crisis,NO different!Yet, while the most dynamic traders

ing from the commodity side, weseeing a lumping of presumptions of aof knowledge and experience thatnot exist. It is like saying someonea doctor, so here, operate on this brainthe fact that he is a foot doc-r. Calling everyone "Wall Street" is aWhen we look at the fund industry, herefind a landscape of so many differentit may appear to be a used car lot. Theic funds are specialized from bonds orto stocks in all sorts of differentWhat the public does not realize,has been caused by OVERRBGUIATION wherehave the SEC, CFTC, and the Fed all withpowers. A fund manager cannot do hisestically by you hiring him and he thenis the best area to be in. Theage individual has to have the expertisemost professionals lack themselves.This is why the CFTC hated my guts. Iating that it be merged intoSEC creating a single agency. That wouldallowed a fully diversified public fundin fact would have been an onshore hedge

While the United States would never oncesten to me, I agreed to do such a fund forAustralian government. I managed the firsthedge fund in the world organized byche Bank and the Australian governmentas a test case.

Hedge funds are such diversified fundswhere you are hiring the manager because hehas expertise that will make the decisionof what to be invested in. Because of theover-regulation, if you obey the laws of theCFTC, you go to jail with the SEC. This iswhy I was warning that these competing agen-cies would drive the industry offshore backwhen the biggest future fund was $100 millionin 1985. Today, we have trillions of dollarsin offshore funds thanks to overregulation.Now, the collapse of the rule of law makingit impossible to get fair trials in New Yorkand the crazy over-regulation that came outafter ENRON, New York lost its status as thefinancial capitol of the world. With what iscoming now and having so many agencies inpublic argument over who should get the powerto regulate banks, you can bet on one thing -they v i l l destroy Wall Street and the smartcompanies are starting to look at getting thehell out of here.

The socialists will never listen. Theywill laugh at the idea of over-regulationand argue there is not enough. But this isto be expected from fools who know nothingabout an industry they claim needs more regulation. For you can bet on one thing, they willdestroy what was not the problem, and leaveloopholes for those who contribute to theircampaigns. So the only one who will lose isthe little guy who already has to have theexpertise of a major international bedge fundwatching every country around the globe on a24 hour basis. Good luck!

Stock brokers no more deserve blamethan commodity brokers or commerical banksfor the most part. The blame rests squarelyon the shoulders of the Investment Bankerswho constantly come up with schemes to makea fortune, and always explode in disaster.This time, they picked the biggest sector ofinvestment that effected everyone - the oldmortgage market. By pooling mortgages, theyremoved the traditional restraint of caringabout who you are lending to, and what is it!you are lending on? That gave the front-linelenders the signal to "don't worry; be happy"for this is going into a pool and we expectsome defaults, that's OK* The one-on-onerelationship was destroyed. Then they tookthese pools and sliced-&-diced them so thatnobody really owned a mortgage in the legalsense. A borrower could now demand to showhim the certified mortgage, and in many keycases, it cannot be produced when pooled.


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OVER-RBGOIATION

OVER-RBGUIATICJN has done far more harm to the public than the Government willever admit. The average person has been stranded in an eternal sea of changein finance that has seriously diminished their capital for retirement. Manypeople have counted on the equity in their home to be their nest-egg. Now,that largest market has been wiped out because of the stupidity of the SECwho has persistently got down on its hands and knees and kissed the groundthat Goldman Sachs walked on. But they did the same before that with noted Salomon

Brothers because the government hires people who are generally incapable of getting firstrate jobs in the private sector fresh out of school. The model for training is reversed.Fresh graduates gravitate to the government to get experience so they can look good whenshopping for a real job. Those who remain in government service, are unable to captureone of those jobs and become embittered toward anyone who has made it in the real world.The big law firms will often hire former government attorneys more as a due payment thananything else. They buy influence with the departments and agencies and that will oftentranslate into immunity for the big houses.We have too many chiefs and no Indians

as the saying goes. One of the primaryreasons the CFTC hated me was I advocatedthat they be merged into the SEC back inthe 1987 Crash. I was asked does an agencyreally harbor resentment for decades? Theanswer is yesl Look at the case of Health-South where Mr. Scrushy beat the governmentand was acquitted of all charges. They thenindicted him for giving $250,000 to the Gov-ernor of Alabama they claimed was to bribehim to be made chairman of a committee thathad no monetary gain, but prestige. The USGovernment remembers everything and you willnever escape. Beat them, and they will huntyou down and call it something else. You aredealing with one of the most vindictivecultures in power in the world.The greatest danger any prisoner facesis when he is about to be released. If thereis anything else the government can try tocharge you with, they do so on the last dayto prevent you from ever leaving. Russiajust followed the US model with the Yukosprisoner now charging him with money launder-

ing after serving 8 years. They did that toKondratieff. His first sentence was up, sothey charged him with something else, foundhim of course guilty, but then just took himout behind the courthouse and executed himafter sentencing him to 7 years, because theyjust didn't want to release him.Look at John Gotti, Jr. He beat themon trial and walked out. He had at least areasonable judge who saw the government wasusing him as a name to further personal car-

eers. This time, he will be tried by JudgeP.Kevin Castle. He will not receive a fairtrial in the least. The US Government is ndifferent than Russia. They must always wiand if you do beat them, they will hunt yodown until they win on something, it doesnot matter.

A lawyer friend of mine Chris Lovelluse to practice before the CFTC. He told mall the nightmares of how they treated alldefendants. In 1987, I was asked to testifagainst the CFTC in Congress. I called Chrand told him I could get him before Congreand just tell them what all lawyers talkabout behind the scenes. He declined tellime his business would be prejudiced for thCFTC would target anyone he represented todrive him out of business. He then advisedme not to testify. If I did, he warned, thwould never forget.This is the real behind-the-scenes liwith regulators. They are relentless, andwill NEVER yield to the truth. It is allabout winning and they WILL do whatever it

takes to win.In a SEC case of Mr. Schiffer triedbefore Judge Richard Owen in New York Cityhe was the first one who had his lawyerstaken away by the SEC using the civil labeto deny counsel. Judge Richard Owen has areputation of being one of the worst judgein the country. (See Three Felonies a Day)Not only is this the tyrannt that threw mein contempt for more than 7 years, but hewas also the Judge in Frank Quattrone's ca


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While I was in court and the discussionwas about taking my lawyers away, Judge Owenkept making smart-ass remarks about Schifferand how he never "took it upstairs11 to arguewhat Judge Owen did was illegal. He wouldconstantly make jokes and more-or-less thenlaugh. When I turned to my lawyer MartinUnger and asked "Who is this guy Schiffer hekeeps joking about?" The reply: "Youdon'twant to know!" I insisted he tell me. It hadturned out that Schiffer committed suicideafter all his lawyers were taken away forhe could not deal with the SEC and Judge Owenwho together relentlessly tortured the poorguy in a CIVIL case until he couldn't takeit any more, mentally.

It became clear to me that transcriptsof court hearings were being altered. Thenthe Second Circuit Court of Appeals came outand was forced to address the fact that thejudges in the Manhattan Federal Court had infact ruled in their own favor that they couldnow create a "'standard practice1 in the So-uthern District is for a court reporter tosubmit the transcript ... to the districtcourt before releasing it to the partiesThe district court is free to alter the tran-script without disclosing such changes to theparties." US v Zichettello, 208 F3d 72, 97(2nd Cir 2000) decided March 30th, 2000. Thereal amazing fact is that both the SupremeCourt and the Court of Appeals are supposeto supervise the administration of justice.NEITHER of these high courts protect thepeople or the Constitution. This decisionwas appealled to the Supreme Court, and theyrefused to accept it. The Second Circuit hadthe audacity to indeed print in their opinion"Neverheless, whether we have thepower to order a change in such apractice is unclear. ... However,v *e invite the judges of the South-ern District to consider revision."

