Game Plan

by Kevin D. Freeman

  In October 2012 the Washington Times reported that the undersecretary of defense for intelligence commissioned another study on weapons of mass destruction, which found that the United States faces serious cyber, electronic, and financial threats from “a vast network of state and non-state actors”:

  The new Pentagon report appears to build on one produced for the Pentagon in 2009 by financial consultant Kevin Freeman, who stated that the United States’ 2008 financial crash may have been deliberate sabotage by terrorists or foreign states.

  That study was criticized by senior Obama administration officials, including the Pentagon’s special operations policymaker, Michael Vickers, who is currently undersecretary of defense for intelligence. U.S. officials said Mr. Vickers blocked further study into possible financial warfare behind the economic crisis. Mr. Freeman wrote a book on the issue called “Secret Weapon.”

  The new Pentagon report said the May 6, 2010, “flash crash” when markets fell by 10 percent “may have been caused by an economic attack by one or a combination of methods,” including the manipulation of computer algorithms that control trading or exchange traded funds that allow traders to short sell mass quantities of stock quickly and anonymously. It also could have been the result of covert currency-manipulation by the holder of a significant U.S. debt—such as China—designed to intentionally weaken the value of the dollar by preventing the United States from selling its debt to others.20

  Our work may have prompted, in part, a joint simulation exercise between the financial securities industry and key government agencies. Known as Quantum Dawn 2, the exercise was designed to throw a variety of threats at Wall Street to see what would happen.21 The sobering results, reported in the Wall Street Journal, demonstrated the vulnerability of our markets: “Hackers were able to force a shutdown of U.S. equity markets in a simulated cyber attack on the U.S. financial sector, suggesting industry and government could do more to harden the financial system against external threats.”22

  Juan Zarate, a former deputy national security advisor and assistant secretary of the treasury, reveals much about the twenty-first-century economic war in Treasury’s War: The Unleashing of a New Era of Financial Warfare. He documents the efforts of a variety of enemies of the United States to harm our economy and destroy the U.S. dollar:

  The United States must begin to play a new and distinctly financial game of geopolitical competition to ensure its security and to seize emerging opportunities. Just as the mistakes leading to 9/11 were deemed a failure of imagination, the inability of the U.S. government to recognize the changed landscape could be considered a collective failure of comprehension.

  The financial wars are coming. It is time to redesign a national economic security model to prepare for them. If we fail to do so, the United States risks being left vulnerable and left behind as other competitors race toward the future.23

  The reality is that we have been in a financial war for more than a dozen years. It has seriously degraded our economy. Its reality has been documented in numerous studies by experts and former high-ranking officials. And yet, despite our best efforts, current American leadership seems intent on ignoring this real, dangerous, and growing threat.

  A History of Financial Warfare

  September 11 was first and foremost an attack on America’s financial center. The 9/11 Commission Report acknowledged as much, stating that al Qaeda terrorists Khalid Sheikh Mohammed and Ramzi Yousef “reportedly brainstormed together about what drove the U.S. economy. New York, which KSM considered the economic capital of the United States, therefore became the primary target.”24 September 11 was “designed to be a serious attack intended to produce massive casualties and serious damage to the economy, but it was also very much designed to be a symbolic assault—one that would strike the symbols of U.S. economic, political, and military power.”25 Shortly before his death, bin Laden released a tape urging the world to “refrain from dealing in the U.S. dollar” and said that good people across the world “should try to get rid of this currency as early as possible.”

  Belligerents have been resorting to economic warfare for centuries. During the Seven Years’ War, British jurists declared that international law permitted blockades. Napoleon blockaded the importation of British goods into French-controlled territory, a policy that boomeranged on him when the French were forced to pay extra money for their own goods. The Confederacy refused to supply cotton to the North, while a Union blockade kept the South from selling its cotton to anyone else. When the United States embargoed oil exports to Japan and froze all Japanese assets in the United States, Japan responded by attacking Pearl Harbor.

  Economic warfare can also be a potent weapon during a war already under way. The Germans attempted to undermine the British pound in World War II by counterfeiting. If they had succeeded, they might have knocked Britain out of the war entirely by inflating its currency. Jan Sejna, the highest-ranking Soviet officer ever to defect to the West, revealed the USSR’s elaborate plans to sabotage the American economy during the Cold War.26 And North Korea, with only limited success so far, conducts its own economic warfare enterprise: its Office 39 steals between $500 million and $1 billion per year through counterfeiting.

  The United States has been the most successful modern practitioner of economic warfare, weakening the Soviet Union by lowering oil prices and imposing a massive embargo on the sinking Evil Empire. In the 1956 Suez crisis, the United States succeeded in knocking Great Britain out of the Middle East by threatening to sink the pound. But economic warfare is a double-edged sword. The 1973 Arab oil embargo seriously damaged the U.S. economy.

