Saturday, July 12, 2008

Are Terrorists Manipulating Our Markets?

Posted Friday, July 11, 2008 4:30 PM PT

Congress is investigating oil speculators, bank stocks are being pummeled, and housing prices are dropping precipitously in certain markets. And this is the good news.

I was always taught in my graduate and undergraduate classes that markets are rational, but after looking at the current market valuation of bank stocks, one must seriously consider if our markets are being manipulated.

It would be reasonable to question whether the U.S. is being subjected to an economic attack.

In the aftermath of 9/11, there was a great deal of speculation about whether terrorists were engaged in the options market to capitalize on the financial weakness in the U. S. market after the attack. The studies are generally inconclusive.

What should not be surprising is that the results were in fact inconclusive.

The privacy of our financial markets makes definitive conclusions difficult to make and increases the likelihood of the financial markets being manipulated without risk of detection.

As someone who has served at the U.S. Central Command, Special Operations Command and in other similar activities, I see economic warfare as a viable and successful activity for an enemy force, as well as for own government.

To believe that all the terrorists want to blow themselves up is terribly naive. Any group that could mastermind the 9/11 massacre cannot be taken for granted. Assuming that the terrorist networks would be content with being attacked while not counterattacking in some fashion defies logic and common sense.

Too Many Eyes

The 9/11 attacks struck a seam in our national defense. The FAA, FBI and CIA were all supposed to be looking at the type of threat the terrorists had in store. The attacks succeeded because the terrorists understood our organizational weaknesses.

The same situation exists in our financial markets. The military looks at economic issues through its Civil Affairs groups and other specialized agencies. The SEC, FDIC and Federal Reserve have some policy issues that deal with global finance, but are mostly focused on individual securities as well as the stability of individual banks and the liquidity in the financial markets.

The FBI has some responsibility, but lacks the resources to properly examine all the issues where an attack could occur.

So with everyone looking at the problem, the likelihood of a coordinated response diminishes.

Recently, the financial markets have gyrated wildly, without reason in most cases. The irrationality and psychology of fear that have permeated the markets have caused substantial losses of wealth. Market volatility of the markets makes financial planning and forecasting virtually impossible, which adds even more to market instability.

The bank mortgage crisis is severe, but not as much as the financial markets are indicating in bank share volatility. Recent gyrations that bank stocks have endured are not a normal reaction from sophisticated market investors.

It's Not A Casino

The implications of collapsing the financial markets as happened with Bear Stearns are severe. Banks are already re-examining home equity lines of credit and scaling back. Real estate refinancing is difficult in some areas. If credit markets dry up, the implications for an economy with $4 per gallon gas and high commodity prices are potentially devastating.

The cure for such problems is relatively straightforward. First, the privacy of financial market transactions is crucial. The cure does not require us to surrender that privacy.

What is needed is to remove the speculative fever in the market by increasing the financial requirements for short-selling stocks, increasing margin capital requirements overall — investigating all stock movements of more than 5% in a day of companies with market capitalizations of more than $500 million — and increasing margin requirements for those selling uncovered calls and puts.

By removing the casino mentality in the markets and increasing the capital requirements for those "betting" on the upside and downside of the markets, the intentions of those attempting to manipulate the markets will be reduced.

The terrorists' goal is not to conquer us, but to defeat our way of life. If we limit the tools available to al-Qaida in our financial markets, the success of this type of economic attack would be minimized.

The threat is real. The solutions are realistic. The time is now.

Ryan, a retired Marine Corps colonel, is a CPA who specializes in corporate restructuring and lectures on ethics for the American Institute of Certified Public Accountants. He is on the boards of numerous publicly traded companies.

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