They declined.Id./at 98

I began keeping track of what I wouldsay in court. I would read specific thingsfrom notes laying on the table to ensurethe words I spoke would be in the record.When I got the transcripts and found whatI would say or object to to establish aright to appeal removed, I just gave up. Itwas clear I would NEVER receive a fair triaand I wrote a letter complaining about thissham to Dorothy Heyl, the SEC lawyer at thetime. I told her,if you people can changethe words I speak in court, why don't youjust alter the transcripts and claim I hadconfessed and get it over with? She neverreplied. So being pist-off at how corruptthe entire process had become, I put in anaffidavit sworn under penalty of perjuryso if I lied they could have prosecuted meand given me 5 more years. I outlined eachtranscript that I believed had been changedand asked for the recusal of Judge Owen.

While we can never be a judge overourselves, judges can be. The passage belowis what Judge Owen said in court that dayjudging his own actions, and claiming whilehe did change my transcripts, he did notremember making any major changes so heacquitted his own actions. I appealled thatto the Second Circuit, and they slapped itdown admonishing me that they would neverwant to revisit this issue again. So muchfor unbiased courts.But my allegations swirled around NewYork. That day in court, the place was justpacked. I was told by the court appointedcounsel in the criminal case, I was crazy.You can't accuse a federal judge of suchthings. I said I didn't give a damn anymoreand let the truth come out.Judge Owen wasso intimidated by so many people there heknew included the press. While no one hadthe guts to report those events since itseems even the press is scared to deathabout judges, they knew what was going on

now for I was the first to ever get a judgeto admit he was altering the public record.

JUDGE RICHARD OWEN:"I don't remember ever making any change to a transcript of any substancewhatever. I may have stuck in a coma, I may have stick in a dash. But I don'tremember ever changing anything of substance."

(99-Civ-9667 SONY; Tr; 9/23/03, p45, L7-11)


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The courts are so dishonest, the SECwas able to get their cases before JudgeOwen to ensure their victory. Judge Owen hadalso presided over First Jersey Securities,a brokerage house that had taken too muchbusiness away from New York. There, the SECasked the court appointed staff to investig-ate First Jersey Securities to see if theycould find anything else that should be thencharged. This is totally illegal for thecourt is suppose to be impartial. The lackof any Rule of Law is illustrated by thereversal of Judge Owen and his investigation.

The SEC managed to get the criminaltrial of Frank Quattrone of First Bostonalso before Judge Owen. Andrew Sorkin ofthe New York Times covered Quattrone's caseand because of my confrontation with Owen,the press was paying very close attentionto what Owen was doing with the transcripts.The Second Circuit had the audacity to evenadmonish the press for their critical cover-age of Judge Owen claiming they misunder-stood events in court that they reportedwhich were not in the transcript.

Andrew Sorkin came to visit me in MCCto discuss Owen. I went over the whole thingabout the transcripts. The Second Circuitwas hit by even amicus briefs (independentgroups) calling for the recusal of JudgeRichard Owen. The Second Circuit will neverrule against a judge and with all the publicoutrage over Judge Owen, they had the trueaudacity to write: "we do not find evidencethat the trial judge made any inappropriatestatements leading us to seriously doubt hisimpartiality." US v Quattrone, 441 F3d 153,192-193 (2d Cir 2006). The Second Circuitnonetheless, stated, "[w]e conclude that thebetter decision is that the case be reassign-ed to another judge upon remand." Ibid.While Federal Courts always protect thejudges and they know they are free to do as

they please, the Second Circuit also had thesheer audacity to criticize the press, whowas even naming the offender, Mr. Sorkinat the New York Times."In attempting to argue that numerousmedia commentators noted the allegedlybiased conduct of the trial judge,Quattrone cites only one newspaperarticle in the text of his OpeningBrief ... However, the very articlethat Quattrone employs to establish

improprieties has at least one materialmischaracterization of the court'strial management. The article claimsthat Brodsky testified upon cross-exam-ination 'No1 when asked 'Did you thinkhe [Quattrone] had done anything wrong?See Andrew Ross Sorkin, A Shift in Testmony in Ex-Banker's Trial, N.Y. TIMES,Apr. 23, 2004, at C3. This characterization was completely accurate ... What vinaccurate, however, was the next sent-ence of the article: 'The judge ... immediately struck the answer from the record ....' Sorkin, supra, at C3. The record clearly reflects that upon objectiothe trial judge allowed Brodsky to testify 'No1 but instructed the witness tomove on without providing further comm-entary."

Quattrone, 441 F3d, 192 n.41I gave up trying to get Judge Owen re-cused. Finally, the Second Circuit would notrecuse Owen directly in my case, but then onits own realizing that the world was lookingat how ruthless the American Justice Systehad become, wanted to avoid any controversyand to my shock and others, recused Judge Owmerely stating:"[W]e believe that on the seventhanniversary of Armstrong's confinement,his case deserves a fresh look by adifferent pair of eyes. We thereforedirect the district court to reassignthe case randomly to a different districourt judge on remand."

Armstrong v Guccione, 470 F3d 89, 113 (2d 2I remain convinced that the SEC controed by favor who their cases were assigned tothat was Judge Owen. To make matters even msuspect, it was the SEC who requested thatwanted Alan Cohen to be appointed as receivewho was a personal friend of Judge Owen's anhis personal former law clerk. If this wasnot a conflict of interest for anyone else,such conflicts are standard in courts of laThe Senate Judiciary Committee will juNEVER investigate judges, so they know theycan do as they like for they are above thelaw. The only judges to ever get prosecutedare those who defend the Constitution andthe people. If they are pro-government, thegovernment will never criminally charge ajudge who rules only in their favor. Citizen

have no right to file criminal charges in thFederal system.


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The SEC also amazingly got their caseagainst First Jersey Securities and Robert E.Brennan before Judge Owen and denied him atrial before a jury holding a bench trialbefore the notorious Judge Owen. Naturally,Owen ruled in favor of the SEC ordering thathe be disgorged of profits he held were infact excessive in selling 6 securities to thepublic in the sum of $22.2 million and topay $52.6 million in interest, on conductit alleged between 1982-1985. But the SECasked the court to appoint its own judicialofficer to investigate calling him a specialagent. This was in complete violation of theConstitution, which the Second Circuit hadacknowledged, but would not reverse the case.(see below) .

There is a very distinct pattern thatthe SEC will bring cases in New York, notwhere the alleged offender actually resides,in order to win at all costs. In my case,the accounts in question were in Philadel-phia, not New York. Drexel Burnham was aPhiladelphia firm. REFCO, a Chicago firm,and Quattrone worked at First Boston. TheFirst Jersey Securities case against Brennanwas also a New Jersey entity. Don't forgetMr. Ebbers of WorldCom. He too was put ontrial in New York.

Strangely enough, the ONLY big casebrought in Manhattan against a Manhattanfirm was Madoff. But he blew up and therewas no choice. I have spoken to members ofthe Press who (1) know that judges in NewYork alter the public record to win cases,and (2) only prosecute outside firms. Youwill NavttK see any New York firm prosecutedlike Goldman Sachs, J.P. Morgan, or anyof the major firms unless a bigger firm hasthem tagged. New York will NOT eat theirown and the best way to describe it is "Youdon't shit where you eat!". The editors ofthe major press will NOT let journalistseven write about this. You would think thataltering transcripts is significant enoughto warrant front page coverage when you have

actual acknowledgement in writing, and itamounts to a Federal Crime meaning that thjudges involved could all be arrested andput in prison themselves.18 USC 1506 Theft or alteration ofrecord or process;

"Whoever feloniously steals, takesaway, alters, falsifies or otherwiseavoids any record ... Shall be finedunder this title or imprisoned notmore than five years, or both.The serious danger that lies in thiscollapse of the rule of law, is that it isjust for sale. This gives many great concerthat the Federal New York Courts protect thlikes of Goldman Sachs preventing ever anycase against them. Indeed, a major classaction lawsuit was filled in New York againMerrill Lynch. It was taken by Judge Pollack