  Today it is not only states that have the capacity to shape international affairs through economic warfare. One of the world’s richest men, George Soros, prompted a run on the pound by short selling in 1992; he made $950 million. In 1997, the Malaysian prime minister accused Soros of doing the same thing to his currency. Officers in the Chinese army have even branded him a “financial terrorist.”

  America’s Enemies

  America’s enemies range from loosely affiliated terrorist groups to countries vying for global dominance. Al Qaeda still has the capacity to launch sophisticated attacks—using not only airplanes or improvised explosive devices but complex financial instruments. Charles Duelfer, former director of the Iraq Survey Group, and Jim Rickards, former general counsel to Long-Term Capital Management, write, “Al Qaeda has declared that damage to the American economy is the second most important goal after mass casualties. Presently, who would warn the White House if foreign entities made a concerted attack on our financial system? Who is charged with detecting such activity?”27 The real answer: no one is.

  Yusuf al-Qaradawi, a leader of the Muslim Brotherhood and host of his own show on Al Gore’s favorite network, Al Jazeera, insists that true Muslims must harm the U.S. economy wherever possible. He suggests that Muslims send “money for the mujahideen.” He also helps run Islamic financial institutions. “I like to call it Jihad with money,” he told the BBC in July 2006.28 A favorite al Qaeda book agrees: “Money is the lifeline of jihad.”29

  The goal of these terrorist groups is not merely the destruction of Western classical liberalism and personal freedom. It is the evisceration of capitalism itself and its replacement with sharia-compliant finance (SCF), which bars interest. No wonder bin Laden explained right after 9/11, “The key pillars of the enemy should be struck, God willing. They shook America’s throne and struck at the U.S. economy in the heart. . . . This is a clear proof that this international usurious, damnable economy—which America uses along with its military power to impose infidelity and humiliation on weak people—can easily collapse. Thanks to Almighty God, those blessed attacks, as they themselves admitted, have inflicted on the New York and other markets more than a trillion dollars in losses. . . . It is very important to concentrate on hitting the U.S. economy through all possible means.”30

  Saudi Arabia and other Muslim states have been energetica
lly pushing SCF for a while, portraying it as an innocent and private financial code for Muslims. But SCF is part of the global sharia agenda. Dr. Mahathir Mohamad, a former prime minister of Malaysia, has articulated the goal of developing a “universal Islamic banking system.” In 2001 he said, “In the old days you needed to conquer a country with military force, and then you could control that country. Today it’s not necessary at all. You can destabilize a country, make it poor, and then make it request help. And [in exchange] for the help that is given, you gain control over the policies of the country, and when you gain control over the policies of a country, effectively you have colonized that country.”31

  Iran also supports global sharia, both in finance and in the broader legal system. All of its banking is SCF compliant, and investments are overseen by Islamic clerics who ensure that cash goes to the right terrorists. In 2011 the then president Mahmoud Ahmadinejad declared a “year of economic jihad,” and Iran refuses to trade in dollars with regard to oil.

  Sudan, Egypt, Libya, and Pakistan are all either SCF compliant or moving in that direction. Islamic nations have begun to create sovereign wealth funds, pooling cash into huge investment vehicles that have the power to turn markets.

  Islamic states are not the only economic threat. China is a rising global power and an economic rival to the United States. The Chinese have repeatedly stated, albeit quietly, that they wish to replace the American dollar as the global currency, and they have started working with Russia to set up a non-dollar alternative.

  The call to replace the dollar is a cornerstone strategy in developing what an official Chinese news agency editorial described as a desirable effort to create a “de-Americanized world.”32 That’s a strong statement from an official news agency.

  Russia likewise sees the United States as a rival. Russia is trading currencies with China, and its quasi-dictator, Vladimir Putin, says, “The ruble must become a more widespread means of international transactions.”

  After the death of Hugo Chavez, Venezuela looked momentarily as though it might move away from its virulently anti-American stance, but so far hopes of moderation have been disappointed. Venezuelan defectors have revealed that Chavez financed al Qaeda’s activities for years. Chavez said in 2009 during a visit to Iran, “Capitalism needs to go down. It has to end. And we must take a transitional road to a new model that we call socialism.”

  While many of those who minimize the threat of economic warfare see our enemies as unsophisticated, the blowhard Chavez proved that rhetorical excess does not mean economic incompetence. He died with $2 billion in his bank account and connections to another hundred billion. Other international adversaries have amassed similar fortunes. Muammar Gaddafi of Libya had a personal fortune of $200 billion. Saudi prince Alwaleed bin Talal has said he was insulted by assertions that he was worth only $20 billion (claiming almost ten billion more than that). Vladimir Putin’s net worth is upward of $70 billion if we analyze his holdings in various corporations, and possibly much higher than that. When you add it all up, there’s quite a bit of money outside our government’s control or even awareness—hundreds of billions of dollars, and even trillions when you include sovereign wealth funds and holdings of Communist governments.33

  Criminal groups like the mafia and drug cartels also have the potential to become economic warriors. Even some American unions have been interested in pursuing relationships with enemies of the U.S. economic system. The former director of the Service Employees International Union’s Banking and Finance Campaign, Stephen Lerner, was caught on tape in March 2011 talking about destabilizing the American economy. “We have a very simple strategy,” said Lerner. “How do we bring down the stock market? How do we bring down the bonuses? How do we interfere with their ability to be rich?”