< v h o wrote a huge opinion dismissing the caspreventing the little guy from ever havinghis day in court against a big New York firMost of this is circumstantial evidencthat nobody can prove without an investigatthat the US Senate will never authorize. Sowhere circumstantial evidence is good enougto criminally prosecute citizens and tossthem in prison until they die like Ebbers, iis not sufficient to prove to the Senate thif it walks like a duck, talks like a duck,

just maybe it might be a duck and not a cowStepping outside of Manhattan destroysthe conviction rate in questionable whitecollar cases. Look at the case of Keatingof S&L fame was criminally prosecuted on ththeory he sold bonds KNOWING that 7 yearslater he would have to file for bankruptcy.He was the sacfricial lamb for the S&L Crisand when his case was overturned, the goverment tried to reindict him. There, the courheld it was a political prosecution and dismissed the case. Rest assured, that would

NEVER take place on the East Coast where thcourts have been stacked with mostly formerprosecutors acting as reborn judges."The district court... stated that it was convinced that the violations pleaded andproven with respect to the six securities ... were but ft h e tip of the iceberg.'Citing its general equity powers, the court stated that a Special Agent would there-for be appointed to investigate ... the possibility ... that the SEC had not pleaded orproven [other frauds]. ... the court itself ... has authority to make appoints [but]It]he appointment of a Special Agent ... is not for the purpose of assisting [the SEC]...We do not regard th e appointment of an investigator, whose instructions are to unearthclaims not previously pursued by the SEC, ...[Would] preserve for the court th e appearanceof impartiality." SEC v First Jersey Securities. 101 F3d 14SO, 1478-Q (?d Cir 1Q%)


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How Did We Get Where We Are?

WHEN people put this togotlior with a major infiltration of government postswith former Goldman Sachs1 partners, the image the emerges is certainly notone that is doing either the United States or W all Street much good in theeyes both domestically or globally. But to understand if Goldman Sachs is thenew Evil Empire Within, we must consider its origin, evolutions, and what ithas now represented that has turned so many against it in the real world. Is GoldmanSachs at its zenith ready for the fall from grace? Or is it at the threshold of a newera? One thing for sure, if it were in the computer field, the government would beattacking it like Microsoft trying to tear it apart limb from limb. But Goldman Sachsis not Microsoft, it is a quasi-Commerical Bank with Fed borrowing power, InvestmentBank when it smells a deal, Primary Dealer that has the Fed's hooked to the point theyfear they cannot survive without it, and above all, it is a Proprietary Hedge Fund thatroams the world economy looking for its next prey.

In The

Marcus Goldman left Bavaria, Germanyin 1848 looking for a new life in the NewWorld. This was during a period of seriouspolitical uprising in Europe that had ledto a major Jewish migration to the UnitedStates. Marcus became a buyer & seller ofwhat we would call today commercial paper.He was peddling such paper in New Jerseyin the economic turmoil following the USCivil War when interest rates were high.Marcus was able to develop a business inthis field because banks tended not to benational with massive networks of branches.I have written about J. Cooke who many hadregarded as a showman for he was the firstto develop agents around the country tosell corporate bonjls. Cooke was in Phila-delphia that tended to be the financialcenter during the mid-1800s. That wouldeventually move to New York City, thanksto J.P. Morgan after J. Cooke went belly-up during the Panic of 1873.

Marcus Goldman got married and he toosettled in Philadelphia at first. He thusfollowed in the footsteps of J. Cooke and*carved-out a small business buying andselling mercantile paper demoninated insmall lots between $2,500 and $10,000. Hewould buy them at a discount and resellthem to banks who lacked branch networks.By the 1880s, Marcus was making a bigfortune in those days, about $50,000 peryear that was tax free back then. It was1882 that he took in his son-in-law as apartner by the name of Samuel Sachs, and

Marcus lent him $15,000 so he could sell hidry goods store, which Sam repaid over thenext 3 years. Marcus had issued 3 notes of$5,000 each. Sam had repaid two notes andwhen his third child was born, Walter, thethird note was forgiven.By 1888, the firm became known as thenGoldman, Sachs & Co. Thus, it remained forthe first 50 years or so a family business.By about 1900, the firm was the largestbroker-dealer in commercial paper with salereaching about $75 million.London was still the financial capital

of the world. Sam wanted to expand the firmand to do so, he needed to go to London mucas J.P. Morgan had done. A informal relatioship was arranged with Kleinwort Sons & Cwas originally founded in Cuba in 1792 andestablished itself in London by 1830. It waa respected merchant bank dealing around thworld with bills of exchange. This was a rivto Peabody, and that is what Sam needed. Sasold the firm as an agreesive American corrpondent that would be in a position to helpKleinwort expand its dealings into thelucrative foreign exchange business and totake advantage of the big arbitrage betweenthe USA and UK markets. Don't forget, it wathat very arbitrage that in 1896 caused J.PMorgan to rise to national notice by leadina consortium to lend the US Treasury gold fit had been that arbitrage that emptied theUS Treasury vaults taking gold to Europe anreplacing it with silver.

Indeed, Kleinwort ^-Goldman Sachs paperwas all over the London market. This producsome tension no doubt, but the firm pressed


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forward establishing correspondent relation-ship outside of London. Goldman-Sachs wasnow starting to rely on deals that one wouldcall self-funding so to speak. In other wordsthey were not putting the firm's capital atrisk itself. By the Panic of 1907, the firmwas now up to half-million in the foreignarbitrage business (trading) between Londonand New York. The main thing, Goldman Sachswas developing a reputation in the Europeanmoney markets and that meant they were nowdeveloping deep trading/credit lines.

Marcus Goldman had remained a partneruntil his death in 1909. The firm now wasin the hands of family Henry Goldman & Sam.They continued to focus on commercial paperthat they regarded as their core business.Henry Goldman, was the risk-taker and hehad visions of expanding into the domesticsecurities business selling railroad bondsto savings banks. Sam was the conservativecommercial-paper guy who also brought in hisson.

Henry Goldman was on a mission to beas famous as J.P. Morgan and George F. Bakerthat was the origin of Citcigroup today. Itwas the Christians v the Jewish firms and tothis day in New York City, this rivalry hascontinued in every field from banking andborkers to legal firms. It is the great un-spoken feud of the New York Hatfields v MeCoys. J.P. Morgan and George Baker would notdo business with the Jewish boys. So Morganwas the target of competition for GoldmanSachs & Co.Just as Michael Milken created the new"Junk Bond Market11 as it was called by hisjealous competitors, Henry Goldman did thesame thing with United Cigar that later wasknown as General Cigar. Milken took firmswho had great earning power but not tradi-tional mortgage quality assets upon which toborrow, and created a equity focused marketthat evolved also into venture capital.United Cigar was a merchant and thattype of business is different. It is a trad-ing firm where it is buying and selling andwas unlike a railraod with infrastructure.Henry Goldman did the very same thing andcreated financing based upon earning powernot tangible assets. Eventually this wouldalso be known as "good will" in valuingcorporations. This is where Henry Goldmanbrings in another Jewish competitor, PhilipLehman.

Lehman Brothers was actually a Alabamacoffee and cotton merchant. Philip Lehmanwas a friend of Henry's and was one of fivebrothers. Philip was eyeing up what Henrywas doing in New York, and he was interestedon expanding his business and making a bidto get into New York City. Philip was keenon getting into the underwriting businessventure. The Lehmans were very rich anhad tons of capital that attracked Henry.In those days, there was still not a fullydeveloped underwriting business. It was agreat opportunity to buy the securities tobe issued from a corporation and sell them tthe public as J. Cooke had shown could be don a major scale. This effort to bring inthe capital from the Lehmans and create abusiness with Goldman Sachs who brought theclients, was the basis of this arrangementthat lasted until 1926.

The INVESTMENT BANK was thus born andthe first deal being United Cigar proved tobe a smashing success that the profit wassaid to have been about 25% of the offer pricethe same thing First Jersey was charged.Another deal emerged from distant familFrom Germany came Julius Rosenwald who had afirst boarded with the Sachs family, and themoved west teaming up with his brother-in-laAaron Nusbaum who convinced him to buy 1 /3rinterest in his operation with his partner aMr. Sears in their operation Sears Roebuck.

Julius bought out Aaron and went to Sachsto finance inventories they would purchase iNew York. With only $250,000 in capital, nowGoldman Sachs arranged a $75 million commercpaper deal. This helped the company explodein growth. By 1907, Sears Roebuck moved for$5 million in long-term capital to build amail order operation in Chicago. But HenryGoldman pitched a stock offering and joinedwith Lehman Brothers to underwrite this newstock venture. The formula of investmentbanking was taking off in spades.Between the joint forces of GoldmanSachs and Lehman Brothers, they put investmenbanking on the map. Thereafter, they under-wrote an explosion in retail companies allfollowing the model of Sears Roebuck. Theybrought to the marketplace F.W. Wollworth,May Department Stores, Brown Shoe, S.H. Kresand expanded into industrials such as B.F.Goodrich, Studebaker, Underwood Typewriters,Continental Can and Jewel Tea. By 1909, Searhad sold his personal stake in a $9 million

deal put together by Goldman Sachs.10


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It was 1907 that Sam Sachs1 son Walterjoined the : firm, which was the same year thatSidney Weinberg joined the firm as a janitor.Walter opened the account with J. Ogden Arm-our who would become the richest man perhapsin history at the Armour & Co based upon theaccess to the London market to sell theircommercial paper via the Kleinwort connect-ion. Meanwhile, Goldman Sachs and Lehman Brosworked together, with the former specializing incommercial paper and the later commoditiestrading.

It was World War I that broke-up thefamily business at Goldman Sachs. As thestory goes, Walter Sachs assured their oldEnglish correspondents at Kleinworts that allhis family partners were supporting the Alliesonly to find that Henry Goldman supported theGerman view. Henry's views were becoming morepublic and the feud erupted in 1915 when J.P.Morgan offered a $500 million Anglo-Frenchwar bond. Virtually every American firm nowjoined in, but Henry refused, and thus itwas said that this incident broke the family.Two Sachs brothers went to J.P. Morgan topersonally subscribe to show their support.When America joined World War I in 1917, itstill did not tone down Henry Goldman andeven the Kleinworts warned that the firm it-self would be blacklisted for its support ofGermany. The Bank of England even forbidKleinwort from doing business with GoldmanSachs. The very day that Goldman Sachs beganto sell US government Liberty Bonds for thewar effort, Henry Goldman was forced to atlast resign. He took with him, all his owncapital undermining the firm's ability todo underwritings. The firm thus acquired thereputation of being "German" and this splitin the family is said to have been permanentand that Henry Goldman and Sam Sachs neverspoke again.

It was this break in the family thatopened the door for a janitor to rise to thetop - Sidney Weinberg. Sidney became a bondtrader even though he dropped out of schoolafter 7th Grade and was largely self-taught.He also created an over-the-counter stockbusiness during the booming 1920s and by1925, he purchased a seat on the NYSE. Hewas a natural trader. Someone who could feelthe blood in the tape. By 1927, Sidney nowbecame a partner in Goldman Sachs. He becametruly a natural trader whose "feel" for themarket saved Goldtaan Sachs in the GreatDepression.

With the departure of Henry and thewhole German thing, the relationship thathad created a dynamic force between LehmaBrothers and Goldman Sachs came to an endBoth firms would evolve as competitors anthe rivalry lasted until the demise of thremarkable Lehman Brothers with the Crashof 2007.The events that began to follow WorldWar I, was shifting the financial capitalfrom London to New York. The credit forthis belongs to J.P. Morgan. The 1920'swas thus a boom that most failed to trulyappreciate. It was a shift from railroadsto industrials creating a new sector withgreat respect built upon the back of theautomobile and the airplane. But this wasa capital shift globally as well. Likeeveryone was running to invest in Japan f1989, the same thing was happening with tUnited States. Foreign investors were now

looking at America as the land of opportuity.But the capital of the world has alsoshifted to the USA. The global concentratof wealth was extensive. This led to majoofferings by China, South America and eveEurope selling their sovereign debt in smdenominations that the New York banks wermarketing to the average person.Goldman Sachs got caught up in the whbull market just like everyone else. Undethe leadership of Waddill Catchings who lthe firm into joining the hot market by ncreating an "investment trust" where he sthat a giant fund could maximize profitsbuying and selling stocks. He promoted thas a business that was professional and tprofession was investing.The "investment trust" was sort of thdomestic "hedge fund" of its day. Everyonwas jumping into the game. Catchings justgot caught-up in the whole thing and was

very bullish going into the high of 1929.He gave this new entity the name: GoldmanSachs Trading Corporation. The deal was tGoldman Sachs would be paid 20% of the prand the stock was offered at $104 per shaIt jumped to $226 per share, that was twiits book value. This would be the very samistake that became exposed in the Crash1966 when shares in mutual funds were thetraded on the exchange allowing them to bbid up well beyond their asset value.1 1


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The whole bullish atmosphere was veryintoxicating. Just three months into thefund, Goldman Sachs arranged for a merger ofthe trust fund with Financial & IndustrialC3orporation that controlled ManufacturersTrust Company that was a giant group ofinsurance companies. This doubled the assetsof Goldman Sachs Trading Corporation takingit up to a staggering near $245 million. Thiswas huge money in those days. The trust now.exploded and the assets under control aresaid to have exceeded $1 billion back then.

, Goldman Sachs expanded the leveragegoing right into the eye of the storm thatwas about to hit starting on September 3rd,1929L In the summer of 1929, Goldman Sachslaunched two more trusts Shenandoah and thememorable Blue Ridge. The shares were over-subscribed and Shenandoah was offered at just$17.80 and it closed on the first trading dayat $36 per share. Blue Ridge was even moreleveraged and the partners at Goldman Sachsput pressure on everyone to buy as a sign ofsupport. The leverage was astonishing forwith just about $25 million in capital, nowthere was more than $500 million at stake.

The disaster was monumental to say theleast. Goldman Sachs Trading Company, whoseshares had stood at $326 at their peak, fellduring the Great Depression to $1.75. Theyfell to less than 1% of their high. The losssuffered at Goldman Sachs on a percentagebasis was far worse than at any other trust.In fact, of the top trusts, Goldman Sachs hadlost about 70% of everyone combined.

Goldman Sachs was a wash with lawsuit^and it became the target of jokes in Vaude-ville. This would fuel the anti-Jewish feel-ing in New York for decades to come. SamuelSachs died in 1934 at the age of 84. He wasdevastated for what he had worked for was tobuild the firm's reputation. That is what hadeven broke the family in two.Over the Years

Over the years that followed, GoldmanSachs struggled to climb back. They returnedto their expertise building upon their oldreputation in commercial paper. They werestill second rate and the leader with allthe prestige was Salomon Brothers who had anelitist view that they would deal only withthe biggest and best. It would be this keencompetition with Salomon Brothers that droveGoldman Sachs and effectively the industry.

Those who were in the industry back twill recall that Salomon Brothers was the bpower around Wall Street and it was known bthe name in the trading floors as "Solly" aover town. Yet, Salomon Brothers was not asold as Goldman Sachs. So from the beginningSolly was a new rising star carving its wayinto the Jewish world of Manhattan. The firactually began in 1910 as the combined forcof Arthur, Herbert, and Percy Salomon.

Solly came at the right time. It wasjust after the 1907 Crash and thus the chaothat erupted at that time, opened the doorfor competition. When opportunity knocked,Solly opened the door.

Solly began specializing in short-termloans. With the reforms that began in 1913,Solly was more of the traditional type ofbank just specializing in bonds. When WorldWar I brokeout, Solly had created a clientbase and thus became a Primary Dealer forthe US Government selling their bonds toraise money for the war.

Where Goldman Sachs had been specializing in helping primarily merchant type clie,who were different from railroads lacking tinfrastructure assets, Solly was followingmore of the model that had first been strucby J. Cooke. Indeed, just as the Governmentturned to Cooke to sell its bonds during thCivil War, now Solly was following in thatsame footpath.