  America has plenty of enemies. And those enemies have plenty of means.

  The Last Collapse

  In 2008, America’s financial markets melted down with some $13 trillion lost in a matter of weeks. It began with the oil run-up of 2007–2008, during which prices spiked from $50 per barrel to $150, helping to pierce the real estate and derivatives bubble. When the price of a commodity triples, there are usually winners and losers. The run-up of oil prices, however, hurt nearly all Americans. The beneficiaries were our enemies. The oil-producing countries at the time were, by and large, our geopolitical foes.

  In late 2007, while oil prices were rising, massive bear raids targeted several of America’s important financial institutions. A bear raid is an illegal manipulation of a target company’s stock price. The purpose can be the raider’s profit, but it can also be subversion. Citigroup was hit by short selling in November. Analysts who studied the transactions later concluded that this had been an illegal bear raid:

  The study authors at the New England Complex Systems Institute (NECSI) retraced events to show that at a critical point in the financial crisis, the stock of Citigroup was attacked by traders by selling borrowed stock (short-selling) which may have caused others to sell in panic. The subsequent price drop enabled the attackers to buy the stock back at a much lower price.

  This kind of illegal market manipulation is called a bear raid and the new study supports earlier suspicions that the raids played a role in the market crash.

  The study has direct evidence. Through its analysis of stock market data not generally available to the public, namely the borrowing of shares, NECSI reconstructs the chain of events.34

  The NECSI analysts estimated that the odds of this kind of trading activity’s taking place without malicious coordination were infinitesimally remote: “Professor Yaneer Bar-Yam, president of NECSI, maintains this was no ‘freak’ or coincidental event. ‘When 100 million shares are borrowed on a single day and then returned on a single day, the evidence that this is a concerted action is hard to refute. The likelihood of such an event happening by coincidence is one in a trillion.’”35

  A few months later, in March 2008, Bear Stearns, America’s fifth-largest investment bank, was in the crosshairs. According to Rolling Stone’s Matt Taibbi, the Bear Stearns bankruptcy included an unnamed person making “one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness.” The next day, Bear collapsed. The $1.7 million investment was suddenly worth $270 million. It was, Taibbi concludes, “one of the most blatant cases of stock manipulation in Wall Street history.” But authorities couldn’t trace it.

  That summer Fannie Mae and Freddie Mac, the government-sponsored entities at the heart of the U.S. mortgage business, came under attack from short-sellers. Their stock plunged in value. Treasury Secretary Henry Paulson believed that the Russians and Chinese had attempted to force our government into a costly bailout—economic warfare, in short. Paulson says the Chinese told him they refused to cooperate with the Russians, but the Russians went ahead.

  In September, the tactic was repeated. The first target was Lehman Brothers, which experienced a massive spike in short selling. More than one-fifth of trades in Lehman on September 17 were failed trades, a sign of short selling. George Soros spelled out the problem: “It’s clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS [credit default swaps] mutually amplified and reinforced each other.”

  Lehman’s collapse led to the collapses of Merrill Lynch, Washington Mutual, Citigroup, Bank of America, and even Goldman Sachs. AIG was soon on the brink. On September 15, Congressman Paul Kanjorski announced that over half a trillion dollars had disappeared from U.S. money-market accounts. The stock market dropped more than 50 percent, the worst decline since the Great Depression. Even though the market has since revived with the help of the Federal Reserve, the nation’s economy continues to suffer. Wall Street has recovered, but Main Street is far from healthy. Worse still, our vulnerabilities h
ave been exposed, our nation is weakened, and yet virtually nothing has been done to prevent a next attack.

  What Comes Next

  Unfortunately, the American government appears to have learned little. In January 2013 the secretary of homeland security, Janet Napolitano, warned that a cyberattack from abroad could cripple the United States. She mentioned the possibility of a “cyber 9/11,” which she said could happen “imminently” and threaten water, electricity, and gas for Americans. Napolitano explained, “We shouldn’t wait until there is a 9/11 in the cyberworld. There are things we can and should be doing right now that, if not prevent, would mitigate the extent of damage.” She added, “The clarion call is here and we need to be dealing with this very urgently. Attacks are coming all the time. They are coming from different sources, they take different forms. But they are increasing in seriousness and sophistication.”36

  Sure enough, in February 2013, even the Federal Reserve admitted that its computer systems had been hacked. The hacker group Anonymous claimed that it stole details on over four thousand top banking executives. “The Federal Reserve system,” said a Fed spokesman, “is aware that information was obtained by exploiting a temporary vulnerability in a website vendor product. Exposure was fixed shortly after discovery and is no longer an issue. This incident did not affect critical operations of the Federal Reserve system.” But the central bank would not say which website had been hacked or what specific information had been leaked.37