Solly survived the Great Depression infar better shape than Goldman Sachs. Fordecades thereafter, Solly did its businessand Goldman Sachs could only watch in envy.The steady drive to beat Solly was alwaysthere. They were the "other" big Jewish firthat had the audacity to compete.Solly, however, was a rising star witha short-life. It would peak perfectly just72 years from its birth. Its demise also hai

lined up with the Economic Confidence ModelAat seemed to drive the firm more than anyother force.It was in 1978 that John Gutfreund rosas the head of Salomon Brothers. Right inline with the major high on the Public Wavethat peaked at 1981.35, Gutfreund was nowselling the firm to the huge commodity firm

known as Philips Brothers of Marc Rich fameThey were the big commodity house known onthe street as PhiBro.12


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PhiBro were great traders coming fromyears of commodity trading. But they stillcouldnf t see that commodities had made a ma orhigh in 1980 that would last for the next20 years or so. They were feeling like theyhad conquered the world, and thus were nowtrying to buy Salomon Brothers when they wereat the top of their cycle. This was the wrongtime to expand.

Gutfeund became a co-CEO with Phibro'sDavid Tendler. The commodities crashed andburned and the tables were turning. Gutfreundnow seized control and started to expand thefirm into the currency trading, and enlargedthe firm's positions in underwriting and sharetrading. Salomon Brothers was now also tryingto expand into Japan as well as Germany andSwitzerland.As commodities peaked in 1980 and the

interest rates thanks to Paul Volker's decis-ion to raise interest rates to insane levels,the decline on the Economic Confidence Modelinto July 1985, brought a collapse in pricesof commodities hurting PhiBro, yet the highlevel of interest rates attracked capitalfrom around the world. This drove the dollarto such record highs where the British poundfell to just about par and the mighty Deutschemark fell to nearly 4 to the dollar. This hadshifted the profit base from PhiBro now toSolly.However, this catastrophe upset the wholeworld economy. Volker not merely removed theusury laws to allow for his drastic rate rise,which is why credit card rates are still hightoday, but he set in motion the entire bullmarket in the dollar.Neither PhiBro nor Solly comprehendedwhat was going on. They got caught in this newpendulum swing with extremely high volatility.This sparked Mr. Baker to now propose creatingthe G-5 in 1985 with the goal of manipulating

the dollar down by 40% to help trade. So wehave mistake NUMBER ONE Volker raising ratesto absurd levels, and NUMBER TWO James Bakerroposing to manipulate the currency marketsforming G-5. And these were Republicans whoto believe in Free Markets. Ifbelieve that one, I will tell the the onethe Brooklyn Bridge.On the first currency swing in the midit was Franklin National Bank that went

n on a small 7% move. They were the bank who

started MasterCard. This swing was dramaticfrom a percentage basis. Suddenly, Sollyneeded to be rescued. It's white knight, waWarren Buffett. The firm that had risen tosuch heights, known as the "King of WallStreet11 saw its profits peak precisely withthe 1985 turn in the Economic ConfidenceModel at about half-billion dollars.As the markets all turned in 1985 withnow the dollar crashing and commoditieswere starting to rise, the stock market wasexploding. The fixed income specialists atSolly were now in a bear market. Solly hadexpanded right at the top in 1985. They hadincreased their staff by 40%. So where itwas PhiBro's turn at the 1981 turning point

it was now Solly's turn with the 1985 targeThis was a very important time wherethe shift from a Public Wave to a Private

Wave was taking place. At Princeton Economiwe took the back page of the English Magazinamed the ECONOMIST for 3 weeks running inJuly 1985 to go on record what the futurewould hold. Granted, we were well ahead ofthe crowd and had a fully functioning globacomputer model before anyone even started thire computer programmers. But that was ourcomparative advantage. It was a time of verhigh volatility and also the birth of thewhole take-over boom. This was the point tmarked the breakout in the Dow Jones and in2.15 years we had the 1987 Crash, S&L Crisiand by the end of this first wave 4.3 yearsJapan reached a bubble top and burst. All othis was set in motion by government tryingto manipulate the Free Markets.

The competition between Goldman Sachsand Salomon Brothers was always there. WhePhiBro and Solly were joining at the hip,Goldman i bagan ' looking around to followin the footsteps of this merger. They toowanted commodity exposure and bought thetrading house of J. Aron that was clearlya competitive move given the Salomon Bros.merger with Philips Bros. J.' Aron was a olcommodity house that began in New Orleansin 1898, It moved to New York City in 1 9 1 0in time for the commodity boom with WorldWar I. The firm was named after Jack Aronwho was part of the Jewish community.

J. Aron expanded into the metals tradduring the late 1960s after gold became afree market in London and the official linwas that there was now a two-tier pricinggold as of 1968. There was the fixed offic13


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rate, and the open market rate. With thebeginning of the floating exchange rate in1971 and the closing of the gold standard,the 1970s became the decade of inflation andcommodities that would rise into 1980 forthe bubble that would last for about 21.5years. J. Aron rose from a capitalizationof less than $500,000 in the late 1960s to$100 million by the peak in 1981. J. Aronhad become the largest trader in gold doingmore volume in dollars than the biggest ofany of the Dow stocks.

Being a commodity firm, J. Aron wasactively trading currency futures that thebanks did not understand. They were the firstto arbitrage the currency futures againstthe cash currency markets at the commercialbanks who back then did not understand themarkets, but had to provide that service tokeep commercial clients.J. Aron's business in precious metalshelped to bring in market-share. This is thebeginning of gold lending. Banks holdinggold would start to lend it to J. Aron at

0.5%. This was a business that was startingto explode. Myself, I was making marketsin gold as well and with friends in keyplaces, I was able to do over-night tradingthat competitors couldn' t figure out what Iwas doing. I had a guy Francis Lee in HongKong where I would lay-off what I boughtafter New York markets closed. But deliveryhad to be made in London the next day. SoI would borrow gold in London, make thedelivery, and then swap them a CQMEX NewYork contract I would buy that day. I latershowed a London firm how to do this wildovernight trading, anql finally got somesleep after the 1980 high. Those were thedays of innovation and wild trading. Theywere the best days of my life with my kidswho were still young and a real joy in allaspects.After the whole 1980 Commodity Boom,

everyone expected it to rebound and keepgoing. Oil hit $40 and gold $875. Everyonewanted to become a commodity trader forthe Dow Jones had kept bouncing off 1,000so why not go where the action was. It wasOctober 1981 when Goldman Sachs purchasedJ. Aron & Co, for $135 million. It was infact the top of the game. Although they hadbought the high, they were importing thecommodity culture of trading that would infact lead to the firm's trading reputation.Its current head, Lloyd C. Blankfein, camefrom J. Aron and has now focused GoldmanSachs as a mean, lean, trading machine. 14

It was this competition between thestwo Jewish firms that fueled the evolutioprocess of Wall Street.Leading up to 1980Sidney Weinberg at GS brought in his heirthat perhaps began the desire to cultivatecontacts within government. It was 1968 wHenry Fowler, former Secretary of Treasurwas recruited. It was Fowler who opened thpolitical doors in a host of different natYet it was Gus Levy who was the agressivepushing the firm into taxable bond dealinexpanding from commercial paper. From 196Goldman Sachs now moved into the bond mar

Salomon Brothers was taking market saway from Goldman Sachs. The decision to gback into proprietary trading appears tobeen from Steve Friedman and Robert Rubinbe competitive with Salomon. Goldman Sachwas still hesitant sitting to a large extwatching trading profits grow at Salomon,that was the trend at Morgan Stanley, FirBoston, and of course Merrill Lynch.

Freidman and Rubin took over the rolof managing Fixed Income where they planneto expand into proprietary trading. GoldmaSachs moved into quantitative analysis inlate 1970s, relying still on academics.It was Freidman and Rubin who changedthe culture creating the trading profit boand starting in 1986, Goldman Sachs begantake talent from Solly offering a huge bostructure and adopting the trading mentalit now acquired from J. Aron & Go.It was 1985 when I wrote directly toPresident Ronald Reagan. I warned that thwhole idea of manipulating the dollar woulead to a crash and dramatically increasevolatility. Beryl Sprinkle, Chief EconomicAdvisor, responded. He pointed out that athat time Princeton Economics was the ONLfirm with such a model, and until someoneelse created a model agreeing with us thavolatility would rise, he basically said

they could not rely on just one model. Nowe set the ball in motion with computers,and the game was now taking a new directiIn 1986, Golcknan Sachs hired FischerBlack of BJACK-SOiOLES fame for valuing tstock options. It was Rubin who brought iBlack, and the problem they had was the nembedded options within debt. But the issthey did not understand that they were nowalking into, was there is a great languaproblem between traders and programmers. Y

MUST be good at both, or you are screwed.


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The Age of ComputersWhile Princeton Economics was more thanalmost 2 decades ahead of the crowd in thisarea, they were well aware that we were thenemerging as the largest institutional advis-ors in the world. This is also clear from thethe standpoint that the regulators jump when

one of the big New York firms makes a call.In 1985, the Supreme Court ruled in amajor case Lowe v SEC, 472 US 181 (1985) thatheld the publishing of analysis was protectedby the First Amendment and did not require tobe regulated by the SEC. Upon advice of mycounsel, I withdrew my registration and weopened out first office overseas in Londonthat year. However, it was the CFTC who triedto claim that the Lowe decision only appliedto the SEC statute, and they would refuse tofollow the Supreme Court.The CFTC appears to have been told wehad too much influence and they tried tosubpoena a list of all our clients arguingI was manipulating the world economy. Theiridea was that anyone who took our researchdid exactly what we said, and that was makingthe forecasts correct, not the model. Theycontinued to harrass us for the next 10 yrseven though I fought them in court and wonthat they had no proof I was manipulatingthe whole world, and even if I was, where

did they have the authority to police thatjurisdiction?Everyone was rushing out and buyingIBM desk-top computers and trying to createmodels. Much of what was coming out was realnonsense. Trying to write a computer programis a completely different field. I was veryfortunate insofar as I had gone to what wasin the 1960s the equivalent of MicrosoftUniversity. RCA had set up a school only formainframe computers. No school could affordone of these monsters that filled a room back

then. I went through everything from theground up - electrical engineering, hardwaredesign, and software design. Today, someonetaking up software need not go through thehardware. But in the old days, you had to doeverything. This gave me a well-rounded ideaof how computers functioned, and what couldbe done with them. I left the field for notbeing married, I was offered Greenland whereNORAD was hidden back then, Guam, or Vietnam.The married guys got Paris, London or Hawaii.So I decided trading was my first love.

When computers began to shrink, nowthey were a tool I knew what could be donewith them. I began working on a program inthe late 1970s. Having experience in bothtrading and programming, I could see in mymind's eye the potential.The greatest problem that Wall Streetran into with their attempt to model themarkets, you have a huge gap between thetrader and the programmer. They do not evenspeak the same languages. What the traderis trying to explain, the programmer is thetrying to write in computer language. It isnot easy. The trader does not comprehend hoa computer operates, so he skips such basicsteps that the programmer, not understandintrading, cannot fill in the gaps.Teaching a computer to do something is

like teaching a child but worse. Where thechild will instinctively take that first stin walking, there is no such instinct in acomputer. You have to teach it absolutelyeverything in such detail, and nothing canbe left out.Goldman Sachs and others hired physicsmajors and math wiz guys, and now they justintroduced another dimension of chaos. Hereyou bring in guys competent at what they dobut thay are not traders. They have no feelfor a market. They cannot smell the blood.

And the make the biggest mistake of all thathe programmers could not fix for they alsohad no experience. Markets are NOT perfectand sometimes they will reach a void whereliquidity disappears, and you just can't gethe hell out no matter what you do.When the 1987 Crash hit, it was one ofthose moments. Liquidity vanished. The markmakers backed away, arid trades were just beinmatched. If you were UNEXPERIENCED in tradiyou were likely to put in a market order. Ywould have lost a fortune. I was trying tobuy calls on the S&P at the low. One tradewas 200 and the next 3,OQO. There were nomarket-makers. Everyone simply got scared.A market order would have been slaughtered.The volatility I warned in 1985 wouldbe unleashed once they started to manipulatthe currencies came true. I was getting therequests to please provide research to theUS Government. I told them to pound sand. Iwas too busy. Jack Swagger called me and ma

a good point. They were going to lock up th15


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computers for by 1987, everyone was trying touse computers for trading and the press wasalready now blaming computer trading. It hadturned out, many who had crude models, simplydidn't follow them. The computers were mostlycorrect - SELL. The professional stock tradersdid not listen.I eventually provided the research onlywhen it became clear that Paul Tudor Jones1partner Peter Borshe became a board member tothe Brady Commission. I contributed and evenwrote to several people pointing out that theentire event was caused by currency for whenthey wanted the dollar down by 40%, foreign

hoLcters of CB Government bonds and assets, sold.The Japanese had purchased up to 33% of the USNational Debt. They were net sellers. They tooktheir funds home setting in motion a capitalconcentration in Japan that led to the bubbletop about 2.15 years after that - 1989.95. WhenNick Brady came out, he conceded that perhapscurrency had something to do with it.The Long-Term Capital ManagementCrisis of untold proportions

Over the next 8-9 years, computer modelswere getting more sophisticated, but at thesame time, more myopic and dangerous. The newmodels were focusing on high leverage. Again,the weakness was they lacked historical backtesting, and failed to comprehend the dynamicstructure of the global economy.

The collapse of Long-Term Capital Manage-ment illustrated the danger between mergingthe fields of experience with no practical riskmanagement. What was happening, was twofold.It was a blending of manipulation/inside infoand sophisicated computer models that did nottake into consideration what happens when themarket goes into total illiquidity.By merging the commodity field with thefinance field, there was a culture clash to

say the least. Commodity trading began withlargely the agriculturals pre-gold. This wasa field that was dominated by manipulations.There was only a few recognized storage ware-houses that the commodity exchanges recognizedand that let the games develop between movingproduct in and out to create swings in themarket price. When inventories would come out,a sharp drop in supply sent prices soaring.

By merging the commodity firms of PhiBand J.Aron & Co into the financial industrythis was a clash of cultures that soon intrduced the Wall Street boys into how thingscan really be done.The SEC was hell bent on inside tradinfrom about 1985 onward as the takeover boom

began. The SEC was convinced that possessininformation of a takeover was now criminalin their mind even though it was opposite othe entire theory of insider trading from tGreat Depression. One of the partners atGoldman Sachs, Mr. Freedman, found himselfcaught up in the whole mess. Robert Rubintook control for Freedman was a partner and he went down, so would the firm. This, I albelieve, contributed to the strategy of thebuilding political alliances.Where the stock boys focused on funda-

mental analysis that yielded to vision ofmerely possessing inside info was a guarantwin, the commodity culture was more about hto manipulate markets that was born from thagricultural plays.Where the stock boys focused on funda-mental analysis that produced visions ofpossessing inside info was the guarantee tovictory, the commodity culture was clearlynot inside info as to what directors aredoing or the latest takeover, but WHO was

trading what and what was their next move.In the movie Wall Street CharlieSheen does not really get inside info. Hefollows a takeover tycoon and watches whohe meets with for lunch and where he takesa plane ride. He puts it together in hishead and assumes the target will be a UScorporate. That is NOT INSIDE TRADING, butis more akin to the commodity culture,using reconnaissance to keep track of whatthe competition is doing in the market.This is NOT criminal activity. EVERYfield of business does the same. They aretracking the competition to know ho \ tostay in the game. The target of who is nowbeing tracked is different in commoditiesrather than stocks, because it is the play-ers, not the corporate directors that nowmatters.

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Going into 1980, the leaders of thatcommodity boom was none other than OPEC drivincthe price of oil up to $40 in 1980, and silverwhere the battle cry was $100 and a ratio togold set by the old Silver Democrats that hadbankrupted the nation when silver was set at16 ounces to one ounce of gold. That rally wasbuilt upon the shoulders of the Hunt Brotherswho every trading desk was following. However,what the Hunt Brothers walked straight intowas this culture of watching the players. Ifthe Hunts tried to sell one ounce, everyonewould jump in front and assume they were nowgoing to sell everything. The exchange riggedthe rules and created a one-sided market moreor-less. The Hunts never stood a chance.

You have to know how to trade and youhave to know the game to survive. AristotleQnassis was also a hard-money guy.He toobought precious metals like there was to be no tomorrow going into 1980. He put thewhole lot into a bank he owned in Geneva ascapital. But he would not let the board eversell the metal. I was called in because heliked my work. He understood that I was thenforecasting a bear market from 1980 into 1985and he could accept someone who was short-term bearish, but still shared his view ofthe decline and fall of the monetary systemas things progressed. Sol was given the jobof hedging this monster position. The platinumposition was about 40% of the entire marketat that time. I had to reveal the position tothe CFTC and was not allowed to speculate inplatinum, but to hedge the verifiable positiononly.

Now I was the 800 gorilla, and the realprofessionals knew. So how does one trade ina market where you are the new Hunt Brother?It takes skill and deception. I was able totrade silver and gold freely, but not platin-um. Knowing how the market operated was thekey. I understood they would watch my everymove. So the only way to trade and not getkilled, was to choreograph the precise oppo-site. I would have to call- dealing desksand ask for a market in gold, then silver,arjd then do the opposite of my intended desirein platinum. I would do a small amount, butenough to be impressive. They would then seeI was a buyer. When I went back for platinum,they would assume (reading me) to be a buyer.They would move the spreads to pick up someextra coin, and then I would sell. I wouldhave to have several desks on line at the sametime and then take a small loss on the gold

and silver. I couldn't do that every day,it was used at critical moments. Knowing hthey operated was paramount for survival.With this backdrop in mind, you can ga sense of what it was to trade size in thsorts of markets. Everybody was watching tflow of orders; who was doing what; and wh

was their next likely move. One time I wastrading and everyone thought I was short. Thfloor brokers paid close attention and relthat info back upstairs. I had used so mandifferent desks that I was able to flip myposition and was actually long. When theysaw me buying, they assumed I was just takingprofit. I had two trusted floor brokers inNew York who knew I was now long. Both J. Aronand Republic National Bank had read me deawrong. To show them they were wrong, I tolthe floor broker to bid size openly. Oncethey did,I could hear the screams yelling"He's fking long! He's fking long! Younever saw such a panic short-covering allbecause they try to read people to gain thadded edge. It was the game of strategy.

So when I say there was a "club11 thatdeveloped mostly in the 1990s, I know whatI am saying. A number of desks would watchthe big houses and what they were up to nowThey would band together, or leak out whata big client would be doing to get interesThis was in the commodity field. But keep mind that this culture was now infiltratinthe financial markets as well from about 1onward with the merger of PhiBro and J.Arointo the Wall Street crowd.

The idea of proprietary trading that dominant in commodities, was blended in witthe financial sector. This blended well butthen has transformed the likes of GoldmanSachs into a proprietary trading machine.The Long Term Capital Management crisiwas a direct result of the "club" relying o

"inside information" that was suppose to bethe IMF continuing the loans to Russia. AsI have written before, Edmond Safra of Replic Bank paid for the IMF diner renting theentire National Gallery. I was invited toshow me the quality of their contacts. Theywanted me to join in with the "club" all thbuying Russia. I declined and warned them tRussia would collapse. They believed that tbest way to win was to rig the game. If thehad the IMF in their back pocket, I would bwrong. But sometimes. all the inside info i17


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The development of what became known asthe "club11 emerged from the blending of thecommodity and the financial sectors. Insteadof insider trading trying to infiltrate theiriterworkirigs of corporations, it moved oninto commodities that was expanded into debtand currencies.What began in the agricultural movingproduct the effect prices by creating thefalse image of a drop in supply, the sameschemes were now being played out in big timemarkets. One of the most outrageous was theconspiracy with paying Russian officials torecall all their platinum to "take inventory"cutting off supply and sending prices soar-ing. Ford Motor Cbmpany ended up suing overthat one. It was the same scheme that wasplayed in agricultural for decades. Now itinvolved paying bribes to corrupt governmentofficials. This would also fuel the idea thatRussia, if it could be controlled, would bethe long awaited red carpet to commodityprofits to new levels.The first time I began to hear the nameWarren Buffett and commodities, was afterhe got involved to rescue Salomon. That hadopened the door to PhiRro, who seems to havenow introduced Buffett to the glories ofcommodity markets.

Silver Manipulation of 1993

92 93The importance of this 1993silvermanipulation is critical to what has takenplace even with AIG. When the CFTC becameaware of excessive positions being takenin silver at PhiBro, they demanded to knowwho was their client. PhiRro refused toreveal that name, so the CFTC demanded that

they exit the trade.

Warren BuffettThe secret client that PhiBro refusedto reveal was none other than Warren BuffetThe amazing thing is how easily the CFTCbacked down. If anyone else refused to do athey command, you will be thrown in jail folife on contanpt until you comply of die!This is the incident that began to nowshift these secret market manipulations oveseas. This is why AIG set up their entiredivision that blew up the world to London.

They wanted to keep everything out of thevision of US regulators. They were able tomuscle the CFTC, but they were riot sure ifthey could do that all the time.Buffett got caught up in this whole gwhen he came in to rescue Salomon BrothersIt was from this time forward, that his nabegan to be associated with what some havecalled the "Wall Street Bubble Machine."In July 2009, the magazine Rolling Stonepublished an article written by Matt Taibbientitled "TheGreat American Bubble Machin

where the opening line is:"From tech stocks to high gas prices,Goldman Sachs has engineered everymajor market manipulation since theGreat Depression - and they're aboutto do it again.11A magazine such as Rolling Stone willnot publish an article of this nature juston wild speculation. There has to be sourceverified even if they remain unmeritioried ithe article. The great bubbles it attributeto Goldman Sachs are:(1) The Great Depression Bubble inInvestment Trusts where theirshares in the trust fell from$326 to $1.75(2) Tech Stocks(3) Housing Mortgage Bubble(4) Gasoline $4 a Gallon Scam(5) Rigging the Bailout(6) Global Warming

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The interesting thing about this list,it is far too short. Indeed this is justnow scratching the surface of the "Club"that I had spent about 10 years documentingand only to find that some magical way, AlanCohen gets appointed receiver over PrincetonEconomics International, Ltd., a foreigncorporation where no American court had anyjurisdiction, he seized all this research,threatens my lawyers with contempt if they donot turn over everything, throws me in.con-tempt of court for over 7 years lying to thecourt claiming there are losses when thereare none, and then emerges as Head of GlobalCompliance for Goldman Sachs. This conflictof interest was sanctioned by the Federalcourts who have protected Goldnan Sachs atevery possible turn.

This blending of commodity and the moretraditional finance/equity Wall Street cul-ture, led to the great expansion of the Clubas it began to spread its scope. Because ofthe philosophy of Inside Trading being anyprivileged information became criminal, ithad the tendency to drive the Club toward tnecash markets and commodities.INEORMATIOSrWBO HAS THE INFORMATION?

There is a major crisis in America andan obcession by the Government over who hasso called "insider information" that is notat all being prosecuted as it originallymeant back in the 1930s. There is a broadassumption that the mere possession of someinformation in stocks is illegal. This isseriously flawed.For you see, information is the name ofthe game in every other field from bonds andcommodities, to economic statistics and thevarious reports ranging from unemployment tocrop inventories and GDP. This presents a

very serious crisis in a hedge fund. Wheredo you draw the line on info when it is infact allowed in every other field but stocks?The flow of information is more-often-than-not the precise opposite of what the SECthinks it is. The 1987 Crash took place whenthere was an ABSENCE of information. Majorportfolio managers called their broker forthe latest info why the DOW was down 500 andthe reply was - "I don't know!" Nothing hadchanged domestically. It was being driven bythe perception that the dollar would fall

20

another 40% so the foreign investors werebailing out. Domestic analysts were confuseso there was the assumption that somebody hcritical INFORMATION nobody else had ^nrl i twas really bad. 11U1UPossessing INFORMATION is not always a100% guarantee that you will win. In the rworld, the whole Martha Stewart case was infact just claiming she lied to the FBI. Shedid NOT possess INSIDER INFORMATION, but hebroker saw another client selling who wasan insider and the presumption was that hemust have had news that was negative. Marththen sold no different than a bird in themiddle of a flock takes flight because thewhole flock is taking off and nobody knowsprecisely why. This is a human characteris-tic as well. We panic because of an observation that everyone else is. They criminallywasted tons of money to put on a show to

prosecute Martha Stuart claiming she liedto the FBI. Aside from the fact that itwould be fantastic if those in governmentcould be criminally prosecuted for lying tothe people, what is really going on withthis nonsense is creating a giant DISTRACTIto make the people think that the courts arthe Justice Department are really protectinthe public rather than the "Club" for byputting Martha on trial, they create theimage that no one is above the law.The reaproblem is, judges, prosecutors, and theirfriends are UNTOUCHABLE!Back in the mid 1980s, Michael Milkenwas at Drexel Burnham Lambert, a Philadelphfirm where I myself once had accounts. Theywere an outsider insofar as the tight NewYork houses were concerned. Milken was trulan original thinker and he created a majorinnovation that advanced financing and infact contributed to the expansion of the USjob market and economy. What he created wasthe opposite of how New York operated.Where the traditional banking model wastill hip-deep in the old railroad model thmeant they lend only against assets, Milkentook the opposite approach that was more ofthe mercantile system of turnover and profirather than infrastructure meaning hard assBy focusing on "profit11 instead of assets,Milken created the innovative market that gbirth to many new companies that created joMilken's problem, he stole the thunder fromNew York and that -really pist-of f the New Y

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The New York crowd had successfully foryears convinced the Justice Department , SEC,and CFTC, that you shouldn't shit where youeat. You will find no major criminal casesagainst any of the big New York firms. Andeven when a major class-action lawsuit wasfiled against Merrill Lynch, Judge Pollackof the Southern District of New York wrote ahuge opinion protecting the firm against theaverage American citizen and dismissed thesuit. Had that suit been brought outside ofNew York City, it would have proceeded. NewYork protects New York. That's just the bottomline. Madoff proved that one. Nobody woulddare investigate until he blew up when therewere plenty of warnings, just not from anyof the big Club members.

The Club no doubt complained about thejunk bond market started by Milken for theyhad been showri-up, and missed the boat. Theonly way to compete in their book, is to usethe Feds to go after a competitor and clearthe decks. They did. Milken was innocent, yetthey inverted the law where he did not needinsider information from a company, just thatnow two people going to take over a companycreate their own insider information. But thiswas how the commodity and currency market hadalways operated. Monitor the competition andguess what their next move will be. There wereno corporate boards to worry about.

Milken had vowed to go to trial. However,the Government had no case and they were setin motion by the New York Crowd. They includedMilken's brother in the indictment trying toforce him to plead to save his family. Theythen took it to the next level and threatenedto indict his 90 year old grandfather. Milkenwas known to be a family man. He caved in andthe US Government acted like some third worlddictatorship ruthlessly extorting confessionsbecause they will Niwia* admit that they areever wrong. The courts just sit there and letthis go on. The Supreme Court takes the trulyabsurd position that the government need toprosecute criminally, means judges and theprosecutors must be absolutely immunity sothey do not hesitate to prosecute. This viewof course means that the Constitution has noreal force for Article II, 3 says they mayonly "faithfully" execute the laws, not withmalice and total disregard for everything wefought and died for that the average personbelieves is the "American Dream" that was tobe truth and honor first. We had a revolution

and Thomas Jefferson wrote in the Declara-tion of Independence the very complaintthat the king was protecting his agentswith mock trials. We do the same. You canosue any Government Attorney nor a Judgeand because of that, you can have evidencethat they were even bribed, but you cannotproceed for only the government, like theking, can criminally charge and it will riodo so as long as that judge and prosecutorlied, manipulated, and cheated to benefitthe government.It was 1986 that the government wentafter Ivan Boesky on insider trading andcompelled him to plead guilty paying a finof $100 million. They now turned to boldlydestroy Drexel Burnham curiously prosecutein New York. The firm pled guilty and paida $650 million fine in 1988. Over 50,000jobs were lost, and the carnage did not

stop there. The SEC was clearly doing afavor for the New York crowd. Drexel endedhaving to default on $100 million in loansDid this really benefit the public? Whenthis very practice is how the entire restof the industry works from commodities,bonds, ard currencies, it made no sense.This was not the insider trading of the olGreat Depression where directors knew thecompany was bust and sold their own stockbefore release that information. Real peoplost real money - rot opportunities. Didthe $650 million in fines paid by Drexelgo to any victim? No!

Milken pled guilty in 1990. He wasfined $600 million. There was one small guwho went to trial on this theory of insidetrading, and won. It was one giant shake-down. The government made more than $1 illand the New York crowd satisfied their egoDrexel believed in competition. They wereriot part of the "club" nor was Bear Sternsarid neither was Lehman Brothers. The outsifirms are the ones who go down. This hasonly fueled many to become concerned aboutdoing business in New York.

To destroy Drexel Burnham, the New Yocrowd had to turn more away from stocks aninto the arms of commodities. For you see,Mr. Freedman, a partner at Goldman Sachs,was neck deep in the same activity. RobertRubin personally began to manage the fallbecause he was a partner and they feared i1986 that they too could have gone down wiBoesky.21


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EXPANDING THE CLUB was something that evolved. It was driven by the InsideTrading in equities, and by the fact that the merger of PhiBro and J.Aroninto the financial fold, introduced a different way of doing business. Youhave to appreciate that the first half of the 1980s there was no reallydeep 24 hour currency trading. The banks largely provided foreign exchangeas part of the overall service for corporate clients. The legalization ofgold for trading in America that came in 1975 with the opening of COMEX futures con-tracts, began to expand the opportunities for trading on a 24 hour basis. Keep in mind,this was again commodity oriented for commodities were the same everywhere. Stocks werea typical domestic product, although foreign buyers would come in and out. Stocks tendedto be listed in the country of their domicle. This also began to emerge with New Yorkexpanding its global reach. Foreign corporations began to list in the US directly oras ADRs, as many of the South African gold stocks in the late 1970s.Princeton Economics was really the main leader in all thecurrency markets. We had so many clients world wide and thereports back then went out by telex. Overseas, the cost to justget the report by telex was $200,000+ per yr. That is why we wereprimarily an institutional advisor because individuals couldn'tafford the telex fees. We opened our first office overseas in

1985 with the idea of sending one telex there, and redistributingit in Europe and the Middle East just to get costs down to allowus to expand.:::|:|:|:tm

One of the biggest positions in the world back then was whatwe advised for one Arab client - $1 billion. Keep in mind that thebiggest futures/hedge fund in 1985 was maybe about $100 million.The 24 hour markets began to develop rapidly after 1980.What was taking place was the birth of a complete new era inthe global economy. In stocks, this was the birth of the Take-OverBoom for after almost 52 years of suppression of private equitybeing looked at as just speculation with hindsight of the Great

Depression, book values had become greater than the market price.You could buy a company paying full value for the stock, and thensell its assets and double your money.Here is a yearly chart showing that the Dow Jones Industrialsbroke-out in 1985 precisely with our model and our announcement bytaking the back page of the Economist magazine for 3 weeks duringJuly 1985. This was a new era that was beginning where stocks wouldonce again reflect profit, the very thing that Milken had seen andthe New York cro^d instigated the Government to wipe out theircompetition. This was a dynamic period of change, and the "Club"did not understand what they were doing as some master plan for thelong-term, but they were in factevolving with the flow. The focuswould now become the commoditymarkets and thus we began to seeorganized manipulations beyondagriculturals. Manipulations beganin small markets that were easilyrigged like rhodium. They expandedinto silver, platinum, and thencrossing into the currency marketswith the British pound and eventhe Japanese yen.

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The Birth of Derivatives insofar as thefinancial markets was concerned, came afterthe turning of our Economic Confidence Modelin 1985. From there onward, there was a madrush to bring in computers and create models.Princeton Economics was very well known behindthe public scene. We were primarily a institu-tional advisory for the biggest corporates andbanks around the world. I would rarely grantinterviews with the ?yierican press, for clientshad long made it clear that they were payingthe big bucks to us, and they did not want tosae the same forecasts given out for free onthe front page of the Wall Street Journal. Soeveryone knew we had sophisticated computermodels long before anyone else, and I havebeen told this perhaps then fueled the rush toget into the field. I am

behind the curtain--the full monty

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